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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Centric Brands (delisted) | NASDAQ:DFBG | NASDAQ | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 5.09 | 4.75 | 5.09 | 0 | 01:00:00 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): November 3, 2015
Joe's Jeans Inc.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation) |
0-18926 (Commission File Number) |
11-2928178 (I.R.S. Employer Identification No.) |
2340 South Eastern Avenue, Commerce, California 90040
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 323-837-3700
Not Applicable
Former name or former address, if changed since last report
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
Discontinued Operations
Joe's Jeans Inc. (the "Company"), a Delaware corporation, is filing this Current Report on Form 8-K to retrospectively reclassify the presentation of its consolidated financial statements that were initially filed with the Securities and Exchange Commission ("SEC") on February 13, 2015 in the Company's Annual Report on Form 10-K for the year ended November 30, 2014 (the "Annual Report") to reflect its Joe's® brand, which historically has been reported as part of the Company's Wholesale and Retail segments, as a discontinued operation, held for sale as of August 31, 2015.
The Joe's® business was sold in September 2015 and its assets and liabilities and results of operations have been reflected in discontinued operations in its Quarterly Report on Form 10-Q for the period ended August 31, 2015 filed with the SEC on October 13, 2015. Accordingly, the Company is revising and including in this Current Report on Form 8-K the following portions of the Annual Report: Selected Financial Data (Item 6) Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 7) and Financial Statements and Supplementary Data (Item 8).
In order to preserve the nature and character of the disclosures set forth in such items as originally filed in the Annual Report, no attempt has been made in this Current Report, and it should not be read, to modify or update disclosures as presented in the Annual Report to reflect events or occurrences after the date of the filing of the Annual Report, except for matters relating specifically to the retrospectively reclassification of the presentation described above. Therefore, this Current Report on Form 8-K should be read in conjunction with the Annual Report and the Company's filings made with the SEC subsequent to the filing of the Annual Report, including the quarterly reports on Form 10-Q for the quarterly periods ended February 28, 2015, May 31, 2015 and August 31, 2015.
Amended and Restated Merger Agreement
As previously disclosed, on September 8, 2015, the Company entered into an agreement and plan of merger (the "Original Agreement") with RG Parent LLC ("RG") and JJ Merger Sub LLC ("Merger Sub"). On November 3, 2015, the Company entered into an amended and restated agreement and plan of merger (the "Amended and Restated Merger Agreement"), effective as of September 8, 2015, with RG and Merger Sub, which amends the Original Agreement to, among other things, require that RG's board of managers solicit written consent from RG's equity holders to enter into the transactions contemplated by the Amended and Restated Merger Agreement.
A copy the Amended and Restated Merger Agreement is filed with this Current Report on Form 8-K as Exhibit 2.1 and is incorporated herein by reference. The foregoing description of the Amended and Restated Merger Agreement is qualified in its entirety by reference to the exhibit filed hereto.
Forward Looking Statements
This Current Report on Form 8-K contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. The matters discussed in this Current Report on Form 8-K involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. All statements in this Current Report on Form 8-K that are not purely historical facts are forward-looking statements, including statements containing the words "may," "will," "expect," "anticipate," "intend," "estimate," "continue," "believe," "plan," "project," "will be," "will continue," "will likely result" or similar expressions. Any forward-looking statement inherently involves risks and uncertainties that could cause actual results to differ
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materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to: the parties' ability to close the merger, including, the receipt and terms and conditions of any required governmental approval of the proposed merger that could reduce anticipated benefits or cause the parties to abandon the merger, the diversion of management's time and attention from the Company's ongoing business during this time period; the impact of the merger on the Company's stock price; the anticipated benefits of the merger on its financial results, business performance and product offerings; the Company's ability to successfully integrate the Robert Graham business and realize cost savings and any other synergies; the risk that the credit ratings of the combined company or its subsidiaries may be different from what the Company expects; continued acceptance of our product, product demand, competition, capital adequacy, general economic conditions and the potential inability to raise additional capital if required; the risk that the Company will be unsuccessful in gauging fashion trends and changing customer preferences; the risk that changes in general economic conditions, consumer confidence, or consumer spending patterns will have a negative impact on the Company's financial performance; the highly competitive nature of the Company's business in the United States and internationally and its dependence on consumer spending patterns, which are influenced by numerous other factors; the Company's ability to respond to the business environment and fashion trends; continued acceptance of the Company's brands in the marketplace; and other risks. The Company discusses certain of these factors more fully in its additional filings with the SEC, including its last annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC, and this Current Report on Form 8-K should be read in conjunction with those reports, together with all of the Company's other filings, including its current reports on Form 8-K, through the date of this Current Report on Form 8-K. The Company urges you to consider all of these risks, uncertainties and other factors carefully in evaluating the forward-looking statements contained in this Current Report on Form 8-K.
Any forward-looking statement is based on information current as of the date of this Current Report on Form 8-K and speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update these statements to reflect events or circumstances after the date on which such statement is made. Readers are cautioned not to place undue reliance on forward-looking statements.
Additional Information about the Proposed Merger and Where to Find It
In connection with the proposed merger, the Company is filing with the SEC a registration statement on Form S-4 that will include a proxy statement of the Company that also constitutes a prospectus of the Company, which proxy statement will be mailed or otherwise disseminated to the Company's stockholders when it becomes available. The Company also plans to file other relevant documents with the SEC regarding the proposed merger. INVESTORS ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS AND OTHER RELEVANT DOCUMENTS FILED WITH THE SEC IF AND WHEN THEY BECOME AVAILABLE, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. You may obtain a free copy of the proxy statement/prospectus (when it becomes available) and other relevant documents filed by the Company with the SEC at the SEC's website www.sec.gov. Copies of the documents filed by the Company will be available free of charge on its website at www.joesjeans.com or by contacting the individual listed below.
Certain Information Regarding Participants
The Company and its directors and executive officers may be deemed to be participants in the solicitation of proxies in respect of the proposed merger. You can find information about the Company's executive officers and directors in the Company's Form 10-K/A filed with the SEC on March 30, 2015. Additional information regarding the interests of such potential participants will be
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included in the proxy statement/prospectus and other relevant documents filed with the SEC if and when they become available. You may obtain free copies of these documents from the Company by contacting the individual listed below.
No Offer or Solicitation
This document shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.
Item 9.01. Financial Statements and Exhibits.
| 2.1 | * | Amended and Restated Agreement and Plan of Merger, effective as of September 8, 2015, by and among RG Parent LLC, JJ Merger Sub LLC and Joe's Jeans Inc. | |
23.1 |
Consent of Moss Adams LLP |
||
23.2 |
Consent of Ernst & Young LLP |
||
99.1 |
Item 6. Selected Financial Data |
||
99.2 |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations |
||
99.3 |
Item 8. Financial Statements and Supplementary Data |
||
101 |
The following materials from Joe's Jeans Inc.'s Annual Report on Form 10-K for the year ended November 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at November 30, 2014 and 2013; (ii) Consolidated Statements of Comprehensive (Loss) Income for the years ended November 30, 2014, 2013 and 2012; (iii) Consolidated Statements of Stockholders' Equity for the years ended November 30, 2014, 2014 and 2013; (iv) Consolidated Statements of Cash Flows for the years ended November 30, 2014, 2013 and 2012; and (v) Notes to Consolidated Financial Statements |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
Joe's Jeans Inc. | |||||
November 3, 2015 |
By: |
/s/ SAMUEL J. FURROW |
||||
|
Name: | Samuel J. Furrow | ||||
|
Title: | Interim Chief Executive Officer and Chairman of the Board of Directors | ||||
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| Exhibit No. | Description | ||
|---|---|---|---|
| 2.1 | * | Amended and Restated Agreement and Plan of Merger, effective as of September 8, 2015, by and among RG Parent LLC, JJ Merger Sub LLC and Joe's Jeans Inc. | |
23.1 |
Consent of Moss Adams LLP |
||
23.2 |
Consent of Ernst & Young LLP |
||
99.1 |
Item 6. Selected Financial Data |
||
99.2 |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations |
||
99.3 |
Item 8. Financial Statements and Supplementary Data |
||
101 |
The following materials from Joe's Jeans Inc.'s Annual Report on Form 10-K for the year ended November 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at November 30, 2014 and 2013; (ii) Consolidated Statements of Comprehensive (Loss) Income for the years ended November 30, 2014, 2013 and 2012; (iii) Consolidated Statements of Stockholders' Equity for the years ended November 30, 2014, 2014 and 2013; (iv) Consolidated Statements of Cash Flows for the years ended November 30, 2014, 2013 and 2012; and (v) Notes to Consolidated Financial Statements |
||
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TABLE OF CONTENTS
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF SEPTEMBER 8, 2015
by and among
RG PARENT, LLC,
JJ MERGER SUB LLC
and
JOE'S JEANS INC.
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AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
This AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of September 8, 2015 (this "Agreement"), is by and among RG PARENT, LLC, a Delaware limited liability company ("RG"), JJ MERGER SUB LLC, a Delaware limited liability company and a wholly owned Subsidiary of the Company ("Merger Sub"), and JOE'S JEANS INC., a Delaware corporation (the "Company"). Certain terms used in this Agreement are defined in Section 7.11.
WHEREAS on September 8, 2015, RG, the Company and Merger Sub entered into an Agreement and Plan of Merger (the "Original Agreement");
WHEREAS, pursuant to Section 7.2 of the Original Agreement, the parties desire to amend and restate the Original Agreement;
WHEREAS, the Board of Directors of the Company (the "Company Board") has (a) determined that it is fair to, and in the best interest of, the Company and its stockholders (the "Company Stockholders") to enter into this Agreement, (b) approved the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, including the merger of Merger Sub with and into RG (the "Merger"), with RG as the surviving limited liability company, and adopted resolutions adopting and approving this Agreement and declaring its advisability, and (c) resolved, on the terms and subject to the conditions set forth in this Agreement, to make the Company Recommendation;
WHEREAS, the Board of Managers of RG has (a) determined that it is in the best interests of RG and its members (the "RG Members") to enter into this Agreement, and (b) authorized and approved the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, including the Merger;
WHEREAS, the Company, as sole member of Merger Sub, has adopted resolutions approving this Agreement;
WHEREAS, prior to or concurrently with the execution of this Agreement, and as a condition and inducement to the Company's and RG's willingness to enter into this Agreement, the holders of Convertible Notes of the Company are entering into a letter agreement in the form attached hereto as Exhibit A, pursuant to which such holders will surrender their Convertible Notes to the Company, subject to the terms and conditions therein, in exchange for cash, Company Common Stock and modified convertible notes (each a "Rollover Letter" and collectively, the "Rollover Letters");
WHEREAS, prior to or concurrently with the execution of this Agreement, and as a condition and inducement to the Company's and RG's willingness to enter into this Agreement, the Company and TCP Denim, LLC, a Delaware limited liability company (the "Preferred Stock Purchaser") and an Affiliate of Tengram Capital Partners, L.P. ("TCP"), are entering into a Stock Purchase Agreement in the form attached hereto as Exhibit B (the "Stock Purchase Agreement"), pursuant to which such Affiliate will, among other things, purchase $50,000,000 of Company Preferred Stock immediately prior to, or concurrently with, the Effective Time;
WHEREAS, prior to or concurrently with the execution of this Agreement, and as a condition and inducement to the Company's and RG's willingness to enter into this Agreement, the Company, Sequential Brands Group, Inc., a Delaware corporation, and Joe's Holdings LLC (the "IP Assets Purchaser") are entering into an Asset Purchase Agreement in the form attached hereto as Exhibit C (including all schedules and exhibits thereto, the "IP Asset Purchase Agreement"), pursuant to which the IP Assets Purchaser will, among other things, purchase certain Intellectual Property Rights and other assets from the Company immediately prior to, or concurrently with, the Effective Time;
WHEREAS, prior to or concurrently with the execution of this Agreement, and as a condition and inducement to the Company's and RG's willingness to enter into this Agreement, the Company and
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GBG USA, Inc., a Delaware corporation (the "Operating Assets Purchaser"), are entering into an Asset Purchase Agreement in the form attached hereto as Exhibit D (including all schedules and exhibits thereto, the "Operating Asset Purchase Agreement" and, together with the IP Asset Purchase Agreement, the "Asset Purchase Agreements"), pursuant to which the Operating Assets Purchaser will, among other things, purchase certain inventory, store leases and certain other assets from the Company immediately prior to, or concurrently with, the Effective Time; and
WHEREAS, prior to, or concurrently with, the execution of this Agreement, and as a condition and inducement to the Company's and RG's willingness to enter into this Agreement, Tengram Capital Partners Fund II, L.P., a Delaware limited partnership ("Guarantor") is entering into a guaranty in favor of the Company (the "Guaranty") with respect to the obligations of the Preferred Stock Purchaser under the Stock Purchase Agreement to pay the purchase price thereunder.
NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement, and intending to be legally bound hereby, RG, Merger Sub and the Company hereby agree as follows:
Section 1.1. The Merger. Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time, Merger Sub shall be merged with and into RG, with RG as the surviving limited liability company, in accordance with the DLLCA, and the separate limited liability company existence of Merger Sub shall thereupon cease. RG shall continue as the surviving limited liability company in the Merger (sometimes hereinafter referred to as the "Surviving Company"), and the separate existence of RG, with all its rights, privileges, immunities, powers and franchises, shall continue unaffected by the Merger, except as set forth in this Article I.
Section 1.2. Closing. Upon the terms and subject to the conditions set forth in this Agreement,
the closing of the Merger (the
"Closing") shall take place at 10:00 a.m. (New York, New York time) on a date to be specified by the parties (the
"Closing Date"), which date shall be no later than the third (3rd) Business Day after satisfaction or waiver of the conditions set forth in Article V
(other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of
those conditions at such time), at the offices of Akin Gump Strauss Hauer & Feld LLP, 1333 New Hampshire Avenue NW, Washington DC 20036, unless another time, date or place is
agreed to in writing by the parties hereto. By agreement of the parties, the Closing may take place by delivery of the documents to be delivered at the Closing by facsimile or other electronic
transmission. All deliveries by one party to any other party at the Closing shall be deemed to have occurred simultaneously and none shall be effective until and unless all have occurred, unless the
parties agree otherwise in writing.
Section 1.3. Effective Time. Upon the terms and subject to the conditions set forth in this
Agreement, on the Closing Date, the Company and RG will cause the Certificate of Merger to be duly
executed and filed with the Secretary of State of the State of Delaware in accordance with the relevant provisions of the DLLCA and shall take all such reasonable further actions as may be required by
Law to make the Merger effective. The Merger shall become effective on the Closing Date at the time when the Certificate of Merger has been duly filed with the office of the Secretary of State of the
State of Delaware or at such later date and time as RG and the Company may agree and specify in the Certificate of Merger in accordance with the DLLCA (the "Effective
Time").
Section 1.4. Conversion of the RG Units. At the Effective Time, by virtue of the Merger and
without any further action on the part of RG, Merger Sub, the Company or the holders of RG Units, the RG Units
shall be converted into the right to receive an aggregate of $81,000,000 in cash (the "Aggregate Cash Consideration") and 8,870,968 shares (after giving
effect to the Reverse Stock Split) of
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Company Common Stock (the "Aggregate Stock Consideration" and, together with the Aggregate Cash Consideration, the "Aggregate Merger Consideration") as follows:
(a) Except as provided in Section 1.4(c), each RG Unit issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger, and without any action on the part of the holder thereof, be converted automatically into the right to receive, upon surrender of the Certificate representing such RG Unit as provided in Section 1.9, such portion of (i) Aggregate Cash Consideration less the RG Payoff Amount (such amount, the "Actual Cash Consideration") and (ii) the Aggregate Stock Consideration ((i) and (ii) collectively, the "Actual Merger Consideration") as indicated in the Merger Consideration Schedule. The Merger Consideration Schedule shall be delivered by RG to the Company at least three (3) Business Days prior to the anticipated Closing Date and the allocations reflected thereon shall be in accordance with RG's limited liability company agreement as of the Effective Time.
(b) All RG Units, when so converted, shall no longer be outstanding and shall automatically be retired and shall cease to exist, and each holder of RG Units shall cease to have any rights with respect thereto, except the right to receive the Actual Merger Consideration into which such RG Units have been converted, as provided herein.
(c) Each RG Unit that is owned by RG or by any Subsidiary of RG and each RG Unit owned by the Company, Merger Sub or any other Subsidiary of the Company immediately prior to the Effective Time shall be retired and cease to exist and no payment or distribution shall be made with respect thereto.
(d) Each common unit of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued common unit of the Surviving Company and shall constitute the only outstanding equity of the Surviving Company.
Section 1.5. Organizational Documents. At the Effective Time, pursuant to the Merger, the limited
liability company agreement of the Surviving Company shall be amended to read in its entirety the same
as the limited liability company agreement of Merger Sub, as in effect immediately prior to the Effective Time, except that the name of the Surviving Company shall remain "RG Parent, LLC".
Thereafter, the limited liability company agreement of the Surviving Company may be amended in accordance with its terms and as provided by Law.
Section 1.6. Officers of the Surviving Company. The officers of RG shall continue in office as
the officers of the Surviving Company, and such officers shall hold office until successors are duly elected or
appointed and qualified in accordance with and subject to applicable Law and the limited liability company agreement of the Surviving Company.
Section 1.7. Exchange Agent. Prior to the Effective Time, the Company shall appoint an exchange
agent reasonably acceptable to RG (the "Exchange
Agent") for the purpose of exchanging the Certificates for the Merger Consideration and for such other purposes as otherwise provided herein. All fees and expenses incurred in
connection with the Exchange Agent shall be paid by the Company, whether or not the transactions contemplated hereby are consummated.
(a) (i) At least five (5) Business Days prior to the Closing Date, the Company shall provide RG with customary payoff letters and forms of Lien releases, in form reasonably satisfactory to RG, with respect to all Indebtedness of the Company and its Subsidiaries described in clauses (a), (b), (d), (e) and (f) of the definition of Indebtedness, including, but not limited to, that Indebtedness set forth on Section 1.8(a) of the Company Disclosure Schedule. At the Closing, the Company shall pay or cause to be paid (A) to the holders of such Indebtedness (other than the holders of the Convertible Notes), the outstanding principal amount, together with all accrued and
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unpaid interest through the Closing Date and prepayment or other penalties or premiums, if any, owed with respect to such Indebtedness of the Company and its Subsidiaries, and (B) to the holders of Convertible Notes, the cash, Company Common Stock and modified convertible notes in exchange for their Convertible Notes in accordance with the Rollover Letters (collectively, the "Company Payoff Amount"). (ii) At least five (5) Business Days prior to the Closing Date, RG shall provide the Company with customary payoff letters and forms of Lien releases, in form reasonably satisfactory to the Company, with respect to all Indebtedness of RG and its Subsidiaries described in clauses (a), (b), (d), (e) and (f) of the definition of Indebtedness, including, but not limited to, that Indebtedness set forth on Section 1.8(a) of the RG Disclosure Schedule (the "RG Debt"). At the Closing, the Company shall pay or cause to be paid to the holders of such Indebtedness, the outstanding principal amount, together with all accrued and unpaid interest through the Closing Date and prepayment or other penalties or premiums, if any, owed with respect to such Indebtedness of the Company and its Subsidiaries (the "RG Payoff Amount").
(b) At the Effective Time, the Company shall cause to be deposited with the Exchange Agent cash and Company Common Stock in the aggregate amount required to pay the Actual Merger Consideration in respect of the RG Units (such cash amounts being referred to herein as the "Exchange Fund"). The Exchange Fund shall be used solely for purposes of paying the Actual Merger Consideration in respect of the RG Units in accordance with Section 1.9 and shall not be used to satisfy any other obligation of the Company or any of its Subsidiaries. Pending distribution of the Exchange Fund in accordance with Section 1.9, the Exchange Agent may invest such cash, provided that such investments are Permitted Investments and shall have maturities that will not prevent or delay payments to be made pursuant to Section 1.9. Any income from investment of the Exchange Fund will be payable solely to the Company. If the Exchange Fund diminishes for any reason below the amount required to make prompt payment of the Actual Merger Consideration, then the Company and Merger Sub shall, jointly and severally, promptly cause to be deposited with the Exchange Agent the amount necessary to replace or restore the lost portion of the Exchange Fund to ensure that it is, at all times, maintained at a level sufficient to make such payments.
Section 1.9. Exchange of Certificates.
(a) Exchange Procedures.
(i) As soon as practicable (but not more than one (1) day) after the Effective Time, the Company and the Surviving Company shall cause the Exchange Agent to mail to each holder of record of Certificates that were subsequently converted into the right to receive the Actual Merger Consideration, as set forth in Section 1.4: (A) a letter of transmittal (a "Letter of Transmittal"), the form and substance of which shall be reasonably agreed to by the Company and RG at least three (3) days prior to the Closing Date, which shall, among other things, specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Surviving Company (or an affidavit of loss in lieu thereof, together with any bond or indemnity agreement, as contemplated by Section 1.9(e); and (B) instructions for use in effecting the surrender of the Certificates in exchange for payment of the applicable Actual Merger Consideration.
(ii) Upon surrender of a Certificate for cancellation to the Surviving Company, together with a Letter of Transmittal, duly completed and validly executed (A) the holder of such Certificate shall be entitled to receive in exchange therefor the applicable amount of (1) cash, by wire transfer of immediately available funds, and (2) shares of Company Common Stock, in each case equal to the portion of the Actual Merger Consideration for each RG Unit represented by such Certificate in accordance with the Merger Consideration Schedule and (B) the Certificate so surrendered shall forthwith be canceled. No interest will be paid or accrued on the Actual Merger Consideration payable upon surrender of the Certificates. Until
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surrendered as contemplated by this Section 1.9(a), each such Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the applicable Actual Merger Consideration. Notwithstanding anything in this Section 1.9 to the contrary, RG Units that are in non-certificate book-entry form immediately prior to the Effective Time will, at the Effective Time, be deemed to be automatically surrendered for all purposes hereunder.
(iii) In the event of a valid transfer of ownership of RG Units prior to the Effective Time that is not registered in the transfer records of RG, the appropriate amount of the Actual Merger Consideration may be paid to the applicable transferee if (i) in the case of certificated RG Units, the Certificate representing such RG Units is presented to the Surviving Company properly endorsed or accompanied by appropriate unit power and otherwise in proper form for transfer and accompanied by all customary documents reasonably required by the Surviving Company to evidence and effect such transfer and to evidence that any applicable Taxes have been paid or (ii) in the case of non-certificate book-entry RG Units, a properly endorsed and appropriate unit power is presented to the Surviving Company and accompanied by all customary documents reasonably required by the Surviving Company to evidence and effect such transfer and to evidence that any applicable Taxes have been paid.
(b) No Further Ownership Rights. All Actual Merger Consideration paid upon the surrender for exchange of the Certificates representing RG Units in accordance with the terms of this Section 1.9 shall be deemed to have been paid in full satisfaction of all rights pertaining to such RG Units and, after the Effective Time, the unit transfer books of RG shall be closed and thereafter there shall be no further registration of transfers on the unit transfer books of the Surviving Company of the RG Units that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Company for any reason, they shall be canceled and exchanged as provided in this Section 1.9.
(c) Termination of Exchange Fund. Any portion of the Exchange Fund (including any interest and other income received with respect thereto) that remains undistributed to the former RG Members on the date twelve (12) months after the Effective Time shall be delivered by the Exchange Agent to the Surviving Company upon demand, and any former holder of RG Units who has not theretofore received any applicable Actual Merger Consideration to which such holder of RG Units is entitled under this Section 1.9 shall thereafter look only to the Surviving Company (subject to abandoned property, escheat or other similar Laws) for payment of their claim for Actual Merger Consideration without any interest thereon and only as a general creditor thereof.
(d) No Liability. None of the Company, the Surviving Company or Merger Sub shall be liable to any holder of RG Units for any part of the Actual Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law. Any amounts remaining unclaimed by holders of any such RG Units at such date as is immediately prior to the time at which such amounts would otherwise escheat to, or become property of, any Governmental Authority shall, to the extent permitted by applicable Law or Order, become the property of the Company free and clear of any claims or interest of any such holders or their successors, assigns or personal representatives previously entitled thereto.
(e) Lost, Stolen or Destroyed Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if reasonably required by the Surviving Company, the posting by such Person of a bond in such reasonable amount as the Surviving Company may direct or the execution and delivery by such Person of an indemnity agreement in such form as the Surviving Company may direct, in each case as indemnity against any claim that may be made against it with respect to such Certificate, the Surviving Company shall issue in exchange for such lost, stolen or destroyed Certificate the appropriate amount of the Actual Merger Consideration.
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(f) Withholding of Taxes. Notwithstanding anything to the contrary in this Agreement, the Company, the Surviving Company or any Affiliate thereof shall be entitled to deduct and withhold from amounts otherwise payable pursuant to this Agreement to any Person such amounts as the Company, the Surviving Company or any Affiliate thereof are required to deduct and withhold with respect to the making of such payment under the Internal Revenue Code of 1986, as amended (the "Code"), or under any provision of state, local or foreign Tax Law (including any income Tax Law or other Tax Law). To the extent that amounts are so withheld by the Surviving Company, any Affiliate or the Company, such withheld amounts shall be (i) paid over to the applicable Governmental Authority in accordance with applicable Law or Order and (ii) treated for all purposes of this Agreement as having been paid to the Person in respect of which such deduction and withholding was made by the Surviving Company, any Affiliate thereof or the Company, as the case may be.
(g) Fractional Shares. No fraction of a share of the Company Common Stock will be issued by virtue of the Merger, and each holder of RG Units who would otherwise be entitled to a fraction of a share of Company Common Stock (after aggregating all fractional shares of Company Common Stock which such holder would otherwise receive) shall, upon compliance with Section 1.9(a), receive from the Company, in lieu of such fractional share, the amount of cash equal to the fair market value of such fractional share.
Section 1.10. Tax Treatment. The parties agree to treat the Merger as a
transfer of the Voting Common Units and Non-Voting Common Units in exchange for the Actual Merger Consideration for
U.S. federal income tax purposes that is subject to Section 351 of the Code (unless otherwise required by applicable Law). The parties shall file all Tax Returns (and cause their respective
Affiliates to file all Tax Returns) consistently with this Section 1.10 and shall not take any position during the course of any audit or other
legal proceeding that is inconsistent with this Section 1.10, unless required by a determination of the applicable taxing authority that is
final.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND MERGER SUB
Except (i) as disclosed in the Company SEC Documents or (ii) as set forth in the disclosure schedule delivered by the Company to RG simultaneously with the execution of this Agreement (the "Company Disclosure Schedule"), the Company and Merger Sub, jointly and severally, represent and warrant to RG as follows (such representations and warranties are given with the assumption that the Asset Sale Transactions have been consummated):
Section 2.1. Organization, Standing and Corporate Power.
(a) The Company is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction in which it is incorporated. Each of the Company's Subsidiaries, including Merger Sub, is a corporation or other legal entity duly organized, validly existing and in good standing under the Laws of the jurisdiction in which it is incorporated or formed. Each of the Company and its Subsidiaries, including Merger Sub, has all requisite corporate or other power, as the case may be, and authority necessary to own or lease all of its properties and assets and to carry on its business as it is now being conducted. Each of the Company and its Subsidiaries, including Merger Sub, is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed, qualified or in good standing, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect.
(b) The copies of the Company Charter Documents that are incorporated by reference into the Company SEC Documents are complete and correct copies thereof as in effect on the date
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hereof. The Company is not in violation of or default under any of the provisions of the Company Charter Documents. No material Subsidiary of the Company, including Merger Sub, is in violation of or default under any of the provisions of its articles of incorporation, bylaws or similar organizational documents.
(c) Section 2.1(c) of the Company Disclosure Schedule lists, as of the date hereof, all Subsidiaries of the Company together with the jurisdiction of organization of each such Subsidiary. (i) The Company is the direct or indirect owner of all outstanding shares of capital stock of, or other equity interests in, each Subsidiary of the Company, (ii) all such shares or other equity interests have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights and are owned directly or indirectly by the Company and (iii) all such shares or other equity interests are free and clear of all liens, pledges, proxies, charges, mortgages, deeds of trust, hypothecations, encumbrances, adverse rights, title defects, restrictions or claims and security interests of any kind or nature whatsoever (including any restriction on the right to vote or transfer the same, except for such transfer restrictions of general applicability as may be provided under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "Securities Act"), and the "blue sky" laws of the various States of the United States) (collectively, "Liens"). Other than money market accounts, the Company does not own, directly or indirectly, any capital stock of, or voting securities or equity interests in, any Person, other than its Subsidiaries.
(d) The Company owns beneficially and of record all of the outstanding capital stock of Merger Sub. Merger Sub was formed solely for the purpose of engaging in the transactions contemplated hereby, has only engaged in business activities related to the transactions contemplated hereby, has no liabilities and is not a party to any agreement other than this Agreement.
(a) The authorized capital stock of the Company consists of 100,000,000 shares of common stock, par value $0.10 per share ("Company Common Stock"), and 5,000,000 shares of preferred stock, par value $0.10 per share ("Company Preferred Stock"). At the close of business on the date of this Agreement, (i) 70,075,429 shares of Company Common Stock were issued and outstanding, (ii) 727,137 shares of Company Common Stock were held by the Company in its treasury and (iii) no shares of Company Preferred Stock were issued and outstanding. All of the shares of Company Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights. None of the Subsidiaries of the Company beneficially owns any shares of Company Common Stock or any other equity securities of the Company.
(b) Since January 1, 2014, the Company has not issued any shares of its capital stock, voting securities or equity interests, or any securities convertible into or exchangeable or exercisable for any shares of its capital stock, voting securities or equity interests, other than pursuant to the outstanding awards under the Company Incentive Plan as disclosed in the Company SEC Documents or as otherwise expressly permitted by this Agreement.
(c) Except (i) as set forth in Section 2.2(a), (ii) for the Convertible Notes (iii) for outstanding awards under the Company Incentive Plan as disclosed in the Company SEC Documents or (iv) as otherwise expressly permitted by Section 4.1 hereof, as of the date of this Agreement there are not, and as of the Effective Time there will not be, any shares of capital stock, voting securities or equity interests of (or any securities convertible into, exercisable or exchangeable for equity interests of) the Company issued and outstanding or any subscriptions, options, warrants, calls, convertible or exchangeable securities, rights, commitments or agreements of any character providing for the issuance of, or obligating the Company or any of its Subsidiaries to transfer or sell, any shares of capital stock, voting securities or equity interests of (or any securities convertible
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into, exercisable or exchangeable for equity interests of) the Company, including any representing the right to purchase or otherwise receive any Company Common Stock. Except as provided for by the Company Incentive Plan and the Convertible Notes, none of the Company or any of its Subsidiaries has issued or is bound by any outstanding subscriptions, options, warrants, calls, convertible or exchangeable securities, rights, commitments or agreements of any character providing for the issuance or disposition of any shares of capital stock, voting securities or equity interests of any Subsidiary of the Company. Except as set forth in the Company Incentive Plan, there are no outstanding obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock, voting securities or equity interests (or any options, warrants or other rights to acquire any shares of capital stock, voting securities or equity interests) of the Company or any of its Subsidiaries. Except as set forth in Section 2.2(c) of the Company Disclosure Schedule, none of the Company or any Subsidiary of the Company is a party to any stockholders' agreement, voting trust agreement, registration rights agreement or other similar agreement or understanding relating to capital stock, voting securities or equity interests of the Company or any of its Subsidiaries or any other agreement relating to the disposition, voting or dividends with respect to any such stock, securities or interests.
Section 2.3. Authority; Noncontravention; Voting Requirements.
(a) Each of the Company and Merger Sub has all necessary corporate or other power and authority to execute and deliver this Agreement, to perform its obligations hereunder (other than to consummate the Merger) and, subject to obtaining the Company Stockholder Approval, to consummate the Merger. The execution, delivery and performance by the Company and Merger Sub of this Agreement, and the consummation by them of the Transactions, have been duly authorized and approved by the Company Board (and have been approved and adopted by the Company as the sole Member of Merger Sub), and, except for obtaining the Company Stockholder Approval with respect to consummation of the Merger, no other corporate or other action on the part of the Company or Merger Sub is necessary to authorize the execution, delivery and performance by the Company and Merger Sub of this Agreement and the consummation by them of the Transactions. This Agreement has been duly executed and delivered by the Company and Merger Sub and, assuming due authorization, execution and delivery hereof by the other parties hereto, constitutes a legal, valid and binding obligation of the Company and Merger Sub, enforceable against them in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other Laws of general application affecting or relating to the enforcement of creditors' rights generally and (ii) is subject to general principles of equity, whether considered in a proceeding at law or in equity (the "Bankruptcy and Equity Exception").
(b) The Company Board, at a meeting duly called and held, has (i) determined that it is fair to, and in the best interest of, the Company and the Company Stockholders to enter into this Agreement, (ii) approved the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, including the Merger, with RG as the surviving limited liability company, and adopted resolutions adopting and approving this Agreement and declaring its advisability, and (iii) resolved to recommend the authorization or approval, as applicable, by the Company Stockholders of such actions that require the authorization or approval of the Company Stockholders in order to consummate the Transactions (the "Company Recommendation"), which resolutions, as of the date hereof, have not been subsequently withdrawn or modified in a manner adverse to RG.
(c) Except as set forth in Section 2.3(c) of the Company Disclosure Schedule, none of the execution and delivery of this Agreement by the Company or Merger Sub, the consummation by the Company or Merger Sub of the Transactions or compliance by the Company or Merger Sub with any of the terms or provisions hereof will (i) assuming that the Company Stockholder
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Approval is obtained, conflict with or violate any provision of the Company Charter Documents or the certificate of formation or limited liability company agreement of Merger Sub or (ii) assuming that the authorizations, consents and approvals referred to in Section 2.4 and the Company Stockholder Approval are obtained and the filings referred to in Section 2.4 are made, (A) violate any material Law, judgment, writ or injunction of any Governmental Authority applicable to the Company, Merger Sub or any of their Subsidiaries or any of their respective properties or assets, or (B) violate, conflict with, result in the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the respective properties or assets of, the Company, Merger Sub or any of their respective Subsidiaries under, any of the terms, conditions or provisions of any loan or credit agreement, debenture, note, bond, mortgage, indenture, deed of trust, license, lease, contract or other agreement, instrument or obligation (each, a "Contract") or Permit, to which the Company, Merger Sub or any of their respective Subsidiaries is a party, or by which they or any of their respective properties or assets may be bound or affected, except, in the case of clause (ii)(B), for such violations, conflicts, losses, defaults, terminations, cancellations, accelerations or Liens as, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect.
(d) (i) The affirmative vote (in person or by proxy) of the holders of a majority of the shares of Company Common Stock for the adoption of an amendment to the Company's certificate of incorporation to effect a 1 for 30 reverse stock split of the Company Common Stock (the "Reverse Stock Split") and (ii) the affirmative vote (in person or by proxy) of the holders of a majority of the shares present at the stockholders meeting for the approval of the issuance of Company Common Stock in connection with the Merger and the issuance of Company Common Stock upon the conversion of Company Preferred Stock in connection with the consummation of the transactions contemplated by the Stock Purchase Agreement, is the only vote or approval of the holders of any class or series of capital stock of the Company or any of its Subsidiaries which is necessary to approve the Transactions (the "Company Stockholder Approval").
Section 2.4. Governmental Approvals. Except for (a) the filing with the SEC of a Proxy
Statement and Consent Solicitation Materials in definitive form relating to the Company Stockholders
Meeting, the Form S-4 Registration Statement and any other filings required under, and compliance with other applicable requirements of, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Securities Act, state securities laws or "blue sky" laws of the of the various States of the United States and the rules of NASDAQ,
(b) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware pursuant to the DLLCA and (c) filings required under, and compliance with other
applicable requirements of, the HSR Act and any other applicable Antitrust Laws, no consents or approvals of, or filings, declarations or registrations with, any Governmental Authority are necessary
for the execution, delivery and performance of this Agreement by each of the Company and Merger Sub and the consummation by each of the Company and Merger Sub of the Transactions, other than such
other consents, approvals, filings, declarations or registrations that, if not obtained, made or given, would not, individually or in the aggregate, reasonably be expected to have a Company Material
Adverse Effect.
Section 2.5. Company SEC Documents; Undisclosed Liabilities.
(a) The Company has filed with and furnished to the SEC all Company SEC Documents required to be filed or furnished by it since January 1, 2014 (collectively, the "Company Reports"), and the Company will file with and furnish to the SEC all Company SEC Documents required to be filed or furnished after the date of this Agreement. As of their respective effective dates (in the case of Company Reports that are registration statements filed pursuant to the requirements of the Securities Act) and as of their respective SEC filing dates (in the case of all other Company
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Reports), and, if amended, as of the date of the last such amendment, the Company Reports complied as to form in all material respects with the requirements of the Exchange Act, the Securities Act and the Sarbanes-Oxley Act, as the case may be, applicable to such Company Reports, and none of the Company Reports as of such respective dates and, if amended, as of the date of the last such amendment, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the Company's Subsidiaries is required to file periodic reports with the SEC pursuant to the Exchange Act. As of the date of this Agreement, there are no outstanding or unresolved comments received from the SEC or its staff with respect to the Company Reports.
(b) The consolidated financial statements of the Company included or incorporated by reference in the Company Reports comply as to form, as of their respective dates and, if amended, as of the date of the last such amendment, in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP (except as indicated in the notes thereto) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited quarterly statements, to normal year-end audit adjustments, the absence of notes and other adjustments described therein).
(c) Except as set forth in Section 2.5(c) of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries has any Liabilities of the type required to be disclosed in the liabilities column of a balance sheet prepared in accordance with GAAP, except Liabilities (i) reflected or reserved against on the unaudited balance sheet of the Company and its Subsidiaries as of May 31, 2015 (the "Balance Sheet Date") (including the notes thereto), (ii) incurred after the Balance Sheet Date in the ordinary course of business consistent with past practice, which, individually or in the aggregate, would not be material to the Company and its Subsidiaries, taken as a whole, or to the Hudson's Business, (iii) permitted by Section 4.1 of this Agreement or (iv) which have been discharged or paid in full in the ordinary course of business consistent with past practice, as of the date of this Agreement.
Section 2.6. Absence of Certain Changes or Events. Except as set forth in Section 2.6 of the Company Disclosure Schedule, since November 30, 2014,
(a) there have not been any changes, events, effects, developments, occurrences or state of facts that, individually or in the aggregate, have had or would reasonably be expected to have a
Company Material Adverse Effect and (b) the Company and its Subsidiaries have carried on and operated their respective businesses in all material respects in the ordinary course of business
consistent with past practice.
Section 2.7. Legal Proceedings. As of the date of this Agreement, except as set forth in
Section 2.7 of the Company Disclosure Schedule,
there is no pending or, to the Knowledge of the Company, threatened, legal, administrative, arbitral or other proceeding, claim, suit or action against, or, to the Knowledge of the Company,
governmental or regulatory audit or investigation of, the Company, any of its Subsidiaries, any of its or their respective properties or assets, or any officer, director or employee of the Company or
any of its Subsidiaries in such capacity, that, individually or in the aggregate, would reasonably be expected to have a Company Material Adverse Effect. There is no Order imposed (or, to the
Knowledge of the Company, threatened to be imposed) upon the Company, any of its Subsidiaries or any of its or their respective properties or assets, by or before any Governmental Authority that,
individually or in the aggregate, would reasonably be expected to have a Company Material Adverse Effect.
Section 2.8. Compliance With Laws; Permits. Except as would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect, the Company and its
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Subsidiaries are (and since January 1, 2014 have been) in compliance with all laws (including common law), statutes, ordinances, codes, rules, regulations, decrees and Orders of Governmental Authorities (collectively, "Laws") applicable to the Company or any of its Subsidiaries, any of their properties or other assets or any of their businesses or operations or their employees. Except as would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, the Company and each of its Subsidiaries hold (and since January 1, 2014 have held) all licenses, franchises, permits, certificates, registrations, approvals and authorizations from Governmental Authorities, or required by Governmental Authorities to be obtained, in each case necessary for the lawful conduct of their respective businesses (collectively, "Permits"). Except as would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, the Company and its Subsidiaries are (and since January 1, 2014 have been) in compliance with the terms of all such Permits.
(a) Each of the Company and its Subsidiaries has timely filed, or has caused to be timely filed on its behalf (taking into account any extension of time within which to file), all material Tax Returns required to be filed by it, and has paid all material Taxes shown thereon as owing, and all such Tax Returns were correct and complete in all material respects.
(b) No material deficiency with respect to Taxes has been proposed, asserted or assessed in writing against the Company or any of its Subsidiaries, except for deficiencies that have been satisfied, settled or withdrawn and other than Permitted Exceptions. There are no Liens for material Taxes on any of the assets of the Company or any of its Subsidiaries, other than Permitted Exceptions. Neither the Company nor any of its Subsidiaries has waived any statute of limitations in respect of Income Taxes or agreed to any extension of time with respect to a material Tax assessment or deficiency. All material amounts of Tax required to be withheld or collected by the Company or any of its Subsidiaries have been timely withheld or collected and timely paid over to the appropriate Governmental Authority. Except as set forth in Section 2.9(b) of the Company Disclosure Schedule, there are no pending audits, examinations, investigations or other proceedings by any taxing authority in respect of a material amount of Taxes.
(c) Neither the Company nor any of its Subsidiaries: (i) is or has been a member of a group filing a consolidated, combined or unitary Tax Return (other than a group the common buyer of which was the Company) or any derivation thereof; (ii) has any material liability for the Taxes of any Person (other than the Company and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar or analogous provision of state, local or foreign Law), or as a transferee or successor, by contract or otherwise; (iii) is a party to or is bound by any agreement or arrangement relating to the indemnification, allocation or sharing of Taxes (other than any such agreement exclusively between or among the Company and wholly owned subsidiaries of the Company and other than leases and similar ordinary course financing agreements the primary purpose of which does not relate to Taxes); or (iv) is or has been party to any "listed transaction," as defined in Section 6707A(c)(2) of the Code and Treasury Regulation Section 1.6011-4(b)(2), or any "reportable transaction," as defined in Section 6707(A)(c)(1) of the Code and Treasury Regulation Section 1.6011-4(b)(1).
(d) Neither the Company nor any of its Subsidiaries has been, in the past two (2) years, a party to a transaction intended to qualify as a distribution governed by Section 355 of the Code.
Section 2.10. Employee Benefits.
(a) Section 2.10(a) of the Company Disclosure Schedule sets forth each material plan, program, arrangement or agreement that is a pension, profit-sharing, savings, retirement, employment, consulting, severance pay, termination, compensation, bonus, stock purchase, stock option, phantom stock or other equity-based compensation, change-in-control, retention, salary
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continuation, vacation, sick leave, disability, death benefit, group insurance, hospitalization, medical, dental, life (including all individual life insurance policies as to which the Company is the owner, the beneficiary, or both), Code Section 125 "cafeteria" or "flexible" benefit, employee loan, educational assistance or fringe benefit plan, program or arrangement, including, without limitation, any (i) "employee benefit plan" within the meaning of Section 3(3) of ERISA; or (ii) other employee benefit plans, agreements, programs, policies, arrangements or payroll practices, whether or not subject to ERISA, under which any current or former employee, director, officer, or consultant (or their respective beneficiaries) of the Company, any Subsidiary or any trade or business which is treated as single employer with any of them under Section 414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA (an "ERISA Affiliate") has any present or future right to benefits (each such plan, program, arrangement or agreement set forth in such Section being individually, a "Company Benefits Plan" and collectively the "Company Benefits Plans").
(b) (i) Each Company Benefits Plan has been established and administered in all material respects in accordance with its terms and in compliance with the applicable provisions of ERISA, the Code and all other applicable Laws; (ii) each Company Benefits Plan that is intended to be qualified within the meaning of Section 401(a) of the Code has received a favorable determination letter from the IRS (covering all required Law up through the date of this Agreement) (or is permitted to rely on a favorable opinion or advisory letter) to the effect that the Company Benefits Plan satisfies the requirements of Section 401(a) of the Code and that its related trust is exempt from taxation under Section 501(a) of the Code and to the Knowledge of the Company there are no facts or circumstances that could reasonably be expected to cause the loss of qualification under Section 401(a) or Section 501(a) of the Code; (iii) other than routine claims for benefits, no legal actions have been filed for any material amount against any Company Benefits Plan or the applicable Company with respect to any Company Benefits Plan; and (iv) to the Knowledge of the Company, no event has occurred and no condition exists that would subject the Company to any material tax, fine, lien, penalty or other liability imposed by ERISA, the Code or other applicable Law with respect to an ERISA Affiliate.
(c) Except as set forth on Section 2.10(c) of the Company Disclosure Schedule, the Company has no obligation to provide or make available post-employment benefits under any Company Benefits Plan, including, without limitation, any Company Benefits Plan that is a "welfare plan" (as defined in Section 3(1) of ERISA) ("Welfare Plan"), for any current or former officer, director, employee, or consultant (or their respective beneficiaries) of the Company or a Subsidiary, except as may be required under COBRA or as may otherwise be set forth in an individual employment, severance, change in control or similar agreement.
(d) Neither the Company nor any ERISA Affiliate currently maintains, contributes to or has in the preceding six (6) years maintained or contributed to any Company Benefits Plan that is, or has been, (i) subject to Title IV of ERISA or Sections 412 or 430 of the Code; or (ii) a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA.
(e) Except as set forth in Section 2.10(e) of the Company Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereunder (i) will (either alone or in combination with another event) (A) result in any material payment becoming due, or increase in any material respect the amount of any compensation due, to any current or former employee of the Company; (B) materially increase any benefits otherwise payable under any Company Benefits Plan; (C) result in the acceleration of the time of payment or vesting of any such compensation or benefits; (D) result in any payments that would not be deductible under Code Section 280G; or (ii) could reasonably be expected to result in an obligation to accelerate the funding of, or contribution to any, Company Benefits Plan pursuant to applicable Law, regulation, contractual arrangement or otherwise. No current or former officer, director, employee, or consultant (or their respective beneficiaries) has or will obtain a right to
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receive a gross-up payment from the Company with respect to excise or penalty Taxes that may be imposed upon such individual pursuant to Section 409A of the Code or Section 4999 of the Code.
(f) Other than as set forth in this Section 2.10, the Company does not make any representations or warranties, either express or implied, with respect to any matters relating to employee benefits or matters pertaining to any Law relating thereto.
(a) Except for this Agreement, the Company Leases and the Contracts set forth in Section 2.11 of the Company Disclosure Schedule and Contracts filed as exhibits to the Company SEC Documents (collectively, "Material Contracts"), as of the date of this Agreement, neither the Company nor any of its Subsidiaries is a party to or expressly bound by (and none of their respective properties or assets is bound by) any Contract:
(i) that would be required to be filed by the Company as a "material contract" pursuant to Item 601(b)(10) of Regulation S-K;
(ii) (A) containing restrictions on the right of the Company or any of its Subsidiaries or any Person that controls, or is under common control with, the Company to engage in activities competitive with any Person or to solicit suppliers anywhere in the world or (B) granting a right of exclusivity to any Person which prevents the Company or a Subsidiary from entering any territory, market or field or freely engaging in business anywhere in the world (including, but not limited to Contracts containing "most favored nations" provisions), other than leases containing customary radius restrictions that would not apply to the Company or its Subsidiaries following the consummation of the Merger;
(iii) relating to the formation, creation, ownership, operation, management or control of any partnership, joint venture, or similar arrangement, including, but not limited to, arrangements that include the sharing of revenue, profits, losses, costs or liabilities, that is material to the business of the Company and its Subsidiaries, taken as a whole, or to the Hudson's Business or the Joe's Business;
(iv) relating to (A) indebtedness for borrowed money, whether direct or indirect, or (B) other Indebtedness in excess of $250,000, in each case other than any Indebtedness between or among any of the Company and any of its Subsidiaries;
(v) involving the acquisition from another Person or disposition to another Person, directly or indirectly (by merger, license or otherwise), other than any acquisition or disposition of inventory, raw materials, supplies, fixtures and IT equipment in the ordinary course of business consistent with past practices, of assets or capital stock or equity interests of another Person, including Contracts for any such acquisition or disposition which has already been consummated that contains representations, warranties covenants, indemnities or other obligations (including indemnification, "earn-out" or other contingent obligations), in each case, that are still in effect and, individually, could reasonably be expected to result in payments by or to the Company or any of its Subsidiaries in excess of $250,000;
(vi) prohibiting the payment of dividends or distributions in respect of the capital stock of the Company or any of its wholly owned Subsidiaries, prohibiting the pledging of the capital stock of the Company or any wholly owned Subsidiary of the Company or prohibiting the issuance of any guaranty by the Company or any Subsidiary of the Company;
(vii) that is a collective bargaining agreement or other agreement with a labor union, works council or similar organization; or
(viii) that is a license agreement, non-assertion agreement, co-existence agreement or option agreement material to the business of the Company and its Subsidiaries, taken as a
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whole, or to the Hudson's Business, pursuant to which the Company or any of its Subsidiaries licenses in Intellectual Property Rights or licenses out or otherwise receives or grants the right to use, register or acquire, Intellectual Property Rights owned by the Company or its Subsidiaries (other than license agreements for commercially available software on standard terms and distribution and sales agreements entered into in the ordinary course of business consistent with past practices).
(b) Each Material Contract is valid and binding on the Company and any Subsidiary party thereto and, to the Knowledge of the Company, each other party thereto, and is in full force and effect and enforceable in accordance with its terms, subject to the Bankruptcy and Equity Exception. Neither the Company nor any of its Subsidiaries (i) is in violation or default under any Material Contract or (ii) has received written notice of any asserted violation or default, or of any event or condition which, after notice or lapse of time or both, will constitute, such a violation or default, by the Company or any Subsidiary party thereto under any Material Contract except, in either case, as would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.
Section 2.12. Intellectual Property.
(a) Section 2.12 of the Company Disclosure Schedule sets forth a current and complete list (in all material respects) of Intellectual Property Rights owned by the Company or any of its Subsidiaries that has been registered or is the subject of a pending application with governmental authorities responsible for such registrations (the "Registered Intellectual Property Rights"). Except as set forth in Section 2.12 of the Company Disclosure Schedule or as would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect: (i) the Company and its Subsidiaries are the sole and exclusive owners of all of the Registered Intellectual Property Rights; (ii) the Registered Intellectual Property Rights are not subject to any Lien other than Permitted Exceptions; (iii) the Company or a Subsidiary of the Company owns, or is licensed or otherwise has the right to use, all material Intellectual Property Rights that, in each case, is used in the conduct of the business of the Company and its Subsidiaries as presently conducted, either itself or through a licensee; and (iv) there are no final judgments or decisions by any court or administrative tribunal that prevent the Company or its Subsidiaries or licensees from using or registering the Intellectual Property Rights in any location where the Company is currently doing business, either as to manufacturing or sales.
(b) Except as set forth in Section 2.12 of the Company Disclosure Schedule: (i) the conduct of the business of the Company and its Subsidiaries and licensees as currently conducted does not infringe, misappropriate or otherwise violate any Intellectual Property Rights of any Person and (ii) no claims are pending or, to the Knowledge of the Company, threatened that the Company or any of its Subsidiaries or licensees is infringing the rights of any Person with regard to any Intellectual Property Right, except in the case of (i) and (ii) for such infringements, misappropriations, violations and claims which, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect.
(c) To the Knowledge of the Company, as of the date hereof (i) no Person is infringing, misappropriating, or otherwise violating any Intellectual Property Right owned, used, or held for use by the Company or its Subsidiaries in the conduct of the business of the Company and its Subsidiaries as presently conducted and (ii) no such claims have been asserted or threatened against any Person by the Company in the past two (2) years, except in the case of (i) and (ii) for such infringements, misappropriations, violations and claims which, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect.
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(d) To the Knowledge of the Company, the Company and its Subsidiaries have at all times complied with all applicable Laws, as well as their own rules, policies and procedures, relating to privacy, data protection, and the collection, retention, protection, and use of personal information collected, used, or held for use by the Company and its Subsidiaries. No claims have been asserted or, to the Knowledge of the Company, threatened against the Company or its Subsidiaries alleging a violation of any Person's privacy or personal information or data rights, except for such violations which, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect.
(e) Except as set forth in Section 2.12(e) of the Company Disclosure Schedule, to the Knowledge of the Company as of the date hereof, there is no jurisdiction among the Key Jurisdictions in which the trademark HUDSON is not available for use and registration by the Company in connection with the products currently being sold in International Classes 14, 18, 25 or 35 by the Hudson's Business.
Section 2.13. Brokers and Other Advisors. Except for the Company Financial
Advisor, the fees and expenses of which will be paid by the Company and have been disclosed to RG, no broker, investment banker,
financial advisor or other Person is entitled to any broker's, finder's, financial advisor's or other similar fee or commission, or the reimbursement of expenses, in connection with the Transactions
based upon arrangements made by or on behalf of the Company or any of its Subsidiaries.
Section 2.14. Related Party Transactions. No "related person" as defined in Item 404 of
Regulation S-K, is a party to any Contract with or binding upon the Company or any of its Subsidiaries
that is of a type that would be required to be disclosed in the Company SEC Documents pursuant to Item 404 of Regulation S-K that has not been disclosed in the Company SEC Documents.
Section 2.15. Insurance. Except as would not reasonably be expected to have, individually or in
the aggregate, a Company Material Adverse Effect, (i) the Company and its
Subsidiaries own or hold policies of insurance in amounts providing reasonably adequate coverage against all risks customarily insured against by companies in similar lines of business as the Company
and its Subsidiaries and in amounts sufficient to comply with all Material Contracts to which the Company or its Subsidiaries are parties or are otherwise bound, and (ii) except as set forth in Section 2.15 of the
Company Disclosure Schedule, all such insurance policies are in full force and effect and will remain so after the Effective
Time, no notice of cancellation or modification has been received, and there is no existing default or event which, with the giving of notice or lapse of time or both, would constitute a default, by
any insured thereunder.
Section 2.16. Property. The Company does not own or have any option to purchase real property.
The Company does not use or occupy, or a have a right to use or occupy, any real property
except pursuant to a Company Lease. Except as would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, (a) the Company or one of its
Subsidiaries has a good and valid leasehold interest in each Company Lease, free and clear of all Liens (other than Permitted Exceptions), (b) each Company Lease is in full force and effect and
there is no violation, breach or default, or any event or condition which, after notice or lapse of time or both, will constitute such a violation, breach or default, by the tenant under any Company
Lease or, to the Knowledge of the Company, by any other party thereto, (c) there are no pending or, to the Knowledge of the Company, threatened, condemnation or eminent domain proceedings or
other Governmental Authority proceedings affecting any demised premises under a Company Lease and (d) each Company Lease has created a legal, binding and enforceable obligation of
(i) the Company or its applicable Subsidiary, and (ii) any other party or parties thereto.
Section 2.17. Environmental Matters. Except for those matters that would not reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse Effect, (a) each of
the Company and its Subsidiaries is and has been in compliance with all Environmental Laws, which
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compliance includes obtaining, maintaining or complying with all Permits required under Environmental Laws for the operation of their respective businesses, (b) as of the date hereof there is no investigation, suit, claim, action or proceeding relating to or arising under any Environmental Law that is pending or, to the Knowledge of the Company, threatened against the Company or any of its Subsidiaries or any real property owned, operated or leased by the Company or any of its Subsidiaries, (c) as of the date hereof neither the Company nor any of its Subsidiaries has received any written notice of or entered into any legally-binding Contract, Order or settlement involving uncompleted, outstanding or unresolved requirements on the part of the Company or its Subsidiaries relating to or arising under Environmental Laws and (d) to the Knowledge of the Company, there are and have been no Hazardous Materials present on any real property owned or leased by the Company or any of its Subsidiaries in a manner and concentration that would reasonably be expected to result in any claim against the Company or its Subsidiaries under any Environmental Law.
Section 2.18. Rights Agreement; Anti-Takeover Provisions.
(a) The Company is not party to a stockholder rights agreement, "poison pill" or similar agreement or plan.
(b) The Company Board has taken all necessary action so that any takeover, anti-takeover, moratorium, "fair price," "control share" or other similar Law enacted under any Law applicable to the Company, including Section 203 of the DGCL, does not, and will not, apply to this Agreement, the Merger or the other Transactions.
Section 2.19. Labor Matters; Employees.
(a) The Company and its Subsidiaries are neither party to, nor bound by, any labor agreement, collective bargaining agreement, work rules or practices, or any other labor-related agreements or arrangements with any labor union, labor organization or works council and, to the Knowledge of the Company, there are no labor organizing activities presently underway or threatened involving any employees of the Company or its Subsidiaries.
(b) Since January 1, 2013, there have been no actual or, to the Knowledge of the Company, threatened material arbitrations, material grievances, material labor disputes, strikes, lockouts, slowdowns or work stoppages or other material concerted action by employees of the Company or any of its Subsidiaries or against or affecting the Company or any of its Subsidiaries. There are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened in writing with respect to the employees of the Company or its Subsidiaries.
(c) To the Knowledge of the Company and its Subsidiaries, the manufacturers, contractors and subcontractors engaged in the manufacturing of products for the Company and its Subsidiaries ("Company Manufacturers") are in compliance in all material respects with all applicable Laws respecting employment and employment practices. To the Knowledge of the Company and its Subsidiaries, no complaint, claim, lawsuit or charge has been made against any Company Manufacturers that would reasonably be expected to result in material liability to the Company or its Subsidiaries.
Section 2.20. Asset Purchase Agreements. The Company has provided RG with true and correct copies
of the Asset Purchase Agreements, including all agreements executed and delivered pursuant thereto.
Section 2.21. Non-Reliance on RG Estimates, Projections, Forecasts, Forward-Looking Statements and Business Plans. In connection with the due diligence investigation of RG by the Company, the Company has received and may continue to receive from RG certain estimates,
projections, forecasts and other forward-looking information, as well as certain business plan information, regarding RG and
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its business and operations. The Company hereby acknowledges that there are uncertainties inherent in attempting to make such estimates, projections, forecasts and other forward-looking statements, as well as in such business plans, with which the Company is familiar, that the Company is taking full responsibility for making its own evaluation of the adequacy and accuracy of all estimates, projections, forecasts and other forward-looking information, as well as such business plans, so furnished to them (including the reasonableness of the assumptions underlying such estimates, projections, forecasts, forward-looking information or business plans), and that the Company will have no claim against RG or any of its Subsidiaries, or any of their respective equityholders, directors, managers, officers, employees, Affiliates, advisors, agents or Representatives, with respect thereto.
Section 2.22. No Other Representations and Warranties. EXCEPT AS CONTAINED IN THIS ARTICLE II, NEITHER THE COMPANY NOR MERGER SUB MAKES ANY REPRESENTATIONS OR WARRANTIES
TO RG AND THE COMPANY AND MERGER SUB DISCLAIM ALL LIABILITY AND RESPONSIBILITY FOR ANY REPRESENTATION, WARRANTY, STATEMENT MADE OR INFORMATION COMMUNICATED (WHETHER ORALLY OR IN WRITING) TO RG AND ITS
AFFILIATES AND REPRESENTATIVES (INCLUDING ANY OPINION, INFORMATION, ADVICE, REPRESENTATION OR WARRANTY WHICH MAY HAVE BEEN PROVIDED TO RG AND ITS AFFILIATES OR REPRESENTATIVES BY THE COMPANY FINANCIAL
ADVISOR, ANY DIRECTOR, OFFICER, EMPLOYEE, ACCOUNTING FIRM, LEGAL COUNSEL, OR OTHER AGENT, CONSULTANT, OR REPRESENTATIVE OF THE COMPANY OR ITS SUBSIDIARIES). ANY AND ALL STATEMENTS MADE OR INFORMATION
COMMUNICATED BY THE COMPANY OR ITS SUBSIDIARIES, OR ANY OF THEIR REPRESENTATIVES OUTSIDE OF THIS AGREEMENT (INCLUDING BY WAY OF THE DOCUMENTS PROVIDED IN RESPONSE TO RG'S WRITTEN DILIGENCE REQUEST(S)
AND ANY MANAGEMENT PRESENTATIONS PROVIDED), WHETHER VERBALLY OR IN WRITING, ARE DEEMED TO HAVE BEEN SUPERSEDED BY THIS AGREEMENT, IT BEING INTENDED THAT NO SUCH PRIOR OR CONTEMPORANEOUS STATEMENTS OR
COMMUNICATIONS OUTSIDE OF THIS AGREEMENT SHALL SURVIVE THE EXECUTION AND DELIVERY OF THIS AGREEMENT.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF RG
Except as set forth in the disclosure schedule delivered by RG to the Company and Merger Sub simultaneously with the execution of this Agreement (the "RG Disclosure Schedule"), RG represents and warrants to the Company and Merger Sub as follows:
Section 3.1. Organization. RG is a limited liability company duly organized, validly existing
and in good standing under the Laws of the state of Delaware. RG has all requisite limited
liability company power and authority necessary to own or lease all of its properties and assets and to carry on its business as it is now being conducted. RG is duly licensed or qualified to do
business and is in good standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it make such
licensing or qualification necessary, except where the failure to be so licensed, qualified or in good standing, individually or in the aggregate, would not reasonably be expected to have a RG
Material Adverse Effect.
Section 3.2. Authority; Noncontravention.
(a) RG has all necessary limited liability company power and authority to execute and deliver this Agreement, to perform its obligations hereunder (other than to consummate the Merger) and to, subject to obtaining the RG Member Consent, consummate the transactions contemplated hereby. The execution, delivery and performance by RG of this Agreement, and the consummation by RG of the transactions contemplated hereby, have been duly authorized and approved by its Board of Managers, except for obtaining the RG Member Consent, no other limited liability
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company action on the part of RG is necessary to authorize the execution, delivery and performance by RG of this Agreement and the consummation by it of the transactions contemplated hereby. This Agreement has been duly executed and delivered by RG and, assuming due authorization, execution and delivery hereof by the Company and Merger Sub, constitutes a legal, valid and binding obligation of RG, enforceable against it in accordance with its terms, subject to the Bankruptcy and Equity Exception.
(b) Except as set forth on Section 3.2(b) of the RG Disclosure Schedule, none of the execution and delivery of this Agreement by RG, the consummation by RG of the transactions contemplated hereby or compliance by RG with any of the terms or provisions hereof will (i) assuming the RG Member Consent is obtained, conflict with or violate any provision of the certificate of formation or limited liability company agreement of RG or (ii) assuming that the authorizations, consents and approvals referred to in Section 3.4 and the RG Member Consent are obtained and the filings referred to in Section 3.4 are made, (A) violate any Law, judgment, writ or injunction of any Governmental Authority applicable to RG or any of its Subsidiaries or any of their respective properties or assets, or (B) violate, conflict with, result in the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the respective properties or assets of RG or any of its Subsidiaries under, any of the terms, conditions or provisions of any Contract or Permit, to which RG or any of its Subsidiaries is a party, or by which they or any of their respective properties or assets may be bound or affected except, in the case of clause (ii), for such violations, conflicts, losses, defaults, terminations, cancellations, accelerations or Liens as, individually or in the aggregate, would not reasonably be expected to have a RG Material Adverse Effect.
(c) Except for the approval by the written consent of (i) holders of at least a majority of the outstanding Preferred Units and (ii) holders of at least a majority of the outstanding Voting Common Units in favor of the adoption of this Agreement and the Merger (the "RG Member Consent"), no vote of the RG Members or the holders of any other equity securities of RG is required by the DLLCA, any other applicable Law, the RG LLC Agreement or other equivalent organizational documents of RG to consummate the transactions contemplated hereby.
(a) The authorized equity of RG consists of Preferred Units, Voting Common Units and Non-Voting Common Units (collectively, the "RG Units"). At the close of business on the date of this Agreement, 5,100,000 Preferred Units, 4,900,000 Voting Common Units and 1,363,636 Non-Voting Common Units were issued and outstanding. All of the RG Units have been duly authorized and validly issued. None of the Subsidiaries of RG beneficially owns any RG Units or any other equity securities of RG.
(b) Except as set forth on Section 3.3(b) of the RG Disclosure Schedule, since January 1, 2014, RG has not issued any voting securities or equity interests, or any securities convertible into or exchangeable or exercisable for any voting securities or equity interests.
(c) Except as set forth in Section 3.3(a), as of the date of this Agreement there are not, and as of the Effective Time there will not be, any voting securities or equity interests of (or any securities convertible into, exercisable or exchangeable for equity interests of) RG issued and outstanding or any subscriptions, options, warrants, calls, convertible or exchangeable securities, rights, commitments or agreements of any character providing for the issuance of, or obligating RG or any of its Subsidiaries to transfer or sell, any shares of capital stock, voting securities or equity interests of (or any securities convertible into, exercisable or exchangeable for equity interests of) RG, including any representing the right to purchase or otherwise receive any RG
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Units. Except as provided by an RG Benefits Plan, none of RG or any of its Subsidiaries has issued or is bound by any outstanding subscriptions, options, warrants, calls, convertible or exchangeable securities, rights, commitments or agreements of any character providing for the issuance or disposition of any voting securities or equity interests of any Subsidiary of RG. There are no outstanding obligations of RG or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock, voting securities or equity interests (or any options, warrants or other rights to acquire any shares of capital stock, voting securities or equity interests) of RG or any of its Subsidiaries. Except for RG's limited liability company agreement, none of RG or any Subsidiary of RG is a party to any stockholders' agreement, voting trust agreement, registration rights agreement or other similar agreement or understanding relating to capital stock, voting securities or equity interests of RG or any of its Subsidiaries or any other agreement relating to the disposition, voting or dividends with respect to any such stock, securities or interests.
Section 3.4. Governmental Approvals. Except for (a) compliance with applicable requirements
of the Securities Act, state securities laws or "blue sky" laws of the various States of the United
States, (b) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware pursuant to the DLLCA and (c) filings required under, and compliance with other
applicable requirements of, the HSR Act and any other applicable Antitrust Laws, no consents or approvals of, or filings, declarations or registrations with, any Governmental Authority are necessary
for the execution, delivery and performance of this Agreement by RG and the consummation by RG of the transactions contemplated hereby, other than such other consents, approvals, filings, declarations
or registrations that, if not obtained, made or given, would not, individually or in the aggregate, reasonably be expected to have a RG Material Adverse Effect.
Section 3.5. Legal Proceedings. As of the date of this Agreement, except as set forth in
Section 3.5 of the RG Disclosure Schedule, there
is no pending or, to the Knowledge of RG, threatened, legal, administrative, arbitral or other proceeding, claim, suit or action against, or, to the Knowledge of RG, governmental or regulatory audit
or investigation of, RG, any of its Subsidiaries, any of its or their respective properties or assets, or any officer, director or employee of RG or any of its Subsidiaries in such capacity, that,
individually or in the aggregate, would reasonably be expected to have a RG Material Adverse Effect. There is no Order imposed (or, to the Knowledge of RG, threatened to be imposed) upon RG, any of
its Subsidiaries or any of its or their respective properties or assets, by or before any Governmental Authority that, individually or in the aggregate, would reasonably be expected to have a RG
Material Adverse Effect.
Section 3.6. Financial Statements; Undisclosed Liabilities.
(a) RG has delivered to the Company: (a) true and complete copies of RG's unaudited consolidated balance sheet, dated May 31, 2015 (the "Most Recent Balance Sheet Date") and the related unaudited consolidated statement of income and cash flows for the four month period then ended (together, the "Most Recent Financial Statements"), and (b) true and complete copies of RG's audited consolidated balance sheets dated December 31, 2014 and December 31, 2013, including the notes thereto, and the related statements of income and cash flows for each of the fiscal years then ended (collectively, the "Year-End Financial Statements" and together with the Most Recent Financial Statements, the "Financial Statements"). The Most Recent Financial Statements present fairly, in all material respects, the consolidated financial position of RG as at and for the period then ended, and have been prepared in accordance with GAAP; provided, however, that such Most Recent Financial Statements are subject to normal year-end adjustments and lack footnotes and other presentation items. The Year-End Financial Statements present fairly, in all material respects, the consolidated financial position of RG as at and for the respective periods then ended, and have been prepared in accordance with GAAP.
(b) Except as set forth in Section 3.6(b) of the RG Disclosure Schedule, neither RG nor any of its Subsidiaries has any Liabilities of the type required to be disclosed in the liabilities column of a
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balance sheet prepared in accordance with GAAP, except Liabilities (i) reflected on or reserved against on the Most Recent Financial Statements, (ii) incurred after the Most Recent Balance Sheet Date in the ordinary course of business consistent with past practices, which, individually or in the aggregate, would not be material to RG and its Subsidiaries, taken as a whole, (iii) which have been discharged or paid in full in the ordinary course of business consistent with past practices as of the date of this Agreement or (iv) obligations incurred in connection with this Agreement and the Transactions.
Section 3.7. Absence of Certain Changes or Events. Except as set forth in Section 3.7 of the RG Disclosure Schedule, since December 31, 2014,
(a) there have not been any changes, events, effects, developments, occurrences or state of facts that, individually or in the aggregate, have had or would reasonably be expected to have a RG
Material Adverse Effect and (b) RG and its Subsidiaries have carried on and operated their respective businesses in all material respects in the ordinary course of business consistent with past
practices.
Section 3.8. Compliance With Laws; Permits. Except as would not reasonably be expected to have,
individually or in the aggregate, a RG Material Adverse Effect, RG and its Subsidiaries are (and since
January 1, 2014 have been) in compliance with all Laws applicable to RG or any of its Subsidiaries, any of their properties or other assets or any of their businesses or operations or their
employees and service providers. Except as would not reasonably be expected to have, individually or in the aggregate, a RG Material Adverse Effect, RG and each of its Subsidiaries hold (and since
January 1, 2014 have held) all Permits. Except as would not reasonably be expected to have, individually or in the aggregate, a RG Material Adverse Effect, RG and its Subsidiaries are (and
since January 1, 2014 have been) in compliance with the terms of all such Permits.
(a) Each of RG and its Subsidiaries has timely filed, or has caused to be timely filed on its behalf (taking into account any extension of time within which to file), all material Tax Returns required to be filed by it, and has timely paid all material Taxes shown thereon as owing, and all such Tax Returns were correct and complete in all material respects.
(b) No material deficiency with respect to Taxes has been proposed, asserted or assessed in writing against RG or any of its Subsidiaries, except for deficiencies that have been satisfied, settled or withdrawn and other than Permitted Exceptions. Neither RG nor any of its Subsidiaries has waived any statute of limitations in respect of Income Taxes or agreed to any extension of time with respect to a material Tax assessment or deficiency. There are no Liens for material Taxes on any of the assets of RG or any of its Subsidiaries, other than Permitted Exceptions. All material amounts of Tax required to be withheld or collected by RG or any of its Subsidiaries have been timely withheld or collected and timely paid over to the appropriate Governmental Authority. There are no pending audits, examinations, investigations or other proceedings by any taxing authority in respect of a material amount of Taxes.
(c) Neither RG nor any of its Subsidiaries: (i) is or has been a member of a group filing a consolidated, combined or unitary Tax Return (other than a group the common buyer of which was RG) or any derivation thereof; (ii) has any material liability for the Taxes of any Person (other than RG and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar or analogous provision of state, local or foreign Law), or as a transferee or successor, by contract or otherwise; (iii) is a party to or is bound by any agreement or arrangement relating to the indemnification, allocation or sharing of Taxes (other than any such agreement exclusively between or among RG and wholly owned subsidiaries of RG and other than leases and similar ordinary course financing agreements the primary purpose of which does not relate to Taxes); or (iv) is or has been a party to any "listed transaction", as defined in Section 6707A(c)(2) of the Code and Treasury Regulation Section 1.6011-4(b)(2), or any "reportable transaction," as defined in Section 6 707(A)(c)(1) of the code and Treasury Regulation Section 1.6011-4(b)(1).
(d) Neither RG nor any of its Subsidiaries has been, in the past two (2) years, a party to a transaction intended to qualify as a distribution governed by Sections 355 of the Code.
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Section 3.10. Employee Benefits Matters.
(a) Section 3.10(a) of the RG Disclosure Schedule sets forth each material plan, program, arrangement or agreement that is a pension, profit-sharing, savings, retirement, employment, consulting, severance pay, termination, compensation, bonus, stock purchase, stock option, phantom stock or other equity-based compensation, change-in-control, retention, salary continuation, vacation, sick leave, disability, death benefit, group insurance, hospitalization, medical, dental, life (including all individual life insurance policies as to which RG is the owner, the beneficiary, or both), Code Section 125 "cafeteria" or "flexible" benefit, employee loan, educational assistance or fringe benefit plan, program or arrangement, including, without limitation, any (i) "employee benefit plan" within the meaning of Section 3(3) of ERISA; or (ii) other employee benefit plans, agreements, programs, policies, arrangements or payroll practices, whether or not subject to ERISA, under which any current or former employee, director, officer, or consultant (or their respective beneficiaries) of RG, any Subsidiary or any trade or business which is treated as single employer with any of them under Section 414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA (an "RG ERISA Affiliate") has any present or future right to benefits (each such plan, program, arrangement or agreement set forth in such Section being individually, an "RG Benefits Plan" and collectively the "RG Benefits Plans").
(b) (i) Each RG Benefits Plan has been established and administered in all material respects in accordance with its terms and in compliance with the applicable provisions of ERISA, the Code and all other applicable Laws; (ii) each RG Benefits Plan that is intended to be qualified within the meaning of Section 401(a) of the Code has received a favorable determination letter from the IRS (covering all required Law up through the date of this Agreement) (or is permitted to rely on a favorable opinion or advisory letter) to the effect that an RG Benefits Plan satisfies the requirements of Section 401(a) of the Code and that its related trust is exempt from taxation under Section 501(a) of the Code and to the Knowledge of RG there are no facts or circumstances that could reasonably be expected to cause the loss of qualification under Section 401(a) or Section 501(a) of the Code; (iii) other than routine claims for benefits, no legal actions have been filed for any material amount against any RG Benefits Plan or RG with respect to any RG Benefits Plan; and (iv) to the Knowledge of RG, no event has occurred and no condition exists that would subject RG to any material tax, fine, lien, penalty or other liability imposed by ERISA, the Code or other applicable Law with respect to an RG ERISA Affiliate.
(c) Except as set forth in Section 3.10(c) of the RG Disclosure Schedule, RG has no obligation to provide or make available post-employment benefits under any RG Benefits Plan, including, without limitation, an RG Benefits Plan that is a "welfare plan" (as defined in Section 3(1) of ERISA) ("RG Welfare Plan"), for any current or former officer, director, employee, or consultant (or their respective beneficiaries) of RG or a Subsidiary, except as may be required under COBRA or as may otherwise be set forth in an individual employment, severance, change in control or similar agreement.
(d) Neither RG nor any RG ERISA Affiliate currently maintains, contributes to or has in the preceding six (6) years maintained or contributed to any RG Benefits Plan that is, or has been, (i) subject to Title IV of ERISA or Sections 412 or 430 of the Code; or (ii) a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA.
(e) Except as set forth in Section 3.10(e) of the RG Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereunder (i) will (either alone or in combination with another event) (A) result in any material payment becoming due, or increase in any material respect the amount of any compensation due, to any current or former employee of RG; (B) materially increase any benefits otherwise payable under any RG Benefits Plan; (C) result in the acceleration of the time of payment or vesting of any such
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compensation or benefits; (D) result in any payments that would not be deductible under Code Section 280G; or (ii) could reasonably be expected to result in an obligation to accelerate the funding of, or contribution to any, RG Benefits Plan pursuant to applicable Law, regulation, contractual arrangement or otherwise. No current or former officer, director, employee, or consultant (or their respective beneficiaries) has or will obtain a right to receive a gross-up payment from a RG with respect to excise or penalty Taxes that may be imposed upon such individual pursuant to Section 409A of the Code or Section 4999 of the Code.
(f) Other than as set forth in this Section 3.10, RG does not make any representations or warranties, either express or implied, with respect to any matters relating to employee benefits or matters pertaining to any Law relating thereto.
(a) Except for the RG Leases and as set forth in Section 3.11 of the RG Disclosure Schedule ("RG Material Contracts"), as of the date of this Agreement, neither RG nor any of its Subsidiaries is a party to or expressly bound by (and none of their respective properties or assets is bound by) any Contract:
(i) (A) containing restrictions on the right of RG or any of its Subsidiaries or any Person that controls, or is under common control with, RG to engage in activities competitive with any Person or to solicit suppliers anywhere in the world or (B) granting a right of exclusivity to any Person which prevents RG or a Subsidiary from entering any territory, market or field or freely engaging in business anywhere in the world (including, but not limited to, Contracts containing "most favored nations" provisions), other than leases containing customary radius restrictions that would not apply to RG or any of its Subsidiaries (other than RG and its Subsidiaries) following the consummation of the Merger;
(ii) relating to the formation, creation, ownership, operation, management or control of any partnership, joint venture, or similar arrangement, including, but not limited to, arrangements that include the sharing of revenue, profits, losses, costs or liabilities, that is material to the business of RG and its Subsidiaries, taken as a whole;
(iii) relating to (A) indebtedness for borrowed money, whether direct or indirect, or (B) other Indebtedness in excess of $250,000, in each case other than any Indebtedness between or among RG and any of its Subsidiaries;
(iv) involving the acquisition from another Person or disposition to another Person, directly or indirectly (by merger, license or otherwise), other than any acquisition or disposition of inventory, supplies, fixtures and IT equipment in the ordinary course of business consistent with past practices, of assets or capital stock or equity interests of another Person, including Contracts for any such acquisition or disposition which has already been consummated that contains representations, warranties covenants, indemnities or other obligations (including indemnification, "earn-out" or other contingent obligations), in each case, that are still in effect and, individually, could reasonably be expected to result in payments by or to RG or any of its Subsidiaries in excess of $250,000;
(v) prohibiting the payment of dividends or distributions in respect of the capital stock of RG or any of its wholly owned Subsidiaries, prohibiting the pledging of the capital stock of RG or any wholly owned Subsidiary of RG or prohibiting the issuance of any guaranty by RG or any Subsidiary of RG;
(vi) that is a collective bargaining agreement or other agreement with a labor union, works council or similar organization; or
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(vii) that is a license agreement, non-assertion agreement, co-existence agreement or option agreement material to the business of RG and its Subsidiaries, taken as a whole, pursuant to which RG or any of its Subsidiaries licenses in Intellectual Property Rights or licenses out or otherwise receives or grants the right to use, register or acquire, Intellectual Property Rights owned by RG or its Subsidiaries (other than license agreements for commercially available software on standard terms and distribution and sales agreements entered into in the ordinary course of business consistent with past practices).
(b) Each RG Material Contract is valid and binding on RG and any Subsidiary party thereto and, to the Knowledge of RG, each other party thereto, and is in full force and effect and enforceable in accordance with its terms, subject to the Bankruptcy and Equity Exception. Neither RG nor any of its Subsidiaries (i) is in violation or default under any RG Material Contract or (ii) has received written notice of any asserted violation or default, or of any event or condition which, after notice or lapse of time or both, will constitute, such a violation or default, by RG and any Subsidiary party thereto under any RG Material Contract except, in either case of clause (i) or (ii) as would not reasonably be expected to have, individually or in the aggregate, a RG Material Adverse Effect.
Section 3.12. Intellectual Property.
(a) Section 3.12 of the RG Disclosure Schedule sets forth a current and complete list (in all material respects) of RG Intellectual Property Rights owned by RG or any of its Subsidiaries that has been registered or the subject of a pending application with Governmental Authorities responsible for such registrations (the "RG Registered Intellectual Property Rights"). Except as set forth in Section 3.12 of the RG Disclosure Schedule or as would not reasonably be expected to have, individually or in the aggregate, a RG Material Adverse Effect: (i) RG and its Subsidiaries are the sole and exclusive owners of all of the RG Registered Intellectual Property Rights; (ii) the RG Registered Intellectual Property Rights are not subject to any Lien other than Permitted Exceptions; (iii) RG or a Subsidiary of RG owns, or is licensed or otherwise has the right to use, all material RG Intellectual Property Rights that, in each case, is used in the conduct of the business of RG and its Subsidiaries as presently conducted, either itself or through a licensee; and (iv) there are no final judgments or decisions by any court or administrative tribunal that prevent RG or its Subsidiaries or licensees from using or registering the RG Intellectual Property Rights in any location where RG is currently doing business, either as to manufacturing or sales.
(b) Except as set forth in Section 3.12 of the RG Disclosure Schedule: (i) the conduct of the business of RG and its Subsidiaries and licensees as currently conducted does not infringe, misappropriate or otherwise violate any RG Intellectual Property Rights of any Person and (ii) no claims are pending or, to the Knowledge of RG, threatened that RG or any of its Subsidiaries or licensees is infringing the rights of any Person with regard to any RG Intellectual Property Right, except in the case of (i) and (ii) for such infringements, misappropriations, violations and claims which, individually or in the aggregate, would not reasonably be expected to have a RG Material Adverse Effect.
(c) To the Knowledge of RG, as of the date hereof (i) no Person is infringing, misappropriating, or otherwise violating any RG Intellectual Property Right owned, used, or held for use by RG or its Subsidiaries in the conduct of the business of RG and its Subsidiaries as presently conducted and (ii) no such claims have been asserted or threatened against any Person by RG in the past two (2) years, except in the case of (i) and (ii) for such infringements, misappropriations, violations and claims which, individually or in the aggregate, would not reasonably be expected to have a RG Material Adverse Effect.
(d) To the Knowledge of RG, RG and its Subsidiaries have at all times complied with all applicable Laws, as well as their own rules, policies and procedures, relating to privacy, data
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protection, and the collection, retention, protection, and use of personal information collected, used, or held for use by RG and its Subsidiaries. No claims have been asserted or, to the Knowledge of RG, threatened against RG or its Subsidiaries alleging a violation of any Person's privacy or personal information or data rights, except for such violations which, individually or in the aggregate, would not reasonably be expected to have a RG Material Adverse Effect.
(e) Except as set forth in Section 3.12(e) of the RG Disclosure Schedule, to the Knowledge of RG as of the date hereof, there is no jurisdiction among the Key Jurisdictions in which the trademark ROBERT GRAHAM is not available for use and registration by RG or its Subsidiaries in connection with the products currently being sold in International Classes 14, 18, 25 or 35 by RG or its Subsidiaries.
Section 3.13. Brokers and Other Advisors. No broker, investment banker, financial advisor or
other Person is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in
connection with the Transactions based upon arrangements made by or on behalf of RG or any of its Subsidiaries except for Persons, if any, whose fees and expenses will be paid by RG or one of its
Affiliates.
Section 3.14. Financing. RG has provided to the Company a true, complete and correct copy of
each executed commitment letter (the "Debt Commitment
Letters") from the Debt Financing Parties pursuant to which they have committed, subject to the terms and conditions therein, to provide RG with debt financing in the amount
set forth therein (being collectively referred to as the "Financing"), including all exhibits, schedules, annexes and amendments to such letter in
effect as of the date hereof. As of the date of this Agreement, the Debt Commitment Letters, including the financing commitments contained therein, (i) have not been amended, restated,
withdrawn, rescinded or otherwise modified or waived, and, no such amendment, restatement, withdrawal, rescission or other modification or waiver of the Debt Commitment Letters is contemplated by RG
or, to the Knowledge of RG, any other party thereto, and (ii) are in full force and effect, and constitute the legal, valid and binding obligations of RG and, to the Knowledge of RG, the other
parties thereto, subject to the Bankruptcy and Equity Exception. There are no conditions precedent related to the funding of the Financing or contingencies that would permit the Debt Financing Parties
to reduce the total amount of the Financing, other than as set forth in or contemplated by the Debt Commitment Letters or the fee letter, if applicable, associated with the Debt Commitment Letters. RG
has fully paid any and all commitment fees or other fees or deposits required by the Debt Commitment Letters to be paid on or before the date hereof. As of the date of this Agreement, no event has
occurred which, with or without notice, lapse of time or both, would reasonably be expected to constitute a default or breach on the part of RG and, to the Knowledge of RG, any other parties thereto,
under the Debt Commitment Letters. As of the date of this Agreement, assuming the accuracy of the Company's representations and warranties set forth in this Agreement and performance by the Company of
its obligations under this Agreement, RG has no reason to believe that any of the conditions to the Financing contemplated by the Debt Commitment Letters will not be satisfied or that the Financing
will not be available to RG on the Closing Date. As of the date of this Agreement, there are no side letters or other agreements, Contracts or written arrangements to which RG or any of its Affiliates
is a party related to the Financing other than as expressly set forth in the Debt Commitment Letters and any customary fee letter, engagement letter and non-disclosure agreements that do not impact
the conditionality or amount of the Financing. Assuming the Financing is funded in accordance with the Debt Commitment Letters, the net proceeds contemplated by the Debt Commitment Letters will,
together with RG cash, Company cash and the proceeds from the consummation of the Stock Purchase Agreement and the Asset Purchase Agreement, in the aggregate be sufficient for Merger Sub and the
Surviving Company to pay the aggregate Merger Consideration (and any repayment or refinancing of debt contemplated by this Agreement or the Debt Commitment Letters) and any other amounts required to
be paid by Merger
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Sub and the Surviving Company in connection with the consummation of the Transactions. RG acknowledges and agrees that obtaining the Financing is not a condition to closing the Transactions.
Section 3.15. Ownership of Company Common Stock. Neither RG nor any of its Subsidiaries is, nor
at any time during the last three (3) years has been, an "interested stockholder" of the Company as defined
in Section 203 of the DGCL or was required to file a Schedule 13D or Schedule 13G with respect to its ownership of securities of the Company pursuant to the Exchange Act
(other than as contemplated by this Agreement).
Section 3.16. Related Party Transactions. Section 3.16 of the RG
Disclosure Schedule sets forth a list of all Contracts (other than employment
Contracts and equity award arrangements) between RG and any of its Affiliates, officers, directors or employees or any of such officers', directors' or employees' Affiliates. Except as set forth in Section 3.16 of the RG
Disclosure Schedule, RG and its Subsidiaries are not indebted or otherwise obligated to any such Person, except for
amounts due under normal arrangements applicable to all employees generally as to salary or reimbursement of ordinary business expenses not unusual in amount or significance.
Section 3.17. Insurance. Except as would not reasonably be expected to have, individually or in
the aggregate, a RG Material Adverse Effect, (i) RG and its Subsidiaries own or hold
policies of insurance in amounts providing reasonably adequate coverage against all risks customarily insured against by companies in similar lines of business as RG and its Subsidiaries and in
amounts sufficient to comply with all Material Contracts to which RG or its Subsidiaries are parties or are otherwise bound, and (ii) all such insurance policies are in full force and effect
and will remain so after the Effective Time, no notice of cancellation or modification has been received, and there is no existing default or event which, with the giving of notice or lapse of time or
both, would constitute a default, by any insured thereunder.
Section 3.18. Property. RG does not own or have any option to purchase real property. RG does
not use or occupy, or a have a right to use or occupy, any real property except pursuant to
a RG Lease. Except as would not reasonably be expected to have, individually or in the aggregate, a RG Material Adverse Effect, (a) RG or one of its Subsidiaries has a good and valid leasehold
interest in each RG Lease, free and clear of all Liens (other than Permitted Exceptions), (b) each RG Lease is in full force and effect and there is no violation, breach or default, or any
event or condition which, after notice or lapse of time or both, will constitute such a violation, breach or default, by the tenant under any RG Lease or, to the Knowledge of RG, by any other party
thereto, (c) there are no pending or, to the Knowledge of RG, threatened, condemnation or eminent domain proceedings, or other Governmental Authority proceedings affecting any demised premises
under a RG Lease and (d) each RG Lease has created a legal, binding and enforceable obligation of (i) RG or its applicable Subsidiary, and (ii) any other party or parties thereto.
Section 3.19. Environmental Matters. Except for those matters that would not reasonably be
expected to have, individually or in the aggregate, a RG Material Adverse Effect, (a) each of RG and
its Subsidiaries is and has been in compliance with all Environmental Laws, which compliance includes obtaining, maintaining or complying with all Permits required under Environmental Laws for the
operation of their respective businesses, (b) as of the date hereof there is no investigation, suit, claim, action or proceeding relating to or arising under any Environmental Law that is
pending or, to the Knowledge of RG, threatened against RG or any of its Subsidiaries or any real property owned, operated or leased by RG or any of its Subsidiaries, (c) as of the date hereof
neither RG nor any of its Subsidiaries has received any written notice of or entered into any legally-binding Contract, Order or settlement involving uncompleted, outstanding or unresolved
requirements on the part of RG or its Subsidiaries relating to or arising under Environmental Laws and (d) to the Knowledge of RG, there are and have been no Hazardous Materials present on any
real property owned or leased by RG or any of its Subsidiaries in a manner and concentration that would reasonably be expected to result in any claim against RG or its Subsidiaries under any
Environmental Law.
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Section 3.20. Labor Matters; Employees.
(a) Except as set forth in Section 3.21(a) of the RG Disclosure Schedule, RG and its Subsidiaries are neither party to, nor bound by, any labor agreement, collective bargaining agreement, work rules or practices, or any other labor-related agreements or arrangements with any labor union, labor organization or works council and, to the Knowledge of RG, there are no labor union organizing activities presently underway or threatened involving any employees of RG or its Subsidiaries.
(b) Since January 1, 2013, there have been no actual or, to the Knowledge of RG, threatened material arbitrations, material grievances, material labor disputes, strikes, lockouts, slowdowns or work stoppages or other material concerted action by employees of RG or any of its Subsidiaries or against or affecting RG or any of its Subsidiaries. There are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened in writing with respect to the employees of RG or its Subsidiaries.
(c) To the Knowledge of RG, the manufacturers, contractors and subcontractors engaged in the manufacturing of products for RG and its Subsidiaries ("RG Manufacturers") are in compliance in all material respects with all applicable Laws respecting employment and employment practices. To the Knowledge of RG, no complaint, claim, lawsuit or charge has been made against any RG Manufacturers that would reasonably be expected to result in material liability to RG or its Subsidiaries.
Section 3.21. Non-Reliance on Company Estimates, Projections, Forecasts, Forward-Looking Statements and Business Plans. In connection with the due diligence investigation of the Company by RG, RG has received and may continue to receive from the Company certain estimates,
projections, forecasts and other forward-looking information, as well as certain business plan information, regarding the Company and its business and operations. RG hereby acknowledges that there are
uncertainties inherent in attempting to make such estimates, projections, forecasts and other forward-looking statements, as well as in such business plans, with which RG is familiar, that RG is
taking full responsibility for making its own evaluation of the adequacy and accuracy of all estimates, projections, forecasts and other forward-looking information, as well as such business plans, so
furnished to them (including the reasonableness of the assumptions underlying such estimates, projections, forecasts, forward-looking information or business plans), and that RG will have no claim
against the Company or any of its Subsidiaries, or any of their respective stockholders, directors, officers, employees, Affiliates, advisors, agents or Representatives, with respect thereto.
Section 3.22. No Other Representations and Warranties. EXCEPT AS CONTAINED IN THIS ARTICLE III, RG DOES NOT MAKE ANY REPRESENTATIONS OR WARRANTIES TO THE COMPANY OR
MERGER SUB AND RG DISCLAIMS ALL LIABILITY AND RESPONSIBILITY FOR ANY REPRESENTATION, WARRANTY, STATEMENT MADE OR INFORMATION COMMUNICATED (WHETHER ORALLY OR IN WRITING) TO THE COMPANY AND ITS
AFFILIATES AND REPRESENTATIVES (INCLUDING ANY OPINION, INFORMATION, ADVICE, REPRESENTATION OR WARRANTY WHICH MAY HAVE BEEN PROVIDED TO THE COMPANY AND ITS AFFILIATES OR REPRESENTATIVES BY ANY
DIRECTOR, OFFICER, EMPLOYEE, ACCOUNTING FIRM, LEGAL COUNSEL, OR OTHER AGENT, CONSULTANT, OR REPRESENTATIVE OF RG OR ITS AFFILIATES). ANY AND ALL STATEMENTS MADE OR INFORMATION COMMUNICATED BY RG, OR
ANY OF ITS REPRESENTATIVES OUTSIDE OF THIS AGREEMENT, WHETHER VERBALLY OR IN WRITING, ARE DEEMED TO HAVE BEEN SUPERSEDED BY THIS AGREEMENT, IT BEING INTENDED THAT NO SUCH PRIOR OR CONTEMPORANEOUS
STATEMENTS OR COMMUNICATIONS OUTSIDE OF THIS AGREEMENT SHALL SURVIVE THE EXECUTION AND DELIVERY OF THIS AGREEMENT.
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ARTICLE IV
ADDITIONAL COVENANTS AND AGREEMENTS
Section 4.1. Conduct of Business.
(a) Except as expressly permitted by this Agreement or the Asset Purchase Agreements, as set forth in Section 4.1(a) of the Company Disclosure Schedule, as required by applicable Law or as consented to by RG in writing (such consent shall not be unreasonably withheld, conditioned or delayed), during the period from the date of this Agreement until earlier of the Effective Time and the valid termination of this Agreement in accordance with Section 6.1, the Company shall, and shall cause each of its Subsidiaries to, (x) conduct its business in all material respects in the ordinary course consistent with past practice, and (y) use commercially reasonable efforts to maintain and preserve intact its business organization and the goodwill of those having business relationships with it and retain the services of its present executive officers and key employees consistent with past practice. Without limiting the generality of the foregoing, except as expressly permitted by this Agreement, as set forth in Section 4.1 of the Company Disclosure Schedule, as required by applicable Law or as consented to by RG in writing (such consent shall not be unreasonably withheld, conditioned or delayed), during the period from the date of this Agreement until the earlier of the Effective Time and a valid termination of this Agreement in accordance with Section 6.1, the Company shall not, and shall not permit any of its Subsidiaries to:
(i) (A) issue, sell, grant, dispose of, pledge or otherwise encumber any shares of its capital stock, voting securities or equity interests, or any securities or rights convertible into, exchangeable or exercisable for, or evidencing the right to subscribe for any shares of its capital stock, voting securities or equity interests, or any rights, warrants, options, calls, commitments or any other agreements of any character to purchase or acquire any shares of its capital stock, voting securities or equity interests or any securities or rights convertible into, exchangeable or exercisable for, or evidencing the right to subscribe for, any shares of its capital stock, voting securities or equity interests; other than issuances by any direct or indirect wholly owned Subsidiary to the Company or another direct or indirect wholly owned Subsidiary of the Company; (B) redeem, purchase or otherwise acquire any of its outstanding shares of capital stock, voting securities or equity interests, or any securities or rights convertible into, exchangeable or exercisable for, or evidencing the right to subscribe for any shares of its capital stock, voting securities or equity interests, or any rights, warrants, options, calls, commitments or any other agreements of any character to acquire any shares of its capital stock, voting securities or equity interests, or any securities or rights convertible into, exchangeable or exercisable for, or evidencing the right to subscribe for any shares of its capital stock, voting securities or equity interests; other than the acquisition or withholding by the Company of shares of Company Common Stock to satisfy Tax obligations with respect to awards granted pursuant to the Company Incentive Plan; (C) declare, authorize, set aside for payment or pay any dividend on, or make any other distribution in respect of, any of its outstanding shares of capital stock, voting securities or equity interests, or any rights, warrants, options, calls, commitments or any other agreements of any character to acquire any shares of its capital stock, voting securities or equity interests or otherwise make any payments to the holders of the foregoing in their capacity as such; (D) split, combine, subdivide or reclassify any shares of its capital stock; or (E) amend (including by reducing an exercise price or extending a term) or waive any of its rights under, any provision of the Company Incentive Plans or any agreement evidencing any right to acquire capital stock of the Company or any restricted stock purchase agreement or any similar or related contract;
(ii) incur or assume any indebtedness for borrowed money or guarantee any indebtedness (or enter into a "keep well" or similar agreement) or issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of the
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Company or any of its Subsidiaries, other than borrowings (A) listed on Section 4.1(b)(i) of the Company Disclosure Schedule, (B) from RG or a Subsidiary of RG or (C) from the Company by a direct or indirect wholly owned Subsidiary of the Company in the ordinary course of business consistent with past practices;
(iii) sell, transfer, lease, sublease, license, mortgage, encumber or otherwise dispose of or subject to any Lien (including pursuant to a sale-leaseback transaction or an asset securitization transaction), other than Permitted Exceptions, any of its properties (including real properties) or assets (including securities of Subsidiaries) to any Person, except (A) in the ordinary course of business consistent with past practices pursuant to Contracts in force at the date of this Agreement that have been made available to RG prior to the date hereof, (B) for sales of inventory to customers in the ordinary course of business consistent with past practices (which, for the avoidance of doubt, does not include bulk sales or liquidations of inventory) and (C) with respect to Company Intellectual Property to the extent not prohibited by Section 4.1(b)(xi);
(iv) (A) increase in any manner or accelerate the vesting or payment of the compensation of or benefits payable to (or severance pay for) any of its current or former directors, officers or employees, or consultants who are natural persons, (B) enter into, establish, amend or terminate any collective bargaining agreement or Company Benefits Plan (or any plan, program, agreement or arrangement that would be a Company Benefits Plan if in effect as of the date hereof) with, for or in respect of, any current or former stockholder, director, officer, other employee, consultant who is a natural person or Affiliate of the Company or its Subsidiaries, (C) fund any rabbi trust or similar arrangement, (D) terminate the employment or services of any officer, consultant who is a natural person or employee whose target annual compensation (including annual base salary and target bonus) is greater than $150,000 or (E) hire any officer, consultant who is a natural person or employee who has target annual compensation greater than $75,000, in each case, other than as required pursuant to applicable Law or required by any Company Benefits Plan in force as of the date hereof;
(v) (A) effectuate a plant closing as defined in the WARN Act affecting any site of employment or one or more facilities or operating units within any site of employment of the Company or its Subsidiaries, (B) effectuate a mass layoff as defined in the WARN Act affecting any site of employment of the Company or its Subsidiaries or (C) enter into any labor agreement, collective bargaining agreement, work rules or practices, or any other labor-related agreements or arrangements with any labor organization, works council, trade union or other labor association, with respect to the employees of the Company or any of its Subsidiaries.
(vi) (A) incur any Taxes outside the ordinary course of business consistent with past practices, except as contemplated by this Agreement and the Asset Purchase Agreements, (B) make any material election concerning Taxes or Tax Returns, (C) change or revoke any election concerning Taxes or Tax Returns, (D) file any material amended Tax Return, (E) enter into any closing agreement with respect to any material Tax, (F) settle or compromise any claim or action relating to material Taxes, (G) surrender any right to claim a material refund of Taxes, (H) make any material change in Tax accounting methods, (I) obtain any material Tax ruling, (J) file any material Tax Return other than one prepared in a manner consistent with past practice, or (K) waive or extend any statute of limitations in respect of material Taxes;
(vii) make any material changes in financial accounting methods, principles or practices (or change an annual accounting period), except insofar as may be required by GAAP or Regulation S-X promulgated under the Exchange Act;
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(viii) amend the Company Charter Documents or organizational documents of any Subsidiary;
(ix) adopt a plan or agreement of complete or partial liquidation, dissolution, restructuring, recapitalization, merger, consolidation or other reorganization;
(x) settle or compromise any litigation, proceeding or pending or threatened claim or action other than settlements or compromises (A) that do not obligate the Company or its Subsidiaries to make payment(s) in excess of amounts reserved on the Company's consolidated balance sheet dated February 28, 2015 by $150,000 in the aggregate, (B) that do not involve any material injunctive or equitable relief or impose material restrictions on the business activities of the Company and its Subsidiaries, taken as a whole, or to the Hudson's Business, (C) that do not relate to the Transactions and (D) that do not involve the issuance of Company securities or equity or voting interests;
(xi) subject to any Lien or otherwise encumber or, except for Permitted Exceptions, permit, allow or suffer to be encumbered, any Company Intellectual Property, except for any Permitted Exceptions;
(xii) sell, assign, license, transfer, convey, lease, abandon or otherwise dispose of any of the Company Intellectual Property Rights, other than licenses made in the ordinary course of business consistent with past practice that are terminable by the Company on 90 days' or fewer notice without liability (including, without limitation, penalty or interest);
(xiii) (A) fail to make any material filing, pay any fee, or take another action necessary to maintain in full force and effect any trademark or trade name that is material to the conduct of the business of the Company and its Subsidiaries, as a whole, as currently conducted or material to the Hudson Business or the Joe's Business, each as currently conducted, other than such failures that can be cured before the Closing and without resulting in an adverse impact on the Company; or (B) enter into any license or transfer agreement granting or transferring to a third party an exclusive right to use any such trademark or trade name, other than distribution agreements, sales agent agreements and commission arrangements entered into in the ordinary course of business consistent with past practices;
(xiv) (A) modify or amend in any material respect, or renew, terminate or waive any material rights under, any Material Contract or (B) enter into any Contract that would have been a Material Contract if entered into prior to the date hereof and that is not terminable by the Company on 90 days' or fewer notice without liability (including, without limitation, penalty or interest); or
(xv) authorize, commit, resolve, propose or agree (in writing or otherwise) to take any of the foregoing actions.
Notwithstanding anything set forth in this Agreement, nothing contained in this Agreement shall give RG, directly or indirectly, the right to control or direct the operations of the Company or any of its Subsidiaries prior to the Effective Time. Prior to the Effective Time, the Company shall exercise, consistent with the terms and conditions of this Agreement, control and supervision over its and its Subsidiaries' business operations.
(b) Except as expressly permitted by this Agreement, as set forth in Section 4.1(b) of the RG Disclosure Schedule, as required by applicable Law or as consented to by the Company in writing (such consent shall not be unreasonably withheld, conditioned or delayed), during the period from the date of this Agreement until earlier of the Effective Time and the valid termination of this Agreement in accordance with Section 6.1, RG shall, and shall cause each of its Subsidiaries to, (x) conduct its business in all material respects in the ordinary course consistent with past practice,
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and (y) use commercially reasonable efforts to maintain and preserve intact its business organization and the goodwill of those having business relationships with it and retain the services of its present executive officers and key employees consistent with past practice. Without limiting the generality of the foregoing, except as expressly permitted by this Agreement, as set forth in Section 4.1(b) of the RG Disclosure Schedule, as required by applicable Law or as consented to by the Company in writing (such consent shall not be unreasonably withheld, conditioned or delayed), during the period from the date of this Agreement until the earlier of the Effective Time and a valid termination of this Agreement in accordance with Section 6.1, RG shall not, and shall not permit any of its Subsidiaries to:
(i) incur or assume any indebtedness for borrowed money that will not be repaid at Closing and reduce the Aggregate Cash Consideration payable to RG or guarantee any material indebtedness (or enter into a "keep well" or similar agreement) or issue or sell any debt securities or options, warrants, calls or other rights, in each case, other than in the ordinary course of business consistent with past practices;
(ii) sell, transfer, lease, sublease, license, mortgage, encumber or otherwise dispose of or subject to any Lien (including pursuant to a sale-leaseback transaction or an asset securitization transaction), other than Permitted Exceptions, any of its material properties (including real properties) or material assets (including securities of Subsidiaries) to any Person, except (A) in the ordinary course of business consistent with past practices or pursuant to Contracts in force at the date of this Agreement that have been made available to the Company prior to the date hereof and (B) with respect to RG Intellectual Property to the extent not prohibited by Section 4.1(b)(x);
(iii) (A) increase in any material manner the compensation of or benefits payable to (or severance pay for) any of its current or former directors, officers or employees, or consultants who are natural persons, (B) enter into, establish, amend or terminate any collective bargaining agreement or RG Benefits Plan (or any plan, program, agreement or arrangement that would be a RG Benefits Plan if in effect as of the date hereof) with, for or in respect of, any current or former stockholder, director, officer, other employee, consultant who is a natural person or Affiliate of RG or its Subsidiaries, (C) fund any rabbi trust or similar arrangement, (D) terminate the employment or services of any officer, consultant who is a natural person or employee whose target annual compensation (including annual base salary and target bonus) is greater than $200,000 or (E) hire any officer, consultant who is a natural person or employee who has target annual compensation greater than $200,000, in each case, other than as contemplated by this Agreement, in the ordinary course of business consistent with past practice, as required pursuant to applicable Law or as required by any RG Benefits Plan in force as of the date hereof;
(iv) (A) incur any Taxes outside the ordinary course of business consistent with past practices, except as contemplated by this Agreement and the Asset Purchase Agreements (B) make any material election concerning Taxes or Tax Returns, (C) change or revoke any election concerning Taxes or Tax Returns, (D) file any material amended Tax Return, (E) enter into any closing agreement with respect to any material Tax, (F) settle or compromise any claim or action relating to material Taxes, (G) surrender any right to claim a material refund of Taxes, (H) make any material change in Tax accounting methods, (I) obtain any material Tax ruling, (J) file any material Tax Return other than one prepared in a manner consistent with past practice, or (K) waive or extend any statute of limitations in respect of material Taxes;
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(v) make any material changes in financial accounting methods, principles or practices (or change an annual accounting period), except insofar as may be required by GAAP or Regulation S-X promulgated under the Exchange Act;
(vi) other than amendments to Exhibit A to the limited liability company agreement of RG, amend RG Charter Documents or organizational documents of any Subsidiary of RG;
(vii) other than in connection with distributions by direct and indirect holders of RG equity interests of equity interests in such holder, adopt a plan or agreement of complete or partial liquidation, dissolution, restructuring, recapitalization, merger, consolidation or other reorganization;
(viii) settle or compromise any litigation, proceeding or pending or threatened claim or action other than settlements or compromises (A) that do not obligate RG or its Subsidiaries to make payment(s) in excess of amounts reserved on RG's consolidated balance sheet dated April 30, 2015 by $350,000 in the aggregate, (B) that do not involve any material injunctive or equitable relief or impose material restrictions on the business activities of RG and its Subsidiaries, taken as a whole and (C) that do not relate to the Transactions;
(ix) other than in the ordinary course of business consistent with past practices, subject to any Lien or otherwise encumber or, permit, allow or suffer to be encumbered, any RG Intellectual Property Rights, in each case except for any Permitted Exceptions;
(x) sell, assign, license, transfer, convey, lease, abandon or otherwise dispose of any material RG Intellectual Property Rights, other than licenses made in the ordinary course of business consistent with past practice;
(xi) (A) fail to make any material filing, pay any fee, or take another action necessary to maintain in full force and effect any trademark or trade name that is material to the conduct of the business of RG and its Subsidiaries, as a whole, as currently conducted, other than such failures that can be cured before the Closing and without resulting in an adverse impact on RG; or (B) enter into any license or transfer agreement granting or transferring to a third party an exclusive right to use any such trademark or trade name, other than licenses or transfer agreements entered into in the ordinary course of business consistent with past practices;
(xii) (A) modify or amend in any material respect, or renew, terminate or waive any material rights under, any Material Contract (except for any modifications or amendments that are beneficial to or not materially less favorable to RG), or (B) enter into any Contract that would have been a Material Contract if entered into prior to the date hereof and that is not terminable by RG on 90 days' or fewer notice without liability (including, without limitation, penalty or interest); or
(xiii) authorize, commit, resolve, propose or agree (in writing or otherwise) to take any of the foregoing actions.
Notwithstanding anything set forth in this Agreement, nothing contained in this Agreement shall (1) give the Company, directly or indirectly, the right to control or direct the operations of RG or any of its Subsidiaries prior to the Effective Time or (2) limit, or be deemed to limit, (X) the liquidation of any direct or indirect holder of RG Units or (Y) the distribution of RG Units by any holder of RG Units, in each case prior to the Effective Time. Prior to the Effective Time, RG shall exercise, consistent with the terms and conditions of this Agreement, control and supervision over its and its Subsidiaries' business operations.
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(a) No Solicitation by RG. RG shall, and shall cause its Subsidiaries and Affiliates and each of its and its Subsidiaries' and Affiliates' respective directors, officers, employees, investment bankers, financial advisors, attorneys, accountants, agents and other representatives (collectively, "Representatives") to, immediately cease and cause to be terminated any solicitation, encouragement, discussions or negotiations with any Person conducted heretofore with respect to a RG Takeover Proposal; provided, however, that nothing in this Section 4.2(a) shall preclude RG or its Representatives from contacting any such party or parties solely for the purpose of complying with the provisions of the first clause of this sentence. Subject to the terms and provisions of this Section 4.2(a) , from the date hereof until the Closing Date, or, if earlier, the termination of this Agreement in accordance with Section 6.1, RG shall not, and shall cause its Subsidiaries and Affiliates and each of its and its Subsidiaries' and Affiliates' respective Representatives not to, directly or indirectly, (i) solicit, initiate, facilitate or encourage (including by way of providing or making available information for the purpose of soliciting, initiating, encouraging or facilitating) any inquiries, discussions or negotiations regarding, or the submission or announcement of any proposals or offers that constitute, or would reasonably be expected to lead to, any RG Takeover Proposal, (ii) provide any information concerning RG or any of its Subsidiaries to any Person or group who would reasonably be expected to make any RG Takeover Proposal or otherwise in connection with, or for the purpose of soliciting, initiating, encouraging or facilitating, any RG Takeover Proposal or any inquiries, discussions or negotiations with respect to a RG Takeover Proposal or that would reasonably be expected to lead to a RG Takeover Proposal, (iii) engage in any discussions or negotiations regarding any RG Takeover Proposal or that would reasonably be expected to lead to a RG Takeover Proposal, (iv) by resolution of the RG Board of Managers, any committee thereof, or otherwise (A) approve, support, recommend, enter into or adopt, or (B) propose to approve, support, recommend, enter into or adopt, (X) any RG Takeover Proposal or (Y) any Contract providing for or any letter of intent or similar document, agreement, commitment, understanding or agreement in principle (whether written or oral, binding or nonbinding) with respect to a RG Takeover Proposal or that would reasonably be expected to lead to a RG Takeover Proposal, or (v) otherwise cooperate with or assist or participate in, or facilitate or encourage any such inquiries, proposals, offers, discussions or negotiations.
(b) No Solicitation by the Company. The Company shall, and shall cause its Subsidiaries and Affiliates and each of its and its Subsidiaries' and Affiliates' respective Representatives to, immediately cease and cause to be terminated any solicitation, encouragement, discussions or negotiations with any Person conducted heretofore with respect to, or which would reasonably be expected to lead to, a Takeover Proposal; provided, however, that nothing in this Section 4.2(b) shall preclude the Company or its Representatives from contacting any such party or parties solely for the purpose of complying with the provisions of the first clause of this sentence. Subject to the terms and provisions of this Section 4.2(b), from the date hereof until the Effective Time, or, if earlier, the termination of this Agreement in accordance with Section 6.1, the Company shall not, and shall cause its Subsidiaries and Affiliates and each of its and its Subsidiaries' and Affiliates' respective Representatives not to, directly or indirectly, (i) solicit, initiate, facilitate or encourage (including by way of providing or making available information for the purpose of soliciting, initiating, encouraging or facilitating) any inquiries, discussions or negotiations regarding, or the submission or announcement of any proposals or offers that constitute, or would reasonably be expected to lead to, any Takeover Proposal, (ii) provide any information concerning the Company or any of its Subsidiaries to any Person or group who would reasonably be expected to make any Takeover Proposal or otherwise in connection with, or for the purpose of soliciting, initiating, encouraging or facilitating, any Takeover Proposal or any inquiries, discussions or negotiations with respect to a Takeover Proposal or that would reasonably be expected to lead to a Takeover Proposal, (iii) engage in any discussions or negotiations regarding any Takeover Proposal or that
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would reasonably be expected to lead to a Takeover Proposal, (iv) by resolution of the Company Board, any committee thereof, or otherwise (A) approve, support, recommend, enter into or adopt, or (B) propose to approve, support, recommend, enter into or adopt, (X) any Takeover Proposal (other than a Superior Proposal in accordance with the terms and conditions hereof) or (Y) any Contract providing for or any letter of intent or similar document, agreement, commitment, understanding or agreement in principle (whether written or oral, binding or nonbinding) with respect to a Takeover Proposal or that would reasonably be expected to lead to a Takeover Proposal, or (v) otherwise cooperate with or assist or participate in, or facilitate or encourage any such inquiries, proposals, offers, discussions or negotiations. Wherever the term "group" is used in this Section 4.2(b), it is used as defined for purposes of Rule 13d-3 under the Exchange Act.
(c) Permitted Response to Unsolicited Takeover Proposals. Notwithstanding anything to the contrary contained in this Section 4.2(c) or any other provision of this Agreement, if at any time after the date hereof and prior to the Company's receipt of the Company Stockholder Approval, (i) the Company receives an unsolicited, bona fide, written Takeover Proposal from a third party, and (ii) the Company Board determines in good faith, After Consultation, that such Takeover Proposal constitutes or would reasonably be expected to lead to a Superior Proposal, then the Company shall be permitted to (A) furnish information (including non-public information) with respect to the Company and its Subsidiaries to the Person making such Takeover Proposal pursuant to an Acceptable Confidentiality Agreement; provided, that all such information has previously been made available to RG or is made available to RG and such third party concurrently and (B) engage in discussions and negotiations with the Person making such Takeover Proposal regarding such Takeover Proposal.
(d) Notice to RG of Takeover Proposals. If the Company or any of its Representatives receives any Takeover Proposal (including any material changes to a Takeover Proposal) then the Company shall, promptly (but in no event later than one (1) Business Day) after becoming aware thereof, notify RG (orally and in writing) and, in connection with such notice, provide (i) the identity of the Person or group making such Takeover Proposal and the material terms and conditions thereof (including, if applicable, copies of any written proposals, indications of interest or offers, including proposed agreements), and thereafter the Company shall keep RG reasonably informed, on a prompt basis, as to the status thereof (including any material changes to the terms thereof, and any change to the price, and any other material developments with respect thereto), including by promptly providing to RG copies of any additional or revised written proposals, indications of interest, offers, or proposed agreements relating to such Takeover Proposal and (ii) a representation that the Company and each of its and its Subsidiaries' and Affiliates' respective Representatives have complied with Section 4.2(d) in all respects.
(e) Further Prohibited Activities. Except as otherwise permitted by Section 4.2(f), neither the Company Board nor any committee thereof shall (i) withdraw or rescind (or modify in a manner adverse to RG), or authorize or publicly announce an intention to withdraw or rescind (or modify in a manner adverse to RG), the Company Recommendation, (ii) fail to include the Company Recommendation in the Proxy Statement and Consent Solicitation Materials, (iii) approve, declare the advisability of or recommend to the Company Stockholders the adoption of, or authorize or publicly announce an intention to approve, declare the advisability of or recommend the adoption of, any Takeover Proposal or any Contract or action that would reasonably be expected to lead to a Takeover Proposal, (iv) take any formal action or make any recommendation or public statement in connection with a tender offer or exchange offer (other than a recommendation against such offer or a customary "stop, look and listen" communication of the type contemplated by Rule 14d-9(f) under the Exchange Act, in each case that includes a reaffirmation of the Company Recommendation) (it being understood that the Company Board may refrain from taking a position with respect to such a tender offer or exchange offer until the close of business as of the
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tenth (10th) Business Day after the commencement of such tender offer or exchange offer pursuant to Rule 14d-9(f) under the Exchange Act without such action being considered a Change in Recommendation), (v) cause, authorize or permit the Company or any of its Subsidiaries to execute or enter into any letter of intent, memorandum of understanding, agreement-in-principle, Contract, merger agreement, acquisition agreement or other similar agreement related to any Takeover Proposal or that would reasonably be expected to lead to a Takeover Proposal, other than an Acceptable Confidentiality Agreement referred to in Section 4.2(c) (a "Company Acquisition Agreement"), or (vi) publicly propose or announce an intention to take any of the foregoing actions (any action described in clauses (i), (ii), (iii), (iv), (v) or (vi) being referred to as a "Change in Recommendation").
(f) Change in Recommendation. Notwithstanding anything to the contrary in this Agreement, at any time prior to the Company's receipt of the Company Stockholder Approval, the Company Board may effect a Change in Recommendation only if (i) the Company has received an unsolicited, bona fide, written Takeover Proposal and the Company Board determines in good faith, After Consultation, that such Takeover Proposal constitutes a Superior Proposal or (ii) the Company Board determines in good faith, after consulting with its legal representatives, that in the light of an Intervening Event the taking of such action is necessary for the Company Board to comply with its fiduciary duties under applicable Law; provided, however, that (w) the Company Board may not effect such Change in Recommendation until after the fifth (5th) Business Day following RG's receipt of notice from the Company Board that the Company Board intends to effect such Change in Recommendation and specifying the reasons therefor, including the material terms and conditions of any Superior Proposal or Intervening Event that is the basis of the Change in Recommendation (it being understood and agreed that any amendment to the material terms or conditions of the Superior Proposal or Intervening Event shall require a new notice and a new five (5) Business Day period) and a representation that the Company and each of its and its Subsidiaries' and Affiliates' respective Representatives have complied with Section 4.2(b) in all respects, (x) during such five (5) Business Day Period, the Company shall negotiate with RG in good faith to make such adjustments to the terms and conditions of this Agreement as would enable the Company Board to proceed with its recommendation of this Agreement and not effect the Change in Recommendation, (y) the Company Board shall not effect the Change in Recommendation if, prior to the expiration of such five (5) Business Day period, RG makes a proposal to adjust the terms and conditions of this Agreement that the Company Board determines in good faith, After Consultation, to be at least as favorable as the Superior Proposal or otherwise appropriately addresses the Intervening Event.
(g) Communications With Stockholders. Nothing contained in Section 4.2 shall prohibit the Company from (i) taking and disclosing to the Company Stockholders a position contemplated by Item 1012 of Regulation M-A under the Exchange Act or (ii) making any disclosure to the Company Stockholders that the Company Board determines in good faith is required by applicable Law; provided, however, that this Section 4.2(g) shall not be deemed to permit the Company Board to make a Change in Recommendation except to the extent permitted by Section 4.2(f), and that any such position or disclosure in connection with a tender offer or exchange offer, other than a recommendation against such offer or a customary "stop, look and listen" communication of the type contemplated by Rule 14d-9(f) under the Exchange Act (in each case that includes a reaffirmation of the Company Recommendation), shall be deemed to be a Change in Recommendation.
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Section 4.3. Reasonable best efforts.
(a) Subject to the terms and conditions of this Agreement, each of the parties hereto shall cooperate with the other parties and use (and shall cause their respective Subsidiaries to use) their respective reasonable best efforts to promptly (i) take, or cause to be taken, all actions, and do, or cause to be done, all things necessary, proper or advisable to cause the conditions to Closing to be satisfied and to consummate and make effective the Transactions as promptly as reasonably practicable and in any event prior to the Outside Date, including preparing and filing promptly and fully all documentation to effect all necessary filings, notices, petitions, statements, registrations, submissions of information, applications and other documents (including any required or recommended filings under applicable Antitrust Laws), and (ii) obtain all approvals, consents, waivers, registrations, permits, authorizations and other confirmations from any Governmental Authority or third party necessary, proper or advisable to consummate the Transactions, including preparing and filing promptly and fully all documentation to effect all filings, notices, and other documents necessary, proper or advisable to obtain the foregoing. Notwithstanding anything in this Agreement to the contrary, it is expressly understood and agreed that neither RG nor its Subsidiaries shall be obligated to litigate or contest any administrative or judicial action or proceeding or any decree, judgment, injunction or other order.
(b) In furtherance and not in limitation of the foregoing, (i) each party hereto agrees to make an appropriate filing of a Notification and Report Form pursuant to the HSR Act with respect to the Transactions as promptly as reasonably practicable, and in no event later than October 14, 2015, to make all appropriate filings and submissions (and filings and submissions considered by RG to be advisable) with any other Governmental Authority pursuant to any other applicable Antitrust Laws, to not withdraw its filing under the HSR Act or other Antitrust Laws without the written permission of the other parties, and to supply as promptly as reasonably practicable any additional information and documentary material that may be requested pursuant to the HSR Act and use its reasonable best efforts to take, or cause to be taken, as promptly as practicable all other actions consistent with this Section 4.3 necessary to cause the expiration or termination of the applicable waiting periods under the HSR Act and any applicable foreign Antitrust Laws as soon as practicable and (ii) the Company shall use its reasonable best efforts to (A) take all action necessary to ensure that no state takeover statute or similar Law is or becomes applicable to any of the Transactions and (B) if any state takeover statute or similar Law becomes applicable to any of the Transactions, take all action necessary to ensure that the Transactions may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise minimize the effect of such Law on the Transactions.
(c) Each of the parties hereto shall use its reasonable best efforts to (i) cooperate in all respects with each other in connection with any filing or submission with a Governmental Authority in connection with the Transactions and in connection with any investigation or other inquiry by or before a Governmental Authority relating to the Transactions, including any proceeding initiated by a private party, (ii) keep the other party informed in all material respects and on a reasonably timely basis of any material communication received by such party from, or any filing by such party with or material communication given by such party to, the Federal Trade Commission, the Antitrust Division of the Department of Justice, or any other Governmental Authority and of any material communication received or given in connection with any proceeding by a private party, in each case regarding any of the Transactions (including, in the case of written correspondence or filings, by promptly providing the other parties (or their counsel) copies thereof), and (iii) consult with each other in advance of and be permitted to attend any meeting or conference (including teleconference) with such Governmental Authorities (to the extent permitted by such Governmental Authorities; provided that such party shall use its reasonable best efforts to obtain such permission). Subject to applicable Laws relating to the exchange of information, each
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of the parties hereto shall have the right to review in advance, and to the extent practicable each will consult the other on, any filing made with, or written materials submitted to any Governmental Authority in connection with the Transactions. RG and the Company may, as each deems advisable and necessary, reasonably designate any competitively sensitive material provided to the other under this Section 4.3 as "Antitrust Counsel Only Material." Such materials and the information contained therein shall be given only to outside antitrust counsel of the recipient and will not be disclosed by such outside counsel to employees, officers, or directors of the recipient unless express permission is obtained in advance from the source of the materials (RG or the Company, as the case may be) or its legal counsel.
Section 4.4. Spinoff Transaction. The parties acknowledge that the Company has entered into
agreements to sell certain assets of the Joe's Jeans business to certain third parties pursuant to the
Asset Purchase Agreements (the "Asset Sale Transactions"). The Company shall use (and shall cause its Subsidiaries to use) its reasonable best efforts
to promptly (i) take, or cause to be taken, all actions, and do, or cause to be done, all things necessary, proper or advisable to cause the conditions to the closing of the Asset Sale
Transactions to be satisfied and to consummate and make effective the Asset Sale Transactions, including preparing and filing promptly and fully all documentation to effect all necessary filings,
notices, petitions, statements, registrations, submissions of information, applications and other documents (including any required or recommended filings under applicable Antitrust Laws) and
(ii) obtain all approvals, consents, waivers, registrations, permits, authorizations and other confirmations from any Governmental Authority or third party necessary, proper or advisable to
consummate the Asset Sale Transactions, including preparing and filing promptly and fully all documentation to effect all filings, notices, and other documents necessary, proper or advisable to obtain
the foregoing. With respect to the Asset Sale Transactions, and the termination of employment of current or former Joe's Employees in connection therewith, the Company and its Subsidiaries shall make
all required payments for any wages, services, or amounts required to be reimbursed or otherwise paid to current or former Joe's Employees as required by applicable Laws. With respect to the Asset
Sale Transactions, the parties acknowledge and agree that the consummation, timing and structure of the Asset Sale Transactions shall occur in a manner that takes into account U.S. federal income tax
considerations and minimizes any U.S. federal income tax.
Section 4.5. Preparation of Proxy Statement and Consent Solicitation Materials/Form S-4 Registration Statement; Stockholders' Meeting.
(a) As promptly as practicable, and in no event later than November 6, 2015, the Company and RG shall prepare the Proxy Statement and Consent Solicitation Materials and the Form S-4 Registration Statement, in which the Proxy Statement and Consent Solicitation Materials will be included, with respect to (i) the adoption of an amendment to the Company's certificate of incorporation to increase the authorized shares of Company Common Stock and to effect the Reverse Stock Split and (ii) the approval of the issuance of Company Common Stock in connection with the Merger and the issuance of Company Common Stock upon the conversion of Company Preferred Stock in connection with the consummation of the transactions contemplated by the Stock Purchase Agreement, and cause it to be filed with the SEC. The Company and RG shall each furnish all information concerning it and the holders of its capital stock or other equity as the other may reasonably request in connection with the preparation of the Form S-4 Registration Statement and the Proxy Statement and Consent Solicitation Materials and any amendment thereto. The Company shall use reasonable best efforts to cause the Form S-4 Registration Statement and the Proxy Statement and Consent Solicitation Materials to comply with the rules and regulations promulgated by the SEC, to respond promptly to any comments of the SEC or its staff, and to have the Form S-4 Registration Statement declared effective under the Securities Act as promptly as practicable after it is filed with the SEC. The Company shall use reasonable best efforts to cause all documents that it is responsible for filing with the SEC in
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connection with the Transactions to comply as to form and substance in all material respects with the applicable requirements of the Securities Act and the Exchange Act.
(b) If at any time prior to the Effective Time either Party becomes aware of any event or circumstance which is required to be set forth in an amendment or supplement to the Form S-4 Registration Statement or Proxy Statement and Consent Solicitation Materials, it shall promptly inform the other Party.
(c) The Company will notify RG in writing promptly after it receives notice thereof, of the time when the Form S-4 Registration Statement has become effective or any supplement or amendment thereto has been filed, the issuance of any stop order, or any request by the staff of the SEC for amendment of the Proxy Statement and Consent Solicitation Materials or Form S-4 Registration Statement or comments thereon or responses thereto. Each of RG, Merger Sub and the Company agrees that if it becomes aware that any information furnished by it would cause any of the statements in the Proxy Statement and Consent Solicitation Materials or the Form S-4 Registration Statement to be false or misleading with respect to any material fact, or omit to state any material fact necessary to make the statements therein not false or misleading, to promptly inform the other parties and to take appropriate steps to correct the Proxy Statement and Consent Solicitation Materials or the Form S-4 Registration Statement.
(d) Prior to the Effective Time, the Company shall use reasonable best efforts to (i) qualify the Company Common Stock under the Blue Sky Laws of such jurisdictions as may be required and (ii) apply for and obtain a NASDAQ listing with respect to such Company Common Stock; provided, however, that the Company shall not be required to (x) qualify to do business as a foreign corporation in any jurisdiction in which it is not now so qualified, (y) file a general consent to service of process in any jurisdiction or (z) subject itself to taxation in any jurisdiction in which it is not so subject.
(e) As promptly as practicable after the Proxy Statement Clearance Date, the Company shall, in accordance with applicable Law, its constituent documents and the rules of NASDAQ (i) establish a record date for and give notice of a meeting of Company Stockholders (the "Stockholders' Meeting"), and (ii) mail to the Company Stockholders as of the record date established for the Stockholders' Meeting a Proxy Statement and Consent Solicitation Materials (the date the Company elects to take such action or is required to take such action, the "Proxy Date"). The Company shall duly call, convene and hold the Stockholders' Meeting as promptly as reasonably practicable after the Proxy Date; provided, however, that in no event shall such meeting be held later than sixty (60) days following the date the Proxy Statement and Consent Solicitation Materials mailed to the Company Stockholders other than in the case in which the Company is required to allow reasonable additional time for the filing and mailing of any supplemental or amended disclosure which the SEC or its staff or a court of competent jurisdiction has instructed the Company is necessary under applicable Law or Order and for such supplemental or amended disclosure to be disseminated and reviewed by the holders of shares of Company Common Stock prior to the Stockholders' Meeting. Notwithstanding anything to the contrary contained in this Agreement, the Company (A) shall adjourn or postpone the Stockholders' Meeting if as of the time for which the Stockholders' Meeting is originally scheduled (as set forth in the Proxy Statement and Consent Solicitation Materials) there are insufficient shares of Company Common Stock represented (either in person or by proxy) to constitute a quorum necessary to conduct the business of the Stockholders' Meeting or insufficient proxies returned to obtain the Company Stockholder Approval and (B) may otherwise only adjourn or postpone the Stockholders' Meeting after consultation with RG, and with RG's consent (not to be unreasonably withheld, conditioned or delayed), to the extent necessary to ensure that any required supplement or amendment to the Proxy Statement and Consent Solicitation Materials are provided to the Company Stockholders within a reasonable amount of time in advance of the Stockholders' Meeting. Once the Company
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has established a record date for the Stockholders' Meeting, the Company shall not change such record date or establish a different record date for the Stockholders' Meeting without the prior written consent of RG (which consent shall not be unreasonably withheld, conditioned or delayed), unless required to do so by applicable Law or the Company Charter Documents. The Company shall ensure that all proxies solicited in connection with the Stockholders' Meeting are solicited in compliance with all applicable Laws (including all applicable rules of NASDAQ) and, unless the Company Board shall have made a Change in Recommendation in accordance with Section 4.2(f), the Company shall use its reasonable best efforts to solicit proxies in favor of the Company Proposal. Notwithstanding any Change in Recommendation, unless this Agreement shall have been properly terminated in accordance with its terms, the Company shall (x) submit this Agreement to the holders of shares of Company Common Stock as promptly as reasonably practicable for the purpose of obtaining the Company Stockholder Approval at the Stockholders' Meeting and (y) not submit any Takeover Proposal for approval by the shareholders of the Company. The Company shall, upon the reasonable request of RG, advise RG in writing at least on a daily basis on each of the last ten (10) Business Days prior to the date of the Stockholders' Meeting as to the aggregate tally of proxies received by the Company with respect to the Company Stockholder Approval.
(f) As promptly as practicable after the Proxy Statement Clearance Date, RG shall, in accordance with applicable Law and its constituent documents, mail to the RG Members the Proxy Statement and Consent Solicitation Materials. Subject to the other provisions of this Agreement, RG shall take all action necessary in accordance with the DLLCA and the RG LLC Agreement to solicit approval by written consent from RG's Members for the purpose of obtaining the RG Member Consent.
Section 4.6. Public Announcements. The initial press release with respect to the execution of
this Agreement shall be a joint press release to be reasonably agreed upon by RG and the Company.
Except for a Change in Recommendation permitted pursuant to Section 4.2(f) or any communication contemplated by Section 4.2(g), neither the
Company nor RG shall issue or cause the publication of any press release or other public announcement (to the extent
not previously issued or made in accordance with this Agreement) with respect to the Merger, this Agreement or the other Transactions without the prior consent of the other party (which consent shall
not be unreasonably withheld, conditioned or delayed), except as may be required by Law, judicial or regulatory process or by any applicable listing agreement with, or applicable rules of, a national
securities exchange or NASDAQ as determined in the good faith judgment of the party proposing to make such release (in which case such party shall allow the other party to comment on such press
release or public announcement in advance of such issuance or publication).
Section 4.7. Access to Information; Confidentiality.
(a) Subject to applicable Laws relating to the exchange of information, the Company shall, and shall cause each of its Subsidiaries to, afford to RG and RG's Representatives reasonable access during normal business hours, during the period commencing on the date hereof and ending on the earlier of the Effective Time and the termination of this Agreement, to the Company's and its Subsidiaries' officers, employees, agents, properties, offices and other facilities and to the Company's and its Subsidiaries' books and records and furnish RG and its Representatives with such financial and operating data and other information with respect to the business, personnel, properties and Contracts of the Company and its Subsidiaries as RG may from time to time reasonably request. Notwithstanding the foregoing, (x) the Company shall not be required to afford such access if it would cause a violation of any Material Contract or would cause a loss of attorney/client privilege to the Company or the Company's Subsidiaries or would constitute a violation of any applicable Laws, provided that the Company shall have used reasonable best efforts to make such disclosure in a form or manner that would not jeopardize such privilege or protection or violate such Law or contractual restriction (including by redacting or otherwise not
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disclosing any portion thereof the disclosure of which would jeopardize such privilege or entering into a joint defense agreement) and (y) any such investigation or consultation shall be conducted in such a manner so as not to interfere unreasonably with the business or operations of the Company or any of its Subsidiaries or otherwise result in any significant interference with the prompt and timely discharge by such officers of their normal duties. The information provided will be subject to the terms of the Confidentiality Agreement, dated as of February 17, 2015, between TCP and the Company, as amended (the "Confidentiality Agreement").
(b) No investigation, or information received, pursuant to this Section 4.7 will modify any of the representations and warranties of the Company.
Section 4.8. Notification of Certain Matters. The Company shall give prompt notice to RG, and RG
shall give prompt notice to the Company, of (i) any notice or other communication received by such party
from any Governmental Authority in connection with the Transactions or from any Person alleging that the consent of such Person is or may be required in connection with the Transactions,
(ii) any actions, suits, claims, investigations or proceedings commenced or, to such party's knowledge, threatened against, relating to or involving or otherwise affecting such party or any of
its Subsidiaries which relate to the Transactions, (iii) the discovery of any fact or circumstance that, or the occurrence or nonoccurrence of any event the occurrence or non-occurrence of
which, is reasonably likely to (A) in the case of the Company, cause the conditions set forth in Section 5.2(a) or Section 5.2(b) not to be
satisfied and (B) in the case of RG, cause the conditions set forth in Section 5.3(a) or Section 5.3(b) not to be satisfied; provided,
however, that the delivery of any notice pursuant to this Section 4.8 shall not (x) cure any breach of, or
non-compliance with, any provision of this Agreement or (y) limit the remedies available to the party receiving such notice.
Section 4.9. Indemnification and Insurance.
(a) From and after the Effective Time, the Company shall and, to the extent applicable, shall cause each of its Subsidiaries (including the Surviving Company and its Subsidiaries) to indemnify and hold harmless each Indemnitee against all claims, losses, liabilities, damages, judgments, inquiries, fines, penalties and reasonable fees, costs and expenses, including attorneys' fees and disbursements, incurred in connection with any threatened, pending or completed claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative (an "Action"), to which such Indemnitee is or was made a party or is threatened to be made a party to or is otherwise involved by reason of the fact that such Indemnitee is or was a director, manager or officer, as applicable, of the Company or RG or any of their respective Subsidiaries or, while a director, manager or officer, as applicable, of the Company or RG or any of their respective Subsidiaries, such Indemnitee is or was serving at the request of the Company or RG or any of their respective Subsidiaries, as applicable, as a director, manager, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise (including with respect to this Agreement, the negotiation, execution, announcement, performance and consummation of all Transactions contemplated by this Agreement and all acts or omissions of each Indemnitee leading thereto and in furtherance thereof on behalf of the Company, the holders of shares of Company Common Stock, RG or the holders of RG Units, as applicable), whether asserted or claimed prior to, at or after the Effective Time, to the fullest extent permitted under applicable Law. In the event of any such Action after the Effective Time, (A) each Indemnitee will be entitled to advancement of expenses incurred in the defense of any such Action from the Company or a Subsidiary of the Company (including the Surviving Company and its Subsidiaries), as applicable, within ten (10) calendar days of receipt by the Company from the Indemnitee of a written request therefor; provided, however, that, if required by the DGCL, the Company Charter Documents or the organizational and governing documents of a Subsidiary of the Company, as applicable, any Indemnitee to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined by a court
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of competent jurisdiction that such Indemnitee is not entitled to be indemnified by the Company or a Subsidiary of the Company (including the Surviving Company and its Subsidiaries), as applicable, pursuant to the DGCL, (B) the Company shall have the right to assume the defense of any such matter with counsel reasonably satisfactory to such Indemnitee, with such Indemnitee's approval not to be unreasonably withheld, (C) if the Company assumes the defense of any such matter, the Company shall not settle, compromise or consent to the entry of any judgment in any proceeding or threatened Action (and in which indemnification or advancements could be sought by such Indemnitee hereunder), unless such settlement, compromise or consent includes an unconditional release of such Indemnitee from all liability arising out of such Action or such Indemnitee otherwise consents in writing and (D) notwithstanding the foregoing, if such Indemnitee reasonably concludes that a conflict of interest or potential conflict of interest exists between Indemnitee and the Company or between Indemnitee and another Indemnitee who is defended by the Company with the same counsel as counsel representing Indemnitee, or if the Company fails to assume the defense of such proceeding, such Indemnitee may retain one (1) independent legal counsel reasonably satisfactory to the Company, and the Company shall pay all reasonable fees and expenses of such counsel for the Indemnitee promptly after statements therefor are received. For purposes of this Agreement, "Indemnitee" means each individual who is or was a director, manager or officer of the Company or RG or any of their respective Subsidiaries.
(b) From and after the Effective Time, the respective certificate of incorporation and bylaws or similar organizational or governing documents of the Company and the Company's Subsidiaries shall contain provisions no less favorable with respect to indemnification, advancement of expenses and exculpation of Indemnitees for the period prior to and including the Effective Time than are currently set forth in the Company Charter Documents and the certificate of incorporation, bylaws, or similar organizational and governing documents of the Company's Subsidiaries, respectively; provided, however, that, from and after the Effective Time, no director, manager, officer, employee or agent of RG or any of its Subsidiaries shall be subject to provisions with respect to indemnification, advancement of expenses or exculpation for the period prior to and including the Effective Time that are less favorable than are currently set forth in the applicable certificate of incorporation, bylaws or similar organizational and governing documents of RG or any of its Subsidiaries.
(c) The Company shall and, to the extent applicable, shall cause each of the its Subsidiaries (including the Surviving Company and its Subsidiaries) to maintain and extend all existing officers' and directors' liability insurance of the Company and, to the extent applicable, its Subsidiaries (including the Surviving Company and its Subsidiaries) ("D&O Insurance") for a period of not less than six (6) years from and after the Effective Time with respect to claims arising from acts, omissions, facts or events that occurred on or before the Effective Time, including in connection with the approval of this Agreement and the Transactions; provided, however, that the Company may substitute therefor policies of substantially equivalent coverage and amounts containing terms no less favorable to the Indemnitees than the existing D&O Insurance (so long as such policies are provided by the Company's current insurance carrier or by a carrier with a rating no lower than A.M. Best rating of A); and provided, further, that if the existing D&O Insurance expires or is terminated or canceled during such period through no fault of the Company, then the Company shall obtain and maintain substantially similar D&O Insurance (with such replacement policies to be provided by the Company's current insurance carrier or by a carrier with a rating no lower than A.M. Best rating of A). Notwithstanding the foregoing, in no event shall the Company be required to pay aggregate premiums for insurance under this Section 4.9(c) in excess of 300% of the most recent aggregate annual premiums paid by the Company for such purpose (the "Maximum Amount"); and provided, further, that if the Company is unable to obtain the amount of insurance required by this Section 4.9(c) for such aggregate premium, the Company shall obtain as
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much insurance as can be obtained for aggregate premiums not in excess of the Maximum Amount. At the Company's option, it may elect to obtain prepaid "tail" or "runoff" policies prior to the Effective Time covering a period of six (6) years from and after the Effective Time with respect to acts, omissions, facts or events occurring on or prior to the Effective Time. Any such "tail" or "runoff" policy purchased by the Company shall be in lieu of all other obligations of the Company in the first sentence of this Section 4.9(c) for so long as any such tail or runoff policy remains in full force and effect. In the event the Company purchases a "tail" or "runoff" policy prior to the Effective Time, the Company shall use its reasonable best efforts to maintain such tail or runoff policy in full force and effect for its term.
(d) The rights of each Indemnitee hereunder shall be in addition to, and not in limitation of, any other rights such Indemnitee may have under the certificates of incorporation or bylaws or other organizational or governing documents of the Company or RG or any of their respective Subsidiaries (including, following the Effective Time, the Surviving Company), any indemnification or other agreements of the Company or RG or any of their respective Subsidiaries (including, following the Effective Time, the Surviving Company), the DGCL or otherwise. Subsequent amendment of the certificate of incorporation, bylaws or other organizational or governing documents of the Company or RG or any of their respective Subsidiaries (including, following the Effective Time, the Surviving Company) or any indemnification or other agreements of the Company or RG or any of their respective Subsidiaries (including, following the Effective Time, the Surviving Company) shall not diminish or impair the rights of any Indemnitee thereunder or hereunder.
(e) In the event the Company or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving company or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any Person, then and in each such case, provision shall be made so that such continuing or surviving company or entity or transferee of such assets, as the case may be, shall assume all of the applicable obligations set forth in this Section 4.9. In addition, the Company shall not distribute, sell, transfer or otherwise dispose of any of its assets in a manner that would reasonably be expected to render the Company unable to satisfy its obligations under this Section 4.9.
(f) The provisions of this Section 4.9 shall survive the consummation of the Transactions. Each Indemnitee (and his or her respective representatives, executors, administrators, spouse, estate, successors and heirs) are intended third-party beneficiaries of this Section 4.9, and this Section 4.9 shall not be amended in a manner that is adverse to any Indemnitee (including his or her respective representatives, executors, administrators, spouse, estate, successors and heirs) or terminated without the consent of such Indemnitee (including his or her respective representatives, executors, administrators, spouse, estate, successors and heirs) affected thereby.
Section 4.10. Fees and Expenses; Taxes.
(a) Except as otherwise provided herein, all fees and expenses incurred in connection with the Transactions (including, without limitation, all fees and expenses incurred in connection with the Financing, the Stock Purchase Agreement and filings made under the HSR Act) shall be paid or reimbursed by the Company upon consummation of the Transactions. Except as otherwise provided in Section 6.3(b), if the Transactions are not consummated, all fees and expenses incurred in connection with the Transactions shall be paid by the party incurring such fees or expenses, which, for the avoidance of doubt, means that the Company shall pay all fees and expense incurred in connection with the filings made under the HSR Act.
(b) Other than any income or withholding Taxes imposed upon a holder of RG Units or RG Debt, the Company shall pay all Taxes incident to preparing for, entering into and carrying out this Agreement and the consummation of the Merger (including (a) transfer, stamp and documentary Taxes or fees and (b) sales, use, gains, real property transfer and other or similar Taxes or fees).
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Section 4.11. Rule 16b-3. The Company, Merger Sub and RG shall take all
such steps as may be reasonably requested by any party hereto to cause the transactions contemplated by
Article I and any other acquisitions of equity securities of the Company in connection with this Agreement by each individual who (a) is a
director or officer of the Company subject to Section 16 of the Exchange Act, or (b) at the Effective Time is or will become a director, officer or ten percent (10%) shareholder of the
Company subject to Section 16 of the Exchange Act, to be exempt under Rule 16b-3 promulgated under the Exchange Act.
Section 4.12. Employee Benefits.
(a) Except as set forth on Section 4.12(a) of the Company Disclosure Schedule, the Company shall provide, or cause to be provided to, employees of the Company and RG and each of their respective Subsidiaries, in each case as of immediately prior to the Effective Time, who continue as employees of the Company or the Surviving Company or any of their respective Subsidiaries immediately following the Effective Time (a "Continuing Employee"), for a period extending until the earlier of the termination of such Continuing Employee's employment with such entities or twelve (12) months following the Closing Date (i) a base wage or salary substantially similar to such base wage or salary in effect immediately prior to the Effective Time and (ii) 401(k) benefits, severance benefit eligibility, medical benefits and other welfare benefit plans, programs and arrangements (excluding any equity and equity-based arrangements) that (A) in the case of Continuing Employees that were employed by the Company or any of its Subsidiaries immediately prior to the Effective Time, are, in the aggregate, substantially comparable to those provided under the Company Benefits Plans as in effect at the Effective Time and (B) in the case of Continuing Employees that were employed by RG or any of its Subsidiaries immediately prior to the Effective Time, are substantially comparable to those provided to employees of RG or its Subsidiaries, in the aggregate, from time to time. The provisions of this Section 4.12 shall not be construed or interpreted to restrict in any way the Surviving Company's or the Company's ability to amend, modify or terminate any Company Benefits Plan or RG Benefits Plan (including to change the entities who administer such Company Benefits Plans or RG Benefits Plan, as applicable, or the manner in which such Company Benefits Plans or RG Benefits Plans, as applicable, are administered) to the extent not inconsistent with such foregoing restrictions or any other plan made available to the Continuing Employees or to terminate any Person's employment at any time or for any reason.
(b) The Company and each of its Subsidiaries shall, after the date hereof and prior to the Effective Time, (i) provide any and all notices to, (ii) make any and all filings or registrations with, and (iii) obtain any and all consents or approvals of, any labor organization, works council or any similar entity, council or organization, required to be made or obtained in connection with this Agreement or the consummation of the Transactions.
(c) Without limiting the generality of Section 7.6, nothing contained in this Section 4.12 shall confer upon any Person, other than the parties hereto, any rights or remedies or any right to employment or continued employment. Nothing in this Agreement shall be deemed to amend or modify any compensation or benefit plan, policy, agreement or arrangement sponsored or maintained by RG, the Company or any of their respective Affiliates.
(a) RG shall use its commercially reasonable best efforts to obtain the Financing on the terms and conditions (including, if applicable, any "market flex" provisions contained in the related fee letter) described in the Debt Commitment Letters with respect to the conditionality, timing, availability, and aggregate amount of the Financing (including the amounts to be funded thereunder at the Closing). RG shall not permit any amendment or modification to be made to, or any waiver of any provision or remedy under, the Debt Commitment Letters without the
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Company's prior written consent (which consent shall not be unreasonably withheld, conditioned or delayed) if such amendment, modification or waiver (i) reduces the aggregate amount of the Financing to an amount below the amount required to satisfy the applicable payment obligations of the Company under this Agreement, (ii) impairs in any material respect the availability of the Financing, (iii) amends the conditions precedent to the Financing in a manner that would reasonably be expected to delay in any material respect or prevent the Closing, or (iv) adversely impacts in any material respect the ability of RG to enforce or cause the enforcement of the rights of RG under the Debt Commitment Letters (provided, that RG may amend, supplement or replace the Debt Commitment Letters to add or replace lenders, lead arrangers, bookrunners, agents or similar entities so long as such action would not reasonably be expected to materially delay or prevent the Closing). RG shall use its commercially reasonable best efforts (i) to maintain in effect the Debt Commitment Letters until the funding of the Financing at or prior to Closing and to negotiate and enter into definitive agreements with respect to the Debt Commitment Letters on the terms and conditions contained in the Debt Commitment Letters (including, if applicable, giving effect to any "market flex" provisions contained in any related fee letter) (or on terms no less favorable (taken as a whole) to RG, as applicable), (ii) to satisfy on a timely basis all conditions to receipt of the Financing that are within RG's control, (iii) upon satisfaction of such conditions and the conditions set forth in Section 5.1 and Section 5.2, to consummate the Financing at or prior to the Closing (with respect to amounts required to consummate the Merger and make other payments due at such time in accordance with the terms hereof) and (iv) to comply in all material respects with its obligations under the Debt Commitment Letters.
(b) If any portion of the Financing contemplated by the Debt Commitment Letters becomes unavailable on the terms and conditions (including, if applicable, "market flex" provisions) contemplated by the Debt Commitment Letters, (i) RG shall promptly notify the Company and (ii) RG shall use its commercially reasonable best efforts to arrange and obtain alternative financing from the same or alternative sources in an amount sufficient to consummate the Transactions with terms and conditions that are not materially less favorable in any respect from the standpoint of RG (as reasonably determined by RG) than the terms and conditions set forth in the Debt Commitment Letters and any related fee letters as promptly as reasonably practicable following the occurrence of such event (the "Alternative Debt Financing"). RG shall promptly provide a true, correct and complete copy of each alternative financing commitment letter in respect of such Alternative Debt Financing ("New Debt Commitment Letter") to the Company. In the event any New Debt Commitment Letters are obtained, (i) any reference in this Agreement to the "Financing" shall include the debt financing contemplated by the Debt Commitment Letters as modified pursuant to clause (ii) below, (ii) any reference in this Agreement to the "Commitment Letters" or the "Debt Commitment Letter" shall be deemed to include the Debt Commitment Letters that are not superseded by a New Debt Commitment Letters at the time in question and the New Debt Commitment Letters to the extent then in effect, and (iii) any reference in this Agreement to "fee letter" shall be deemed to include any fee letter relating to the Debt Commitment Letters that are not superseded by a New Debt Commitment Letters at the time in question and the New Debt Commitment Letters to the extent then in effect.
(c) Upon the Company's request, RG shall keep the Company reasonably informed of the status of its efforts to arrange the Financing and provide to the Company copies of the material definitive documents for the Financing. RG shall give the Company prompt notice: (i) of any breach of any material provisions of the Debt Commitment Letters by any party to the Debt Commitment Letters related to the Financing of which RG has knowledge; and (ii) of the receipt of any written notice or other written communication from a financing source for the Financing with respect to any actual breach, default, termination or repudiation by any party to the Debt Commitment Letters or any definitive document related to the Financing or any material provisions of the Debt Commitment Letters or any definitive document related to the Financing;
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provided, that in each case, in no event will RG be under any obligation to disclose any information that is subject to attorney-client or similar privilege if RG shall have used its reasonable best efforts to disclose such information in a manner that would not waive such privilege.
Section 4.14. Financing Cooperation.
(a) During the period from the date of this Agreement to the Effective Time, the Company and its Subsidiaries shall, and the Company shall use its reasonable best efforts to cause its and its Subsidiaries' respective Representatives to, provide to RG all cooperation that is reasonably requested by RG in connection with the debt and equity financings (including without limitation, any portion of the contemplated Financing) the proceeds of which shall be used to consummate the Transactions, which cooperation shall include, in any event:
(i) participation in a reasonable number of meetings, presentations, road shows, due diligence sessions (including accounting due diligence sessions), drafting sessions, sessions with prospective lenders and sessions with rating agencies;
(ii) making the Company's officers reasonably available to assist the Debt Financing Parties;
(iii) cooperating reasonably with the Debt Financing Parties' due diligence, to the extent customary and reasonable;
(iv) assisting RG and the Debt Financing Parties with the preparation of customary materials for rating agency presentations (and assisting in the obtaining of corporate, credit and facility ratings from ratings agencies), offering documents, bank information memoranda (including the delivery of customary authorization and representation letters authorizing the distribution of information to prospective lenders or investors and containing a representation that the public side versions of such documents, if any, do not include material non-public information regarding the Company or its Subsidiaries or securities), and all other material required in connection with the Financing and all documentation and other information reasonably required in connection with applicable "know your customer" and anti-money laundering rules and regulations, including the PATRIOT Act; provided, that prior to the Closing, the Company shall provide all such documentation and information about the Company and its Subsidiaries as is reasonably requested in writing by RG to the extent required under applicable "know your customer" and anti-money laundering rules and regulations including the USA PATRIOT Act;
(v) assisting with the preparation of, and executing and delivering, any pledge and security documents, any loan agreement, notes, other definitive financing documents (including a certificate of the chief financial officer with respect to solvency of the Company and its Subsidiaries after giving effect to the transactions contemplated hereby), legal opinions, or documents as may be reasonably requested by RG in connection with the Financing;
(vi) facilitating the pledging of collateral and any collateral audits and appraisals required in connection with the Financing;
(vii) assisting RG in preparing customary financial information and disclosures regarding the Company and its Subsidiaries, as may be reasonably requested by RG and identifying any portion of such information that constitutes material non-public information;
(viii) using reasonable best efforts to obtain such legal opinions, surveys and title insurance as reasonably requested by RG or any of the Debt Financing Parties in connection with the Financing;
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(ix) instructing its independent accountants to cooperate with and assist RG in preparing customary and appropriate information packages and offering materials as any of the Debt Financing Parties or other prospective lenders may reasonably request for use in connection with the Financing and using reasonable best efforts to cause such accountants to consent to the use of their reports in any material relating to the Financing;
(x) using reasonable best efforts to obtain customary payoff letters, lien releases, instruments of termination, waivers, consents, estoppels, approvals or discharge and legal opinions, in each case reasonably requested by RG in connection with the Financing and collateral arrangements;
(xi) taking such corporate or entity actions, subject to the occurrence of the Closing, reasonably requested by RG to permit the consummation of the Financing and to permit the proceeds thereof to be made available at the Closing; and
(xii) ensuring that there is no competing issue of debt securities or commercial bank or other credit facilities (other than the Financing) by or on behalf of the Company or any of its Subsidiaries (it being understood and agreed that any deferred purchase price obligations and ordinary course capital lease, purchase money and equipment financings are not restricted by the foregoing);
provided, however, that (A) no such requested cooperation may unreasonably interfere with the ongoing operations of the Company and its Subsidiaries, (B) no obligation of the Company or any of its Subsidiaries under any certificate, agreement, notice or other document or instrument shall be effective until the Effective Time, and none of the Company or any of its Subsidiaries shall be required to pay or incur any liability for any commitment or other similar fee, pay or incur any liability for any expense (other than as provided in this Agreement) or incur any other obligation or liability in connection with the Financing prior to the Effective Time unless promptly reimbursed by RG (provided that notice of such fee, liability or expense is provided to RG) and (C) neither the Company nor any of its Subsidiaries, nor any of their respective directors or officers, shall be required to take any action to authorize or approve the Financing (or any Alternative Debt Financing), except at or contemporaneously with the Effective Time.
(b) The Company shall use reasonable best efforts to, as promptly as practicable, update or correct any Required Information determined to contain any untrue statement of material fact or omit to state any material fact necessary to make the statements contained therein not materially misleading. The Company hereby consents to the reasonable use of the Company's and its Subsidiaries' logos in connection with the Financing, provided that such logos are used solely in a manner that is not intended to or reasonably likely to harm or disparage the Company and its Subsidiaries or the reputation or goodwill of the Company and its Subsidiaries or any of their logos.
(c) The Company shall prepare and furnish to RG and the Debt Financing Parties, as promptly as reasonably practicable (and, in any event, no later than the time periods specified in the definition of "Required Information"), the Required Information.
Section 4.15. Company Board of Directors. At the Effective Time, the applicable number of
directors on the Company Board shall resign such that only two directors on the Company Board immediately prior to
the Effective Time shall remain on the Company Board immediately following the Effective Time and, as of the Effective Time, the Company Board shall appoint the three (3) persons designated by
the Preferred Stock Purchaser in writing at least five (5) Business Days prior to the anticipated Closing Date to fill three of such vacancies as a director of the Company. A remaining vacancy
will be filled by the Company's Chief Executive Officer following the Effective Time.
Section 4.16. Legal Privileges. The Company acknowledges and agrees that all attorney-client,
work product and other legal privileges (collectively, "Legal
Privileges") that may exist with respect to
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RG shall, from and after the Effective Time, be deemed joint privileges of the holders of RG Units, the Surviving Company and the Company. Each of the holders of RG Units, the Surviving Company and the Company shall use all commercially reasonable efforts after the Effective Time to preserve all privileges and none of the holders of RG Units, the Surviving Company or the Company shall knowingly waive any such privilege without the prior written consent of the other party (which consent shall not be unreasonably withheld, conditioned or delayed). Notwithstanding the foregoing, from and after the Effective Time, (i) the holders of RG Units shall be the sole holder of the Legal Privileges with respect to the engagement of Skadden by RG (which shall not pass to the Surviving Company or the Company upon the consummation of the transactions contemplated by this Agreement) and none of the Surviving Company, the Company or any of their respective Affiliates shall be a holder thereof, (ii) to the extent that files of Skadden in respect of such engagement constitute property of RG (as the client), only the holders of RG Units (and none of the Surviving Company, the Company or any of their respective Affiliates) shall hold such property rights and (iii) Skadden shall not have any duty of any type or manner to reveal or disclose all or any portion of any communications subject to any Legal Privilege or any files to the Surviving Company, the Company or any of their respective Affiliates by reason of any attorney-client relationship between Skadden and RG or any of their respective Affiliates or otherwise. The preceding sentence is irrevocable, and no term thereof may be amended, waived or modified in any respect, without the prior written consent of Skadden and TCP, on behalf of the holders of RG Units.
Section 4.17. Amendments, Modifications and Waivers of the Asset Purchase Agreements. Without
the prior written consent of RG, the Company shall not amend, modify or waive any provision of the Asset Purchase Agreements that would decrease the
aggregate cash consideration to the Company or that would have, or would be reasonably likely to have, a material adverse effect on (a) RG and its Subsidiaries (taken as a whole),
(b) the Company or any of its Subsidiaries (taken as a whole) or (c) the ability of the parties hereto to consummate the transactions contemplated by this Agreement in accordance with
the terms hereof.
Section 4.18. Notification of Certain Matters. The Company shall promptly provide RG with
(i) any notice delivered to the Company pursuant to, or in connection with, either Asset Purchase Agreement and
(ii) any notice delivered by the Company pursuant to, or in connection with, either Asset Purchase Agreement.
ARTICLE V
CONDITIONS TO THE MERGER
Section 5.1. Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of each party hereto to effect the Merger shall be subject to the satisfaction (or waiver, if permissible under applicable Law, by RG and the Company) on or prior to the Closing Date of the following conditions:
(a) Stockholder Approval. The Company Stockholder Approval and the RG Member Consent shall have been obtained.
(b) Antitrust. All waiting periods applicable to the consummation of the Merger under the HSR Act and any other applicable Antitrust Laws shall have expired or been terminated; and
(c) No Injunctions or Restraints. No Law or Order enacted, promulgated, issued, entered, amended or enforced by any Governmental Authority shall be in effect enjoining, restraining, preventing or prohibiting consummation of the Merger or making the consummation of the Merger illegal.
(d) Validity of Rollover Letters. The Rollover Letters shall be in full force and effect and the valid, binding obligation of each Convertible Noteholder and the consummation of the transactions contemplated thereby shall occur at or immediately prior to the Effective Time.
(e) Financing. RG shall have obtained the Financing as contemplated by Section 4.13, or the Debt Financing Parties shall be prepared to provide the Financing immediately following the Effective Time.
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(f) Consummation of the Stock Purchase Agreement. The transactions contemplated by the Stock Purchase Agreement shall have been consummated, or all conditions to the consummation thereof immediately following the Effective Time shall have been satisfied or waived.
(g) Consummation of the IP Asset Purchase Agreement. The transactions contemplated by the IP Asset Purchase Agreement shall have been consummated without any amendment or modification to, or waiver of, (i) Section 8.02(d) of the IP Asset Purchase Agreement for which the Company will have, or could reasonably be expected to have, liability for indemnification to the IP Asset Purchaser under the IP Asset Purchase Agreement or (ii) other than in accordance with Section 4.17, any other provision of the IP Asset Purchase Agreement.
(h) Consummation of the Operating Asset Purchase Agreement. The transactions contemplated by the Operating Asset Purchase Agreement shall have been consummated without any amendment or modification to, or waiver of, (i) Section 8.02(i) of the Operating Asset Purchase Agreement for which the Company will have, or could reasonably be expected to have, liability for indemnification to the Operating Asset Purchaser under the Operating Asset Purchase Agreement or (ii) other than in accordance with Section 4.17, any other provision of the Operating Asset Purchase Agreement.
Section 5.2. Conditions to Obligations of RG. The
obligations of RG to effect the Merger are further subject to the satisfaction or (to the extent permitted by Law) waiver by RG at or prior to the Effective Time of the following
conditions:
(a) Representations and Warranties. (i) The representations and warranties of the Company and Merger Sub set forth in Sections 2.1, 2.2, 2.3(a), 2.3(d), 2.6(a), 2.13, 2.18 and 2.20 shall be true and correct in all respects (other than, in the case of Section 2.2, for such failures to be true and correct as are de minimis in effect and, in the case of the first and last sentence of Section 2.1(c), for such failures to be true and correct that are not material to the Company and its Subsidiaries (taken as a whole)) as of the date of this Agreement and as of the Closing Date (assuming for purposes thereof that the Asset Sale Transactions have been consummated), as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date) and (ii) all other representations and warranties of the Company and Merger Sub set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date (assuming for purposes thereof that the Asset Sale Transactions have been consummated), as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date), except where the failure of such representations and warranties to not be so true and correct (without giving effect to any limitation as to "materiality" or "Company Material Adverse Effect" set forth therein) does not have, and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. RG shall have received a certificate signed on behalf of the Company by the Interim Chief Executive Officer and Chief Financial Officer thereof to such effect.
(b) Performance of Obligations of Company. The Company shall have performed or complied in all material respects with its obligations, agreements and covenants required to be performed or complied with by it under this Agreement at or prior to the Closing Date and RG shall have received a certificate signed on behalf of the Company by the Interim Chief Executive Officer and Chief Financial Officer thereof to such effect.
(c) Listing. The shares of Company Common Stock to be issued in the Merger shall have been authorized for listing on the NASDAQ, subject to official notice of issuance.
(d) Registration Statement. The Form S-4 Registration Statement shall have become effective under the Securities Act and no stop order suspending the effectiveness of the S-4
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Registration Statement shall have been issued and be in effect and no proceeding for that purpose shall have been initiated by the SEC and not withdrawn.
(e) No Company Material Adverse Effect. Since the date of this Agreement, there shall not have occurred a Company Material Adverse Effect and there shall not have been any changes, events, effects, developments, occurrences or state of facts that, individually or in the aggregate, would reasonably be expected to have a Company Material Adverse Effect.
Section 5.3. Conditions to Obligation of the Company. The
obligation of the Company to effect the Merger is further subject to the satisfaction or (to the extent permitted by Law) waiver by the Company at or prior to the Effective Time of
the following conditions:
(a) Representations and Warranties. (i) The representations and warranties of the RG set forth in Sections 3.1, 3.2(a), 3.3, 3.7(a) and 3.13 shall be true and correct in all respects (other than, in the case of Section 3.3, for such failures to be true and correct as are de minimis in effect) as of the date of this Agreement and as of the Closing Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date) and (ii) all other representations and warranties of RG set forth in this Agreement shall be true and correct (disregarding all qualifications or limitations as to "materiality", "RG Material Adverse Effect" and words of similar import set forth therein) as of the date of this Agreement and as of the Closing Date as though made on the Closing Date (except to the extent expressly made as of an earlier date, in which case as of such date), except where the failure of such representations and warranties to be so true and correct would not, individually or in the aggregate, reasonably be expected to have a RG Material Adverse Effect. The Company shall have received a certificate signed on behalf of RG by an executive officer thereof to such effect.
(b) Performance of Obligations of RG. RG shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date and the Company shall have received a certificate signed on behalf of RG by an executive officer of RG to such effect.
(c) No RG Material Adverse Effect. Since the date of this Agreement, there shall not have occurred a RG Material Adverse Effect and there shall not have been any changes, events, effects, developments, occurrences or state of facts that, individually or in the aggregate, would reasonably be expected to have a RG Material Adverse Effect.
(d) Validity of the Guaranty. The Guaranty shall be in full force and effect and the valid, binding obligation of the Guarantor.
Section 5.4. Frustration of Closing Conditions. None
of the Company or RG may rely on the failure of any condition set forth in Sections 5.1, 5.2 or 5.3, as the case may be, to be satisfied if such
failure was caused by such party's failure to use the efforts to consummate the Merger and the other
Transactions required hereunder, including as required by and subject to Section 4.3.
Section 6.1. Termination. This Agreement may be terminated and the Transactions abandoned at any time prior to the Effective Time, whether before or after receipt of the Company Stockholder Approval or the RG Member Consent:
(a) by the mutual written consent of the Company and RG;
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(b) by either of the Company or RG:
(i) if any Governmental Authority shall have enacted, promulgated, issued, entered, amended or enforced (A) a Law prohibiting the Merger or making the Merger illegal, or (B) an Order, in each case, permanently enjoining, restraining, preventing or prohibiting the Merger and such Order shall have become final and non-appealable; provided that the right to terminate this Agreement under this Section 6.1(b)(i) shall not be available to a party if the issuance of such final, non-appealable Order was primarily due to the failure of such party to perform any of its obligations under this Agreement;
(ii) if the Merger shall not have been consummated on or before the Outside Date; provided that the right to terminate this Agreement under this Section 6.1(b)(ii) shall not be available to any party if the failure of the Merger to be so consummated on or before the Outside Date was primarily due to the failure of such party to perform any of its obligations under this Agreement; or
(iii) if the Stockholders' Meeting (including any adjournments or postponements thereof) shall have been held and concluded without the Company Stockholder Approval having been obtained;
(c) by the Company:
(i) if the Company enters into a definitive Company Acquisition Agreement providing for a Superior Proposal in accordance with Section 4.2(f); provided that, notwithstanding anything to the contrary in this Section 6.1, the Company shall not have the right to terminate this Agreement pursuant to this Section 6.1(c)(i) if the Company Stockholder Approval shall have been obtained;
(ii) if there shall be any breach of or inaccuracy in any of RG's representations or warranties set forth in this Agreement or RG has failed to perform any of its covenants or agreements set forth in this Agreement, which inaccuracy, breach or failure to perform (A) would give rise to the failure of any condition set forth in Section 5.3(a) or Section 5.3(b) and (B) (1) is not capable of being cured prior to the Outside Date or (2) is not cured within thirty (30) days following the Company's delivery of written notice to RG of such breach; provided that the Company shall not have the right to terminate this Agreement pursuant to this Section 6.1(c)(ii) if the Company is then in breach of any of its representations, warranties, covenants or agreements hereunder such that the conditions set forth in Section 5.2(a) or Section 5.2(b) would not be satisfied;
(iii) if (A) all conditions precedent set forth in Sections 5.1 and 5.2 have been timely satisfied or waived (other than the condition precedent set forth in Section 5.1(e)), (B) all conditions precedent to consummation of the Financing have been timely satisfied or waived, (C) RG fails to consummate the Merger by the date the Closing is required to occur pursuant to Section 1.2 as a result of the failure of the Financing to be funded and (D) the Company has given RG written notice at least two (2) Business Days prior to such termination stating that the Company is willing and able to consummate the transactions contemplated hereby and that the Company intends to terminate this Agreement pursuant to this Section 6.1(c)(iii) (the occurrence of (A) through (D) collectively, the "Financing Issue");
(d) by RG:
(i) if (A) a Change in Recommendation shall have been made, (B) the Company shall have breached in any material respect its obligations under Section 4.2, or (C)(x) following the public disclosure or announcement of a Takeover Proposal (other than a tender offer or exchange offer contemplated in clause (y)) the Company Board shall have failed to reconfirm
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publicly the Company Recommendation within three (3) Business Days after such disclosure or announcement or (y) a tender offer or exchange offer relating to the shares of Company Common Stock is commenced (within the meaning of Rule 14d-2 under the Exchange Act) and, not later than the tenth (10th) day next following such commencement, the Company shall not have publicly announced its recommendation that holders of shares of Company Common Stock reject such tender offer or exchange offer (it being hereby understood and agreed that for purposes of this clause (y) of this Section 6.1(d)(i), the Company's public disclosure or announcement of a position pursuant to Rule 14e-2(a)(2) or (3) under the Exchange Act with respect to such tender offer or exchange offer shall be deemed a failure by the Company to publicly disclose or announce the rejection of such tender offer or exchange offer); or
(ii) if there shall be any breach of or inaccuracy in any of the Company's representations or warranties set forth in this Agreement or the Company has failed to perform any of its covenants or agreements set forth in this Agreement, which inaccuracy, breach or failure to perform would give rise to the failure of any condition set forth in Section 5.2(a) or Section 5.2(b), and (B) (1) is not capable of being cured prior to the Outside Date or (2) is not cured within thirty (30) days following RG's delivery of written notice to the Company of such breach; provided that RG shall not have the right to terminate this Agreement pursuant to this Section 6.1(d)(ii) if RG is then in breach of any of its representations, warranties, covenants or agreements contained in this Agreement such that any condition set forth in Section 5.3(a) or Section 5.3(b) would not be satisfied.
Section 6.2. Effect of Termination. In
the event of the termination of this Agreement as provided in Section 6.1, written notice thereof shall be given to the other
party or parties, specifying the provision hereof pursuant to which such termination is made, and this Agreement shall forthwith become null and void (other than Sections 4.6, 4.10, 6.2,
6.3 and 6.4 and
Article VII, the first sentence of Section 2.21 and of Section 3.22 and the expense
reimbursement provisions contained in Section 4.14(a), all of
which shall survive termination of this Agreement), and there shall be no liability on the part of RG or the Company or their Affiliates or Representatives, except (a) the Company shall have
liability to the extent provided in Section 6.3, (b) RG shall have liability to the extent provided in Section 6.4; (c) no such
termination shall relieve RG or the Company for any liabilities or damages incurred or suffered by the Company or
RG, as the case may be, to the extent such liabilities or damages were the result of the breach by RG or the Company, as the case may be, of any of its representations, warranties, covenants or other
agreements set forth in this Agreement and (c) nothing shall relieve any party to this Agreement from liability for any damages for a knowing and intentional breach of a representation or
warranty or a knowing and intentional breach of any obligation hereunder made or allowed to occur or actual (not constructive) fraud.
Section 6.3. Termination Fee; Reimbursement of Expenses.
(a) In the event that:
(i) (A) a Takeover Proposal shall have been made known to the Company, publicly disclosed or made publicly known or made directly to the Company Stockholders or the intention (whether or not conditional) of any Person to make a Takeover Proposal shall have been made known to the Company, publicly disclosed or made publicly known or made directly to the Company Stockholders, and thereafter, (B) this Agreement is terminated by the Company or RG pursuant to Section 6.1(b)(ii) (Outside Date) or Section 6.1(b)(iii) (Company Stockholder Approval) or by RG pursuant to Section 6.1(d)(ii) (Breach) and (C) within twelve (12) months after the date this Agreement is terminated the Company or any of its Subsidiaries consummates any Takeover Proposal or enters into a definitive agreement with respect to any Takeover Proposal that is subsequently consummated; provided that solely for
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this Section 6.3(a)(i), all references to 20% in the definition of "Takeover Proposal" shall be deemed to be references to 50%;
(ii) this Agreement is terminated by RG pursuant to Section 6.1(d)(i) (Change in Recommendation, Etc.) whether or not the Stockholder Meeting has been held; or
(iii) this Agreement is terminated by the Company pursuant to Section 6.1(c)(i) (Superior Proposal);
then in any such event under Section 6.3(a)(i), Section 6.3(a)(ii) or Section 6.3(a)(iii) of this Section 6.3(a), the Company shall pay to RG the Termination Fee, less the amount of any expenses previously reimbursed by the Company to RG pursuant to Section 6.3(b).
(b) In the event that this Agreement is terminated by RG pursuant to Section 6.1(d)(ii) (Breach), then the Company shall reimburse RG, up to an aggregate amount of Three Million Dollars ($3,000,000), for all of the documented out-of-pocket fees and expenses incurred by RG or its Affiliates in connection with this Agreement and the Transactions, including (i) all fees and expenses of accountants, counsel, investment banking firms or financial advisors (and their respective counsel and representatives), professional advisors and consultants to RG or any of its Affiliates in connection with this Agreement and the Transactions, including such fees and expenses incurred in connection with due diligence or other activities and (ii) all fees and expenses paid or payable to banks, investment banking firms and other financial institutions (and their respective counsel and representatives) in connection with arranging or providing the Financing. In the event that this Agreement is terminated by the Company pursuant to Section 6.1(c)(ii) (Breach), then RG shall reimburse the Company, up to an aggregate amount of Three Million Dollars ($3,000,000), for all of the documented out-of-pocket fees and expenses incurred by the Company or its Affiliates in connection with this Agreement and the Transactions, including (i) all fees and expenses of accountants, counsel, investment banking firms or financial advisors (and their respective counsel and representatives), professional advisors and consultants to the Company or any of its Affiliates in connection with this Agreement and the Transactions, including such fees and expenses incurred in connection with due diligence or other activities and (ii) all fees and expenses paid or payable to banks, investment banking firms and other financial institutions (and their respective counsel and representatives) in connection with arranging or providing the Financing.
(c) Any payment required to be made pursuant to Section 6.3(a)(i), shall be made to RG upon the consummation of the transactions contemplated by a Takeover Proposal; any payment required to be made pursuant to Section 6.3(a)(ii) or Section 6.3(b) shall be made to RG or the Company, respectively, promptly following termination of this Agreement (and in any event not later than two (2) Business Days after such termination); and any payment required to be made pursuant to Section 6.3(a)(iii) shall be made to RG simultaneously with and as a condition to the termination of this Agreement by the Company pursuant to Section 6.1(c)(i). All such payments shall be made by wire transfer of immediately available funds to an account to be designated by the recipient.
(d) The parties hereto acknowledge that the damages resulting from termination of this Agreement under circumstances in which the Termination Fee is payable are uncertain and incapable of accurate calculation and that the amounts payable pursuant to Section 6.3(a) are reasonable forecasts of the actual damages which may be incurred, and in the event that RG shall receive full payment pursuant to Section 6.3(a), the receipt of the Termination Fee shall be deemed to be liquidated damages, and not a penalty, for any and all losses or damages suffered or incurred by RG, any of its Affiliates or any other Person in connection with this Agreement (and the termination hereof), the Transactions (and the abandonment thereof) or any matter forming the basis for such termination, and upon such payment of such amount none of the Company or any
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of its Affiliates or Representatives shall have any further liability or obligation relating to or arising out of this Agreement or the Transactions. Under no circumstances shall the Company be obligated to pay more than one (1) Termination Fee.
Section 6.4. Reverse Termination Fee. In
the event that this Agreement is terminated by the Company pursuant to Section 6.1(c)(iii) or by RG pursuant to Section 6.1(b)(ii) at a time when
(a) the Company would have the right to terminate this Agreement pursuant to Section 6.1(c)(iii) and (b) the Company had provided the notice contemplated by Section 6.1(c)(iii)(D), then RG shall pay the Company the Reverse Termination Fee less the amount of any expenses previously reimbursed to the
Company pursuant to Section 6.3(b). Any payment required to be made pursuant to this Section 6.4 shall be made to the Company promptly following
termination of this Agreement (and in any event not later than two
(2) Business Days after such termination) and such payment shall be made by wire transfer of immediately available funds to an account to be designated by the Company. The parties hereto
acknowledge that the damages resulting from termination of this Agreement under circumstances in which the Reverse Termination Fee is payable are uncertain and incapable of accurate calculation and
that the amounts payable pursuant to this Section 6.4 are reasonable forecasts of the actual damages which may be incurred, and in the event that
the Company shall receive full payment pursuant to this Section 6.4, the receipt of the Reverse Termination Fee shall be deemed to be liquidated
damages, and not a penalty, for any and all losses or damages suffered or incurred by the Company, any of its Subsidiaries or Affiliates or any other Person in connection with this Agreement (and the
termination hereof), the Transactions (and the abandonment thereof) or any matter forming the basis for such termination, and upon such payment of such amount none of RG or any of its Subsidiaries,
Affiliates or Representatives shall have any further liability or obligation relating to or arising out of this Agreement or the Transactions. Under no circumstances shall RG be obligated to pay more
than one (1) Reverse Termination Fee.
Section 7.1. No Survival, Etc. The representations, warranties and agreements in this Agreement shall terminate at the Effective Time or, except as otherwise provided in Section 6.2, upon the termination of this Agreement pursuant to Section 6.1, as the case may be, except that the agreements set forth in Article I, Sections 4.9, 4.10 and 4.12, this Article VII and any other agreement in this Agreement which contemplates performance after the Effective Time shall survive the Effective Time indefinitely. The Confidentiality Agreement shall (i) survive termination of this Agreement in accordance with its terms and (ii) terminate as of the Effective Time.
Section 7.2. Amendment or Supplement. At any time prior to the Effective Time, this Agreement may be amended or supplemented in any and all respects, whether before or after receipt of the Company Stockholder Approval, by written agreement of the parties hereto, by action taken or authorized by their Board of Directors or Board of Managers, as applicable; provided, however, (a) that following receipt of the Company Stockholder Approval and the RG Member Consent, there shall be no amendment or change to the provisions hereof which by Law would require further approval by the Company Stockholders without such approval and (b) no amendments or waivers of any Financing Source Provisions shall be effective without the written consent of each Debt Financing Party.
Section 7.3. Extension of Time, Waiver, Etc. At any time prior to the Effective Time, any party may, subject to applicable Law, (a) waive any inaccuracies in the representations and warranties of any other party hereto, (b) extend the time for the performance of any of the obligations or acts of any other party hereto or (c) waive compliance by the other party with any of the agreements contained herein or, except as otherwise provided herein, waive any of such party's conditions. Notwithstanding the foregoing, no failure or delay by the Company or RG in exercising any right hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right hereunder. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party.
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Section 7.4. Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned or delegated, in whole or in part, by operation of Law or otherwise, by any of the parties without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the parties hereto and their respective successors and permitted assigns. Any purported assignment not permitted under this Section 7.4 shall be null and void.
Section 7.5. Counterparts; Scanned Signatures. This Agreement may be executed in counterparts (each of which shall be deemed to be an original but all of which taken together shall constitute one and the same agreement) and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. Facsimile or other electronically scanned and transmitted signatures shall be deemed originals for all purposes of this Agreement.
Section 7.6. Entire Agreement; No Third-Party Beneficiaries; Representations; Disclosure.
(a) This Agreement, together with the Company Disclosure Schedule, the RG Disclosure Schedule and the Confidentiality Agreement (i) constitute the entire agreement, and supersede all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof and thereof and (ii) except for the provisions of Section 4.9, are not intended to and shall not confer upon any Person other than the parties hereto any rights or remedies hereunder provided, however, that the Debt Financing Parties shall be third-party beneficiaries of Section 7.2(b) , Section 7.6(a), Section 7.6(b), Section 7.7 and Section 7.8 (in each case, together with any related definition and other provisions of this Agreement to the extent a modification or termination would serve to modify the substance or provisions or such Sections, the "Financing Source Provisions"). Notwithstanding the immediately preceding sentence, following the Effective Time, the provisions of Article I relating solely to the payment of the Merger Consideration shall be enforceable by holders of RG Units, as applicable, solely to receive such payment.
(b) Notwithstanding anything to the contrary contained in this Agreement, (a) the Company and its Subsidiaries and their Affiliates and Representatives shall not have any rights or claims against any Debt Financing Parties in any way relating to this Agreement or any of the transactions contemplated by this Agreement, or in respect of any oral representations made or alleged to have been made in connection herewith or therewith, including any dispute arising out of or relating in any way to any Debt Commitment Letters or the performance thereof or the financings contemplated thereby, whether at law or equity, in contract, in tort or otherwise and (b) no Debt Financing Party shall have any liability (whether in contract, in tort or otherwise) to any of the Company, its Subsidiaries or their Affiliates or Representatives for any obligations or liabilities of any party hereto under this Agreement or for any claim based on, in respect of, or by reason of, the transactions contemplated hereby and thereby or in respect of any oral representations made or alleged to have been made in connection herewith or therewith, including any dispute arising out of or relating in any way to the Debt Commitment Letters or the performance thereof or the financings contemplated thereby, whether at law or equity, in contract, in tort or otherwise.
(c) The Company Disclosure Schedule shall be arranged in sections corresponding to the numbered sections contained in this Agreement, and the disclosure in any section shall qualify (i) the corresponding section of this Agreement and (ii) the other sections of this Agreement, to the extent that it is reasonably apparent on the face of such disclosure that it also qualifies or applies to such other sections notwithstanding the absence of a cross reference contained therein. The inclusion of any information in the Company Disclosure Schedule shall not be deemed to be an admission or acknowledgment, in and of itself, that such information is required by the terms hereof to be disclosed, is material, constitutes or has resulted in or would reasonably be expected
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to result in a Company Material Adverse Effect or is outside the ordinary course of business consistent with past practices.
(d) The RG Disclosure Schedule shall be arranged in sections corresponding to the numbered sections contained in this Agreement, and the disclosure in any section shall qualify (i) the corresponding section of this Agreement and (ii) the other sections of this Agreement, to the extent that it is reasonably apparent on the face of such disclosure that it also qualifies or applies to such other sections notwithstanding the absence of a cross reference contained therein. The inclusion of any information in the RG Disclosure Schedule shall not be deemed to be an admission or acknowledgment, in and of itself, that such information is required by the terms hereof to be disclosed, is material, constitutes or has resulted in or would reasonably be expected to result in a RG Material Adverse Effect or is outside the ordinary course of business consistent with past practices.
Section 7.7. Governing Law; Jurisdiction; Waiver of Jury Trial.
(a) This Agreement shall be governed by and construed in accordance with the Laws of the State of Delaware, without regard to its rules of conflict of laws. To the fullest extent permitted by Law, any action against any party to this Agreement arising out of or in any way relating to this Agreement shall be brought in the Court of Chancery of the State of Delaware and any state appellate court therefrom within the State of Delaware (or, if the Court of Chancery of the State of Delaware declines to accept jurisdiction over a particular matter, any state or federal court within the State of Delaware), and each of the parties submits to the exclusive jurisdiction of such courts for the purpose of any such action. To the fullest extent permitted by Law, each party irrevocably and unconditionally agrees not to assert (i) any objection which it may ever have to the laying of venue of any such action in the Court of Chancery of the State of Delaware and any state appellate court therefrom within the State of Delaware (or, if the Court of Chancery of the State of Delaware declines to accept jurisdiction over a particular matter, any state or federal court within the State of Delaware), (ii) any claim that any such action brought in any such court has been brought in an inconvenient forum, and (iii) any claim that such court does not have jurisdiction with respect to such action. Notwithstanding the foregoing, (i) all matters relating to the interpretation, construction, validity and enforcement (whether at law, in equity, in contract, in tort, or otherwise) against any of the Debt Financing Parties and each of their respective Affiliates and their respective Representatives or Affiliates in any way relating to the Debt Commitment Letters and related fee letters or the performance thereof or the financings contemplated thereby, shall, except as expressly provided in the Debt Commitment Letter, be exclusively governed by, and construed in accordance with, the domestic Law of the State of New York without giving effect to any choice or conflict of law provision or rule whether of the State of New York or any other jurisdiction that would cause the application of Law of any jurisdiction other than the State of New York, (ii) any action against any of the Debt Financing Parties and each of their respective Affiliates and their respective Representatives or Affiliates arising out of or in any way relating to this Agreement, the Financing or the transactions contemplated hereby or thereby shall be brought in any state or federal court sitting in the Borough of Manhattan, New York, New York and any state appellate court thereof, and each of the parties submits to the exclusive jurisdiction of such courts for the purpose of any such action, and (iii) each party irrevocably and unconditionally agrees (a) not to bring or permit any of its Affiliates or Representatives to bring or support anyone else in bringing any such action in any other court, (b) that a final judgment in any such action shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law, (c) that the laws described in subsection (i) of this sentence shall govern any such action and (d) not to assert, to the fullest extent permitted by Law, any objection which it may now or hereafter have to the laying of venue of, and the defense of an inconvenient forum to the maintenance of, any such action in any such court.
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(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT OR THE DEBT COMMITMENT LETTERS OR THE DOCUMENTS RELATED THERETO IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE, TO THE FULLEST EXTENT PERMITTED BY LAW, EACH SUCH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR THE DEBT COMMITMENT LETTERS OR THE DOCUMENTS RELATED THERETO. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS Section 7.7.
Section 7.8. Specific Enforcement; Limit on Liability.
(a) The parties agree that irreparable damage would occur and the parties would not have any adequate remedy at law in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, except as provided in the following sentence. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement from the Chancery Court of the State of Delaware and any state appellate court therefrom within the State of Delaware (or, if the Chancery Court of the State of Delaware declines to accept jurisdiction over a particular matter, any state or federal court within the State of Delaware), without proof of actual damages, without bond or other security being required, this being in addition to any other remedy to which they are entitled at law or in equity. The parties hereto further agree that (i) by seeking the remedies provided for in this Section 7.8, a party shall not in any respect waive its right to seek any other form of relief that may be available to a party under this Agreement (including monetary damages) in the event that the remedies provided for in this Section 7.8 are not available or otherwise are not granted, and (ii) nothing set forth in this Section 7.8 shall require any party hereto to institute any proceeding for (or limit any party's right to institute any proceeding for) specific performance under this Section 7.8 prior or as a condition to exercising any termination right under Article VI (and pursuing damages after such termination), nor shall the commencement of any legal proceeding pursuant to this Section 7.8 or anything set forth in this Section 7.8 restrict or limit any party's right to terminate this Agreement in accordance with the terms of Article VI or pursue any other remedies under this Agreement that may be available then or thereafter.
(b) Notwithstanding Section 7.8(a), in the event that the Financing Issue occurs, the Company shall not be entitled to specifically enforce the terms and provisions of this Agreement and its sole and exclusive remedy shall be to terminate this Agreement in accordance with Section 6.1(c)(iii) and receive the Reverse Termination Fee in accordance with Section 6.4. Furthermore, in no event shall the Company or any of its Subsidiaries or any of their respective Affiliates, or any of their Representatives or Affiliates, be entitled to seek the remedy of specific performance of the Financing against any of the Debt Financing Parties.
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Section 7.9. Notices. All notices, requests and other communications to any party hereunder shall be in writing and shall be deemed given if delivered personally, facsimiled (which is confirmed) or sent by overnight courier (providing proof of delivery) to the parties at the following addresses:
If to RG, to:
RG
Parent, LLC
c/o Tengram Capital Partners
33 Riverside Avenue, First Floor
Westport, CT 06880
Attention: Andrew R. Tarshis
Facsimile: (203) 454-6998
with a copy (which shall not constitute notice) to:
Skadden,
Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue, Suite 3400
Los Angeles, California 90071
Attention: Jeffrey H. Cohen
Andrew D. Garelick
Facsimile: (213) 687-5600
If to the Company or Merger Sub, to:
Joe's
Jeans Inc.
2340 S. Eastern Avenue
Commerce, CA 90040
Attention: Interim Chief Executive Officer
Facsimile: (323) 837-3791
with a copy (which shall not constitute notice) to:
Akin
Gump Strauss Hauer & Feld LLP
1333 New Hampshire Avenue NW
Washington DC 20036
Attention: Russell W. Parks, Jr.
Erica D. McGrady
Facsimile: (202) 887-4288
or such other address or facsimile number as such party may hereafter specify by like notice to the other parties hereto. All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5 p.m. in the place of receipt and such day is a Business Day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding Business Day in the place of receipt.
Section 7.10. Severability. If any term or other provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms, provisions and conditions of this Agreement shall nevertheless remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the Transactions are fulfilled to the extent possible.
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(a) As used in this Agreement, the following terms have the meanings ascribed thereto below:
"Acceptable Confidentiality Agreement" means a confidentiality agreement, which need not contain a standstill agreement, with terms no less favorable to the Company or beneficial to the counterparty in any substantive respect than those contained in the Confidentiality Agreement.
"Action" has the meaning set forth in Section 4.9(a).
"Actual Cash Consideration" has the meaning set forth in Section 1.4(a).
"Actual Merger Consideration" has the meaning set forth in Section 1.4(a).
"Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, or is controlled by, or is under common control with, such Person. For this purpose, "control" (including, with its correlative meanings, "controlled by" and "under common control with") shall mean the possession, directly or indirectly, of the power to direct or cause the direction of management or policies of a Person, whether through the ownership of securities or partnership or other ownership interests, by contract or otherwise.
"After Consultation" means, with respect to the Company Board, after consultation with the Company Financial Advisor and the Company's outside legal counsel.
"Agreement" has the meaning set forth in the preamble.
"Aggregate Cash Consideration" has the meaning set forth in Section 1.4.
"Aggregate Merger Consideration" has the meaning set forth in Section 1.4(a).
"Aggregate Stock Consideration" has the meaning set forth in Section 1.4.
"Alternative Debt Financing" has the meaning set forth in Section 4.13(b).
"Antitrust Laws" means the Sherman Act, as amended, the Clayton Act, as amended, the HSR Act, the Federal Trade Commission Act, as amended, and all other applicable Laws issued by a Governmental Authority that are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade or lessening of competition through merger or acquisition.
"Asset Purchase Agreements" has the meaning set forth in the recitals.
"Asset Sale Transaction" has the meaning set forth in Section 4.4.
"Balance Sheet Date" has the meaning set forth in Section 2.5(c).
"Bankruptcy and Equity Exception" has the meaning set forth in Section 2.3(a).
"Business Day" means a day except a Saturday, a Sunday or other day on which the SEC or banks in New York, New York are authorized or required by Law to be closed.
"Certificate of Merger" means the certificate of merger with respect to the Merger, containing the provisions required by, and executed in accordance with, the DLLCA.
"Certificates" means, to the extent applicable, (i) a certificate or certificates representing RG Units or (ii) RG Units that are in non-certificated book-entry form, in either case that are outstanding immediately prior to the Effective Time.
"Change in Recommendation" has the meaning set forth in Section 4.2(e).
"Closing" has the meaning set forth in Section 1.2.
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"Closing Date" has the meaning set forth in Section 1.2.
"Code" has the meaning set forth in Section 1.9(f).
"Commitment Letters" has the meaning set forth in Section 3.14.
"Common Units" means the units of limited liability company interests as defined in the limited liability company agreement of RG dated as of June 10, 2011, as amended.
"Company" has the meaning set forth in the preamble.
"Company 10-K" means the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 2014, as amended.
"Company Acquisition Agreement" has the meaning set forth in Section 4.2(e).
"Company Benefits Plan(s)" has the meaning set forth in Section 2.10(a).
"Company Board" has the meaning set forth in the recitals.
"Company Charter Documents" means the Certificate of Incorporation and Bylaws of the Company, each as amended.
"Company Common Stock" has the meaning set forth in Section 2.2(a).
"Company Disclosure Schedule" has the meaning set forth in Article II.
"Company Financial Advisor" means Carl Marks Advisory Group.
"Company Incentive Plan" means the Amended and Restated 2004 Stock Incentive Plan, as amended, of the Company.
"Company Intellectual Property" means all Intellectual Property Rights owned, used or held for use by or licensed to the Company or any of its Subsidiaries used in or necessary for the conduct of the business of the Company or any of its Subsidiaries as currently conducted.
"Company Lease" means any lease, sublease, sub-sublease, license or other agreement under which the Company or any of its Subsidiaries leases, subleases, licenses, uses or occupies (in each case whether as landlord, tenant, sublandlord, subtenant or by other occupancy arrangement), or has the right to use or occupy, now or in the future, any real property.
"Company Manufacturers" has the meaning set forth in Section 2.19(d).
"Company Material Adverse Effect" means any change, event, circumstance, effect, development, occurrence or state of facts that, individually or in the aggregate: (i) has or would be reasonably likely to have a material adverse effect on the business, condition, properties, assets, liabilities (contingent or otherwise), results of operations or financial condition of (x) the Company and its Subsidiaries, taken as a whole, or on the Hudson's Business; provided, however, that none of the following shall be deemed in itself to constitute, and that none of the following shall be taken into account in determining whether there has been or would reasonably be expected to be, a Company Material Adverse Effect: (a) any change generally affecting the economy, financial markets or political, economic or regulatory conditions in the United States or any other geographic region in which the Company and its Subsidiaries conduct business (except, in each case, to the extent that the Company and its Subsidiaries, taken as a whole, or the Hudson's Business are disproportionately adversely affected relative to other participants in the industries in which the Company and its Subsidiaries participate), (b) general financial, credit or capital market conditions, including interest rates or exchange rates, or any changes therein (except, in each case, to the extent that the Company and its Subsidiaries, taken as a whole, or the Hudson's Business are disproportionately adversely affected relative to other participants in the industries in which
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the Company and its Subsidiaries participate), (c) conditions (or changes therein) in any industries in which the Company and its Subsidiaries operate (excluding seasonal fluctuations) (except, in each case, to the extent that the Company and its Subsidiaries, taken as a whole, or the Hudson's Business are disproportionately adversely affected relative to other participants in the industries in which the Company and its Subsidiaries participate), (d) the taking of any action required by this Agreement or the announcement of the transactions contemplated hereby, (e) changes in applicable Law or GAAP (or, in each case, any interpretations thereof) (except, in each case, to the extent that the Company and its Subsidiaries, taken as a whole, or the Hudson's Business are disproportionately adversely affected relative to other participants in the industries in which the Company and its Subsidiaries participate), (f) a decline in the price of the Company Common Stock on NASDAQ or any other market in which such securities are quoted for purchase and sale (it being understood that the facts or occurrences giving rise to or contributing to such failure may be taken into account in determining whether there has been, or will be, a Company Material Adverse Effect), (g) any acts of terrorism or war or any escalation thereof or any weather related event, fire or natural disaster (except, in each case, to the extent that the Company and its Subsidiaries, taken as a whole, or the Hudson's Business are disproportionately adversely affected relative to other participants in the industries in which the Company and its Subsidiaries participate), or (h) any failure by the Company and its Subsidiaries to meet internal or published projections, forecasts, performance measures, operating statistics or revenue or earnings predictions for any period (it being understood that the facts or occurrences giving rise to or contributing to such failure may be taken into account in determining whether there has been, or will be, a Company Material Adverse Effect); or (ii) has a material adverse effect on the Company's ability to, in a timely manner, perform its obligations under this Agreement, consummate the transactions contemplated by this Agreement or consummate the Transactions.
"Company Payoff Amount" has the meaning set forth in Section 1.8(a).
"Company Preferred Stock" has the meaning set forth in Section 2.2(a).
"Company Recommendation" has the meaning set forth in Section 2.3(b).
"Company Reports" has the meaning set forth in Section 2.5(a).
"Company SEC Documents" means all reports, schedules, forms, certifications, prospectuses, and registration, proxy and other statements required to be filed with or furnished to the SEC, together with all documents filed on a voluntary basis on Form 8-K, and in each case including all exhibits and schedules thereto and documents incorporated by reference therein.
"Company Stockholder Approval" has the meaning set forth in Section 2.3(d).
"Company Stockholders" has the meaning set forth in the recitals.
"Confidentiality Agreement" has the meaning set forth in Section 4.7(a).
"Contract" has the meaning set forth in Section 2.3(c).
"Continuing Employee" has the meaning set forth in Section 4.12(a).
"Convertible Notes" means those certain subordinated convertible notes issued on September 30, 2013, and all payment in kind notes issued as interest thereon, to the former stockholders and optionholders of Hudson Clothing Holdings, Inc.
"Copyrights" has the meaning set forth in the definition of Intellectual Property Rights.
"D&O Insurance" has the meaning set forth in Section 4.9(c).
"Debt Commitment Letter" has the meaning set forth in Section 3.14.
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"Debt Financing Parties" means the Persons that have committed to provide or otherwise entered into agreements to provide the Financing (or any alternative or replacement Financing) in connection with the Transactions contemplated hereby and any agent or arrangers thereof, including the parties to the financing commitments in the Debt Commitment Letters and in any joinder agreements, credit agreements or other financing agreements relating thereto, together with each former, current and future Affiliate thereof and each former, current and future officer, director, employee, partner, controlling person, advisor, attorney, agent and representative of each such person or Affiliate or the heirs, executors, successors and assigns of any of the foregoing.
"DGCL" means the Delaware General Corporation Law.
"Distribution" means any dividend on, or any other distribution in respect of, any of the Company's outstanding shares of capital stock, voting securities or equity interests, or any rights, warrants, options, calls, commitments or any other agreements of any character to acquire any shares of its capital stock, voting securities or equity interests.
"DLLCA" means the Delaware Limited Liability Company Act.
"Effective Time" has the meaning set forth in Section 1.3.
"Environmental Laws" means all Laws concerning pollution or protection of the environment, greenhouse gases, natural resources, wildlife, wetlands or health and safety, including all laws relating to the presence, use, generation, handling, treatment, storage, disposal, management, Release or threatened Release of, or exposure to, any Hazardous Materials, or preservation or reclamation of natural resources.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder.
"ERISA Affiliate" has the meaning set forth in Section 2.10(a).
"Exchange Act" has the meaning set forth in Section 2.4.
"Exchange Agent" has the meaning set forth in Section 1.7.
"Exchange Fund" has the meaning set forth in Section 1.8(b).
"Financing" has the meaning set forth in Section 3.14.
"Financing Issue" has the meaning set forth in Section 6.1(c)(iii).
"Financing Source Provisions" has the meaning set forth in Section 7.6(a).
"Financial Statements" has the meaning set forth in Section 3.6(a).
"Form S-4 Registration Statement" means the registration statement on Form S-4 to be filed with the SEC by the Company in connection with issuance of Company Common Stock in the Merger, as such registration statement may be amended prior to the time it is declared effective by the SEC.
"GAAP" means generally accepted accounting principles in the United States.
"Governmental Authority" means any supranational, foreign, domestic, state, municipal or local government, political subdivision or any department, court, arbitrator, commission, board, bureau, regulatory or administrative agency, instrumentality or other authority thereof, or any other governmental or quasi-governmental authority (including any government-sponsored enterprise such as Fannie Mae or Freddie Mac).
"Guarantor" has the meaning set forth in the preamble.
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"Guaranty" has the meaning set forth in the preamble.
"Hazardous Materials" means any material, substance or waste that is regulated, classified, or otherwise characterized under or pursuant to any Environmental Law as "hazardous", "toxic", a "pollutant", a "contaminant", "radioactive", a "universal waste" or words of similar meaning or effect or which can give rise to liability under any Environmental Law.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
"Hudson's Business" means the business of the Company operated as of the date hereof under the brand names "Hudson's" and "Hudson Jeans".
"Indebtedness" means without duplication (a) all indebtedness for borrowed money, whether direct or indirect; (b) all liabilities secured by any mortgage, pledge, security interest, lien, charge or other encumbrance existing on property owned or acquired and subject thereto; (c) all guarantees, endorsements and other contingent obligations in respect of Indebtedness of others; (d) the deferred portion or installments of purchase price, and any amounts reserved for the payment of a contingent purchase price, in connection with the acquisition of any business; (e) obligations to reimburse issuers of any letters of credit (but only to the extent drawn without duplication of other indebtedness supported or guaranteed thereby); (f) any obligation evidenced by bonds, debentures, notes or similar instruments; and (g) capital lease obligations, with such lease obligations to be determined in accordance with GAAP; provided that Indebtedness shall not include (x) operating leases or (y) accounts payable, accrued expenses, accrued income Taxes and deferred income Tax liability.
\"Indemnitee" has the meaning set forth in Section 4.9(a).
"Intellectual Property Rights" means all of the rights arising from or in respect of the following, whether protected, created or arising under the Laws of the United States or any foreign jurisdiction: (i) patents, patent applications, any reissues, reexaminations, divisionals, continuations, continuations-in-part and extensions thereof (collectively, "Patents"); (ii) trademarks, service marks, trade names (whether registered or unregistered), fictitious names, industrial designs, brand names, domain names, social media handles and accounts, trade dress rights, identifying symbols, logos, emblems, signs or insignia, and including all goodwill associated with the foregoing; (iii) copyrights, whether registered or unregistered (including copyrights in computer software programs), mask work rights and registrations and applications therefore (collectively, "Copyrights"); (iv) confidential, proprietary or other nonpublic information, or non-public processes, designs, specifications, technology, know-how, techniques, formulas, inventions (whether or not patentable and whether or not reduced to practice), concepts, trade secrets, discoveries, ideas and technical data and information, in each case which derive economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other Persons who can obtain economic value from its disclosure or use, and which is the subject of commercially reasonable efforts to maintain its secrecy, excluding any rights in respect of any of the foregoing that comprise or are protected by Copyrights or Patents; (v) rights of publicity and moral rights; (vi) any other intellectual property rights; and (vii) all applications and registrations related to any of the foregoing clauses (i) through (iv).
"Intervening Event" means a material event, development, occurrence, state of facts or change that was not known or reasonably foreseeable to the Company Board, on the date of this Agreement, which event, development, occurrence, state of facts or change becomes known to the Company Board before the Company Stockholder Approval; provided, however, that a Takeover Proposal shall not be, and shall not be deemed to be, an Intervening Event.
"IP Asset Purchase Agreement" has the meaning set forth in the recitals.
65
"IP Assets Purchaser" has the meaning set forth in the recitals.
"Joe's Business" means the business of the Company operated as of the date hereof under the brand names "Joe's Jeans," "Joe's," "Joe's JD" and "else."
"Key Jurisdictions" means the following jurisdictions: Argentina, Australia, Brazil, Canada, Chile, European Community, Hong Kong, India, International Registration, Japan, Korea (South), Kuwait, Malaysia, Mexico, Macau, New Zealand, Norway, Peru, Russia, Singapore, Switzerland, Taiwan, Turkey, United Arab Emirates, United States of America and Uruguay.
"Knowledge of the Company" means the actual knowledge, after reasonable inquiry under the circumstances (but only to the extent of each such individual's area of responsibility), of Samuel Furrow, Hamish Sandhu, Lori Nembirkow, Peter Kim and Robert Otto.
"Knowledge of RG" means the actual knowledge, after reasonable inquiry under the circumstances (but only to the extent of each such individual's area of responsibility), of Michael Buckley and Scott Vogel.
"Laws" has the meaning set forth in Section 2.8.
"Letter of Transmittal" has the meaning set forth in Section 1.9(a)(i).
"Liabilities" means any and all debts, liabilities and obligations of any nature whatsoever, whether accrued or fixed, absolute or contingent, known or unknown matured or unmatured or determined or determinable, including those arising under any Law, those arising under any contract or permit and those arising as a result of any act or omission.
"Liens" has the meaning set forth in Section 2.1(c).
"Material Contract" has the meaning set forth in Section 2.11(a).
"Merger" has the meaning set forth in the recitals.
"Merger Sub" has the meaning set forth in the preamble.
"Most Recent Balance Sheet Date" has the meaning set forth in Section 3.6(a).
"NASDAQ" means the Nasdaq Capital Market.
"New Debt Commitment Letter" has the meaning set forth in Section 4.13(b).
"Non-Voting Common Units" means the units of limited liability company interests as defined in the limited liability company agreement of RG dated as of June 10, 2011, as amended.
"Operating Asset Purchase Agreement" has the meaning set forth in the recitals.
"Operating Assets Purchaser" has the meaning set forth in the recitals.
"Order" means any writ, judgment, injunction, consent, order, decree, stipulation, award or executive order of or by any Governmental Authority.
"Original Agreement" has the meaning set forth in the recitals.
"Outside Date" means February 8, 2016.
"Patents" has the meaning set forth in the definition of Intellectual Property Rights.
"Paying Agent" means a bank or trust company reasonably satisfactory to the Company appointed by RG to act as paying agent for payment of the Merger Consideration.
"Permits" has the meaning set forth in Section 2.8.
66
"Permitted Exceptions" means: (i) all defects, exceptions, restrictions, easements, rights of way and encumbrances disclosed in policies of title insurance which have been made available to RG or incurred subsequent to the date of any of such policies of title insurance which do not impair in any material respect the continued use or occupation of the property to which they relate in the conduct of the business currently conducted thereon; (ii) statutory liens for current Taxes, assessments or other governmental charges not yet due or the amount or validity of which is being contested in good faith by appropriate proceedings, provided an appropriate reserve has been established therefor in the Company SEC Documents in accordance with GAAP; (iii) mechanics', materialmens', architects', carriers', workers', repairers' or other similar Liens arising or incurred in the ordinary course of business consistent with past practices that are not material to the business, operations and financial condition of the Company and its Subsidiaries taken as a whole and are not delinquent; and (iv) zoning, entitlement and other land use and environmental regulations by any Governmental Authority, that, individually or in the aggregate, would not be reasonably expected to impair in any material respect the continued use or occupation of the property to which they relate in the conduct of the business currently conducted thereon.
"Permitted Investments" means (i) bank deposits with commercial banks with capital exceeding $1 billion (based on the most recent financial statements of such bank that are then publicly available); (ii) investments in any readily accessible money market fund with assets under management of at least $10 billion that invests solely in U.S. Government Securities; provided, however, that the funds deposited in any such fund may not represent more than 2% of the assets in such fund; (iii) investments in any prime money market fund with assets in excess of $35 billion, provided that no more than $750 million of the funds may be invested in any single such fund; or (iv) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof having maturities of not more than six (6) months from the date hereof.
"Person" means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity, including a Governmental Authority.
"Preferred Stock Purchaser" has the meaning set forth in the recitals.
"Preferred Units" means the units of limited liability company interests as defined in the limited liability company agreement of RG dated as of June 10, 2011, as amended.
"Proxy Date" has the meaning set forth in Section 4.5(e).
"Proxy Statement and Consent Solicitation Materials" means a proxy statement/prospectus/Consent Solicitation Materials to be sent to (a) the Company's stockholders in connection with the Stockholders Meeting and (b) the RG Members in connection with the RG Member Consent.
"Proxy Statement Clearance Date" means the date on which the SEC has, orally or in writing, confirmed that it has no further comments on the Proxy Statement and Consent Solicitation Materials and Form S-4 Registration Statement.
"Registered Intellectual Property" has the meaning set forth in Section 2.12(a).
"Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing of or migrating into or through the environment or any natural or man-made structure.
"Representatives" has the meaning set forth in Section 4.2(a).
"Required Information" means all financial and other information regarding the Company and its Subsidiaries as is reasonably requested by RG or any of the Debt Financing Parties in connection with the Financing, in each case as is customarily required in connection with the
67
execution of debt financings similar to the Financing (provided that the Company will have no obligation to prepare pro forma financial information or post-closing financial information), including (i) all customary financial information of the Company and its Subsidiaries that is required to permit RG Parent or its affiliates to prepare a pro forma EBITDA of Company and its Subsidiaries (after giving pro forma effect to the Merger and the other transactions contemplated hereby) for the most recent twelve (12)-month period ending at least 30 days prior to the Closing Date, (ii) all customary financial information of the Company and its Subsidiaries that is required to permit RG Parent or its affiliates to prepare a pro forma consolidated balance sheet and related pro forma consolidated statement of income of the Company and its Subsidiaries (giving pro forma effect to the Merger and the other transactions contemplated hereby) as of a date, and for a 12-month period ending, not more than 30 days prior to the Closing Date, (iii) all customary financial information of the Company and its Subsidiaries that is required to permit RG Parent or its affiliates to prepare pro forma financial projections of the Company and its Subsidiaries (after giving pro forma effect to the Merger and the other transactions contemplated hereby) in the format, and for the periods, required by the Debt Financing Parties and (iv) internally-prepared monthly financial statements for the Company and its Subsidiaries on a consolidated basis, to be delivered to RG Parent no later than 30 days after the end of each month.
"Reverse Stock Split" has the meaning set forth in the recitals.
"Reverse Termination Fee" means Seven Million Five Hundred Thousand Dollars ($7,500,000).
"RG" has the meaning set forth in the preamble.
"RG Benefits Plan(s)" has the meaning set forth in Section 3.10(a).
"RG Debt" has the meaning set forth in Section 1.8(a).
"RG ERISA Affiliate" has the meaning set forth in Section 3.10(a).
"RG Lease" means any lease, sublease, sub-sublease, license or other agreement under which RG or any of its Subsidiaries leases, subleases, licenses, uses or occupies (in each case whether as landlord, tenant, sublandlord, subtenant or by other occupancy arrangement), or has the right to use or occupy, now or in the future, any real property.
"RG Manufacturers" has the meaning set forth in Section 3.21(d).
"RG Material Adverse Effect" means any change, event, circumstance, effect, development, occurrence or state of facts that, individually or in the aggregate: (i) has or would reasonably be likely to have a material adverse effect on to the business, condition, properties, assets, liabilities (contingent or otherwise), results of operations or financial condition of RG and its Subsidiaries, taken as a whole; provided, however, that none of the following shall be deemed in itself to constitute, and that none of the following shall be taken into account in determining whether there has been or would reasonably be expected to be, a RG Material Adverse Effect: (a) any change generally affecting the economy, financial markets or political, economic or regulatory conditions in the United States or any other geographic region in which RG and its Subsidiaries conduct business (except, in each case, to the extent that RG and its Subsidiaries, taken as a whole, are disproportionately adversely affected relative to other participants in the industries in RG and its Subsidiaries participate), (b) general financial, credit or capital market conditions, including interest rates or exchange rates, or any changes therein (except, in each case, to the extent that RG and its Subsidiaries, taken as a whole, are disproportionately adversely affected relative to other participants in the industries in RG and its Subsidiaries participate), (c) conditions (or changes therein) in any industries in which RG and its Subsidiaries operate (excluding seasonal fluctuations) (except, in each case, to the extent that the Company and its Subsidiaries, taken as a whole, are disproportionately adversely affected relative to other participants in the industries in
68
which the Company and its Subsidiaries participate), (d) the taking of any action required by this Agreement or the announcement of the transactions contemplated hereby, (e) changes in applicable Law or GAAP (or, in each case, any interpretations thereof) (except, in each case, to the extent that RG and its Subsidiaries, taken as a whole, are disproportionately adversely affected relative to other participants in the industries in RG and its Subsidiaries participate), (f) any acts of terrorism or war or any escalation thereof or any weather related event, fire or natural disaster (except, in each case, to the extent that RG and its Subsidiaries, taken as a whole, are disproportionately adversely affected relative to other participants in the industries in which RG and its Subsidiaries participate), or (g) any failure by RG to meet internal or published projections, forecasts, performance measures, operating statistics or revenue or earnings predictions for any period (it being understood that the facts or occurrences giving rise to or contributing to such failure may be taken into account in determining whether there has been, or will be, a Material Adverse Effect); or (ii) has a material adverse effect on RG's ability to, in a timely manner, perform its obligations under this Agreement or consummate the Transactions.
"RG Material Contracts" has the meaning set forth in Section 3.11(a).
"RG Member Consent" has the meaning set forth in Section 3.2(c).
"RG Members" has the meaning set forth in the recitals.
"RG Payoff Amount" has the meaning set forth in Section 1.8(a).
"RG Registered Intellectual Property" has the meaning set forth in Section 3.12(a).
"RG Takeover Proposal" means any inquiry, proposal or offer from any Person or "group" (as defined for purposes of Section 13(d) of the Exchange Act), other than the Company and its Subsidiaries, relating to any of the following, or an expression by any Person or "group" (as defined for purposes of Section 13(d) of the Exchange Act) that it is considering or may engage in the following: (A) a direct or indirect acquisition (whether in a single transaction or a series of related transactions) of assets of RG and its Subsidiaries (including securities of Subsidiaries) equal to 20% or more of RG's consolidated assets or to which 20% or more of RG's revenues or earnings on a consolidated basis are attributable, (B) a direct or indirect acquisition (whether in a single transaction or a series of related transactions) of 20% or more of the outstanding shares of any class of equity securities of RG or securities of RG representing more than 20% of the voting power of RG, (C) a tender offer or exchange offer that if consummated would result in any Person or "group" (as defined in Section 13(d) of the Exchange Act) beneficially owning 20% or more of any class of equity securities of RG or securities of RG representing more than 20% of the voting power of RG or (D) a merger, consolidation, share exchange, business combination, joint venture, recapitalization, liquidation, dissolution or similar transaction involving RG or any of its Subsidiaries that, if consummated, would have the effect set forth in clause (A) or clause (B); in each case, other than the Transactions.
"RG Units" has the meaning set forth in Section 3.3(a).
"RG Welfare Plan" has the meaning set forth in Section 3.10(c).
"Rollover Letter" has the meaning set forth in the preamble.
"SEC" means the Securities and Exchange Commission.
"Securities Act" has the meaning set forth in Section 2.1(c).
"RG Units" has the meaning set forth in Section 1.4(a).
"Skadden" means Skadden, Arps, Slate, Meagher & Flom LLP.
"Stock Purchase Agreement" has the meaning set forth in the recitals.
69
"Stockholders' Meeting" has the meaning set forth in Section 4.5(e).
"Subsidiary" when used with respect to any party, means any corporation, limited liability company, partnership, association, trust or other entity the accounts of which would be consolidated with those of such party in such party's consolidated financial statements if such financial statements were prepared in accordance with GAAP, as well as any other corporation, limited liability company, partnership, association, trust or other entity of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power (or, in the case of a partnership, more than 50% of the general partnership interests) are, as of such date, owned or controlled by such party or one or more Subsidiaries of such party or by such party and one or more Subsidiaries of such party.
"Superior Proposal" means an unsolicited, bona fide, written Takeover Proposal (provided that for purposes of this definition all references to 20% contained in the definition of "Takeover Proposal" shall be deemed to be references to 50%) which the Company Board determines in good faith, After Consultation, to be more favorable to the Company Stockholders, from a financial point of view, than the Transactions, in each case taking into account all financial, legal, financing, regulatory and other aspects of such Takeover Proposal that are reasonably relevant to a determination of the likelihood of consummation of such Takeover Proposal (including the reputation of the Person or group making the Takeover Proposal) and further taking into account at any time of determination, collectively, any changes to (a) the terms and conditions of this Agreement and the transactions contemplated hereby that are then offered in writing by RG (b) the terms and conditions of the Stock Purchase Agreement and the transactions contemplated thereby that are then offered in writing by TCP Denim LLC and (c) the terms and conditions of the Asset Purchase Agreement and the transactions contemplated thereby that are then offered in writing by Sequential Brands Group, Inc. and GBG USA, Inc.
"Surviving Company" has the meaning set forth in Section 1.1.
"Takeover Proposal" means any inquiry, proposal or offer from any Person or "group" (as defined for purposes of Section 13(d) of the Exchange Act), other than RG and its Subsidiaries, relating to any of the following, or an expression by any Person or "group" (as defined for purposes of Section 13(d) of the Exchange Act) that it is considering or may engage in the following: (A) a direct or indirect acquisition (whether in a single transaction or a series of related transactions) of assets of the Company and its Subsidiaries (including securities of Subsidiaries) equal to 20% or more of the Company's consolidated assets or to which 20% or more of the Company's revenues or earnings on a consolidated basis are attributable, (B) a direct or indirect acquisition (whether in a single transaction or a series of related transactions) of 20% or more of the outstanding shares of any class of equity securities of the Company or securities of the Company representing more than 20% of the voting power of the Company, (C) a tender offer or exchange offer that if consummated would result in any Person or "group" (as defined in Section 13(d) of the Exchange Act) beneficially owning 20% or more of any class of equity securities of the Company or securities of the Company representing more than 20% of the voting power of the Company or (D) a merger, consolidation, share exchange, business combination, joint venture, recapitalization, liquidation, dissolution or similar transaction involving the Company or any of its Subsidiaries that, if consummated, would have the effect set forth in clause (A) or clause (B); in each case, other than the Transactions.
"Tax" or "Taxes" means (i) all federal, state, local or foreign taxes, charges, fees, imposts, levies or other assessments, including all net income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes (in the case of all such taxes, whether the tax base is modified or not), customs
70
duties, fees, assessments and charges of any kind whatsoever, (ii) all interest, penalties, fines, additions to tax or additional amounts imposed by any Governmental Authority in connection with any item described in clause (i), and (iii) any liability in respect of any items described in clauses (i) or (ii) payable by reason of contract, assumption, transferee or successor liability, operation of Law, Treasury Regulation Section 1.1502-6(a) (or any predecessor or successor thereof or any analogous or similar provision under Law) or otherwise.
"Tax Returns" means any return, report, claim for refund, estimate, information return or statement or other similar document relating to or required to be filed with any Governmental Authority with respect to Taxes, including any schedule or attachment thereto, and including any amendment thereof.
"Termination Fee" means Five Million Two Hundred Fifty Thousand Dollars ($5,250,000).
"Transactions" refers collectively to the transactions contemplated by the Agreement, including the Merger and the transactions contemplated by the Stock Purchase Agreement.
"U.S. Government Securities" means securities that are (i) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America which, in either case, are not callable or redeemable at the option of the issuer thereof and shall also include (a) a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as amended), as custodian, with respect to any such U.S. Government Securities or a specific payment of principal of or interest on any such U.S. Government Securities held by such custodian for the account of the holder of such depository receipt; provided, however, that (except as required by Law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Securities or the specific payment of principal of or interest on the U.S. Government Securities evidenced by such depository receipt and (b) reverse repurchase agreements in respect of the securities described above.
"Voting Common Units" means the units of limited liability company interests as defined in the limited liability company agreement of RG dated as of June 10, 2011, as amended.
"WARN Act" means the Worker Adjustment and Retraining Notification Act of 1988, or any similar state or local law.
"Welfare Plan" has the meaning set forth in Section 2.10(c).
"Year-End Financial Statements" has the meaning set forth in Section 3.6(a).
(a) When a reference is made in this Agreement to an Article, a Section, Annex or Schedule, such reference shall be to an Article of, a Section of, or an Annex or Schedule to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The word "will" when used in this Agreement shall be construed to have the same meaning and effect of the word "shall". The word "or" when used in this Agreement is not exclusive. All terms defined in this Agreement shall have the defined meanings when used in any document made or delivered pursuant hereto unless otherwise defined therein. Any documents or information "made available,"
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"provided," "delivered" or furnished (or any similar terms) shall include only (i) Company Reports and (ii) such documents or information available in the electronic dataroom maintained on behalf of the Company and RG, respectively, by Intralinks, Inc. not later than 9:00 am (California time) on the day prior to the date of this Agreement. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such term. Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and references to all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.
(b) The parties hereto have participated jointly in the negotiation and drafting of this Agreement and, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as jointly drafted by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.
[signature page follows]
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IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Agreement and Plan of Merger to be duly executed and delivered as of the date first above written.
| RG PARENT, LLC | ||||||
By: |
/s/ WILLIAM SWEEDLER |
|||||
| Name: | William Sweedler | |||||
| Title: | Chairman | |||||
JJ MERGER SUB, LLC |
||||||
By: |
/s/ HAMISH SANDHU |
|||||
| Name: | Hamish Sandhu | |||||
| Title: | CFO | |||||
JOE'S JEANS INC. |
||||||
By: |
/s/ HAMISH SANDHU |
|||||
| Name: | Hamish Sandhu | |||||
| Title: | CFO | |||||
[Signature Page to Amended and Restated Merger Agreement]
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of Joe's Jeans Inc. (the "Company") (Form S-3 No. 333-123088, No. 333-140867, No. 333-145727 and No. 333-149471; and Form S-8 No. 333-163187, No. 333-146740, No. 333- 126544, No. 333-117755, No. 333-109151, No. 333-102580 and No. 333-179769) of our reports dated February 13, 2015 (except for the effects of discontinued operations discussed in Note 1—Business Description and Basis of Presentation, Note 2—Subsequent Events and Note 4—Discontinued Operations to the consolidated financial statements, as to which the date is November 2, 2015), relating to the Company's consolidated financial statements and the schedule of Joe's Jeans Inc. as of November 30, 2014 and for the year then ended (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the existence of substantial doubt about the Company's ability to continue as a going concern and the retrospective adjustments to reflect discontinued operations) appearing in this Form 8-K.
/s/ Moss Adams LLP
Los Angeles, California
November 2, 2015
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements of Joe's Jeans Inc.:
of our report dated February 13, 2014 (except for the effects of discontinued operations discussed in Note 1 and Note 4, as to which the date is November 2, 2015), with respect to the 2013 and 2012 consolidated financial statements and the schedule of Joe's Jeans Inc., included in this Current Report on Form 8-K.
| /s/ Ernst & Young LLP |
Los Angeles, California
November 2, 2015
ITEM 6. SELECTED FINANCIAL DATA
Note: Capitalized terms not defined herein have the meaning as ascribed to them in our Annual Report on Form 10-K for the year ended November 30, 2014, filed with the SEC on February 13, 2015 ("Annual Report").
The table below (includes the notes hereto) sets forth a summary of selected consolidated financial data. The selected consolidated financial data should be read in conjunction with the related consolidated financial statements and notes thereto provided in Item 8. Financial Statements and Supplementary Data and the Consolidated Financial Statement and Schedules included as Exhibit 99.3 of our Current Report on Form 8-K filed with the SEC on November 3, 2015.
| |
Year ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands, except per share data) | |||||||||||||||
| |
11/30/14 | 11/30/2013 | 11/30/12 | 11/30/11 | 11/30/10 | |||||||||||
| |
(1) |
(2) |
|
|
|
|||||||||||
Net sales |
$ | 84,225 | $ | 28,417 | $ | 9,484 | $ | 7,231 | $ | 4,283 | ||||||
Cost of goods sold |
44,502 | 14,451 | 2,835 | 2,448 | 1,590 | |||||||||||
| | | | | | | | | | | | | | | | | |
Gross profit |
39,723 | 13,966 | 6,649 | 4,783 | 2,693 | |||||||||||
Operating expenses |
||||||||||||||||
Selling, general and administrative |
42,329 | 21,956 | 10,728 | 9,363 | 6,882 | |||||||||||
Impairment of goodwill |
23,585 | — | — | |||||||||||||
Depreciation and amortization |
3,637 | 1,319 | 565 | 588 | 361 | |||||||||||
Retail stores impairment |
840 | — | — | 1,144 | — | |||||||||||
| | | | | | | | | | | | | | | | | |
|
70,391 | 23,275 | 11,293 | 11,095 | 7,243 | |||||||||||
| | | | | | | | | | | | | | | | | |
Operating loss from continuing operations |
(30,668 | ) | (9,309 | ) | (4,644 | ) | (6,312 | ) | (4,550 | ) | ||||||
Interest expense |
5,141 | 1,032 | — | — | — | |||||||||||
Other expense |
(2,268 | ) | 209 | — | — | — | ||||||||||
| | | | | | | | | | | | | | | | | |
Loss before taxes |
(33,541 | ) | (10,550 | ) | (4,644 | ) | (6,312 | ) | (4,550 | ) | ||||||
Income tax (benefit) provision |
(5,059 | ) | (3,134 | ) | (2,012 | ) | (2,555 | ) | (1,884 | ) | ||||||
| | | | | | | | | | | | | | | | | |
Loss from continuing operations |
(28,482 | ) | (7,416 | ) | (2,632 | ) | (3,757 | ) | (2,666 | ) | ||||||
Income from discontinued operations, net of tax |
766 |
102 |
8,197 |
2,392 |
5,267 |
|||||||||||
| | | | | | | | | | | | | | | | | |
Net (loss) income and comprehensive (loss) income |
$ | (27,716 | ) | $ | (7,314 | ) | $ | 5,565 | $ | (1,365 | ) | $ | 2,601 | |||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Earnings (loss) per common share—basic |
||||||||||||||||
Loss from continuing operations |
$ | (0.42 | ) | $ | (0.11 | ) | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.04 | ) | |
Earnings from discontinued operations |
0.01 | 0.00 | 0.12 | 0.04 | 0.08 | |||||||||||
| | | | | | | | | | | | | | | | | |
Earnings (loss) per common share—basic |
$ | (0.41 | ) | $ | (0.11 | ) | $ | 0.08 | $ | (0.02 | ) | $ | 0.04 | |||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Earnings (loss) per common share—diluted |
||||||||||||||||
Loss from continuing operations |
$ | (0.42 | ) | $ | (0.11 | ) | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.04 | ) | |
Earnings from discontinued operations |
0.01 | 0.00 | 0.12 | 0.04 | 0.08 | |||||||||||
| | | | | | | | | | | | | | | | | |
Earnings (loss) per common share—diluted |
$ | (0.41 | ) | $ | (0.11 | ) | $ | 0.08 | $ | (0.02 | ) | $ | 0.04 | |||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Weighted average shares outstanding |
||||||||||||||||
Basic |
68,226 | 67,163 | 65,496 | 64,001 | 62,362 | |||||||||||
Diluted |
68,226 | 67,163 | 66,849 | 64,001 | 64,505 | |||||||||||
Balance sheet data: |
||||||||||||||||
Total assets |
$ | 203,949 | $ | 223,023 | $ | 86,024 | $ | 80,162 | $ | 81,469 | ||||||
Long term debt(3) |
24,733 | 89,982 | — | — | — | |||||||||||
Stockholders' equity |
40,997 | 65,769 | 71,739 | 64,757 | 64,873 | |||||||||||
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note: Capitalized terms not defined herein or in Exhibit 99.3 of the Current Report on Form 8-K filed with the SEC on November 3, 2015 have the meaning as ascribed to them in our Annual Report on Form 10-K for the year ended November 30, 2014, filed with the SEC on February 13, 2015.
Introduction
This discussion and analysis summarizes the significant factors affecting our results of operations and financial conditions during the fiscal years ended November 30, 2014, 2013 and 2012, respectively. This discussion should be read in conjunction with our Consolidated Financial Statements, Notes to Consolidated Financial Statements and supplemental information in Item 8 of our Annual Report and included as Exhibit 99.3 of our Current Report on Form 8-K filed herewith. The discussion and analysis contains statements that may be considered forward-looking. These statements contain a number of risks and uncertainties, as discussed under the heading "Forward-Looking Statements" and "Risk Factors" of our Annual Report that could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of our Annual Report. Our future results, performance or achievements could differ materially from those expressed or implied in these forward-looking statements. We do not undertake to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date of the filing of our Annual Report or to reflect the occurrence of unanticipated events, including events as a result of new information, changed circumstances or otherwise.
We completed the acquisition of Hudson on September 30, 2013 and the information presented includes the results of operations of Hudson from that date through the end of our fiscal year of November 30, 2013, which was approximately two months of operations, and its financial results are included in each of the two reportable segments in a manner consistent with our reporting structure. Therefore, our results of operations for the fiscal year 2013 are not necessarily indicative of future results. Our financial results for fiscal 2014 reflect a full year of operations for our Hudson subsidiary.
We completed the sale of certain of our operating and intellectual property assets related to the Joe's Business (as defined below) to two separate purchasers for an aggregate purchase price of $80 million (the "Asset Sale") in September 2015, and, as a result, sales of our Joe's® products are presented as held for sale (discontinued operations) in our condensed consolidated financial statements for all periods presented. As part of the Asset Sale, we entered into an asset purchase agreement (the "IP Asset Purchase Agreement") with Joe's Holdings LLC, a Delaware limited liability company ("IP Assets Purchaser"), and, solely for the purposes of its related guarantee, Sequential Brands Group, Inc., a Delaware corporation, pursuant to which, the IP Assets Purchaser, among other things, purchased certain intellectual property assets (the "Intellectual Property Assets") used or held for use in our business operated under the brand names "Joe's Jeans," Joe's," "Joe's JD" and "else" (the "Joe's Business"). The aggregate purchase price was $67 million. Simultaneous with the IP Asset Purchase Agreement, we entered into an asset purchase agreement (the "Operating Asset Purchase Agreement" and together with the IP Asset Purchase Agreement, the "Asset Purchase Agreements"), with GBG USA Inc., a Delaware corporation ("Operating Assets Purchaser"), pursuant to which the Operating Assets Purchaser, among other things, purchased certain inventory and other assets and assumed certain liabilities from us and our subsidiaries related to the Joe's Business, including certain employees of the Joe's Business and, at a later date, specified Joe's store leases. The aggregate purchase price was $13 million. At the closing of the sale, both the IP Assets Purchaser and the Operating Assets Purchaser deposited an aggregate of $4.0 million into an escrow account, which will be used to defer certain costs and expenses which may be incurred by us after the closing of the transaction.
1
Executive Overview and Subsequent Events
Our principal business activity is the design, development and worldwide marketing of apparel products, which include denim jeans, related casual wear and accessories that bear the brands Joe's® and Hudson®. Joe's® was established in 2001 and the brand is recognized in the premium denim industry, an industry term for denim jeans with price points generally of $120 or more, for its quality, fit and fashion-forward designs. We completed an Asset Sale related to our Joe's® brand in September 2015 sales of our Joe's® products are presented as held for sale (discontinued operations) in our condensed consolidated financial statements for all periods presented. Hudson was established in 2002, and is similarly recognized as a premier designer and marketer of women's and men's premium branded denim apparel. Because we focus on design, development and marketing, we rely on third parties to manufacture our apparel products. We sell our products through our own retail stores and to numerous retailers, which include major department stores, specialty stores and distributors around the world.
On September 30, 2013, we acquired all of the outstanding equity interests in Hudson for an aggregate purchase price consisting of approximately $65,416,000 in cash and approximately $27,451,000 in convertible notes, net of discount. We also issued promissory notes, bearing no interest, for approximately $1,235,000 in aggregate principal amount that was paid on April 1, 2014 to certain option holders of Hudson. This acquisition provided us with an additional proven premium denim brand and enhanced our prospects for growth across wholesale, retail and e-commerce, both domestically and overseas, and created the potential for improved purchasing authority with current and future vendors and other operational efficiencies. As of September 30, 2013, the Hudson business represented approximately 40 percent of our consolidated total assets at November 30, 2013 and approximately three percent of consolidated net loss for the year ended November 30, 2013.
During fiscal 2014 and 2015, we believed that our growth potential relied on the integration of the Hudson and Joe's Jeans operations. We did not achieve the desired level of integration on our original timetable. As a result, we failed to meet certain financial covenants set forth in our Term Loan Credit Agreement with Garrison. On November 6, 2014, we received a notice of default and demand for payment of default interest from Garrison, as term loan agent, under the Term Loan Credit Agreement. As a result of the default under the Term Loan Credit Agreement, we were also in default under the terms of our Revolving Credit Agreement and our factoring facility with CIT and we were prohibited from making payments under the Convertible Notes and the obligations to Mr. Dahan.
Additionally, during fiscal 2014, our business was also impacted by a decline in our overall Joe's® business, but offset by the addition of sales from the acquisition of Hudson. On a comparative basis, sales of our men's and women's denim bottoms were, and continue to be, impacted by a weakening in the overall denim market, as consumer preference shifts to non-denim bottoms. Both brands have been focused on designing new products in a variety of fits and washes with new and innovative fabrics to give the customer a reason to purchase a new pair of jeans. Beginning in fiscal 2012, we also offered a line, else™, that had price points starting at $68 and was created to reach young women who are looking for a premium denim-like product at a more affordable price. The increases and decreases in sales related to this brand impacted our comparative sales during fiscal 2013 and 2014. We sold the else™ trademark pursuant to the Asset Sale and at the time of the sale, the else™ brand had a very limited assets and distribution in the international market.
On January 19, 2015, our President and Chief Executive Officer, Marc. B. Crossman, resigned. As a result of the defaults and the resignation of our CEO, our Board determined that it was in the best interests of the company and our stockholders to explore all of strategic alternatives to remedy the defaults with our lenders and to find a new CEO to lead us. On January 29, 2015, we engaged Carl Marks Advisory Group ("Carl Marks") to help us explore all of our alternatives to resolve our financial condition. In March 2015, Carl Marks launched its strategic transaction process seeking proposals for
2
transactions that would generate enough funds that would allow the Company to repay the term loan in full. The indications of interest were for a wide variety of transactions including a partial refinancing, IP sale/license transaction, asset sale transaction and a merger/recapitalization transaction. As part of the process, on September 8, 2015, we entered into various definitive agreements intended to provide a total solution to resolving the Company's operational, financial and management issues, pursuant to which we agreed to (i) the Asset Sale, which was completed September 11, 2015, whereby we sold certain of our operating and intellectual property assets related to the Joe's Business for a total of $80 million, (ii) combine our remaining business operated under the Hudson brand with RG pursuant to the Merger Agreement, (iii) issue and sell $50 million of our Series A Preferred Stock in a private placement to an affiliate of TCP pursuant to the Stock Purchase Agreement, (iv) exchange our outstanding Convertible Notes for a combination of cash, shares of our common stock and the Modified Convertible Notes and (v) gain a CEO with public company experience. On September 11, 2015, the proceeds of the Asset Sale were used to repay all of our indebtedness outstanding under the Term Loan Credit Agreement and a portion of our indebtedness outstanding under our Revolving Credit Agreement. As a result, the Term Loan Credit Agreement was paid in full and terminated on September 11, 2015 and we entered in the Amended and Restated Revolving Credit Agreement with CIT, which provides for a maximum credit availability of $7.5 million and waived certain defaults. See Note 2—Subsequent Events for more information regarding the Merger and the Merger Transaction.
Our auditors have expressed their substantial doubt about our ability to continue as a going concern due to our net working capital deficiency and our recurring losses from operations. All financial statements and information have been prepared assuming that we will continue as a going concern. While management is evaluating all options to cure the defaults, including refinancing, extending the indebtedness and exploring alternatives for other sources of capital for ongoing cash needs, there can be no assurance that we will be able to secure a resolution or refinance or extend the indebtedness and, accordingly, our liquidity and ability to operate could be adversely affected. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern.
Our Joe's® product line, which was sold pursuant to the Asset Sale, included women's and men's denim jeans, pants, shirts, sweaters, jackets and other apparel products. We also offered under our Joe's® brand women's handbags and clutches, women's intimates, children's products, shoes, belts and leather goods produced by us or under various license agreements and we received royalty payments based upon net sales from licensees. Our Hudson® product line includes women's, men's and children's denim jeans, pants, jackets and other bottoms. Similar to the evolution of Joe's®, we expect to evaluate offering a range of products under the Hudson® brand name.
We have retained and continue to operate the 32 Joe's® brand retail stores after the closing of the Operating Asset Purchase Agreement and the IP Asset Purchase Agreement and expect to proceed with the disposition of certain stores; provided, however that, certain retail stores designated by Operating Assets Purchaser will be transferred to the Operating Assets Purchaser on or prior to December 31, 2016 for no additional consideration. Subject to certain limitations on our aggregate net liability with respect to the net costs and expenses related to the operation of the retail stores if the Merger does not close, such costs and expenses will be borne by us, the IP Assets Purchaser and the Operating Assets Purchaser. The Operating Assets Purchaser will supply Joe's® branded merchandise to the retail stores for resale under a license from the IP Assets Purchaser.
For 2015, we believe that our growth drivers will be dependent upon the completion of the Merger and the Merger Transactions, cost saving measures related to the operation of our Hudson subsidiary, the performance of our Hudson brand and the performance of the Joe's® brand retail stores which we still own and operate. Upon completion of the Merger it will be necessary for us to integrate the
3
operations of RG in order to reduce expenses and achieve the synergies that we expect as a result of the acquisition of RG.
Our business is seasonal. The majority of the marketing and sales orders take place from late fall to late spring. The greatest volume of shipments and actual sales are generally made from summer through early fall, which coincides with our third and fourth fiscal quarters, and accordingly, our cash flow is strongest in those quarters. Due to the seasonality of our business, as well as the evolution and changes in our business and product mix, including our acquisition of Hudson and and our sale of the Joe's Business, our quarterly or yearly results are not necessarily indicative of the results for the next quarter or year. Furthermore, because of the growing number of full-price retail and outlet stores opened at different points during the past few fiscal years, we continue to assess the seasonality of our business on our retail segment and its potential impact on our financial results.
Our reportable business segments are Wholesale and Retail. We manage, evaluate and aggregate our operating segments for segment reporting purposes primarily on the basis of business activity and operation. Our Wholesale segment was comprised of sales of Hudson® products to retailers, specialty stores and international distributors, revenue from licensing agreements and includes expenses from sales, trade shows, distribution, product samples and customer service departments. Our Retail segment was comprised of sales to consumers through ten full-price retail stores, 11 outlet stores and through our online retail site at www.hudsonjeans.com. Our Corporate and other is comprised of expenses from corporate operations, which include the executive, finance, legal, human resources, design and production departments and general advertising expenses associated with our products. Sales of our Joe's® products are presented as discontinued operations as a result of the sale of those assets in our condensed consolidated financial statements for all periods presented.
4
Comparison of Fiscal Year Ended November 30, 2014 to Fiscal Year Ended November 30, 2013
| |
Year ended (in thousands) |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
11/30/14 | 11/30/13 | $ Change | % Change | |||||||||
|
(1) | ||||||||||||
Net sales |
$ | 84,225 | $ | 28,417 | $ | 55,808 | 196 | % | |||||
Cost of goods sold |
44,502 | 14,451 | 30,051 | 208 | % | ||||||||
| | | | | | | | | | | | | | |
Gross profit |
39,723 | 13,966 | 25,757 | 184 | % | ||||||||
Gross margin |
47 | % | 49 | % | (2 | )% | (4 | )% | |||||
Selling, general and administrative |
42,329 |
21,956 |
20,373 |
93 |
% |
||||||||
Impairment of goodwill |
23,585 | — | 23,585 | N/A | |||||||||
Depreciation and amortization |
3,637 | 1,319 | 2,318 | 176 | % | ||||||||
Retail stores impairment |
840 | — | 840 | N/A | |||||||||
| | | | | | | | | | | | | | |
Operating loss from continuing operations |
(30,668 | ) | (9,309 | ) | (21,359 | ) | (229 | )% | |||||
Interest expense |
5,141 |
1,032 |
4,109 |
398 |
% |
||||||||
Other (income) expense |
(2,268 | ) | 209 | (2,477 | ) | (1,185 | )% | ||||||
| | | | | | | | | | | | | | |
(Loss before taxes |
(33,541 | ) | (10,550 | ) | (22,991 | ) | 218 | % | |||||
Income tax (benefit) provision |
(5,059 |
) |
(3,134 |
) |
(1,925 |
) |
61 |
% |
|||||
| | | | | | | | | | | | | | |
Income (loss) from continuing operations |
$ | (28,482 | ) | $ | (7,416 | ) | $ | (21,066 | ) | (284 | )% | ||
Income (loss) from discontinued operations, net of tax |
766 |
102 |
664 |
651 |
% |
||||||||
| | | | | | | | | | | | | | |
Net loss and comprehensive loss |
$ | (27,716 | ) | $ | (7,314 | ) | $ | (20,402 | ) | (279 | )% | ||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
5
Results of Operations
The following table sets forth certain statements of operations data by our reportable segments for the periods as indicated:
| |
Year ended (in thousands) |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
11/30/14 | 11/30/13 | $ Change | % Change | |||||||||
|
(1) | ||||||||||||
Net sales |
|||||||||||||
Wholesale |
$ | 68,377 | $ | 15,621 | $ | 52,756 | 338 | % | |||||
Retail |
15,848 | 12,796 | 3,052 | 24 | % | ||||||||
| | | | | | | | | | | | | | |
|
$ | 84,225 | $ | 28,417 | $ | 55,808 | 196 | % | |||||
Gross Profit: |
|||||||||||||
Wholesale |
$ | 29,006 | $ | 5,227 | $ | 23,779 | 455 | % | |||||
Retail |
10,717 | 8,739 | 1,978 | 23 | % | ||||||||
| | | | | | | | | | | | | | |
|
$ | 39,723 | $ | 13,966 | $ | 25,757 | 184 | % | |||||
Operating (loss) income: |
|||||||||||||
Wholesale |
$ | 18,550 | $ | 3,700 | $ | 14,850 | 401 | % | |||||
Retail |
(1,774 | ) | (1,020 | ) | (754 | ) | 74 | % | |||||
Corporate and other |
(47,444 | ) | (11,989 | ) | (35,455 | ) | 296 | % | |||||
| | | | | | | | | | | | | | |
|
$ | (30,668 | ) | $ | (9,309 | ) | $ | (21,359 | ) | 229 | % | ||
Fiscal Year 2014 Overview
Net Sales
Our net sales increased to $84,225,000 in fiscal 2014 from $28,417,000 in fiscal 2013, a 196 percent increase.
More specifically, our wholesale net sales increased to $68,377,000 from fiscal 2014 from $15,621,000 for fiscal 2013, a 338 percent increase. This increase in our wholesale sales is attributed to the $52,756,000 in wholesale sales from for a full year from Hudson®.
Our retail net sales increased to $15,848,000 for fiscal 2014 from $12,796,000 for fiscal 2013, a 24 percent increase. The primary reason for this increase was due to $3,029,000 in retail sales from Hudson's® e-shop. Same store sales for Joe's® stores opened at least 12 months decreased by five percent.
Gross Profit
Our gross profit increased to $39,723,000 for fiscal 2014 from $13,966,000 for fiscal 2013, a 184 percent increase. Our overall gross margin decreased to 47 percent from 49 percent for fiscal 2013.
Our wholesale gross profit increased to $29,006,000 for fiscal 2014 from $5,227,000 for fiscal 2013, a 455 percent increase. Our wholesale gross profit grew for fiscal 2014 compared to fiscal 2013 due to the addition of a full year of sales from Hudson®. Our wholesale gross margin for fiscal 2014 increased to 42 percent compared to 33 percent for the prior year comparable period. The increase in gross margin can be mostly attributed to an amortization charge of approximately $2,000,000 in fiscal 2013
6
and $1,000,000 in the first quarter of fiscal 2014 related to a fair value step up of inventory acquired from Hudson and subsequently sold in fiscal 2014.
Our retail gross profit increased to $10,717,000 for fiscal 2014 from $8,739,000 for fiscal 2013, a 23 percent increase. This increase is primarily attributable to the additional retail sales from Hudson's® e-shop that generated an additional $2,176,000 in gross profit for fiscal 2014. We did not open any additional store locations in fiscal 2014. Our retail gross margin percentage was comparable at 68 percent in both periods.
Selling, General and Administrative Expense, including Depreciation and Amortization, and Impairment of Assets
Selling, general and administrative, or SG&A, expenses, including, depreciation and amortization, and impairment of assets increased to $70,391,000 for fiscal 2014 from $23,275,000 for fiscal 2013, a 202 percent increase. Our SG&A expenses increased primarily due to a $23,585,000 goodwill impairment charge as the carrying value of our Hudson wholesale reporting unit exceeded our fair market value and $25,322,000 of additional expenses related to the operation of our Hudson subsidiary. Our SG&A includes expenses related to employee and employee related benefits, sales commissions, advertising, sample production, facilities and distribution related costs, professional fees, stock-based compensation, factor and bank fees, impairment of assets, transaction expenses in connection with the Hudson acquisition and also includes depreciation and amortization.
Our wholesale SG&A expense increased to $10,456,000 for fiscal 2014 compared to $1,527,000 for fiscal 2013, a 585 percent increase. Our wholesale SG&A expense was higher in fiscal 2014 mostly due to the additional SG&A expense associated with a full year of Hudson's operations.
Our retail SG&A expense increased to $12,491,000 for fiscal 2014 compared to $9,759,000 for fiscal 2013, a 28 percent increase. Our retail SG&A expense increased mostly due to an additional retail expense of $1,407,000 associated with Hudson's e-commerce operations. In fiscal 2014, we recorded a retail store impairment charge of $840,000 related to the property and equipment at six of our retail stores. Based on the operating performance of these stores, we believed that we could not recover the carrying value of the property and equipment at these stores. In addition, fiscal 2014 also includes the full year of operations of four stores opened at various times during fiscal 2013.
Our corporate and other SG&A expense increased to $47,444,000 for fiscal 2014 compared to $11,989,000 for fiscal 2013, a 296 percent increase. Our corporate and other SG&A expense includes general overhead associated with our operations, including Hudson, and professional fees and other transaction expenses associated with the acquisition of Hudson. Our corporate and other SG&A expense includes a $23,585,000 goodwill impairment charge for fiscal 2014 as the carrying value of our Hudson wholesale reporting unit exceeded our fair market value. In fiscal 2013, we recorded $4,262,000 of transaction expenses in connection with the acquisition of Hudson that we did not have in fiscal 2014. We also had additional expenses for Hudson's corporate operations of $14,986,000 in fiscal 2014 that we did not have in fiscal 2013.
Operating (Loss) Income from Continuing Operations
We had an operating loss of $30,668,000 for fiscal 2014 compared to $9,309,000 for fiscal 2013. We generated a higher operating loss primarily due to a $23,585,000 goodwill impairment charge for fiscal 2014.
Due to the addition of Hudson's operations, our wholesale operating income increased to $18,550,000 for fiscal 2014 from $3,700,000 for fiscal 2013, a 401 percent increase. As a result of negative same store sales, lower gross margins, higher expenses associated with operating four stores for a full fiscal year and a retail store impairment charge, we generated a retail operating loss of
7
$1,774,000 for fiscal 2014 compared to an operating loss of $1,020,000 for fiscal 2013. Corporate operating loss increased to $47,444,000 for fiscal 2014 from an operating loss of $11,989,000 for fiscal 2013 mostly due to a $23,585,000 goodwill impairment charge for fiscal 2014.
Interest Expense
Our interest expense increased to $5,141,000 for fiscal 2014 from $1,032,000 for fiscal 2013. Our interest expense is primarily associated with interest expense from our Revolving Credit Agreement with CIT and our Term Loan Credit Agreement with Garrison and amortization of debt discounts and deferred financing costs associated the finance arrangements resulting from the Hudson acquisition in September 2013. We entered into the Revolving Credit Agreement and the Term Loan Credit Agreement in September 2013, therefore, our interest expense in 2013 only reflects two months of interest under these agreements. Effective retroactively to October 1, 2014, we began paying additional interest to both CIT and Garrison, respectively, due to the default under the respective agreements. We pay to CIT an additional one percent interest and Garrison an additional two percent interest.
Other Expense
Other expense mostly represents the change in fair value of the embedded conversion derivative from November 30, 2013 to May 8, 2014, the date of our annual meeting of stockholders approving the conversion of shares under the convertible notes, and this change in value was $2,268,000 for fiscal 2014.
Income Taxes
Our effective tax rate was 15 percent for fiscal 2014 compared to 30 percent for fiscal 2013. For fiscal 2014, we had an unfavorable permanent book/tax difference associated with goodwill impairment, which reduced our tax benefit. For fiscal 2013, we had expenses that were not deductible for tax related to the acquisition of Hudson, which reduced our tax benefit.
Loss from Continuing Operations
We generated a loss from continuing operations of $28,482,000 in fiscal 2014 compared to $7,416,000 in fiscal 2013.
Income from Discontinued Operations
We generated income from discontinued operations of $766,000 in fiscal 2014 compared to $102,000 in fiscal 2013.
Net (Loss) Income and Comprehensive (Loss) Income
We generated a net loss of $27,716,000 in fiscal 2014 compared to a net loss of $7,314,000 in fiscal 2013. The increase in our net loss was primarily due to a $23,585,000 goodwill impairment charge for fiscal 2014, a retail store impairment charge of $840,000 and higher interest expense operating associated with the acquisition of Hudson.
8
Comparison of Fiscal Year Ended November 30, 2013 to Fiscal Year Ended November 30, 2012
| |
Year ended (in thousands) |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
11/30/13 | 11/30/12 | $ Change | % Change | |||||||||
|
(1) | ||||||||||||
Net sales |
$ | 28,417 | $ | 9,484 | $ | 18,933 | 200 | % | |||||
Cost of goods sold |
14,451 | 2,835 | 11,616 | 410 | % | ||||||||
| | | | | | | | | | | | | | |
Gross profit |
13,966 | 6,649 | 7,317 | 110 | % | ||||||||
Gross margin |
49 | % | 70 | % | (21 | )% | (30 | )% | |||||
Selling, general and administrative |
21,956 |
10,728 |
11,228 |
105 |
% |
||||||||
Depreciation and amortization |
1,319 | 565 | 754 | 133 | % | ||||||||
| | | | | | | | | | | | | | |
Operating (loss) income from continuing operations |
(9,309 | ) | (4,644 | ) | (4,665 | ) | (128 | )% | |||||
Interest expense |
1,032 |
— |
1,032 |
N/A |
|||||||||
Other expense |
209 | — | 209 | N/A | |||||||||
| | | | | | | | | | | | | | |
(Loss) income before taxes |
(10,550 | ) | (4,644 | ) | (5,906 | ) | 127 | % | |||||
Income tax provision |
(3,134 |
) |
(2,012 |
) |
(1,122 |
) |
56 |
% |
|||||
| | | | | | | | | | | | | | |
Income (loss) from continuing operations |
(7,416 | ) | (2,632 | ) | (4,784 | ) | (182 | )% | |||||
Income (loss) from discontinued operations, net of tax |
102 |
8,197 |
(8,095 |
) |
(99 |
)% |
|||||||
| | | | | | | | | | | | | | |
Net (loss) income and comprehensive (loss) income |
$ | (7,314 | ) | $ | 5,565 | $ | (12,879 | ) | 231 | % | |||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
9
Results of Operations
The following table sets forth certain statements of operations data by our reportable segments for the periods as indicated:
| |
Year ended (in thousands) |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
11/30/13 | 11/30/12 | $ Change | % Change | |||||||||
|
(1) | ||||||||||||
Net sales |
|||||||||||||
Wholesale |
$ | 15,621 | $ | — | $ | 15,621 | N/A | ||||||
Retail |
12,796 | 9,484 | 3,312 | 35 | % | ||||||||
| | | | | | | | | | | | | | |
|
$ | 28,417 | $ | 9,484 | $ | 18,933 | 200 | % | |||||
Gross Profit: |
|||||||||||||
Wholesale |
$ | 5,227 | $ | — | $ | 5,227 | N/A | ||||||
Retail |
8,739 | 6,649 | 2,090 | 31 | % | ||||||||
| | | | | | | | | | | | | | |
|
$ | 13,966 | $ | 6,649 | $ | 7,317 | 110 | % | |||||
Operating (loss) income: |
|||||||||||||
Wholesale |
$ | 3,700 | $ | — | $ | 3,700 | N/A | ||||||
Retail |
(1,020 | ) | 78 | (1,098 | ) | (1,408 | )% | ||||||
Corporate and other |
(11,989 | ) | (4,722 | ) | (7,267 | ) | 154 | % | |||||
| | | | | | | | | | | | | | |
|
$ | (9,309 | ) | $ | (4,644 | ) | $ | (4,665 | ) | 100 | % | ||
Fiscal Year 2013 Overview
Net Sales
Our net sales increased to $28,417,000 in fiscal 2013 from $9,484,000 in fiscal 2012, an 200 percent increase.
More specifically, our wholesale net sales increased to $15,621,000 for fiscal 2013 from $0 for fiscal 2012. Our wholesale sales for fiscal 2013 represents the addition from Hudson® since our acquisition was completed on September 30, 2013.
Our retail net sales increased to $12,796,000 for fiscal 2013 from $9,484,000 for fiscal 2012, a 35 percent increase. The primary reason for this increase was the opening of five additional retail stores since the end of fiscal 2012 that contributed to the overall sales increase for this segment and $475,000 in retail sales from Hudson's® e-shop as a result of the acquisition. Same store sales for Joe's® stores opened at least 12 months decreased by four percent.
Gross Profit
Our gross profit increased to $13,966,000 for fiscal 2013 from $6,649,000 for fiscal 2012, an 110 percent increase. Our overall gross margin decreased to 49 percent for fiscal 2013 from 70 percent for fiscal 2012.
Our wholesale gross profit increased to $5,227,000 for fiscal 2013 from $0 for fiscal 2012. Our wholesale gross profit grew for fiscal 2013 compared to fiscal 2012 due to the addition of sales from Hudson®. Our wholesale gross margin for fiscal 2013 was 33 percent and was impacted by an
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amortization charge of approximately $2,000,000 related to a fair value step up of inventory acquired from the acquisition of Hudson and sold prior to our fiscal year end.
Our retail gross profit increased to $8,739,000 for fiscal 2013 from $6,649,000 for fiscal 2012, a 31 percent increase. We increased the number of store locations in fiscal 2013 compared to fiscal 2012. In fiscal 2013, we operated 11 outlet stores and 12 full price retail stores compared to 11 outlet stores and 9 full price retail stores in fiscal 2012. Our retail gross margin percentage decreased to 68 percent from 70 percent in fiscal 2012 primarily due to more promotional activity at our retail stores due to heavier activity by our competitors than in the prior year period. Gross profit attributable to sales from Hudson's e-shop totaled $364,000 for fiscal 2013.
Selling, General and Administrative Expense, including Depreciation and Amortization
Selling, general and administrative, or SG&A, expenses increased to $23,275,000 for fiscal 2013 from $11,293,000 for fiscal 2012, a 106 percent increase. Our SG&A includes expenses related to employee and employee related benefits, sales commissions, advertising, sample production, facilities and distribution related costs, professional fees, stock-based compensation, factor and bank fees, transaction expenses in connection with the Hudson acquisition and depreciation and amortization.
Our wholesale SG&A expense increased to $1,527,000 for fiscal 2013 from $0 for fiscal 2012. Our wholesale SG&A expense was higher in fiscal 2013 mostly due to SG&A expense associated with Hudson's operations.
Our retail SG&A expense increased to$9,759,000 for fiscal 2013 from $6,571,000 for fiscal 2012, a 49 percent increase. Our retail SG&A expense increased due to the addition of costs associated with opening and operating three new retail stores since the end of fiscal 2012, which included additional store payroll, store rents and depreciation expense.
Our corporate and other SG&A expense increased to $11,989,000 for fiscal 2013 from $4,722,000 for fiscal 2012, a 154 percent increase. Our increase in corporate and other SG&A expense was primarily attributable to $4,262,000 of professional fees and other transaction expenses in connection with the acquisition of Hudson and the addition of expenses for Hudson's corporate operations of $3,260,000 for the two months ended November 30, 2013.
Operating (Loss) Income from Continuing Operations
We had an operating loss of $9,309,000 for fiscal 2013 compared to $4,644,000 for fiscal 2012. We generated an increase in our operating loss primarily due to higher SG&A expenses related to the acquisition of Hudson and expenses related to increasing our retail store base.
Due to the addition of Hudson's operations, our wholesale operating income increased to $3,700,000 for fiscal 2013 from $0 for fiscal 2012. As a result of lower gross margins and higher expenses associated with opening and operating new stores, we generated a retail operating loss of $1,020,000 for fiscal 2013 compared to retail operating income of $78,000 for fiscal 2012. Corporate operating loss increased to $11,989,000 from $4,722,000 mostly due to an increase in SG&A expenses related to the acquisition and the inclusion of Hudson's corporate expenses.
Interest Expense
Our interest expense increased to $1,032,000 for fiscal 2013 from $0 for fiscal 2012. Our interest expense for fiscal 2013 is primarily associated with interest expense from our Revolving Credit Agreement with CIT and our Term Loan Credit Agreement with Garrison and amortization of debt discounts and deferred financing costs associated the finance arrangements resulting from the Hudson acquisition.
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Other Expense
Other expense mostly represents the change in fair value of the embedded conversion derivative from September 30, 2013 to November 30, 2013 and this change in value was $209,000 for fiscal 2013.
Income Taxes
Our effective tax rate was 30 percent for fiscal 2013 compared to 43 percent for fiscal 2012. For fiscal 2013, we had expenses that were not deductible for tax related to the acquisition of Hudson, which reduced our tax benefit.
(Loss) Income from Continuing Operations
We generated a loss from continuing operations of $7,416,000 in fiscal 2013 compared to $2,632,000 in fiscal 2012.
Income from Discontinued Operations
We generated income from discontinued operations of $102,000 in fiscal 2013 compared to $8,197,000 in fiscal 2012.
Net (Loss) Income and Comprehensive (Loss) Income
We generated a net loss of $7,314,000 in fiscal 2013 compared to net income of $5,565,000 in fiscal 2012. The shift to net loss from net income was primarily due to an increase in SG&A expense associated with transaction and other expenses related to the acquisition and integration of Hudson into our consolidated financial statements, an increase in expenses related to increasing our retail store base and the contingent consideration buy out expense recorded in the first quarter of fiscal 2013 that is part of our discontinued operations.
Liquidity and Capital Resources
Until the acquisition of Hudson on September 30, 2013, our primary sources of liquidity were: (i) cash from sales of our products; (ii) sales from accounts receivable factoring facilities and advances against inventory; and (iii) utilizing existing cash balances. Beginning September 30, 2013, in connection with the acquisition of Hudson, we entered into an amended and restated accounts receivable factoring facility and the Revolving Credit Agreement with CIT that provided advances to us for eligible accounts receivable and eligible inventory up to $50,000,000, based upon the value of the eligible accounts receivable and inventory less any reserves imposed by CIT. The initial proceeds from the advances under this revolving credit facility, which included accounts receivable and inventory borrowing, were used to pay a portion of the consideration for the acquisition and fees and expenses associated with the acquisition and the remainder was used to repay our existing factor loans and for working capital and other general corporate purposes. In connection with the Asset Sale, we repaid a portion of our indebtedness under the Revolving Credit Agreement with CIT and amended the Revolving Credit Agreement pursuant to the Amended and Restated Revolving Credit Agreement. The Amended and Restated Revolving Credit Agreement matures on December 31, 2015.
In addition, in connection with the acquisition of Hudson, we entered into the Term Loan Credit Agreement for $60,000,000 with Garrison to finance the remainder of the purchase price required for the acquisition. Under the Term Loan Credit Agreement, we paid interest to Garrison and were required to make prepayments under certain circumstances. The term loan was set to mature on September 30, 2018. We used a portion of the proceeds of the Asset Sale to repay all of our indebtedness outstanding under the Term Loan Credit Agreement. As a result, the Term Loan Credit Agreement was paid in full and terminated on September 11, 2015.
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Both the Revolving Credit Agreement and the Term Loan Credit Agreement, along with the Convertible Notes issued in connection with the acquisition of Hudson are discussed in more detail below under "Financing Arrangements Related to the Acquisition of Hudson."
Under the amended and restated factoring agreement entered into on September 30, 2013, we continue to sell or assign to CIT certain of our accounts receivable, including accounts arising from or related to sales of inventory and the rendition of services. We pay a factoring rate of 0.50 percent for accounts for which CIT bears the credit risk, subject to discretionary surcharges and 0.35 percent for accounts for which we bear the credit risk, but in no event less than $3.50 per invoice. The interest rate associated with borrowings equals the interest rate then in effect for "Revolving A Loans" pursuant to the revolving credit agreement. As of November 30, 2015, that interest rate was approximately 2.75 percent. The amended and restated factoring agreement may be terminated by CIT upon 60 days' written notice or immediately upon the occurrence of an event of default as defined in the agreement. In connection with the Asset Sale, we also entered into a Reassignment and Termination Agreement, dated as of September 11, 2015 (the "Reassignment and Termination Agreement"), pursuant to which Joe's Jeans Subsidiary, Inc. ("Joe's Sub") was terminated as a party to the amended and restated factoring agreement and CIT reassigned to Joe's Sub all of its accounts factored with CIT which were outstanding as of the date of the Reassignment and Termination Agreement. The accounts receivable agreement may be terminated by us upon 60 days' written notice prior to September 30, 2018 or annually with 60 days' written notice prior to September 30th of each year thereafter and remains effective until terminated.
For the fiscal year ended 2014, we used $10,333,000 of cash flow from operations. Cash flow from financing activities consisted of $13,665,000 of borrowings under our revolving credit facility. We made payments of $343,000 for taxes on restricted stock units. We purchased $227,000 in restricted stock, repaid our promissory tax notes in the aggregate amount of $1,235,000 and made payments of $75,000 against our term loan. We used $381,000 in investing activities, $765,000 for the purchase of property and equipment and $481,000 for a final working capital payment relating to our purchase of Hudson. Our cash balance increased to $1,054,000 as of November 30, 2014.
As of November 30, 2014, our cash balance was $1,054,000 and our cash availability with CIT was approximately $12,000,000. This amount with CIT fluctuates on a daily basis based upon invoicing and collection related activity by CIT on our behalf. As of November 30, 2014, our revolving credit facility had an outstanding balance of $31,338,000.
For the remainder of fiscal 2015, our primary capital needs are for: (i) operating expenses; (ii) payments, including interest, required to be made under our amended and restated factoring facility, Amended and Restated Revolving Credit Agreement, and Convertible Notes, which continue to accrue additional interest at the default rates; (iii) working capital necessary to fund inventory purchases; (iv) payments related to restructuring and advice of our financial and legal advisors related to strategic alternatives, including the Asset Sale and the completion of the Merger and Merger Transaction; (v) financing extensions of trade credit to our customers; (vi) payment for the fixed amount paid to Mr. Dahan pursuant to our agreement with him, including any additional payments not made during the period we were prohibited from making payments; and (vii) payments for expenses associated with restructuring our operations in connection with the Asset Sale and the completion of the Merger and Merger Transaction. We anticipate funding our operations through working capital generated by the following: (i) cash flow from sales of our products from the combined companies; (ii) managing our operating expenses and inventory levels; (iii) maximizing trade payables with our domestic and international suppliers; (iv) increasing collection efforts on existing accounts receivables; (v) utilizing our Amended and Restated Revolving Credit Agreement with CIT, which includes the amended and restated factoring facility; and (vi) proceeds from the Asset Sale.
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Based on our cash on hand, cash flow from operations and the expected borrowing availability under the Amended and Restated Revolving Credit Agreement with CIT based upon our borrowing base and sales forecasts, we believe that we have the working capital resources necessary to meet our projected operational needs for the remainder of fiscal 2015. However, if we require more capital for growth and integration or if we experience a decline in sales and/or operating losses, we believe that it will be necessary to obtain additional working capital through additional credit arrangements. However, there can be no assurance that other financings will be available if needed. Our inability to fulfill any interim working capital requirements raises a substantial doubt about our ability to continue as a going concern for a reasonable period of time.
We believe that the rate of inflation over the past few years has not had a significant adverse impact on our net sales or income from continuing operations.
Financing Arrangements Related to the Acquisition of Hudson
As discussed above, in connection with the acquisition of Hudson we entered into the Revolving Credit Agreement with CIT and the Term Loan Credit Agreement with Garrison. We also issued approximately $32,445,000 in convertible notes (face amount) and promissory notes, bearing no interest, for approximately $1,235,000 in aggregate principal amount that was paid on April 1, 2014 to certain option holders of Hudson.
The Convertible Notes
The Convertible Notes were issued with different interest rates and conversion features for Hudson's management stockholders and Fireman, respectively. Interest on the Convertible Notes is paid in a combination of cash and additional paid-in-kind notes, or PIK notes. Convertible Notes in an aggregate principal amount of approximately $22,885,000 (face amount) were issued to Hudson's management stockholders, are structurally and contractually subordinated to our senior debt and mature on March 31, 2019. All of the notes are expressly junior and subordinated in right of payment to all amounts due and owing upon any indebtedness outstanding under the Revolving Credit Agreement and the Term Loan Credit Agreement (as discussed below). Due to the defaults and events of default under the Revolving Credit Agreement and Term Loan Credit Agreement, we are prohibited from making any payments under the Convertible Notes.
The management notes accrue interest quarterly on the outstanding principal amount (i) from September 30, 2013 until the earlier to occur of the date of conversion of the notes or November 30, 2014 at a rate of 10 percent per annum, which is payable 7.68 percent in cash and 2.32 percent in PIK notes, (ii) from December 1, 2014 until the earlier to occur of the date of conversion of the notes or September 30, 2016 at a rate of 10 percent per annum payable in cash, and (iii) from October 1, 2016 until the earlier to occur of the date of conversion of the notes or the date such principal amount is paid in full at a rate of 10.928 percent per annum payable in cash. Payment of interest at the cash pay rate under clause (ii) or (iii), as applicable, for any payment date will be subject to satisfaction of certain financial conditions for us. As of December 1, 2014, we did not meet such financial conditions, and therefore, the interest continues to accrue quarterly at a rate of 10 percent per annum, which is payable 7.68 percent in cash and 2.32 percent in PIK notes. In addition, because we are prohibited from making any payments under the Convertible Notes, as of January 1, 2015, we began to accrue an additional two percent interest under the default rate in cash. The management notes become convertible by each of the holders beginning on September 30, 2015 until maturity on March 31, 2019 into shares of our common stock, cash, or a combination of cash and common stock, with the settlement choice at our election.
The approximately $9,560,000 (face amount) in aggregate principal amount of convertible notes issued to Fireman are structurally and contractually subordinated to our senior debt and mature on
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March 31, 2019. The Fireman note accrues interest quarterly on the outstanding principal amount (i) from September 30, 2013 until the earlier to occur of the date of conversion of the notes or November 30, 2014 at a rate of 6.5 percent per annum, which is payable 3 percent in cash and 3.5 percent in PIK notes, (ii) from December 1, 2014 until the earlier to occur of the date of conversion of the notes or September 30, 2016 at a rate of 6.5 percent per annum payable in cash, and (iii) from October 1, 2016 until the earlier to occur of the date of conversion of the notes or the date such principal amount is paid in full at a rate of 7 percent per annum payable in cash. Payment of interest at the cash pay rate under clause (ii) or (iii), as applicable, for any payment date will be subject to satisfaction of certain financial conditions for us. As of December 1, 2014, we did not meet such financial conditions, and therefore, the interest continues to accrue quarterly at a rate of 6.5 percent per annum, which is payable 3 percent in cash and 3.5 percent in PIK notes. In addition, because we are prohibited from making any payments under the Convertible Notes, as of January 1, 2015, we accrue an additional two and a half percent interest under the default rate in cash. The Fireman note became convertible by the holder on October 14, 2014 until maturity on March 31, 2019 into shares of common stock, cash, or a combination of cash and common stock, with the settlement choice at our election.
Each of the notes is convertible, in whole but not in part, at a conversion price of $1.78 per share, subject to certain adjustments, into approximately 18,200,000 shares of our common stock. The Fireman note may be converted at its sole election and the management notes may be converted at either a majority of the holders' election or individually, depending on the holder. If we elect to pay cash with respect to a conversion of the notes, the amount of cash to be paid per share will be equal to (a) the number of shares of common stock issuable upon such conversion multiplied by (b) the average of the closing prices for the common stock over the 20 trading day period immediately preceding the notice of conversion. We will have the right to prepay all or any portion of the principal amount of the notes at any time by paying 103 percent of the principal amount of the portion of any management note subject to prepayment or 100 percent of the principal amount of the portion of the Fireman note subject to prepayment.
In connection with the quarterly interest payments payable on January 1, 2014, April 1, 2014, July 1, 2014, October 1, 2014, January 1, 2015 and April 1, 2015 we issued a total of approximately $218,000, $215,000, $219,000, $223,000, $225,000 and $221,000, respectively, in the aggregate principal amount of Convertible Notes as PIK Notes to the holders of the Convertible Notes. In addition, because we are prohibited from making any payments under the Convertible Notes, we did not pay the quarterly interest payment on January 1, 2015 and are accruing at an additional two or two and one-half percent interest under the default rate of the agreements, respectively.
On September 8, 2015, we entered into the Rollover Agreement with the holders of our Convertible Notes, pursuant to which the holders of the Convertible Notes have agreed to contribute to us the Convertible Notes in exchange for the following:
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The Rollover Agreement will be automatically terminated upon termination of the Merger Agreement prior to the Rollover Time. The Rollover Agreement may also be terminated by the Company or by Mr. Kim and Fireman if the Rollover Time has not occurred prior to April 8, 2016.
The Modified Convertible Notes are structurally and contractually subordinated to our senior debt and will mature five and a half years following the date of such note. The Modified Convertible Notes accrue interest quarterly on the outstanding principal amount at a rate of 6.5% per annum (to be increased to 7% as of October 1, 2016 with respect to the Modified Convertible notes issued to Fireman), which will be payable 50% in cash and 50% in additional notes; provided, however, that we may, in our sole discretion, elect to pay 100% of such interest in cash. Beginning upon the date of issuance, the Modified Convertible Notes will be convertible by each of the holders into shares of our common stock, cash, or a combination of cash and common stock, at our election.
If we elect to issue only shares of common stock upon conversion of the Modified Convertible Notes, each of the Modified Convertible Notes would be convertible, in whole but not in part, into a number of shares equal to the conversion amount divided by the market price. The conversion amount is (a) the product of (i) the market price, multiplied by (ii) the quotient of (A) the principal amount, divided by (B) the conversion price, minus (b) the aggregate optional prepayment amounts paid to the holder. The market price is the average of the closing prices for our common stock over the 20 trading day period immediately preceding the notice of conversion. If we elect to pay cash with respect to a conversion of the Modified Convertible Notes, the amount of cash to be paid per share will be equal to the conversion amount. We will have the right to prepay all or any portion of the principal amount of the Modified Convertible Notes at any time so long as it makes a pro rata prepayment on all of the Modified Convertible Notes.
Revolving Credit Agreement
The Revolving Credit Agreement with CIT provided us with a revolving credit facility up to $50,000,000 comprised of a revolving A-1 commitment of up to $1,000,000 and a revolving A commitment of up to $50,000,000 minus the revolving A-1 commitment. Our actual maximum credit availability under the revolving facility varied from time to time and was determined by calculating a borrowing base, which was based on the value of the eligible accounts and eligible inventory minus reserves imposed by CIT. The revolving facility also provided for swingline loans, up to $5,000,000 sublimit, and letters of credit, up to $1,000,000 sublimit. Proceeds from advances under the revolving facility were to be used for working capital needs and general corporate purposes and were initially
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used to pay a portion of the consideration for the acquisition and fees and expenses associated with the acquisition and to repay our existing factor loans.
As of August 31, 2015, we were not in compliance with the covenants under the Revolving Credit Agreement as a result of an event of default under the Term Loan Credit Agreement. As of November 30, 2014, February 28, 2015 and May 31, 2015, we were out of compliance with (i) the minimum fixed charge coverage ratio of 1.09x; (ii) the covenant to timely deliver the financial plan and forecast for 2015; (iii) the minimum fixed charge coverage ratio of 1.15x; and (iv) the minimum fixed charge coverage ratio of 1.20x. See "Subsequent Events" above for a discussion of the forbearance agreements and amendments to the Revolving Credit Agreement and Term Loan Credit Agreement entered into with CIT and Garrison.
In connection with the Asset Sale, a portion of our indebtedness under the Revolving Credit Agreement was repaid, and on September 11, 2015, we entered into the Amended and Restated Revolving Credit Agreement. Among other things, the Amended and Restated Revolving Credit Agreement (i) amended and restated the Revolving Credit Agreement as it had been amended from time to time and (ii) waived the "Existing Defaults" and "Forbearance Defaults" (each as defined under the CIT Forbearance Agreement) and certain other defaults. Pursuant to a separate consent and agreement, CIT and the lenders consented to the Asset Sale.
The Amended and Restated Revolving Credit Agreement provides for a revolving facility (the "Revolving Facility") with a revolving commitment of up to $10,000,000 (the "Revolving Commitment"). Our actual maximum credit availability under the Revolving Facility varies from time to time and is equal to the lesser of (i) the Revolving Commitment minus an availability block of $2.5 million, or $7.5 million, and (ii) a calculated borrowing base, which is based on the value of the eligible accounts and eligible inventory minus the availability block of $2.5 million minus reserves imposed by the revolving lenders, all as specified in the Amended and Restated Revolving Credit Agreement. The Revolving Facility provides for swingline loans, up to $1 million sublimit, and letters of credit, up to $1 million sublimit, within such credit availability limits. Proceeds from advances under the Revolving Facility may be used (i) to pay fees and expenses in connection with the Amended and Restated Revolving Credit Agreement and the Asset Sale and (ii) for working capital needs and general corporate purposes.
All unpaid loans under the Revolving Facility mature on December 31, 2015. We have the right at any time and from time to time to (i) terminate the commitments under the Revolving Facility in full and (ii) prepay any borrowings under the Revolving Facility, in whole or in part, without terminating or reducing the commitment under the Revolving Facility.
The Revolving Facility is guaranteed by the Company and all of its subsidiaries, and is secured by liens on substantially all assets owned by the borrowers and guarantors party thereto, subject to permitted liens and exceptions. In connection with the Asset Sale, the Guarantee and Collateral Agreement, dated as of September 30, 2013, by and among Joe's Sub and Hudson, us, certain of our subsidiaries party thereto and CIT, as administrative agent and collateral agent, as amended (the "Guarantee and Collateral Agreement"), was further amended pursuant to the Reaffirmation and Amendment of Collateral Documents, dated as of September 11, 2015, by and among CIT, the Company, Joe's Sub, Hudson, Innnovo West Sales, Inc., Joe's Jeans Retail Subsidiary, Inc., Hudson Clothing Holdings, Inc., and HC Acquisition Holdings, Inc (the "Reaffirmation and Amendment of Collateral Documents"), providing for among other things, the addition of the factor as a secured party under the Guarantee and Collateral Agreement.
Advances under the Revolving Facility are in the form of either base rate loans or LIBOR rate loans. The interest rate for base rate loans under the Revolving Commitment fluctuates and is equal to (x) the greatest (the "Alternate Base Rate") of (a) JPMorgan Chase Bank prime rate; (b) the Federal funds rate plus 0.50%; and (c) the rate per annum equal to the 90 day LIBOR published in the New
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York City edition of the Wall Street Journal under "Money Rates" (the "90-Day LIBO Rate") plus 1.0%, in each case, plus (y) 3.50%. The interest rate for LIBOR rate loans under the Revolving Commitment is equal to the 90-Day LIBO Rate per annum plus 4.50%. Interest on the Revolving Facility is payable on the first day of each calendar month and the maturity date. Among other fees, we will pay a commitment fee of 0.25% per annum (due quarterly) on the average daily amount of the unused revolving commitment under the Revolving Facility. We also must pay fees with respect to any letters of credit issued under the Revolving Facility.
The Revolving Facility contains usual and customary negative covenants for transactions of this type, including, but not limited to, restrictions on the Company's and its subsidiaries' ability, to create or incur indebtedness; create liens; consolidate, merge, liquidate or dissolve; sell, lease or otherwise transfer any of its assets (with the Asset Sale expressly permitted); substantially change the nature of its business; make investments or acquisitions; pay dividends; enter into transactions with affiliates; amend material documents, prepay certain indebtedness and make capital expenditures. The negative covenants are subject to certain exceptions as specified in the Amended and Restated Revolving Credit Agreement.
Additionally, in connection with the Asset Sale, Joe's Sub, Hudson, the Operating Assets Purchaser and CIT entered into the Reassignment and Termination Agreement, pursuant to which, Joe's Sub was terminated as a party to the amended and restated factoring agreement. Subject to the terms and conditions provided in the Reassignment and Termination Agreement, CIT reassigned to Joe's Sub all of its accounts factored with CIT which were outstanding as of the date of the Reassignment and Termination Agreement.
Term Loan Credit Agreement
Our indebtedness outstanding under the Term Loan Credit Agreement was fully repaid with a portion of the proceeds of the Asset Sale. As a result, the Term Loan Credit Agreement was terminated on September 11, 2015. The Term Loan Credit Agreement provided for term loans of up to $60,000,000 and was fully funded to us as of September 30, 2013. The term loan proceeds were used to finance a portion of the consideration for the acquisition of Hudson and to pay fees and expenses associated with the acquisition.
The term loan was to mature on September 30, 2018. We were allowed to prepay the term loan at any time, in whole or in part, subject to the payment of a prepayment fee if we prepay prior to September 30, 2016. The prepayment fee was 2 percent at the time we repaid the loan. In addition, while the loan was outstanding, we were required to make prepayments out of extraordinary receipts, certain percentage of the excess cash flow and certain net proceeds of certain asset sales or equity issuances, in each case (other than a prepayment in connection with excess cash flow), subject to the payment of the prepayment fee.
The term loan facility was guaranteed by us and all of our subsidiaries, and was secured by liens on substantially all assets owned by us, including a first-priority lien on intellectual property owned by us and a second-priority lien on the revolving credit priority collateral.
The interest rate for the term loan fluctuated and was equal to the rate per annum equal to the British Banker Association Interest Settlement Rate for deposits in Dollars with a term of three months, as appears on the Bloomberg BBAM Screen, plus 10.75 percent. Interest was payable on the first day of each calendar month and the maturity date. In addition, because we were in default under the Term Loan Credit Agreement, we were paying an additional two percent interest under the default rate. Our average interest rate, including the default rate, was approximately 14 percent.
The Term Loan Credit Agreement contained usual and customary negative covenants for transactions of this type, including, but not limited to: restrictions on our ability and our subsidiaries'
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ability to create or incur indebtedness; create liens; consolidate, merge, liquidate or dissolve; sell, lease or otherwise transfer any of its assets; substantially change the nature of its business; make investments or acquisitions; pay dividends; enter into transactions with affiliates; amend material documents, prepay certain indebtedness and make capital expenditures. The negative covenants are subject to certain exceptions as specified in the Term Loan Credit Agreement.
In addition, the Term Loan Credit Agreement also required us to maintain (a) (i) at all times, availability under the revolving credit facility of not less than $5,000,000 and (ii) at all times as tested on each date that a borrowing certificate is delivered, the sum of availability under the revolving credit facility plus up to $2,500,000 of unrestricted cash of not less than $7,500,000; (b) a minimum fixed charge coverage ratio; (c) a minimum EBITDA; and (d) a leverage ratio not more than the maximum leverage coverage ratio as set forth in the Term Loan Credit Agreement.
As of August 31, 2015, we were not compliance with the covenants under the Term Loan Credit Agreement. Under the Term Loan Credit Agreement, an event of default had occurred. The minimum EBITDA for the twelve fiscal months ending (i) September 30, 2014 of $22,136,300; (ii) October 31, 2014 of $22,991,900; (iii) November 30, 2014 of $23,417,800 were not met; and (iv) the financial plan and forecast for 2015 was not timely delivered. In addition, as of November 30, 2014, February 28, 2015 and May 31, 2015, we were out of compliance with the (i) minimum fixed charge coverage ratio of 1.09x; (ii) maximum leverage ratio of 3.21x; (iii) minimum fixed charge coverage ratio of 1.15x; (iv) maximum leverage ratio of 3.00x; (v) minimum fixed charge coverage ratio of 1.20x; and (vi) maximum leverage ratio of 2.75x.
See "Subsequent Events" above for a discussion of the forbearance agreements and amendments to the Revolving Credit Agreement and Term Loan Credit Agreement entered into with CIT and Garrison, respectively.
Commitments and Contractual Obligations
The following table sets forth our contractual obligations and commercial commitments for our continuing operations as of November 30, 2014:
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Payments due by period (in thousands) |
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Total | 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | |||||||||||||||
Operating lease obligations |
$ | 26,921 | $ | 4,659 | $ | 4,415 | $ | 4,291 | $ | 4,052 | $ | 2,867 | $ | 6,637 | ||||||||
Purchase obligations |
7,596 | 7,596 | — | — | — | — | — | |||||||||||||||
Long term debt |
59,004 | 59,004 | ||||||||||||||||||||
Convertible notes |
33,320 | — | — | — | — | 33,320 | ||||||||||||||||
Contingent consideration buy-out payable |
3,277 | 3,277 | — | — | — | — | — | |||||||||||||||
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$ | 130,118 | $ | 74,536 | $ | 4,415 | $ | 4,291 | $ | 4,052 | $ | 36,187 | $ | 6,637 | ||||||||
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Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Management's Discussion of Critical Accounting Policies
We believe that the accounting policies discussed below are important to an understanding of our financial statements because they require management to exercise judgment and estimate the effects of uncertain matters in the preparation and reporting of financial results. Accordingly, we caution that these policies and the judgments and estimates they involve are subject to revision and adjustment in the future. While they involve less judgment, management believes that the other accounting policies
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discussed in "Notes to Consolidated Financial Statements—Note 2—Summary of Significant Accounting Policies" included in audited financial statements accompanying this joint proxy and consent solicitation statement/prospectus are also important to an understanding of our financial statements. We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Wholesale revenues are recorded on the accrual basis of accounting when title transfers to the customer, which is typically at the shipping point. We record estimated reductions to revenue for customer programs, including co-op advertising, other advertising programs or allowances, based upon a percentage of sales. We also allow for returns based upon pre-approval or in the case of damaged goods. Such returns are estimated based on historical experience and an allowance is provided at the time of sale.
Retail store revenue is recognized net of estimated returns at the time of sale to consumers. E-commerce sales of products ordered through our retail internet site known as www.joesjeans.com are recognized upon estimated delivery and receipt of the shipment by the customers. E-commerce revenue is also reduced by an estimate of returns. Retail store revenue and E-commerce revenue exclude sales taxes. Revenue from licensing arrangements are recognized when earned in accordance with the terms of the underlying agreements, generally based upon the higher of (a) contractually guaranteed minimum royalty levels and (b) estimates of sales and royalty data received from our licensees. Payments received in consideration of the grant of a license or advanced royalty payments are recognized ratably as revenue over the term of the license agreement. The revenue recognized ratably over the term of the license agreement will not exceed royalty payments received. The unrecognized portion of the upfront payments are included in deferred royalties and accrued expenses depending on the long or short term nature of the payments to be recognized. As of November 30, 2014, we recognized all of the advanced payments under our licensing agreements as income.
Factored Accounts and Receivables, Allowance for Customer Credits and Doubtful Allowances
We evaluate our ability to collect on accounts receivable and charge-backs (disputes from the customer) based upon a combination of factors. Whether a receivable is past due is based on how recently payments have been received and in certain circumstances where we are aware of a specific customer's inability to meet its financial obligations (e.g., bankruptcy filings, substantial downgrading of credit sources). A specific reserve for bad debts is taken against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. Amounts are charged off against the reserve once it is established that amounts are not likely to be collected. We recognize reserves for charge-backs based on our historical collection experience.
The balance in the allowance for customer credits and doubtful accounts as of November 30, 2014 and November 30, 2013 was $844,000 and $283,000, respectively, for non-factored accounts receivables.
Inventory
We continually evaluate the composition of our inventories by assessing slow-turning, ongoing product as well as product from prior seasons. Market value of distressed inventory is valued based on historical sales trends on our individual product lines, the impact of market trends and economic conditions, and the value of current orders relating to the future sales of this type of inventory. Significant changes in market values could cause us to record additional inventory markdowns.
20
Valuation of Long-lived and Intangible Assets and Goodwill
We assess the impairment of identifiable intangibles, long-lived assets and goodwill annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that could trigger an impairment review other than on an annual basis include the following:
When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors and the carrying value exceeds the estimated undiscounted cash flows expected to be generated by the asset, impairment is measured based on a projected discounted cash flow method using a discount rate determined by management. These cash flows are calculated by netting future estimated sales against associated merchandise costs and other related expenses such as payroll, occupancy and marketing. An asset is considered to be impaired if we determine that the carrying value may not be recoverable based upon our assessment of the asset's ability to continue to generate income from operations and positive cash flow in future periods or if significant changes our strategic business objectives and utilization of the assets occurred. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value, which is determined based on discounted future cash flows. The impairment loss calculations require management to apply judgment in estimating future cash flows and the discount rates that reflect the risk inherent in future cash flows. Future expected cash flows for store assets are based on management's estimates of future cash flows over the remaining lease period or expected life, if shorter. We consider historical trends, expected future business trends and other factors when estimating each store's future cash flow. We also consider factors such as: the local environment for each store location, including mall traffic and competition; our ability to successfully implement strategic initiatives; and the ability to control variable costs such as cost of sales and payroll, and in some cases, renegotiate lease costs.
In fiscal 2014, we recorded store impairment charge of $840,000 related to six of our retail stores. Based on the operating performance of these stores, we believed that we could not recover the carrying value of property and equipment located at these stores.
Business acquisitions are accounted for under the purchase method by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Purchased intangible assets with finite lives are amortized over their estimated useful lives. Goodwill and intangible assets with indefinite lives are not amortized but are tested at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable for impairment.
In fiscal 2007, we acquired through merger JD Holdings, which included all of the goodwill and intangible assets goodwill related to the Joe's®, Joe's Jeans™ and JD® logo and marks. On September 30, 2013, we acquired Hudson, which included all of the goodwill and intangible assets related to the Hudson® logos and marks. We have assigned an indefinite life to the remaining intangible assets relating to the trademarks acquired, and therefore, no amortization expenses are expected to be recognized. However, we will test the assets for impairment annually in accordance with
21
our critical accounting policies. As of September 11, 2015, we sold the Joe's®, Joe's Jeans™ and JD® logo and marks in connection with the Asset Sale.
We evaluate goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable using a two-step process. The first step is to determine the fair value of each reporting unit and compare this value to its carrying value. If the fair value exceeds the carrying value, no further work is required and no impairment loss would be recognized. The second step is performed if the carrying value exceeds the fair value of the assets. The implied fair value of the reporting unit's goodwill must be determined and compared to the carrying value of the goodwill.
We review our other indefinite-lived intangible assets for impairment on an annual basis, or when circumstances indicate their carrying value may not be recoverable. We calculate the value of the indefinite-lived intangible assets using a discounted cash flow method, based on the relief from royalty concept.
Our annual impairment testing date is September 30 of each year or when circumstances indicate their carrying value may not be recoverable. Based on our under-performance in the fourth quarter of fiscal 2014, we determined that it was appropriate to perform an impairment testing as of November 30, 2014. Based on our testing we determined that the goodwill allocated to our Hudson wholesale reporting unit was impaired by $23,585,000, and there was no impairment of our other indefinite-lived intangible assets. As of February 28, 2015, we also determined that a triggering event had occurred due to the decline in our market capitalization and tested our goodwill and other indefinite-lived assets for impairment and determined that there was no impairment.
Additional Merger Consideration
In connection with the merger with JD Holdings, we agreed to pay to Mr. Dahan the following contingent consideration in the applicable fiscal year for 120 months following October 25, 2007:
The additional merger consideration, or contingent consideration, was paid in advance on a monthly basis based upon estimates of gross profits after the assumption that the payments were likely to be paid. At the end of each quarter, any overpayments were offset against future payments and any significant underpayments were made.
Under the Financial Accounting Standards Board (FASB) Accounting Standards Codification, or ASC, accounting for consideration transferred to settle a contingency based on earnings or other performance measures, certain criteria is used to determine whether contingent consideration based on earnings or other performance measures should be accounted for as (1) adjustment of the purchase price of the acquired enterprise or (2) compensation for services, use of property or profit sharing. The determination of how to account for the contingent consideration is a matter of judgment that depends on the relevant facts and circumstances. The advanced contingent consideration payments are accounted for as operating expense.
On February 18, 2013, we entered into a new agreement with Mr. Dahan that provided certainty of payments to him by removing the contingencies related to the contingent consideration payments
22
described above. This agreement fixed the overall amount to be paid by us for the remaining months of year six through year 10 with payments being made over an accelerated time period until November 2015 instead of October 2017. Under the agreement, the total aggregate amount Mr. Dahan will receive is $9,168,000. We recorded a one-time charge as an expense for the full amount in the first quarter of fiscal 2013. In addition, Mr. Dahan agreed to a restrictive covenant relating to non-competition and non-solicitation until November 30, 2016 in addition to the restrictive covenant in the original merger agreement. As a result of our defaults pursuant our Term Loan Credit Agreement and Revolving Credit Agreement, we did not make any buy-out payments to Mr. Dahan during fiscal 2015. In connection with the Asset Sale, Mr. Dahan was repaid a portion of the buy-out payment owed to him and the remainder is expected to be paid at the closing of the Merger and Merger Transaction.
Income Taxes
As part of the process of preparing our consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which we operate. The process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for book and tax purposes. These timing differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. Management records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Management has considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. Increases in the valuation allowance result in additional expense to be reflected within the tax provision in the consolidated statement of income. Reserves are also estimated for ongoing audits regarding federal and state issues that are currently unresolved. We routinely monitor the potential impact of these situations.
Contingencies
We record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal and income tax matters requires management to use judgment. Many of these legal and tax contingencies can take years to be resolved. Generally, as the time period increases over which the uncertainties are resolved, the likelihood of changes to the estimate of the ultimate outcome increases. Management believes that the accruals for these matters are adequate. Should events or circumstances change, we could have to record additional accruals.
Stock Based Compensation
We account for stock-based compensation in accordance with the ASC standards. We elected the modified prospective method where prior periods are not revised for comparative purposes. Under the fair value recognition provisions, stock based compensation is measured at grant date based upon the fair value of the award and expense is recognized on a straight-line basis over the vesting period. We use the Black-Scholes option pricing model to determine the fair value of stock options, which requires management to use estimates and assumptions. The determination of the fair value of stock based option awards on the date of grant is based upon the exercise price as well as assumptions regarding subjective variables. These variables include our expected life of the option, expected stock price volatility over the term of the award, determination of a risk free interest rate and an estimated dividend yield. We estimate the expected life of the option by calculating the average term based upon historical experience. We estimate the expected stock price volatility by using implied volatility in market traded stock over the same period as the vesting period. We base the risk-free interest rate on zero coupon yields implied from United States Treasury issues with remaining terms similar to the term on the options. We do not expect to pay dividends in the foreseeable future and therefore use an
23
expected dividend yield of zero. If factors change or we employ different assumptions for estimating fair value of the stock option, our estimates may be different than future estimates or actual values realized upon the exercise, expiration, early termination or forfeiture of those awards in the future. At this time, we believe that our current method for accounting for stock based compensation is reasonable. Furthermore, an entity may elect either an accelerated recognition method or a straight-line recognition method for awards subject to graded vesting based on a service condition, regardless of how the fair value of the award is measured. For all stock based compensation awards that contain graded vesting based on service conditions, we have elected to apply a straight-line recognition method to account for these awards. However, guidance is relatively new and the application of these principles over time may be subject to further interpretation or refinement. See "Notes to Consolidated Financial Statements—Note 2—Summary of Significant Accounting Policies—Stock-Based Compensation" and "Notes to Consolidated Financial Statements—Note 12—Stockholders' Equity—Stock Incentive Plans" for additional discussion.
Discontinued Operations
In accordance with the provisions of ASC 205-20, the results of operations of a component of an entity that has either been disposed of or is classified as held for sale is required to be reported as discontinued operations in the consolidated financial statements. In order to be considered a discontinued operation, both the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of an entity and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. The accompanying consolidated financial statements reflect the results of operations and financial position of our Joe's Business as discontinued operations.
Recent Accounting Pronouncements
In July 2013, FASB issued a standard to clarify the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists as of the reporting date. This guidance is effective for annual reporting periods beginning after December 15, 2013. The adoption of this amendment will not have a material effect on our financial statements.
In April 2014, FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property Plant and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, ("ASU 2014-08") which provides amended guidance on the presentation of financial statements and reporting discontinued operations and disclosures of disposals of components of an entity within property, plant and equipment. ASU 2014-08 amends the definition of a discontinued operation and requires entities to disclose additional information about disposal transactions that do not meet the discontinued operations criteria. The effective date of ASU 2014-08 is for disposals that occur in annual periods (and interim periods therein) beginning on or after December 15, 2014. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers, ("ASU 2014-09") which provides a single, comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersedes virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. We are currently evaluating the impact that this amended guidance will have on our consolidated
24
financial statements and related disclosures. In July 2015, the FASB reached a decision to defer the effective date of the amended guidance. In August 2015, ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, was issued which defers the effective date of ASU 2014-09 to December 15, 2017. Early adoption is not permitted.
In August 2014, FASB issued ASU No. 2014-15 to communicate amendments to FASB Accounting Standards Codification Subtopic 205-40, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, (the "ASC amendments"). The ASC amendments establish new requirements for management to evaluate a company's ability to continue as a going concern and to provide certain related disclosures. The ASC amendments are effective for the annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted, but we have not yet adopted such guidance.
In July 2015, FASB issued ASU 2015-11, Inventory (Topic 330)—Simplifying the Measurement of Inventory, which will require an entity to measure inventory at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The guidance will be effective for us beginning with fiscal year 2018. Early adoption is permitted. We are currently evaluating the impact that this amended guidance will have on our consolidated financial statements and related disclosures.
Going Concern
The accompanying financial statements have been prepared assuming that we will continue as a going concern. While management is evaluating all options to cure the defaults, including refinancing, extending the indebtedness and exploring alternatives for other sources of capital for ongoing cash needs, there can be no assurance that we will be able to secure a resolution or refinance or extend the indebtedness and, accordingly, our liquidity and ability to operate could be adversely affected. We have engaged Carl marks to assist us as we explore all alternatives. We are currently in discussions with our creditors under both of the term loan credit agreement and revolving credit agreement regarding a resolution to the defaults, and our ability to continue as a going concern is dependent upon us resolving the outstanding indebtedness. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern.
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EXHIBIT 99.3
Joe's Jeans Inc. and Subsidiaries Index to Consolidated Financial Statements
Note: Capitalized terms not defined herein have the meaning as ascribed to them in our Annual Report on Form 10-K for the year ended November 30, 2014, filed with the SEC on February 13, 2015 ("Annual Report").
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is included in "Item 15. Exhibits, Financial Statement Schedules" of our consolidated financial statements and notes thereto, and the consolidated financial statement schedule filed on this Annual Report.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed as a part of this Annual Report:
1
Joe's Jeans Inc. and Subsidiaries
Index to Consolidated Financial Statements
F-i
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders
Joe's Jeans Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Joe's Jeans Inc. and subsidiaries (the "Company") as of November 30, 2014, and the related consolidated statements of comprehensive (loss) income, stockholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended November 30, 2014 listed in the Index as Schedule II. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Joe's Jeans Inc. and subsidiaries as of November 30, 2014, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion the financial statement schedule for the year ended November 30, 2014, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.
The accompanying consolidated financial statements for the year ended November 30, 2014 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a net working capital deficiency and has suffered recurring losses from operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 4 to the consolidated financial statements, the 2014 financial statements and the schedule have been retrospectively adjusted to reflect discontinued operations.
/s/ Moss Adams LLP
Los Angeles, California
February 13, 2015 (except for the effects of discontinued operations discussed in Note 1—Business Description and Basis of Presentation, Note 2—Subsequent Events and Note 4—Discontinued Operations to the consolidated financial statements, as to which the date is November 2, 2015.)
F-
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Joe's Jeans Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Joe's Jeans Inc. and subsidiaries, (the "Company"), as of November 30, 2013, and the related consolidated statements of comprehensive (loss) income, stockholders' equity, and cash flows for each of the two years in the period ended November 30, 2013. Our audits also included the financial statement schedule for the years ended November 30, 2013 and 2012 listed in the index as Schedule II. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Joe's Jeans Inc. and subsidiaries at November 30, 2013, and the consolidated results of their operations and their cash flows for each of the two years in the period ended November 30, 2013, in conformity with United States generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the years ended November 30, 2013 and 2012, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.
| /s/ Ernst & Young LLP |
Los Angeles, California
February 13, 2014 (except for the effects of discontinued operations discussed in Note 1 and Note 4, as to which the date is November 2, 2015)
F-2
JOE'S JEANS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| |
November 30, 2014 |
November 30, 2013 |
|||||
|---|---|---|---|---|---|---|---|
ASSETS |
|||||||
Current assets |
|||||||
Cash and cash equivalents |
$ | 1,054 | $ | 785 | |||
Accounts receivable, net |
1,279 | 3,419 | |||||
Factor accounts receivable, net |
11,105 | 13,744 | |||||
Inventories, net |
25,354 | 22,751 | |||||
Deferred income taxes, net |
6,065 | 3,114 | |||||
Prepaid expenses and other current assets |
1,212 | 1,914 | |||||
Current portion of assets held for sale |
57,050 | 49,075 | |||||
| | | | | | | | |
Total current assets |
103,119 | 94,802 | |||||
Property and equipment, net |
2,897 |
4,696 |
|||||
Goodwill |
8,394 | 29,976 | |||||
Intangible assets |
56,773 | 59,110 | |||||
Deferred financing costs |
1,611 | 2,031 | |||||
Other assets |
958 | 1,540 | |||||
Assets held for sale, net of current portion |
30,197 | 30,868 | |||||
| | | | | | | | |
Total assets |
$ | 203,949 | $ | 223,023 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||
Current liabilities |
|||||||
Accounts payable and accrued expenses |
$ | 11,651 | $ | 16,542 | |||
Line of credit |
31,338 | 17,673 | |||||
Short term debt |
59,003 | — | |||||
Buy-out payable-short term |
3,277 | 3,072 | |||||
Promissory tax note issued |
— | 1,235 | |||||
Current portion of liabilities held for sale |
11,680 | 9,894 | |||||
| | | | | | | | |
Total current liabilities |
116,949 | 48,416 | |||||
Long term debt |
— |
58,840 |
|||||
Convertible notes |
24,733 | 27,912 | |||||
Deferred income taxes, net |
17,765 | 16,202 | |||||
Buy-out payable-long term |
— | 3,230 | |||||
Deferred rent |
1,579 | 1,239 | |||||
Other liabilities |
643 | 250 | |||||
Long-term liabilities held for sale |
1,283 | 1,165 | |||||
| | | | | | | | |
Total liabilities |
162,952 | 157,254 | |||||
Commitments and contingencies |
|||||||
Stockholders' equity |
|||||||
Common stock, $0.10 par value: 100,000 shares authorized, 69,822 shares issued and 69,297 outstanding (2014) and 68,878 shares issued and 68,549 outstanding (2013) |
6,984 | 6,890 | |||||
Additional paid-in capital |
111,010 | 107,933 | |||||
Accumulated deficit |
(73,679 | ) | (45,963 | ) | |||
Treasury stock, 524 shares (2014), 329 shares (2013) |
(3,318 | ) | (3,091 | ) | |||
| | | | | | | | |
Total stockholders' equity |
40,997 | 65,769 | |||||
| | | | | | | | |
Total liabilities and stockholders' equity |
$ | 203,949 | $ | 223,023 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The accompanying notes are an integral part of these financial statements.
F-3
JOE'S JEANS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands, except per share data)
| |
Year ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
November 30, 2014 |
November 30, 2013 |
November 30, 2012 |
|||||||
Net sales |
$ | 84,225 | $ | 28,417 | $ | 9,484 | ||||
Cost of goods sold |
44,502 | 14,451 | 2,835 | |||||||
| | | | | | | | | | | |
Gross profit |
39,723 | 13,966 | 6,649 | |||||||
| | | | | | | | | | | |
Operating expenses |
||||||||||
Selling, general and administrative |
42,329 | 21,956 | 10,728 | |||||||
Impairment of goodwill |
23,585 | |||||||||
Depreciation and amortization |
3,637 | 1,319 | 565 | |||||||
Retail stores impairment |
840 | — | — | |||||||
| | | | | | | | | | | |
|
70,391 | 23,275 | 11,293 | |||||||
| | | | | | | | | | | |
Operating loss from continuing operations |
(30,668 | ) | (9,309 | ) | (4,644 | ) | ||||
Interest expense, net |
5,141 | 1,032 | — | |||||||
Other (income) expense |
(2,268 | ) | 209 | — | ||||||
| | | | | | | | | | | |
Loss from continuing operations, before income tax benefit |
(33,541 | ) | (10,550 | ) | (4,644 | ) | ||||
Income tax benefit |
(5,059 | ) | (3,134 | ) | (2,012 | ) | ||||
| | | | | | | | | | | |
Loss from continuing operations |
(28,482 | ) | (7,416 | ) | (2,632 | ) | ||||
Income from discontinued operations, net of tax |
766 | 102 | 8,197 | |||||||
| | | | | | | | | | | |
Net (loss) income and comprehensive (loss) income |
$ | (27,716 | ) | $ | (7,314 | ) | $ | 5,565 | ||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Earnings (loss) per common share—basic |
||||||||||
Loss from continuing operations |
$ | (0.42 | ) | $ | (0.11 | ) | $ | (0.04 | ) | |
Earnings from discontinued operations |
$ | 0.01 | 0.00 | 0.12 | ||||||
| | | | | | | | | | | |
Earnings (loss) per common share—basic |
$ | (0.41 | ) | $ | (0.11 | ) | $ | 0.08 | ||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Earnings (loss) per common share—diluted |
||||||||||
Loss from continuing operations |
$ | (0.42 | ) | $ | (0.11 | ) | $ | (0.04 | ) | |
Earnings from discontinued operations |
0.01 | 0.00 | 0.12 | |||||||
| | | | | | | | | | | |
Earnings (loss) per common share—diluted |
$ | (0.41 | ) | $ | (0.11 | ) | $ | 0.08 | ||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Weighted average shares outstanding |
||||||||||
Basic |
68,226 | 67,163 | 65,496 | |||||||
Diluted |
68,226 | 67,163 | 66,849 | |||||||
The accompanying notes are an integral part of these financial statements.
F-4
JOE'S JEANS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
| |
Common Stock | |
|
|
|
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Additional Paid-In Capital |
Accumulated Deficit |
Treasury Stock |
Total Stockholders' Equity |
|||||||||||||||
| |
Shares | Par Value | |||||||||||||||||
Balance, November 30, 2011 |
65,477 | $ | 6,550 | $ | 105,512 | $ | (44,214 | ) | $ | (3,091 | ) | $ | 64,757 | ||||||
Net income and comprehensive income |
— |
— |
— |
5,565 |
— |
5,565 |
|||||||||||||
Stock-based compensation, net of withholding taxes |
— | — | 1,423 | — | — | 1,423 | |||||||||||||
Exercise of stock options |
20 | 2 | 18 | — | — | 20 | |||||||||||||
Issuance of restricted common stock |
1,797 | 180 | (180 | ) | — | — | — | ||||||||||||
Excess tax benefit on stock-based compensation |
— | — | (26 | ) | — | — | (26 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
Balance, November 30, 2012 |
67,294 | 6,732 | 106,747 | (38,649 | ) | (3,091 | ) | 71,739 | |||||||||||
Net loss and comprehensive loss |
— |
— |
— |
(7,314 |
) |
— |
(7,314 |
) |
|||||||||||
Stock-based compensation, net of withholding taxes |
— | — | 1,127 | — | — | 1,127 | |||||||||||||
Exercise of stock options |
22 | 2 | 25 | — | — | 27 | |||||||||||||
Issuance of restricted common stock |
1,562 | 156 | (156 | ) | — | — | — | ||||||||||||
Excess tax benefit on stock-based compensation |
— | — | 190 | — | — | 190 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Balance, November 30, 2013 |
68,878 | 6,890 | 107,933 | (45,963 | ) | (3,091 | ) | 65,769 | |||||||||||
Net loss and comprehensive loss |
— |
— |
— |
(27,716 |
) |
— |
(27,716 |
) |
|||||||||||
Embedded conversion feature net of taxes |
— | — | 2,109 | — | — | 2,109 | |||||||||||||
Stock repurchase |
— | — | — | — | (227 | ) | (227 | ) | |||||||||||
Stock-based compensation, net of withholding taxes |
— | — | 941 | — | — | 941 | |||||||||||||
Issuance of restricted common stock |
944 | 94 | (94 | ) | — | — | — | ||||||||||||
Excess tax benefit on stock-based compensation |
— | — | 121 | — | — | 121 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Balance, November 30, 2014 |
69,822 | $ | 6,984 | $ | 111,010 | $ | (73,679 | ) | $ | (3,318 | ) | $ | 40,997 | ||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
F-5
JOE'S JEANS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| |
Year ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
November 30, 2014 | November 30, 2013 | November 30, 2012 | |||||||
Loss from continuing operations |
$ | (28,482 | ) | $ | (7,416 | ) | $ | (2,632 | ) | |
Adjustment to reconcile net income to net cash provided by operating activities: |
||||||||||
Depreciation |
3,637 | 1,319 | 565 | |||||||
Change in fair value of embedded conversion derivative |
(2,270 | ) | 204 | — | ||||||
Impairment of goodwill |
23,585 | — | — | |||||||
Retail stores impairment |
840 | — | — | |||||||
Amortization of deferred financing costs |
420 | 70 | — | |||||||
Amortization of convertible notes discount |
1,646 | 257 | — | |||||||
Amortization of term loan discount |
238 | 40 | — | |||||||
PIK interest on convertible note discount |
875 | — | — | |||||||
Stock-based compensation |
1,284 | 1,687 | 1,847 | |||||||
Excess tax benefit on stock-based compensation |
121 | 190 | (26 | ) | ||||||
Provision for non-factored customer credits and doubtful accounts |
561 | 12 | 14 | |||||||
Decrease in deferred taxes |
(4,294 | ) | 153 | 3,591 | ||||||
Other liabilities |
393 | — | — | |||||||
Changes in operating assets and liabilities: |
||||||||||
Accounts receivable |
1,579 | (2,129 | ) | 890 | ||||||
Factored accounts receivable |
2,639 | 62 | — | |||||||
Inventories |
(2,603 | ) | 1,015 | (272 | ) | |||||
Prepaid expenses and other assets |
1,284 | 991 | (927 | ) | ||||||
Accounts payable and accrued expenses |
(4,891 | ) | 2,048 | 301 | ||||||
Buy-out note payable |
(3,025 | ) | 6,302 | — | ||||||
Due to/from related parties |
— | (195 | ) | 450 | ||||||
Deferred rent |
340 | 410 | 77 | |||||||
| | | | | | | | | | | |
Net cash provided by (used in) continuing operations |
(6,123 | ) | 5,020 | 3,878 | ||||||
Net cash provided by (used in) discontinued operations |
(4,210 | ) | 2,962 | 1,904 | ||||||
| | | | | | | | | | | |
Net cash provided by (used in) operating activities |
(10,333 | ) | 7,982 | 5,782 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||||
Purchase of Hudson Clothing, Inc., net of cash acquired |
(418 | ) | (65,218 | ) | — | |||||
Purchases of property and equipment |
(341 | ) | (1,480 | ) | (1,384 | ) | ||||
| | | | | | | | | | | |
Net cash used in continuing investing activities |
(759 | ) | (66,698 | ) | (1,384 | ) | ||||
Net cash used in discontinued investing activities |
(424 | ) | (655 | ) | (1,395 | ) | ||||
| | | | | | | | | | | |
Net cash used in investing activities |
(1,183 | ) | (67,353 | ) | (2,779 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||||
Payments on factor borrowing, net |
(7,411 | ) | (1,354 | ) | ||||||
Payment of deferred financing costs |
(3,051 | ) | — | |||||||
Proceeds from line of credit, net |
9,031 | 32 | — | |||||||
Payment of promissory note |
(1,235 | ) | — | — | ||||||
Proceeds from term loan |
(75 | ) | 60,000 | — | ||||||
Exercise of stock options |
27 | 20 | ||||||||
Purchase of treasury stock |
(227 | ) | — | — | ||||||
Payment of taxes on restricted stock units |
(343 | ) | (560 | ) | (424 | ) | ||||
| | | | | | | | | | | |
Net cash provided by (used in) continuing financing activities |
7,151 | 49,037 | (1,758 | ) | ||||||
Net cash provided by (used in) discontinued financing activities |
4,634 | (2,307 | ) | (509 | ) | |||||
| | | | | | | | | | | |
Net cash provided by (used in) financing activities |
11,785 | 46,730 | (2,267 | ) | ||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
269 |
(12,641 |
) |
736 |
||||||
CASH AND CASH EQUIVALENTS, at beginning of year |
785 |
13,426 |
12,690 |
|||||||
| | | | | | | | | | | |
CASH AND CASH EQUIVALENTS, at end of year |
$ | 1,054 | $ | 785 | $ | 13,426 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
F-6
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Description and Basis of Presentation
Our principal business activity involves the design, development and worldwide marketing of apparel products, which include denim jeans, related casual wear and accessories that bear the brand Joe's® and Hudson®. Our primary current operating subsidiaries are Joe's Jeans Subsidiary, Inc. ("Joe's Sub") and Hudson Clothing, LLC ("Hudson"). In addition, we have other subsidiaries, including Joe's Jeans Retail Subsidiary, Inc., Innovo West Sales, Inc., Hudson Clothing Holdings, Inc. and HC Acquisition Holding, Inc. All significant inter-company transactions have been eliminated. We completed the acquisition of Hudson on September 30, 2013 and the information presented includes the results of operations of Hudson from the date of acquisition. On September 11, 2015, we completed the sale of certain of our operating and intellectual property assets related to the Joe's® brand and business to two separate purchasers for an aggregate purchase price of $80 million, the proceeds of which were used to repay all of our indebtedness outstanding under our term loan credit agreement (the "Term Loan Credit Agreement") with Garrison Loan Agency Service LLC ("Garrison") and a portion of our indebtedness outstanding under our revolving credit agreement (the "Revolving Credit Agreement") with CIT Commercial Services, Inc., a unit of CIT Group ("CIT"). As a result, we reported the operating results of our Joe's business in "Income (loss) from discontinued operations, net of tax" in our condensed consolidated statements of net loss and comprehensive loss for all periods presented. In addition, the assets and liabilities associated with our Joe's business are reported as held for sale (discontinued operations), in the condensed consolidated balance sheets for all periods presented. (see "Note 4—Discontinued Operations"). Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect our continuing operations.
Our reportable business segments are Wholesale and Retail. We manage, evaluate and aggregate our operating segments for segment reporting purposes primarily on the basis of business activity and operation. Our Wholesale segment is comprised of sales of Hudson® products to retailers, specialty stores and international distributors, includes revenue from licensing agreements and records expenses from sales, trade shows, distribution, product samples and customer service departments. Our Retail segment is comprised of sales to consumers through ten of our Joe's branded full price retail stores, 11 outlet stores and through our online retail site at www.hudsonjeans.com. Our Corporate and other is comprised of expenses from corporate operations, which include the executive, finance, legal, human resources, design and production departments and general advertising expenses associated with our brands. Sales of our Joe's® and else™ products for our wholesale segment and for those retail stores being transferred pursuant to the Operating Assets Purchase Agreement (as defined below) are presented as discontinued operations in our condensed consolidated financial statements for all periods presented. Our fiscal year end is November 30. Each fiscal year, as presented, is 52 weeks.
Going Concern
The accompanying consolidated financial statements for the year ended November 30, 2014 were prepared under the assumption that we will continue to operate as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. We face various uncertainties that raise substantial doubt about our ability to continue as a going concern. These financial statements do not include any adjustments that may result from the outcome of these uncertainties.
On November 6, 2014, we received an initial notice of default and event of default and demand for payment of default interest under the Term Loan Credit Agreement for violating certain financial and maintenance covenants from Garrison. As a result of the events of default under the Term Loan
F-7
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business Description and Basis of Presentation (Continued)
Credit Agreement, this also triggered a default and an event of default under the terms of the Revolving Credit Agreement with CIT. Both lenders reserved their respective rights to exercise any and all remedies available to them under their respective agreements and demanded payment of interest under those agreements at the default rate of interest. In addition, as a result of the events of default under the Term Loan Credit Agreement and the Revolving Credit Agreement, we also were in default of our subordinated convertible notes issued to the former equity owners of Hudson. Under the terms of the Revolving Credit Agreement and the Term Loan Credit Agreement, we were prohibited from making any payments under the subordinated convertible notes, but we were accruing interest on the convertible notes at the default rate. We were also prohibited from making earn-out payments to our former creative director, Mr. Dahan under his buy-out agreement.
On September 11, 2015, our indebtedness outstanding under the Term Loan Credit Agreement was fully repaid with a portion of the proceeds of the sale of certain Joe's assets. As a result, the Term Loan Credit Agreement terminated on September 11, 2015. We also used a portion of the proceeds from the asset sale to repay a substantial portion of our indebtedness under the Revolving Credit Agreement, and on September 11, 2015, we entered into an amended and restated revolving credit agreement (the "Amended and Restated Revolving Credit Agreement"), which waived our existing defaults, forbearance defaults and certain other defaults. However, we continue to experience negative trends including declining sales and recurring losses throughout fiscal 2015. In addition, we have limited working capital and borrowing availability on our Amended and Restated Credit Agreement that matures on December 31, 2015. We are currently in default under our convertible notes which have a face value of $33,991,000, which impacts our leverage ratio and attractiveness to secure additional financing from lenders.
See "Note 2—Subsequent Events" for a further discussion of the asset sales, the repayment of certain obligations under our agreements with Garrison and CIT, and the terms of our Amended and Restated Revolving Credit Agreement.
2. Subsequent Events
On September 8, 2015, we entered into three separate definitive agreements described below (collectively, the "Transaction Agreements"). Pursuant to the first two agreements, on September 11, 2015, we sold certain of our operating and intellectual property assets under the brand names "Joe's Jeans," Joe's," "Joe's JD" and "else" (the "Joe's Business") to two separate purchasers for an aggregate purchase price of $80 million (the "Asset Sale"). The proceeds from the Asset Sale were used to repay all of our indebtedness outstanding under our Term Loan Credit Agreement with Garrison and a portion of our indebtedness outstanding under our Revolving Credit Agreement with CIT.
In addition, subject to the completion of the conditions described below, we agreed to combine our remaining business operated under the Hudson® brand with RG Parent LLC, a Delaware limited liability company ("RG" or "Robert Graham"), pursuant to the Merger Agreement (defined below). Under the terms of this transaction, we will also issue and sell $50 million of a new series of the Company's preferred stock in a private placement to an affiliate of Tengram Capital Partners, L.P. ("TCP") and exchange outstanding convertible notes for a combination of cash, shares of our common stock, $0.10 par value per share ("Common Stock"), and modified convertible notes (the "Modified Convertible Notes") (collectively, the "Merger Transactions"). RG is a portfolio company of TCP and its principal business activity involves the design, development and marketing of luxury lifestyle brand
F-8
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Subsequent Events (Continued)
apparel products under the brand Robert Graham®. The Merger Transactions are subject to certain closing conditions, which includes the approval of our stockholders and the members of RG and financing, as discussed below under "Agreement and Plan of Merger."
IP Asset Purchase Agreement
On September 8, 2015, we, along with Joe's Holdings LLC, a Delaware limited liability company ("IP Assets Purchaser"), and solely for the purposes of its related guarantee, Sequential Brands Group, Inc., a Delaware corporation , entered into an asset purchase agreement (the "IP Asset Purchase Agreement"), pursuant to which, the IP Assets Purchaser, among other things, purchased certain intellectual property assets (the "Intellectual Property Assets") used or held for use in our business operated under the brand names "Joe's Jeans," Joe's," "Joe's JD" and "else" (the "Joe's Business"). The aggregate purchase price was $67 million. Additionally, at the closing of the sale, the IP Assets Purchaser deposited $2.5 million to an escrow account, which will be used to defer certain costs and expenses which may be incurred by us after the closing of the transaction.
The IP Asset Purchase Agreement contains representations and warranties, covenants related to our operations and business, and indemnification rights of both parties after the closing of the transaction that are customary for transactions of this type.
We will retain and operate the 32 Joe's® brand retail stores after the closing of the Operating Asset Purchase Agreement and the IP Asset Purchase Agreement and thereafter will proceed with the disposition of certain stores; provided, however that, certain retail stores designated by Operating Assets Purchaser will be transferred to the Operating Assets Purchaser on or prior to December 31, 2016 for no additional consideration. Subject to certain limitations on our aggregate net liability with respect to the net costs and expenses related to the operation of the retail stores if the Merger Transactions do not close, such costs and expenses will be borne by us, the IP Assets Purchaser and the Operating Assets Purchaser. The Operating Assets Purchaser will supply Joe's® branded merchandise to the retail stores for resale under a license from the IP Assets Purchaser.
Operating Asset Purchase Agreement
On September 8, 2015, we, along with GBG USA Inc., a Delaware corporation ("Operating Assets Purchaser"), entered into an asset purchase agreement (the "Operating Asset Purchase Agreement" and together with the IP Asset Purchase Agreement, the "Asset Purchase Agreements"), pursuant to which, the Operating Assets Purchaser, among other things, purchased certain inventory and other assets and assume certain liabilities from us and our subsidiaries related to the Joe's Business, including certain employees of the Joe's Business and at a later date, specified Joe's store leases. The aggregate purchase price was $13 million. Additionally, at the closing of the sale, the Operating Assets Purchaser deposited $1.5 million into an escrow account, which will be used to defer certain costs and expenses which may be incurred by the Company after the closing of the transaction.
The Operating Asset Purchase Agreement contains representations and warranties, covenants of the Company, and indemnification rights of both parties after the closing of the transaction that are customary for transactions of this type.
On September 11, 2015, we completed the Asset Sale of the Joe's Business pursuant to the respective Asset Purchase Agreements. The proceeds were used to repay all of our indebtedness
F-9
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Subsequent Events (Continued)
outstanding under the Term Loan Credit Agreement and a portion of our indebtedness outstanding under our Revolving Credit Agreement.
Agreement and Plan of Merger
On September 8, 2015, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with JJ Merger Sub LLC, a Delaware limited liability company and our wholly owned subsidiary ("Merger Sub"), and RG, pursuant to which Merger Sub will merge with and into RG on the terms and subject to the conditions set forth in the Merger Agreement (the "Merger"), with RG surviving the Merger as our wholly-owned subsidiary.
At the effective time of the Merger (the "Effective Time"), on the terms and subject to the conditions set forth in the Merger Agreement, all of the common units of RG (the "RG Units") outstanding immediately prior to the Effective Time will be converted into the right to receive an aggregate of $81 million in cash (the "Aggregate Cash Consideration") and 8,870,968 shares of Common Stock (after giving effect to a 1 for 30 reverse stock split) (the "Aggregate Stock Consideration" and, together with the Aggregate Cash Consideration, the "Aggregate Merger Consideration"). The portion of the Aggregate Merger Consideration constituting the Aggregate Cash Consideration will be reduced by an amount necessary to satisfy certain indebtedness of RG outstanding as of the Effective Time (as adjusted, the "Actual Cash Consideration" and, together with the Aggregate Stock Consideration, the "Actual Merger Consideration").
The Merger Agreement contains customary representations, warranties and covenants of us and RG.
The completion of the Merger is subject to customary closing conditions, including, among others, (i) our stockholder approval of: (x) the issuance of Common Stock in connection with the Merger, (y) the issuance of Common Stock upon conversion of the Company's Series A Preferred Stock (defined below) pursuant to the Stock Purchase Agreement (as defined below), and (z) a charter amendment to effect a 1 for 30 reverse stock split of our Common Stock (the "Reverse Stock Split"), (ii) consummation of the asset sales pursuant to each of the IP Asset Purchase Agreement and Operating Asset Purchase Agreement, (iii) consummation of the transactions contemplated by the Stock Purchase Agreement (defined below), (iv) consummation of the transactions contemplated by the Rollover Agreement (as defined below), (v) RG must have obtained financing or the persons who have committed to provide financing must be prepared to provide the financing immediately following the Effective Time, (vi) the Registration Statement on Form S-4 registering the Common Stock to be issued in connection with the Merger must have become effective, (vii) the Common Stock to be issued in the Merger must be authorized for listing on NASDAQ and (viii) since the date of the Merger Agreement, there must not be any changes, events, effects, developments, occurrences or state of facts that, individually or in the aggregate would reasonably be expected to have a material adverse effect on us or RG, subject to customary exceptions.
The Merger Agreement may be terminated under certain circumstances, including if the Merger has not been consummated on or before February 8, 2016.
We have agreed to pay RG a termination fee of $5.25 million, less certain expenses, if: (i) we terminate the Merger Agreement under certain circumstances and within twelve months after such termination, consummates a takeover proposal or enters into a definitive agreement with respect to a
F-10
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Subsequent Events (Continued)
takeover proposal; (ii) the Merger Agreement is terminated by RG as a result of the Board changing its recommendation with respect to the Merger and related transactions; or (iii) the Merger Agreement is terminated by us because we have received a superior proposal and enter into a definitive agreement with respect thereto. In the event that the Merger Agreement is terminated by us because of RG's failure to obtain financing or by RG because the Merger has not occurred by February 8, 2016 at a time that we would have the right to terminate pursuant to a financing issue and have provided notice of such right, in each case, so long as we are not in breach of certain obligations related to obtaining the financing, then RG must pay us a reverse termination fee of $7.5 million, less certain expenses they may have been previously reimbursed to us. If either party terminates the Merger Agreement as a result of the other party's breach, then the breaching party must pay the non-breaching party up to an aggregate amount of $3 million for all of the documented out-of-pocket fees and expenses incurred in connection with the Merger Agreement and related transactions.
Stock Purchase Agreement
In connection with the Merger, in September 8, 2015, we entered into a stock purchase agreement (the "Stock Purchase Agreement") with TCP Denim, LLC, a Delaware limited liability company and affiliate of TCP (the "Purchaser"), pursuant to which we will issue and sell to Purchaser immediately prior to the consummation of the Merger an aggregate of fifty thousand (50,000) shares of the Company's preferred stock, par value $0.10 per share, designated as "Series A Convertible Preferred Stock" (the "Series A Preferred Stock"), for an aggregate purchase price of $50 million in cash. Concurrently with the execution of the Stock Purchase Agreement, Tengram Capital Partners Fund II, L.P., a Delaware limited partnership, is entering into a limited guaranty in favor of us with respect to the obligations of the Purchaser under the Stock Purchase Agreement to pay the purchase price.
The Stock Purchase Agreement also provides that the proceeds from the sale of Series A Preferred Stock must be used for the purposes of consummating the Merger and the transactions contemplated by the Merger Agreement. The following is a summary of the terms of the Series A Preferred Stock as set forth in the form of certificate of designation for the Series A Preferred Stock: (i) each share of Series A Preferred Stock entitles the holder thereof to receive cumulative cash dividends, payable quarterly, at an annual rate of 10%, plus accumulated and accrued dividends thereon through such date; additionally, if the Board declares or pays a dividend on the Common Stock, then each holder of the Series A Preferred Stock will be entitled to receive a cash dividend on an as converted basis; (ii) each holder of the Series A Preferred Stock is entitled to vote on an as converted basis and together with the holders of Common Stock as a single class, subject to certain limitations; (iii) for so long as a to be determined percent of the shares of the Series A Preferred Stock remain outstanding, the holders of the Series A Preferred Stock, exclusively and as a separate class, will be entitled to elect three (3) members of the Board (the "Series A Directors"), and such Series A Director may only be removed without cause by the affirmative vote of the holders of a majority of the shares of Series A Preferred Stock; (iv) the holders of the Series A Preferred Stock have separate class voting rights with respects to certain matters affecting their rights; (v) upon any liquidation event, holders of the Series A Preferred Stock are entitled to receive the greater of the liquidation preference on the date of determination and the amount that would be payable to the holders of the Series A Preferred Stock had such holders converted their shares of Series A Preferred Stock into shares of Common Stock immediately prior to such liquidation event; and (vi) each share of the Series A
F-11
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Subsequent Events (Continued)
Preferred Stock is convertible, at the option of the holder thereof, at any time and without the payment of additional consideration by the holder, at an initial conversion price of $11.10 (after taking into account the 1 for 30 reverse stock split).
Rollover Agreement
On September 8, 2015, we entered into a rollover agreement (the "Rollover Agreement") with the holders of convertible notes (the "Convertible Notes"), pursuant to which they have agreed to contribute to us the Convertible Notes in exchange for the following:
The Rollover Agreement will be automatically terminated upon termination of the Merger Agreement prior to the Rollover Time. The Rollover Agreement may also be terminated by us or by Mr. Kim and Fireman Capital CPF Hudson Co-Invest LP ("Fireman") if the Rollover Time has not occurred prior to April 8, 2016.
The Modified Convertible Notes are structurally and contractually subordinated to our senior debt and will mature five and a half years following the date of such note. The Modified Convertible Notes
F-12
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Subsequent Events (Continued)
accrue interest quarterly on the outstanding principal amount at a rate of 6.5% per annum (to be increased to 7% as of October 1, 2016 with respect to the Modified Convertible Notes issued to Fireman), which will be payable 50% in cash and 50% in additional paid in kind ("PIK Notes"); provided, however, that we may, in our sole discretion, elect to pay 100% of such interest in cash. Beginning upon the date of issuance, the Modified Convertible Notes will be convertible by each of the holders into shares of Common Stock, cash, or a combination of cash and Common Stock, at our election.
If we elect to issue only shares of Common Stock upon conversion of the Modified Convertible Notes, each of the Modified Convertible Notes would be convertible, in whole but not in part, into a number of shares equal to the conversion amount divided by the market price. The conversion amount is (a) the product of (i) the market price, multiplied by (ii) the quotient of (A) the principal amount, divided by (B) the conversion price, minus (b) the aggregate optional prepayment amounts paid to the holder. The market price is the average of the closing prices for the Common Stock over the 20 trading day period immediately preceding the notice of conversion. If we elect to pay cash with respect to a conversion of the Modified Convertible Notes, the amount of cash to be paid per share will be equal to the conversion amount. We will have the right to prepay all or any portion of the principal amount of the Modified Convertible Notes at any time so long as it makes a pro rata prepayment on all of the Modified Convertible Notes.
CIT Agreements
On September 11, 2015, we entered into (i) the Amended and Restated Revolving Credit Agreement (as defined below), (ii) the Reaffirmation and Amendment of Collateral Documents (as defined below), and (iii) the Reassignment and Termination Agreement (as defined below).
A portion of the proceeds of the Asset Sale were used to repay all of our indebtedness outstanding under the Term Loan Credit Agreement with Garrison, as administrative agent, collateral agent, lead arranger, documentation agent and syndication agent, and the lenders party thereto. As a result, the Term Loan Credit Agreement was paid in full and terminated on September 11, 2015.
In connection with the Asset Sale, on September 11, 2015, we, along with Hudson Clothing, LLC, our wholly-owned subsidiary ("Hudson" or the "Borrower"), as "Administrative Borrower", and certain of our other subsidiaries party thereto, as "Guarantors", entered into the Amended and Restated Revolving Credit Agreement with CIT, as administrative agent and collateral agent , and the lenders party thereto. Among other things, the Amended and Restated Revolving Credit Agreement (i) amends and restates the Revolving Credit Agreement, dated as of September 30, 2013 (as amended by (a) Omnibus Amendment No. 1 to Revolving Credit Agreement and Guarantee and Collateral Agreement, dated as of December 20, 2013, (b) Amendment No. 2 to Revolving Credit Agreement, dated as of April 23, 2015, and (c) the CIT Forbearance Agreement (as defined below), by and among Hudson and Joe's Jeans Subsidiary Inc., as borrowers, us and certain of our other subsidiaries as a party thereto, as guarantors, CIT, and the lenders party thereto, and (ii) waives the "Existing Defaults" and "Forbearance Defaults" (each as defined under the Forbearance and Amendment No. 3 to Revolving Credit Agreement, dated June 26, 2015, between the Company and CIT (the "CIT Forbearance Agreement")) and certain other defaults. Pursuant to a separate consent and agreement, CIT and the lenders consented to the Asset Sale.
F-13
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Subsequent Events (Continued)
The Amended and Restated Revolving Credit Agreement provides for a revolving credit facility (the "Revolving Facility") with up to $10,000,000 of lender commitments (the "Revolving Commitment"). The Borrowers' actual maximum credit availability under the Revolving Facility varies from time to time and is equal to the lesser of (i) the Revolving Commitment minus an availability block of $2.5 million, or $7.5 million, and (ii) a calculated borrowing base, which is based on the value of the eligible accounts and eligible inventory minus the availability block of $2.5 million minus reserves imposed by the revolving lenders, all as specified in the Amended and Restated Revolving Credit Agreement. The Revolving Facility provides for swingline loans, up to $1 million sublimit, and letters of credit, up to $1 million sublimit, within such credit availability limits. Proceeds from advances under the Revolving Facility may be used (i) to pay fees and expenses in connection with the Amended and Restated Revolving Credit Agreement and the Asset Sale and (ii) for working capital needs and general corporate purposes.
All unpaid loans under the Revolving Facility mature on December 31, 2015. The Borrowers have the right at any time and from time to time to (i) terminate the commitments under the Revolving Facility in full and (ii) prepay any borrowings under the Revolving Facility, in whole or in part, without terminating or reducing the commitment under the Revolving Facility.
The Revolving Facility is guaranteed by us and all of our subsidiaries, and is secured by liens on substantially all assets owned by the borrowers and guarantors party thereto, subject to permitted liens and exceptions. In connection with the Asset Sale, the Guarantee and Collateral Agreement, dated as of September 30, 2013, by and among Joe's Jeans Subsidiary, Inc. ("Joe's Jeans Subsidiary"). and Hudson, us and certain of our subsidiaries as a party thereto and CIT, as administrative agent and collateral agent, as amended (the "Guarantee and Collateral Agreement"), was further amended pursuant to the Reaffirmation and Amendment of Collateral Documents, dated as of September 11, 2015, by and among CIT, us, Joe's Jeans Subsidiary, Hudson, Innovo West Sales, Inc., Joe's Jeans Retail Subsidiary, Inc., Hudson Clothing Holdings, Inc., and HC Acquisition Holdings, Inc (the "Reaffirmation and Amendment of Collateral Documents"), providing for among other things, the addition of the factor as a secured party under the Guarantee and Collateral Agreement.
Advances under the Revolving Facility are in the form of either base rate loans or LIBOR rate loans. The interest rate for base rate loans under the Revolving Commitment fluctuates and is equal to (x) the greatest (the "Alternate Base Rate") of (a) JPMorgan Chase Bank prime rate; (b) the Federal funds rate plus 0.50%; and (c) the rate per annum equal to the 90 day LIBOR published in the New York City edition of the Wall Street Journal under "Money Rates" (the "90-Day LIBO Rate") plus 1.0%, in each case, plus (y) 3.50%. The interest rate for LIBOR rate loans under the Revolving Commitment is equal to the 90-Day LIBO Rate per annum plus 4.50%. Interest on the Revolving Facility is payable on the first day of each calendar month and the maturity date. Among other fees, the Borrowers pay a commitment fee of 0.25% per annum (due quarterly) on the average daily amount of the unused revolving commitment under the Revolving Facility. The Borrowers also pay fees with respect to any letters of credit issued under the Revolving Facility.
The Revolving Facility contains usual and customary negative covenants for transactions of this type, including, but not limited to, restrictions on our and our subsidiaries' ability, to create or incur indebtedness; create liens; consolidate, merge, liquidate or dissolve; sell, lease or otherwise transfer any of its assets (with the Asset Sale expressly permitted); substantially change the nature of its business; make investments or acquisitions; pay dividends; enter into transactions with affiliates; amend material documents, prepay certain indebtedness and make capital expenditures. The negative covenants are subject to certain exceptions as specified in the Amended and Restated Revolving Credit Agreement.
F-14
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Subsequent Events (Continued)
Additionally, in connection with the Asset Sale, Joe's Sub, Hudson, the Operating Assets Purchaser and CIT entered into a Reassignment and Termination Agreement, dated as of September 11, 2015 (the "Reassignment and Termination Agreement"). Pursuant to the Reassignment and Termination Agreement, Joe's Sub was terminated as a party to the amended and restated factoring agreement, dated as of September 30, 2013, by and among Joe's Sub, Hudson, and CIT. Subject to the terms and conditions provided in the Reassignment and Termination Agreement, CIT reassigned to Joe's Sub all of its accounts factored with CIT which were outstanding as of the date of the Reassignment and Termination Agreement.
Separation Agreement with Joseph Dahan
In connection with the closing of the Operating Asset Purchase Agreement on September 11, 2015, Mr. Joseph M. Dahan resigned as our Creative Director and Director pursuant to the Separation Agreement and Mutual Limited Release, dated as of September 8, 2015, between Mr. Dahan and us (the "Separation Agreement and Mutual Limited Release") and we made certain severance and reimbursement of expense payments to him in exchange for a mutual limited release.
Employment Agreement with Peter Kim
On September 8, 2015, we entered into a new three-year Employment Agreement with Mr. Kim (the "Employment Agreement"), to serve as the Chief Executive Officer of Hudson that will become effective and replace Mr. Kim's previous employment agreement as of the Effective Time of the Merger.
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Revenue Recognition
Wholesale revenues are recorded on the accrual basis of accounting when title transfers to the customer, which is typically at the shipping point. We record estimated reductions to revenue for customer programs, including co-op advertising, other advertising programs or allowances, based upon a percentage of sales. We also allow for returns based upon pre-approval or in the case of damaged goods. Such returns are estimated based on historical experience and an allowance is provided at the time of sale.
Retail store revenue is recognized net of estimated returns at the time of sale to consumers. E-commerce sales of products ordered through our retail internet sites known as www.joesjeans.com and www.hudsonjeans.com are recognized upon estimated delivery and receipt of the shipment by the customers. E-commerce revenue is also reduced by an estimate of returns. Retail store revenue and E-commerce revenue exclude sales taxes. Revenue from licensing arrangements are recognized when
F-15
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Summary of Significant Accounting Policies (Continued)
earned in accordance with the terms of the underlying agreements, generally based upon the higher of (a) contractually guaranteed minimum royalty levels and (b) estimates of sales and royalty data received from our licensees. Payments received in consideration of the grant of a license or advanced royalty payments are recognized ratably as revenue over the term of the license agreement and are reflected under the caption of "Deferred Licensing Revenue" on the Consolidated Balance Sheets. The revenue recognized ratably over the term of the license agreement will not exceed royalty payments received. The unrecognized portion of the upfront payments are included in deferred royalties and accrued expenses depending on the long or short term nature of the payments to be recognized. There were no advanced payments under our licensing agreements during our fiscal year ended November 30, 2013. For our fiscal year ended November 30, 2014, we received $60,000 in advanced payments under our intimates' license agreement.
Accounts Receivable, Due To Factor and Allowance for Customer Credits and Doubtful Allowances
We evaluate our ability to collect on accounts receivable and charge-backs (disputes from the customer) based upon a combination of factors. Whether a receivable is past due is based on how recently payments have been received and in certain circumstances where we are aware of a specific customer's inability to meet its financial obligations (e.g., bankruptcy filings, substantial downgrading of credit sources). A specific reserve for bad debts is taken against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. Amounts are charged off against the reserve once it is established that amounts are not likely to be collected. We recognize reserves for charge-backs based on our historical collection experience. See "Notes to Consolidated Financial Statements—Note 5—Factored Accounts and Receivables" for further discussion.
Inventory
Inventory is valued at the lower of cost or market with cost determined by the first-in, first-out method. Inventory consists of finished goods, work-in-process and raw materials. We continually evaluate our inventories by assessing slow moving current product. Market value of non-current inventory is estimated based on historical sales trends for this category of inventory for individual product lines, the impact of market trends, an evaluation of economic conditions and the value of current orders relating to future sales of this type of inventory. Inventory reserves establish a new cost basis for inventory. Such reserves are not reversed until the related inventory is sold or otherwise disposed. Costs capitalized in inventory include the purchase price of raw materials and contract labor, plus in-bound transportation costs and import fees and duties. During the fourth quarter of fiscal 2014, we wrote down certain finished goods inventory from continuing operations by $1,085,000, representing the lower of cost or market adjustment.
Deferred Financing Costs
Deferred financing costs are amortized using the straight-line method over the term of the related agreements (five years) and recorded as a component of interest expense in the accompanying consolidated statement of comprehensive (loss). Amortization of deferred financing costs included in interest expense from continuing operations was approximately $420,000 and $70,000 for the year ended November 30, 2014 and 2013. We did not record any amortization of deferred financing cost for the years ended November 30, 2012.
F-16
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Summary of Significant Accounting Policies (Continued)
Costs of Goods Sold
Costs of goods sold include product, freight in, freight out, inventory reserves, inventory markdowns and other various charges.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include salaries and benefits, travel and entertainment, professional fees, advertising, marketing, sample expenses, stock based compensation expenses, facilities, fulfillment and distribution costs, bad debt expenses and write down of other assets.
Earnings Per Share
Basic earnings per share, or EPS, is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period except for periods of net loss for which no common share equivalents are included because their effect would be anti-dilutive. Dilutive common equivalent shares consist of common stock issuable upon exercise of stock options, restricted stock and restricted stock units using the treasury stock method. Dilutive common stock equivalent shares issuable upon conversion of the convertible notes are calculated using the if-converted method.
Deferred Rent
When a lease includes lease incentives (such as a rent holiday) or requires fixed escalations of the minimum lease payments, rental expense is recognized on a straight-line basis over the term of the lease and the difference between the average rental amount charged to expense and amounts payable under the lease is included in deferred rent in the accompanying consolidated balance sheets.
Advertising Costs
Advertising costs are charged to expense as incurred, except in the case of seasonal media campaigns. The production and other related costs of seasonal media campaigns are capitalized and amortized over the expected period of future benefits, which is typically six months or less.
Advertising and tradeshow expenses from continuing operations included in selling, general and administrative expenses were approximately $4,121,000, $824,000 and $109,000 for fiscal 2014, 2013 and 2012, respectively.
Financial Instruments
The fair values of our financial instruments (which consist of cash, accounts receivable, factored accounts receivable, accounts payable, accrued expenses and a line of credit) do not differ materially from their recorded amounts because of the relatively short period of time between origination of the instruments and their expected realization. The fair value of our term debt and convertible notes is based on the amount of future cash flows associated with the instrument discounted using our incremental borrowing rate. At November 30, 2014, the carrying value of the term debt was not materially different from fair value.
F-17
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Summary of Significant Accounting Policies (Continued)
We do not hold or have any obligations under financial instruments that possess off-balance sheet credit or market risk.
Impairment of Long-Lived Assets and Intangibles
We assess the impairment of long-lived assets, identifiable intangibles and goodwill annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that could trigger an impairment review other than on an annual basis include the following:
When we determine that the carrying value of long-lived assets, such as property and equipment and purchased intangibles subject to amortization, may not be recoverable based upon the existence of one or more of the aforementioned factors and the carrying value exceeds the estimated undiscounted cash flows expected to be generated by the asset, impairment is measured based on a projected discounted cash flow method using a discount rate determined by management. These cash flows are calculated by netting future estimated sales against associated merchandise costs and other related expenses such as payroll, occupancy and marketing.
The impairment loss calculations require management to apply judgment in estimating future cash flows and the discount rates that reflect the risk inherent in future cash flows. Future expected cash flows for store assets are based on management's estimates of future cash flows over the remaining lease period or expected life, if shorter. We consider historical trends, expected future business trends and other factors when estimating each store's future cash flow. We also consider factors such as: the local environment for each store location, including mall traffic and competition; our ability to successfully implement strategic initiatives; and the ability to control variable costs such as cost of sales and payroll, and in some cases, renegotiate lease costs. The estimated cash flows used for this nonrecurring fair value measurement are considered a Level 3 input as defined in Note 10. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to our results of operations.
During fiscal 2014, we recorded store impairment charges from continuing operations of $840,000 related to six of our retail stores. Based on the operating performance of these stores, we believed that we could not recover the carrying value of property and equipment located at these stores. There was no impairment recorded for our retail stores during fiscal 2012 or fiscal 2013. During fiscal 2014, we recorded a goodwill impairment charge from continuing operations of $23,585,000 as the carrying value of our Hudson wholesale reporting unit exceeded our fair market value.
Business acquisitions are accounted for under the purchase method by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts
F-18
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Summary of Significant Accounting Policies (Continued)
assigned is recorded as goodwill. Purchased intangible assets, such as customer relationships and designs, with finite lives are amortized over their estimated useful lives. Goodwill and other intangible assets, such as trademarks, with indefinite lives are not amortized but are tested at least annually for impairment.
In fiscal 2007, we acquired through merger JD Holdings, which included all of the goodwill and intangible assets related to the Joe's®, Joe's Jeans™ and JD® logo and marks. On September 30, 2013, we acquired Hudson, which included all of the goodwill and intangible assets related to the Hudson® logos and marks. We have assigned an indefinite life to the remaining intangible assets relating to the trademarks acquired, and therefore, no amortization expenses are expected to be recognized. However, we will test the assets for impairment annually in accordance with our critical accounting policies. As part of our annual test of assets for impairment during fiscal 2014, we recorded impairment to our goodwill in the amount of $23,585,000.
We evaluate goodwill for impairment at least annually using a two-step process. The first step is to determine the fair value of each reporting unit and compare this value to its carrying value. If the fair value exceeds the carrying value, no further work is required and no impairment loss would be recognized. The second step is performed if the carrying value exceeds the fair value of the assets. The implied fair value of the reporting unit's goodwill must be determined and compared to the carrying value of the goodwill.
We review our other indefinite-lived intangible assets for impairment on an annual basis, or when circumstances indicate their carrying value may not be recoverable. We calculate the value of the indefinite-lived intangible assets using a discounted cash flow method, based on the relief from royalty concept.
Our annual impairment testing date is September 30 of each year. Based on our under-performance in the fourth quarter of fiscal 2014, we determined that it was appropriate to perform our impairment testing as of November 30, 2014. Based on our testing we determined that the goodwill allocated to our Hudson wholesale reporting unit was impaired by $23,585,000, and there was no impairment of our other indefinite-lived intangible assets. For fiscal 2013 and 2012, we determined that there was no impairment of our goodwill or indefinite lived intangible assets.
Cash Equivalents
We consider all highly liquid investments that are both readily convertible into known amounts of cash and mature within 90 days from their date of purchase to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents, accounts receivable and amounts due from factor. We maintain cash and cash equivalents with various financial institutions. The policy is designed to limit exposure to any one institution. We perform periodic evaluations of the relative credit rating of those financial institutions that are considered in our investment strategy.
We do not require collateral for trade accounts receivable. However, we sell a portion of our accounts receivable to CIT on a non-recourse basis. In that instance, we are no longer at risk if the customer fails to pay. However, for accounts receivable that are not sold to CIT or sold on a recourse
F-19
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Summary of Significant Accounting Policies (Continued)
basis, we continue to be at risk if these customers fail to pay. We provide an allowance for estimated losses to be incurred in the collection of accounts receivable based upon the aging of outstanding balances and other account monitoring analysis. The net carrying value approximates the fair value for these assets. Such losses have historically been within management's expectations. Uncollectible accounts are written off once collection efforts are deemed by management to have been exhausted.
For fiscal 2014, 2013 and 2012, sales to customers or customer groups from continuing operations representing greater than 10 percent of net sales are as follows:
| |
2014 | 2013 | 2012 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Nordstrom, Inc. |
39.6 | % | 25.0 | % | 0.0 | % | ||||
Macy's Inc. |
9.8 | % | 14.0 | % | 0.0 | % | ||||
Our 10 largest customers and customer groups accounted for approximately 73 percent of our net sales during fiscal 2014. In addition, our international sales from continuing operations were $5,700,000, $1,472,000 and $0 in fiscal 2014, 2013 and 2012, respectively.
Stock-Based Compensation
We measure the cost of all employee stock-based compensation awards based on the grant date fair value of those awards and record that cost as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award). An entity may elect either an accelerated recognition method or a straight-line recognition method for awards subject to graded vesting based on a service condition, regardless of how the fair value of the award is measured. For all stock based compensation awards that contain graded vesting based on service conditions, we have elected to apply a straight-line recognition method to account for these awards.
Property and Equipment
Property and equipment are stated at the lower of cost or fair value in the case of impaired assets. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the lives of the respective leases or the estimated service lives of the improvements, whichever is shorter. Maintenance and repairs are charged to expense as incurred. Upon sale or retirement, the asset cost and related accumulated depreciation or amortization is removed from the accounts, and any related gain or loss is included in the determination of net income.
Income Taxes
We use the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates.
Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The likelihood of a material change in our expected realization of these assets
F-20
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Summary of Significant Accounting Policies (Continued)
depends on our ability to generate sufficient future taxable income. Our ability to generate enough taxable income to utilize our deferred tax assets depends on many factors, among which is our ability to deduct tax loss carry-forwards against future taxable income, the effectiveness of tax planning strategies and reversing deferred tax liabilities.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based upon the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based upon the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. Our policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense.
Discontinued Operations
In accordance with the provisions of ASC 205-20, the results of operations of a component of an entity that has either been disposed of or is classified as held for sale is required to be reported as discontinued operations in the consolidated financial statements. In order to be considered a discontinued operation, both the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of an entity and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. The accompanying consolidated financial statements reflect the results of operations and financial position of our "Joe's Business" as discontinued operations.
Other Recently Issued Financial Accounting Standards
In July 2013, the Financial Accounting Standards Board, or FASB, issued a standard to clarify the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists as of the reporting date. This guidance is effective for annual reporting periods beginning after December 15, 2013. The adoption of this amendment will not have a material effect on our financial statements.
In April 2014, the FASB issued authoritative guidance which raises the threshold for disposals to qualify as discontinued operations. Under this new guidance, a discontinued operation is (1) a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on an entity's operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date. This guidance also requires expanded or new disclosures for discontinued operations, individually material disposals that do not meet the definition of a discontinued operation, an entity's continuing involvement with a discontinued operation following disposal and retained equity method investments in a discontinued operation. This guidance is effective for fiscal periods beginning after December 15, 2014. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract,
F-21
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Summary of Significant Accounting Policies (Continued)
(2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for fiscal periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective adoption. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15 to communicate amendments to FASB Accounting Standards Codification Subtopic 205-40, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, or ASC amendments. The ASC amendments establish new requirements for management to evaluate a company's ability to continue as a going concern and to provide certain related disclosures. The ASC amendments are effective for the annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted, but we have not yet adopted such guidance.
4. Discontinued Operations
On September 11, 2015, we completed the Asset Sale related to the Joe's Business. See "Note 2—Subsequent Events" for a further discussion of the Asset Sale. Accordingly, the Joe's Business was classified as "held for sale" and its results of operations are presented as discontinued operations in the accompanying consolidated statements of net loss and comprehensive loss for all periods presented. The assets and liabilities of the discontinued operations have been reclassified as assets and liabilities held for sale within our consolidated balance sheets for all periods presented.
The operating results of discontinued operations for fiscal 2104, 2013 and 2012 are as follows (in thousands):
| |
Year ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
November 30, 2014 |
November 30, 2013 |
November 30, 2012 |
|||||||
Net sales |
$ | 104,530 | $ | 111,766 | $ | 109,158 | ||||
| | | | | | | | | | | |
Income from discontinued operations, before provision for income taxes |
1,195 | 4,719 | 14,985 | |||||||
Income tax expense |
429 | 4,617 | 6,788 | |||||||
| | | | | | | | | | | |
Income from discontinued operations |
$ | 766 | $ | 102 | $ | 8,197 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
F-22
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Discontinued Operations (Continued)
The components of major assets and liabilities held for sale at November 30, 2014 and 2013 were as follows (in thousands):
| |
November 30, 2014 |
November 30, 2013 |
|||||
|---|---|---|---|---|---|---|---|
ASSETS: |
|||||||
Current assets: |
|||||||
Accounts receivable, net |
$ | 1,309 | $ | 1,202 | |||
Factored accounts receivable, net |
19,316 | 17,690 | |||||
Inventories, net |
35,965 | 29,919 | |||||
Prepaid expenses and other current assets |
460 | 264 | |||||
| | | | | | | | |
Total Current assets |
57,050 | 49,075 | |||||
| | | | | | | | |
Noncurrent assets: |
|||||||
Property and equipment, net |
2,143 | 2,697 | |||||
Goodwill |
3,836 | 3,836 | |||||
Intangible assets |
24,000 | 24,000 | |||||
Other assets |
218 | 335 | |||||
| | | | | | | | |
Total Noncurrent assets |
30,197 | 30,868 | |||||
| | | | | | | | |
Assets of held for sale |
$ | 87,247 | $ | 79,943 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES: |
|||||||
Current liabilities: |
|||||||
Accounts payable and accrued expenses |
$ | 11,680 | $ | 9,894 | |||
| | | | | | | | |
Total Current liabilities |
11,680 | 9,894 | |||||
| | | | | | | | |
Noncurrent liabilities: |
|||||||
Deferred rent |
1,283 | 1,165 | |||||
| | | | | | | | |
Total Noncurrent liabilities |
1,283 | 1,165 | |||||
| | | | | | | | |
Liabilities held for sale |
$ | 12,963 | $ | 11,059 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
5. Acquisition of Hudson
On July 15, 2013, we announced the execution of a stock purchase agreement with Hudson, Fireman Capital CPF Hudson Co-Invest LP, or Fireman, Peter Kim, Paul Cardenas, Tony Chu, and certain option holders of Hudson named therein, pursuant to which we agreed to acquire all of the outstanding equity interests in Hudson. On September 30, 2013, we completed the acquisition of Hudson and purchased all of the outstanding equity interests for an aggregate purchase price of approximately $94,102,000, consisting of $65,416,000 in cash, approximately $27,451,000 in convertible notes, net of discount, and $1,235,000 in aggregate principal amount of promissory notes bearing no interest, that was paid on April 1, 2014, to certain former option holders of Hudson.
F-23
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Acquisition of Hudson (Continued)
In addition, in connection with the acquisition, we, along with all of our subsidiaries entered into: (i) the Revolving Credit Agreement with CIT as administrative agent, collateral agent, documentation agent and syndication agent, CIT Finance LLC, as sole lead arranger and sole bookrunner, and the lenders party thereto, and (ii) the Term Loan Credit Agreement with Garrison, as administrative agent, collateral agent, lead arranger, documentation agent and syndication agent, and the lenders party thereto. In addition, we entered into an amended and restated factoring agreement with CIT that amends and restates our existing factoring agreement. See "Note 10—Debt" for a description of our debt arrangements.
The acquisition has been accounted for as a purchase under United States generally accepted accounting principles. Accordingly, we have, with the assistance from independent valuation specialists, allocated the purchase price to the assets and liabilities of Hudson in our financial statements as of the completion of the acquisition at their respective fair values as of September 30, 2013. During the measurement period of one year, we recognized additional liabilities of $2,003,000 based upon the information obtained from facts and circumstances that existed as of the acquisition date. Goodwill was increased by the same amount to reflect these adjustments.
The assets acquired in this acquisition consisted of tangible and intangible assets acquired and liabilities assumed. The differences between the fair value of the consideration paid and the estimated fair value of the assets and liabilities has been recorded as goodwill. The significant factors that resulted in recognition of goodwill were: (a) the purchase price was based upon cash flow and return on capital projections assuming integrations with our company; and (b) the calculation of the fair value of tangible and intangible assets acquired that qualified for recognition. We have determined that the useful life of the acquired trade name asset is indefinite, and therefore, no amortization expense will initially need to be recognized. The useful life of the acquired customer relationships and design assets are finite and will be amortized over their useful lives. However, we will test the assets for impairment annually and/or if events or changes in circumstances indicate that the assets might be impaired. Additionally, a deferred tax liability has been established in the allocation of the purchase price with respect to the identified indefinite long lived intangible assets acquired.
F-24
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Acquisition of Hudson (Continued)
Under the purchase method of accounting, the total consideration as shown in the table below (in thousands) is allocated to the assets based on their estimated fair values as of the date of the completion of the acquisition. The consideration is allocated as follows:
Assets and liabilities assumed: |
||||
Cash and cash equivalents |
$ | 198 | ||
Accounts receivable |
1,263 | |||
Due from factor |
13,806 | |||
Inventories |
22,230 | |||
Prepaid expenses and other assets |
2,183 | |||
Property and equipment |
726 | |||
Other assets |
239 | |||
Accounts payable and accrued expenses |
(9,566 | ) | ||
Other current liabilities |
(3,132 | ) | ||
Due to factor |
(7,411 | ) | ||
Deferred income taxes, net |
(17,913 | ) | ||
Intangible assets acquired: |
||||
Trade names |
44,400 | |||
Customer relationships |
2,700 | |||
Design |
12,400 | |||
| | | | | |
Net assets acquired |
62,123 | |||
Goodwill created by the acquisition |
31,979 | |||
| | | | | |
Total consideration transferred |
$ | 94,102 | ||
| | | | | |
| | | | | |
| | | | | |
Total Purchase Price |
||||
Cash |
$ | 65,416 | ||
Promissory notes |
1,235 | |||
Convertible notes (Face value $32,445 less discount) |
27,451 | |||
| | | | | |
Total Purchase Price |
$ | 94,102 | ||
| | | | | |
| | | | | |
| | | | | |
The following table presents our unaudited pro forma results from continuing operations (in thousands) for fiscal year ended 2013 and 2012 as if the acquisition of the Hudson had occurred on December 1, 2011. These results are not intended to reflect our actual operations had the acquisition occurred on December 1, 2011. Acquisition transaction costs have been excluded from the pro forma net (loss) income and comprehensive (loss) income.
| |
November 30, 2013 | November 30, 2012 | |||||
|---|---|---|---|---|---|---|---|
Net sales |
$ | 93,261 | $ | 83,007 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net (loss) income and comprehensive (loss) income |
$ | (23,145 | ) | $ | (12,040 | ) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
F-25
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Factored Accounts and Receivables.
Factored accounts and receivables consisted of the following (in thousands):
| |
November 30, 2014 | November 30, 2013 | |||||
|---|---|---|---|---|---|---|---|
Non-recourse receivables assigned to factor |
$ | 14,314 | $ | 15,456 | |||
Client recourse receivables |
1,919 | 55 | |||||
| | | | | | | | |
Total receivables assigned to factor |
16,233 | 15,511 | |||||
Allowance for customer credits |
(5,128 |
) |
(1,767 |
) |
|||
| | | | | | | | |
Factor accounts receivable, net of allowance |
$ | 11,105 | $ | 13,744 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Non-factored accounts receivable |
$ | 2,123 | $ | 3,702 | |||
Allowance for customer credits |
(766 | ) | (253 | ) | |||
Allowance for doubtful accounts |
(78 | ) | (30 | ) | |||
| | | | | | | | |
Accounts receivable, net of allowance |
$ | 1,279 | $ | 3,419 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Of the total amount of receivables sold by us as of November 30, 2014 and November 30, 2013, we hold the risk of payment of $1,919,000 and $55,000, respectively, in the event of non-payment by the customers.
Prior to our acquisition of Hudson on September 30, 2013, our Joe's Sub was a party to an accounts receivable factoring agreement and an inventory security agreement with CIT. The agreements prior to September 30, 2013 were structured so that we had the ability to obtain cash by selling to CIT certain of our accounts receivable and advances for up to 50 percent of the value of certain eligible inventory. The accounts receivables were sold for up to 85 percent of the face amount on either a recourse or non-recourse basis depending on the creditworthiness of the customer. CIT permitted us to sell our accounts receivables at the maximum level of 85 percent and allowed advances of up to $6,000,000 for eligible inventory. CIT had the ability, in its discretion at any time or from time to time, to adjust or revise any limits on the amount of loans or advances made to us pursuant to both of these agreements and to impose surcharges on our rates for certain of our customers. In addition, cross guarantees were executed by and among us and all of our parent and subsidiaries to guarantee each entity's obligations. In connection with the agreements prior to September 30, 2013, certain assets were pledged to CIT, including our entire inventory, merchandise and/or goods, including raw materials through finished goods and receivables. However, our trademarks were not encumbered under those agreements.
This accounts receivable agreement could be terminated by CIT upon 60 days' written notice or immediately upon the occurrence of an event of default as defined in the agreement. In June 2013, we entered into an amendment to the accounts receivable agreement that permitted us to terminate the accounts receivable agreement upon 30 days' written notice prior to September 30, 2013, or thereafter upon 60 days' written notice provided that the minimum factoring fees have been paid for the respective period or if CIT fails to fund us for five consecutive days. The inventory agreement could be terminated once all obligations were paid under both agreements or if an event of default occurred as defined in the agreement. On September 30, 2013, we entered into an amended and restated factoring agreement with CIT that amended and restated our existing factoring agreement and replaced all prior agreements relating to factoring and inventory security.
F-26
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Factored Accounts and Receivables. (Continued)
Under the agreements that terminated on September 30, 2013, we paid to CIT a factoring rate of 0.55 percent for accounts for which CIT had the credit risk, subject to discretionary surcharges, up to $40,000,000 of invoices factored, 0.50 percent over $40,000,000 of invoices factored and 0.35 percent for accounts for which we had the credit risk. The interest rate associated with borrowings under the inventory lines and factoring facility was 0.25 percent plus the Chase prime rate, which was 3.25 percent prior to September 30, 2013. In the event we needed additional funds, we also had a letter of credit facility with CIT to allow us to open letters of credit for a fee of 0.25 percent of the letter of credit face value with international and domestic suppliers, subject to our overall availability.
Amended and Restated Factoring Agreement
On September 30, 2013, we entered into an amended and restated factoring agreement with CIT, which replaces all prior agreements relating to factoring and inventory security. The amended and restated factoring agreement provides that we sell and assign to CIT certain of our accounts receivable, including accounts arising from or related to sales of inventory and the rendition of services. We will pay a factoring rate of 0.50 percent for accounts for which CIT bears the credit risk, subject to discretionary surcharges, and 0.35 percent for accounts for which we bear the credit risk, but in no event less than $3.50 per invoice. The amended and restated factoring agreement may be terminated by CIT upon 60 days' written notice or immediately upon the occurrence of an event of default as defined in the agreement. The accounts receivable agreement may be terminated by us upon 60 days' written notice prior to September 30, 2018 or annually with 60 days' written notice prior to September 30th of each year thereafter. The amended and restated factoring agreement remains effective until it is terminated. As of November 30, 2014, our cash balance was $1,054,000 and our cash availability with CIT was approximately $12,000,000. This amount with CIT fluctuates on a daily basis based upon invoicing and collection related activity by CIT on our behalf for the receivables sold.
In November 2014, we received an initial notice of default and event of default and demand for payment of default interest from Garrison, as term loan agent, under the Term Loan Credit Agreement. As a result of the event of default under the Term Loan Credit Agreement, this also triggered a default and an event of default under the terms of the Revolving Credit Agreement with CIT. As a result of such default and event of default, both of CIT and Garrison have reserved their respective rights to exercise any and all remedies available to it under their respective agreements and have demanded payment of interest under those agreements at the default rate of interest. On February 10, 2015, we received additional notices of default and events of default for failure to comply with certain financial and other covenants and a demand for continued payment of default interest from both Garrison and CIT.
F-27
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Inventories, Net
Inventory is valued at the lower of cost or market with cost determined by the first-in, first-out method. Inventories consisted of the following (in thousands):
| |
November 30, 2014 | November 30, 2013 | |||||
|---|---|---|---|---|---|---|---|
Finished goods |
$ | 15,478 | $ | 13,015 | |||
Finished goods consigned to others |
531 | 554 | |||||
Work in progress |
3,157 | 2,776 | |||||
Raw materials |
6,778 | 7,000 | |||||
| | | | | | | | |
|
25,944 | 23,345 | |||||
Less allowance for obsolescence and slow moving items |
(590 | ) | (594 | ) | |||
| | | | | | | | |
|
$ | 25,354 | $ | 22,751 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
8. Property and Equipment
Property and equipment consisted of the following (in thousands):
| |
Useful lives (years) | November 30, 2014 | November 30, 2013 | ||||||
|---|---|---|---|---|---|---|---|---|---|
Computer and equipment |
3 - 7 | $ | 1,726 | $ | 1,639 | ||||
Furniture and fixtures |
3 - 7 | 1,759 | 2,361 | ||||||
Leasehold improvements, primarily retail |
5 - 10 | 2,713 | 3,798 | ||||||
| | | | | | | | | | |
|
6,198 | 7,798 | |||||||
Less accumulated depreciation |
(3,301 | ) | (3,102 | ) | |||||
| | | | | | | | | | |
Net property and equipment |
$ | 2,897 | $ | 4,696 | |||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Depreciation expenses from continuing operations aggregated $1,300,000, $929,000 and $565,000 for fiscal 2014, 2013 and 2012, respectively.
9. Intangible Assets
Intangible assets are recorded at cost, less accumulated amortization. Amortization of intangible assets with definite lives is provided for over their estimated useful lives. The life of the trade names is indefinite. Intangible assets consisted of the following (in thousands):
| |
Amortization Period |
Gross Amount | Accumulated Amortization |
Net Amount | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
Trade names |
Indefinite | $ | 44,400 | $ | — | $ | 44,400 | |||||
Designs |
6 Years | 12,400 | 2,411 | 9,989 | ||||||||
Customer relationships |
10 Years | 2,700 | 316 | 2,384 | ||||||||
| | | | | | | | | | | | | |
Total |
$ | 59,500 | $ | 2,727 | $ | 56,773 | ||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Amortization expense from continuing operations related to the intangible assets amounted to approximately $2,337,000 for the year ended November 30, 2014 and $390,000 for the year ended
F-28
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Intangible Assets (Continued)
November 30, 2013. There was no amortization expense related to intangible assets for the year ended November 30, 2012.
Estimated amortization expense for the next five years is as follows (in thousands) at November 30, 2014:
2015 |
$ | 2,337 | ||
2016 |
2,337 | |||
2017 |
2,337 | |||
2018 |
2,337 | |||
2019 |
1,992 | |||
Thereafter |
1,035 | |||
| | | | | |
Total |
$ | 12,375 | ||
| | | | | |
| | | | | |
| | | | | |
10. Debt
The five-year payment schedule of our term debt and convertible notes is as follows (in thousands):
| |
Payments due by period | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Total | 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | |||||||||||||||
| |
(in thousands) |
|||||||||||||||||||||
Short term debt |
$ | 59,003 | $ | 59,003 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||
Convertible notes |
33,320 | — | — | — | — | 33,320 | — | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
|
$ | 92,323 | $ | 59,003 | $ | — | $ | — | $ | — | $ | 33,320 | $ | — | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Convertible Notes
The convertible notes were issued with different interest rates and conversion features for Hudson's management stockholders and Fireman, respectively. Interest on the convertible notes is paid in a combination of cash and additional paid in kind notes, or PIK notes. Convertible notes in an aggregate principal amount of approximately $22,885,000 (face amount) were issued to Hudson's management stockholders, are structurally and contractually subordinated to our senior debt and mature on March 31, 2019. All of the notes are expressly junior and subordinated in right of payment to all amounts due and owing upon any indebtedness outstanding under the Revolving Credit Agreement and the Term Loan Credit Agreement (as discussed below).
The management notes accrue interest quarterly on the outstanding principal amount (i) from September 30, 2013 until the earlier to occur of the date of conversion of the notes or November 30, 2014 at a rate of 10 percent per annum, which is payable 7.68 percent in cash and 2.32 percent in PIK Notes, (ii) from December 1, 2014 until the earlier to occur of the date of conversion of the notes or September 30, 2016 at a rate of 10 percent per annum payable in cash, and (iii) from October 1, 2016 until the earlier to occur of the date of conversion of the notes or the date such principal amount is paid in full at a rate of 10.928 percent per annum payable in cash. Payment of interest at the cash pay rate under clause (ii) or (iii), as applicable, for any payment date will be subject to satisfaction of certain financial conditions for us. As of December 1, 2014, we did not meet such financial conditions,
F-29
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Debt (Continued)
and therefore, the interest continues to accrue quarterly at a rate of 10 percent per annum, which is payable 7.68 percent in cash and 2.32 percent in PIK notes. In addition, because we are prohibited from making any payments under the subordinated convertible notes, as of January 1, 2015, we began to accrue an additional two percent interest under the default rate in cash. The management notes become convertible by each of the holders beginning on September 30, 2015 until maturity on March 31, 2019 into shares of our common stock, cash, or a combination of cash and common stock, with the settlement choice at our election.
The approximately $9,560,000 (face amount) in aggregate principal amount of convertible notes issued to Fireman are structurally and contractually subordinated to our senior debt and mature on March 31, 2019. The Fireman note accrues interest quarterly on the outstanding principal amount (i) from September 30, 2013 until the earlier to occur of the date of conversion of the notes or November 30, 2014 at a rate of 6.5 percent per annum, which is payable 3 percent in cash and 3.5 percent in PIK Notes, (ii) from December 1, 2014 until the earlier to occur of the date of conversion of the notes or September 30, 2016 at a rate of 6.5 percent per annum payable in cash, and (iii) from October 1, 2016 until the earlier to occur of the date of conversion of the notes or the date such principal amount is paid in full at a rate of 7 percent per annum payable in cash. Payment of interest at the cash pay rate under clause (ii) or (iii), as applicable, for any payment date will be subject to satisfaction of certain financial conditions for us. As of December 1, 2014, we did not meet such financial conditions, and therefore, the interest continues to accrue quarterly at a rate of 6.5 percent per annum, which is payable 3 percent in cash and 3.5 percent in PIK notes. In addition, because we are prohibited from making any payments under the subordinated convertible notes, as of January 1, 2015, we began to accrue an additional two and a half percent interest under the default rate in cash. The Fireman note becomes convertible by the holder on October 14, 2014 until maturity on March 31, 2019 into shares of common stock, cash, or a combination of cash and common stock, with the settlement choice at our election.
Each of the notes are convertible, in whole but not in part, at a conversion price of $1.78 per share, subject to certain adjustments, into approximately 18,200,000 shares of our common stock. The Fireman note may be converted at its sole election and the management notes may be converted at either a majority of the holders' election or individually, depending on the holder. If the we elect to pay cash with respect to a conversion of the notes, the amount of cash to be paid per share will be equal to (a) the number of shares of common stock issuable upon such conversion multiplied by (b) the average of the closing prices for the common stock over the 20 trading day period immediately preceding the notice of conversion. We will have the right to prepay all or any portion of the principal amount of the notes at any time by paying 103 percent of the principal amount of the portion of any management note subject to prepayment or 100 percent of the principal amount of the portion of the Fireman note subject to prepayment.
The holders of the convertible notes also have demand and piggyback registration rights associated with their notes in a separate agreement pursuant to which they have the right to require us to prepare and file a registration statement on Form S-1 or S-3 or any similar form or successor to such forms under the Securities Act, or any other appropriate form under the Securities Act or the Exchange Act, for the resale of all or part of their shares that may be issued under the convertible notes.
F-30
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Debt (Continued)
Embedded Conversion Derivative
FASB Accounting Standards Codification (ASC) Topic 470 (ASC 470), Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement) requires the issuer of convertible debt that may be settled in shares or cash upon conversion at their option, such as our convertible notes, to account for their liability and equity components separately by bifurcating the embedded conversion derivative, or the derivative, from the host debt instrument. Although ASC 470 has no impact on our actual past or future cash flows, it requires us to record non-cash interest expense as the debt discount is amortized.
As a result of the issuance of convertible notes in September 2013, the total potential shares of common stock that could be issued exceeded the amount of shares we were eligible to issue under NASDAQ rules as of that date. Therefore, we were required to value the derivative and recognize the fair value as a long-term liability. The fair value of this derivative at the time of issuance of the convertible notes was $5,496,000 and was recorded as the original debt discount for the purposes of accounting for the debt component of the convertible notes. This debt discount on the Fireman and management notes are being amortized as interest expense using an effective interest rate of 8.32 percent and 4.31 percent, respectively, over the remaining 5.5 year term of the convertible notes.
On May 8, 2014, we obtained stockholder approval for our ability to issue the common stock underlying the convertible notes in compliance with NASDAQ rules. The derivative liability has been reassessed and it was determined that it should be reclassified to stockholders' equity as of May 8, 2014. We determined the fair value of the derivative using a binomial lattice model at that date. The key assumptions for determining the fair value at May 8, 2014 included the remaining time to maturity of approximately four years and ten months, volatility of 60 percent, and the risk-free interest rate of 1.63 percent. The fair value of the embedded conversion derivative was $5,700,000 and $3,430,000 at November 30, 2013 and May 8, 2014, respectively. The decrease in the fair value of the embedded conversion derivative from November 30, 2013 to May 8, 2014 resulted in a gain of $2,270,000, which has been recorded as other income. The primary reason for the decrease in fair value was due to the change in our stock price as compared to the conversion price.
The following table (in thousands) is a summary of the recorded value of the convertible note as of November 30, 2014. The value of the convertible note reflects the present value of the contractual cash flows from the convertible notes and resulted in an original issue discount of $10,490,000 including the additional original discount attributed to the embedded conversion derivative of $5,496,000, that were recorded on September 30, 2013, the issuance date.
Convertible notes—Face value |
$ | 32,445 | ||
Less: Original issue discount |
(4,994 | ) | ||
Less: Debt discount related to the embedded derivative liability |
(5,496 | ) | ||
| | | | | |
Convertible notes recorded value on issue date |
21,955 | |||
Accretion of debt discounts for 14 months ended November 30, 2014 |
1,903 | |||
PIK Interest paid October 1, 2013 - November 30, 2014 |
875 | |||
| | | | | |
Convertible notes value |
24,733 | |||
Plus: Embedded derivative liability—fair market value |
— | |||
| | | | | |
Debt as of November 30, 2014 |
$ | 24,733 | ||
| | | | | |
| | | | | |
| | | | | |
F-31
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Debt (Continued)
The following table (in thousands) is a summary of our total interest expense as follows:
| |
Year ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
November 30, 2014 | November 30, 2013 | November 30, 2012 | |||||||
Contractual coupon interest |
$ | 11,523 | $ | 2,195 | $ | 376 | ||||
Amortization of discount and deferred financing costs |
2,304 | 367 | — | |||||||
| | | | | | | | | | | |
Total interest expense |
$ | 13,827 | $ | 2,562 | $ | 376 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Promissory Notes
In connection with the acquisition, we issued approximately $1,235,000 in aggregate principal amount of promissory notes bearing no interest that were paid on April 1, 2014 to certain option holders of Hudson.
Revolving Credit Agreement
The Revolving Credit Agreement with CIT provided us with a revolving credit facility up to $50,000,000 comprised of a revolving A-1 commitment of up to $1,000,000 and a revolving A commitment of up to $50,000,000 minus the revolving A-1 commitment. Our actual maximum credit availability under the revolving facility varied from time to time and was determined by calculating a borrowing base, which was based on the value of the eligible accounts receivable and eligible inventory minus reserves imposed by CIT. The revolving facility also provided for swingline loans, up to $5,000,000 sublimit, and letters of credit, up to $1,000,000 sublimit. Proceeds from advances under the revolving facility could be used for working capital needs and general corporate purposes and were initially used to pay a portion of the consideration for the acquisition of Hudson and fees and expenses associated with the acquisition of Hudson. As of November 30, 2014, $31,338,000 was outstanding under our revolving credit facility and cash availability of approximately $12,000,000.
The Revolving Credit Agreement was guaranteed by us and all of our subsidiaries, and secured by liens on substantially all assets owned by us, including a first-priority lien on certain property, including principally trade accounts, inventory, certain related assets and proceeds of the foregoing, subject to permitted liens and exceptions, and a second-priority lien on all other assets, including intellectual property owned by us, which secured the term loan facility on a first-priority basis.
All unpaid loans under the Revolving Credit Agreement were to mature on September 30, 2018.
As of November 30, 2014, we were not in compliance with certain covenants under the Revolving Credit Agreement as a result of an event of default under the Term Loan Credit Agreement.
In connection with the Asset Sale, a portion of our indebtedness under the Revolving Credit Agreement was repaid, and on September 11, 2015, we entered into the Amended and Restated Revolving Credit Agreement. Among other things, the Amended and Restated Revolving Credit Agreement (i) amended and restated the Revolving Credit Agreement as it had been amended from time to time and (ii) waived the "Existing Defaults" and "Forbearance Defaults" (each as defined under the CIT Forbearance Agreement) and certain other defaults. See "Note 2—Subsequent Events" for a discussion of forbearance agreements and Amended and Restated Revolving Credit Agreement.
F-32
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Debt (Continued)
Term Loan Credit Agreement
The Term Loan Credit Agreement with Garrison provided for term loans of up to $60,000,000 and was fully funded to us as of September 30, 2013.
Amounts outstanding under the Term Loan Credit Agreement were guaranteed by us and all of our subsidiaries and were secured by liens on substantially all assets owned by us, including a first-priority lien on intellectual property owned by us and a second-priority lien on the revolving credit priority collateral. The term loan was to mature on September 30, 2018. As of November 30, 2014, we were not in compliance with certain financial and maintenance covenants under the term loan credit agreement.
A portion of the proceeds from the Asset Sale were used to repay all of our indebtedness outstanding under the Term Loan Credit Agreement. For a discussion of the forbearance agreements and the repayment of the Term Loan Credit Agreement in connection with the Asset Sale, see "Note 2—Subsequent Events."
11. Fair Value Disclosures
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Accounting guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. We review the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
F-33
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Fair Value Disclosures (Continued)
The following table presents our fair value hierarchy for liabilities measured at fair value on a recurring basis as of November 30, 2014 (in thousands):
| |
As of November 30, 2014 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Total | Level 1 | Level 2 | Level 3 | |||||||||
Embedded conversion derivative |
— | — | — | — | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| |
As of November 30, 2013 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Total | Level 1 | Level 2 | Level 3 | |||||||||
Embedded conversion derivative |
$ | 5,700 | $ | — | $ | — | $ | 5,700 | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
A reconciliation of the changes in Level 3 fair value measurements is as follows as of November 30, 2014 (in thousands):
| |
Convertible Notes Embedded Derivative |
|||
|---|---|---|---|---|
Balance at November 30, 2013 |
$ | 5,700 | ||
Total (gains) losses included in other expense |
(2,270 | ) | ||
Reclassification to stockholders' equity |
(3,430 | ) | ||
| | | | | |
Balance at November 30, 2014 |
$ | — | ||
| | | | | |
| | | | | |
| | | | | |
The following table presents our fair value hierarchy for assets measured at fair value on a non-recurring basis as of November 30, 2014 (in thousands):
| |
As of November 30, 2014 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Total | Level 1 | Level 2 | Level 3 | Total Losses |
|||||||||||
Property and equipment, net |
$ | 2,897 | $ | — | $ | — | $ | 2,897 | $ | 840 | ||||||
Goodwill |
$ | 8,394 | $ | — | $ | — | $ | 8,394 | $ | 23,585 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
F-34
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income Taxes
The provision (benefit) for income taxes is as follows:
| |
Year ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2014 | 2013 | 2012 | |||||||
| |
(in thousands) |
|||||||||
Current: |
||||||||||
Federal |
$ | (1,427 | ) | $ | (2,387 | ) | $ | (5,258 | ) | |
State |
199 | (896 | ) | (324 | ) | |||||
| | | | | | | | | | | |
|
(1,228 | ) | (3,283 | ) | (5,582 | ) | ||||
| | | | | | | | | | | |
Deferred: |
||||||||||
Federal |
(3,655 | ) | (78 | ) | 3,772 | |||||
State |
(176 | ) | 227 | (202 | ) | |||||
| | | | | | | | | | | |
|
(3,831 | ) | 149 | 3,570 | ||||||
| | | | | | | | | | | |
Total |
$ | (5,059 | ) | $ | (3,134 | ) | $ | (2,012 | ) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
F-35
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income Taxes (Continued)
Net deferred tax assets and liabilities result from the following temporary differences between the book and tax basis of assets and liabilities:
| |
Year ended | ||||||
|---|---|---|---|---|---|---|---|
| |
2014 | 2013 | |||||
| |
(in thousands) |
||||||
Current: |
|||||||
Deferred tax assets: |
|||||||
Allowance for customer credits and doubtful accounts |
$ | 2,427 | $ | 1,251 | |||
Inventory valuation |
2,097 | 879 | |||||
Tax credits |
— | 5 | |||||
Inventory capitalization |
1,527 | 1,004 | |||||
State tax deduction |
73 | 163 | |||||
Inventory purchase price adjustment |
— | 135 | |||||
Accrued vacation |
201 | 84 | |||||
Other |
— | 38 | |||||
Valuation Allowance |
(189 | ) | — | ||||
| | | | | | | | |
Total current deferred tax assets |
6,136 | 3,559 | |||||
| | | | | | | | |
Current deferred tax liabilities: |
|||||||
Inventory revaluation |
— | (386 | ) | ||||
Prepaid expenses |
(71 | ) | (59 | ) | |||
| | | | | | | | |
Total current deferred taxes liabilities |
(71 | ) | (445 | ) | |||
| | | | | | | | |
Net current deferred tax assets |
$ | 6,065 | $ | 3,114 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Noncurrent: |
|||||||
Deferred tax assets: |
|||||||
Benefit of net operating loss carryforwards |
$ | 8,483 | $ | 8,584 | |||
Stock compensation expense |
263 | 198 | |||||
Deferred rent |
1,139 | 965 | |||||
Interest expense |
— | 1,442 | |||||
Tax credits |
70 | — | |||||
State tax deduction |
69 | ||||||
Other |
59 | 65 | |||||
Valuation allowance |
(451 | ) | (342 | ) | |||
| | | | | | | | |
Net noncurrent deferred tax assets |
9,632 | 10,912 | |||||
| | | | | | | | |
Deferred tax liabilities: |
|||||||
Property and equipment basis difference |
(117 | ) | (755 | ) | |||
Amortizable intangible assets |
(2,365 | ) | (3,026 | ) | |||
Debt discount |
(3,005 | ) | — | ||||
Long lived intangible asset |
(21,910 | ) | (23,333 | ) | |||
| | | | | | | | |
Total noncurrent deferred tax liabilities |
(27,397 | ) | (27,114 | ) | |||
| | | | | | | | |
Net noncurrent deferred tax liability |
$ | (17,765 | ) | $ | (16,202 | ) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
F-36
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income Taxes (Continued)
A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Annually, management reassesses the need for a valuation allowance. Realization of deferred income tax assets is dependent upon taxable income in prior carryback years, estimates of future taxable income, tax planning strategies and reversals of existing taxable temporary differences. Based on our assessment of these items for fiscal 2014, 2013 and 2012, we determined that the deferred tax assets were more likely than not to be realized with the exception of a valuation allowance of $640,000, $342,000 and $0, respectively, that was recorded against a state net operating loss deferred tax asset of $210,000. We considered all available evidence, both positive and negative, in our assessment of the valuation allowance needed as of November 30, 2014. We concluded that the valuation allowance of $640,000 as of November 30, 2014 is sufficient based on our available tax planning strategies, which include certain of our assets that have a fair value in excess of tax basis. The valuation allowance recorded during 2013 was associated with net operating losses that expired during 2014. The increases to the valuation allowance that were recognized as part of tax expense in 2014 and 2013 were $508,000 and $342,000, respectively.
The reconciliation of the effective income tax rate from continuing operations to the federal statutory rate for the years ended is as follows:
| |
Year ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2014 | 2013 | 2012 | |||||||
Computed tax provision at the statutory rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||
State income tax |
— | 4.2 | % | 10.1 | % | |||||
Contingent consideration payments |
— | — | — | |||||||
Transaction costs |
0.6 | % | (9.4 | )% | — | |||||
Acquisition basis difference |
(0.8 | )% | (0.4 | )% | — | |||||
Effect of uncertain tax positions |
(0.1 | )% | (0.1 | )% | — | |||||
Sec 162 (m) limitation |
— | — | — | |||||||
Prior year adjustment |
— | — | — | |||||||
Goodwill impairment |
(19.0 | )% | — | — | ||||||
Other adjustments |
0.4 | % | 1.4 | % | (0.8 | )% | ||||
| | | | | | | | | | | |
Effective tax rate |
15.1 | % | 29.7 | % | 43.3 | % | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
We are subject to United States federal income tax as well as income tax in multiple state jurisdictions. To the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward amount. We are no longer subject to United States federal and California income tax examinations by tax authorities for years prior to fiscal 2010. We are currently not being examined by any tax authorities.
We had net operating loss carryforwards of $25,067,000 at the end of fiscal 2014 for federal tax purposes that will expire from fiscal 2019 through fiscal 2034. We also had $19,874,000 of net operating loss carryforwards available for California that will expire from fiscal 2015 through fiscal 2034.
Certain limitations may be placed on net operating loss carryforwards as a result of "changes in control" as defined in Section 382 of the Internal Revenue Code. In the event a change in control occurs, it will have the effect of limiting the annual usage of the carryforwards in future years.
F-37
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income Taxes (Continued)
Additional changes in control in future periods could result in further limitations of our ability to offset taxable income. Management believes that certain changes in control have occurred which resulted in limitations on its net operating loss carryforwards, however, management has determined that these limitations will not impact the ultimate utilization of the net operating loss carryforwards.
As of November 30, 2014 and 2013, we provided a liability of $400,000 and $388,000, respectively, for unrecognized tax benefits related to various federal and state income tax matters. Included in the balance sheet at November 30, 2014 is $339,000, net of tax related benefits that impact the effective income tax rate if recognized. The following presents a roll forward of its unrecognized tax benefits (in thousands):
Balance at November 30, 2012 |
$ | 80 | ||
Increase related to acquisition |
308 | |||
| | | | | |
Balance at November 30, 2013 |
388 | |||
Increase for tax positions during prior period |
20 | |||
Increase for tax positions during current period |
(8 | ) | ||
| | | | | |
Balance at November 30, 2014 |
$ | 400 | ||
| | | | | |
| | | | | |
| | | | | |
We recognized interest and penalties related to unrecognized tax benefits of $28,000 and $6,000 in the provision for income taxes in our statements of comprehensive (loss) income for fiscal 2014 and 2013, respectively. For fiscal 2014 and 2013, we had approximately $36,000 and $19,000, respectively, of interest accrued as of November 30, 2014 and 2013, respectively. For the payment of any penalty, we accrued $62,000 and $51,000 as of November 30, 2014 and 2013, respectively. The penalty accrual at November 30, 2014 was related to the acquisition and local income taxes. We expect $64,000 of unrecognized tax benefits to reverse in fiscal 2015 due to the expiration of the applicable statute of limitations.
13. Stockholders' Equity
Stock Incentive Plans
On June 3, 2004, we adopted the 2004 Stock Incentive Plan, or the 2004 Incentive Plan, and in October 2011, we adopted an Amended and Restated 2004 Stock Incentive Plan, or the Restated Plan, to update it with respect to certain provisions and changes in the tax code since its original adoption. Under the Restated Plan, the number of shares authorized for issuance is 6,825,000 shares of common stock. After the adoption of the Restated Plan in October 2011, we will no longer grant awards pursuant to the 2004 Incentive Plan; however, it remains in effect for awards outstanding as of the adoption of the Restated Plan. Under the Restated Plan, grants may be made to employees, officers, directors and consultants under a variety of awards based upon underlying equity, including, but not limited to, stock options, restricted common stock, restricted stock units or performance shares. The Restated Plan limits the number of shares that can be awarded to any employee in one year to 1,250,000. The exercise price for incentive options may not be less than the fair market value of our common stock on the date of grant and the exercise period may not exceed ten years. Vesting periods, terms and types of awards are determined by the Board of Directors and/or our Compensation and Stock Option Committee, or Compensation Committee. The Restated Plan includes a provision for the acceleration of vesting of all awards upon a change of control as well as a provision that allows
F-38
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Stockholders' Equity (Continued)
forfeited or unexercised awards that have expired to be available again for future issuance. Since fiscal 2008, we have issued both restricted common stock and restricted common stock units, or RSUs, to our officers, directors and employees pursuant to our various plans. The RSUs represent the right to receive one share of common stock for each unit on the vesting date provided that the employee continues to be employed by us. On the vesting date of the RSUs, we expect to issue the shares of common stock to each participant upon vesting and expect to withhold an equivalent number of shares at fair market value on the vesting date to fulfill tax withholding obligations. Any RSUs withheld or forfeited will be shares available for issuance in accordance with the terms of the Restated Plan.
The shares of common stock issued upon exercise of a previously granted stock option or a grant of restricted common stock or RSUs are considered new issuances from shares reserved for issuance in connection with the adoption of the various plans. We require that the option holder provide a written notice of exercise in accordance with the option agreement and plan to the stock plan administrator and full payment for the shares be made prior to issuance. All issuances are made under the terms and conditions set forth in the applicable plan. As of November 30, 2014, 3,085,935 shares remained available for issuance under the Restated Plan.
For all stock compensation awards that contain graded vesting with time-based service conditions, we have elected to apply a straight-line recognition method to account for all of these awards. For existing grants that were not fully vested at November 30, 2013 and grants made in fiscal 2014, there was a total of $660,000 of stock based compensation expense from continuing operations recognized during fiscal 2014.
The following summarizes option grants, restricted common stock and RSUs issued to members of our Board of Directors for the fiscal years 2002 through fiscal 2014 (in actual amounts) for service as a member:
| |
November 30, 2014 | |
|||||
|---|---|---|---|---|---|---|---|
Granted as of:
|
Number of options | Exercise price | |||||
2002 |
40,000 | $ | 1.00 | ||||
2002 |
31,496 | $ | 1.27 | ||||
2003 |
30,768 | $ | 1.30 | ||||
2004 |
320,000 | $ | 1.58 | ||||
2005 |
300,000 | $ | 5.91 | ||||
2006 |
450,000 | $ | 1.02 | ||||
| |
Number of restricted shares issued |
|||
|---|---|---|---|---|
2007 |
320,000 | |||
2008 |
473,455 | |||
2009 |
371,436 | |||
2010 |
131,828 | |||
2011 |
— | |||
2012 |
617,449 | |||
2013 |
— | |||
2014 |
219,678 | |||
F-39
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Stockholders' Equity (Continued)
Stock option activity in the aggregate for the periods indicated are as follows (in actual amounts):
| |
Options | Weighted average exercise price |
Weighted average remaining contractual Life (Years) |
Aggregate Intrinsic Value |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at November 30, 2013 |
775,000 | $ | 4.03 | ||||||||||
Granted |
— | — | |||||||||||
Exercised |
— | — | |||||||||||
Expired |
(225,000 | ) | 1.62 | ||||||||||
Forfeited |
— | — | — | — | |||||||||
| | | | | | | | | | | | | | |
Outstanding and exercisable at November, 2014 |
550,000 | $ | 5.02 | 0.7 | $ | — | |||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Weighted average per option fair value of options granted during the year |
N/A | ||||||||||||
Outstanding at November 30, 2012 |
796,794 | $ | 3.96 | ||||||||||
Granted |
— | — | |||||||||||
Exercised |
(21,794 | ) | 1.30 | ||||||||||
Expired |
— | — | |||||||||||
Forfeited |
— | — | — | — | |||||||||
| | | | | | | | | | | | | | |
Outstanding and exercisable at November, 2013 |
775,000 | $ | 4.03 | 1.4 | $ | 18,000 | |||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Weighted average per option fair value of options granted during the year |
N/A | ||||||||||||
| |
Options | Weighted average exercise price |
Weighted average remaining contractual Life (Years) |
Aggregate Intrinsic Value |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at November 30, 2011 |
868,290 | $ | 3.73 | ||||||||||
Granted |
— | — | |||||||||||
Exercised |
(20,000 | ) | 1.00 | ||||||||||
Expired |
(51,496 | ) | 1.17 | ||||||||||
Forfeited |
— | — | — | — | |||||||||
| | | | | | | | | | | | | | |
Outstanding and exercisable at November, 2012 |
796,794 | $ | 3.96 | 2.3 | $ | — | |||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Weighted average per option fair value of options granted during the year |
N/A | ||||||||||||
The total intrinsic value of options exercised during the fiscal years ended November 30, 2013 and 2012 was $10,948 and $7,600, respectively. There were no options exercised during the year ended November 30, 2014.
F-40
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Stockholders' Equity (Continued)
Exercise prices for options outstanding and exercisable as of November 30, 2014 are as follows:
| |
Options Outstanding and Exercisable | |||||||
|---|---|---|---|---|---|---|---|---|
| Exercise Price | Number of shares | Weighted-Average Remaining Contractual Life |
||||||
| $ | 1.02 | 100,000 | 1.3 | |||||
| $ | 5.91 | 450,000 | 0.5 | |||||
| | | | | | | | | |
| 550,000 | 0.7 | |||||||
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
The following table summarizes stock option activity by plan. There are no stock options outstanding under our Restated Plan.
| |
Total Number of Shares |
2004 Incentive Plan |
2000 Director Plan |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at November 30, 2013 |
775,000 | 775,000 | — | |||||||
Granted |
— | — | — | |||||||
Exercised |
— | |||||||||
Forfeited / Expired |
(225,000 | ) | (225,000 | ) | — | |||||
| | | | | | | | | | | |
Outstanding and exercisable at November 30, 2014 |
550,000 | 550,000 | — | |||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Outstanding at November 30, 2012 |
796,794 | 775,000 | 21,794 | |||||||
Granted |
— | — | — | |||||||
Exercised |
(21,794 | ) | — | (21,794 | ) | |||||
Forfeited / Expired |
— | — | — | |||||||
| | | | | | | | | | | |
Outstanding and exercisable at November 30, 2013 |
775,000 | 775,000 | — | |||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Outstanding at November 30, 2011 |
868,290 | 775,000 | 93,290 | |||||||
Granted |
— | — | — | |||||||
Exercised |
(20,000 | ) | — | (20,000 | ) | |||||
Forfeited / Expired |
(51,496 | ) | — | (51,496 | ) | |||||
| | | | | | | | | | | |
Outstanding and exercisable at November 30, 2012 |
796,794 | 775,000 | 21,794 | |||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
F-41
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Stockholders' Equity (Continued)
A summary of the status of restricted common stock and RSUs as of November 30, 2014, and changes during the year, are presented below:
| |
|
|
|
Weighted-Average Grant-Date Fair Value |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Restricted Shares |
Restricted Stock Units |
Total Shares | Restricted Shares |
Restricted Stock Units |
|||||||||||
Outstanding at November 30, 2013 |
954,798 | 1,661,330 | 2,616,128 | $ | 0.90 | $ | 0.93 | |||||||||
Granted |
288,121 | 362,242 | 650,363 | 1.49 | 1.49 | |||||||||||
Issued |
(450,616 | ) | (655,384 | ) | (1,106,000 | ) | 0.95 | 1.11 | ||||||||
Cancelled |
— | (312,792 | ) | (312,792 | ) | — | 0.97 | |||||||||
Forfeited |
— | (21,545 | ) | (21,545 | ) | — | 0.72 | |||||||||
| | | | | | | | | | | | | | | | | |
Outstanding at November 30, 2014 |
792,303 | 1,033,851 | 1,826,154 | $ | 1.08 | $ | 1.00 | |||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Outstanding at November 30, 2012 |
844,236 | 2,713,605 | 3,557,841 | $ | 0.85 | $ | 0.87 | |||||||||
Granted |
420,882 | 631,059 | 1,051,941 | 1.02 | 1.02 | |||||||||||
Issued |
(310,320 | ) | (1,140,709 | ) | (1,451,029 | ) | 0.92 | 0.89 | ||||||||
Cancelled |
— | (426,749 | ) | (426,749 | ) | — | 0.89 | |||||||||
Forfeited |
— | (115,876 | ) | (115,876 | ) | — | 0.95 | |||||||||
| | | | | | | | | | | | | | | | | |
Outstanding at November 30, 2013 |
954,798 | 1,661,330 | 2,616,128 | $ | 0.90 | $ | 0.93 | |||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Outstanding at November 30, 2011 |
464,610 | 2,542,728 | 3,007,338 | $ | 1.30 | $ | 0.98 | |||||||||
Granted |
670,781 | 1,871,539 | 2,542,320 | 0.66 | 0.75 | |||||||||||
Issued |
(291,155 | ) | (1,126,519 | ) | (1,417,674 | ) | 1.09 | 0.84 | ||||||||
Cancelled |
— | (533,955 | ) | (533,955 | ) | — | 0.88 | |||||||||
Forfeited |
— | (40,188 | ) | (40,188 | ) | — | 0.77 | |||||||||
| | | | | | | | | | | | | | | | | |
Outstanding at November 30, 2012 |
844,236 | 2,713,605 | 3,557,841 | $ | 0.85 | $ | 0.87 | |||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
As of November 30, 2014, there was $1,281,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Restated Plan. The unrecognized compensation cost is expected to be recognized over a weighted-average of 1.8 years. In fiscal 2014, there were no options granted, 362,242 RSUs and 288,121 shares of restricted stock granted. In fiscal 2014, we issued 655,384 shares of our common stock to holders of RSUs, 450,616 shares of restricted stock and withheld, cancelled or forfeited 334,337 RSUs or restricted stock.
Convertible Notes
In connection with the acquisition of Hudson, we issued the sellers convertible notes. See "Note 10—Debt" for a further discussion of the convertible notes.
F-42
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Stockholders' Equity (Continued)
Earnings Per Share
Earnings per share are computed using weighted average common shares and dilutive common equivalent shares outstanding. Potentially dilutive securities consist of outstanding options and warrants. A reconciliation of the numerator and denominator of basic earnings per share and diluted earnings per share is as follows:
| |
Year Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
November 30, 2014 |
November 30, 2013 |
November 30, 2012 |
|||||||
| |
(in thousands, except per share data) |
|||||||||
Basic (loss) earnings per share computation: |
||||||||||
Numerator: |
||||||||||
Loss from continuing operations |
$ | (28,482 | ) | $ | (7,416 | ) | $ | (2,632 | ) | |
Income from discontinued operations |
766 | 102 | 8,197 | |||||||
| | | | | | | | | | | |
Net (loss) income |
$ | (27,716 | ) | $ | (7,314 | ) | $ | 5,565 | ||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Denominator: |
||||||||||
Weighted average common shares outstanding |
68,226 | 67,163 | 65,496 | |||||||
Earnings (loss) per common share—basic |
||||||||||
Loss from continuing operations |
$ | (0.42 | ) | $ | (0.11 | ) | $ | (0.04 | ) | |
Earnings from discontinued operations |
0.01 | 0.00 | 0.12 | |||||||
| | | | | | | | | | | |
Earnings (loss) per common share—basic |
$ | (0.41 | ) | $ | (0.11 | ) | $ | 0.08 | ||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Diluted income (loss) per share computation: |
||||||||||
Numerator: |
||||||||||
Loss from continuing operations |
$ | (28,482 | ) | $ | (7,416 | ) | $ | (2,632 | ) | |
Income from discontinued operations |
766 | 102 | 8,197 | |||||||
| | | | | | | | | | | |
Net (loss) income |
$ | (27,716 | ) | $ | (7,314 | ) | $ | 5,565 | ||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Denominator: |
||||||||||
Weighted average common shares outstanding |
68,226 | 67,163 | 65,496 | |||||||
Effect of dilutive securities: |
||||||||||
Restricted shares, RSU's, convertible securities and options |
— | — | 1,353 | |||||||
| | | | | | | | | | | |
Dilutive potential common shares |
68,226 | 67,163 | 66,849 | |||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Earnings (loss) per common share—diluted |
||||||||||
Loss from continuing operations |
$ | (0.42 | ) | $ | (0.11 | ) | $ | (0.04 | ) | |
Earnings from discontinued operations |
0.01 | 0.00 | 0.12 | |||||||
| | | | | | | | | | | |
Earnings (loss) per common share—diluted |
$ | (0.41 | ) | $ | (0.11 | ) | $ | 0.08 | ||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
For fiscal 2014 and fiscal 2013, currently exercisable options, convertible notes, unvested restricted shares and unvested RSUs in the aggregate of 20,970,505 and 21,618,876, respectively, have been excluded from the calculation of the diluted loss per share as their effect would have been anti-dilutive. For fiscal 2012, currently exercisable options and warrants in the aggregate of 1,058,970 have been excluded from the calculation of diluted income per share because the exercise prices of such options and warrants were out-of-the-money.
F-43
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Stockholders' Equity (Continued)
Shares Reserved for Future Issuance
As of November 30, 2014, shares reserved for future issuance include (i) 550,000 shares of common stock issuable upon the exercise of stock options granted under the incentive plans; (ii) 1,033,851 shares of common stock issuable upon the vesting of RSUs; (iii) an aggregate of 3,085,935 shares of common stock available for future issuance under the Restated Plan as of November 30, 2014; and (iv) 18,719,094 shares of common stock issuable pursuant to the convertible notes.
14. Commitments and Contingencies
Operating Lease Obligations and Other Obligations Related to Operations
We lease certain equipment and office and retail space under separate lease arrangements. The leases generally contain renewal provisions. Equipment and office/retail rental expenses under such leases from continuing operations for the years ended November 30, 2014, November 30, 2013 and November 30, 2012, were approximately $4,946,000, $4,204,000 and $2,617,000, respectively.
We lease retail store locations under operating lease agreements expiring on various dates through 2024 or 3 to 10 years from the rent commencement date. Some of these leases require us to make periodic payments for property taxes, utilities and common area operating expenses. Certain retail store leases provide for rents based upon the minimum annual rental amount and a percentage of annual sales volume, generally ranging from 6% to 8%, when specific sales volumes are exceeded. Some leases include lease incentives, rent abatements and fixed rent escalations, which are amortized and recorded over the initial lease term on a straight-line basis.
In November 2010, we entered into a lease agreement to lease office and warehouse space at our current corporate offices and in August 2013, we entered into an extension for the lease of the same space beginning January 1, 2014, which was assigned in connection with the Asset Sale to the Operating Assets Purchaser. However, we continue to occupy approximately 1,000 square feet of office space of under an arrangement with the Operating Assets Purchaser.
As of November 30, 2014, the future minimum rental payments under non-cancelable retail operating leases with lease terms in excess of one year for continuing operations were as follows (in thousands):
2015 |
$ | 4,659 | ||
2016 |
4,415 | |||
2017 |
4,291 | |||
2018 |
4,052 | |||
2019 |
2,867 | |||
Thereafter |
6,637 | |||
| | | | | |
|
$ | 26,921 | ||
| | | | | |
| | | | | |
| | | | | |
Purchase commitments in the aggregate amount of $7,596,000 are all expected to be fulfilled within the next 12 months.
F-44
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Commitments and Contingencies (Continued)
Advertising Commitments
From time to time, we enter into various agreements for short term billboard, taxi cab top, bus or other advertising spaces in various locations in and around New York and Los Angeles and for print advertising. However, we do not have any commitment to pay a minimum amount or any long term commitments for such advertising.
Letters of Credit
We had a no contingent liability for letters of credit as of November 30, 2014.
Contingent Consideration Payments, Buy-Out Agreement and Earnout Subordination Agreement
As part of the consideration paid in connection with the merger with JD Holdings in October of 2007 and without regard to continued employment, until February 12, 2013, Mr. Dahan was entitled to a certain percentage of the gross profit earned by us in any applicable fiscal year until October 2017. Mr. Dahan was entitled to the following: (i) 11.33 percent of the gross profit from $11,251,000 to $22,500,000; (ii) three percent of the gross profit from $22,501,000 to $31,500,000; (iii) two percent of the gross profit from $31,501,000 to $40,500,000; and (iv) one percent of the gross profit above $40,501,000. The payments were paid in advance on a monthly basis based upon estimates of gross profits after the assumption that the payments were likely to be paid. At the end of each quarter, any overpayments were offset against future payments and any significant underpayments were made. No payments were made if the gross profit was less than $11,250,000. "Gross Profit" was defined as net sales of the Joe's® brand less cost of goods sold. We accounted for such payments as compensation expense.
On February 18, 2013, we entered into an agreement with Mr. Dahan that provided certainty of payments to him by removing the contingencies related to the contingent consideration payments to be made to Mr. Dahan as an earn out under the original merger agreement. This agreement fixed the overall amount to be paid by us for the remaining months of year six through year 10 in the original merger agreement. The payments are now made over an accelerated time period until November 2015 instead of October 2017. Under the agreement, beginning on February 22, 2013 until November 27, 2015, Mr. Dahan is entitled to receive the total aggregate fixed amount of $9,168,000 through weekly installment payments. In the first quarter of fiscal 2013, we recorded a charge of $8,732,000 as contingent consideration buy-out expense in connection with this agreement. This amount represented the net present value of the total fixed amount that Mr. Dahan would receive. The entire amount was expensed during the first quarter of fiscal 2013 as the amount payable represented a present obligation due to Mr. Dahan. Mr. Dahan is not required to perform any services or remain employed to receive the fixed amount. Mr. Dahan also agreed to an additional restrictive covenant relating to non-competition and non-solicitation until November 30, 2016 that added to the original restrictive covenant in the merger agreement.
On September 30, 2013, Mr. Dahan, CIT, Garrison and all of our loan parties entered into an earn out subordination agreement which provided, among other things, that any payment, whether in cash, in kind, securities or any other property, in connection with our obligations to Mr. Dahan would be expressly junior and subordinated in right of payment to all amounts due and owing upon any indebtedness outstanding under the Revolving Credit Agreement and the Term Loan Credit Agreement. We are permitted to make certain amount of weekly installment payments of our
F-45
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Commitments and Contingencies (Continued)
obligations in the absence of an insolvency proceeding or any event of default under the Revolving Credit Agreement and the Term Loan Credit Agreement. In connection with the Asset Sale, Mr. Dahan was repaid a portion of the buy-out payment owed to him and the remainder is expected to be paid at the closing of the Merger and Merger Transactions.
Litigation
We are involved from time to time in routine legal matters incidental to our business. In the opinion of our management, resolution of such matters will not have a material effect on our financial position or results of operations.
Convertible Notes, Promissory Tax Notes, Revolving Credit Agreement and Term Loan Credit Agreement
See "Note 10—Debt" for a further discussion on the commitments related to acquisition which included the issuance of the convertible notes, the promissory tax notes, the Revolving Credit Agreement and the Term Loan Credit Agreement.
F-46
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Segment Reporting and Operations by Geographic Areas
Segment Reporting
The following table (in thousands) contains summarized financial information concerning our reportable segments:
| |
Year ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2014 | 2013 | 2012 | |||||||
Net sales: |
||||||||||
Wholesale |
$ | 68,377 | $ | 15,621 | $ | — | ||||
Retail |
15,848 | 12,796 | 9,484 | |||||||
| | | | | | | | | | | |
|
$ | 84,225 | $ | 28,417 | $ | 9,484 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Gross profit: |
||||||||||
Wholesale |
$ | 29,006 | $ | 5,227 | $ | — | ||||
Retail |
10,717 | 8,739 | 6,649 | |||||||
| | | | | | | | | | | |
|
$ | 39,723 | $ | 13,966 | $ | 6,649 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Operating (loss) income: |
||||||||||
Wholesale |
$ | 18,550 | $ | 3,700 | $ | — | ||||
Retail |
(1,774 | ) | (1,020 | ) | 78 | |||||
Corporate and other |
(47,444 | ) | (11,989 | ) | (4,722 | ) | ||||
| | | | | | | | | | | |
|
$ | (30,668 | ) | $ | (9,309 | ) | $ | (4,644 | ) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Capital expenditures: |
||||||||||
Wholesale |
$ | — | $ | 129 | $ | — | ||||
Retail |
87 | 1,337 | 1,384 | |||||||
Corporate and other |
254 | 14 | — | |||||||
Assets held for sale |
424 | 655 | 1,395 | |||||||
| | | | | | | | | | | |
|
$ | 765 | $ | 2,135 | $ | 2,779 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total assets: |
||||||||||
Wholesale |
$ | 34,234 | $ | 38,034 | $ | — | ||||
Retail |
6,707 | 6,534 | 5,112 | |||||||
Corporate and other |
75,761 | 98,512 | 18,704 | |||||||
Assets held for sale |
87,247 | 79,943 | 62,208 | |||||||
| | | | | | | | | | | |
|
$ | 203,949 | $ | 223,023 | $ | 86,024 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Operations by Geographic Areas
Currently, we do not have any material reportable operations outside of the United States.
16. Related Party and Other Transactions
Joe Dahan
Since the acquisition of the Joe's® brand as a result of a merger in October 2007 through February 18, 2013, Mr. Dahan was entitled to a certain percentage of our gross profit in any applicable
F-47
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Related Party and Other Transactions (Continued)
fiscal year until October 2017. At the time of the acquisition, pursuant to ASC 805—Business Combinations, we assessed this original contingent consideration arrangement as compensatory and expensed such amounts over the term of the earn out period at the defined percentage amounts. For the fiscal years ended 2013 and 2012, expenses of $311,000 and $1,862,000, respectively, were recorded in the statement of net (loss) income and comprehensive (loss) income related to the contingent consideration expense made to Mr. Dahan under the original agreement.
On February 18, 2013, we entered into a new agreement with Mr. Dahan that fixed the overall amount to be paid by us for the remaining months of year six through year 10 in the original merger agreement at $9,168,000 through weekly installment payments beginning on February 22, 2013 until November 27, 2015. In the first quarter of fiscal 2013, we recorded a charge of $8,732,000 as contingent consideration buy-out expense in connection with this agreement. This amount represented the net present value of the total fixed amount that Mr. Dahan would receive. The entire amount was expensed during the first quarter of fiscal 2013 as the amount payable represented a present obligation due to Mr. Dahan. On September 30, 2013, in connection with entry into new credit facilities relating to the acquisition of Hudson, Mr. Dahan, CIT, Garrison and all of our loan parties entered into an earn out subordination agreement, which provides, among other things, that any payment, whether in cash, in kind, securities or any other property, in connection with the our obligations to Mr. Dahan is expressly junior and subordinated in right of payment to all amounts due and owing upon any indebtedness outstanding under the Revolving Credit Agreement and the Term Loan Credit Agreement. We are permitted to make certain amount of weekly installment payments of our obligations in the absence of an insolvency proceeding or any event of default under the Revolving Credit Agreement or the Term Loan Credit Agreement. In connection with the Asset Sale, Mr. Dahan was repaid a portion of the buy-out payment owed to him and the remainder is expected to be paid at the closing of the Merger and Merger Transactions.
See "Note 14—Commitments and Contingencies—Contingent Consideration Payments, Buy Out Agreement and Earnout Subordination Agreement" for a further discussion on these agreements with Mr. Dahan.
Ambre Dahan
In January 2013, we entered in to a consulting arrangement with Ambre Dahan, the spouse of Mr. Dahan, for design director services that pays her $175,000 per annum on a bi-weekly basis. For the fiscal year ended 2014, we paid Ms. Dahan $175,000 under this arrangement. This arrangement was terminated effective as of November 17, 2014. Mr. Dahan is not a party to this arrangement, and we do not consider this arrangement material to us.
Albert Dahan
In April 2009, we entered into a commission-based sales agreement with Albert Dahan, brother of Mr. Dahan, for the sale of our products into the off-price channels of distribution. Under the agreement, Mr. Albert Dahan is entitled to a commission for purchase orders entered into by us where he acts as a sales person. The agreement may be terminated at any time for any reason or no reason with or without notice. For the fiscal year ended 2014 there were no payments made to Mr. Albert Dahan under this arrangement. For fiscal years ended 2013 and 2012, payments of $453,000 and $573,000, respectively, were made to Mr. Albert Dahan under this arrangement.
F-48
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Related Party and Other Transactions (Continued)
In October 2011, we entered into an agreement with Ever Blue LLC, or Ever Blue, an entity for which Albert Dahan is the sole member, for the sale of children's products. Ever Blue has an exclusive right to produce, distribute and sell children's products bearing the Joe's® brand on a worldwide basis, subject to certain limitations on the channels of distribution. In exchange for the license, Ever Blue pays to us a royalty on net sales with certain guaranteed minimum sales for each term. In connection with this agreement, we provided initial funding to Ever Blue for inventory purchases, which such amount has been repaid in full. For the fiscal years ended 2014, 2013 and 2012, we recognized $504,000, $612,000 and $296,000, respectively in royalty income under the license agreement.
Peter Kim
We have entered into several agreements, including a stock purchase agreement, a convertible note, a registration rights agreement, an employment agreement and a non-competition agreement with Peter Kim in connection with the acquisition of Hudson and as part of our subsequent events. See "Note 2—Subsequent Events," "Note 5—Acquisition of Hudson" and "Note 10—Debt" for a further discussion of those agreements.
Employment Agreements with Officers and Directors
We have entered into employment agreements with Marc Crossman, our former President and Chief Executive Officer, Joe Dahan, our former Creative Director and Peter Kim, our Chief Executive Office of our Hudson subsidiary. Mr. Dahan and Mr. Kim were also members of our Board of Directors during fiscal 2014.
Marc Crossman
On May 30, 2008, we entered into an employment agreement with Mr. Crossman to serve as our President and Chief Executive Officer. The employment agreement was effective as of December 1, 2007, the commencement of our 2008 fiscal year, had an initial term of two years and automatically renewed for additional two year periods on December 1, 2009, December 1, 2011 and December 1, 2013, respectively. The employment agreement continues to automatically renew for additional two year periods if neither we nor Mr. Crossman provides 180 days' advanced notice of non-renewal prior to the end of the term or upon the occurrence of a change in control. Under the employment agreement, Mr. Crossman is entitled to an annual salary of $429,300, an annual discretionary bonus targeted at 50 percent of his base salary based upon the achievement of financial and other performance criteria that the Compensation Committee of the Board of Directors may deem appropriate in its sole and absolute discretion, an annual grant of equity compensation pursuant to our stock incentive plans, life and disability insurance policies paid on his behalf and other discretionary benefits that the Compensation Committee of the Board of Directors may deem appropriate in its sole and absolute discretion. The employment agreement provides for severance payment of up to two years if terminated under certain circumstances.
On January 19, 2015, our Board of Directors accepted the resignation of Mr. Crossman. The Board and Mr. Crossman also agreed that Mr. Crossman would become a consultant for a period of twelve (12) months pursuant to a Consulting Agreement. In exchange for a release of all claims related to Mr. Crossman's employment and the provision of consulting services by Mr. Crossman, we have agreed to pay Mr. Crossman the following: (i) payment of $35,775.00 per month for a period of twelve
F-49
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Related Party and Other Transactions (Continued)
(12) months, (ii) acceleration of the unvested equity awards previously granted to Mr. Crossman, (iii) granted him restricted common stock in the amount of 600,000 shares that vest 1/12th on a monthly basis over the twelve (12) month period, and (iv) agreed to reimburse him for health and dental COBRA payments for a period of twelve (12) months or until he is eligible for coverage under a successor employer's group health plan.
Joe Dahan
On October 25, 2007, we entered into an employment agreement for Mr. Dahan to serve as Creative Director for the Joe's brand. The initial term of employment was for five years, or until October 25, 2012, and then automatically renewed for successive one year periods unless terminated earlier in accordance with the agreement. Under the employment agreement, Mr. Dahan was entitled to an annual salary of $300,000 and other discretionary benefits that the Compensation Committee of the Board of Directors may deem appropriate in its sole and absolute discretion. The employment agreement provided for severance payment of up to one year if terminated under certain circumstances. In connection with the separation and mutual release agreement entered into with Mr. Dahan, we agreed to pay him severance from September 11, 2015 until October 25, 2015. See "Note 2—Subsequent Events" for a discussion of the agreement.
Peter Kim
On September 30, 2013, we entered into an employment agreement with Mr. Kim to serve as Chief Executive Officer of our Hudson subsidiary for a term of three years. Under the employment agreement, Mr. Kim is entitled to a base salary of $500,000 per year and is also eligible to receive an annual discretionary bonus targeted at 50 percent of his base salary, based on the satisfaction of criteria and performance standards as established in advance and agreed to by Mr. Kim and the Compensation Committee of the Board of Directors. Mr. Kim is also entitled to other discretionary benefits that the Compensation Committee of the Board of Directors may deem appropriate in its sole and absolute discretion. The employment agreement provides for severance payment of up to one year if terminated under certain circumstances. In connection with the Merger, we entered into the Employment Agreement and Non-Competition Agreement with Mr. Kim to be effective upon the completion of the Merger. See "Note 2—Subsequent Events" for details of the agreement.
17. Supplemental Cash Flow Information
| |
Year ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2014 | 2013 | 2012 | |||||||
| |
(in thousands) |
|||||||||
Significant Non-cash transactions |
||||||||||
Write off of fully depreciated fixed assets |
$ | 2,233 | $ | — | $ | 89 | ||||
Sale of fixed assets at net carrying value |
$ | — | $ | — | $ | 104 | ||||
Additional cash flow information |
||||||||||
Cash paid during the year for interest |
$ | 10,639 | $ | 1,710 | $ | 383 | ||||
Cash paid during the year for income taxes |
$ | — | $ | 870 | $ | 862 | ||||
F-50
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Employee Benefit Plans
On December 1, 2002, we established a tax qualified defined contribution 401(k) Profit Sharing Plan, or the Joe's Plan for our Joe's employees. All employees who have worked for us for 30 consecutive days may participate in the Joe's Plan and may contribute up to 100 percent, subject to certain limitations, of their salary to the Joe's Plan. We may make company matched contributions on a discretionary basis. All employees who have worked 500 hours qualify for profit sharing in the event at the end of each year we decide to do so. Costs of the Joe's Plan charged to operations from continuing operations were $27,000, $22,000 and $26,000 for fiscal 2014, 2013 and 2012, respectively. In addition, we match our Joe's employees' contributions, which are subject to a vesting schedule, in the lesser of the following amounts: (i) up to 2 percent of the employee's compensation, or (ii) 1/3 of the employee's contribution up to 6 percent of the employee's salary. For fiscal 2014, 2013 and 2012, we contributed $154,000, $141,000 and $132,000, respectively, to employees under the match portion of the Joe's Plan.
The Hudson Clothing LLC 401(k) Plan, or the Hudson Plan, was established on January 1, 2009 and covers employees employed by our Hudson subsidiary. All employees who have worked for Hudson after 6 months may participate in the Hudson Plan and may contribute up to the maximum amount allowed by law of their salary to the plan. We may make company matched contributions on a discretionary basis. All employees who have worked 1,000 hours qualify for profit sharing in the event at the end of each year we decide to do so. No costs of the Hudson Plan were charged to operations for fiscal 2013 since the acquisition. In addition, we match our Hudson employees' contributions, which are subject to a vesting schedule, of $0.50 for each $1.00 of the employee's contribution up to 3 percent of the employee's contribution. For fiscal 2014, we contributed $63,000 to employees under the match portion of the Hudson's Plan.
F-51
JOE'S JEANS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended November 30, 2014 and November 30, 2013:
| |
Quarter ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2014
|
February 28 | May 31 | August 31 | November 30 | |||||||||
| |
(in thousands, except per share data) |
||||||||||||
Net sales |
$ | 21,388 | $ | 21,850 | $ | 25,718 | $ | 15,269 | |||||
Gross profit |
9,518 | 10,699 | 12,438 | 7,068 | |||||||||
(Loss) income before taxes |
(5,670 |
) |
3,123 |
(667 |
) |
(30,327 |
) |
||||||
Income tax (benefit) expense |
(1,875 | ) | 1,189 | (174 | ) | (4,199 | ) | ||||||
| | | | | | | | | | | | | | |
Income (loss) from continuing operations |
(3,795 | ) | 1,934 | (493 | ) | (26,128 | ) | ||||||
Income (loss) from discontinued operations, net of tax |
1,616 |
405 |
769 |
(2,024 |
) |
||||||||
| | | | | | | | | | | | | | |
Net (loss) income and comprehensive (loss) income |
$ | (2,179 | ) | $ | 2,339 | $ | 276 | $ | (28,152 | ) | |||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Net (loss) income per share: |
|||||||||||||
Income (loss) from continuing operations |
$ | (0.06 | ) | $ | 0.03 | $ | (0.01 | ) | $ | (0.39 | ) | ||
Income (loss) from discontinued operations |
0.02 | 0.01 | 0.01 | (0.03 | ) | ||||||||
| | | | | | | | | | | | | | |
(Loss) income per common share—basic |
$ | (0.03 | ) | $ | 0.03 | $ | 0.00 | $ | (0.42 | ) | |||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Income (loss) from continuing operations |
$ | (0.06 | ) | $ | 0.03 | $ | (0.01 | ) | $ | (0.39 | ) | ||
Income (loss) from discontinued operatoins |
0.02 | 0.01 | 0.01 | (0.03 | ) | ||||||||
| | | | | | | | | | | | | | |
(Loss) income per common share—diluted |
$ | (0.03 | ) | $ | 0.03 | $ | 0.00 | $ | (0.42 | ) | |||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| |
Quarter ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2013
|
February 29 | May 31 | August 31 | November 30 | |||||||||
| |
(in thousands, except per share data) |
||||||||||||
Net sales |
$ | 2,919 | $ | 3,011 | $ | 2,992 | $ | 19,495 | |||||
Gross profit |
1,952 | 2,159 | 2,040 | 7,815 | |||||||||
(Loss) income before taxes |
(1,451 |
) |
(1,313 |
) |
(2,806 |
) |
(4,980 |
) |
|||||
Income tax (benefit) expense |
(563 | ) | (509 | ) | (1,064 | ) | (998 | ) | |||||
| | | | | | | | | | | | | | |
Income (loss) from continuing operations |
(888 | ) | (804 | ) | (1,742 | ) | (3,982 | ) | |||||
Income (loss) from discontinued operations, net of tax |
(5,501 |
) |
1,977 |
1,456 |
2,170 |
||||||||
| | | | | | | | | | | | | | |
Net (loss) income and comprehensive (loss) income |
$ | (6,389 | ) | $ | 1,173 | $ | (286 | ) | $ | (1,812 | ) | ||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Net (loss) income per share: |
|||||||||||||
Income (loss) from continuing operations |
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.06 | ) | |
Income (loss) from discontinued operatoins |
(0.08 | ) | 0.03 | 0.02 | 0.03 | ||||||||
| | | | | | | | | | | | | | |
(Loss) income per common share—basic |
$ | (0.10 | ) | $ | 0.02 | $ | (0.00 | ) | $ | (0.03 | ) | ||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Income (loss) from continuing operations |
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.06 | ) | |
Income (loss) from discontinued operatoins |
(0.08 | ) | 0.03 | 0.02 | 0.03 | ||||||||
| | | | | | | | | | | | | | |
(Loss) income per common share—diluted |
$ | (0.10 | ) | $ | 0.02 | $ | (0.00 | ) | $ | (0.03 | ) | ||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
F-52
Schedule II
Valuation of Qualifying Accounts
| |
(in thousands) | |
|
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Description
|
Balance at Beginning of Period |
Additions Charged to Costs & Expenses |
Charged to Other Accounts |
Deductions(1) | Balance at End of Period |
|||||||||||
Allowance for doubtful accounts: |
||||||||||||||||
Year ended November 30, 2014 |
$ | 30 | 87 | — | (39 | ) | $ | 78 | ||||||||
Year ended November 30, 2013 |
$ | — | — | 30 | (2) | 0 | $ | 30 | ||||||||
Year ended November 30, 2012 |
$ | — | 0 | — | 0 | $ | — | |||||||||
Allowance for customer credits: |
||||||||||||||||
Year ended November 30, 2014 |
$ | 2,020 | 17,314 | — | (13,440 | ) | $ | 5,894 | ||||||||
Year ended November 30, 2013 |
$ | 21 | 1,807 | 1,304 | (2) | (1,112 | ) | $ | 2,020 | |||||||
Year ended November 30, 2012 |
$ | 8 | 13 | — | 0 | $ | 21 | |||||||||
Allowances for inventories: |
||||||||||||||||
Year ended November 30, 2014 |
$ | 594 | — | — | (4 | ) | $ | 590 | ||||||||
Year ended November 30, 2013 |
$ | — | — | 595 | (2) | (1 | ) | $ | 594 | |||||||
Year ended November 30, 2012 |
$ | — | — | — | — | $ | — | |||||||||
F-53
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