Exhibit 99.6
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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 8, 2003
BY FACSIMILE AND E-MAIL
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Sarah Hewitt
Brown Raysman Millstein Felder & Steiner
900 Third Avenue
New York, New York 10022
Re: Hanover Direct, Inc. ("Hanover")
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Dear Sarah:
Thank you for your very prompt reply to my letter to you erroneously
dated September 2, 2003. On behalf of our client, Chelsey Direct, LLC
("Chelsey"), I am responding to your letter, dated September 4, 2003.
A review of the materials produced to date has indicated that your
reply is but the latest in a fulsome stream of correspondence that you and your
client have been conducting, first with Richemont Finance S.A. ("Richemont") and
its counsel and now with our client and us. The accuracy of the positions that
you express has not increased with time or repetition; and we generally concur
with the dismissal of those positions by our predecessors. It is interesting to
note, however, that the contentious attitude of Hanover's management preceded
Chelsey's purchase of Richemont's position, and the alleged violation by
Richemont of purported obligations to Hanover.
While you maintain that my comments about the nature of the meeting
between representatives of Chelsey and Hanover were "disingenuous," you have not
indicated any inaccuracy in those comments. The recapitalization proposal
presented by Chelsey is a response and "specific counteroffer." It represents a
repurchase of the Series B Preferred Shares owned by Chelsey for a package of
newly issued preferred and common shares. Hanover's management may be obsessed
with the notion that the Common Shareholders would do better with a cash
repurchase; but this would only be true if Chelsey were prepared to accept
something approximating the unacceptable price proposed by Hanover's management.
You have asked in numerous ways how Chelsey can be so sure that its
recapitalization proposal will be beneficial to the Common Stockholders, since
Chelsey has not had access to inside information and has not developed its own
strategic plan for the Company. This question has been answered by Chelsey on
numerous occasions. The Series B Preferred Shares owned by Chelsey today have a
liquidation preference of approximately $110,000,000. Chelsey has offered to cut
this obligation in half (with one half to be embodied in a security with more
benign terms to Hanover) and to accept Common Shares in exchange for the
liquidation preference that was foregone at a rate equal to 300% of the then
price of the Common Stock.
As Chelsey has noted on numerous occasions, Hanover's value would have
to grow at an extraordinary rate in order for the existing Common Shares to
achieve a value equal to or greater than the value than those shares would
achieve by virtue of the recapitalization proposal. Accordingly, Hanover's
Common Stockholders will benefit from the recapitalization proposal under any
realistic scenario, whether the current plans of management are implemented or
changed in the future by the Board of Directors. The absence of a specific,
pre-formulated strategy by Chelsey is not necessary for Chelsey to reach its
conclusion with respect to the attractiveness of the recapitalization proposal.
To achieve a greater benefit for its current Common Shareholders,
Hanover would have to achieve an extraordinary rate of growth while satisfying
its obligations to the Series B Preferred shareholder. A regular theme of
Hanover's correspondence and public disclosure has been to distort those
obligations. Contrary to the statements made by Hanover and its representatives,
Hanover cannot merely allow the Series B Preferred Shares to accrete through
August 2005 and then allow it to remain in place. To the extent that the fair
market value of Hanover's assets exceeds its liabilities and nominal stated
capital it is required to redeem preferred shares. If it cannot redeem all of
the Series B Preferred shares, it must redeem as many shares as it can and
continue to do so until all of the Series B Shares are redeemed. I would be
interested to review any authority on which you rely to the effect that Hanover
would not have to "put at risk potential value for all shareholders in order to
redeem the Preferred Stock."
The intentional obtuseness on which Hanover's management must rely to
attempt to justify its positions is further evidenced by your assertion on their
behalf that Chelsey never proposed a three party transaction. To review, Chelsey
(one party) suggested to Hanover that Chelsey would purchase from Richemont (a
second party) its Hanover securities and exchange those securities with Hanover
(the third party) for a new package of securities. What is disturbing is the
false assertion that Hanover was unable to pursue this option because of a
confidentiality obligation to Richemont. In fact, Richemont encouraged Hanover
to pursue such a transaction. Similarly, Hanover has not been able to square the
proposition that Richemont was in possession of inside information making it
unlawful for it to engage in a transaction in Hanover securities with a
sophisticated party in a private transaction at the same time that Hanover's
CEO, in possession of the same information, was acquiring Hanover stock.
We will not bother to debate with you further the correctness of
Hanover's public filings, the results of its operations, whether it is relevant
whether it matters that it is merely "unlikely" that it will be able to redeem
the Series B Preferred shares as scheduled, or the appropriateness of broad
confidentiality agreements when no confidential information has been requested.
While Chelsey believes that the Escrow and Side Letter to which you refer are
not material since they
merely provide support for indemnification obligations, which were set forth in
the exhibit to Chelsey's prior 13D. Chelsey will nonetheless file these
agreements as exhibits to its next Schedule 13D amendment, to eliminate this red
herring.
Finally, I note that you caution Chelsey against contacting "the
Company's law firms" in addition to the Transaction Committee's financial
advisor and Board members, among others. It is not clear to me that I am not
running afoul of your admonitions by even responding to your letter. Your and
management's attempts to control who can talk to whom, are rife with actual and
apparent improprieties, as those attempts interfere with the supposed
independent functioning of the Transactions Committee. It is difficult to
reconcile this attempt to stifle dialogue with a good faith effort to act in the
best interests of the Company's shareholders, which you and your clients are
obliged to do. Again, as noted in the past by Richemont and its counsel,
Chelsey, as an outside shareholder is not subject to those duties.
Very truly yours,
/s/ Martin Nussbaum
Martin Nussbaum
cc: William B. Wachtel