Exhibit 99.3
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SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
NEW YORK OFFICE
THE CHRYSLER BUILDING
405 LEXINGTON AVENUE
NEW YORK, NY 10174
TELEPHONE (212) 973-0111
FACSIMILE (212) 891-9598
WWW.SWIDLAW.COM
WASHINGTON, DC OFFICE
THE WASHINGTON HARBOUR
MARTIN NUSSBAUM 3000 K STREET, NW, SUITE 300
TELEPHONE: (212) 891-9276 WASHINGTON, DC 20007-5116
FACSIMILE: (212) 891-9255 TELEPHONE: (202) 424-7500
MNUSSBAUM@SWIDLAW.COM FACSIMILE: (202) 424-7647
September 2, 2003
BY FACSIMILE
Sarah Hewitt
Brown Raysman Millstein Felder & Steiner
900 Third Avenue
New York, New York 10022
Dear Sarah:
I am responding to your letter of August 14, 2003. Once again, you are casting
aspersions, rather than addressing the merits of the proposal of Chelsey Direct
LLC ("Chelsey"). While we believe that the resources of Hanover Direct, Inc,
("Hanover") could be more productively applied, on this occasion I will respond.
First, 1 would point out a fundamental omission from the recitation in your
letter regarding the background for the meeting between Chelsey and the Board of
Directors of Hanover. You omit to say that Chelsey had been requested to present
a cash price at which it would be prepared to sell its equity stake to Hanover,
which would appear to be Hanover's real agenda. I indicated to you before the
meeting that Chelsey did not believe that to be a productive line of discussion
since it emphasized the tensions between the Series B Preferred and Common
Stock; nevertheless, this was one of the two questions asked by Tom Shull at the
meeting.
My comments below correspond to the paragraph numbers in your letter.
1. You ask how Chelsey can reconcile the statement in its 13D that it
"ascribes no value to the common shares" with its statement that it intends
to profit from its investment in [Hanover] in a transaction that aligns the
interests of all of the holders of equity." The two statements are not
inconsistent. By Hanover's own account, there is no source of proceeds to
satisfy the mandatory redemption of the Series B Preferred Stock (the
"Preferred Stock")in 2005 and it will be unlikely to be able to satisfy
such obligation. The Preferred Stock thereby creates an overhang on
Hanover's capital structure which, in Chelsey's view, makes it impossible
to ascribe any value to the Common Stock. Chelsey's recapitalization
proposal, would reduce by 50% the accreted value of the Preferred Stock and
would delay the mandatory redemption until 2009. As a result, the
depressive effect on the value of the common stock would be significantly
diminished. Chelsey would receive additional shares of Common Stock in
exchange for the reduction in the accreted value of the Preferred Stock.
Even after reflecting dilution in the Common Stock, the current Common
Stockholders would achieve greater value than is currently available to
them under any likely growth plan. Therefore, the interests of Chelsey and
other holders of the Common Stock would be aligned.
2. We understand that Hanover is embarrassed about the misleading way in which
it handled the negotiations with Chelsey that preceded Chelsey's purchase
from Richemont Finance S.A. ("Richemont"). I nonetheless find it surprising
that you could write that Hanover is unaware of any concrete efforts on
Chelsey's part to work with Hanover to purchase the equity block held by
Richemont. You are well aware of the meetings between Chelsey and Hanover
management in which Chelsey sought to negotiate a three way transaction
which would ultimately result in Hanover's repurchase of the block. Chelsey
was fully prepared to negotiate a transaction that would have facilitated
the repurchase of the equity block by Hanover. At the time, Hanover
management represented to Chelsey that its loan agreement would preclude a
repurchase of the block, Chelsey would thereafter learn that Hanover was
simultaneously negotiating with Richement to buy the block. More recently,
we learned from documents produced by Hanover in discovery, that Hanover
was seeking to purchase the block of Common Stock owned by Richement for
$.10 per share. This is particularly surprising in light of Hanover's
protestations about Chelsey's view as to the depressive effect of the
Preferred Stock on the value of the Common Stock.
3. Your characterizations regarding the confidentiality agreement between
Richement and Hanover as being an impediment to Hanover's ability to deal
honestly with Chelsey in its negotiations to arrange a three party
transaction are disingenuous. Obviously, Hanover could have sought
Richemont's permission to make full disclosure to Chelsey.
4. Hanover did not, as your letter would have us believe, immediately seek
clarification from a court in order to resolve an ambiguous situation.
Before seeking judicial relief or guidance, Hanover engaged in self help by
unilaterally refusing to perform the ministerial act of transferring record
ownership of the shares acquired by Chelsey. Over a period of weeks,
Chelsey made repeated requests for transfer accompanied by opinions of
counsel; and then, when Hanover could milk the delay no longer, it
commenced a declaratory judgment action. Hanover's refusal to transfer
record ownership of the shares was nothing more than a transparent attempt
to muddy the waters after the transfer from Richemont to Chelsey had been
made. Hanover is seeking to use a legal protection available to Chelsey,
i.e. its right to full disclosure from Richemont, (which Chelsey had
knowingly waived) as a sword to achieve Hanover's own ends. We would also
question how Hanover could contend that Richemont was restricted in its
ability to sell by virtue of its possession of inside information in light
of Tom Shull's purchases of the Company's Common Stock. Now that Richemont
has voluntarily appeared in this action, we look forward to a prompt
judicial resolution.
5. You appear to be splitting hairs in your distinction between Chelsey's
statement that Hanover has acknowledged that, absent a significant asset
disposition, it cannot honor its obligation to
redeem the Preferred Stock and Hanover's statement that it is unlikely to
be able to redeem the Preferred Stock. Moreover, since your letter, Hanover
has in fact acknowledged that it will be unable to effect the 2003
redemption.
6. Chelsey's statement that the Certificate of Designations obligates Hanover
to redeem the Preferred Stock on August 31, 2005 is accurate. The
Certificate of Designations provides that if, at such date, Hanover does
not have sufficient capital and surplus legally available to redeem the
preferred Stock, Hanover is required to take all measures permitted under
the Delaware General Corporation Law to increase the amount of its capital
and surplus legally available and continue to do so until all of the shares
of Preferred Stock are redeemed. These measures would include, among other
things, a revaluation of the surplus based upon the then fair market value
of the assets. You are correct that the redemption obligation is subject to
the terms and conditions of the working capital facility. I would bring to
your attention in that regard, that the Certificate of Designations
precludes any modification or refinancing of the facility on terms which
are less favorable to the Preferred Stock holders, as to specified
provisions intended to protect the redemption obligation, than the version
of the facility in place at the end of 2001. If any disclosure is lacking,
it is Hanover's public disclosures as to the import of these provisions.
7. You refer to the improvement in Hanover's operating income and comparative
EBITDA from 2000 to 2002. These improvements came from the disposal of
operations that were incurring significant losses rather than an
improvement in the remaining businesses. You choose not to mention the
substantial decline in revenues over the same period of almost $150
million. While the sale of the Improvements business accounted for a large
part of this reduction, disturbingly, revenues from continuing operations
continue to decline, i.e., by 6.9% from 2001 to 2002 and an additional 6.8%
for the first six months of 2003 compared with the prior year. Although
gains in internet sales offset what would have been an even greater decline
in Hanover's revenues, these gains are hardly sufficient to generate the
growth model needed to restore value to the Common Stock. Hanover's scarce
resources have led to a continued reduction in catalogue circulation which
has substantially eroded any platform for meaningful growth. Chelsey looks
forward to working cooperatively with the Board and management of Hanover
to better understand the company's prospects. As Chelsey has said, it
believes that if management's program is the course of action that is best
suited to creating shareholder value, that program should be supported.
8. As to opportunities to enable Hanover to redeem the Preferred Stock, I
would again suggest that you look at the lapses in Hanover's public
disclosures before throwing stones at Chelsey, Hanover should make full
public disclosure of its discussions regarding asset dispositions. This
would enable all of Hanover's shareholders to adequately assess the
company's ability to redeem the Preferred Stock.
9. Chelsey's recapitalization proposal would reduce the cost of redeeming the
Preferred Stock by 50% and delay the redemption until 2009. Chelsey's
estimates of growth necessary to match its recapitalization proposal were
premised upon the generous assumption that Hanover would have an enterprise
value of 6 to 7 times EBITDA. The first $145 million of sale proceeds would
be distributable to the Preferred Stock if the recapitalization proposal is
rejected. In order to achieve an enterprise value in excess of the sum of
Hanover's debt,
obligations and the liquidation preference of the Preferred Stock,
Hanover's EBITDA would have to increase by 400%. To achieve a return equal
to Chelsey proposal, Hanover's EBITDA would have to increase by in excess
of 500% and perhaps as much as 800%. I am certain that Hanover can do the
math itself. The growth levels are staggering.
10. Chelsey's disinclination to enter into a confidentiality agreement with
Hanover is for reasons well understood by Hanover. Chelsey does not wish to
limit its flexibility with respect to its equity stake. Moreover, Hanover
seems to delight in using confidentiality agreements to further its own
ends. Witness the pending litigation against the transfer by Richement. If
Hanover believes it has material undisclosed opportunities, it should be
open with its public shareholders and disclose those opportunities.
11. Your reference to significant contingent liabilities and obligations to
severed employees seems inconsistent with the first ten points in your
letter and only makes Chelsey's case more strongly. Hanover simply cannot
satisfy its redemption obligations with respect to the Preferred Stock and
needs to be realistic about considering alternatives. As to triggering a
default under Hanover's secured lending facility, that facility requires
refinancing in the short term in any event. Hanover will need to address
its Preferred Stock obligation as a condition to that refinancing. It would
be better to address that need sooner than later. I submit that it would be
more likely that a restructured loan facility could be negotiated with the
participation of the Preferred Stock than Hanover could do on its own
within the limits of the Certificate of Designations governing the
Preferred Stock.
I would suggest that, rather than continuing to throw bricks at Chelsey, Hanover
work with Chelsey in facilitating the only possible opportunity to create value
for both the holders of the Preferred Stock and the Common Stock.
Very truly yours,
/s/ Martin Nussbaum/pp
Martin Nussbaum