HANOVER DIRECT INC /DE// - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended January 1, 1994

Commission file number 1-12082

HANOVER DIRECT, INC.
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(Exact name of registrant as specified in its charter)

Delaware 13-0853260
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(State of incorporation) (I.R.S. Employer Identification No.)

1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (201) 863-7300
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Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
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Common Stock, $.66 2/3 Par Value American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None
----

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO _____

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____

As of March 9, 1993, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $200.2 million (based on the closing price
of the Common Stock on the American Stock Exchange on March 9, 1994).

As of March 9, 1994, the registrant had 82,933,177 shares of Common Stock and
234,900 shares of Series A Preferred Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Proxy statement for the 1994 Annual Meeting of Shareholders is incorporated by
reference into Part III of this Annual Report on Form 10-K.
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P A R T I

ITEM 1. BUSINESS

GENERAL

Hanover Direct, Inc. (the "Company") is a leading direct specialty retailer
that publishes a portfolio of 14 branded specialty catalogs offering home
furnishings, general merchandise and apparel. The Company's catalogs include
DOMESTICATIONS, the nation's leading specialty home textile catalog, which has
grown rapidly with revenues increasing from approximately $30 million in 1987
to approximately $311 million in 1993. The Company's portfolio of catalogs
also includes COLONIAL GARDEN KITCHENS, a leading specialty catalog featuring
worksaving and lifestyle enhancing items for the kitchen and home. During
1993, the Company mailed approximately 322 million catalogs and had total
revenues of approximately $643 million. The Company maintains a proprietary
customer list, containing approximately 19 million names of customers who have
made purchases from at least one of the Company's catalogs within the past 36
months. Approximately seven million of the names on the list represent
customers who have made purchases from at least one of the Company's catalogs
within the last 12 months.

The Company is incorporated in Delaware with its principal executive office
at 1500 Harbor Boulevard, Weehawken, New Jersey 07087. The Company's telephone
number is (201) 863-7300.

HISTORY AND ORGANIZATION

History. The Company's direct marketing subsidiary, founded in 1934,
initially operated as a chain of specialty retail women's fashion stores in
Pennsylvania and nearby states under the name Lana Lobell. In 1950, it
published its first catalog offering women's fashion by mail and, by the end of
the decade, a majority of the subsidiary's revenues was derived from catalog
sales. In 1962, the subsidiary first published HANOVER HOUSE, a catalog
featuring gifts, seasonal, household and novelty items. The Company's direct
marketing subsidiary was acquired in 1972 by The Horn & Hardart Company
("H&H"), a restaurant company founded in 1911. The Company's direct marketing
subsidiary continued its growth through internal development of new and
existing catalogs utilizing its proprietary customer list as well as through
acquisitions of other catalog companies.

Restructuring. The Company incurred a substantial amount of debt in
connection with the growth of its restaurant business in the 1970s and 1980s.
As the Company began the disposition of its restaurant operations in 1989,
management believed that the underlying asset values would at least enable it
to repay the debts secured thereby. However, the Company's withdrawal from the
restaurant business coincided with a severe decline in real estate values in
the northeastern United States and elsewhere in the country. Accordingly,

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the Company failed to generate sufficient cash proceeds to repay all of the
associated debt. As a result, a high level of debt remained and placed an
excessive burden on the cash flows of the direct marketing business, the
Company's only source of internally generated cash. By early 1991, vendors and
factors were restricting the availability of trade credit on normal terms,
hampering the Company's ability to purchase merchandise. Because of strong
demand for the merchandise in the Company's catalogs and its inability to
obtain adequate trade credit with which to purchase merchandise, the Company's
backorder level increased substantially and it incurred operating losses. In
response, the Company began to take additional actions and explore financial
alternatives available to it to solve its cash flow problems, including the
sale of an equity interest in the Company.

In the fall of 1991, NAR Group Limited, a British Virgin Islands
corporation (together with its affiliates, "NAR"), effectively gained control
of the Company. NAR is a private investment holding company that is a joint
venture between the family of Alan G. Quasha, a Director and the Chairman of
the Board of the Company, and Compagnie Financiere Richemont A.G., a Swiss
public company engaged in tobacco, luxury goods and other businesses. NAR
acquired a 48.9% interest in the Company through an equity investment of $40
million and the extension of a line of credit of up to $30 million (later
increased to $50 million) and implemented a restructuring program consisting of
operational changes, debt reduction and disposition of substantially all of the
Company's remaining non-direct marketing assets. By the end of 1992, through
the sale of assets and a series of transactions, including a rights offering, a
sale of preferred stock and exchange offers, the Company reduced its debt and
lease obligations (excluding working capital debt) by $182.8 million from
September 1991. As a result of these transactions, NAR increased its interest
in the Company to approximately 56% through an additional equity investment of
approximately $38.1 million.

In September 1993, the Company changed its name to Hanover Direct, Inc. and
eliminated its two-tier holding company structure. This reorganization was
accounted for similarly to a pooling-of-interests and, accordingly, the
Company's financial statements include the results of H&H and The Hanover
Companies ("THC") for all applicable periods presented.

RECENT ACQUISITIONS AND VENTURES

During 1993, the Company made the following acquisitions:

Gump's. In May 1993, the Company acquired substantially all of the assets
of Gump's Inc., the well known San Francisco retailer and a leading upscale
catalog marketer of exclusive gifts, for a total purchase price of $13.2
million, consisting of $6.9 million in cash and $6.3 million of Common Stock.
The Company is relocating its retail store to a new location in downtown San
Francisco, which is scheduled to open in the fall of 1994.

The Company Store. In August 1993, the Company acquired in Chapter 11
bankruptcy proceedings substantially all of the assets of Company Store
Holdings, Inc., an upscale direct marketer of down comforters and other down
and related products for the home, sold under THE COMPANY STORE and SCANDIA
DOWN names, for a total purchase price of $7 million, consisting of the
issuance of $4.6 million of notes and $2.4 million of Common Stock.

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Tweeds. In September 1993, the Company purchased all of the outstanding
stock of Tweeds, the European inspired women's fashion catalog, for a total
purchase price of $8.8 million, consisting of the assumption of $5.1 million of
liabilities, $.1 million in cash and $3.6 million of Common Stock.

In addition, the Company has recently entered into the following ventures:

Sears. In January 1994, the Company entered into a licensing agreement
(the "Sears Agreement") with the direct marketing subsidiary of Sears Roebuck
and Co. ("Sears"), to produce specialty catalogs for the 23 million customers
of the recently discontinued Sears catalog. The specialty catalogs include:
Show Place, based on the DOMESTICATIONS catalog, Great Kitchens, based on the
COLONIAL GARDEN KITCHENS catalog, and Beautiful Style, based on the SILHOUETTES
catalog. The Sears Agreement has an initial three-year term and continues
thereafter unless terminated by either party. Profits and losses from the
venture are to be shared between the parties on an equal basis. The Company
also issued to Sears a performance warrant to purchase 3.5 million shares of
Common Stock in 1999 if the licensed business with Sears has revenues of at
least $250 million and earnings before interest and taxes of at least $30
million in 1998. Alternately, Sears will be entitled to purchase 7 million
shares of Common Stock in 1999 if the licensed business with Sears has revenues
of at least $500 million and earnings before interest and taxes of at least $60
million in 1998. If neither of these goals is achieved, the performance
warrant will expire unexercised in 1999. The warrant exercise price is $10.57
per share. The Company is obligated to meet various operational performance
standards and, if the Company is unable to meet these standards, Sears would be
entitled to terminate the agreement. The Company is also entitled to terminate
the agreement if Sears fails to comply with any material provision thereof.
Show Place, Great Kitchens and Beautiful Style are trademarks of Sears.

The Safety Zone. In September 1993, the Company acquired 20% of the
outstanding common stock of Aegis Safety Holdings, Inc. ("Aegis"), a direct
marketer of safety and anti-hazard products through The Safety Zone catalog.
The consideration for the acquisition was the provision by the Company of
certain catalog fulfillment and production services to Aegis at the Company's
cost until August 1998, subject to certain early termination provisions. The
Company also acquired an option to increase its ownership to 50% of Aegis'
common stock until the end of 1996. Aegis has an option to require the Company
to acquire all of Aegis' then outstanding stock after December 31, 1998 if the
Company has exercised its option and certain other conditions have been
satisfied. The Company has agreed to extend a secured working capital line of
up to $1 million to Aegis. Aegis had approximately $9 million in net sales
for the eleven months ended January 1, 1994.

Boston Publishing Company. In February 1994, the Company acquired a 20%
ownership interest in Boston Publishing Company, Inc. ("BPC"), the publisher
of The Museum Collection, a catalog featuring reproductions, replicas and
adaptations of items contained in museum collections, and Finishing Touches, a
catalog featuring items for the home, in consideration for providing $3.0
million of secured working capital financing, a $.75 million short-term loan
and a $.5 million convertible term loan. As part of the acquisition the
Company will provide BPC with access to the Company's proprietary customer list
and catalog production assistance. BPC had approximately $12 million in
revenues in 1993.

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THE COMPANY'S CATALOGS

Each of the Company's specialty catalogs targets distinct market segments
and develops and executes its own merchandising strategy based on a focused
assortment of merchandise that is designed to meet the needs and preferences of
its target customers. Through market research and ongoing testing of new
products and concepts, the Company determines, on a catalog by catalog basis,
the appropriate price points, service levels, mailing plans and presentation of
its products.

The Company has placed an increasing emphasis on the use of exclusive or
private label products in a number of its catalogs, including DOMESTICATIONS,
TWEEDS and THE COMPANY STORE, to further enhance the brand identity of the
catalog. The Company's specialty catalogs typically range in size from 44 to
100 pages with four to six new editions per year depending on the seasonality
and fashion content of the products offered. Each edition may be mailed
several times each year with slight variations in format and content.
Depending on the catalog's product focus, approximately 30% to 70% of the
merchandise assortment in each edition is seasonal or new items. Catalogs
featuring women's fashions generally have the highest new product introduction
rate. Each catalog employs the services of an outside creative agency or has
its own creative staff which is responsible for the design, layout, copy, feel
and theme of the book. Generally, the initial sourcing of new merchandise for
a catalog begins two to six months before the catalog is mailed.

During 1993, the Company streamlined its catalog operations into two main
groups, Apparel and Non-Apparel. Revenues for 1993 and the percent of total
revenues for 1993 for each of the Company's catalogs are set forth below:

PERCENT OF
REVENUES (a) TOTAL REVENUES
------------ --------------
(IN THOUSANDS)

NON-APPAREL GROUP
DOMESTICATIONS $ 310,573 48.3%
HANOVER HOUSE 41,869 6.5
COLONIAL GARDEN KITCHENS 39,604 6.2
TAPESTRY 31,584 4.9
GUMP'S (b) (c) 22,653 3.5
THE COMPANY STORE (b) 15,244 2.4
MATURE WISDOM 13,420 2.1
Other (d) 2,478 .4
Discontinued Catalogs 6,451 1.0
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Total Non-Apparel $ 483,876 75.3%
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APPAREL GROUP
INTERNATIONAL MALE $44,759 7.0%
SILHOUETTES 25,268 3.9
SIMPLY TOPS 23,988 3.7
ESSENCE BY MAIL 16,475 2.6
UNDERGEAR 12,825 2.0
TWEEDS (b) 9,280 1.5
Sale catalogs and other(e) 12,773 2.0
Discontinued Catalogs 13,267 2.0
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Total Apparel $ 158,635 24.7%
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Total Company (f) $ 642,511 100%
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(a) Revenues are net of returns.
(b) Revenues were recorded for these catalogs from the dates of their
respective acquisitions in 1993.
(c) Represents revenues from both the GUMP'S catalog and retail store.
(d) Represents revenues from the outlet store and surplus inventory
liquidation.
(e) Represents revenues from sale catalogs, the outlet stores and surplus
inventory liquidation.
(f) Excludes Safety Zone which is accounted for on the equity method.

Non-Apparel Group. The catalogs comprising the Non-Apparel Group are as
follows:

DOMESTICATIONS(R): DOMESTICATIONS is the nation's leading specialty home
textiles catalog and the preferred fashion decorating sourcebook for today's
value-oriented and style-conscious consumer. DOMESTICATIONS features sheets,
towels, comforters, tablecloths and other items for the home. The catalog has
enjoyed significant growth and success, experiencing a 48% compound annual
growth rate during the period from 1987 to 1993. The layout and presentation
of DOMESTICATIONS has a decorator look offering coordinated decorating ideas
for the home. Over 60% of the items offered in the catalog are exclusive or
private label, designed by its in-house staff.

HANOVER HOUSE(R): HANOVER HOUSE features gifts, seasonal, household and
novelty items. HANOVER HOUSE is currently being repositioned to upgrade its
presentation and product mix.

COLONIAL GARDEN KITCHENS(R): COLONIAL GARDEN KITCHENS is a leading
specialty catalog, featuring work saving and lifestyle enhancing items for the
kitchen and home. The Company is currently testing a new upscale kitchen and
home product catalog called KITCHEN & HOME.

TAPESTRY(R): TAPESTRY is a value-oriented home accessories catalog
featuring flatware, dinnerware, furniture, rugs and other home decorating
items.

GUMP'S(R): GUMP'S is the well known San Francisco retailer and a leading
upscale catalog marketer of exclusive gifts.

THE COMPANY STORE(R): THE COMPANY STORE is an upscale direct marketer of
down comforters and other down and related products for the home.

MATURE WISDOM(R): MATURE WISDOM is one of the leading general merchandise
catalogs catering to the needs of older customers featuring fashions, health
care products and other items for greater ease of living.

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THE SAFETY ZONE: The Safety Zone is a direct marketer of safety and
anti-hazard products in which the Company has a 20% interest.

Apparel Group. The catalogs comprising the Apparel Group are as follows:

INTERNATIONAL MALE(R): INTERNATIONAL MALE is an authority for unique men's
fashion with an international flair.

UNDERGEAR(R): UNDERGEAR is a leader in activewear, workout wear and fashion
underwear for men.

SILHOUETTES(R): SILHOUETTES is a women's fashion catalog featuring special
occasion and career fashions in sizes 14 to 26.

SIMPLY TOPS(R): SIMPLY TOPS is a source for unique apparel, supplying
moderate-priced clothing to women interested in embellished clothing which
makes a statement.

ESSENCE BY MAIL(R): ESSENCE BY MAIL is the original catalog featuring
women's fashions and home decorating items reflecting African-American culture
and is a 50% joint venture with Essence Communications Inc., publisher of
Essence magazine.

TWEEDS(R): TWEEDS is a European inspired women's fashion catalog featuring
relaxed fashions uniquely designed by its in-house staff.

MARKETING AND DATABASE MANAGEMENT

The Company maintains one of the largest proprietary customer lists in the
industry containing approximately 19 million names of customers who have
purchased from one of the Company's catalogs within the past 36 months. The
list contains name, gender, residence and historical transaction data
(including catalog(s) purchased from, product classifications, recency of
purchase, average order size and payment method). This database is selectively
enhanced with demographic, socioeconomic, lifestyle and purchase behavior
overlays from other sources.

The Company utilizes proprietary modelling and sophisticated segmentation
analysis, on a catalog by catalog basis, to devise catalog marketing and
circulation strategies which are intended to maximize the contribution by
customer by catalog. This analysis is the basis for the Company's
determination of which of the Company's 14 catalogs (and how frequently) will
be mailed to a particular customer as well as the promotional incentive content
of the catalog(s) such customer receives.

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In addition to mailing to customers who exist on its database, the Company
has an ongoing prospect acquisition program designed to attract new customers
on a cost effective basis. The primary source of new customers for the
Company's catalogs is lists that have been rented from other mailers and
compilers. Prior to mailing to these non-proprietary lists, the lists are
edited using statistical segmentation tools to enhance their probable
performance. Other sources of new customers include space advertisements,
promotional inserts in outbound merchandise packages and friend's name cards
inserted in mailed catalogs.

During 1993, the Company mailed approximately 322 million catalogs. Of the
approximately 19 million names on the Company's proprietary customer list,
approximately seven million customers, or approximately 37%, have made at least
one purchase from one of the Company's catalogs within the preceding 12 months.

TELEMARKETING AND CUSTOMER SERVICE

The Company designs its service standards to exceed its customers'
expectations and supports this with an unconditional merchandise guarantee.
Under the Company's return policy, a customer may return merchandise for a
refund, exchange or replacement if not satisfied for any reason. The Company's
return rate for 1993 was approximately 13% of gross shipments.

In 1993, the Company received approximately 64% of its orders through its
toll-free telephone service which offers customer access seven days per week,
24 hours per day. Telemarketing facilities are located in San Diego,
California, Hanover, Pennsylvania, DeSoto, Texas, Roanoke, Virginia and La
Crosse, Wisconsin. The telemarketing facilities utilize state-of-the-art
telephone switching equipment which enables the Company to route calls between
telemarketing centers and enhance prompt customer service. During 1993, the
Company's telemarketing centers processed approximately 11.7 million calls and
received approximately 5.6 million orders. The remaining calls included
requests for copies of catalogs, order status inquiries and other general
inquiries.

The Company trains its telemarketing service representatives to be
courteous, efficient and knowledgeable about the Company's products. Each
telemarketing service representative initially receives 40 hours of training in
selling products, services, systems and communication skills through simulated
as well as actual phone calls. A substantial portion of the evaluation of
telemarketing service representatives' performance is based on meeting customer
service standards. While primarily trained with product knowledge to serve
customers of one or more specific catalogs, telemarketing service
representatives also receive cross-training which enables them to take overflow
calls from other catalogs. The Company utilizes customer surveys as an
important measure of performance and customer satisfaction.

The Company's computerized database provides its telemarketing service
representatives with information concerning a customer's previous orders,
permitting the service representative to establish a personalized dialogue with
the customer. Telemarketing service representatives are provided selling
information which they are trained to use to describe promotional items.

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DISTRIBUTION

The Company maintains distribution centers in Hanover, Pennsylvania,
DeSoto, Texas, Roanoke, Virginia and LaCrosse, Wisconsin. The Company's long
range plan is to maximize efficiencies in merchandise handling and distribution
by consolidating the warehousing and distribution of like items in specific
fulfillment centers. The Company plans to consolidate the Apparel Group
catalogs into the Tweeds Roanoke facility and to construct in 1994 a 500,000
square foot state-of-the-art facility on a separate site in Roanoke which,
upon its completion, will handle all of DOMESTICATIONS fulfillment needs. The
Company's facilities processed approximately 13 million packages in 1993.

The Company obtains rate discounts from the United States Postal Service by
automatically weighing each parcel and sorting and trucking packages to a
number of United States Postal Service drop points throughout the country. The
Company's size enables it to efficiently handle packages in this manner. From
time to time, the Company uses United Parcel Service, Federal Express and other
expedited delivery services. The Company, on average, shipped approximately
48,000 packages per day in 1993.

PURCHASING

The Company's large sales volume permits it to achieve a variety of
purchasing efficiencies, including the ability to obtain prices and terms which
are more favorable than those available to smaller companies. Major goods and
services used by the Company are purchased or leased from selected suppliers by
its central buying staff. These goods and services include: paper, catalog
printing and printing related services such as order forms and color
separations, communication systems including telephone time and switching
devices, packaging materials, expedited delivery services, computers and
associated network software and hardware. The Company's objective is to
achieve favorable "total costs" reflecting a long-term mutual commitment by the
Company and each supplier for competitive rates and terms as well as the
quality, future maintenance, replacement and modification needs of the Company.

The Company typically enters into annual agreements for paper and printing
with a limited number of suppliers. These agreements permit periodic price
increases or decreases based on prevailing market conditions, changes in
supplier costs and continuous productivity improvements. The Company's
telephone systems are typically contracted for on a three to four year basis.
During 1993, the Company purchased approximately 55 thousand tons of paper and
approximately 60 million minutes of telephone time. The Company believes it
has developed and maintains strong relationships with suppliers for key goods
and services.

MANAGEMENT INFORMATION SYSTEMS

The Company is currently in the process of upgrading its management
information systems by implementing new integrated software and migrating from
a centralized mainframe to mid-range mini-computers. The migration of the
Company's business applications is the first phase of the Company's overall
systems plan which defines the mid- and long-term systems and computing
strategy for the Company. As part of this plan, the Company has purchased and
will be installing new integrated software for use in managing all phases of
the Company's operations. The new software is an upgraded

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version of existing software installed in over 60 mail order companies which
has been designed to meet the Company's requirements as a high volume publisher
of multiple catalogs. The Company plans to bring the new systems on-line for
several catalogs in 1994 with expected completion in 1995. Delivery,
installation and implementation are expected to commence shortly. The Company
currently estimates that the total cost to install and implement the new
systems, including the cost of dedicated internal personnel, will be
approximately $13 to $15 million.

The new software system is an on-line, real-time system which includes
order processing, fulfillment, inventory management, list maintenance and
reporting. The implementation of the software will provide the Company with a
flexible system that offers highly sophisticated data manipulation, a high
degree of marketing-oriented and fulfillment functionality and extensive
reporting capabilities. The new management information systems are designed to
permit the Company to achieve substantial improvements in the way its
financial, merchandising and inventory functions are performed. The new system
was selected to support the Company's decentralized operating structure because
it can be customized for and by each catalog unit.

CREDIT MANAGEMENT

The Company's customers are able to purchase merchandise using checks or
money orders, the Company's credit cards or third party credit cards. Several
of the Company's catalogs, including DOMESTICATIONS, INTERNATIONAL MALE, and
GUMP'S, offer their own credit cards. Approximately 73% of 1993 sales were
paid using third party credit cards and 8% were paid with the Company's credit
cards.

In December 1992, the Company entered into a three year $75 million credit
facility with General Electric Credit Corporation ("GECC") which provides for
the sale and servicing of accounts receivable originating from the Company's
revolving credit cards. The Company is obligated to repurchase uncollectible
accounts and is required to maintain a specified percentage of all outstanding
receivables sold under the program as a deposit with GECC to service its
obligations under the agreement. The Company is required to pay certain
servicing fees to GECC and the Company earns the finance charge income that
GECC charges to the accounts. GECC's servicing responsibilities include credit
processing, collections, billing/payment processing, reporting and credit card
issuance.

INVENTORY MANAGEMENT

The Company's inventory management strategy is designed to maintain
inventory levels that provide optimum in-stock positions while maximizing
inventory turnover rates and minimizing the amount of unsold merchandise at the
end of each season. The Company manages inventory levels by monitoring sales
and fashion trends and making purchasing adjustments as necessary and by
promotional sales. Additionally, the Company sells excess inventory in its
special sale catalogs, its outlet stores and to jobbers.

The Company acquires products for resale in its catalogs from numerous
domestic and foreign vendors. No single source supplied more than 8% of the
Company's products in 1993. The Company's vendors are selected based on their
ability to reliably meet the Company's production and quality requirements, as
well as their financial strength and willingness to meet the Company's needs on
an ongoing basis.

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EMPLOYEES

The Company currently employs approximately 2,280 persons on a full time
basis and approximately 530 persons on a part time basis. Approximately 120
employees of The Company Store manufacturing facility are members of the
International Ladies Garment Workers Union. The Company believes its relations
with its employees are good.

SEASONALITY

Although the Company experiences quarterly variations in sales, such
variations are due primarily to fluctuations in circulation levels rather than
seasonality and are further ameliorated by the Company's diversified portfolio
of catalogs. The Company traditionally mails more catalogs in the second half
of the year.

COMPETITION

The mail order catalog business is highly competitive. The Company's
catalogs compete with other mail order catalogs and retail stores, including
department stores, specialty stores and discount stores. Competitors also
exist in each of the Company's catalog specialty areas, including Spiegel and
Chadwick's of Boston in women's fashion; Spiegel, Touch of Class, Linen Source,
Lands' End Coming Home and Horchow in home furnishings; Lillian Vernon, Taylor
Gift, Williams Sonoma, Chef's Corner, Harriet Carter and Dr. Leonards in
general merchandise; and Bachrach's, Collections, Road Runner Sports and J.
Crew in men's fashions. The Company also considers general catalog companies
such as J.C. Penney and retail stores as part of its competition. A number of
the Company's competitors have substantially greater financial, distribution
and marketing resources than the Company. The recent substantial sales growth
in the direct marketing industry has encouraged the entry of many new
competitors and an increase in competition from established companies. The
Company believes that the principal bases upon which it competes are quality,
value, service, product offerings, catalog design, convenience, efficiency and
safety.

TRADEMARKS

Each of the Company's catalogs has its own federally registered trademark.
DOMESTICATIONS, TAPESTRY, HANOVER HOUSE, COLONIAL GARDEN KITCHENS, MATURE
WISDOM, INTERNATIONAL MALE, UNDERGEAR, SILHOUETTES, SIMPLY TOPS, GUMP'S,
TWEEDS, THE COMPANY STORE, FASHION FAVORITES, FASHION GALAXY and OUTTAKES are
registered trademarks of the Company. "Essence" is a trademark used by the
Company under license by Essence Communications, Inc. The Company also owns
numerous trademarks, copyrights and service marks on its logos, products and
catalog offerings. The Company has also protected various trademarks
internationally. The Company vigorously protects such marks and believes there
is substantial goodwill associated with them.

GOVERNMENT REGULATION

The Company is subject to Federal Trade Commission regulations governing
its advertising and trade practices, Consumer Product Safety Commission
regulations governing the safety of the products it sells in its catalogs and
other regulations relating to the sale of merchandise to its customers. The
Company is also subject to the Department of Treasury-Customs regulations

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with respect to any goods it imports. To date, such governmental regulations
have not had a material adverse effect on the Company's business.

The imposition of a sales and use tax collection obligation on out-of-state
catalog companies in states to which they ship products is the subject of a
case recently decided by the United States Supreme Court. While the Court
reaffirmed an earlier decision which allowed direct marketers to make sales
into states where they do not have a physical presence without collecting sales
taxes with respect to such sales, the Court further noted that Congress has the
power to change this law. The Company believes that it collects sales tax in
all jurisdictions where it is currently required to do so.

ITEM 2. PROPERTIES

The Company's corporate headquarters are located in a modern
84,700-square-foot facility in Weehawken, New Jersey. The facility houses
merchandising and marketing personnel, an art department including photographic
studios, catalog production personnel and corporate and administrative offices.
The Weehawken facility is leased for a 15-year term expiring in 2005.

The Company also occupies a leased office building in Hanover, Pennsylvania
and five warehouse/fulfillment locations in the Hanover area providing a total
of approximately 1,200,000 square feet of space, including its principal
fulfillment center consisting of a twenty acre leasehold with a 265,000 square
foot warehouse and other improvements. The other four warehouse/fulfillment
locations are leased pursuant to short-term leases. The Company intends to
consolidate all or most of the facilities with short-term leases into its new
fulfillment center that will be constructed for DOMESTICATIONS in Roanoke,
Virginia.

Administrative offices in Hanover, Pennsylvania are located in a two- story
building of approximately 123,000 square feet, with a lease expiring in 1994,
which contains renewal options for three five-year periods. Brawn of
California, Inc., occupies 30,000 square feet of new office space in San Diego,
California pursuant to a fifteen-year lease that expires in 2004.

Gump's occupies 4,700 square feet of office space in addition to 49,800
square feet of space for its retail store in San Francisco, California. In
addition, Gump's occupies a leased warehouse/fulfillment center in DeSoto,
Texas of approximately 43,000 square feet. This lease expires in 1995.

The Company Store occupies 185,000 square feet for its
warehouse/fulfillment center pursuant to a short-term lease. Additionally, a
150,000 square ft. manufacturing and assembly facility and 58,000 square ft.
telemarketing and customer service facility in La Crosse are owned.

In January 1994, the Company purchased for $1.1 million a 50% interest in
Blue Ridge Associates (the "Partnership"), a partnership which owns the Tweeds
Roanoke, Virginia fulfillment center. In addition, the Partnership and the
Company entered into a 15 year lease covering the facility. Under the terms of
the lease agreement and subject to certain conditions specified therein, the
Partnership, as lessor, agreed to expand the facility by not less than 100,000
square feet in accordance with plans and specifications reasonably acceptable
to the parties. The expanded facility will be leased to the Company on the
same terms as the existing facility, subject to an adjustment in the amount of
rent payments and the expiration date.

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The following chart lists each of the Company's principal properties:

OWNED
OR APPROXIMATE CATALOG
LOCATION LEASED SQUARE FOOTAGE USE (a)
-------- ------ -------------- --------

Warehouse and
Fulfillment Centers:

Emigsville, PA Leased 144,000
Hanover, PA Owned 265,000
Hanover, PA Leased 433,300
Landsville, PA Leased 23,000
York, PA Leased 319,000
DeSoto, TX Leased 43,000 GUMP'S(b)
Roanoke, VA Leased 175,000 TWEEDS(c)
LaCrosse, WI Leased 185,000 THE COMPANY STORE

Corporate and
Administrative Offices:

San Diego, CA Leased 30,000 Men's Apparel(f)
San Francisco, CA Leased 4,700 GUMP'S
Edgewater, NJ Leased 65,000 TWEEDS
Weehawken, NJ Leased 84,700 Corporate Headquarters

Telemarketing and
Customer Service:

Hanover, PA Leased 123,300
LaCrosse, WI Owned 58,000(d)

Retail Stores:

Beverly Hills, CA Leased 1,200 SCANDIA DOWN
Costa Mesa, CA Leased 1,200 SCANDIA DOWN
San Diego, CA Leased 3,800 INTERNATIONAL MALE
San Francisco, CA Leased 49,800 GUMP'S(e)
West Hollywood, CA Leased 3,600 INTERNATIONAL MALE
Hanover, PA Leased 12,500 Outlet Store
La Crosse, WI Leased 13,000 THE COMPANY STORE
Oshkosh, WI Leased 2,000 THE COMPANY STORE
Kenosha, WI Leased 5,500 THE COMPANY STORE
Madison, WI Leased 5,500 THE COMPANY STORE

Manufacturing
and Assembly:

LaCrosse, WI Owned 150,000 THE COMPANY STORE

(a) Unless otherwise noted, the facility services multiple catalogs.
(b) Also a telemarketing center for GUMP'S.
(c) Also a telemarketing center for TWEEDS.
(d) Also used for executive offices for THE COMPANY STORE.
(e) Also used for GUMP'S executive offices. To be replaced by a new store in
the fall of 1994.
(f) Also a telemarketing center for Men's Apparel.

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The Company also leases 18 properties, all of which are subleased. All of
such properties are part of the Company's discontinued restaurant operations.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in various routine lawsuits of a nature which is
deemed customary and incidental to its businesses. In the opinion of
management, the ultimate disposition of such actions will not have a material
adverse effect on the Company's financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None

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15
P A R T II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Common Stock is traded on the American Stock Exchange (Symbol: HNV).
The following table sets forth, for the periods shown, the high and low sale
prices of the Common Stock reported on the American Stock Exchange Composite
Tape.

HIGH LOW
-------- -------

1992

First Quarter $ 3 $ 1 1/2
Second Quarter 2 1/8 1 5/8
Third Quarter 2 1/4 1 3/8
Fourth Quarter 2 7/8 1 5/8

1993

First Quarter $ 4 $ 2 1/16
Second Quarter 4 1/2 2 3/4
Third Quarter 5 1/2 4 1/6
Fourth Quarter 7 5/8 4 1/2

The Company is restricted from paying dividends on its Common Stock or from
acquiring any of its capital stock by certain debt covenants contained in
agreements to which the Company is a party. Cash dividends have not been paid
on the Common Stock since 1967.

As of March 9, 1994, there were approximately 4,359 holders of record of
Common Stock.

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ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data for each of the years
indicated:

1989 1990 1991 1992 1993
-------- -------- -------- -------- --------
INCOME STATEMENT DATA: (in thousands, except share and per share data)

REVENUES $ 382,637 $ 555,770 $ 623,650 $ 586,562 $ 642,511
Operating (loss) income 9,703 10,190 (26,078) 14,402 19,076
Interest expense, net... 11,084 11,426 18,341 13,135 2,757
Other income (expense).. 1,868 - (6,437) - 888
Income (loss) from
continuing operations.. 187 (2,136) (51,081) 1,048 17,337
(Loss) from discontinued
operations............. (9,146) (115,921) (21,119) - -
---------- ---------- ---------- ---------- ----------

Income (loss) before
extraordinary items and
cumulative effect of
accounting change for
income taxes........... (8,959) (118,057) (72,200) 1,048 17,337
Extraordinary items..... - 2,146 6,915 9,201 -
Cumulative effect of
accounting change for
income taxes........... - - - 10,000 -
---------- ---------- ---------- ---------- ----------

NET INCOME (LOSS)....... (8,959) (115,911) (65,285) 20,249 17,337
Preferred stock dividends - - (466) (3,197) (4,093)
---------- ---------- ---------- ---------- ----------

Net income (loss)
applicable to common
shareholders........... $ (8,959) $ (115,911) $ (65,751) $ 17,052 $ 13,244
========== ========== ========== ========== ==========

Per Share:
Income (loss) from
continuing operations.. $ .01 $ (.15) $ (3.16) $ (.06) $ .17
(Loss) from discontinued
operations (.64) (8.24) (1.30) - -
---------- ---------- ---------- ---------- ----------

Income (loss) before
extraordinary items.... (.63) (8.39) (4.46) (.06) .17
Extraordinary items..... - .15 .43 .24 -
Cumulative effect of
accounting change for
income taxes........... - - - .26 -
---------- ---------- ---------- ---------- ----------

Net (loss) income ...... $ (.63) $ (8.24) $ (4.03) $ .44 $ .17
========== ========== ========== ========== ==========

Weighted average number
of shares outstanding:
Primary... ............. 14,145,416 14,068,460 16,287,723 38,467,015 75,625,330
========== ========== ========== ========== ==========
Fully diluted........... 14,145,416 14,068,460 16,287,723 38,467,015 77,064,131
========== ========== ========== ========== ==========

BALANCE SHEET DATA
(END OF PERIOD):
Working capital
(deficit).............. $ 42,176 $ 8,913 $ (37,636) $ 31,566 $ 25,476
Total assets............ 324,148 234,761 162,800 134,352 188,838
Total debt.............. 179,251 155,649 127,918 43,362 36,160
Preferred stock of
subsidiary............. - - 35,247 32,842 -
Shareholders' (deficit)
equity................. 53,813 (61,484) (113,632) (19,758) 45,868

There were no cash dividends declared on Common Stock in any of the periods.
See Notes to Consolidated Financial Statements.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following table sets forth, for the fiscal years indicated, the percentage
relationship to revenues of certain items in the Company's Consolidated
Statement of (Loss) Income:

Fiscal Year
--------------------------------------
1991 1992 1993
-------- -------- --------

Revenues 100.0% 100.0% 100.0%
Cost of sales and operating expenses.... 65.6 65.1 63.6
Selling expenses........................ 28.0 23.6 24.6
General and administrative expenses..... 9.2 8.9 8.9
Income (loss) from operations............ (4.2) 2.5 3.0
Interest expense, net................... 2.9 2.2 .4
Income (loss) from continuing operations
before income taxes..................... (8.2) .2 2.7
Income tax provision (credit)........... - - -
Income (loss) from continuing operations (8.2)% .2% 2.7%
===== ===== =====

RESULTS OF OPERATIONS

1993 COMPARED WITH 1992

Net Income. The Company reported net income of $17.3 million or $.17 per
share for the year ended January 1, 1994, compared to net income of $1.0
million (before extraordinary items and cumulative effect of accounting change)
or a loss of $.06 per share in 1992. Net income for 1992 after extraordinary
items and cumulative effect of accounting change was $20.2 million or $.44 per
share. Per share amounts are expressed after deducting preferred dividends of
$3.2 million in 1992 and $4.1 million in 1993.

Revenues. Revenues increased 9.5% from $587 million in 1992 to $643
million in 1993. The higher revenues were due to a 10% increase in revenues
relating to continuing catalogs, which include the initial test marketing of
the Sears venture which began in mid-1993 and resulted in the Sears Agreement
in January 1994. Additionally, approximately $47 million of the increase was
generated by the acquisition of GUMP'S, THE COMPANY STORE AND TWEEDS in the
second half of 1993. Revenues from discontinued catalogs were $63 million and
$19.5 million in 1992 and 1993, respectively.

Non-Apparel revenues increased 23% from $395 million in 1992 to $484
million in 1993. This increase is a result of $38 million of revenues
generated by GUMP'S and THE COMPANY STORE which were acquired in the third
quarter of 1993 and a 14% increase in revenues related to continuing catalogs.
Substantially all of the increase in revenues from continuing catalogs is
related to DOMESTICATIONS, COLONIAL GARDEN KITCHENS and TAPESTRY, of which
approximately 40% is attributable to the Sears venture. Revenues from
discontinued catalogs (assuming such catalogs were discontinued at the
beginning of 1992) were $10 million and $6.5 million in 1992 and 1993,
respectively.

Apparel revenues declined 17% from $192 million in 1992 to $159 million in
1993. Revenues from discontinued catalogs were $53 million and $13 million in
1992 and 1993, respectively, while continuing catalog revenues declined by 2%
from 1992. Additionally, the acquisition of TWEEDS in the

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fourth quarter of 1993 contributed $9 million to revenues. As discussed below,
the Company is continuing to restructure its Apparel catalogs.

The Company mailed approximately 322 million catalogs in 1993, a 13%
increase over 1992, with variations in mailing strategies and volumes amongst
the catalogs. Additionally, the Company was able to increase its average order
size by 9%. Revenues also improved as the Company reduced its order
cancellation and return rates compared to 1992, principally as a result of
improving its in-stock inventory position.

Operating Costs and Expenses. Cost of sales and operating expenses as a
percentage of revenues decreased from 65.1% in 1992 to 63.6% in 1993. The
improvement was attributable to an increase in product margin due to changes in
the sales mix as well as lower inventory markdowns in 1993 and lower shipping
costs due to more efficient shipping methods. Shipping costs were also
positively impacted by fewer split-shipments due to the improved in-stock
inventory position.

Selling expenses increased from 23.6% of revenues in 1992 to 24.6% of
revenues in 1993 and represented an increase of $19.3 million. This increase
was due to lower response rates, related principally to an aggressive customer
acquisition campaign primarily in DOMESTICATIONS (which increased the size of
its 12 month customer list by 14%) and from the addition of the selling
expenses for the GUMP'S retail store. Selling expenses include catalog
creation and mailing costs and rentals of mailing lists from third parties, as
well as retail selling expenses.

General and administrative expenses represented 8.9% of revenues in 1992
and 1993. Such expenses increased $5.3 million, or 10.2%, from 1992 to 1993,
including $5.8 million of expenses for the three companies acquired in 1993.
General and administrative expenses were reduced by lower bad debt expense and
lower credit card commissions, offset by increases in merchandise and marketing
personnel.

Income (Loss) from Operations. Income from operations increased from $14.4
million in 1992, or 2.5% of revenues, to $19.1 million in 1993, or 3.0% of
revenues. Income from operations excluding the discontinued catalogs was $24.6
million in 1992 (comprised of $21.9 million and $2.7 million for Non-Apparel
and Apparel, respectively) compared to $26.7 million in 1993 (comprised of
$25.8 million and $.9 million for Non-Apparel and Apparel, respectively). Of
this, the three companies acquired in 1993 generated income from operations of
$3 million. Losses from discontinued catalogs were $9.0 million in 1992
compared to $4.3 million in 1993.

The restructuring of the Apparel catalogs continued in 1993 as the catalog
mix was changed further, with two catalogs being discontinued and the
acquisition of Tweeds. In order to improve operating results, each Apparel
catalog is being more sharply focused on its target audience and overhead and
circulation levels for certain catalogs have been reduced.

Interest and Other Income (Expense). Interest expense decreased
approximately $8.5 million from $13.4 million in 1992 to $4.9 million in 1993,
due to the Company's financial restructuring which began in the fourth quarter
of 1991 and included a debt reduction of $67 million from the beginning of 1992
to the end of 1993. Interest income was $2.2 million in 1993, an increase of
$1.9 million from 1992, due primarily to the interest portion of a Federal
income tax refund received in fiscal 1993.

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19
Other income of $.9 million in 1993 represents a settlement of a claim in
bankruptcy from a brokerage firm with which the Company had previously had a
contract.

Income Taxes. In 1992 the Company adopted Statement of Financial
Accounting Standards No. 109 - Accounting for Income Taxes ("SFAS 109"). In
accordance with this statement, the Company recognized a deferred tax asset of
$10 million reflecting the cumulative effect of this accounting change for the
estimated future benefit expected to be realized from the utilization of net
operating loss carryforwards ("NOLs") and deductible temporary differences.
The deferred tax asset consisted of a $63 million gross deferred tax asset less
a $53 million valuation allowance that was established to reflect the annual
limitation on the utilization of certain of the NOLs and an assumed limitation
on the utilization of the remaining deferred tax asset. Realization of the
future tax benefits is dependent on the Company's ability to generate taxable
income within the carryforward period. Future levels of operating income and
taxable income are dependent, in part, upon general economic conditions,
competitive pressures on sales and margins, and other factors beyond the
Company's control.

In 1992 management determined that, based on the successful completion of
the financial restructuring, future operating income of the Company would be
sufficient to utilize $30 million of deductible timing differences and NOLs
prior to their expiration. (See Results of Operations for 1992 Compared with
1991 for additional details). At January 1, 1994, the Company had $147 million
of NOLs and has maintained the $30 million amount of expected future operating
income that will more likely than not utilize the NOLs prior to their
expiration. Management believes that, although the 1993 operating results
might justify a higher amount, in view of its history of operating losses, the
$30 million represents a reasonable conservative estimate of the future
utilization of the NOLs and the Company will continue to evaluate the
likelihood of future profit and the necessity of future adjustments to the
deferred tax asset valuation allowance.

The Federal income tax provision was $5.9 million in 1993 which was
offset by the utilization of certain NOLs. In addition, the Revenue
Reconciliation Act of 1993 raised the 1993 corporate income tax rate from 34%
to 35%, and, as a result, the Company recognized an additional deferred tax
benefit of $.6 million in 1993. In addition, the Company recorded a state tax
provision of $.2 million in 1992 and $.5 million in 1993.

Shareholders' Equity. The number of shares of Common Stock outstanding
increased by 13,396,345 in 1993 due to: i) 1,150,733 shares issued in
connection with the Company's equity and incentive plans, ii) 2,615,928 shares
issued in connection with the acquisitions of GUMP'S, THE COMPANY STORE AND
TWEEDS, iii) 2,278,128 shares issued upon the conversion of the 7.5% Preferred
Stock, iv) 18,937,169 shares issued in connection with the exchange of the
Class B Preferred Stock and Class B Common Stock (of which 12,270,503 shares
were exchanged) and v) 684,890 shares issued as dividends on the Class B
Preferred Stock. At January 1, 1994, there were 82,933,177 shares of Common
Stock outstanding compared to 69,536,832 shares outstanding at December 26,
1992.

The dividends of $3.2 million in 1992 and $4.1 million in 1993 represent
dividend requirements on the two preferred stocks. These preferred stocks were
converted into Common Stock in 1993, which resulted in the elimination of
future dividends.

18
20
1992 COMPARED WITH 1991

Net Income. The Company generated net income of $17.1 million, or $.44 per
share, in 1992 compared to a net loss of $65.8 million, or $4.03 per share in
1991. Included in the 1992 net income are $9.2 million of extraordinary gains
resulting from the exchange offers (compared to extraordinary gains of $6.9
million in 1991) and $10 million due to the cumulative effect of the change in
the method of accounting for income taxes. The year ended December 28, 1991
included provisions for losses on disposal of discontinued operations of $21.1
million and restructuring and other non-recurring charges of $15.3 million.

Income (Loss) From Operations. Income from continuing operations improved
$52.1 million from a loss of $51.1 million in 1991 to income of $1 million in
1992. This improvement reflects the impact of the financial restructuring and
operational changes that began in the fourth quarter of 1991 with NAR's
investment in the Company. The financial restructuring has allowed the Company
to eliminate $142.8 million in debt and $40 million of lease obligations and
dispose of its discontinued restaurant operations. Without this cash drain,
the Company's liquidity has significantly improved. The operational changes
included the decentralization of the Company which resulted in a strategic
review throughout the organization of all catalogs, costs and service levels.
As a result, seven catalogs (six Apparel and one Non-Apparel) were discontinued
in late 1991 and early 1992. In 1991 and 1992, these catalogs had a combined
loss from operations of $16.2 and $6.7 million, respectively, on revenues of
$97 million and $25 million, respectively. The elimination of these catalogs
enabled the Company to redirect its resources into its core catalogs, thereby
improving its inventory position for the remaining catalogs and allowing for
investment in infrastructure improvements. Revenues from continuing catalogs
increased approximately $35 million or 7% from 1991 to 1992.

The Company's improved liquidity, as well as the elimination of the
uncertainty as to whether the Company would be able to satisfy its debt
obligations, enabled it to normalize its relationships with vendors. This
resulted in higher inventory receipts on a timely basis which significantly
reduced backorder levels and the associated costs. In addition, net interest
expense was reduced in fiscal 1992 by $5.2 million ($9 million on an annualized
basis) as a result of the debt and equity transactions. These reasons, as well
as the elimination of the $15.3 million of non-recurring restructuring,
transaction and other costs resulted in the significant turnaround in the
Company's operating results.

Revenues. Revenues decreased $37 million, or 5.9%, compared to 1991 as the
Company focused on its profitable catalogs and discontinued seven poorer
performing catalogs in late 1991 and early 1992. Revenues from continuing
catalogs increased 7% from $527 million in 1991 to $562 million in 1992. The
Company mailed approximately 375 million catalogs in 1991 compared to
approximately 285 million in 1992, a 24% decrease, but was able to increase its
average order size and response rates. Revenues were also improved as the
Company reduced its order cancellation and return rates by two percentage
points compared to 1991, principally as a result of the normalization of the
backorder levels which peaked at approximately $58 million in 1991 to a low of
$11 million at the end of 1992.

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21
Non-Apparel revenues increased 3% from $383 million in 1991 to $395 million
in 1992. Revenues from continuing catalogs increased 7% to $394 million in
1992. Revenues from discontinued catalogs were $15.6 million and $.7 million
in 1991 and 1992, respectively.

Apparel revenues declined 20% from $240 million in 1991 to $192 million in
1992, although revenues from continuing catalogs increased 6% to $168 million.
Revenues of the discontinued catalogs were $82 million and $24 million in 1991
and 1992, respectively.

Operating Costs and Expenses. Cost of sales and operating expenses as a
percentage of revenues decreased from 65.6% in 1991 to 65.1% in 1992, although
gross margin decreased $9.7 million from 1991 to 1992. The improvement in
margin percentage was attributable to reducing shipping costs by one percent of
revenues as there were less split-shipments and other operational
inefficiencies associated with the 1991 backorder situation. Partially
offsetting these improvements was a change in the sales mix from higher margin
fashion merchandise to lower margin home textile merchandise.

Selling expenses decreased $35.9 million in 1992, of which $23 million was
due to lower circulation resulting from discontinuing certain catalogs.
Selling expenses decreased as a percentage of revenues from 28.0% in 1991 to
23.6% in 1992 due to improved customer order response rates and lower paper
costs.

General and administrative expenses decreased $5.4 million, or 9.4%, from
1991 to 1992. Such expenses decreased as a percentage of sales, from 9.2% in
1991 to 8.9% in 1992. The decrease in expense was due to lower bad debt
expense ($1.3 million), lower credit card commissions ($2 million) and reduced
space advertising activity ($2 million). These decreases were partially offset
by increases in consulting and internal development costs for management
information systems and to support the decentralized organization ($2.2
million).

Interest and Other Income (Expense). Interest expense was $13.4 million in
1992, a decrease of $7.1 million over 1991, as a result of debt reduction due
to the rights offering relating to the H&H Common Stock (the "Rights Offering")
and two separate exchange offers for the Company's 14% senior subordinated
debentures due 1997 (the "14% Debentures") and the Company's 7 1/2% convertible
subordinated debentures due 2007 (the "7 1/2% Debentures" and the two exchange
offers being referred to herein as the "Exchange Offers"). Future interest
expense will be reduced on an annualized basis by $9 million, as a result of
this debt reduction. The closing of the transactions in 1991 had the effect of
reducing interest expense due to the retirement of $15.1 million of 7 1/2%
Debentures, the repayment of $5 million of principal amount of 8% Subordinated
Notes due 1994 (the "8% Notes"), as well as a reduction of the interest rate
from 11% to 8% thereon.

Interest income was $.2 million in 1992, a decrease of $1.9 million from
1991. The decrease is due to the Company's overall liquidity position in which
funds were not available to invest in interest bearing instruments.

Extraordinary Items. In 1991, the Company recognized a $6.9 million
extraordinary gain with respect to the retirement of $15.1 million of its 7
1/2% Debentures. The Company recorded extraordinary gains of $9.2 million in
1992 from the exchange of $11.9 million of 7 1/2% Debentures and $23.4 million
of 14% Debentures into equity.

20
22
Income Taxes. At December 26, 1992, the Company had tax NOLs totalling
$142 million, which expire through 2007. Certain transactions the Company
entered into during 1991 resulted in an ownership change with respect to the
Company and, thus, in the imposition of an annual limitation of approximately
$4 million on the amount of future taxable income of the Company which may be
offset by the Company's pre-change NOLs. The Company's available NOLs for tax
purposes consists of $98 million of pre-change NOLs (subject to this
limitation) and $44 million of post-change NOLs (not subject to this
limitation).

SFAS 109 requires that the tax benefit of such NOLs be recorded as an asset
to the extent that management assesses the utilization of such NOLs to be "more
likely than not". The deferred tax asset of $10 million recognized in 1992
consists of a $63 million gross deferred tax asset (principally, the expected
tax benefit of the NOLs discussed above) less a $53 million valuation
allowance.

The Company believes, based upon successful completion of the financial
restructuring, the disposal of unprofitable discontinued operations, the
Company's history of prior operating earnings in its direct marketing business
and its expectations for the future, that the operating income of the Company
will be sufficient to utilize a substantial portion of the NOLs prior to their
expiration. Since the realization of the future tax benefits is dependent on
the Company's ability to generate taxable income within the carryforward period
(through 2007), the Company believes it would be imprudent to record the entire
benefit, based on income projections through 2007, due to the Company's recent
operating losses. The Company does believe that an appropriate measure of its
current earnings level is to adjust its 1992 income before extraordinary gains
of $1 million by $9 million, which represents the annual interest expense on
the debt that has been retired. Using this $10 million income as a base and
three years as a reasonable time frame, income would not have to grow from its
current level in order to generate the $30 million necessary to utilize NOLs
sufficient to realize the $10 million benefit that was recorded in 1992.

Shareholders' Equity. Net income for the year ended December 26, 1992 was
$17.1 million, or $0.44 per share, as compared to a net loss of $65.8 million,
or $4.03 per share in 1991. Net income from continuing operations in 1992 was
$1 million, or a loss of $.06 per share after deducting preferred dividends of
$3.2 million, compared to a net loss of $51.1 million, or $3.16 per share in
1991.

Extraordinary items in 1992 were $9.2 million or $.24 per share, compared
to $6.9 million or $.43 per share in 1991. The cumulative effect of accounting
change for income taxes in 1992 was $10 million, or $.26 per share as compared
to no cumulative adjustment in 1991. For the year ended December 26, 1992
there was no income or loss from discontinued operations compared to a loss of
$21.1 million, or $1.30 per share in 1991.

The number of shares of Common Stock outstanding increased in 1992
principally due to the Rights Offering in which 14,396,798 shares were issued,
the Exchange Offers in which 7,548,465 shares were issued and the exchange of
the preferred stock by NAR for 20 million shares of H&H Common Stock. At
December 26, 1992 there was a total of 69,535,089 shares of H&H Class B Common
and H&H Common Stock outstanding compared to 28,537,471 at December 28, 1991.

21
23
The dividends of $3.2 million in 1992 represent dividend requirements on
the two preferred stocks that were issued in October 1991 and September 1992.
In 1991, the dividend accretion was $.5 million, representing the two months
during which the 8% preferred stock was outstanding in 1991.

LIQUIDITY AND CAPITAL RESOURCES

The Company had $2.6 million in cash and cash equivalents at each of
December 26, 1992 and January 1, 1994. Working capital and the current ratio
were $25.5 million and 1.24 to 1 at January 1, 1994 versus $31.6 million and
1.42 to 1 at December 26, 1992. The Company had substantially paid down its
long-term revolving credit facility at January 1, 1994, compared to a balance
of $21.2 million outstanding at December 26, 1992.

The Company generated $28.0 million in cash from operations in 1993. Cash
was used primarily to support increases of i) $12.1 million of inventory as
part of the Company's strategy to increase its in-stock position at the time
customer orders are received; ii) $5.3 million in prepaid catalog costs to
support the spring mailing activity and iii) $4.2 million in capital
expenditures, primarily for its new management information system, while $21.0
million was used for the paydown of the Company's revolving credit facility.
These uses of cash were primarily financed by a $24.5 million increase in
accounts payable and operating profits. With the significant improvement in
the Company's financial condition in 1993, it has been successful in restoring
normal trade terms with its vendors, which has resulted in greater leverage of
its accounts payable.

The Company experiences seasonality in its working capital requirements and
fluctuations in the revolving credit facility will occur, usually within the
first and fourth quarters of the year.

With the Company's financial restructuring completed and the corresponding
improvement in its financial condition, the Company focused in 1993 on
refinancing its remaining indebtedness, simplifying its capital structure and
embarking on a program of investing in infrastructure improvements to support
its growth objectives.

Refinancing of Indebtedness. In May 1993, the Company refinanced its
revolving credit facility that had been previously provided by a subsidiary of
NAR with a new three-year $40 million facility with an independent financial
institution. In October 1993, the Company increased the maximum credit
available to $52.5 million to include GUMP'S, THE COMPANY STORE AND TWEEDS as
borrowers under the facility. A subsidiary of NAR has provided a secured
limited guarantee of $10 million which allows the Company to borrow in excess
of its availability based on a formula, up to the facility's limit. This
limited guarantee was reduced by approximately $5.1 million during the fourth
quarter of 1993, and the guarantee will be eliminated in March 1994 based on
the Company's 1993 operating results. At January 1, 1994, the Company's
borrowing base formula would have enabled the Company to borrow approximately
$40 million, compared to the $.2 million that was outstanding.

In August 1993, the Company issued $20 million of 9.25% Senior Subordinated
Notes ("the 9.25% Notes") in a private placement with an insurance company.
The Company retired its outstanding $12.4 million of 8% Notes that were due in
October 1994 and $.8 million of its 14% Notes using the proceeds of the 9.25%
Notes, with the remainder to be used for the purchase of additional fulfillment
and warehouse capacity. The Company is

22
24
required to redeem $6 million of the 9.25% Notes without penalty by February
15, 1994 (subsequently amended to May 1, 1994) if the Company has not
established or acquired a new distribution facility by such date.

In 1993, the Company acquired three companies for $.1 million of its own
cash, $4.6 million of debt and $12.3 million of Common Stock. In addition, the
Company has agreed to provide an aggregate of up to $4 million of secured
working capital financing, a $.75 million short-term loan and a $.5 million
convertible note to two entities in which it has acquired an equity interest.

Simplification of Capital Structure. In September 1993, through a series
of mergers involving H&H and THC, the Company changed its name to Hanover
Direct, Inc. and eliminated its two-tier holding company structure.

On December 13, 1993, the Company converted its 7.5% Preferred Stock into
2,278,128 shares of Common Stock. The holders of the 7.5% Preferred Stock were
paid all accrued and unpaid dividends in cash amounting to $197,000. On
January 1, 1994, 12,270,503 shares of Class B Common Stock and 40,000 shares of
Class B Preferred Stock were exchanged into 18,937,169 shares of Common Stock.
All accrued and unpaid dividends amounting $886,000 were paid in cash in
February 1994. As a result of these transactions, the Company has eliminated
approximately $4 million of future annual preferred stock dividend
requirements.

On December 10, 1993, the Company issued 234,900 shares of its 6.0% Series
A Preferred Stock (6.0% Preferred Stock) for an installment note in the amount
of $2.4 million that it had assumed in its acquisition of Tweeds.

As a result of these transactions, the Company's capital structure consists
of 82,933,177 shares of Common Stock and 234,900 shares of 6.0% Preferred Stock
at January 1, 1994.

Infrastructure Investments. To improve its infrastructure to support its
growth objectives, the Company intends to construct a new 500,000 square foot
fulfillment center costing approximately $18 million in Roanoke, Virginia to
support the DOMESTICATIONS business and has acquired a 50% interest in a
partnership which owns the 175,000 square foot TWEEDS fulfillment center, into
which the Company plans to consolidate its Apparel group.

Additionally, the Company is currently in the process of upgrading its
management information systems by implementing new integrated software which it
expects to be fully operational in 1995 and is migrating from a centralized
mainframe to mid-range mini-computers at a total estimated cost of
approximately $13 to $15 million. As of January 1, 1994, the Company has
incurred costs of approximately $5.3 million as part of this plan, including
capital leases aggregating $2.4 million to be paid over four years.

Public Offering of Shares. On February 18, 1994, the Company filed a
registration statement on Form S-3 with the Securities and Exchange Commission
registering 10 million shares of its Common Stock, including 4,154,604 shares
on behalf of two selling shareholders. The net proceeds from the offering with
respect to the Company's shares will be used for general corporate purposes,
including the expansion of the Company's business.

23
25
The Company plans to fund the remaining infrastructure costs through cash
generated from operations, the proceeds of the Common Stock offering and,
possibly, obtaining mortgage financing. The Company believes that it has
adequate sources of financing to service its capital requirements.

Effects of Inflation. The Company normally experiences increased cost of
sales and operating expenses as a result of the general rate of inflation in
the economy. Operating margins are generally maintained through selective
price increases where market conditions permit. The Company's inventory is
mail-order merchandise which undergoes sufficiently high turnover so that the
cost of goods sold approximates replacement cost. Because sales are not
dependent upon a particular supplier or product brand, the Company can adjust
product mix to mitigate the effects of inflation on its overall merchandise
base.

24
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Hanover Direct, Inc.:

We have audited the accompanying consolidated balance sheets of Hanover
Direct, Inc. (a Delaware corporation) (successor to The Horn & Hardart Company,
see Note 1 to the Consolidated Financial Statements) and subsidiaries as of
December 26, 1992 and January 1, 1994, and the related consolidated statements
of income (loss), shareholders' (deficit) equity and cash flows for each of the
three fiscal years in the period ended January 1, 1994. These financial
statements and the schedules referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules referred to below based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hanover Direct, Inc. and
subsidiaries as of December 26, 1992 and January 1, 1994, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 1, 1994 in conformity with generally accepted accounting
principles.

As discussed in Notes 1 and 10 to the Consolidated Financial Statements,
effective December 29, 1991 the Company changed its method of accounting for
income taxes.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
financial statement schedules are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

ARTHUR ANDERSEN & CO.

New York, New York
February 28, 1994

25
27
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 26, 1992 and January 1, 1994

DECEMBER 26, JANUARY 1,
1992 1994
----------- ---------
(IN THOUSANDS)

ASSETS

Current Assets:
Cash and cash equivalents $ 2,553 $ 2,583
Accounts receivable, net of allowance
for doubtful accounts of $2,892 in
1992 and $2,509 in 1993 22,840 19,043
Inventories 58,270 80,429
Deferred tax asset, net 2,800 2,975
Prepaid catalog costs 18,277 25,571
Other current assets 2,058 2,374
-------- --------

Total Current Assets 106,798 132,975
-------- --------

Property and Equipment, at cost
Land 205 1,171
Buildings and building improvements 4,462 7,862
Leasehold improvements 5,696 6,242
Furniture, fixtures and equipment 16,309 22,551
Construction in progress - 5,434
-------- --------
26,672 43,260
Accumulated depreciation
and amortization (15,761) (18,341)
-------- --------

Net Property and Equipment 10,911 24,919
-------- --------

Excess of Cost Over Net Assets of
Acquired Businesses, net 8,710 18,463

Deferred Tax Asset, net 7,200 7,656

Other Assets, net 733 4,825
-------- --------

Total Assets $134,352 $188,838
======== ========

See Notes to Consolidated Financial Statements.

26
28

HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
As of December 26, 1992 and January 1, 1994 DECEMBER 26, JANUARY 1,
1992 1994
------------ ----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Current portion of long-term debt and
capital lease obligations $ 73 $ 2,024
Accounts payable 49,741 78,905
Dividends payable - 886
Accrued liabilities 21,363 20,653
Customer prepayments and credits 4,055 5,031
--------- --------
Total Current Liabilities 75,232 107,499
--------- --------

Noncurrent Liabilities:
Long-term debt 43,184 32,313
Capital lease obligations 105 1,823
Other 2,747 1,335
--------- --------
Total Noncurrent Liabilities 46,036 35,471
--------- --------

Total Liabilities 121,268 142,970
--------- --------
Commitments and Contingencies

Preferred Stock:
7.5% cumulative, convertible, $.01 par
value, authorized 861,900 shares;
issued 529,114 shares in 1992 6,526 -

Class B 8% cumulative, convertible,
$.01 par value, authorized and issued
40,000 shares in 1992 26,316 -
--------- --------
Total Preferred Stock 32,842 -
--------- --------

Shareholders' (Deficit) Equity:

6% Preferred Stock, convertible, $10
stated value, authorized 5,000,000 shares;
issued 234,900 shares in 1993 - 2,378
Class B Common Stock, $.01 par value,
authorized and issued 12,270,503 shares
in 1992 123 -
Common Stock, $.66 2/3 par value, authorized
150,000,000 shares; issued 58,154,584 shares
in 1992 and 83,136,542 shares in 1993 38,774 55,423
Capital in excess of par value 178,149 209,834
Accumulated deficit (229,049) (215,805)
--------- --------
(12,003) 51,830
Less:
Treasury stock, at cost (2,169,713 shares
in 1992 and 1,120,032 shares in 1993) (7,170) (3,130)
Notes receivable from sale of Common Stock - (1,774)
Deferred compensation (585) (1,058)
--------- --------
Shareholders' (Deficit) Equity (19,758) 45,868
--------- --------
Total Liabilities and Shareholders' (Deficit)
Equity $ 134,352 $188,838
========= ========

See Notes to Consolidated Financial Statements.

27
29
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For The Years Ended December 28, 1991, December 26, 1992 and January 1, 1994

1991 1992 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

REVENUES $623,650 $586,562 $642,511
-------- -------- --------
Operating costs and expenses:
Cost of sales and operating expenses 409,098 381,716 408,387
Selling expenses 174,401 138,494 157,811
General and administrative expenses 57,329 51,950 57,237
Restructuring expenses 8,900 - -
-------- -------- --------
649,728 572,160 623,435
-------- -------- -------

INCOME (LOSS) FROM OPERATIONS (26,078) 14,402 19,076

Interest expense (20,525) (13,379) (4,925)
Interest income 2,184 244 2,168
Other income (expense) (6,437) - 888
-------- -------- --------

Income (loss) from continuing operations
before income taxes (50,856) 1,267 17,207
Income tax provision (benefit) 225 219 (130)
-------- -------- --------

INCOME (LOSS) FROM CONTINUING OPERATIONS (51,081) 1,048 17,337

Provision for loss on disposal of
discontinued operations (21,119) - -
-------- -------- --------

Income (loss) before extraordinary items
and cumulative effect of accounting change (72,200) 1,048 17,337
Extraordinary items 6,915 9,201 -
Cumulative effect of accounting change for
income taxes - 10,000 -
-------- -------- --------
NET INCOME (LOSS) (65,285) 20,249 17,337

Preferred stock dividends (466) (3,197) (4,093)
-------- -------- --------
Net income (loss) applicable to Common
Shareholders $(65,751) $ 17,052 $ 13,244
======== ======== ========

Net income (loss) per share:
Income (loss) from continuing operations $ (3.16) $ (0.06) $ 0.17
(Loss) from discontinued operations (1.30) - -
-------- -------- --------
Income (loss) before extraordinary items
and cumulative effect of accounting change (4.46) (0.06) 0.17
Extraordinary items 0.43 0.24 -
Cumulative effect of accounting change for
income taxes - 0.26 -
-------- -------- --------
Net income (loss) per share $ (4.03) $ 0.44 $ 0.17
======== ======== ========

See Notes to Consolidated Financial Statements.

28
30
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 28, 1991, DECEMBER 26, 1992, AND JANUARY 1, 1994
(in thousands, except share amounts)

Preferred Stock Preferred Stock
Class B 8% Cumulative 7.5% Cumulative
Shares Amount Shares Amount
-----------------------------------------------------

Balance at December 29, 1990 0 $0 0 $0

Net loss for the year
Issuance of warrants
Executive employment contracts
Shares to 401k savings plan
Payment on notes receivable
Issuance of Class B Common Stock
Amortization of deferred compensation
Termination of Employee Stock Ownership
Plan
-----------------------------------------------------
Balance at December 28, 1991 0 $0 0 $0

Net income for the year
Issuance of Common Stock to and redemption of
Class B Common Stock by NAR
Issuance of Class B Common Stock
Amortization of deferred compensation
Issuance of Common Stock in
connection with Rights Offering
14% Exchange Offer
7 1/2% Exchange Offer
Stock Dividend to NAR
Issuance of Common Stock
Transfer of ESOP shares to treasury
-----------------------------------------------------
Balance at December 26, 1992 0 $0 0 $0

Net income
Mergers of H&H & THC into Hanover Direct, Inc. 40,000 25,516 569,532 7,158
Exchange of Class B 8% Preferred and Common Stock (40,000) (25,516)
Conversion of 7.5% Preferred Stock (569,532) (7,158)
Issuance of Preferred Stock
Stock dividends
Amortization of deferred compensation
Issuance of Common Stock
-----------------------------------------------------
Balance at January 1, 1994 0 $0 0 $0
=====================================================

Preferred Stock Class B Common Stock
Series A, 6.0% $.01 par value
Shares Amount Shares Amout
----------------------------------------------------

Balance at December 29, 1990 0 $0 0 $0

Net loss for the year
Issuance of warrants
Executive employment contracts
Shares to 401k savings plan
Payment on notes receivable
Issuance of Class B Common Stock 13,333,334 133
Amortization of deferred compensation
Termination of Employee Stock Ownership
Plan
----------------------------------------------------
Balance at December 28, 1991 0 $0 13,333,334 $133

Net income for the year
Issuance of Common Stock to and redemption of
Class B Common Stock by NAR (13,333,334) (133)
Issuance of Class B Common Stock 12,270,503 123
Amortization of deferred compensation
Issuance of Common Stock in
connection with Rights Offering
14% Exchange Offer
7 1/2% Exchange Offer
Stock Dividend to NAR
Issuance of Common Stock
Transfer of ESOP shares to treasury
----------------------------------------------------

Balance at December 26, 1992 0 $0 12,270,503 $123

Net income
Mergers of H&H & THC into Hanover Direct, Inc.
Exchange of Class B 8% Preferred and Common Stock (12,270,503) (123)
Conversion of 7.5% Preferred Stock
Issuance of Preferred Stock 234,900 2,342
Stock dividends 36
Amortization of deferred compensation
Issuance of Common Stock

--------------------------------------------------
Balance at January 1, 1994 234,900 $2,378 0 $0
==================================================

Capital
Common Stock in Excess
$.66 2/3 par value of par Accum. Treasury Stock
Share Amount Value (Deficit) Shares Amount
-----------------------------------------------------------------------------------

Balance at December 29, 1990 14,812,863 $9,874 $124,228 ($180,350) (900,943) ($7,865)

Net loss for the year (65,751)
Issuance of warrants 3,286
Executive employment contracts 1,281,458 854 6,287 (1,281,458) (3,845)
Shares to 401k savings plan (56) 12,502 109
Payment on notes receivable
Issuance of Class B Common Stock 1,867
Amortization of deferred compensation
Termination of Employee Stock
Ownership Plan
-----------------------------------------------------------------------------------
Balance at December 28, 1991 16,094,321 $10,728 $135,612 ($246,101) (2,169,899) ($11,601)

Net income for the year 17,052
Issuance of Common Stock to and
redemption of Class B Common
Stock by NAR 20,000,000 13,334 24,146
Issuance of Class B Common Stock 410
Amortization of deferred
compensation
Issuance of Common Stock in
connection with Rights Offering 14,396,798 9,603 11,086
14% Exchange Offer 4,099,625 2,733 5,123
7 1/2% Exchange Offer 3,448,840 2,299 5,773 45,006 393
Stock Dividend to NAR (3,764) 601,233 5,249
Issuance of Common Stock 115,000 77 (237)
Transfer of ESOP shares to
treasury (646,053) (1,211)
-----------------------------------------------------------------------------------
Balance at December 26, 1992 58,154,584 $38,774 $178,149 ($229,049) (2,169,713) ($7,170)

Net income 13,244
Mergers of H&H & THC into Hanover
Direct, Inc.
Exchange of Class B 8% Preferred
and Common Stock 18,937,169 12,625 13,014
Conversion of 7.5% Preferred Stock 2,278,128 1,519 5,639
Issuance of Preferred Stock
Stock dividends (438) 684,890 2,946
Amortization of deferred compensation
Issuance of Common Stock 3,766,661 2,505 13,470 364,791 1,094

----------------------------------------------------------------------------------
Balance at January 1, 1994 83,136,542 $55,423 $209,834 ($215,805) (1,120,032) ($3,130)
==================================================================================

Notes
Receivable
From Sale
of Common Deferred
Stock Comp. Total
---------------------------------

Balance at December 29, 1990 ($270) ($7,101) ($61,484)

Net loss for the year (65,751)
Issuance of warrants 3,286
Executive employment contracts (1,297) 1,999
Shares to 401k savings plan 53
Payment on notes receivable 270 270
Issuance of Class B Common Stock 2,000
Amortization of deferred compensation 1,145 1,145
Termination of Employee Stock
Ownership Plan 4,850 4,850
----------------------------------
Balance at December 28, 1991 $0 ($2,403) ($113,632)

Net income for the year 17,052
Issuance of Common Stock to and
redemption of Class B Common
Stock by NAR 37,347
Issuance of Class B Common Stock 533
Amortization of deferred
compensation 607 607
Issuance of Common Stock in
connection with Rights Offering 20,689
14% Exchange Offer 7,856
7 1/2% Exchange Offer 8,465
Stock Dividend to NAR 1,485
Issuance of Common Stock (160)
Transfer of ESOP shares to
treasury 1,211 0
----------------------------------
Balance at December 26, 1992 $0 ($585) ($19,758)
Net income 13,244
Mergers of H&H & THC into Hanover
Direct, Inc. 32,674
Exchange of Class B 8% Preferred
and Common Stock 0
Conversion of 7.5% Preferred Stock 0
Issuance of Preferred Stock 2,342
Stock dividends 2,544
Amortization of deferred compensation 599 599
Issuance of Common Stock (1,774) (1,072) 14,223
----------------------------------
Balance at January 1, 1994 ($1,774) (1,058) $45,868
==================================

See Notes to Consolidated Financial Statements

29

31

HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years ended December 28, 1991, December 26, 1992 and January 1, 1994

1991 1992 1993
-------- -------- --------
(IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($65,285) $20,249 $17,337
Adjustments to reconcile net
income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization ......... 11,568 5,188 4,122
Noncash portion of loss provision...... 19,516 - -
Noncash portion of extraordinary gains. (6,915) (9,201) -
Noncash portion of cumulative effect of
an accounting change.............. - (10,000) -
Noncash portion of ESOP termination.... 4,734 - -
Noncash portion of contract settlement. 2,652 - -
Deferred taxes......................... - - (631)
Other, net............................. 216 368 (33)
Changes in assets and liabilities, net
of effects of acquired businesses and
dispositions of assets:
Payment for repurchase of mail order
customer receivables.............. - (35,301) -
Net proceeds from sale of mail order
customer receivables.................. 11,332 37,008 -
Accounts receivable, net............... (4,427) 13,321 8,907
Inventories............................ 10,662 (9,854) (12,081)
Prepaid catalog costs.................. 12,606 9,470 (5,305)
Other current assets................... 3,254 (671) 282
Accounts payable....................... (23,937) (17,292) 24,530
Accrued liabilities.................... (9,811) (12,821) (10,650)
Dividend payable....................... - - 886
Customer prepayments and credits....... - (3,508) 684
------- ------- -------

Net cash provided (used) by operating
activities............................... (33,835) (13,044) 28,048
------- ------- ------

CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash.............. 557 5,765 -
Acquisitions of property and equipment... (1,320) (1,431) (4,239)
Purchase of businesses................... - - (100)
Net proceeds from sales of property...... 3,025 17,256 -
Other, net............................... (647) - (313)
------- ------- -------
Net cash provided (used) by investing
activities................................ 1,615 21,590 (4,652)
------- ------- -------

See Notes to Consolidated Financial Statements.

30

32
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For The Years Ended December 28, 1991, December 26, 1992 and January 1, 1994

1991 1992 1993
-------- --------- ---------
(IN THOUSANDS)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under revolving credit
facility . . . . . . . . . . . . . . . . . $ - $ - $ (20,965)
Proceeds from issuance of debt . . . . . . . 21,602 9,583 20,000
Net proceeds from issuance of
Preferred Stock and Class B Common Stock . 29,281 27,533 -
Payments of long-term debt and capital
lease obligations . . . . . . . . . . . . (18,060) (68,720) (19,856)
Proceeds from Rights Offering . . . . . . . - 19,748 -
Cash dividends paid . . . . . . . . . . . . - - (890)
Payment of debenture issuance costs . . . . (2,665) (825) -
Payment of debt issuance costs . . . . . . . - - (1,560)
Loan to ESOP. . . . . . . . . . . . . . . . . (1,050) - -
Proceeds from issuance of Common Stock . . . - - 912
Other, net . . . . . . . . . . . . . . . . . (1,593) - (1,007)
-------- ----------- ----------
Net cash provided (used) by financing
activities . . . . . . . . . . . . . . . . . . 27,515 (12,681) (23,366)
-------- ----------- ----------

Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . (4,705) (4,135) 30

Cash and cash equivalents at the beginning
of the year . . . . . . . . . . . . . . . . . 11,393 6,688 2,553
-------- ----------- ----------

Cash and cash equivalents at end of the
year . . . . . . . . . . . . . . . . . . . . . $ 6,688 $ 2,553 $ 2,583
======== =========== ==========

SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . $ 21,325 $ 12,547 $ 4,883
Income taxes paid . . . . . . . . . . . . . 755 226 71
Issuance of warrants . . . . . . . . . . . . 3,286 - -

See Notes to Consolidated Financial Statements.

31
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 28, 1991, DECEMBER 26, 1992 AND JANUARY 1, 1994

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Merger - Hanover Direct, Inc. ("HDI") was formed in connection with
the September 8, 1993 merger (the "Merger") involving HDI, The Horn & Hardart
Company ("H&H") and The Hanover Companies ("THC"), a wholly-owned subsidiary of
H&H. The Merger consisted of the merger of H&H into HDI, followed by the
merger of THC into HDI. The purpose of the Merger was to create a single
corporation to replace the then-existing two-tier structure whereby H&H and THC
were both subject to the filing requirements of Section 13 of the Securities
Exchange Act of 1934, as amended. The financial statements of THC had
previously been included in the consolidated financial statements of H&H.

The Merger was consummated by (i) the exchange to holders of shares of
H&H Common Stock shares of HDI Common Stock, (ii) the exchange to holders of
shares of THC 7.5% Preferred Stock shares of HDI's 7.5% Preferred Stock, and
(iii) the exchange to holders of shares of THC Class B Preferred Stock, shares
of HDI's Class B Preferred Stock, each such distribution being on a one-for-
one-basis.

The Merger was accounted for similarly to a pooling-of-interests and,
accordingly, HDI's Consolidated Financial Statements include the results of H&H
and THC for all applicable periods presented.

Principles of Consolidation - The Consolidated Financial Statements
include the accounts of HDI and all subsidiaries (the "Company"). Intercompany
transactions and balances have been eliminated. Certain prior year amounts
have been reclassified to conform to the current year presentation.

Fiscal Year - The Company operates on a 52/53 week fiscal year. The
years ended December 28, 1991 and December 26, 1992 were 52 week years. The
year ended January 1, 1994 was a 53 week year.

Inventories - Inventories consist principally of merchandise held for
resale and are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.

Prepaid Catalog Costs - Costs related to mail order catalogs and
promotional material are amortized over their estimated productive lives, based
on projected net shipments, not exceeding six months.

Depreciation and Amortization - Depreciation and amortization of
property and equipment are provided on the straight-line method at rates based
on the lesser of the estimated useful lives of the assets or terms of leases as
follows: buildings and building improvements, 30 years; furniture, fixtures and
equipment, 3-10 years; and leasehold improvements, over the terms of the
related leases. Expenditures for maintenance and repairs are charged to
operations as incurred; major improvements are capitalized.

Construction in Progress - Construction in progress includes the
costs to upgrade the Company's management information systems. These costs
will be depreciated and amortized over five years or the life of any leases,
whichever is shorter, and depreciation will commence when the assets are placed
in service. The Company capitalized $5.3 million of such costs as of January
1, 1994.

32
34
Excess of Cost Over Net Assets of Acquired Businesses - Excess of cost
over the net assets of acquired businesses is being amortized on a
straight-line basis over periods up to forty years. Accumulated amortization
was $3,458,000 and $3,878,000 at December 26, 1992 and January 1, 1994,
respectively.

Mailing Lists - The costs of acquired mailing lists are amortized
over a five year period. Mailing lists, included in Other Assets, amounted to
$89,000 and $2,274,000 at December 26, 1992 and January 1, 1994, respectively,
and are carried net of accumulated amortization of $6,020,000 and $6,295,000,
respectively.

Change in Accounting for Income Taxes - Effective December 29, 1991
(beginning of fiscal year 1992), the Company adopted Statement of Financial
Accounting Standards No. 109 - Accounting for Income Taxes ("SFAS 109"). This
standard requires, among other things, recognition of future tax benefits,
measured by enacted rates, attributable to deductible temporary differences
between financial statement and income tax bases of assets and liabilities and
to tax net operating loss carryforwards, to the extent that realization of such
benefits is "more likely than not".

Cash and Cash Equivalents - For purposes of the Consolidated
Statements of Cash Flows, the Company considers all highly liquid temporary
investments with an original maturity of less than ninety days as cash
equivalents.

Net Income (Loss) Per Share - Net income (loss) per share was computed
using the weighted average number of common shares outstanding. The weighted
average number of shares used in the calculation for both primary and fully
diluted net income (loss) per share in 1991 and 1992 were 16,287,723 and
38,467,015 shares, respectively. For 1993 the weighted average number of
shares for primary and fully diluted net income (loss) per share were
75,625,330 and 77,064,131 shares, respectively. Common share equivalents for
purposes of net income (loss) per share are stock options and warrants.

Supplemental Earnings Per Share - Assuming that the rights offering
and exchange offers discussed in Notes 2 and 7 had been consummated at the
beginning of fiscal year 1992, the weighted average number of shares
outstanding would have been 68,795,471, and earnings per share for 1992 would
have been as follows:

Income from continuing operations $.09
Net income $.37

The supplemental earnings per share was calculated assuming that the
Company eliminated $9 million of interest on the debt that was retired and the
Company incurred additional dividends on $.8 million on the preferred stock.

Assuming that the conversions of the 7.5% Preferred Stock and the
exchange of the Class B 8% Preferred Stock and the Class B Common Stock had
been consummated at the beginning of fiscal year 1993, the weighted average
number of shares outstanding for primary and fully diluted earnings per share
would have been 84,408,807 and 85,847,608 and earnings per share would have
been $.21 and $.20, respectively. This supplemental earnings per share
calculation assumes that the Company eliminated $4.1 million of preferred stock
dividends.

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Supplemental Disclosure of Noncash Activities

1992 1993
--------- --------
(IN THOUSANDS)

Exchange of THC 8% Cumulative Preferred
Stock and issuance of 20,000,000 shares
of Common Stock . . . . . . . . . . . $ 35,847 $ -
========= ========
Exchange of 14% Senior Subordinated
Debentures for Common Stock and THC 7.5%
Preferred Stock . . . . . . . . . . . $ 18,575 $ -
========= ========
Exchange of 7 1/2% Convertible Subordinated
Debentures for Common Stock and THC 7.5%
Preferred Stock . . . . . . . . . . . $ 11,900 $ -
========= ========
Dividend on 7.5% Preferred Stock paid -
in-kind . . . . . . . . . . . . . . . $ - $ 610
========= ========
Dividend on Class B 8% Preferred Stock
paid in Common Stock . . . . . . . . . $ - $ 2,508
========= ========
Exchange of 8.0% Class B Preferred Stock
for Common Stock . . . . . . . . . . . $ - $ 25,516
========= ========
Exchange of Class B Common Stock for
Common Stock . . . . . . . . . . . . . $ - $ 123
========= ========
Exchange of 7.5% Convertible Preferred
Stock for Common Stock . . . . . . . . $ - $ 7,158
========= ========
Issuance of 6% Preferred Stock . . . . . $ - $ 2,342
========= ========
Capital Lease Obligations . . . . . . . . $ - $ 2,541
========= ========
Issuance of Common Stock for notes
receivable . . . . . . . . . . . . . . $ - $ 1,915
========= ========

Acquisition of businesses:
Fair value of assets acquired . . . $ 38,578
Fair value of liabilities assumed . . (26,180)
Common stock issued . . . . . . . . (12,298)
--------
Net cash paid . . . . . . . . . . . $ 100
========

There were no significant noncash activities in 1991.

2. TRANSACTIONS WITH NAR GROUP LIMITED

On October 25, 1991 the Company's shareholders approved several
transactions among the Company, THC and NAR Group Limited ("NAR") pursuant to
which NAR acquired 13,333,334 shares of Class B Common Stock of the Company
and 40,000 shares of 8% Cumulative Preferred Stock of THC (the "Hanover
Preferred Stock"), for an aggregate purchase price of $40 million. The
purchase price was paid by the surrender by NAR of $15.1 million principal
amount of the Company's 7-1/2% Convertible Subordinated Debentures due March 1,
2007 (valued under the Purchase Agreement at $7.5 million) plus $31.3 million
in cash (representing the difference between $32.5 million and the sum of (i)
accrued interest on the debentures and (ii) $1 million of reimbursable expenses
payable to NAR under the stock purchase agreement). NAR also received warrants
to purchase 1,210,901 shares of the Company's Common Stock at exercise prices
ranging from $4.00 to $5.25 per share and expiring in five years. The exercise
prices were subsequently adjusted to prices ranging from $2.19 to $2.42 per
share in accordance with the anti-dilution provisions of the warrant
agreements.

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The Company entered into this transaction in July 1991, expecting that
this transaction would close by September 30, 1991 so it could apply the
proceeds to repay an interim borrowing which matured on the same date.
Unforeseeable delays prevented the Company from obtaining required consents
from certain creditors which were conditions to closing the transactions. As a
result of these delays, the Company was required to satisfy the maturing
interim borrowing out of working capital. Using working capital to satisfy
these borrowings caused increased strain on the Company's already poor cash
flow which further strained its relationship with its vendors. The Company
closed the above transactions on October 25, 1991 and received an equity
infusion of approximately $40 million. A working capital line of credit of
approximately $30 million had previously been made available to the Company by
a subsidiary of NAR. Although the Company believed that the resulting capital
provided to it would be sufficient to return the Company to profitability and
enable the Company to pay off $46.1 million of debt that was due in October
1992, it became apparent thereafter, that due to the Company's high debt
service requirements and other operational difficulties, it still did not
possess the sufficient liquidity to obtain the necessary merchandise on a
timely basis. The Company, therefore, required additional capital to permit it
to maintain satisfactory credit relations with its vendors and other trade
creditors, as well as to satisfy the debt that was due in October 1992.

The stock purchase agreement had granted NAR an option to cause the
Company to conduct a rights offering in the event that the Company did not
achieve certain earnings in the fourth quarter of 1991. In the event that NAR
exercised that option it would have been committed to purchase any shares of
Common Stock not subscribed for in such Rights Offering by the Company's other
shareholders. Thus, it appeared to the Company that the most likely source of
additional capital was NAR. Because the Company had a significant loss in the
fourth quarter of 1991, in December 1991 NAR indicated to the Company that it
would not exercise its option to cause the Company to conduct a Rights Offering
but indicated that it would be willing to make an additional equity investment
in the Company on terms other than those contemplated by the agreement.

In July 1992, the Company and NAR entered into a Definitive Agreement,
the terms of which were subsequently approved by the Company's shareholders on
September 23, 1992, at which time the following transactions were consummated:

- - NAR exchanged its 40,000 shares of the Hanover Preferred Stock and
13,333,334 shares of the Class B Common Stock for 20 million shares of
Common Stock of the Company.

- - NAR purchased 12,270,503 shares of the Company's Class B Common Stock
and 40,000 shares of a newly-created Class B 8% Cumulative Preferred
Stock (the "Class B Preferred Stock"), for an aggregate purchase price
of $28.4 million. Pursuant to the terms of the Preferred Stock, the
Company had the right to require the exchange of the Hanover Preferred
Stock and the Class B Common Stock into 18,937,169 shares of Common
Stock at any time after the date on which the per-share closing price
had been greater than $6.00 for 20 consecutive trading days.

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- - The Company conducted a rights offering (the "Rights Offering") in
which the Company's shareholders (other than NAR) subscribed to
7,636,905 shares of Common Stock at $1.50 per share for an aggregate of
$11.5 million. NAR purchased the remaining 6,759,893 shares not
subscribed for $1.50 per share for an aggregate of approximately $10
million. NAR received a standby commitment fee of $177,000 and an
underwriting fee of $405,000 representing 4% of the offering price of
all shares it purchased that were not purchased by other shareholders
in the Rights Offering.

On January 1, 1994, the Company exercised its right to require the
exchange of 40,000 shares of the Class B Preferred Stock and 12,270,503 shares
of the Class B Common Stock into 18,937,169 shares of Common Stock.

3. ACQUISITIONS

Gump's

In July 1993, the Company acquired substantially all of the mail order
and retail assets of Gump's, Inc. ("Gump's"). Gump's is an upscale catalog
marketer of exclusive gifts and the legendary San Francisco retailer. The
consideration given for the assets acquired was $13.2 million and consisted of
$6.9 million in cash and 1,327,330 shares of Common Stock valued at $4.78 per
share or $6.3 million. The $6.9 million of cash used for the purchase of the
assets was comprised of (i) proceeds of the sale of Gump's accounts receivable
aggregating $2.8 million; (ii) $2.6 million of Gump's cash acquired by the
Company as part of the assets acquired; and (iii) $1.5 million of additional
credit under the Company's revolving credit facility, as amended.

In connection with the above transaction, the Company amended its
agreement with General Electric Capital Corp. ("GECC") for the sale and
servicing of accounts receivable to include the Gump's accounts receivable
under its $75 million facility. The Company also amended its revolving credit
facility to increase the maximum credit available by $5 million for Gump's and
to include two wholly-owned subsidiaries of the Company as borrowers under the
revolving credit facility.

The Company Store

In August 1993, the Company acquired certain assets of Company Store
Holdings, Inc. ("CSH"), The Company Store, Inc., Scandia Down Corporation and
Southern California Comfort Corporations (collectively, "The Company Store").
The Company Store is a direct marketer of down comforters, other down products
and home furnishings.

The consideration given for the assets acquired was $7 million and
consisted of (i) 516,824 shares of the Company's Common Stock, valued at $4.64
per share, or $2.4 million, and (ii) two promissory notes in the aggregate
principal amount of $1.1 million issued by a subsidiary of the Company, with
interest thereon at six percent (6%) per annum due on October 31, 1994 and $3.5
million principal amount of secured notes issued by certain subsidiaries of the
Company with interest thereon at six percent (6%) per annum, with principal and
interest payments payable monthly on a fifteen year amortization, with the
remaining balance due and payable on August 31, 1998.

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In October 1993, the Company amended its revolving credit facility to
increase the maximum credit available by $5 million for The Company Store and
to include The Company Store as a borrower under the facility.

Tweeds

In September 1993, the Company acquired all of the outstanding shares
of Tweeds, Inc. Tweeds is a well-known European- inspired women's fashion
catalog.

The purchase price was $8.8 million and consisted of: (i) $.1 million
in cash; (ii) 771,774 shares of the Company's Common Stock, valued at $4.60 per
share, or $3.6 million and (iii) the assumption of $5.1 million of liabilities.
In October 1993, the Company amended its revolving credit facility to increase
its maximum credit available by $2.5 million for Tweeds and to include Tweeds
as a borrower under the facility.

Accounting for Acquisitions

The acquisitions of Gump's, The Company Store and Tweeds have been
accounted for using the purchase method of accounting with an estimated excess
of cost over net assets of acquired businesses of approximately $10.2 million
recorded, based upon the fair values of the assets acquired and liabilities
assumed. In addition, the Company recorded $2.5 million representing the fair
value of acquired mailing lists. The operating results of the acquired
companies are included in consolidated net income from their respective dates
of acquisition.

The following represents the unaudited pro forma results of operations
for the years ended December 26, 1992 and January 1, 1994 as if these three
acquisitions had occurred at the beginning of fiscal years 1992 and 1993:

(In thousands except per share amounts) (Unaudited)
1992 1993
--------- ----------

Revenues $ 733,454 $ 723,749
========= ==========
Income (loss) before extraordinary
items and cumulative effect of
accounting change for income taxes $ (3,720) $ 10,160
========= ==========

Net income applicable to Common
Shareholders $ 12,284 $ 6,067
========= ==========

Per Share:
Income (loss) per share before
extraordinary items and cumulative
effect of accounting change for income
taxes $ (.17) $ .08

Extraordinary items .23 -
Cumulative effect of accounting change
for income taxes .24 -
--------- ----------
Net income $ .30 $ .08
========= ==========

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The pro forma information does not purport to be indicative of the
results that actually would have been obtained if the operations were combined
during the periods presented, and is not intended to be a projection of future
results or trends.

The Safety Zone

In September 1993, the Company acquired 20% of the outstanding common
stock of Aegis Safety Holdings, Inc. ("Aegis"), a direct marketer of safety and
anti=hazard products through The Safety Zone catalog. The consideration for
the investment was the provision by the Company of certain catalog fulfillment
and financial services to Aegis at the Company's cost until August 1998,
subject to certain early termination provisions. The Company also acquired an
option to purchase an additional 460,714 shares at $7.00 per share, subject to
anti=dilution provisions which would increase its ownership to 50% of Aegis
common stock. This option expires at the end of 1996. Aegis has an option to
require the Company to acquire all of Aegis' then outstanding stock after
December 31, 1998 if the Company has exercised its option and certain other
conditions have been satisfied. The Company has agreed to extend a secured
working capital line of up to $1 million to Aegis in 1994. Aegis had
approximately $9 million in net sales for the eleven months ended January 1,
1994.

Boston Publishing Company

In February 1994, the Company entered into an agreement with Boston
Publishing Company, Inc. ("BPC") whereby the Company acquired a 20% equity
interest in BPC and agreed to provide certain catalog related services to the
Boston based publisher. The Company will also provide BPC with a secured
three=year revolving credit facility of up to $3 million, a secured $.75
million short=term loan, and a $.5 million five year convertible note. The
note is convertible into equity representing approximately 4% of BPC. The
Company also acquired an option to acquire an additional 1,536,345 shares at
$2.08 per share subject to anti=dilution provisions which would increase its
ownership to 50% in BPC. The BPC shareholders will have the right to require
the Company to purchase their shares in fiscal year 1997 under certain
circumstances.

BPC publishes the Museum Collections catalog featuring unique,
well=valued museum replicas, reproductions and adaptations; and the Finishing
Touches catalog, featuring decorative merchandise for the home. BPC had
approximately $12 million (unaudited) in revenues in 1993.

The investments in Aegis and BPC are accounted for by the equity
method of accounting.

4. SEARS LICENSING AGREEMENT

In January 1994, the Company entered into a licensing agreement (the
"Sears Agreement") with the direct marketing subsidiary of Sears Roebuck and
Co. ("Sears"), to produce specialty catalogs for customers of the recently
discontinued Sears catalog. The specialty catalogs include: Show Place, based
on the DOMESTICATIONS catalog, Great Kitchens, based on the COLONIAL GARDEN
KITCHENS catalog, and Beautiful Style, based on the SILHOUETTES catalog. The
Sears Agreement has an initial three-year term and continues thereafter unless
terminated by either party. Profits and losses from the venture are to be
shared between the parties on an equal basis.

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The Company also issued to Sears a performance warrant to purchase 3.5
million shares of Common Stock in 1999 if the licensed business with Sears has
revenues of at least $250 million and earnings before interest and taxes of at
least $30 million in 1998. Alternately, Sears will be entitled to purchase 7
million shares of Common Stock in 1999 if the licensed business with Sears has
revenues of at least $500 million and earnings before interest and taxes of at
least $60 million in 1998. If neither of these goals are achieved, the
performance warrant will expire unexercised in 1999. The Company will be
required to value the performance warrant at such time as it is deemed to have
become measurable for accounting purposes because the required events have
become probable or have occurred (which may be prior to the date the warrant is
exercisable under the Sears Agreement) (the "Measurement Date"). The value
would be the difference, if any, between the closing market price of the Common
Stock at the Measurement Date and the exercise price of the performance
warrant, multiplied by the applicable number of shares. The value would be
amortized from the Measurement Date through 1998 and would be subject to change
each reporting period based on the closing market price of the Common Stock as
of such reporting date. The warrant exercise price is $10.57 per share. The
Company is obligated to meet various operational performance standards and if
the Company is unable to meet these standards, Sears would be entitled to
terminate the agreement. The Company is also entitled to terminate the
agreement in certain circumstances, including if Sears fails to comply with any
material provision of the Sears Agreement.

5. ACCOUNTS RECEIVABLE, NET

On December 22, 1992, the Company repurchased all receivables then
owned by certain trusts ($52.7 million), and concurrently entered into an
agreement with an unrelated third party which provides for the sale and
servicing of accounts receivable originating from the Company's revolving
credit card.

The Company remains obligated to repurchase uncollectible accounts
pursuant to the recourse provisions of the agreement and is required to
maintain a specified percentage of all outstanding receivables sold under the
program as a deposit with the third party to secure its obligations under the
agreement. The Company is required to pay certain servicing fees to the third
party and the Company earns the finance charge income that is charged to the
accounts.

The uncollected balances of accounts receivable sold under this
program were $51.3 million, of which $15.3 million represents deposits under
the agreement and $2.7 million are accounts not purchased under the agreement
which are included in Accounts receivable at December 26, 1992. At January 1,
1994, the uncollected balances of accounts receivable under this program were
$47.0 million, of which $13.0 million represents deposits under the agreement.
The total reserve balance maintained for the repurchase of uncollectible
accounts was $5.5 million and $3.1 million at December 26, 1992 and January 1,
1994, respectively, of which $3.5 million and $1.7 million, respectively, are
included in Accrued liabilities and the remaining balance is included in the
allowance for doubtful accounts.

Receivables sold under this agreement are considered financial
instruments with off=balance sheet risk as defined in Statement of Financial
Accounting Standards No. 105.

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Because the Company's sales are primarily made to individual customers
located throughout the United States, the Company believes there are no
concentrations of credit risks.

6. ACCRUED LIABILITIES

Accrued liabilities consists of the following (in thousands):

DECEMBER 26, JANUARY 1,
1992 1994
------------ ----------

Compensation.............................. $ 3,298 $ 3,642
Interest.................................. 1,033 746
Insurance................................. 1,434 736
Reserve for future sales returns.......... 3,901 4,911
Reserve for repurchase of accounts
receivable sold with recourse............ 3,500 1,735
Net liabilities of discontinued
operations............................... 4,944 977
Other..................................... 3,253 7,906
---------- ---------
$ 21,363 $ 20,653
========== =========

7. LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

DECEMBER 26, JANUARY 1,
1992 1994
------------ -----------

Revolving Credit Facility................. $ 21,195 $ 230
Industrial Revenue Bonds
with variable interest rates
averaging 4.3% in 1992 and 3.7% in 1993
due 2003................................. 8,000 8,000
6% Notes Payable due 1994................. - 1,100
6% Mortgage Notes Payable due 1998........ - 3,452
9.25% Senior Subordinated Notes due 1998.. - 20,000
7 1/2% Convertible Subordinated Debentures
due 2007................................. 751 751
14% Senior Subordinated Debentures........ 825 -
8% Subordinated Notes..................... 12,360 -
Other..................................... 76 56
---------- ----------
43,207 33,589
Less current portion...................... 23 1,276
---------- ----------
Noncurrent portion........................ $ 43,184 $ 32,313
========== ==========

Revolving Credit Facility

On May 5, 1993, the Company consummated a three-year, $40 million credit
facility with a financial institution, replacing the previous facility with
Quadrant Capital Corporation ("QCC"), a subsidiary of NAR, that had been
entered into in 1991. The new facility (the "Revolving Credit Facility")
provides for cash borrowings and letters of credit based on eligible inventory,
with a $10 million sublimit for letters of credit. The interest rate on the
funds borrowed under the Revolving Credit Facility is the prime rate of
Philadelphia National Bank plus two percent per annum. Subsequent to May 5,
1993, the Company amended the Revolving Credit Facility to include Gump's, The
Company Store and Tweeds, as borrowers under the agreement and

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the limit was increased to $52.5 million. The facility is guaranteed by the
Company and is secured by inventory and other assets of its principal operating
subsidiaries. In addition, a subsidiary of NAR provided a secured limited
guarantee of $10 million which allowed the Company to borrow funds in excess of
its availability, based on a formula, up to the facility's limit. The
guarantee is reduced based upon availability under the agreement and the
Company's cash flow, as defined, and accordingly, was reduced by $5.1 million
in the fourth quarter of 1993 and will be eliminated in March 1994.

The loan agreement contains working capital and net worth covenants, debt
incurrence restrictions, dividend restrictions, and prepayment penalties.

The face amount of unexpired documentary letters of credit at December 26,
1992 and January 1, 1994 were $1.7 million and $5.7 million, respectively. In
addition, the Company had issued $5.7 million of standby letters of credit at
December 26, 1992.

Industrial Revenue Bonds due 2003

The Industrial Revenue Bonds are due on December 1, 2003 and are secured by
the related assets purchased from the proceeds of the bonds and by an
irrevocable letter of credit in the amount of $8.6 million. The obligations
are guaranteed by the Company.

6% Notes Payable due 1994

In connection with the purchase of The Company Store, a subsidiary of the
Company entered into two secured promissory notes in the aggregate amount of
$1.1 million. The promissory notes bear interest at 6% per annum and are due
October 31, 1994. The promissory notes are secured by equipment of The Company
Store.

6% Mortgage Notes Payable due 1998

In connection with the purchase of The Company Store, certain subsidiaries
of the Company entered into two secured notes in the aggregate amount of $3.5
million with interest at 6% per annum with principal and interest payments
payable monthly on a fifteen year amortization with the remaining balance due
on August 31, 1998. The mortgage notes payable are non-recourse notes and are
not guaranteed by the Company. The mortgage notes payable are secured by the
manufacturing and office facilities of The Company Store.

9.25% Senior Subordinated Notes due 1998

On August 17, 1993, the Company issued $20 million of 9.25% Senior
Subordinated Notes due 1998 ("9.25% Notes") in a private placement with an
insurance company. The Company utilized the funds to retire approximately $14
million of other subordinated debt. Under the terms of the 9.25% Notes, the
Company must redeem $6 million without penalty by February 15, 1994,
(subsequently amended to May 1, 1994) if the Company has not established or
acquired a new distribution facility by such date.

The 9.25% Notes mature on August 1, 1998 and require quarterly interest
payments. The 9.25% Notes require that the Company maintain certain minimum
net worth, working capital, debt to earnings and fixed charge coverage ratios.
Under the terms of the related Registration Rights Agreement, the

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Company is required to file a "shelf" registration statement under the
Securities Act of 1933, by February 13, 1994 (subsequently extended until March
15, 1994) and use its best effort to cause the registration to be declared
effective by June 13, 1994.

7 1/2% Convertible Subordinated Debentures due 2007

On September 23, 1992, the Company consummated an exchange offer with
holders of these debentures, pursuant to which the Company issued 40,500 shares
of its Common Stock and 13,500 shares of 7.5% Preferred Stock (hereinafter
defined) in exchange for $540,000 of the debentures that were tendered. This
resulted in an extraordinary gain of $.3 million in 1992.

On November 9, 1992, the Company, with the consent of a majority of holders
of these debentures, amended the indenture to allow, for the 30 day period
ending on December 4, 1992, holders of the debentures to be able to convert
their debentures into Common Stock at a conversion price of $3.33 per share
instead of $10.31 per share. As a result, the Company converted approximately
$11.4 million of these debentures into 3,408,340 shares of Common Stock and
recorded an extraordinary gain of approximately $1.6 million based on the fair
market value of the shares issued.

14% Senior Subordinated Debentures

In 1992, the Company defaulted with respect to the payment of interest on
these debentures. The Company and holders of 75% of the 14% Debentures entered
into an exchange agreement (the "14% Exchange Offer") by which such holders
would exchange their debentures for a combination of cash and 7.5% Preferred
Stock (hereinafter defined) and Common Stock of the Company. On September 23,
1992, the Company consummated the 14% Exchange Offer resulting in the exchange
of $23.5 million (of the $24.3 million) of 14% Debentures outstanding for $4.85
million in cash and 4,099,625 shares of its Common Stock and 403,088 shares of
7.5% Cumulative Convertible Preferred Stock ("7.5% Preferred Stock"). A
subsidiary of QCC owned and exchanged approximately $1.7 million or 7% of these
debentures.

The Company recorded an extraordinary gain in 1992 of approximately $6.2
million as a result of the 14% Exchange Offer. The gain was calculated based
on the cash and the fair market value of the securities issued in exchange for
the debt retired, net of approximately $1.3 million in transaction costs. The
gain also includes interest that was forgiven as part of the 14% Exchange Offer
amounting to approximately $3.7 million.

The defaulted interest was paid to the remaining bondholders on November 4,
1992 and the Company was no longer in default. On August 17, 1993, the Company
paid off the remaining $825,000 of 14% debentures with proceeds from the 9.25%
Notes.

8% Subordinated Notes

The 8% Subordinated Notes were due on October 15, 1994. They had
originally been due in October, 1991, and carried an interest rate of 11%. In
connection with the restructuring of the Company's debt obligations in 1991,
these notes were partially paid down by $5.0 million, and extended to 1994 with
the interest rate lowered to 8%. The Company was required to pay an amount
equal to 3% per year if, at final maturity or earlier redemption, NAR's
compound annual rate of return on the Company's Common Stock, together

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with any dividends on the Class B Preferred, had exceeded 20% after adjustment
to eliminate general market changes as reflected in movements of the Dow Jones
Industrial Average. The Company redeemed all of the outstanding notes at the
face amount plus accrued interest on August 17, 1993, with the proceeds of the
9.25% Notes.

General

At January 1, 1994, the aggregate annual principal payments required on all
long-term debt were as follows (in thousands): 1994 - $1,276, 1995 - $161,
1996 - $437, 1997 - $181, 1998 - $22,783 and thereafter $8,751.

8. CAPITAL STOCK

On September 8, 1993 HDI was formed through a series of mergers involving
H&H and THC. The Merger was consummated by (i) the exchange to holders of
shares of H&H Common Stock shares of the HDI's Common Stock, (ii) the exchange
to holders of shares of THC 7.5% Preferred Stock shares of 7.5% Preferred
Stock, and (iii) the exchange to holders of shares of THC Class B Preferred
Stock shares of the HDI's Class B Preferred Stock, each such distribution being
on a one-for-one-basis.

On December 13, 1993, the Company converted all of the 7.5% Preferred Stock
into 2,278,128 shares of Common Stock. The holders of the 7.5% Preferred Stock
were paid all outstanding dividends in cash amounting to $197,000. These
shares had been issued in connection with the 1992 7 1/2% Exchange Offer. Each
share was convertible into four shares of Common Stock at the time on which the
per-share closing price of the Common Stock on the American Stock Exchange
exceeded $6.00 for 20 trading days in a consecutive 30 day trading period,
which occurred on November 11, 1993.

On January 1, 1994, 12,270,503 shares of Class B Common Stock and 40,000
shares of Class B Preferred Stock were exchanged into 18,937,169 shares of
Common Stock.

Dividends on the Class B Preferred Stock aggregated $3.3 million in fiscal
1993 and were paid through the issuance of 684,890 shares of Common Stock and
$693,000 in cash. The Common Stock issued in connection with these dividends
was valued at the average per-share closing price of the Common Stock during
the 20 consecutive trading days immediately preceding the date on which the
dividends were paid. On January 1, 1994, the Company had accrued dividends
payable of $886,000 on the Class B Preferred Stock which were paid in cash on
February 22, 1994.

6% Series A Convertible Preferred Stock

On December 10, 1993, in connection with the Company's acquisition of
Tweeds, the Company entered into an exchange agreement with a major vendor of
Tweeds. Under the exchange agreement, the Company issued 234,900 shares of its
6% Series A Preferred Stock (6% Preferred Stock) for an installment note,
dated March 29, 1993, as amended, in the amount of approximately $2.4 million
issued by Tweeds. Dividends on the 6% Preferred Stock began accruing on
September 30, 1993.

The 6% Preferred Stock shall be converted into Common Stock of the
Company over a three year period on September 30, 1994, 1995, and 1996. The

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conversion price shall be an amount equal to the average of the per share
closing prices for the five trading days proceeding the conversion dates.

The 6% Preferred Stock has a stated value of $10 per share and has a
liquidation preference of an amount equal to the stated value of each share of
the 6% Preferred Stock plus accrued dividends or $2,385,000 at January 1, 1994.
The Company has the right to redeem the 6% Preferred Stock at its initial
stated value plus accrued dividends, payable in cash.

Warrants

The warrants outstanding at January 1, 1994, are as follows:

WARRANTS EXERCISE EXPIRATION
ISSUED PRICE DATE
-------- -------- ----------

3,151,945 $ 2.42 05/08/96
349,601 2.19 05/10/96
3,157,884 2.91 07/08/96
334,550 2.19 07/10/96
----------
6,993,980
==========

Of the above warrants issued, 5,033,735 warrants are held by NAR and
affiliates.

In addition, as previously discussed, the Company issued to Sears a
performance warrant to purchase up to 7 million shares of Common Stock in 1999.
This performance warrant is not reflected in the above table.

At January 1, 1994, there were 82,933,177 shares of Common Stock and
234,900 shares of 6% Series A Preferred Stock outstanding. Additionally, an
aggregate of 18,367,717 shares of Common Stock were reserved for (i) the
exercise of outstanding options (535,250), (ii) the exercise of outstanding
warrants (13,993,980) including the Sears performance warrant discussed above,
(iii) the Executive Equity Incentive Plan (1,736,170), (iv) the Restricted
Stock Award Plan (314,200), and (v) the All Employee Equity Investment Plan
(1,788,117).

Other Transactions

In July 1993, the Company filed a Form S-3 with the Securities and Exchange
Commission registering 3,750,000 shares of the Company's Common Stock for the
purpose of the Gump's acquisition and future business combination transactions.
As of January 1, 1994, 2,615,928 shares have been issued in connection with the
Gump's, The Company Store and Tweeds acquisitions.

On February 16, 1994, the Company entered into an agreement with Sun Life
Insurance Company of America ("Sun Life") whereby Sun Life will exercise its
1,960,245 warrants in a cashless or net-issue exchange with the Company and the
Company will issue 1,309,207 shares of Common Stock. The number of shares of
the Company's Common Stock to be received by Sun Life upon the "cashless"
exercise of its warrants was determined based upon the average closing price of
the Common Stock on the American Stock Exchange for the ten day trading period
ended on February 15, 1994, which is $7.163 per share.

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46
Dividend Restrictions

The Company is restricted from paying dividends on its Common Stock or from
acquiring any of its capital stock by certain debt covenants contained in
agreements to which the Company is a party.

9. EMPLOYEE BENEFIT PLANS

Stock Option Plan

Pursuant to the Company's Stock Option Plan (the "Plan"), an aggregate of
2,830,519 shares were approved by shareholders for issuance to employees and
consultants of the Company. The option price and the periods over which an
option is exercisable are specified by the Compensation Committee of the Board
of Directors.

Options expire five years from the date of grant and principally vest over
three to four years. Payment for shares purchased upon the exercise of an
option shall be in cash or stock of the Company. If paid in cash, a partial
payment may be made with the remainder in installments evidenced by promissory
notes at the discretion of the Compensation Committee.

Changes in options outstanding and options available for grant, expressed
in number of shares, are as follows:

1991 1992 1993
---------- ----------- ----------

Options outstanding,
beginning of period 1,231,623 945,965 603,765
Expired (28,433) (164,200) (214,165)
Cancelled (257,225) (178,000) (24,350)
--------- --------- ---------
Options outstanding,
end of period 945,965 603,765 365,250
========= ========= =========
Options exercisable,
end of period 571,833 502,675 365,250
========= ========= =========
Available for grant of
options, end of period 1,012,118 1,345,318 1,583,833
========= ========= =========

The option prices range from $2.75 per share to $9.625 per share, with
amounts as follows: $2.75 - 200,000 shares, $5.00 - 144,550 shares, $7.00
- -6,200 shares, $8.00 - 7,000 shares and $9.625 - 7,500 shares.

Prior to 1992, three directors were granted non-qualified options outside
of the Plan to purchase a total of 50,000 shares. Of these options 45,000
shares expire in 1994 and 5,000 shares expire in 1995. The option price ranges
from $5.00 per share to $7.25 per share. The table above does not include
these option grants.

On September 23, 1992, six directors were granted options to purchase
20,000 shares each, at market price, which at that time was $1.75 per share.
These option grants were approved at the 1993 annual meeting of shareholders
and expire in 1997. The table above does not include these option grants.

Hanover Direct, Inc. Savings Plan

The 401(K) Savings Plan (the "Plan") allows eligible employees to
contribute a percentage of their base compensation to the Plan. The Company
makes matching contributions of one-third of the employees' pre-tax

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47
contributions. Participants may invest contributions in various investment
funds, in addition to a guaranteed investment fund or in the Company's Common
Stock.

The Company's contributions charged to expense for 1991, 1992 and 1993 were
$241,000, $265,000 and $431,000, respectively.

Supplemental Retirement Plan

The Supplemental Retirement Plan (the "Plan") allows eligible employees to
make contributions to a trust where, prior to October 1993, they were invested
for each participant in life insurance having a cash surrender value and
carrying a term benefit payable to the beneficiary selected by the participant.
The Company makes matching contributions. In October 1993, the Company amended
and restated the Plan. Participant contributions are invested by the trust for
each participant in a tax free money market fund. Company contributions in
1991, 1992 and 1993 amounted to $130,000, $179,000 and $130,000, respectively.

The Plan permits eligible employees to contribute up to 4% of their salary.
The Company matches all participant contributions, up to the 4% threshold. The
Plan is not tax-qualified under the applicable provisions of the Internal
Revenue Code of 1986, as amended.

Incentive Compensation Plan

Bonus arrangements with certain executives and key employees generally
provide for additional compensation based upon the attainment of certain profit
levels, as well as other performance measures. These bonuses approximated $1.6
million and $.4 million in 1992 and 1993, respectively. There were no bonuses
paid in 1991. Under the bonus plan, 25% of the bonus is paid in restricted
stock that participants vest in over a three year period. In fiscal 1993,
89,220 shares were issued in connection with the Incentive Compensation Plan.

Executive Equity Incentive Plan

On December 17, 1992, the Board of Directors adopted the 1993 Executive
Equity Incentive Plan (the "Incentive Plan"). Such plan was approved by
Shareholders at the 1993 Annual Meeting. Pursuant to the Incentive Plan,
options to purchase shares of the Company's Common Stock will be granted from
time to time by the Compensation Committee of the Board of Directors to
selected executives of the Company or its affiliates. For each such option
granted, the selected executive will receive the right to purchase on a
specified date (the "Tandem Investment Date") a number of shares of the
Company's Common Stock ("Tandem Shares") equal to one-half the maximum number
of shares of the Company's Common Stock covered by such option. An aggregate
of 2,400,000 shares of the Company's Common Stock have been reserved for
issuance under the Incentive Plan. Company financing is available under the
Incentive Plan to pay for the purchase price of the Tandem Shares.

The purchase price per share of the Company's Common Stock upon exercise of
a stock option was $2.50 ("Option Price") for all options granted before the
ratification of the Incentive Plan by the Shareholders, and the fair market
value of a share of the Company's Common Stock on the date of grant of such
option for all other options. Options granted under the Incentive Plan become
exercisable three years after the date of grant and expire six years

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48
from the date of grant. The purchase price shall be paid in full at the time
of purchase in cash, or shares of the Company's Common Stock valued at their
fair market value or in combination thereof. The difference between the Option
Price and the fair market value of the Common Stock on the Tandem Investment
Date aggregated $601,000 and is being amortized over the three year period that
the options become exercisable. The amortization for fiscal 1993 was $170,000.

In 1993, 663,830 shares were purchased at prices ranging from $3.125 to
$4.50 for a total consideration of $2,133,156. The employees paid $710,000 and
the Company accepted notes in the amount of $1,423,000 which are due in 1999.
The notes bear interest at 3.96% to 5.54%, and 1,327,660 options were granted
to such employees at prices ranging from $2.50 to $4.50.

Restricted Stock Award Plan

On December 17, 1992, the Board of Directors adopted the 1993 Restricted
Stock Award Plan (the "Restricted Stock Plan"). Each full-time or permanent
part-time employee of the Company or its affiliates selected by the
Compensation Committee who holds a key position that the Compensation Committee
shall have designated for eligibility in the Restricted Stock Plan, has
attained the age of 18, has performed at least 12 months of continuous service
with the Company or an affiliate of the Company, and is not covered by a
collective bargaining agreement may participate in the Restricted Stock Plan.
Pursuant to the Restricted Stock Plan, the Compensation Committee from time to
time may award shares of the Company's Common Stock ("Award Shares") to such
participants. The Award Shares received by such participants are not
transferable (other than by will or the laws of descent and distribution) until
the vesting date or when such participant attains the age of 65, dies, or
becomes permanently disabled, and are subject to forfeiture in the event the
participant ceases to be an employee prior to that date. An aggregate of
500,000 shares of the Company's Common Stock have been reserved for issuance
under the Restricted Stock Plan. During 1993, 185,800 shares were awarded to
participants aggregating $650,000. Such amount is being amortized over a three
year vesting period. Amortization in 1993 was $188,000.

All Employee Equity Investment Plan

On December 17, 1992, the Board of Directors adopted the 1993 All Employee
Equity Investment Plan (the "Investment Plan"), subject to the approval of
Shareholders at the 1993 Annual Meeting. Each full-time or permanent part-time
employee of the Company or its affiliates who has attained the age of 18, has
met certain standards of continuous service with the Company or an affiliate of
the Company and is not covered by a collective bargaining agreement may
participate in the Investment Plan.

An eligible employee shall be granted a right to purchase a specific number
of shares of the Company's Common Stock by the Compensation Committee, based on
the eligible employee's salary level. The purchase price of the Company's
Common Stock in the Investment Plan shall be the average market value of a
share of the Company's Common Stock during the 20 days prior to the first day
of the subscription period, less a 40% discount. The Shares received by such
participants are not transferable (other than by will or the laws of descent
and distribution) until the vesting date or when such participant attains the
age of 65, dies, or becomes permanently disabled, and are subject to forfeiture
in the event the participant ceases to be an employee prior to that date. An
aggregate of 2,000,000 shares of the

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49
Company's Common Stock have been reserved for issuance under the Investment
Plan. During fiscal 1993, 211,883 shares were purchased by employees at an
average discounted price of $2.32. The difference between the market price and
discounted price aggregated $422,000 and is being amortized over a three year
vesting period. Amortization in 1993 was $46,000.

Employee Stock Ownership Plan

The Employee Stock Ownership Plan (the "ESOP") was terminated December 28,
1991. Because the value of the unallocated shares was not sufficient upon
termination to fully satisfy the ESOP's indebtedness to the Company, a charge
of $4.7 million was recognized in 1991 and is reflected in Other income
(expense). Shares allocated to participants at December 28, 1991 were
approximately 288,000. These shares became vested upon termination of the
ESOP. In November 1992, after receiving approval of the termination from the
Internal Revenue Service, the Company transferred 646,053 non-vested shares
into its Treasury. The vested shares were distributed in 1993.

10. INCOME TAXES

Effective December 29, 1991, the Company adopted Statement of Financial
Accounting Standards No. 109 - Accounting for Income Taxes (SFAS 109). In
accordance with this statement, for the year ended December 26, 1992, the
Company recognized a deferred tax asset of $10 million, reflecting the
cumulative effect of the accounting change for the benefit expected to be
realized from the utilization of net operating loss carryforwards ("NOLs") and
deductible temporary differences. For the year ended January 1, 1994, the
Company recognized an additional deferred tax asset of $.6 million, reflecting
the effect of the increase in the Federal corporate income tax rate (from 34%
to 35%) on the benefit expected to be realized from the utilization of NOLs
carryforwards and deductible temporary differences.

At January 1, 1994, the Company had tax NOLs totalling $147 million, which
expire as follows: In the year 2000 - $1 million, 2001 - $21 million, 2003 -
$15 million, 2004 - $14 million, 2005 - $21 million, 2006 - $47 million, 2007 -
$28 million.

The Company also has $.9 million of charitable contribution carryforwards
that expire in 1994 through 1997 and $1.7 million of general business tax
credit carryforwards that expire in 1998 through 2003.

Under Section 382 of the Internal Revenue Code of 1986, certain
transactions the Company entered into during 1991 resulted in an ownership
change with respect to the Company and, thus, in the imposition of an annual
limitation ("the Section 382 limitation") of approximately $4 million on the
amount of taxable income of the Company which may be offset by the Company's
pre-change NOL, charitable contribution and business tax credit carryforwards.
The Company's available NOLs for tax purposes consists of $97 million of
pre-change NOL (subject to the Section 382 limitation) and $50 million of
post-change NOL (not subject to the Section 382 limitation). The Company's
charitable contribution carryforwards and business tax credit carryforwards are
pre-change items subject to the Section 382 limitation.

The unused portion of the $4 million annual Section 382 limitation for any
year may be carried forward to succeeding years to increase the annual
limitation for those succeeding years. In addition, the Company's entire $97
million of pre-change NOL may be used to offset future taxable income

48
50
realized within five years of the date of change of ownership from built-in
gains (generally, taxable income from the sale of appreciated assets held by
the Company at the date of change in ownership) without reference to the
Section 382 limitation.

A reconciliation of the Company's net income for financial statement
purposes to taxable income (loss) for the years ended December 26, 1992 and
January 1, 1994 is as follows (in thousands):

1992 1993
---------- ----------

Net income............................. $ 20,249 $ 17,337
Income tax provision (benefit)........ 219 (130)
---------- ---------
Income before income taxes............. 20,468 17,207
---------- ---------
Differences between income before taxes
for financial statement purposes and
taxable income:
Cumulative effect of accounting
change for income taxes............... (10,000) -
State income taxes.................... (219) (501)
Utilization of carryovers............. - (2,543)
Permanent differences................. 3,687 28
Net change in temporary
differences........................... (41,678) (14,191)
---------- ---------
(48,210) (17,207)
---------- ---------
Taxable income (loss).................. ($ 27,742) $ -
========== =========

Changes during 1992 and 1993 in temporary differences principally relate to
restaurant closing expenses and losses on asset disposals accrued in 1990 and
1991, which are deductible for income tax purposes in the year in which the
assets are actually disposed and expenses are paid.

The components of the net deferred tax asset at January 1, 1994 are as
follows (in millions):

Non-
Current current Total
------- ------- -----

Federal tax NOL, charitable contribution
and business tax credit carryforwards...... $ - $55.2 $55.2
Allowance for doubtful accounts............. .8 - .8
Accrued liabilities......................... 3.6 - 3.6
Tax basis in net assets of discontinued
operations in excess of financial
statement amount........................... .3 - .3
Other....................................... .4 - .4
----- ----- -----
Deferred Tax Asset.......................... 5.1 55.2 60.3
Valuation allowance....................... (2.1) (47.6) (49.7)
----- ----- -----
Deferred Tax Asset, net..................... $ 3.0 $ 7.6 $10.6
===== ===== =====

The Company has established a valuation allowance for a portion of the
deferred tax asset, due to the Section 382 limitation and limiting the
utilization of the remaining deferred tax asset.

SFAS 109 requires that the future tax benefit of such NOLs be recorded as
an asset to the extent that management assesses the utilization of such NOLs to
be "more likely than not". In 1992 management determined, based upon the
conversion of interest-bearing debentures to equity, the issuance of additional
Common Stock, the disposal of unprofitable discontinued restaurant

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operations, the Company's history of prior operating earnings in the direct
marketing business and its expectations for the future, that the operating
income of the Company will, more likely than not, be sufficient to utilize $30
million of deductible temporary differences and NOLs prior to their expiration.
In making such determination, the Company adjusted 1992 income by eliminating
interest expense related to retired debt and assumed that such adjusted 1992
income level could be obtained in each of the next three years.

Realization of the future tax benefits is dependent on the Company's
ability to generate taxable income within the carryforward period and the
periods in which net temporary differences reverse. Future levels of operating
income and taxable income are dependent upon general economic conditions,
competitive pressures on sales and margins, postal and other delivery rates,
and other factors beyond the Company's control. Accordingly, no assurance can
be given that sufficient taxable income will be generated for utilization of
the NOLs and reversals of temporary differences. At January 1, 1994, the
Company has maintained the $30 million amount of expected future operating
income that will "more likely than not" utilize the deductible temporary
differences and NOLs prior to their expiration. Management believes that
although the 1993 operating results might justify a higher amount,
in view of its history of operating losses, the $30 million represents
a reasonable conservative estimate of the future utilization of the
NOLs and will continue to evaluate the likelihood of future profit and the
necessity of future adjustments to the deferred tax asset valuation allowance.

The Company's tax returns for years subsequent to 1984 have not been
examined by the Internal Revenue Service ("IRS"). Availability of the NOLs
might be challenged by the IRS upon examination of such returns which could
affect the availability of NOLs incurred prior or subsequent to the change in
ownership or both. The Company believes, however, that IRS challenges that
would limit the utilization of NOLs will not have a material adverse effect on
the Company's financial position.

The Federal income tax provision was $5.9 million in 1993 which was offset
by the utilization of certain NOLs. In addition, a $.6 million deferred tax
benefit in 1993 was recorded as a result of the increase in the Federal
corporate income tax rates from 34% to 35%. The Company's Federal income tax
provision consists of zero in 1991 and 1992. The Company's provision for
state income taxes consists of $.2 million in 1991, $.2 million in 1992 and
$.5 million in 1993.

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Total tax expense for each of the three fiscal years presented differ from
the amount computed by applying the statutory tax rate of 35% (34% in 1992 and
1991) due to the following:

1991 1992 1993
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
LOSS INCOME INCOME
---------- ---------- ----------

Tax (benefit) at statutory
rate............................ (34.0%) 34.0% 35.0%
Cumulative effect of accounting
change for income taxes......... - (16.6) -
State and local taxes............ 0.3 1.1 1.9
Effect of federal rate change on
deferred tax asset.............. - - (3.7)
Stock issuance expenses.......... - 5.5 -
Net reversal of temporary
differences..................... - (69.2) (28.9)
Loss for which no tax benefit
could be recognized............. 30.8 - -
Utilization of contribution and
NOL carryover................... - - (5.4)
Tax NOL for which no benefit
could be recognized............. - 46.1 -
Other............................ 3.2 0.2 0.3
------- ------- --------
0.3% 1.1% (0.8%)
======= ======= ========

11. LEASES

Certain leases to which the Company is a party provide for payment of real
estate taxes and other expenses. Most leases are operating leases and include
various renewal options with specified minimum rentals. Rental expense for
operating leases related to continuing operations were as follows (in
thousands):

1991 1992 1993
-------- -------- -------

Minimum rentals $ 6,807 $ 8,910 $ 9,458
======== ======== ========

Future minimum lease payments under noncancellable operating and capital
leases relating to continuing operations, that have initial or remaining terms
in excess of one year, together with the present value of the net minimum lease
payments as of January 1, 1994, are as follows (in thousands):

OPERATING CAPITAL
YEAR ENDING LEASES LEASES
------------- ------------ -----------

1994......................... $ 7,257 $ 873
1995......................... 4,527 732
1996......................... 3,425 694
1997......................... 2,703 454
1998......................... 2,627 -
Thereafter................... 17,706 -
------- --------
Total minimum lease
payments.................... $38,245 2,753
=======
Less amount representing
interest (a)............... 182
--------
Present value of minimum
lease payments (b).......... $ 2,571
========

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(a) Amount necessary to reduce net minimum lease payments to present value
calculated at the Company's incremental borrowing rate at the inception of the
leases.

(b) Reflected in the balance sheet as current and noncurrent capital lease
obligations of $50,000 and $105,000 in 1992 and $748,000 and $1,823,000 in
1993, respectively.

12. DISCONTINUED RESTAURANT OPERATIONS

In 1992, the Company sold substantially all of the properties remaining
from its discontinued restaurant operations. The Company realized net proceeds
from such sales of approximately $17.3 million of which approximately $14.9
million was used to reduce outstanding indebtedness. In addition, in exchange
for notes, cash and stock valued at $3.9 million, the Company was relieved of
$20.4 million in future rent obligations.

Revenues applicable to discontinued operations were $10 million in 1991.
Interest expense allocated to discontinued operations was $1.6 million and $1.9
million for the years 1991 and 1992, respectively. There was no interest
expense allocated to discontinued operations for the year ended January 1,
1994.

At December 26, 1992 and January 1, 1994, reserves for discontinued
restaurant operations approximated $3.5 million and $2.6 million, respectively.
Charges against these reserves were $7.7 million and $0.9 million for the years
ended December 26, 1992 and January 1, 1994, respectively.

The future minimum lease payments under noncancellable leases as of January
1, 1994, are as follows: 1994 - $1.7 million; 1995 - $1.7 million; 1996 - $1.5
million; 1997 - $1.5 million; 1998 - $1.4 million and thereafter $14.8 million.
The above amounts exclude annual sublease income of $1.8 million from subleases
which have the same expiration as the underlying leases.

13. RESTRUCTURING CHARGES AND TRANSACTION COSTS

In 1991, in connection with the restructuring activities, the Company
recorded charges of approximately $5.8 million. These charges were primarily
related to severance costs ($.6 million), the costs associated with the
restructuring of certain catalogs, including inventory costs ($2.6 million),
and other restructuring costs ($2.6 million). The operating results of 1991
also include charges of approximately $4.8 million which were directly related
to the stock purchase agreement transaction. These charges include
approximately $1.7 million of transaction fees which have been classified as
Other income (expense) and increased compensation costs directly related to the
change in control provisions included in certain executive employment
contracts. In addition, the Company incurred a charge of $3.1 million in
connection with the settlement of the employment contract of the former
Chairman and CEO of the Company.

14. MANAGEMENT COMPENSATION AGREEMENTS

In connection with consummating the transactions in the stock purchase
agreement and as a condition thereto, the Company entered into an employment
agreement (the "Employment Agreement") with Jack E. Rosenfeld, the President

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54
and Chief Executive Officer of the Company. The Employment Agreement provides
for (1) a five-year term commencing on October 25, 1991, at a base salary of
$500,000 per year; (2) a payment to a trust on behalf of Mr. Rosenfeld of
916,667 shares of Common Stock in lieu of a cash payment of $1,564,000 to which
he would have been entitled in connection with a change in control, 250,000 of
such shares to vest in equal annual installments over three years with the
vested shares distributable to Mr. Rosenfeld at the end of the employment term
or the earlier termination of his employment; (3) the grant of an option to Mr.
Rosenfeld, which has expired, to purchase shares of Common Stock in the event
the Company achieved certain earnings in the fourth quarter of 1991; and (4)
the grant of registration rights under the Securities Act of 1933, as amended,
for shares of Common Stock owned by Mr. Rosenfeld. On October 25, 1991, NAR
entered into an agreement with Mr. Rosenfeld pursuant to which he may purchase
from NAR prior to October 25, 1996, 1,213,605 shares of Common Stock at a price
per share of $2.00 (subject to adjustment) plus 10% per year through the
exercise period. This agreement was amended on September 23, 1992 to provide
that NAR would grant to Mr. Rosenfeld in March 1993 the right to purchase an
additional 1,213,605 shares of Common Stock ("Rights Shares") at a price per
share of $1.50 (subject to adjustment) plus 10% per year from September 1992
through the exercise period.

In connection with the stock purchase agreement, the Company entered into
employment agreements with each of Messrs. Michael P. Sherman, Wayne P. Garten
and Edward J. O'Brien, executive officers of the Company. These agreements
were substantially the same as such officers' existing employment agreements,
except that they provided for cash payments to Messrs. Sherman, Garten and
O'Brien of $281,714, $221,621 and $90,000, respectively, and contribution to a
trust on behalf of such officers of 156,979 shares, 147,812 shares and 60,000
shares of Common Stock of the Company, respectively, in connection with the
change in control effected by the NAR transaction and in lieu of their right to
receive a cash change in control payment. Pursuant to the terms of the trust,
such Common Stock was distributed to each such officer during fiscal 1993.
Messrs. Sherman, Garten and O'Brien were granted certain registration rights
under the Securities Act of 1933, as amended, with respect to the shares of
Common Stock granted to each of them.

15. RELATED PARTY TRANSACTIONS

Approximately $85,000 was paid for the rental of property pursuant to an
operating lease to a partnership in which the wife of the Chief Executive
Officer and President of the Company, Jack E. Rosenfeld, is a partner. Jack E.
Rosenfeld is also a director of the Company.

On September 23, 1992, a transaction was approved by the Company's
shareholders pursuant to which NAR acquired 62% of the Company's Common Stock.
See Note 2 for a description of the transaction. At January 1, 1994, NAR owned
57% of the Company's outstanding Common Stock.

Since January 1993, pursuant to a consulting arrangement, QCC renders
management consulting, business advisory and investment banking services to the
Company for an annual fee of $750,000.

16. COMMITMENTS AND CONTINGENCIES

The Company is obligated under various employment contracts with key
executives extending through 1995. The aggregate payments due under such
contracts is $2.0 million.

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In connection with certain disposal transactions, the Company remains
contingently liable with respect to lease obligations for 10 restaurant
properties, should the buyers fail to perform under the agreements. The future
minimum lease payments as of January 1, 1994, are as follows (in thousands):
1994 - $459; 1995 - $445; 1996 - $366; 1997 - $278; 1998 - $192 and thereafter
$737.

In January 1994, the Company purchased for $1.1 million a 50% interest in
Blue Ridge Associates (the "Partnership), a partnership which owns the Tweeds
Roanoke, Virginia fulfillment center. In connection with the Partnership, a
subsidiary of the Company is contingently liable with respect to the
obligations of the Partnership. The Partnership has a mortgage on the Roanoke
fulfillment center in the amount of $6.6 million.

In May 1992 the United States Supreme Court reaffirmed an earlier decision
which allowed direct marketing companies to make sales into states where they
do not have a physical presence without collecting sales taxes with respect to
those sales. The Court, however, noted that Congress has the power to change
this law. Forty-six states plus the District of Columbia have sales or use
taxes or authorize local governmental units to impose sales or use taxes. The
Company sells merchandise in all fifty states plus the District of Columbia.
Various states are increasing their efforts by various means, including
lobbying Congress, to impose on direct marketers the burden of collecting sales
and use taxes on the sale of products shipped to state residents. The
imposition of a sales and use tax collection obligation on the Company in
states to which it ships products would result in additional administrative
expense to the Company and higher costs to its customers for the same
merchandise currently being purchased by them. This may have a negative effect
on customer response rates and revenue levels, thereby negatively affecting the
Company's sales and profitability. Under the law as it presently exists, the
Company believes that it collects sales tax in all jurisdictions that it is
required to do so.

The Company is involved in other various routine lawsuits of a nature which
are deemed customary and incidental to its business. In the opinion of
management, the ultimate disposition of such actions will not have a material
adverse effect on the Company's financial position or results of operations.

17. SUBSEQUENT EVENT

On February 18, 1994, the Company filed a registration statement on Form
S-3 with the Securities and Exchange Commission registering 10 million shares
of its Common Stock, including 4,154,604 shares on behalf of two selling
shareholders. The net proceeds from the offering with respect to the Company's
shares will be used for general corporate purposes, including the expansion of
the Company's business. The registration statement has not yet become
effective.

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18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(in thousands, except per share amounts)
1992
- --------

Revenues $128,787 $142,861 $144,769 $170,145
Gross profit 42,698 51,337 48,924 61,887
Income from operations 2,133 3,123 2,291 6,855
Income (loss) from continuing
operations (1,823) (899) (1,246) 5,016
Extraordinary items - 1,209 6,501 1,491
Cumulative effect of
accounting change for
income taxes 10,000 - - -
-------- ------- ------- -------
NET INCOME 8,177 310 5,255 6,507

Preferred stock dividends (700) (700) (800) (997)
-------- ------- ------- -------
Net income (loss) applicable to
Common Shareholders $ 7,477 $ (390) $ 4,455 $ 5,510
======== ======= ======= ========

Net income (loss) per share:
Income (loss) from continuing
operations $ (.09) $ (.05) $ (.07) $ .06
Extraordinary items - .04 .22 .02
Cumulative effect of
accounting change for
income taxes .35 - - -
-------- ------- ------- -------
Net income (loss) $ .26 $ (.01) $ .15 $ .08
======== ======= ======= ========

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(in thousands, except per share amounts)
1993
- --------

Revenues $121,565 $144,319 $147,890 $228,737
Gross profit 43,585 52,578 51,233 86,728
Income from operations 2,937 3,963 3,056 9,120
NET INCOME 2,477 4,356 2,492 8,012

Preferred stock dividends (1,000) (1,005) (1,006) (1,082)
-------- -------- -------- --------

Net income applicable to
Common Shareholders $ 1,477 $ 3,351 $ 1,486 $ 6,930
======== ======== ======== ========

Net income per share $ .02 $ .05 $ .02 $ .09
======== ======== ======== ========

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None

55
57
P A R T III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

(a) Identification of Directors.

The information required by this item is incorporated by reference
from the Company's definitive proxy statement to be filed by the
Company pursuant to Regulation 14A.

(b) Identification of Executive Officers.(a)

TITLE AND OTHER OFFICE HELD
NAME AGE INFORMATION SINCE
- ---- --- --------------- -----------

JACK E. ROSENFELD 55 Chief Executive Officer, 1990
President and Director. Mr.
Rosenfeld served as Executive
Vice President of the Company
from June 1988 until October 1990
He was elected to the Board of
Directors in 1974.

MICHAEL P. SHERMAN 41 Executive Vice President 1990
Corporate Affairs, General
Counsel and Secretary. He joined
the Company in 1983 and
was elected Vice President-Assistant
Secretary in the same year. From 1986
to 1990, Mr. Sherman held the position
of Senior Vice President, General
Counsel and Secretary.

WAYNE P. GARTEN 41 Executive Vice President, 1990
Chief Financial Officer since
1990. From 1989 to 1990, Mr.
Garten previously held the position
of Senior Vice President, Chief
Financial Officer. He joined the
Company in 1983 and was elected
Vice President in 1984. He was
elected Vice President-Finance
in 1989.

EDWARD J. O'BRIEN 50 Senior Vice President and 1991
Treasurer. Mr. O'Brien joined the
Company in 1986 and was elected
Vice President in 1988.

56
58

TITLE AND OTHER OFFICE HELD
NAME AGE INFORMATION SINCE
- ---- --------------- -----------

DAVID E. ULLMAN 36 Vice President, 1992
Controller. Prior to joining
the Company, Mr. Ullman was with
Arthur Andersen & Co. for ten
years, most recently as a manager
in the Audit and Business Advisory
Group.

(a) All references to dates and positions held by such executive officers refer
to the Company's predecessor, H&H. H&H merged with and into the Company
in September 1993, with the Company surviving.

Pursuant to the Company's By-Laws, its officers are chosen annually by the
Board of Directors and hold office until their respective successors are chosen
and qualified.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.

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59
P A R T IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this report.

PAGE NO.
--------

1. Index to Consolidated Financial Statements

Report of Independent Public Accountants 25

Hanover Direct, Inc. and Subsidiaries Financial
Statements:

Consolidated Balance Sheets as of December 26, 1992 26
and January 1, 1994

Consolidated Statements of Income/(Loss) for the three 28
years ended January 1, 1994

Consolidated Statements of Shareholders' (Deficit) 29
Equity for the three years ended January 1, 1994

Consolidated Statements of Cash Flows for the three 30
years ended January 1, 1994

Notes to Consolidated Financial Statements 32

Supplementary Data:

Selected quarterly financial information (unaudited)
for the two fiscal years ended January 1, 1994

2. Index to Financial Statement Schedules

Schedule II 61

Schedule VIII 63

Schedules other than those listed above are omitted
because they are not applicable or the required
information is shown in the financial statements or
notes thereto.

3. Exhibits 64

The exhibits required by Item 601 of Regulation S-K
filed as part of, or incorporated by reference in, this
report are listed in the accompanying Exhibit Index.

58
60
(b) Reports on Form 8-K

Current Report on Form 8-K dated July 12, 1993 of H & H
Current Report on Form 8-K dated August 25, 1993 of H & H
Current Report on Form 8-K dated September 30, 1993
Current Report on Form 8-K dated January 1, 1994

(c) Exhibits required by Item 601 of Regulation S-K. See Exhibit Index.

59
61
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

HANOVER DIRECT, INC.
(registrant)

Date: March 9, 1994 By: s/Jack E. Rosenfeld
---------------------------
Jack E. Rosenfeld, Director,
President and Chief
Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.

Principal Financial Officer:

s/Wayne P. Garten
- -----------------------------
Wayne P. Garten
Executive Vice President and
Chief Financial Officer

Board of Directors:

s/Ralph Destino s/Edmund R. Manwell
- ----------------------------- -----------------------------
Ralph Destino, Director Edmund R. Manwell, Director

s/J. David Hakman s/Alan G. Quasha
- ----------------------------- -----------------------------
J. David Hakman, Director Alan G. Quasha, Director

s/S. Lee Kling s/Geraldine Stutz
- ----------------------------- -----------------------------
S. Lee Kling, Director Geraldine Stutz, Director

s/Theodore H. Kruttschnitt s/Jeffrey Laikind
- ----------------------------- -----------------------------
Theodore H. Kruttschnitt Jeffrey Laikind, Director
Director

s/Elizabeth Valk Long s/Robert F. Wright
- ----------------------------- -----------------------------
Elizabeth Valk Long, Director Robert F. Wright, Director

Date: March 9, 1994

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62
SCHEDULE II

HANOVER DIRECT, INC.
AMOUNTS RECEIVABLE FROM RELATED PARTIES, UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
YEAR ENDED JANUARY 1, 1994

Column A Column B Column C Column D Column E
- ---------------------------- -------------- --------------- -------------------- -----------------------

Deductions Balance at end
Balance at -------------------- of period
beginning Amounts Amounts -----------------------
Name of debtor of period Additions Collected written off Current Non Current
- ------------------------- -------------- --------------- ----------- ------------ --------- -----------

Spence Halper, E.V.P.(a)
Year Ended January 1, 1994 $ - $100,000 $- $ - $ - $100,000

Wayne P. Garten, E.V.P.(b)
Year Ended January 1, 1994 $ - $235,802 $135,802 $ - $ - $100,000

Edward J. O'Brien, Sr.V.P.(c)
Year Ended January 1, 1994 $ - $113,837 $63,837 $ - $ - $50,000

Charles Pellenberg, E.V.P.(a)
Year Ended January 1, 1994 $ - $125,000 $ - $ - $ - $125,000

Jack Rosenfeld, C.E.O.(a)
Year Ended January 1, 1994 $ - $187,500 $ - $ - $ - $187,500

Michael P. Sherman, E.V.P.(d)
Year Ended January 1, 1994 $ - $229,802 $129,802 $ - $ - $100,000

61
63
SCHEDULE II

HANOVER DIRECT, INC.
AMOUNTS RECEIVABLES FROM RELATED PARTIES, UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
YEAR ENDED JANUARY 1, 1994

(a) Notes receivable issued in connection with Executive Equity Incentive
Plan. The Notes bear interest at 5.54% and are due March 1999.

(b) Notes receivable represents $100,000 for the Executive Equity
Incentive Plan bearing interest at 5.54% due March 1999. The $135,802
represents a personal loan with interest at 8% and such loan was
repaid in fiscal 1993.

(c) Notes receivable represents $50,000 for the Executive Equity Incentive
Plan bearing interest at 5.54% due March 1999. The remaining $63,837
represents a personal loan with interest at 8% and such loan was
repaid in fiscal 1993.

(d) Notes receivable represents $100,000 for the Executive Equity
Incentive Plan bearing interest at 5.54% due March 1999. The
remaining $129,802 represents a personal loan with interest at 8% and
such loan was repaid in fiscal 1993.

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64
SCHEDULE VIII

HANOVER DIRECT, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JANUARY 1, 1994, DECEMBER 26, 1992 AND DECEMBER 28, 1991

Column A Column B Column C Column D Column E
- -------------------------- ------------ ---------------------------------- ------------- -------------

Additions
-----------------------------------
Balance at Charged to
beginning Charged to costs other accounts Deductions - Balance at
Description of period and expenses describe describe end of period
- -------------------------- --------------- ---------------- --------------- -------------- --------------

1993:
- -------------------------

Allowance for doubtful
accounts receivable $6,386,000 $3,676,000 (5) $134,000 (1) $5,952,000 $4,244,000

Reserves for
discontinued operations 3,464,000 (2) 906,000 2,558,000

Deferred tax asset
valuation allowance 53,000,000 (6) 2,600,000 (4) 5,900,000 49,700,000

1992:
- ---------------------------

Allowance for doubtful
accounts receivable 7,040,000 6,024,000 (1) 6,678,000 6,386,000

Reserves for
discontinued operations 11,185,000 (2) 7,721,000 3,464,000

Deferred tax asset
valuation allowance (3)53,000,000 53,000,000

1991:
- ---------------------------

Allowance for doubtful
accounts receivable 4,994,000 6,756,000 (1) 4,710,000 7,040,000

Reserves for
discontinued operations 17,270,000 5,229,000 (2) 11,314,000 11,185,000

(1) Accounts written-off.
(2) Utilization of reserves.
(3) The Company adopted SFAS 109 effective December 29, 1991
(4) Utilization of valuation allowance.
(5) Represents acquired allowance for doubtful accounts receivable.
(6) Represents increase in available net operating losses and effect of
increase in coporate income tax rates from 34% to 35%.

63
65
EXHIBIT INDEX

EXHIBIT NUMBER PER
ITEM 601 OF DESCRIPTION OF DOCUMENT AND INCOR-
REGULATION S-K PORATION REFERENCE WHERE APPLICABLE

2.1 Plan of Agreement and Merger dated as of April 15, 1993
between The Horn & Hardart Company and Hanover Direct,
Inc. Incorporated by reference to the Company's*
Registration Statement on Form S-4 filed on April 16,
1993, Registration No. 33-6152.

2.2 Plan of Agreement and Merger dated as of April 15, 1993
between The Hanover Companies and Hanover Direct, Inc.
Incorporated by reference to the Company's* Registration
Statement on Form S-4 filed on April 16, 1993,
Registration No. 33-6152.

2.3 Asset Purchase Agreement dated as of May 21, 1993 among
the Company*, GSF Acquisition Corp. ("GSF") and Gump's,
Inc. Incorporated by reference to the Company's* Current
Report on Form 8-K dated July 12, 1993.

2.4 Asset Purchase Agreement dated as of May 21, 1993 among
the Company*, Gump's By Mail, Inc. ("GBM") and Gump's,
Inc. Incorporated by reference to the Company's* Current
Report on Form 8-K dated July 12, 1993.

2.5 Order Confirming Sale of the Assets of The Company Store
to the Company, entered by the United States Bankruptcy
Court for the Western District of Wisconsin on August 20,
1993 in Bankruptcy No. 92-21810-11. Incorporated by
reference to the Company's* Current Report on Form 8-K
dated August 25, 1993.

2.6 Stock Purchase Agreement dated as of September 7, 1993
among Warburg, Pincus Capital Partners, L.P., WPM, Inc.,
Sprout Capital V, Sprout Technology Fund, DLJ Venture
Capital Fund, DLJ Venture Capital Fund II, L.P., Sprout
Growth, Ltd., Sprout Growth, L.P., Primus Capital Fund II,
L.P., PAS Associates, Tweeds, Inc., the Company* and TW
Acquisitions, Inc. Incorporated by reference to the
Company's Current Report on Form 8-K dated September 30,
1993.

64
66
3.1 Certificate of Incorporation. FILED HEREWITH.

3.2 Certificate of Amendment of the Company's Certificate of
Incorporation together with Certificate of Designation of
Series A Convertible Additional Preferred Stock. FILED
HEREWITH.

3.3 Bylaws. Incorporated by reference to the Company's
Registration Statement on Form S-4 filed on April 16,
1993, Registration No. 33-6152.

4.1 Indenture between the Company and First Trust National
Association, as Trustee, dated as of August 17, 1993.
FILED HEREWITH.

4.2 Registration Rights Agreement dated as of August 17, 1993
by and between the Company* and Sun Life Insurance Company
of America. FILED HEREWITH.

4.3 Warrant Agreement dated as of October 25, 1991 between the
Company* and NAR. Incorporated by reference to the
Company's* Current Report on Form 8-K dated October 25,
1991.

4.4 Registration Rights Agreement dated as of July 8,1991
among the Company*, NAR and Intercontinental Mining &
Resources Limited ("IMR"). Incorporated by reference to
the Company's* Current Report on Form 8-K Dated July 10,
1991.

4.5 Shareholders' Agreement dated October 25, 1991 between the
Company* and NAR. Incorporated by reference to the
Company's Current Report on Form 8-K dated October 25,
1991.

4.6 Definitive Agreement dated July 20, 1992 between the
Company* and NAR. Incorporated by reference to the
Company's* Registration Statement on Form S-4 filed on
July 28, 1992, Registration Statement No. 33-50102.

65
67
4.7 Form of Warrant Agreement dated as of January 1, 1994
between the Company and Sears Shop At Home Services, Inc.
("Sears"). Incorporated by reference to the Company's
Current Report on Form 8-K dated January 1, 1994.

10.1 1978 Stock Option Plan, as amended. Incorporated by
reference to the Company's* Annual Report on Form 10-K
for the fiscal year ended December 28, 1991.

10.2 Stock Purchase Agreement dated as of July 8, 1991 among
the Company* and North American Resources ("NAR").
Incorporated by reference to the Company's* Current
Report on Form 8-K dated July 10, 1991.

10.3 Amendment to the Stock Purchase Agreement dated as of
October 14, 1991 between the Company* and NAR.
Incorporated by reference to the Company's Current Report
on Form 8-K dated October 25, 1991.

10.4 Agreement dated as of December 21, 1992 among the
Company*, Hanover Direct Pennsylvania, Inc. ("HDPI"),
Brawn of other than as noted California, Inc. ("Brawn")
and General Electric Capital Corporation ("GECC").
Incorporated by reference to the Company's* Annual Report
on Form 10-K for the fiscal year ended December 26, 1992.

10.5 Amendment to the Account Purchase Agreement dated as of
July 12, 1993 among the Company*, HDPI, Brawn and GECC.
Incorporated by reference to the Company's* Current Report
on Form 8-K dated July 12, 1993.

10.6 Loan and Security Agreement dated as of May 5, 1993 among
Congress Financial Corporation ("Congress"), HDPI and
Brawn. Incorporated by reference to the Companies
Registration Statement on Form S-4 filed on April 16, 1993,
Registration No. 33-6152.

10.7 Amended and Restated Loan and Security Agreement dated as
of July 9, 1993 among HDPI, Brawn, GBM, GSF and Congress.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated July 12, 1993.

66
68
10.8 Second Amended and Restated Loan and Security
Agreement dated as of October 27, 1993 among
Congress, HDPI, Brawn, GBM, Gump's Corp., TCSA, Inc.,
SDSA, Inc. and Tweeds. FILED HEREWITH.

10.9 Form of Stock Option Agreement between the Company*
and certain Directors of the Company, as amended.
Incorporated by reference to the Company's* Annual
Report on Form 10-K for the fiscal year ended
December 28, 1991.

10.10 Form of Stock Option Agreement between the Company*
and certain Directors of the Company. Incorporated
by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 28, 1991.

10.11 Executive Employment Agreement dated as of October
25, 1991 among the Company*, HDPI and Jack E.
Rosenfeld. Incorporated by reference to the
Company's Current Report on Form 8-K dated October
25, 1991.

10.12 Stock Option Agreement dated as of January 1, 1992
between the Company* and Jack E. Rosenfeld, as
amended. Incorporated by reference to the Company's*
Annual Report on Form 10-K for the fiscal year ended
December 26, 1992.

10.13 Registration Rights Agreement dated as of October 25,
1991 between the Company* and Jack E. Rosenfeld.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated October 25, 1991.

10.14 Employment Agreement dated as of October 14, 1991
between the Company* and Michael P. Sherman.
Incorporated by reference to the Company's Report on
Form 8-K dated October 28, 1991.

10.15 Amendment No. 1 to the Employment Agreement dated as
of June 18, 1993 between the Company and Michael P.
Sherman. FILED HEREWITH.

67
69
10.16 Registration Rights Agreement dated as of October 14,
1991 between the Company* and Michael P.Sherman.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated October 25, 1991.

10.17 Employment Agreement dated as of October 14, 1991,
between the Company* and Wayne P. Garten.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated October 25, 1991.

10.18 Amendment No. 1 to the Employment Agreement dated as
of June 18, 1993 between the Company and Wayne P.
Garten. FILED HEREWITH.

10.19 Registration Rights Agreement dated as of October 14,
1991 between the Company* and Wayne P. Garten.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated October 25, 1991.

10.20 Form of Indemnification Agreement among the Company*
and each of the Company's directors and executive
officers. Incorporated by reference to the
Company's* Current Report on Form 8-K dated October
25, 1991.

10.21 Letter Agreement dated May 5, 1989 among the
Company*, Theodore H. Kruttschnitt, J. David Hakman
and Edmund R. Manwell. Incorporated by reference to
the Company's* Current Report on Form 8-K dated May
10, 1989.

10.22 Hanover Direct, Inc. Savings Plan as amended. FILED
HEREWITH.

10.23 Restricted Stock Plan. Incorporated by reference to
the Company's* Registration Statement on Form S-8
filed on February 24, 1993, Registration No.
33-58760.

10.24 All Employee Equity Investment Plan. Incorporated by
reference to the Company's* Registration Statement on
Form S-8 filed on February 24, 1993, Registration No.
33-58756.

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70
10.25 Executive Equity Incentive Plan. Incorporated by
reference to the Company's* Registration Statement on
Form S-8 filed on February 24, 1993, Registration No.
33-58758.

10.26 Form of Supplemental Retirement Plan. FILED HEREWITH.

10.27 Form of License Agreement dated as of January 1, 1994
between Hanover Ventures, Inc. and Sears.
Incorporated by reference to the Company's Current
Report on Form 8-K dated January 1, 1994.

21.1 Subsidiaries of the Registrant. FILED HEREWITH.

23.1 Consent of Independent Public Accountants. FILED
HEREWITH.

* Hanover Direct, Inc., a Delaware corporation, is the successor by merger to
The Horn & Hardart Company and The Hanover Companies.

69