EXHIBIT 99.2
MEMORANDUM OF UNDERSTANDING
WHEREAS, Hanover Direct, Inc. (the "Company"), Chelsey Direct, LLC
("Chelsey") and Regan Partners, L.P. ("Regan Partners") have reached an
agreement in principle on the terms of a recapitalization of the Company, the
reconstitution of the Board of Directors of the Company and a settlement of
outstanding litigation between the Company and Chelsey;
WHEREAS, the Company, Chelsey and Regan Partners desire to
memorialize the terms of their agreement;
NOW, THEREFORE, it is agreed as follows:
1. Acknowledgement of Chelsey Stock Ownership. The Company
acknowledges that Chelsey is the lawful and bona fide owner of 29,446,888 shares
of Common Stock, par value $0.66-2/3 per share, of the Company (the "Common
Stock") and 1,622,111 shares of Series B Preferred Stock, par value $0.01 per
share, of the Company (the "Series B Preferred Stock"), consisting of all of the
issued and outstanding shares of Series B Preferred Stock, and the Company does
not and will not challenge Chelsey's ownership of such shares. The Company shall
take all action necessary to effect Chelsey's ownership of such shares of Common
Stock and Series B Preferred Stock, including, without limitation, causing the
removal of any restrictive legends on such shares, other than a customary legend
confirming that the transfer of such shares is restricted by the Securities Act
of 1933, as amended.
2. Recapitalization.
(a) Within ten (10) days following the execution of this memorandum,
or as soon thereafter as possible, subject to the approval of the Company's
Board of Directors and its Transactions Committee, the Company and Chelsey shall
enter into a binding agreement (the "Recapitalization Agreement") which shall
embody the recapitalization plan set forth on Exhibit A hereto (the
"Recapitalization") and all of the other provisions of this memorandum. The
agreements set forth in paragraph 14 shall be exhibits to the Recapitalization
Agreement. The closing of the transactions contemplated by the Recapitalization
Agreement (the "Closing") shall occur as promptly as practicable following the
execution of the Recapitalization Agreement. If the Closing has not occurred by
the close of business on November 30, 2003, then, no later than December 3,
2003, the Company shall pay Chelsey $1,000,000 by wire transfer of immediately
available funds to an account designated by Chelsey. If the Closing has not
occurred by the close of business on December 17, 2003, then this memorandum
shall cease to be effective to the extent set forth in paragraph 15 unless
either the Company or Chelsey elects, by delivery of notice of such election to
such other party prior to such time, to extend the Closing past such date. In
the event of such election, then (i) (A) if the Company makes such election, the
number of shares of Common Stock and Series C Preferred Stock issued to Chelsey
in the Recapitalizaton shall be adjusted as set forth in Exhibit A and (B) if
Chelsey makes such election, there shall be no adjustment to the number of
shares of Common Stock and Series C
Preferred Stock issued to Chelsey in the Recapitalizaton and (ii) the Closing
shall occur not later than February 29, 2004.
(b) Each of the Company and Chelsey shall take all actions
reasonably necessary to execute the Recapitalization Agreement and thereafter to
close the transactions contemplated by the Recapitalization Agreement within the
time periods set forth in paragraph 2(a). Such actions shall include, without
limitation, the negotiation in good faith of all necessary documentation, as
described in Paragraph 14 hereof, as exhibits to the Recapitalization Agreement,
the filing of a Certificate of the Designations, Powers, Preferences and Rights
of Series C Participating Preferred Stock of the Company (the "Certificate of
Designations") with the Secretary of State of Delaware, the filing of the
Stipulation of Discontinuance with the Supreme Court of the State of New York,
the execution and delivery of the other documents described in paragraph 14
attached as exhibits to the Recapitalization Agreement and any necessary filings
with the Securities and Exchange Commission and the American Stock Exchange. The
Closing shall be subject to the Company obtaining the consent of Congress
Financial Corporation and the consents set forth on Exhibit B, and the Company
agrees to use its best efforts to obtain such consents as promptly as
practicable. Chelsey shall have the opportunity to participate in any
communications or meetings with Congress or any of the parties set forth on
Exhibit B regarding the consent of such parties to the Recapitalization, and the
Company shall advise Chelsey as promptly as practicable with respect to any
developments with respect to such consents.
3. Reconstituted Board of Directors. The Company shall prepare and
use its best efforts to file with the Securities and Exchange Commission and
transmit to all equity holders of the Company as required by Rule 14f-1 of the
Securities Exchange Act of 1934, as amended, a statement regarding a change in
majority of directors pursuant to Rule 14f-1 (the "14f Statement"), as promptly
as practicable following the execution of this memorandum. The 14f Statement
shall report the intention of the Company to reconstitute the Board of Directors
as the "Reconstituted Board," as set forth in the following paragraph. The
Company hereby represents and warrants that the information contained in the 14f
Statement shall not contain any statement which, at the time and in light of the
circumstances under which it is made, is false or misleading with respect to any
material fact, or omits to state any material fact necessary in order to make
the statements therein not false or misleading, except with respect to any
information contained in the 14f Statement that was provided to the Company in
writing by Chelsey for inclusion in the 14f Statement, and Chelsey hereby
represents and warrants that the information provided in writing by Chelsey for
inclusion in the 14f Statement shall not contain any statement which, at the
time and in light of the circumstances under which it is made, is false or
misleading with respect to any material fact, or omits to state any material
fact necessary in order to make the statements therein not false or misleading.
The Board of Directors of the Company shall be reconstituted,
simultaneously with the execution of the Recapitalization Agreement, so that (a)
the number of directors comprising the Board of Directors of the Company shall
be fixed at eight (8) and (b) the Board of Directors of the Company shall
consist of the following individuals: Martin Edelman, William Wachtel, Stuart
Feldman, Wayne Garten, Thomas Shull, Basil Regan, David Brown and Robert
2
Masson. Following execution of the Recapitalization Agreement and the expiration
of the tenth (10th) day following the filing of the 14f Statement by the Company
with the Securities and Exchange Commission and the transmission to all equity
holders of the Company as required by Rule 14f-1, (x) the number of directors
comprising the Board of Directors of the Company shall be fixed at nine (9) and
(y) the Board of Directors of the Company shall consist of the individuals
listed in the previous sentence plus Donald Hecht (the Board of Directors, as
reconstituted pursuant to clauses (x) and (y), shall be referred to herein as
the "Reconstituted Board"). Following the execution of the Recapitalization
Agreement and prior to Mr. Hecht being added to the Board of Directors as set
forth in this paragraph, if the Board of Directors shall be deadlocked on any
matter before the Board of Directors, such matter shall be decided by the
Executive Committee of the Board of Directors.
The Committees of the Board of Directors shall also be
reconstituted, simultaneously with the execution of the Recapitalization
Agreement, as follows: the members of the Executive Committee shall be Stuart
Feldman (Chairman), Martin Edelman and Basil Regan; the members of the Audit
Committee shall be Robert Masson (Chairman), Wayne Garten, David Brown and
Donald Hecht (Mr. Hecht shall be added to the Audit Committee at the same time
he is added to the Board of Directors); the members of the Compensation
Committee shall be David Brown (Chairman), Wayne Garten and Stuart Feldman; the
members of the Nominating Committee shall be William Wachtel (Chairman), Wayne
Garten and Thomas Shull; and the members of the Transactions Committee shall be
Martin Edelman (Chairman), David Brown and Basil Regan.
In the event that Messrs. Edelman, Garten, Feldman, Wachtel or Hecht
or their respective successors shall be unable or unwilling to serve as a
director or committee member for any reason, Chelsey shall designate a director
or committee member, as applicable, in place of such person, in the event Mr.
Regan or his successor shall be unable or unwilling to serve as a director or
committee member for any reason, Regan Partners shall designate a director or
committee member, as applicable, in place of such person, in the event that Mr.
Shull or his successor shall be unable or unwilling to serve as a director for
any reason, the Board of Directors shall designate the Chief Executive Officer
of the Company in place of such person and in the event that Messrs. Brown or
Masson or their respective successors shall be unable or unwilling to serve as a
director or committee member for any reason, the Board of Directors (acting
without the participation of Messrs. Wachtel and Feldman) shall designate a
director or committee member, as applicable, in place of such person; provided,
however, that any such substitute person not designated by the Board of
Directors shall be reasonably acceptable to the Board of Directors.
Regarding the reelection of the Board of Directors, the Company and
the Board of Directors shall take the actions set forth in Part 2 of Exhibit C
and the parties thereto shall take the actions set forth in the Voting Agreement
referred to in paragraph 9.
4. Company Store Group. Prior to the expiration of one hundred fifty
(150) days from the execution of the Recapitalization Agreement, the Company
agrees that it shall not (a) sell, other than in the ordinary course of
business, the inventory, trademarks or customer lists
3
associated with the Company Store division of the Company or (b) terminate the
employment of the Chief Executive Officer of the Company, unless, in either
case, such action has been approved by the Board of Directors pursuant to an
affirmative vote of at least six (6) members of the Board of Directors.
5. Transactions Committee. Simultaneously with the execution of the
Recapitalization Agreement, the Board of Directors of the Company shall approve
a new charter for the Transactions Committee as set forth on Part 1 of Exhibit
C. Regarding vacancies on the Transactions Committee, the Company and the Board
of Directors shall take the actions set forth in Part 3 of Exhibit C.
6. Mutual Releases; Termination of Litigation. At the Closing, (a)
the Company and its officers and directors shall release Chelsey and its
officers and managers from all claims, filed or that could have been filed, as
of the date of such release, (b) Chelsey and its officers and managers shall
release the Company and its officers and directors from all claims, filed or
that could have been filed, as of the date of such release and (c) each of the
Company and Chelsey shall discontinue, with prejudice, all pending litigation
between such parties. Pending the Closing, neither the Company nor Chelsey shall
take any action to prosecute any pending litigation between such parties, and
each of the Company and Chelsey agree to grant to the other party any extensions
of time necessary to preserve such litigation through the date of the Closing.
7. Change in Control. Chelsey and the Company will recognize and
agree that the Recapitalization is a "change of control" for purposes of all of
the Company's existing Compensation Continuation (Change of Control) Plans, the
Employment Agreement, dated as of September 1, 2002, as amended, between the
Company and Mr. Shull and the Transaction Bonus Letters between the Company and
its executive officers. The Company shall be permitted to make any payments
required thereunder on the Closing.
8. Registration Rights. The Company shall at its sole expense
provide two (2) demand and unlimited piggyback registration rights with respect
to resales by Chelsey of all shares of Common Stock owned by Chelsey pursuant to
a Registration Rights Agreement to be entered into between the parties prior to
the Closing.
9. Voting Agreements. Simultaneously with the execution of the
Recapitalization Agreement, Chelsey, Stuart Feldman, Regan Partners and Basil
Regan shall enter into an agreement providing that each of them will vote any
shares of the Company beneficially owned by them or any entity affiliated with
them to (a) effectuate the Recapitalization, if any vote is required, and the
provisions of paragraph 13 and (b) effectuate the provisions of Part 2 of
Exhibit C for so long as Regan Partners owns at least 75% of the outstanding
shares of Common Stock (as adjusted for stock splits, reverse stock splits and
the like) owned by Regan Partners as of the date of this memorandum.
10. Fairness Opinion. The Company hereby represents and warrants to
Chelsey that the provisions of this memorandum have been approved by a committee
of independent directors of the Board of Directors which has orally received a
fairness opinion from
4
independent financial advisors stating that the terms of the Recapitalization
are fair to the holders of Common Stock of the Company (other than Chelsey and
Stuart Feldman) from a financial point of view. The Company shall use its best
efforts to obtain and furnish to Chelsey written confirmation of the fairness
opinion prior to the execution of the Recapitalization Agreement.
11. Sales by Regan Partners. For so long as Regan Partners exercises
it right to have a designee serve on the Board of Directors of the Company,
Regan Partners hereby agrees that it will notify Chelsey at least twenty-four
(24) hours prior to any sale, transfer or other disposition (or the execution of
any agreement with respect thereto), other than fund balancing transactions
involving Regan Partners and/or any affiliates of Regan Partners, of any shares
of Common Stock of the Company owned by Regan Partners and will provide to
Chelsey an opportunity to purchase such shares prior to such sale, transfer or
other disposition on terms no less favorable to Regan Partners than otherwise
available to it pursuant to such proposed sale, transfer or other disposition.
12. Assets Sale Transactions. The Company agrees that, until the
Board of Directors is reconstituted with the eight (8) members set forth in
paragraph 3, it shall not enter into any agreement with respect to any asset
sale transaction outside of the ordinary course of business other than the
transactions contemplated herein. The Company will notify Chelsey promptly of
the receipt of any notice, discussions, or requests for information relating to
any asset sale transactions outside of the ordinary course of business.
13. Amendments to Certificate of Incorporation. The Company agrees
that it shall, acting through its Board of Directors and in accordance with its
charter and bylaws and applicable law, recommend in the proxy statement for the
first shareholders meeting following the Recapitalization amendments to its
Certificate of Incorporation to effectuate the following: (a) a reduction in the
par value per share of Common Stock from $0.66-2/3 per share to $0.01 per share,
(b) a reverse split of the Common Stock in a ratio of 10 for 1 and (c) an
increase by 10 million shares of the number of authorized shares of preferred
stock of the Company, and all of such shares shall be issuable by the Board of
Directors in one or more series (i.e., blank check preferred stock).
14. Other Agreements. The Recapitalization Agreement shall have
attached as exhibits the following agreements: the Certificate of Designations,
a Voting Agreement, a Registration Rights Agreement, General Releases, a
Stipulation of Discontinuance, a Transactions Committee Charter and a Corporate
Governance Agreement (to embody the corporate governance provisions set forth in
Exhibit C).
15. Binding Effect. The provisions of (a) the first paragraph of
paragraph 3, (b) the last sentence of paragraph 6, (c) all of paragraph 10, (d)
all of paragraph 11, (e) all of paragraph 12, (f) all of paragraph 16 and (g)
all of paragraph 17 constitute binding obligations of the parties hereto. With
respect to the other provisions of this memorandum, upon the negotiation,
execution and delivery of the definitive documentation referred to in this
memorandum, the parties will be legally bound. If definitive documentation has
not been negotiated, executed and delivered by (x) December 17, 2003, if neither
the Company nor
5
Chelsey gives the notice to extend the Closing as set forth in paragraph 2, or
(y) February 29, 2004, the provisions listed in clauses (a) - (e) set forth in
the first sentence of this paragraph shall no longer be binding obligations of
the parties hereto.
16. Expenses. The Company shall promptly pay (a) the reasonable
legal fees and disbursements of Swidler Berlin Shereff Friedman, LLP ("SBSF") in
connection with the preparation and negotiation of this memorandum, the
Recapitalization Agreement and all related documentation on behalf of Chelsey
and (b) the reasonable fees of any financial advisors engaged by Chelsey or SBSF
not to exceed $20,000 in the aggregate relating to compliance with the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, including,
without limitation, a valuation by such financial advisors of the securities to
be received by Chelsey pursuant to the Recapitalization.
17. Miscellaneous. This memorandum shall be governed by the internal
laws of the State of New York, without regard to its conflicts of laws'
principles. This memorandum may be executed in one or more counterparts, each of
which will be deemed an original and all of which together will constitute the
same agreement.
6
Dated November 10, 2003
HANOVER DIRECT, INC.
By: /s/ Thomas C. Shull
----------------------------
Name: Thomas C. Shull
Title: President/CEO
Hanover Direct, Inc.
115 River Road
Building 10
Edgewater, New Jersey 07020
CHELSEY DIRECT, LLC
By: /s/ William B. Wachtel
----------------------------
Name: William B. Wachtel
Title: Managing Member
Chelsey Direct, LLC
712 Fifth Avenue, 45th Floor
New York, New York 10019
REGAN PARTNERS, L.P.
By: /s/ Basil P. Regan
----------------------------
Name: Basil P. Regan
Title: General Partner
Regan Partners, L.P.
32 East 57th Street, 20th Floor
New York, New York 10022
EXHIBIT A
RECAPITALIZATION OF HANOVER DIRECT, INC.
SUMMARY OF TERMS
Chelsey will transfer 1,622,111 shares of Series B Preferred Stock
(including accrued dividends) to the Company. If the Closing occurs on or prior
to December 17, 2003 or if Chelsey elects to extend the Closing past December
17, 2003 as set forth in paragraph 2 of this memorandum, the Company shall issue
to Chelsey (a) 564,819 shares of Series C Preferred Stock (on the terms set
forth below) and (b) 81,857,833 newly issued shares of Common Stock. If the
Company elects to extend the Closing past December 17, 2003 as set forth in
paragraph 2 of this memorandum, the Company shall issue to Chelsey (a) shares of
Series C Preferred Stock with an aggregate liquidation preference equal to
one-half (1/2) of the accreted liquidation preference (less $500,000) of the
Series B Preferred Stock on the date of the Closing and (b) newly issued shares
of Common Stock at the rate of $0.69 per share (300% of the market value at
August 6, 2003), rounded up to the next full share, for the balance of the
accreted liquidation preference (less $500,000) of the Series B Preferred Stock
on the date of the Closing.
Key Terms of Series C Preferred Stock:
Amount of Issue: If the Closing occurs on or prior to December
17, 2003 or if Chelsey elects to extend the Closing past
December 17, 2003 as set forth in paragraph 2 of this
memorandum, 564,819 shares of Series C Preferred Stock.
If the Company elects to extend the Closing past
December 17, 2003 as set forth in paragraph 2 of this
memorandum, shares of Series C Preferred Stock with an
aggregate liquidation preference equal to one-half (1/2)
of the accreted liquidation preference (less $500,000)
of the Series B Preferred Stock on the date of the
Closing.
Liquidation Preference: $100.00 per share
Dividend: Commencing January 1, 2006, dividends shall be payable
quarterly at the rate of 6% per annum, with the
preferred dividend rate increasing at by 1 1/2% per
annum on each anniversary of the dividend commencement
date until redeemed. At the Company's option, in lieu of
cash dividends, the Company may instead elect to cause
accrued and unpaid dividends to compound at a rate equal
to 1% higher than the applicable cash dividend rate.
The Series C Preferred Stock shall be entitled to
participate ratably with the Common Stock on a share for
share basis in any dividends or distributions paid to or
with respect to the Common Stock. The right to
participate shall have anti-dilution protection.
Redemption: The Series C Preferred Stock may be redeemed in whole
and, except as set forth below, not in part, at the
option of the Company at any time for the liquidation
preference and any accrued and unpaid dividends (the
"Redemption Price"). The Series C Preferred Stock shall
be redeemed by the Company on January 1, 2009 (the
"Mandatory Redemption Date") for the Redemption Price.
If the Series C Preferred Stock is not redeemed on or
before the Mandatory Redemption Date, the Series C
Preferred Stock shall be entitled to elect one-half
(1/2) of the Company's Board of Directors. The Company
shall redeem the maximum number of shares of Series C
Preferred Stock as possible with the net proceeds of
certain asset and equity sales not required to be used
to repay Congress Financial Corporation pursuant to the
terms of the 19th Amendment to the Loan Agreement with
Congress, and Chelsey shall be required to accept such
redemptions.
Voting: Each share Series C Preferred Stock shall be entitled to
one hundred (100) votes per share plus that number of
votes as shall equal the dollar value of any accrued,
unpaid and compounded dividends with respect to such
share, and shall vote as a class with the Common Stock
on any matter submitted to a vote of the holders of
Common Stock. The Series C Preferred Stock shall be
entitled to vote as a class on any matter that would
adversely affect that Series.
Covenants and Rights: The Series C Preferred Stock shall have such additional
covenants and rights as are customary or necessary to
give effect to the foregoing and as may be agreed
between the parties.
EXHIBIT B
CONSENTS POTENTIALLY REQUIRED FOR RECAPITALIZATION
1. Congress Financial Corporation
2. American Stock Exchange
EXHIBIT C
OTHER MATERIAL TERMS AND CONDITIONS OF RECAPITALIZATION PROPOSAL
1*
TRANSACTIONS COMMITTEE OF THE BOARD OF DIRECTORS (THE "COMMITTEE"):
- COMPOSITION: The Committee will have three members, one designated
by Chelsey (Martin Edelman), one designated by Regan Partners (Basil
Regan) and an independent member to be unanimously designated by
Chelsey and Regan Partners (David Brown).
- CHARTER OF COMMITTEE: Pass on redemptions of the Series C Preferred
Stock, including transactions that pursuant to the terms of the
Series C Preferred Stock would require the Company to redeem any
shares of the Series C Preferred Stock (consistent with applicable
laws or agreements). The Board of Directors, in the reasonable
exercise of its business judgment, shall determine if any such
transaction is reasonably likely to require the Company to redeem
any shares of the Series C Preferred Stock, and, if the Board of
Directors determines that a redemption is reasonably likely, such
matter shall then be submitted to the Transactions Committee.
- ADVISORS: The Committee will have the authority to retain
independent counsel and a financial advisor/investment bank agreed
unanimously by the Committee.
- ACTIONS: In a manner determined by the Committee, approve the terms
of any transaction and recommend execution of any transaction and
related redemption of the Series C Preferred Stock to the Board.
- APPROVAL OF ACTION: A unanimous vote of the three-member Committee
is required for the above Actions. A unanimous vote of the Committee
cannot be overturned by the Board of Directors. If the Committee
shall not be able to decide unanimously on any matter before the
Committee during the first 5 months following the execution of the
Recapitalization Agreement, such matter shall be decided by a vote
of at least 5 members of the Board of Directors while the Board of
Directors has 8 members and 6 members of the Board of Directors
while the Board of Directors has 9 members, and thereafter such
matter shall be decided by a majority of the Board of Directors.
- DURATION: Structure to survive until the new Series C Preferred
Stock is redeemed in full.
2*
DESIGNATED DIRECTORS: For a period of two years from the Closing, the Company,
acting through its Board of Directors and in accordance with its charter and
bylaws and applicable law, shall recommend in the proxy statement for each
annual or special meeting of stockholders at which directors shall be elected
and shall recommend at each such stockholders meeting as part of the management
or Nominating Committee slate for election to the Company's Board of Directors,
such number of persons designated by Chelsey so that five of nine directors of
the Company will at all times be directors of the Company designated by Chelsey
and at all times one person designated by Regan Partners will at all times be a
director of the Company. All shares for which the Company's management or Board
of Directors hold proxies (including undesignated proxies) shall be voted in
favor of the election of such designees of Chelsey and Regan Partners, except as
may otherwise be provided by stockholders submitting such proxies. In the event
that any Chelsey or Regan Partners designee shall cease to serve as a director
of the Company for any reason, the Company shall cause the vacancy resulting
thereby to be filled by a designee of Chelsey or Regan Partners, as the case may
be, reasonably acceptable to the Board of Directors as promptly as practicable.
For a period of two years from the Closing, so long as the Board of Directors of
the Company consists of a majority of designees of Chelsey, Chelsey will not
seek to nominate or propose for nomination or elect any persons to the Board if
the effect thereof would be to cause persons affiliated or associated with
Chelsey to constitute more than five directors of the Company's Board of
Directors as then required pursuant to the preceding paragraph; provided that
Chelsey may nominate or propose for nomination or elect any persons
to the Board without regard to the foregoing limitation after the new Series C
Preferred Stock is redeemed in full.
Prior to the Closing, Chelsey, Regan Partners and Basil Regan shall enter into
an agreement providing that each of them will vote any shares of the Company
beneficially owned by them or any entity affiliated with them to effectuate the
foregoing provisions.
3*
For a period of at least two years from the Closing, the Company's Board of
Directors, acting in accordance with its charter and bylaws and applicable law,
shall maintain a Transactions Committee as described above. Such Transactions
Committee shall consist of three directors, one designated by Chelsey, one
designated by Regan Partners and one designated jointly by Regan Partners and
Chelsey. In the event that the Chelsey or Regan Partners designee on the
Transactions Committee shall cease to serve as a director of the Company or a
member of the Transactions Committee for any reason, the Company shall cause the
vacancy resulting thereby to be filled by a designee of Chelsey or Regan
Partners, as applicable, as promptly as practicable. In the event that the
designee selected jointly by Chelsey and Regan Partners on the Transactions
Committee shall cease to serve as a director of the Company or a member of the
Transactions Committee for any reason, the Company shall cause the vacancy
resulting thereby to be filled by a designee selected jointly by Chelsey and
Regan Partners as promptly as practicable.
* The right of Regan Partners to designate nominees to the Board of Directors
shall terminate if Regan Partners ceases to own at least 75% of the outstanding
shares of Common Stock (as adjusted for stock splits, reverse stock splits and
the like) owned by Regan Partners as of the date of this memorandum.