27. In consideration for providing the Term Loan Facility to the Company, Chelsey
Finance received a closing fee of $200,000, which was paid in cash, and received a warrant (the "Common Stock Warrant") to purchase 30% of the fully diluted shares of Common Stock of the Company.
28. Also pursuant to the terms and conditions of the Recapitalization Agreement, the
Company, acting through its Board of Directors and in accordance with its charter and bylaws and applicable law, agreed to present to the Company's stockholders a proposal to amend its Certificate of Incorporation to effect a one-for-ten reverse split of the Company's Common Stock (the “Reverse Stock Split”).
29. The Reverse Stock Split was approved at Hanover's annual stockholder meeting on
August 12, 2004 and consummated on or about September 27, 2004, effectively increasing the voting power of the common stock held by Chelsey and decreasing the collective voting power of the common stock held by other shareholders.
Background of the Offer - Hanover’s Accounting Problems
30. On October 27, 2005, the Company issued a press release which contained, in part, the following:
Item 2.02 Results of Operations and Financial Condition.
As set forth in greater detail in Item 4.01 below, the Audit Committee of the Board of Directors of Hanover Direct, Inc. (the “Company”) has dismissed the Company’s current principal independent auditors, KPMG LLP (“KPMG”) prior to their completion of the audit of the Company’s financial statements for the 2004 fiscal year. Because the Company’s new auditors, once selected by the Audit Committee, will require an indeterminate period of time to audit the Company’s financial statements which will further delay the already delayed filing of the Company’s fiscal year 2004 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, the Company has included as exhibits to this Current Report a current draft of the Company’s fiscal year 2004 Annual Report on Form 10-K and a current draft of the Quarterly Report on Form 10-Q for the Quarterly Period ended June 25, 2005.
Management believes that the financial statements included in the draft of the Form 10-K are accurate and are in a form that management was prepared to file had the Company received an audit report from its independent auditors. Similarly, the financial statements included in the second quarter 2005 Form 10-Q have not been reviewed by an independent auditor. Accordingly, neither the draft Form 10-K nor the draft Form 10-Q comply with the requirements of the Securities Exchange Act of 1934.
Moreover and as described below, prior to KPMG’s dismissal, KPMG identified material weaknesses in internal controls and informed the Company in a September 22, 2005 letter (“September 22nd KPMG Letter”) that it would have to perform additional audit procedures before KPMG could issue a report on the Company’s financial statements. KPMG did not perform these additional audit procedures prior to its dismissal.
The Company’s new independent auditors may require revisions to the financial statements and/or disclosures included in the drafts of the 2004 Form 10-K and second quarter 2005 Form 10-Q. In addition because of external factors beyond the Company’s control and because of the passage of time before the filing of the Form 10-K and Form 10-Q, the drafts included as exhibits may require other changes. Consequently, it is probable that these documents will be modified before being filed.
Readers are cautioned that there can be no assurances that these modifications will not materially affect the financial results reported in and/or the disclosures contained in the draft filings
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