Exhibit 99.5
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BROWNRAYSMAN
Brown Raysman Millstein Felder & Steiner LLP
Sarah Hewitt
Partner
212-895-2190
shewitt@brownraysman.com
September 4, 2003
BY FACSIMILE AND E-MAIL
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Martin A. Nussbaum, Esq.
Swidler Berlin Shereff Friedman, LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
Re: Hanover Direct, Inc.
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Dear Marty:
I am in receipt of your letter dated September 2, 2003 that was faxed
to me by your firm for the first time at 3:16 p.m. today.
Let me first address your disingenuous comments about the nature of the
meeting between representatives of Chelsey Direct, LLC ("Chelsey") and members
of the Board of Directors and management of Hanover Direct, Inc. ("Hanover" or
the "Company"). First, I clearly stated in my letter to you that Chelsey was
asked for its "specific counteroffer to the Company's July 7, 2003 proposal" in
addition to its specific proposal for the terms of an exchange offer by which
the Series B Preferred Stock would be exchanged for Common Stock of the Company
and its vision and proposed plan for value creation opportunities at the Company
above and beyond those currently articulated by management in its recent SEC
filings and other public statements. Mr. Shull asked about Chelsey's
counteroffer to the Company's July 7, 2003 proposal because no reference had
been made to it in Chelsey's presentation up to that point. While you told me
your personal view of the wisdom of a counteroffer prior to the meeting, you
also told me you would confer with your client on that request to ascertain
their view. While Chelsey tenaciously asserts that its recapitalization proposal
brings value to both the Company's Series B Preferred and Common stockholders,
it remains Hanover's firm belief that a purchase by Hanover of Chelsey's entire
equity position would provide the most meritorious resolution of value
apportionment between the holders of the Company's Series B Preferred and Common
Stock. In light of the Company's recent discovery of the undisclosed Escrow and
Side Letter Agreements between Chelsey and Richemont Finance S.A. ("Richemont")
through the document discovery in the litigation rather than in the parties'
Schedule 13D filings, the Company believes it can better understand now why its
various buyback offers were not seriously considered by nor economically
attractive to Chelsey.
Let me now address your letter of September 2, 2003 point by point.
1) By Chelsey's own admission on multiple occasions, Chelsey has
conducted no analysis of the existing or future operating
potential of the Company's business and Chelsey has also stated
that it has no strategic vision for the Company. Given this, what
is the basis for your statement that "[e]ven 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"?
2) Hanover is in no way embarrassed by the manner in which its
Board, Board Committees, management and advisors have conducted
themselves in all discussions with either Chelsey or Richemont.
In no instance did Chelsey ever discuss a "three way transaction
which would ultimately result in Hanover's repurchase of the
block" with Hanover's management, the Transactions Committee or
the Board as confirmed in the various minutes, contemporaneous
notes and recall of all of the Hanover participants involved in
these discussions.
3) It is in no way disingenuous to request that parties involved in
negotiations with public companies first execute a
confidentiality agreement to protect the public company's
material, non-public information or to expect that the parties to
such agreements would honor those agreements. And, as previously
stated, Hanover is completely unaware of any efforts by Chelsey
to arrange a three party transaction.
4) The Company's actions at all times were consistent with its duty
to ensure that the transfer of its publicly traded shares was
properly made pursuant to applicable laws. Mr. Shull's purchases
of an aggregate of 50,000 shares of common stock were made
consistent with the Company's Securities Trading Policy and
applicable laws.
5) The Company again refers you to its filings of its Current Report
on Form 8-K made with the Securities and Exchange Commission (the
"SEC") on November 21, 2002 and subsequent filings. The Company
notes that it had no obligation to redeem any Series B Preferred
Stock in 2003. Rather, if the Company does not redeem one-half
the Series B Preferred shares by August 31, 2003, it is required
to offer to add two Series B Preferred members to its Board of
Directors. As you are aware, the Company currently stands ready
and willing to facilitate the temporary addition of the Series B
Preferred directors to its Board should Chelsey so elect and has
already contacted Chelsey with respect to the process.
6) The Company again refers you to its filings of its Current Report
on Form 8-K made with the SEC on November 21, 2002 and subsequent
filings. The Company clearly acknowledges and will abide by its
obligations to the holders of the Series B
Preferred Stock under the Certificate of Designations. Nothing in
the Delaware General Corporation Law would require the Company to
render itself insolvent or imprudently sell assets or otherwise
put at risk potential value for all shareholders in order to
redeem the Preferred Stock.
7) Your characterization of Hanover's operating improvement and
comparative EBITDA from fiscal 2000 to fiscal 2002 is inaccurate.
As reflected in the Company's 2002 Annual Report to Shareholders,
its comparative EBITDA has improved by $44.4 million dollars
excluding "the disposal of operations." The Company has
frequently discussed or disclosed in its various public filings
its strategic plans and prospects.
8) Hanover has made, and will continue to make, accurate and
complete public disclosures, including with respect to any asset
sales or strategic initiatives, at the appropriate time.
9) The Company does not understand the basis for your math,
particularly given the fact that Chelsey has not conducted any
relevant analysis of the Company's business or operations.
10) The Company remains mystified by Chelsey's disinclination to
enter into a confidentiality agreement particularly when it is
standard practice to request that parties involved in
negotiations with public companies first execute a
confidentiality agreement to protect the public company's
material, non public information and by Chelsey's apparent lack
of understanding that the Company would expect that the parties
to such agreements would, in fact, honor those agreements.
11) The Company again requests that Chelsey review the Company's
public disclosures to better understand the Company's liabilities
and contingent liabilities in order to factor them into its
financial analysis. The Company does not share your view as to
its ability to refinance its secured lending facility.
The Company would like to remind you that Chelsey's independently
initiated contacts with the Transactions Committee's financial advisors, the
Company's law firms, and the Company's lenders, vendors, and Board members,
amongst others, may at a minimum have the appearance of impropriety and the
Company respectfully requests that they cease immediately so the parties' good
faith efforts may proceed.
While the Company's representatives continue to review the Chelsey
proposal, the Company does not see how Chelsey can say that its proposal is the
only possible opportunity to create value for all the Company's shareholders
which, of course, is the duty of all concerned.
This letter is written without prejudice to the rights of the Company,
all of which are hereby expressly reserved.
Very truly yours,
/s/ Sarah Hewitt
Sarah Hewitt
cc: Thomas C. Shull
Leslie A. Lupert, Esq.
William B. Wachtel, Esq.