UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. )
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Preliminary Proxy Statement |
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Definitive Proxy Statement |
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Soliciting Material Under Rule 14a-12 |
DIFFERENTIAL BRANDS GROUP INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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DIFFERENTIAL BRANDS GROUP INC.
1231 S. Gerhart Avenue
Commerce, California 90022
Notice of Annual Meeting of Stockholders
To Be Held Monday, November 7, 2016
To the Stockholders of Differential Brands Group, Inc. (formerly known as Joe’s Jeans Inc.):
Notice is hereby given that the 2016 annual meeting of stockholders (the “Annual Meeting”) of Differential Brands Group, Inc. (the “Company,” “we” or “us”) will be held at the Company’s principal executive offices located at 1231 S. Gerhart Avenue, Commerce, California 90022 at 10 am Pacific Standard Time, for the following purposes:
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To reelect seven directors to serve until the 2017 Annual Meeting of Stockholders or until their respective successors are elected and qualified. |
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To adopt the Differential Brands Group 2016 Stock Incentive Compensation Plan (the “2016 Plan”) and to approve the material terms of the performance goals of the 2016 Plan under Section 162(m) of the Internal Revenue Code of 1986, as amended. |
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To approve the issuance of more than 19.99% of the Company’s outstanding common stock in accordance with the stockholder approval requirements of Listing Rule 5635(d) of The NASDAQ Stock Market LLC (“Nasdaq”) in one or more private placements. |
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To approve amendments to the Company’s existing Amended and Restated Bylaws, adopted as of July 6, 2015 (the “Bylaws”), to permit any action required or permitted to be taken by stockholders at an annual or special meeting of stockholders to be effected by written consent in lieu of a meeting. |
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To ratify the appointment of CohnReznick LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2016. |
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To transact such other business as may properly come before the meeting or any adjournment or postponement thereof. |
These proposals are described more fully in the enclosed proxy statement, which we urge you to read in its entirety.
The board of directors has fixed the close of business on October 5, 2016 as the record date for determination of stockholders entitled to notice of, and to vote at, the meeting and any of its adjournments or postponements.
You are cordially invited to attend the Annual Meeting in person. You must be a stockholder of record at the close of business on October 5, 2016 to vote at the Annual Meeting.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the 2016 annual meeting in person, we strongly encourage you to vote. Please vote as soon as possible, even if you plan to attend the 2016 annual meeting in person. If you are unable to attend the Annual Meeting in person you are requested to complete, date and sign the enclosed proxy card and return it promptly in the pre-addressed envelope provided so that it is received by us at least 24 hours before the Annual Meeting or vote by telephone or over the Internet if your voting instruction form describes such voting methods. Your proxy may be revoked at any time before it is voted if you return a later-dated proxy card or if you vote your shares in person at the Annual Meeting if you are the record holder of the shares and can provide a copy of a certificate(s) evidencing your shares.
If you are a beneficial owner whose shares are held of record by a broker, your broker has discretionary voting authority to vote your shares only on routine matters, even if the broker does not receive voting instructions from you. Your broker does not have discretionary authority to vote on non-routine matters without instructions from you, in which case a “broker non-vote” will occur and your shares will not be voted on such matters. The only routine matter to be voted on at the Annual Meeting is the ratification of the selection of our independent registered public accounting firm (Proposal No. 5). Non-routine matters at the Annual Meeting include the election of directors (Proposal No. 1), the approval of the
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2016 Plan (Proposal No. 2), the approval of the issuance of more than 19.99% of our outstanding common stock in one or more private placements in accordance with Nasdaq Listing Rule 5635(d) (Proposal No. 3) and the adoption of amendments to our Bylaws (Proposal No. 4).
October 17, 2016 |
By Order of the Board of Directors |
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/s/ William Sweedler |
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William Sweedler |
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Chairman of the Board of Directors |
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Important Notice Regarding the Availability of Proxy Materials for
the Annual Meeting of Stockholders to be Held on November 7, 2016
The notice of Annual Meeting, the proxy statement and our Annual Report on Form 10-K for the fiscal year ended November 30, 2015 are available on our website at http://www.differentialbrandsgroup.com/ under “Investor Information.”
YOUR VOTE IS IMPORTANT. YOU ARE URGED TO FILL IN, DATE AND SIGN THE ENCLOSED
PROXY CARD AND MAIL IT PROMPTLY IN THE ENVELOPE PROVIDED. YOUR PROMPT
RETURN OF THE PROXY CARD WILL HELP AVOID THE ADDITIONAL EXPENSE OF
FURTHER SOLICITATION TO ASSURE A QUORUM AT THE MEETING.
THE ANNUAL MEETING OF STOCKHOLDERS WILL BE HELD ON NOVEMBER 7, 2016.
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We are a “smaller reporting company,” as defined in Item 10 of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and have elected to provide in this proxy statement certain scaled disclosures permitted under the Exchange Act for smaller reporting companies. As a result of being a smaller reporting company, we do not provide pay for performance, compensation and risk and compensation ratio disclosures and compensation committee interlocks disclosures, a compensation discussion and analysis or a compensation committee report, among other disclosures. However, we include in this proxy statement certain compensation disclosures applicable only to larger reporting companies to the extent that we were an accelerated filer for the fiscal year ended November 30, 2014. We will remain a “smaller reporting company” until such time as our public float as of the last business day of our most recently completed second fiscal quarter is at least $75 million.
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DIFFERENTIAL BRANDS GROUP INC.
1231 S. Gerhart Avenue
Commerce, California 90022
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
To Be Held Monday, November 7, 2016
General Information and Voting Rights
QUESTIONS ABOUT THE ANNUAL MEETING AND VOTING
When and where is the Annual Meeting being held?
This proxy statement (the “Proxy Statement”) is furnished in connection with the solicitation of proxies by the board of directors (the “Board” or the “Board of Directors”) of Differential Brands Group Inc. (the “Company,” “we” or “us”), a Delaware corporation formerly known as Joe’s Jeans, Inc., for use at the 2016 annual meeting of stockholders (the “Annual Meeting”) to be held at the Company’s principal executive offices located at 1231 S. Gerhart Avenue Commerce, California 90022 on Monday, November 7, 2016 at 10 am Pacific Standard Time, and any adjournments or postponements thereof.
Who may attend the Annual Meeting?
Any stockholder, and certain other permitted attendees, may attend the Annual Meeting. If you plan to attend the Annual Meeting in person, we ask that you also complete and return the reservation form attached to the end of the Proxy Statement. Please note that space limitations make it necessary to limit attendance to stockholders and one guest. Admission to the Annual Meeting will be on a first-come, first-served basis. Proof of the Company’s stock ownership as of the record date, along with photo identification, will be required for admission. The “street name” holders will need to bring a copy of a brokerage statement reflecting their stock ownership as of the record date. No cameras, recording equipment, electronic devices, use of cell phones or other mobile devices, large bags or packages will be permitted at the Annual Meeting.
Who is entitled to vote?
Only holders of record of our common stock at the close of business on October 5, 2016 (the “Record Date”) will be entitled to vote at the Annual Meeting on the proposals described in this Proxy Statement. On the Record Date, there were 13,083,923 shares of common stock outstanding. On all matters to come before the Annual Meeting, each holder of record of common stock is entitled to one vote for each share of common stock. The shares of common stock held in our treasury, which are not considered outstanding, will not be voted.
What is the difference between holding shares as a stockholder of record and holding shares in “street name”? Will my shares be voted if I do not provide my proxy?
Stockholders of Record. If your shares are registered in your name, you are a stockholder of record. As the stockholder of record, you have the right to direct the voting of your shares by returning the enclosed proxy card to us or to vote in person at the Annual Meeting. We encourage you to vote by proxy so that your shares will be represented and voted at the Annual Meeting even if you cannot attend.
Beneficial Owners With Shares Held in “Street Name.” If your shares are held in “street name” at a bank, broker or other similar organization or other nominees, the organization holding your account is considered the stockholder of record for purposes of voting at the Annual Meeting. As the beneficial owner, you have the right to instruct your nominee holder on how to vote your shares and to attend the Annual Meeting. However, since you are not the stockholder of record, you may not vote these shares in person at the Annual Meeting unless you receive a valid proxy from your bank, broker or other nominee holder. To obtain a valid proxy, you must make a special request of your bank, broker or other nominee. If you do not make this request, you may still vote by following the instructions in the voting instruction card, which your bank, broker or other nominee has enclosed for you to use in directing such bank, broker or nominee on how to vote your shares.
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All Stockholders. All shares entitled to vote and represented by properly executed proxies received prior to the Annual Meeting, and not revoked, will be voted at the Annual Meeting in accordance with the instructions indicated on those proxies. If no instructions are indicated on a properly executed proxy, the shares represented by that proxy will be voted as recommended by the Board of Directors.
How do I vote?
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You may vote by mail. You can do this by completing your proxy card (as a stockholder of record) or voting instruction card (as a beneficial owner holding in “street name”) and returning it in the enclosed, prepaid and addressed envelope. If you return a signed card but do not provide voting instructions, your shares will be voted as recommended by the Board. |
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You may vote in person. Ballots will be passed out at the Annual Meeting to anyone who wants to vote at the Annual Meeting. If you choose to do so, please bring the enclosed proxy card or proof of identification. If your shares are held directly in your name, you may vote in person at the Annual Meeting. However, if your shares are held in “street name” (that is, through a bank, broker or other nominee), you must first obtain a properly executed proxy from the stockholder of record (that is, your bank, broker or other nominee) and vote. |
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“Street name” holders may also vote by phone or through an Internet website. If you hold your shares in “street name” (e.g., through a broker, bank or other nominee), then you received this Proxy Statement from the nominee, along with the nominee’s voting instruction card, which includes voting instructions (including voting by phone or through an Internet website) and instructions on how to change your vote. Your vote will be based on your instructions to the bank, broker or other nominee on how to vote the ordinary shares. |
If I vote by proxy, can I change my vote or revoke my proxy?
If you are a stockholder of record, you may revoke your proxy at any time before the meeting either by filing with the Secretary of the Company at our principal offices a written notice of revocation or a duly executed proxy bearing a later date or by attending the Annual Meeting and expressing a desire to vote your shares in person. If you hold your shares in street name, you may change your vote by submitting new voting instructions to your broker, bank or other nominee. You must contact your bank, broker or other nominee to find out how to do so.
Could other matters be decided at the Annual Meeting?
As of the date of this Proxy Statement, we do not know of any matters to be raised at the Annual Meeting other than those referred to in this Proxy Statement.
If any other matters are properly presented for consideration at the Annual Meeting, including, among other things, consideration of a motion to adjourn the meeting to another time or place in order to solicit additional proxies in favor of the nominees to the Board of Directors, the persons named as proxies and acting thereunder will have discretion to vote on these matters according to their best judgment to the same extent as the person delivering the proxy would be entitled to vote. As of the date of this notice, we have not received notice of any other matters that may be properly presented at the Annual Meeting.
What constitutes a quorum?
Pursuant to our existing Amended and Restated Bylaws, adopted as of July 6, 2015 (the “Bylaws”), in order for us to conduct the Annual Meeting, the holders of shares of common stock outstanding representing a majority of the voting power of all outstanding shares entitled to vote as of the Record Date of October 5, 2016, must be present at the Annual Meeting in person or by proxy. This is referred to as a quorum. Abstentions and broker non-votes will be included in the number of shares present at the Annual Meeting for determining the presence of a quorum.
What happens if a quorum is not present?
Pursuant to our Bylaws, if a quorum is not present, the Annual Meeting will be adjourned to such day and at such time and place as the Chairman of the Annual Meeting may determine. At the adjourned meeting the stockholders may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 30 days,
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notice of the adjourned meeting will be given to each stockholder of record entitled to vote at the meeting, but otherwise notice of the adjournment is not required.
How will votes be counted?
For Proposal No. 1 (the election of directors), you may vote “FOR” all of the nominees or your vote may be “WITHHELD” for one or more of the nominees. For the other items of business (Proposals Nos. 2-5), you may vote “FOR”, “AGAINST” or “ABSTAIN.” Broker non-votes and abstentions will have the effect as described in each of the proposals as described below.
Proposal No. 1: To Reelect Seven Directors to Serve on the Board of Directors Until the 2017 Annual Meeting of Stockholders or Until Their Respective Successors Are Elected and Qualified: Pursuant to our Bylaws, the nominees for reelection to the Board of Directors who receive a plurality of “FOR” votes cast by holders of our common stock present in person or represented by proxy and entitled to vote at the Annual Meeting will be elected. “WITHHELD” votes will be counted as present for the purposes of this vote, but will have no effect on the outcome of the proposal. Brokers, banks and other financial institutions cannot vote your stock on your behalf for the election of directors if you have not provided instructions on your voting instruction form; for your vote to be counted, you must submit your voting instructions to your broker or custodian. Broker non-votes will not be counted as present and are not entitled to vote on this proposal.
Proposal No. 2: To Adopt the Differential Brands Group Inc. 2016 Stock Incentive Compensation Plan (the “2016 Plan”) and to Approve the Material Terms of the Performance Goals of the 2016 Plan Under Section 162(m) of the Internal Revenue Code of 1986, as Amended: Pursuant to our Bylaws and the rules of The Nasdaq Stock Market LLC (“Nasdaq”), the adoption of the 2016 Plan and related performance goals requires the affirmative “FOR” vote of a majority of the votes cast by holders of our common stock present in person or represented by proxy and entitled to vote at the Annual Meeting. Abstentions will not be counted in determining whether this proposal has been approved. Brokers, banks and other financial institutions cannot vote your stock on your behalf for this proposal if you have not provided instructions on your voting instruction form; for your vote to be counted, you must submit your voting instructions to your broker or custodian. Broker non-votes will not be counted as present and are not entitled to vote on this proposal.
Proposal No. 3: To Approve the Issuance of More Than 19.99% of our Outstanding Common Stock in accordance with the Stockholder Approval Requirements of Nasdaq Listing Rule 5635(d) in One or More Private Placements: Pursuant to our Bylaws and the rules of Nasdaq, the adoption of a more-than-19.99% common stock issuance requires the affirmative “FOR” vote of a majority of the votes cast by holders of our common stock present in person or represented by proxy and entitled to vote at the Annual Meeting. Abstentions will not be counted in determining whether this proposal has been approved. Brokers, banks and other financial institutions cannot vote your stock on your behalf for this proposal if you have not provided instructions on your voting instruction form; for your vote to be counted, you must submit your voting instructions to your broker or custodian. Broker non-votes will not be counted as present and are not entitled to vote on this proposal.
Proposal No. 4: To Approve Amendments to our Bylaws to Permit Any Action Required or Permitted to Be Taken by Stockholders at an Annual or Special Meeting of Stockholders to Be Effected by Written Consent in Lieu of a Meeting: Pursuant to our Bylaws, the adoption of certain amendments to the Bylaws requires the approval of a majority of the total number of directors of the Board, including vacancies, but the Board may not amend our Bylaws to take action reserved exclusively for stockholders under Delaware corporate law. Further, our Bylaws may be amended by our stockholders, and Board-adopted amendments may be amended or repealed by our stockholders.
Our Board has adopted, subject to approval of our stockholders, certain amendments to our Bylaws to provide procedures for action to be taken by stockholders by written consent in lieu of a meeting. To obtain stockholder approval, the adoption of these amendments requires the affirmative “FOR” vote of a majority of the votes cast by holders of our common stock present in person or represented by proxy and entitled to vote at the Annual Meeting. Abstentions will not be counted in determining whether this proposal has been approved. Brokers, banks and other financial institutions cannot vote your stock on your behalf for this proposal if you have not provided instructions on your voting instruction form; for your vote to be counted, you must submit your voting instructions to your broker or custodian. Broker non-votes will not be counted as present and are not entitled to vote on this proposal.
Proposal No. 5: To Ratify the Appointment of CohnReznick LLP as our Independent Registered Public Accounting Firm for the Fiscal Year Ending December 31, 2016: Ratification of the appointment of our independent registered public
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accounting firm requires the affirmative “FOR” vote of a majority of the votes cast by holders of our common stock present in person or represented by proxy and entitled to vote at the Annual Meeting. Abstentions will not be counted in determining whether this proposal has been approved. Broker non-votes will be counted as present and are entitled to vote on the proposal. If you hold your shares in street name and do not provide voting instructions to your broker, the shares may be voted on this proposal at the discretion of your broker.
How will my shares be voted if I do not provide instructions on the proxy card?
Stockholders of Record. If you hold your shares directly in your own name, your shares will not be voted if you do not vote them or provide a proxy. If you hold your shares directly in your own name and you sign and return your proxy card (including over the internet or by telephone) but do not include voting instructions, your proxy will be voted as the Board of Directors recommends on each proposal.
Beneficial Owners. If you hold your shares in “street name” and do not provide voting instructions to your bank, broker or other nominee, your broker may vote your shares on “routine” matters even if you do not provide a proxy. The only routine matter to be voted on at the Annual Meeting is the ratification of our independent registered public accounting firm for the fiscal year ending December 31, 2016 (Proposal No. 5). If a bank, broker or other nominee votes your shares on these matters in accordance with these rules, your shares will count as present at the Annual Meeting for purposes of establishing a quorum and will count as “FOR” vote, abstention or “AGAINST” vote, as the case may be, depending on how the broker votes. If a brokerage firm signs and returns a proxy on your behalf that does not contain voting instructions, your shares will count as present at the Annual Meeting for quorum purposes and will be voted in connection with the selection of our independent registered public accounting firm for the fiscal year ending December 31, 2016, but will not count as a “FOR” vote for any other matter, including the election of the nominees for directors. Because banks, brokers and other nominees require their customers’ direction to vote on non-routine matters, it is critical that the stockholders provide their banks, brokers and other nominees with voting instructions with respect to the proposals involving non-routine matters (Proposals Nos. 1-4).
What is a broker non-vote?
A “broker non-vote” occurs when a beneficial owner of shares held by a broker, bank or other nominee fails to provide the stockholder of record with voting instructions on any non-routine matters brought to a vote at the meeting.
We will bear the expense of soliciting proxies. Our directors, officers and other employees may solicit proxies in person, by telephone, by mail or by other means of communication, but such persons will not be specially compensated for such services. While we presently intend that solicitations will be made only by directors, officers and employees of the Company, we may also retain outside brokers, banks, custodians, nominees and other fiduciaries to assist in the solicitation of proxies. Any reasonable charges and expenses incurred in connection with the use of such outside solicitors will be paid by the Company.
To reduce the expense of delivering duplicate proxy materials to our stockholders, we are relying on the Securities and Exchange Commission (the “SEC”) rules that permit us to deliver only one set of proxy materials, including our proxy statement, our Annual Report on Form 10-K for the fiscal year ended November 30, 2015 and the notice of annual meeting, to multiple stockholders who share an address unless we receive contrary instructions from any stockholder at that address. This practice, known as “householding,” reduces duplicate mailings, thus saving printing and postage costs as well as natural resources. Each stockholder retains a separate right to vote on all matters presented at the Annual Meeting. Once you have received notice from your broker or us that they or we will be householding materials to your address, householding will continue until you are notified otherwise or until you revoke your consent. If, at any time, you wish to receive a separate copy of the Annual Report on Form 10-K for the fiscal year ended November 30, 2015 or other proxy materials, free of charge, or if you wish to receive separate copies of future annual reports or proxy materials, please mail your request to Differential Brands Group Inc., 1231 S. Gerhart Avenue, Commerce, California 90022, attention: Lori Nembirkow, or call us at +1 (323) 890-1800.
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For at least ten days prior to the Annual Meeting, a list of stockholders entitled to vote at the Annual Meeting, arranged in alphabetical order, showing the address of and number of shares registered in the name of each stockholder, will be open for examination by any stockholder, for any purpose related to the Annual Meeting, during ordinary business hours at our principal executive offices located at 1231 S. Gerhart Avenue, Commerce, California 90022. The list will also be available for examination at the Annual Meeting.
Voting Results of the Annual Meeting
Voting results will be published in a Current Report on Form 8-K issued by us within four business days following the Annual Meeting and will be reported on our website at http://www.differentialbrandsgroup.com/.
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Proposal No. 1 — To Reelect Seven Directors to Serve on the Board of Directors
Until the 2017 Annual Meeting of Stockholders or Until Their Respective
Successors Are Elected and Qualified
Upon recommendation of the Nominating and Governance Committee, our Board of Directors has nominated seven directors to serve until the annual meeting of stockholders to be held in 2017 (the “2017 Annual Meeting of Stockholders”) and until their successors have been elected and qualified. Pursuant to our Bylaws, each member of our Board of Directors is elected at the annual meeting of stockholders and serves until the next annual meeting of stockholders or until a successor has been elected and qualified or his or her earlier death, resignation or removal. Additionally, our Bylaws provide that the number of directors of the Company shall be fixed from time to time exclusively by the Board, which is currently seven. All seven nominees listed below currently serve on our Board.
As previously reported in our Current Report on Form 8-K filed with the SEC on January 29, 2016, we completed the acquisition (the “RG Merger”) of all of the outstanding equity interests of RG Parent LLC and its subsidiaries (“RG” or “Robert Graham”), a business engaged in the design, development, sales and licensing of apparel products and accessories that bear the brand name Robert Graham® on January 28, 2016. In connection with the completion of the RG Merger, Samuel J. Furrow resigned from his position as Interim Chief Executive Officer and Chairman of the Board of Directors, and each of Joanne Calabrese and Suhail R. Rizvi resigned as directors of the Company. On January 28, 2016, pursuant to the Stock Purchase Agreement and the Certificate of Designation, and in connection with the consummation of the RG Merger, TCP Denim, LLC designated Matthew Eby, William Sweedler and Andrew Tarshis to serve together with the Company’s continuing directors, Kelly Hoffman and Kent Savage. The Board of Directors then appointed Walter McLallen and Michael Buckley as directors of the Company and William Sweedler as Chairman of the Board of Directors.
Unless otherwise instructed, the proxy holders will vote the proxies received by them for the nominees named above. If any nominee is unable or unwilling to serve as a director at the time of the Annual Meeting, the proxies will be voted for such other nominee(s) as shall be designated by the then current Board of Directors to fill any vacancy. In accordance with Article III of our Bylaws, vacancies are filled by a majority vote of the remaining Board of Directors or by a sole remaining director. We have no reason to believe that the nominees will be unable or unwilling to serve if elected as directors.
As set forth in our Bylaws, the election of directors to the Board is determined by a plurality of the votes cast by the stockholders present and entitled to vote. This means that the seven nominees receiving the highest numbers of “FOR” votes cast at the Annual Meeting will be elected as directors.
The table and biographies below set forth information as of the date of this Proxy Statement with respect to the director nominees, all of whom are currently directors of the Company.
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Age |
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Positions |
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Independent |
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Director |
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William Sweedler |
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49 |
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Chairman of the Board of the Company; Co‑Founder and Managing Partner, Tengram Capital Partners |
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Y |
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2016 |
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Michael Buckley |
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53 |
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Chief Executive Officer and Director of the Company |
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N |
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2016 |
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Matthew Eby |
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45 |
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Director of the Company; Co‑Founder and Managing Partner, Tengram Capital Partners |
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Y |
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2016 |
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Kelly Hoffman |
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58 |
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Director of the Company; Chief Executive Officer and Director, Ring Energy, Inc. |
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Y |
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2004 |
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Walter McLallen |
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50 |
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Director of the Company; Managing Director, Meritage Capital Advisors |
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Y |
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2016 |
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Kent Savage |
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54 |
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Director of the Company; General Partner, Savage Interests LP; Chief Executive Officer, Icon.me, LLC |
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Y |
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2003 |
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Andrew Tarshis |
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50 |
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Director of the Company; Chief Operating Officer/Chief Compliance Officer and Partner, Tengram Capital Partners |
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Y |
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2016 |
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William Sweedler has served as Chairman of our Board of Directors since January 2016. Since January 2011, Mr. Sweedler has been a Co-Founder and General Partner of Tengram Capital Partners L.P. (“Tengram Capital Partners”), a consumer private equity firm formed to invest in the consumer and retail sectors. Tengram is also currently our largest
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stockholder, as discussed further in “Security Ownership of Certain Beneficial Owners and Management” below. Prior to his tenure at Tengram Capital Partners, Mr. Sweedler was the founder and Chief Executive Officer of Windsong Brands, a diversified brand development and investment company that specialized in the acquisition, growth, licensing, and comprehensive management of consumer branded intellectual property and businesses. Mr. Sweedler is currently Chairman of the Board of Sequential Brands Group, Inc. (Nasdaq: SQBG), as well as a director at the following privately-held companies: NEST Fragrances, Tommie Copper, Luciano Barbera and Zanella. Prior to founding Windsong Brands, he was President and Chief Executive Officer of Joe Boxer, a wholly-owned division of the Iconix Brand Group (Nasdaq: ICON) of which he was also an Executive Vice President and Director. Mr. Sweedler has a B.S. in Finance and Investments from Babson College with a BS in Finance and Investments. With over 25 years of experience in the consumer sector as an operator and strategic investor, Mr. Sweedler brings strategic vision and guidance to the Company as Chairman of our Board of Directors.
Michael Buckley has served as a member of our Board of Directors and our Chief Executive Officer since January 2016. Prior to the RG Merger, Mr. Buckley served as Chief Executive Officer of Robert Graham since June 2011. From 2006 to 2010, Mr. Buckley served as the President of True Religion Apparel Inc. From 2001 to 2005, Mr. Buckley served as President and Chief Executive of North American operations for the Ben Sherman Group. From 1996 to 2001, Mr. Buckley served as Vice President of Diesel USA, a retail apparel company, where he oversaw all U.S.-based retail and financial operations of Diesel® Jeans U.S.A. Mr. Buckley’s experience with the management of all aspects of operations of an apparel company provides us with leadership and guidance across all aspects of our operations.
Matthew Eby has served as a member of our Board of Director since January 2016. Since January 2011, Mr. Eby has been a Co-Founder and General Partner of Tengram Capital Partners where he is responsible for originating, underwriting and monitoring of investments and co-manages the daily activities of the firm. Mr. Eby serves as Chairman of NEST Fragrances and Deva Curl and is a member of the board of directors of Laura Geller Beauty. Prior to founding Tengram, Mr. Eby was the founder and Chief Investment Officer of JAWS Estates Capital, the private investment office of Barry Sternlicht and the Sternlicht family. In 2009, on behalf of Starwood Capital Group, he led the initial public offering of Starwood Property Trust (NYSE: STWD), a mortgage real estate investment trust focused on commercial real estate properties, that raised over $930 million. Prior to founding JAWS, Mr. Eby was an associate at Morgan Stanley where he helped to found a group designed to facilitate interaction between the Investment Banking Division and the High Net Worth and Retail Divisions. Before entering the investment industry, Mr. Eby served five years as an officer in the U.S. Navy. Mr. Eby holds an M.B.A. from Harvard Business School and a B.Sc. from the United States Naval Academy. Mr. Eby’s experience with the management of investments and operating activities of brands provides us with guidance as we manage the integration between Robert Graham and Hudson, as well as review other potential strategic acquisitions.
Kelly Hoffman has served as a member of our Board of Directors since June 2004. Since January 2013, Mr. Hoffman has served as the Chief Executive Officer and Director of Ring Energy, Inc. (NYSE: REI), an oil and gas exploration, development and production company with operations in Texas and Kansas. From December 2011 until January 2013, Mr. Hoffman served as a consultant to numerous companies in the oil and gas industry. From April 2008 until December 2011, Mr. Hoffman served as President of Victory Park Resources, a privately held exploration and production company specializing in the acquisition of oil and gas producing properties in Oklahoma, Texas and New Mexico. From 1998 until September 2009, Mr. Hoffman served as Chairman of the Board of Directors and Chief Executive Officer of Varsity Media Group Inc., a technology and new media company. From 1991 until 1998, Mr. Hoffman owned AOCO Operating, a company that raised capital for the acquisition of property in Texas, Louisiana and New Mexico whereby he purchased over 20,000 acres and drilled over 75 successful oil wells. Mr. Hoffman began his oil and gas career at Amoco Production Company in Texas in various positions. Mr. Hoffman attended Texas Tech University and majored in Business Administration. Mr. Hoffman’s experience with starting up, raising capital and running various companies provides us with practical knowledge and guidance on operations.
Walter McLallen has served as a member of our Board of Director since January 2016. Since 2004, Mr. McLallen has served as the Managing Director of Meritage Capital Advisors. Mr. McLallen also has extensive board and organizational experience across numerous corporate and non‑profit boards, including, most recently, serving as Vice Chairman of Remington Outdoor Company, a billion-dollar consumer products company for over nine years. At Remington Outdoor Company, Mr. McLallen also served on the executive committee, audit committee, compensation committee, and investment and benefits committee. In addition, since 2016, Mr. McLallen has also served as a member of the board of directors of AerCap Holdings N.V. (NYSE:AER), a global leader in aircraft leasing. Mr. McLallen holds a B.A. from the University of Illinois Urbana-Champaign. Mr. McLallen’s experience with over 25 years in the investment banking, corporate finance advisory, capital markets and financial sector, including significant exposure to financial
7
reporting, accounting, finance, risk management and portfolio management across a broad section of industries, provides us with expertise and guidance on financial and public company reporting requirements.
Kent Savage has served as a member of our Board of Directors since July 2003. Since 2000, Mr. Savage has served as the General Partner of Savage Interests LP, a limited partnership for investments. Since 2012, Mr. Savage has also served as co-founder and Chief Executive Officer of Icon.me, LLC. From June 2005 until 2010, Mr. Savage served as Founder and Chief Executive Officer of Famecast, Inc., a privately-held interactive branded entertainment and contest management company. From January 2004 until June 2005, Mr. Savage served as Chief Executive Officer for Digital Lifestyles Group, Inc., a publicly-traded manufacturer and distributor of personal computers, and in connection, Mr. Savage created the hip-e™ computer. Between February 2003 and January 2004, Mr. Savage served in various consulting capacities to start-up companies. From September 2002 until February 2003, Mr. Savage served as Co-Founder, Chief Sales and Marketing Officer for TippingPoint Technologies (Nasdaq: TPTI), which was later acquired by 3Com. From February 1999 until August 2001, Mr. Savage served as co-founder, Chief Executive Officer and President for Netpliance, Inc., which completed an initial public offering (Nasdaq: NPLI). From April 1998 until February 1999, Mr. Savage served as General Manager, Broadband for Cisco Systems Inc. Service Provider Line of Business. From July 1996 until April 1998, Mr. Savage served as Vice President, Sales and Marketing for NetSpeed, Inc., which was acquired by Cisco Systems (Nasdaq: CSCO). Mr. Savage received his B.S. degree in Business from Oklahoma State University, attended University of Virginia’s Executive Leadership Program, and received his M.B.A. degree from Southern Methodist University. Mr. Savage’s extensive experience as an officer and director at other public companies brings valuable experience and insight regarding our financial and accounting matters, which are also key to his role as chairman of our Audit Committee.
Andrew Tarshis has served as a member of our Board of Director since January 2016. Since January 2011, Mr. Tarshis has served as a Partner of Tengram Capital Partners, as well as its Chief Operating Officer and Chief Compliance Officer since 2013. Prior to joining Tengram, Mr. Tarshis was Executive Vice President and General Counsel at Iconix Brand Group, Inc. (Nasdaq: ICON), a brand management and licensing company, where he was involved in all aspects of the Company’s strategic and legal affairs, including M&A, financing, licensing and intellectual property, governance, securities and other regulatory and compliance matters. Prior to joining Iconix, Mr. Tarshis served as Senior Vice President and General Counsel for Windsong Allegiance Group, LLC, former owner of the Joe Boxer and Hathaway brands, and as a corporate attorney for Toys R Us, Inc., specializing in intellectual property. Mr. Tarshis currently serves on the boards of directors of clothing and accessories companies Luciano Barbera and Zanella and luxury cosmetics and skin care company Cos Bar. Mr. Tarshis received his J.D. from the University of Connecticut School of Law and his B.A. from the University of Michigan, Ann Arbor. Mr. Tarshis’s experience with the management of all aspects of strategic and legal affairs provides us with guidance and brings valuable experience and insight into all legal matters related to our operations and reporting requirements as a public company.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION
OF EACH OF THE DIRECTOR NOMINEES NAMED IN THIS PROXY STATEMENT.
8
The table and biographies below set forth information as of the date of this Proxy Statement with respect to our executive officers.
Name |
|
Age |
|
Position |
|
Michael Buckley |
|
53 |
|
Chief Executive Officer and Director of the Company (Principal Executive Officer) |
|
Hamish Sandhu |
|
53 |
|
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
|
Peter Kim |
|
46 |
|
Chief Executive Officer of Hudson subsidiary |
|
Michael Buckley has served as Chief Executive Officer and a member of our Board of Directors since January 2016. For more information, see Mr. Buckley’s full biography under “Proposal No. 1. Election of Directors.”
Hamish Sandhu has served as our Chief Financial Officer since August 2007. From January 2006 until August 2007, Mr. Sandhu was Chief Financial Officer of California Tan, Inc., a consumer products company manufacturing and marketing lotion and equipment to the indoor tanning industry. From September 2001 until December 2005, Mr. Sandhu was Chief Financial Officer of Ancra International LLC, a manufacturer of aircraft cargo systems and trucking restraint products.
Peter Kim has served as the Chief Executive Officer of Hudson Clothing LLC, our wholly-owned subsidiary (“Hudson”), since its acquisition by us in September 2013. Hudson owns the businesses associated with our Hudson® brand. Mr. Kim founded Hudson and has been its Chief Executive Officer and a member of its board of directors since 2002.
9
BOARD MEETINGS AND BOARD COMMITTEE INFORMATION
Our Board of Directors manages us through board meetings and through its committees. During our fiscal year ended November 30, 2015 (“fiscal 2015”) our Board of Directors held 30 meetings, including one meeting by unanimous written consent. Each incumbent director attended at least 75% of all the meetings of the Board of Directors and the committees on which such director served. Although we do not have a formal policy regarding attendance at our annual meeting of stockholders, we attempt to accommodate the schedules of each member of our Board of Directors in choosing a date for our annual meeting of stockholders and our annual meeting of our Board of Directors. Directors are generally in attendance at the annual meeting of stockholders. Four members of our Board of Directors attended our annual meeting of stockholders in 2015 (the “ 2015 Annual Meeting of Stockholders”) in person.
In accordance with our Corporate Governance Guidelines, non-management directors also meet as needed in executive sessions without management present, with at least one such meeting a year attended only by independent directors. The Chairman of the Board presides over these executive sessions. During fiscal 2015, our non-management met nine times in executive session, all of which meetings were comprised of only independent directors. We also formed a special committee to review and discuss proposals related to our recapitalization in light of our financial condition prior to the RG Merger, which met 25 times during fiscal 2015.
Committees and Committee Charters
The Board of Directors has established a separately designated audit committee (the “Audit Committee”), compensation and stock option committee (the “Compensation and Stock Option Committee”) and nominating and governance committee (the “Nominating and Governance Committee”) of the Board of Directors. Our Board of Directors may also establish special committees from time to time to perform specifically delegated functions. The Board of Directors has adopted a written charter that governs the conduct and responsibilities of each of the Audit Committee, Compensation and Stock Option Committee and Nominating and Governance Committee, copies of which may be found on our website at www.differentialbrandsgroup.com/ in the section titled “Investor Information—Corporate Governance.” You may also request printed copies of the charter(s) by sending written request to the Secretary at the address set forth on the cover of this Proxy Statement. Information contained on, or that can be accessed through, our website does not constitute a part of this Proxy Statement and is not incorporated by reference herein.
The following table identifies the current members of our Board serving on the Audit Committee, the Compensation and Stock Option Committee and the Nominating and Governance Committee.
Name |
|
Audit |
|
Compensation |
|
Nominating |
|
Matthew Eby |
|
|
|
|
|
Chair |
|
Kelly Hoffman |
|
X |
|
|
|
|
|
Walter McLallen |
|
X |
|
X |
|
|
|
Kent Savage(1) |
|
Chair |
|
|
|
X |
|
William Sweedler |
|
|
|
Chair |
|
X |
|
Andrew Tarshis |
|
|
|
X |
|
|
|
(1) |
Mr. Savage has been designated to be an “audit committee financial expert” as such term is defined in the rules and regulations of the SEC. |
The Audit Committee is currently comprised of Messrs. Hoffman, McLallen and Savage. Mr. Savage serves as Chairman of the Audit Committee. The Audit Committee met or acted through written consent a total of six times in fiscal 2015.
The principal responsibility of the Audit Committee is to oversee our accounting and financial reporting processes and the audits of our financial statements. In that regard, the Audit Committee assists our Board of Directors in monitoring (1) our accounting, auditing, and financial reporting processes generally, including the qualifications, independence and performance of the independent auditor (including pre-approval of audit and non-audit services to be performed by the
10
independent auditor), (2) the integrity of our financial statements, (3) our systems of internal control regarding finance and accounting and (4) our compliance with legal and regulatory requirements. Our Audit Committee is also responsible for reviewing with management our major risk exposures and our risk assessment and risk management programs. As discussed above, the Audit Committee has a charter that details its duties and responsibilities, which was adopted by our Board of Directors on November 21, 2013.
Currently, all Audit Committee members are “independent” under applicable Nasdaq listing standards and rules and regulations of the SEC, including Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Board has also determined that each member of the Audit Committee has sufficient knowledge and understanding of the Company’s financial statements to serve on the Audit Committee and is financially literate within the meaning of Nasdaq listing standards as interpreted by the Board. Mr. Savage has been designated to be an “audit committee financial expert” as such term is defined under federal securities laws.
Compensation and Stock Option Committee
Currently, the Compensation and Stock Option Committee, is comprised of Messrs. McLallen, Sweedler and Tarshis. Mr. Sweedler serves as Chairman of the Compensation and Stock Option Committee. The Compensation and Stock Option Committee met or acted through written consent a total of four times in fiscal 2015.
The Compensation and Stock Option Committee’s responsibilities include determining the compensation of our Chief Executive Officer and other executive officers, reviewing and approving employment agreements, severance arrangements, change in control provisions and special or supplemental benefits applicable to our Chief Executive Officer and other executive officers and, in consultation with senior management, recommending to the Board of Directors for the Board’s approval our general compensation philosophy and objectives. Additionally, the Compensation and Stock Option Committee reviews and approves incentive compensation and equity-based plans, as well as compensation plans, policies and benefit programs applicable to employees generally, and administers our equity-based compensation plans. In connection with its deliberations, the Compensation and Stock Option Committee seeks the views of management with respect to appropriate compensation levels of the other officers and directors and may recruit compensation consultants, outside counsel and other advisers as it deems necessary to provide independent advice regarding market trends and other competitive considerations, and has the sole authority to compensate and oversee the work of such consultants, outside counsel and other advisers. During fiscal 2015, the Compensation and Stock Option Committee did not retain the services of compensation consultants to determine or recommend the amount or form of executive and director compensation. As discussed above, the Compensation and Stock Option Committee has a charter that details its duties and responsibilities, which was adopted by our Board of Directors on November 21, 2013.
In setting the level of cash and equity compensation, the Compensation and Stock Option Committee considers various factors, including our overall performance and the individual’s performance during the year, the uniqueness and relative performance of the executive’s skill set, the expected future contribution to us and competitive conditions. In addition, the Compensation and Stock Option Committee considered the affirmative “say on pay” vote at our annual meeting of stockholders held in 2011 and again at our annual meeting of stockholders held in 2014 and the affirmative golden parachute “say on pay” vote at our 2015 Annual Meeting of Stockholders, and continued to apply the same principles in determining the amounts and types of executive compensation. In addition, our Compensation and Stock Option Committee reviews compensation for our Chief Executive Officer, and considers the recommendation by the Chief Executive Officer for the other Named Executive Officers (as defined below) other than the Chief Executive Officer. As set forth in our Compensation and Stock Option Committee’s charter, the Chief Executive Officer may not be present during voting or deliberations on his compensation.
Currently, all Compensation and Stock Option Committee members are “independent” under applicable Nasdaq listing standards, including the enhanced independence requirements applicable to members of compensation committees. The Compensation and Stock Option Committee also has the ability to delegate its duties as necessary and appropriate, including the ability to delegate certain of its responsibilities under our equity based compensation plans.
Nominating and Governance Committee
The Nominating and Governance Committee is currently comprised of Messrs. Eby, Savage and Sweedler. Mr. Eby serves as Chairperson of the Nominating and Governance Committee. The Nominating and Governance Committee met a total of one time in fiscal 2015.
11
The principal responsibilities of the Nominating and Governance Committee are (1) assisting our Board of Directors in identifying individuals qualified to serve as members of our Board of Directors, (2) developing and recommending to our Board of Directors a set of corporate governance guidelines, and (3) overseeing the evaluation of our Board of Directors and management. In that regard, the Nominating and Governance Committee also has primary responsibility to recommend to our Board of Directors the director nominees for election by the stockholders at meetings of stockholders and for filling any vacancies and newly created directorships, to periodically review and make recommendations regarding the composition and size of our Board of Directors and committees, to review and make recommendations to our Board of Directors with respect to director compensation, to lead the Board’s annual self-evaluation process, to annually recommend to the Board the chairpersons and members of the Board’s committees and to oversee director orientation and continuing education programs.
As discussed above, the Nominating and Governance Committee has a charter that details its duties and responsibilities, which was adopted by our Board of Directors on November 21, 2013. Currently, all Nominating and Governance Committee members are “independent” under Nasdaq listing standards.
12
Directors may be nominated by the Board or stockholders in accordance with the Company’s Bylaws. The Nominating and Governance Committee is responsible for developing criteria for the selection of, and recommending to the Board candidates for, new directors for election at stockholder meetings and nominees for vacancies and for reviewing such director candidates, including those nominated by stockholders. The Board’s and Nominating and Governance Committee’s methods for choosing candidates for election to the Board of Directors (other than those formally nominated by our stockholders, as discussed below) include the solicitation of ideas for possible candidates from a number of sources, including existing members of the Board of Directors, executive officers, individuals personally known to the members of the Board of Directors and other research. We may also from time to time retain one or more third-party search firms to identify suitable candidates.
In evaluating the suitability of candidates, the Nominating and Governance Committee may take into account many factors, including the potential candidate’s judgment, experience, independence, character, business acumen and such other factors as the Nominating and Governance Committee concludes are pertinent in light of the current needs of our Board of Directors, including an incumbent’s past performance, attendance at meetings and participation in and contributions to the activities of our Board of Directors. Our Board of Directors believes that each candidate should be an individual who has demonstrated integrity and ethics in such candidate’s personal and professional life, has an understanding of elements relevant to the success of a publicly-traded company and has established a record of professional accomplishment in such candidate’s chosen field. Each candidate should be prepared to participate fully in our Board of Directors’ activities, including attendance at and active participation in meetings of our Board of Directors. Our Board of Directors has no stated specific minimum qualifications that must be met by a candidate for a position on our Board of Directors.
We have no formal policy on diversity; however, our Board of Directors believes that its membership should reflect a diversity of experience, gender, race, ethnicity and age. To date, no more specific criteria has been developed other than that set forth in the charter of the Nominating and Governance Committee and our Corporate Governance Guidelines.
There is no specific procedure outlined in the charter for the Nominating and Governance Committee or the Corporate Governance Guidelines to consider recommendations by common stockholder for candidates on our Board of Directors, but such recommended candidates will be considered in accordance with the principal responsibilities of the Nominating and Governance Committee, our Bylaws, our Corporate Governance Guidelines and all applicable rules and regulations relating to such nominations by our common stockholders. Any recommendations by stockholders for nominations to our Board of Directors are evaluated in a manner similar to how the Nominating and Governance Committee considers all directors.
Corporate Governance Guidelines
Our Board of Directors has adopted Corporate Governance Guidelines that describe, among other matters, the role of the Board of Directors, Board of Directors composition and selection, director independence and other director qualifications, selection of the Chairman and Chief Executive Officer, our majority voting standard, committees of the Board of Directors, meetings of the Board of Directors, director responsibilities, director compensation, annual performance evaluations, succession planning and the process for stockholders or other interested parties to communicate with our Board of Directors. A copy of the Corporate Governance Guidelines, as amended from time to time, can be found on our website at www.differentialbrandsgroup.com/ in the section titled “Investor Information—Corporate Governance.”
Our Board of Directors is led by our Chairman of the Board and our Company is led by our Chief Executive Officer. In accordance with our Corporate Governance Guidelines, our Board of Directors believes that whether to have the same person occupy the offices of Chairman and Chief Executive Officer should be decided by the Board of Directors, from time to time, in its business judgment after considering relevant circumstances. We currently separate the offices of Chairman of the Board and Chief Executive Officer.
We believe that, under normal circumstances, separating the role of Chairman and Chief Executive Officer promotes balance between the oversight function of the Board of Directors and our operational and strategic direction
13
undertaken by our Chief Executive Officer. We believe that this separation also balances the leadership in the boardroom and at the Company in its day-to-day operational activities. Our Board of Directors will periodically make a determination as to the appropriateness of this policy, including in connection with the recruitment and succession of the Chairman and/or Chief Executive Officer.
In addition, all of our committees have separate committee chairpersons that act as the presiding chair at the particular committee meetings. All members are free to request items for inclusion on the agenda at meetings and have an opportunity to bring up any items of discussion at any time among the Board of Directors or with management.
Compensation of Directors and Officers
The Compensation and Stock Option Committee determines the compensation to be paid to our officers and directors, with recommendations from management as to the amount and/or form of such compensation. The Nominating and Corporate Governance Committee also makes recommendations to our Board regarding director compensation.
Code of Business Conduct and Ethics
Our Board of Directors adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees on May 22, 2003. Our Code of Business Conduct and Ethics is available on our website at www.differentialbrandsgroup.com in the section titled “Investor Information — Corporate Governance,” or you may request a free copy of our Code of Business Conduct and Ethics from our Chief Compliance Officer at our principal executive offices located at Differential Brands Group Inc., 1231 S. Gerhart Avenue, Commerce, California 90022 or by calling +1 (323) 890-1800. You may also find a copy of our Code of Business Conduct and Ethics filed as Exhibit 14 to our Annual Report on Form 10-K for the fiscal year ended November 29, 2003 filed with the SEC on February 27, 2004.
To date, there have been no waivers under our Code of Business Conduct and Ethics. We intend to disclose any amendments to our Code of Business Conduct and Ethics and any waiver granted from a provision of such code on our website at www.differentialbrandsgroup.com within the same time frame that would otherwise be required by a Current Report on Form 8-K.
Our Bylaws provide that nominations of persons for election as directors at a meeting of stockholders at which directors are to be elected may be made by or at the direction of the Board of Directors or by a stockholder, as set forth below.
For a stockholder to properly bring before an annual meeting a nomination or nomination(s) for election to the Board of Directors, the stockholder must have given timely notice including all of the information regarding the nominee(s) and the stockholder giving the notice, as mandated by our Bylaws, must have been a stockholder of record on the date of giving notice, and must be entitled to vote for the election of directors at the annual meeting. To be timely, such notice must be received by the Secretary of the Company at our principal executive offices located at Differential Brands Group Inc., 1231 S. Gerhart Avenue, Commerce, California 10022 not later than the close of business on the 90th day nor earlier than the opening of business on the 120th day prior to the first anniversary of the preceding year’s annual meeting. However, if the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, under the terms of our Bylaws, notice by the stockholder must be (i) no earlier than the opening of business on the 120th day before the annual meeting and (ii) not later than the later of the close of business on the 90th day before the annual meeting or the close of business on the tenth day following the day on which the Company first publicly announces the date of the annual meeting.
For a stockholder to properly bring before a special meeting a nomination or nomination(s) for election to the Board of Directors,the stockholder’s notice must be received by the Secretary of the Company at our principal executive offices at the address referenced above (i) not earlier than the opening of business on the 120th day prior to the meeting and (ii) not later than the close of business on the 90th day before the meeting or the close of business on the tenth day following the day on which the Company first publicly announces the date of the special meeting.
Pursuant to our Bylaws, because this Annual Meeting is being held more than 30 days before the anniversary date of the 2015 Annual Meeting of Stockholders, written notice from stockholders was required to be received by the close of
14
business on October 13, 2016, which was the ninth day following the day on which the Company first publicly announced the date of the Annual Meeting.
If the number of directors to be elected to the Board of Directors at an annual meeting is increased, and the Company does not publicly announce the names of the nominees for the additional directorships before the close of the 90th day prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice will be considered timely, but only with respect to nominees for the additional directorships, if the notice is received by the Secretary of the Company at the principal executive offices of the Company at the address referenced above by the close of business on the tenth day following the day on which the Company first publicly announces the nominees for additional directorships.
Currently, the following six out of seven members of our Board of Directors are considered “independent” under Nasdaq listing standards and as such term is defined in the rules and regulations of the SEC:
· |
Matthew Eby; |
· |
Kelly Hoffman; |
· |
Walter McLallen; |
· |
Kent Savage; |
· |
William Sweedler and |
· |
Andrew Tarshis. |
In making its determination that the foregoing directors are independent, the Board of Directors considered all relevant facts and circumstances. As required under Nasdaq listing standards, in making its determination of independence, the Board of Directors considered whether the director had a relationship with the Company which, in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In addition, the Nasdaq definition of independent director includes a series of objective tests which were considered by the Board. Specifically, a member of the Board of Directors may be considered independent if such member:
· |
a director who is, or at any time during the past three years was, employed by the Company; |
· |
a director who accepted, or who has a family member who accepted, any compensation from the Company in excess of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence, other than compensation for board or board committee service, compensation paid to a family member who is an employee (other than an executive officer) of the Company, benefits under a tax-qualified retirement plan, or non-discretionary compensation; |
· |
a director who is a family member of an individual who is, or at any time during the past three years was, employed by the Company as an executive officer; |
· |
a director who is, or has a family member who is, a partner in, or a controlling stockholder or an executive officer of, any organization to which the Company made, or from which the Company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more, other than payments arising solely from investments in the Company’s securities or payments under non-discretionary charitable contribution matching programs; |
· |
a director who is, or has a family member who is, employed as an executive officer of another entity where at any time during the past three years any of the executive officers of the Company served on the compensation committee of such other entity; or |
· |
a director who is, or has a family member who is, a current partner of the Company’s outside auditor, or was a partner or employee of the Company’s outside auditor who worked on the Company’s audit at any time during any of the past three years. |
15
There are no current transactions with members of the Board of Directors that needed to be considered for any impact on the respective member’s independence. All current members of our Audit Committee, Compensation and Stock Option Committee and Nominating and Governance Committee are considered to be independent based on the applicable rules of Nasdaq and the SEC. The remaining member of our Board, Mr. Buckley, is not considered independent because he is employed by the Company as its Chief Executive Officer.
Communications with the Board of Directors
Stockholders may contact an individual director, the Board of Directors as a group, or a specified Board of Directors committee or group, including the independent directors as a group, by mail, addressed to our corporate office at 1231 S. Gerhart Avenue, Commerce, California 90022, or by email addressed to board@differentialbrandsgroup.com. Each communication should specify the applicable addressee(s) to be contacted, as well as the general topic of the communication. The Secretary will initially receive and process communications before forwarding them to the addressee. Our policy on communications with the Board of Directors is contained in our Corporate Governance Guidelines, which can be found on our website at www.differentialbrandsgroup.com in the section titled “Investor Information—Corporate Governance.”
The Board’s Role in Risk Oversight
Our Board of Directors oversees our risks in an enterprise-wide approach to understand our material enterprise risks, including operational, financial, strategic, compliance and reputational risks. First, we have a fully independent Audit Committee that is primarily responsible for reviewing with management our major risk exposures and our risk assessment and risk management programs, including our financial risks. Our Audit Committee meets on a quarterly basis and as needed with management and our internal audit consultants to review and discuss these matters. In addition, at the invitation of the Audit Committee, other members of the Board of Directors and management team are also present at these meetings to participate in the discussion on our most significant risks and exposure to risks and the evaluation of these matters to ensure consensus and mutual understanding between our Board of Directors and management. Finally, each of our committees considers their own particular set of risks associated with its responsibilities.
Historically, our non-employee directors have been compensated for service through an equity grant or on a cash basis. Our non-employee directors are not compensated in any other manner; however, they are reimbursed for travel and business expenses associated with attending our annual meeting of stockholders or other in-person meetings if the director’s schedule permits such attendance.
On January 15, 2016, the Compensation and Stock Option Committee of the Board of Directors approved a cash payment of $98,000 to each of the directors for their service in 2015. The following table summarizes compensation paid to our non-employee directors during the fiscal year ended November 31, 2015. This table does not provide information regarding director compensation to incumbent non-employee directors and director nominees William Sweedler, Matthew Eby, Walter McLallen and Andrew Tarshis, as each of them has served on our Board of Directors only since January 28, 2016.
Board of Director Fees
|
|
Issued for 2015 |
|
|||||||
Name |
|
Fees earned |
|
Stock |
|
Total |
|
|||
Samuel J. Furrow(1) |
|
$ |
98,000 |
|
$ |
— |
|
$ |
98,000 |
|
Suhail Rizvi(2) |
|
|
98,000 |
|
|
— |
|
|
98,000 |
|
Kent Savage |
|
|
98,000 |
|
|
— |
|
|
98,000 |
|
Joanne Calabrese(3) |
|
|
98,000 |
|
|
— |
|
|
98,000 |
|
Kelly Hoffman |
|
|
98,000 |
|
|
— |
|
|
98,000 |
|
|
|
$ |
490,000 |
|
$ |
— |
|
$ |
490,000 |
|
(1) |
Mr. Furrow resigned from his position as Interim Chief Executive Officer and Chairman of the Board of Directors on January 28, 2016, in connection with the completion of the RG Merger. |
16
(2) |
Mr. Rivzi resigned from his position as director of the Company on January 28, 2016, in connection with the completion of the RG Merger. |
(3) |
Ms. Calabrese resigned from her position as director of the Company on January 28, 2016, in connection with the completion of the RG Merger. |
Other than the cash payment of $98,000 to Mr. Furrow for his board service in 2015, during which period he also served as interim chief executive officer, members of our Board of Directors who are employees receive no additional compensation for service as members of our Board of Directors. Members of our Board of Directors who also serve on one or more committees of our Board of Directors do not receive any additional compensation for such service.
This Executive Compensation section focuses on the following: (1) the objectives of the executive compensation policies and practices; (2) the objectives that the compensation program is designed to reward; (3) each element of compensation; (4) the rationale for each element of compensation; (5) the methodologies utilized by us in determining the amounts to pay for each element; and (6) how an element of compensation and our rationale for each element fit together within our overall compensation objectives. This discussion relates to our Principal Executive Officer, Principal Financial Officer, and current and former certain executive officers, or collectively, our Named Executive Officers.
For our fiscal year ended November 30, 2015, our Named Executive Officers include:
· |
Samuel J. Furrow, Former Interim Chief Executive Officer and Chairman of the Board of Directors |
· |
Samuel Joseph Furrow, Jr., Former Interim Chief Executive Officer |
· |
Marc B. Crossman, Former Chief Executive Officer and President |
· |
Hamish Sandhu, Chief Financial Officer |
· |
Joseph M. Dahan, Former Creative Director |
· |
Peter Kim, Chief Executive Officer of Hudson |
Effective January 19, 2015, Marc B. Crossman resigned as our Chief Executive Officer and President. Also effective January 19, 2015, the Board of Directors appointed Samuel Joseph Furrow, Jr. to the position of Interim Chief Executive Officer. Effective February 11, 2015, Samuel Joseph Furrow, Jr. resigned as our Interim Chief Executive Officer and the Board of Directors appointed Samuel J. Furrow as our Interim Executive Officer. In connection with the completion of the Joe’s Asset Sale (as defined below), effective September 11, 2015, Joseph M. Dahan resigned as our Creative Director and Director. In connection with the completion of the RG Merger, effective January 28, 2016, Samuel J. Furrow resigned as our Interim Executive Officer and Chairman of the Board of Directors and the Board of Directors appointed Michael Buckley as Chief Executive Officer.
At our annual meeting of stockholders held on May 8, 2014, our stockholders were asked to consider and vote on a resolution approving the compensation of our Named Executive Officers, commonly referred to as “say on pay.” A substantial majority of our stockholders approved the compensation of our Named Executive Officers, with approximately 76% of the votes cast in favor of that “say on pay” resolution. While we are pleased with our stockholder support, we will continue to actively evaluate our executive compensation program.
Our executive compensation program is designed to provide proper incentive to management to maximize performance in order to encourage creation of stockholder value and achievement of strategic corporate objectives, attract and retain qualified, skilled and dedicated executives on a long-term basis, reward past performance and provide incentives for future performance.
17
In keeping with these objectives, our goal is to (1) align the interests of the executive officers with the interests of our stockholders, (2) ensure the long-term commitment of our management team, and (3) ensure accountability for both our overall performance and the individual’s performance and contribution.
In setting the level of cash and equity compensation, the Compensation and Stock Option Committee of our Board of Directors considers various factors, including our overall performance and the individual’s performance during the year, the uniqueness and relative performance of the executive’s skill set, the expected future contribution to us and competitive conditions. In addition, the Compensation and Stock Option Committee considered our stockholders’ affirmative ‘say on pay’ vote at our annual meeting in October 2011 and again in May 2014 and continued to apply the same principles in determining the amounts and types of executive compensation. In addition, our Compensation and Stock Option Committee reviews compensation for our Chief Executive Officer, and considers the recommendation by the Chief Executive Officer for the other Named Executive Officers other than the Chief Executive Officer.
Our compensation structure for our Named Executive Officers consists of a combination of (1) base salary, (2) long-term incentive awards primarily through grants of restricted stock and restricted stock units (“RSUs”) pursuant to our stock incentive plans, (3) company paid benefits, including medical insurance, dental insurance, 401(k) Plan, disability insurance, life insurance and flexible spending accounts, and (4) discretionary cash bonuses for certain of our Named Executive Officers. The Compensation and Stock Option Committee also takes into account certain change in control provisions available to our Named Executive Officers.
As described below in “Employment Contracts and Termination of Employment and Change in Control Arrangements,” we entered into an employment agreement with Mr. Buckley and a new employment agreement with Mr. Kim each of which became effective upon completion of the RG Merger on January 28, 2016. Also, on January 15, 2016, the Compensation and Stock Option Committee of the Board of Directors approved a cash bonus of $10,000 to Hamish Sandhu, our Chief Financial Officer.
The following table provides certain summary information concerning the compensation earned by our Named Executive Officers for the fiscal years ended November 30, 2015 and 2014, respectively (rounded to the nearest thousand).
Name and Principal Position |
|
Year |
|
Salary (1) |
|
Bonus |
|
Stock |
|
All other |
|
Total |
|
|||||
Samuel J Furrow |
|
2015 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Former Interim Chief Executive Officer and Chairman of the Board |
|
2014 |
|
|
— |
|
|
— |
|
|
98,000(4) |
|
|
— |
|
|
98,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Samuel Joseph Furrow, Jr. |
|
2015 |
|
$ |
18,000 |
|
$ |
— |
|
$ |
15,000 |
|
$ |
1,000 |
|
$ |
34,000 |
|
Former Interim Chief Executive Officer |
|
2014 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marc Crossman |
|
2015 |
|
$ |
475,000 |
|
$ |
— |
|
$ |
222,000(5) |
|
$ |
19,000 |
|
$ |
716,000 |
|
Former Chief Executive Officer and President |
|
2014 |
|
|
463,000 |
|
|
— |
|
|
429,000 |
|
|
24,000 |
|
|
916,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hamish Sandhu |
|
2015 |
|
$ |
299,000 |
|
$ |
— |
|
$ |
— |
|
$ |
26,000 |
|
$ |
325,000 |
|
Chief Financial Officer |
|
2014 |
|
|
296,000 |
|
|
— |
|
|
84,000 |
|
|
23,000 |
|
|
403,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Dahan |
|
2015 |
|
$ |
318,000 |
|
$ |
— |
|
$ |
— |
|
$ |
1,686,000(6) |
|
$ |
2,004,000 |
|
Creative Director |
|
2014 |
|
|
317,000 |
|
|
— |
|
|
— |
|
|
3,042,000(6) |
|
|
3,359,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Kim |
|
2015 |
|
$ |
500,000 |
|
$ |
— |
|
$ |
— |
|
$ |
23,900 |
|
$ |
523,900 |
|
Chief Executive Officer—Hudson Subsidiary |
|
2014 |
|
|
500,000 |
|
|
— |
|
|
— |
|
|
22,000 |
|
|
522,000 |
|
(1) |
Salary amount includes a payout for earned but unused vacation at the Named Executive Officer’s daily rate. In accordance with our employee handbook, all regular full‑time employees are eligible to be paid out for earned but unused vacation at the end of each fiscal year. Payout for fiscal 2014 and 2015 was made in January 2016 for Mr. Sandhu and upon termination of employment for all other Named Executive Officers. |
(2) |
Represents restricted common stock and RSUs issued pursuant to our Amended Stock Incentive Plan and reflects the grant date fair value dollar amount of compensation expense recognized by us in our financial statements for reporting purposes in accordance with Accounting Standards Codification 718, or ASC 718. For a discussion on the assumptions made regarding the valuation of the stock awards and option awards, please see |
18
“Notes to Consolidated Financial Statements—Note 12—Stockholders’ Equity—Stock Incentive Plans” to our Annual Report on Form 10-K for the fiscal year ended November 30, 2015, filed with the SEC on February 29, 2016. |
(3) |
The following table details the components of this column: |
Name and principal position |
|
Year |
|
Benefit of |
|
401(k) match |
|
Fixed |
|
Total |
|
||||
Samuel J Furrow |
|
2015 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Former Interim Chief Executive Officer and Chairman of the Board |
|
2014 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Samuel Joseph Furrow, Jr. |
|
2015 |
|
$ |
1,000 |
|
$ |
— |
|
$ |
— |
|
$ |
1,000 |
|
Former Interim Chief Executive Officer |
|
2014 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Marc Crossman |
|
2015 |
|
$ |
18,000 |
|
$ |
900 |
|
$ |
— |
|
$ |
18,900 |
|
|
|
2014 |
|
|
18,000 |
|
|
6,000 |
|
|
— |
|
|
24,000 |
|
Hamish Sandhu |
|
2015 |
|
$ |
18,000 |
|
$ |
7,900 |
|
$ |
— |
|
$ |
25,900 |
|
|
|
2014 |
|
|
18,000 |
|
|
5,000 |
|
|
— |
|
|
23,000 |
|
Joseph Dahan |
|
2015 |
|
$ |
18,000 |
|
$ |
— |
|
$ |
1,668,000 |
|
$ |
1,686,000 |
|
|
|
2014 |
|
|
18,000 |
|
|
— |
|
|
3,024,000 |
|
|
3,042,000 |
|
Peter Kim |
|
2015 |
|
$ |
20,000 |
|
$ |
3,900 |
|
$ |
— |
|
$ |
23,900 |
|
|
|
2014 |
|
|
19,000 |
|
|
3,000 |
|
|
— |
|
|
22,000 |
|
(a) |
This amount represents health premiums paid on behalf of the Named Executive Officer in excess of premiums paid for other employees. |
(b) |
This amount represents the amount paid in connection with the new fixed payment agreement entered into with Mr. Dahan in February 2013. One-half of Mr. Dahan’s payment was made at the close of the Asset Sale and the remainder was paid at the close of the RG Merger in January 2016. See also “Employment Contracts and Termination of Employment and Change in Control Arrangements—Joseph M. Dahan” for a further discussion of this fixed payment agreement. |
(4) |
Mr. Furrow did not receive any additional compensation for his service as interim chief executive officer from January 2015 until January 2016. This amount represents his stock award for service as a member of our board of directors for fiscal 2014. |
(5) |
In connection with Mr. Crossman’s resignation on January 19, 2015, we granted Mr. Crossman 600,000 shares of restricted common stock, which vests 1/12th on a monthly basis over the twelve (12) period of his consultant agreement. This figure represents the aggregate dollar amount of the original grant. See also footnote (2) above for discussion on compensation amount. |
(6) |
For a discussion on the fixed payment agreement entered into with Mr. Dahan, please see “Employment Contracts and Termination of Employment and Change in Control Arrangements—Joseph M. Dahan.” |
19
Outstanding Equity Awards at 2015 Fiscal Year-End
The following table sets forth information regarding outstanding equity awards held by our Named Executive Officers during our fiscal year ended November 30, 2015. These amounts have not been adjusted to reflect the Reverse Stock Split that was declared on January 28, 2016.
|
|
Option awards |
|
Stock awards |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
Equity |
|
|
|
|
Number of |
|
Number of |
|
Option |
|
Option |
|
Number of |
|
Market value |
|
Number of |
|
Market or |
|
|
Name |
|
Exercisable |
|
Unexercisable |
|
price |
|
date |
|
vested |
|
vested |
|
vested |
|
not vested |
|
|
Samuel J Furrow |
|
— |
|
— |
|
|
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
— |
|
Samuel Joseph Furrow, Jr. |
|
13,333 |
|
— |
|
0.38 |
|
1/6/2025 |
|
— |
|
— |
|
|
|
$ |
— |
|
Marc Crossman |
|
— |
|
— |
|
|
|
|
|
— |
|
— |
|
100,000(1) |
|
$ |
21,000 |
|
Hamish Sandhu |
|
— |
|
— |
|
|
|
|
|
— |
|
— |
|
35,235(2) |
|
$ |
7,399 |
|
|
|
— |
|
— |
|
|
|
|
|
— |
|
— |
|
67,125(3) |
|
$ |
14,096 |
|
|
|
— |
|
— |
|
|
|
|
|
— |
|
— |
|
14,571(4) |
|
$ |
3,060 |
|
Joseph Dahan |
|
— |
|
— |
|
|
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
Peter Kim |
|
— |
|
— |
|
|
|
|
|
— |
|
— |
|
|
|
|
|
|
(1) |
In connection with Mr. Crossman’s resignation on January 19, 2015, we granted Mr. Crossman 600,000 shares of restricted common stock, which vests 1/12th on a monthly basis over the twelve (12) period of his consultant agreement. This figure represents the amount remaining to vest as of November 30, 2015. |
(2) |
These RSUs vest as follows: one‑eighth of the RSUs began vesting on June 18, 2014 and the remaining RSUs vest every six months thereafter over a four year period. This figure represents the remaining amount to vest as of November 30, 2015. |
(3) |
These RSUs vest as follows: one‑eighth of the RSUs began vesting on June 18, 2013 and the remaining RSUs vest every six months thereafter over a four year period. This figure represents the remaining amount to vest as of November 30, 2015. |
(4) |
These RSUs vest as follows: one‑eighth of the RSUs began vesting on June 18, 2012 and the remaining RSUs vest every six months thereafter over a four year period. This figure represents the remaining amount to vest as of November 30, 2015. |
Employment Contracts and Termination of Employment and Change in Control Arrangements
Change in Control Provisions
Prior to its termination in September 2015, Mr. Joseph Dahan’s employment agreement contained certain change in control provisions. These provisions provided him with certain compensation arrangements in the event that a change in control occurs. Prior to its termination in January 2015, Mr. Crossman also had a change in control provision in his employment agreement that would have provided him with certain compensation arrangements in the event a change of control occurred prior to its termination. In addition, our Amended and Restated 2004 Stock Incentive Plan and 2004 Stock Incentive Plan each contain a change in control provision which provides for the immediate vesting in full of all grants or lapse of all restrictions for all grantees, including our Named Executive Officers, in the event a change in control occurs.
Marc Crossman
On May 30, 2008, we entered into an executive employment agreement with Mr. Crossman to serve as our President and Chief Executive Officer (the “Crossman Employment Agreement”). Mr. Crossman was previously serving as our President since September 2004 and as our Chief Executive Officer since January 2006 under an employment-at-will arrangement.
On January 19, 2015, our Board of Directors accepted the resignation of Mr. Crossman from his positions. The Board and Mr. Crossman also agreed that Mr. Crossman would become a consultant for a period of twelve (12) months
20
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 per month for a period of twelve (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. Mr. Crossman is subject to confidentiality, non-solicitation and non-competition restrictions for a period of two years following termination of his employment.
Under the terms of the Crossman Employment Agreement before his resignation, Mr. Crossman received an annual salary of $429,300 and was entitled to receive other cash and non-cash compensation, including an annual discretionary bonus targeted at 50% of his base salary based upon the achievement of financial and other performance criteria as set forth in the Crossman Employment Agreement, an annual grant of equity compensation pursuant to our stock incentive plans, and life and disability insurance policies paid on his behalf. The Crossman Employment Agreement was effective as of December 1, 2007, the commencement of our 2008 fiscal year, and had an initial term of two years, which automatically renewed for another two year period on December 1, 2009, December 1, 2011 and December 1, 2013, respectively before it was terminated on January 19, 2015.
In the event that Mr. Crossman’s employment would have been terminated by us other than for Cause, terminated by Mr. Crossman for Good Reason, terminated by us within 18 months following a Change in Control and without Cause, or terminated by Mr. Crossman within 18 months following a Change in Control and for Good Reason, Mr. Crossman would have been entitled to certain severance payments and benefits, including an amount equal to 24 months of his prior year’s base salary and bonus in exchange for his execution of a release of claims. Mr. Crossman was not entitled to severance benefits if he died during the term of his employment, he was terminated for Cause or due to Disability, he terminated his employment for a reason other than a good reason, or revoked his agreement to release us from any and all claims related to his employment. “Cause” under the Crossman Employment Agreement was defined as: (i) conviction of an offense involving an act of dishonesty, fraud or any other act of moral turpitude, or using alcohol, narcotics or illegal drugs to such an extent that it repeatedly materially adversely affects executive’s performance hereunder; (ii) substantial and willful failure to perform specific and lawful written directives of the Board; (iii) willful and knowing violation of any rules or regulations of any governmental or regulatory body that is materially injurious to the financial condition of the Company; (iv) conviction of or plea of guilty or nolo contendere to a felony or an act of moral turpitude; or (v) a material breach of the terms and conditions of the employment agreement. “Disability” was defined as executive’s incapacity due to physical or mental illness (as determined in good faith by a physician acceptable to the Company and executive), (i) absent from the full‑time performance of his duties for 120 consecutive days during any 12-month period or (ii) if a physician acceptable to the Company and executive advises us that it is likely that executive will be unable to return to the full‑time performance of his duties for 120 consecutive days during the succeeding 12-month period. “Good Reason” was defined as: (i) a material breach of the employment agreement by us that is not cured in the applicable time periods; (ii) relocation of the Company more than 50 miles from Commerce, California; or (iii) a material reduction in Mr. Crossman’s base salary. A “Change in Control” was defined as: (i) a change in the our incumbent directors such that they no longer constitute a majority of the directors; (ii) any person or entity becoming the beneficial owner of 50% or more of our combined voting power; (iii) the consummation of a merger, consolidation, share exchange or other corporate transaction involving us that requires the approval of our stockholders where our stockholders as a group no longer own at least 50% of the voting power of the surviving corporation or our Board members do not constitute a majority of the new board members of the surviving corporation; or (iv) the approval by our stockholders to liquidate or dissolve.
Joseph Dahan
In connection with the completion of a merger between us, Joe’s Jeans Subsidiary, Inc. and JD Holdings in October 2007, Mr. Joseph Dahan’s employment agreement automatically became effective for service as our Creative Director. Under the employment agreement, the initial term of employment was for five years with automatic renewals for successive one year periods thereafter, unless terminated earlier. Mr. Dahan was entitled to an annual salary of $300,000 and other discretionary benefits that the Compensation and Stock Option Committee of the Board of Directors may deem appropriate in its sole and absolute discretion.
In connection with the sale of certain of our operating and intellectual property assets related to the business operated under the brand names “Joe’s Jeans,” “Joe’s,” “Joe’s JD” and “else” to GBG USA Inc. (the “Joe’s Business”) and the sale of certain of our intellectual property assets related to the Joe’s Business to Joe’s Holdings LLC, which closed on September 11, 2015 (the “Joe’s Asset Sale”), we entered into a separation agreement with Mr. Joseph Dahan. Pursuant
21
to the separation agreement, Mr. Dahan resigned as a member of the Board and as our Creative Director, effective as of September 11, 2015. In exchange for a release of all claims related to Mr. Dahan’s employment, we paid Mr. Dahan his termination severance as provided in his employment agreement.
Under the terms of the employment agreement, if we terminated the employment of Mr. Dahan for Cause or for Mr. Dahan’s Disability, we would only be required to pay him through the date of termination. “Cause” was defined as: (i) a conviction, plea of guilty or nolo contendere to a felony or a crime of moral turpitude; (ii) a material breach of any provision of the employment agreement that is not cured within 45 days of receipt of written notice of such breach; (iii) the solicitation, persuasion or attempt at persuasion for any employee, consultant, contractor, customer or potential customer to engage in an act prohibited by the employment agreement; or (iv) a violation of any of our policies in our handbook or code of ethics and such violation constitutes a breach of the code of ethics or warrants termination. “Disability” was defined as inability to perform duties for 180 consecutive days or shorter periods aggregating 270 days during any 12 month period.
In addition, we could terminate Mr. Dahan’s employment without Cause at any time upon two weeks’ notice, provided that we paid him the present value of the annual salary amounts otherwise due to him for the remainder of the initial term of employment or any renewal term. Mr. Dahan could have terminated his employment for Good Reason at any time within 30 days written notice. “Good Reason” was defined as: (i) a material breach of the employment agreement by us that is not cured within 30 days of written notice or (ii) Mr. Dahan’s decision to terminate employment at any time after 18 months following a Change in Control. A “Change in Control” was defined as (i) the sale or disposal of all or substantially all of the assets; (ii) the merger or consolidation with another company provided that our stockholders as a group no longer own at least 50% of the voting power of the surviving corporation; (iii) any person or entity becoming the beneficial owner of 50% or more of our combined voting power; or (iv) the approval by our stockholders to liquidate or dissolve. In the event that Mr. Dahan terminated his employment for Good Reason, then he would have been entitled to the present value of the annual salary amounts otherwise due to him for the remainder of the initial term of employment or any renewal term. Further, Mr. Dahan could have terminated his employment for any reason upon ten business days’ notice and only be entitled to his salary as of the date of termination on a pro rata basis.
The employment agreement contained customary terms and conditions related to confidentiality of information, ownership by us of all intellectual property, including future designs and trademarks, alternative dispute resolution and Mr. Dahan’s duties and responsibilities to us as Creative Director.
In addition, pursuant to the merger agreement, Mr. Dahan was entitled to, for 120 months following October 25, 2007, irrespective of his employment status, additional contingent consideration payments based upon our achievement of certain gross profit thresholds on sales from our Joe’s® brand products. 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. 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 was entitled to receive $9,168,000 in weekly installments until November 2015. However, as a result of our default under the revolving credit agreement, dated September 30, 2013, as amended, with CIT Commercial Services, Inc. (the “CIT Revolving Credit Agreement”) and the term loan credit agreement, dated September 30, 2013 with Garrison Loan Agency Services LLC (the “Garrison Term Loan Credit Agreement”) in November 2014 and February 2015, we were prohibited from making any payments to Mr. Dahan during 2015. One-half of the amount remaining to Mr. Dahan was paid at the close of the Joe’s Asset Sale and the remainder was paid at the close of the RG Merger in January 2016.
Peter Kim
Old Employment Agreement
In connection with the acquisition of Hudson, we entered into an employment agreement with Peter Kim pursuant to which Mr. Kim serves as the Chief Executive Officer of Hudson (the “Original Kim Employment Agreement”). The Original Kim Employment Agreement became effective on September 30, 2013 upon completion of the acquisition of Hudson, and had a term of three years. Mr. Kim’s initial base salary was $500,000 per year, and such amounts were to be reviewed by the Compensation and Stock Option Committee at least annually, provided that the base salary was decreased during Mr. Kim’s term of employment. In addition to his base salary, Mr. Kim was eligible to receive an annual discretionary bonus targeted at 50% 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 and Stock Option Committee. The Original Kim Employment Agreement also provided Mr. Kim with certain other benefits and the reimbursement of certain expenses.
22
In the event of a termination of Mr. Kim’s employment for any reason or no reason, we were required to pay Mr. Kim for (i) his accrued but unpaid base salary through the date of termination, (ii) any accrued but unused vacation time, (iii) any unreimbursed expenses, and (iv) any bonus amounts that have been earned but have not been paid, and any bonus for the period in which termination occurred, prorated for the partial period, any rights under any benefit or equity plan, program or practice, and his rights to indemnification and directors and officers liability insurance.
In addition, in the event of a termination of Mr. Kim’s employment without Cause or in the event that Mr. Kim voluntarily terminated his employment for “Good Reason”, we were also required (i) to make a severance payment to Mr. Kim equal to twelve months of his base salary, payable in twelve monthly installments and (ii) pay for the COBRA premiums (to the extent they exceed applicable active employee rates) on our group medical plan for Mr. Kim and his spouse and dependents for the shorter of the first 12 months of such coverage or his period of COBRA eligibility. Our obligation to provide the foregoing severance benefits is subject to Mr. Kim’s execution of a settlement agreement and release. “Cause” is defined as the same as the Crossman Employment Agreement. “Good Reason” is defined as (i) a material breach of the employment agreement by us that is not cured in the applicable time periods; (ii) relocation of the Company more than 50 miles from Commerce, California; (iii) requiring Mr. Kim to report to anyone other than the CEO of the Company (iv) a material breach by us of any provision of the employment agreement; or (v) a material reduction in Mr. Kim’s base salary.
The Original Kim Employment Agreement also contained exclusivity, non‑compete and non‑solicitation covenants generally prohibiting Mr. Kim from providing services to a competitor during the term of his employment or soliciting employees during the term of his employment and for 12 months following his termination of employment. In addition, the Original Kim Employment Agreement mandated that Mr. Kim’s confidentiality obligations continue even after his termination of employment.
Mr. Kim also entered into a non‑competition agreement which also became effective on September 30, 2013 upon completion of the acquisition of Hudson, pursuant to which Mr. Kim agreed not to engage in, compete with or permit his name to be used by or in connection with any premium denim apparel business outside his role with Hudson, that is competitive to us, Hudson or our respective subsidiaries, or to solicit certain personnel for a period of up to three years from the closing of the acquisition.
New Employment Agreement
On September 8, 2015, we entered into a new three-year employment agreement with Mr. Kim to serve as the Chief Executive Officer of Hudson that replaced his previous employment agreement as of January 28, 2016 (the “New Kim Employment Agreement”). Mr. Kim’s annual base salary is $600,000 and Mr. Kim is eligible to receive an annual discretionary bonus targeted at 50% of his base salary, based on the satisfaction of criteria and performance standards as established in advance by the Compensation and Stock Option Committee after consultation with Mr. Kim. The New Kim Employment Agreement also provides Mr. Kim with certain other benefits and the reimbursement of certain expenses. On January 28, 2016, we granted Mr. Kim (i) RSUs in respect of 166,667 shares of our common stock (the “Kim RSU Award”) that vest and become transferable in three equal, annual installments beginning on January 28, 2017, subject to Mr. Kim’s continuous employment and (ii) performance share units in respect of 166,667 shares of the common stock (the “Kim PSU Award”) that will be earned over a three‑year performance period beginning on January 28, 2017, subject to Mr. Kim’s continuous employment (unless Mr. Kim is terminated without “cause” or for “good reason,” as provided below). One‑third of the Kim PSU Award will be entitled to vest each year based on annual performance metrics established by the Compensation and Stock Option Committee at the beginning of the applicable year. The Kim RSU Award and PSU Award will be settled in cash, unless we are able to attain stockholder approval of a new equity incentive plan covering such awards. Mr. Kim will also be entitled to participate in all regular long‑term incentive programs maintained by us or Hudson on the same basis as similarly‑situated employees.
In the event of a termination of Mr. Kim’s employment for any reason or no reason, we have agreed to pay Mr. Kim for (i) his accrued but unpaid base salary through the date of termination, (ii) any accrued but unused vacation time, (iii) any unreimbursed expenses, and (iv) if not previously paid to Mr. Kim: any bonus amounts that have been earned but have not been paid; any bonus for the period in which termination occurred, prorated for the partial period, with the amount, if any, based on actual performance and paid when bonuses for the applicable period are paid to other senior executives; any rights under any benefit or equity or long‑term incentive plan, program or practice; and his rights to indemnification and directors and officers liability insurance.
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In addition, in the event of a termination of Mr. Kim’s employment by us without “cause” (as defined in the New Kim Employment Agreement) or in the event that Mr. Kim voluntarily terminates his employment for “good reason” (as defined in the New Kim Employment Agreement), we are also required to make a severance payment to Mr. Kim equal to twelve months of his base salary, payable in twelve monthly installments. Additionally, any unvested portion of the restricted stock award will immediately vest and become transferable and any unvested performance shares will continue to vest without regard to Mr. Kim’s continued employment. We have agreed to also pay for the COBRA premiums (to the extent they exceed applicable active employee rates and subject to Mr. Kim timely electing continuation coverage under COBRA) on our group medical plan for Mr. Kim and his spouse and dependents for the shorter of the first 12 months of such coverage or his period of COBRA eligibility. Our obligation to provide the foregoing severance benefits is subject to Mr. Kim’s execution of a settlement agreement and release for us and our subsidiaries.
The New Kim Employment Agreement also contains exclusivity, non-compete and non-solicitation covenants generally prohibiting Mr. Kim from providing services to a competitor during the term of his employment or soliciting employees during the term of his employment and for 12 months following his termination of employment. During the term, Mr. Kim is permitted to own an interest in and, when not employed by Hudson, take part in and manage or operate relating to certain other apparel businesses conducted by Mr. Kim’s family from time to time that are not competitive with us and our subsidiaries. In addition, the employment agreement mandates that Mr. Kim’s confidentiality obligations continue even after his termination of employment.
New Non-Competition Agreement
Mr. Kim has also entered into a non-competition agreement, which became effective as of January 28, 2016, pursuant to which Mr. Kim has agreed not to engage in, compete with or permit his name to be used by or in connection with any premium denim apparel business outside his role with Hudson, that is competitive to us or our subsidiaries for a period of up to three years from January 28, 2016.
Hamish Sandhu
In connection with Mr. Sandhu’s appointment as Chief Financial Officer, we entered into a written offer letter whereby Mr. Sandhu agreed to serve as our Chief Financial Officer. Under the terms of the offer letter, Mr. Sandhu’s annual base salary was $205,000, which was increased to $255,000 in November 2008 and $280,000 in December 2012. We also agreed to pay the full cost of participation in our health insurance plan for Mr. Sandhu and his family. Notwithstanding anything to the contrary, until July 2015, Mr. Sandhu was an employee at-will.
On July 2, 2015, we entered into an employment agreement with Mr. Sandhu. Under the terms of the employment agreement, Mr. Sandhu will receive an initial base salary of $325,000, and such amount will be reviewed by the Compensation and Stock Option Committee at least annually, provided that the base salary may not be decreased during Mr. Sandhu’s term of employment. In addition to his base salary, Mr. Sandhu will be eligible to receive an annual discretionary cash and equity bonus of not less than 10 percent of his base salary, based upon the achievement of financial and other performance criteria as established in advance by the Compensation and Stock Option Committee, and with respect to the 2015 fiscal year, as set forth in the employment agreement. The employment agreement also provides Mr. Sandhu with certain other benefits, including premiums for health insurance paid on his behalf and for his family, and life and disability insurance policies paid on his behalf. The employment agreement is effective as of July 2, 2015 and has an initial term of one year. The employment agreement automatically renews for additional one year periods if neither we nor Mr. Sandhu provide 90 days’ advanced notice of non‑renewal prior to the end of the term.
In the event of a termination of Mr. Sandhu’s employment for any reason or no reason, we must pay Mr. Sandhu for (i) his accrued but unpaid base salary through the date of termination, (ii) any accrued but unused vacation time, (iii) any unreimbursed expenses, (iv) any bonus amounts that have been earned but have not been paid, (v) any rights under any benefit or equity plan, and (vi) any ongoing rights to indemnification and directors and officers liability insurance.
In addition, in the event of a termination of Mr. Sandhu’s employment by us without “Cause” or in the event that Mr. Sandhu voluntarily terminates his employment for “Good Reason”, we will also be required (i) to make a severance payment to Mr. Sandhu equal to his annual base salary, payable in equal installments in accordance with our normal payroll practices, (ii) any bonus amounts that have been earned for the period in which termination occurred, prorated for the partial period, and (iii) pay for the COBRA premiums (to the extent they exceed applicable active employee rates) on our group medical plan for Mr. Sandhu and his spouse and dependents for the shorter of the first 12 months of such coverage or his period of COBRA eligibility. Our obligation to provide the foregoing severance benefits is subject to Mr. Sandhu’s
24
execution of a settlement agreement and release. “Cause” is defined as (i) conviction of an offense involving an act of dishonesty, fraud or any other act of moral turpitude under the provisions of any Federal, State or local laws or ordinances; (ii) willful failure to perform, or gross negligence in performing, executive’s duties owed to us, after notice; (iii) willful and knowing violation of any rules or regulations of any governmental or regulatory body that is materially injurious to the financial condition of us; (iv) conviction of or plea of guilty or nolo contendere to a felony; (v) material breach of the terms of the employment agreement by Mr. Sandhu; (vi) any breach by the executive of the executive’s fiduciary duty of care or duty of loyalty to us or (vii) commission of an act of dishonesty, fraud or misrepresentation which results in material harm to us or our business. “Good Reason” is defined as (i) a material adverse alteration in the nature or status of Mr. Sandhu’s responsibilities; (ii) relocation of the Company more than 10 miles outside of Los Angeles County, California; (iii) a material breach by us of our obligations under the employment agreement, or (iv) a reduction in Mr. Sandhu’s then current salary, in each case that is not cured within the applicable time periods.
The employment agreement also contains exclusivity, non-compete and non-solicitation covenants generally prohibiting Mr. Sandhu from providing services to a competitor during the term of his employment or soliciting employees during the term of his employment and for 12 months following his termination of employment. In addition, the employment agreement mandates that Mr. Sandhu’s confidentiality obligations continue even after his termination of employment.
Michael Buckley
On January 28, 2016, in connection with the transactions contemplated by the RG Merger, we entered into an employment agreement with Mr. Buckley (the “Buckley Employment Agreement”). Pursuant to the terms of the Buckley Employment Agreement, Mr. Buckley serves as our Chief Executive Officer, reporting to our Board of Directors, for an initial term ending on December 31, 2018 with automatic, one-year renewal terms, unless we or Mr. Buckley gives notice 180 days prior to the end of the then-current term.
The Buckley Employment Agreement provides that we will pay Mr. Buckley an annual base salary of $600,000 and that Mr. Buckley will be eligible to receive an annual bonus of up to 150% of his base salary, based on our achievement of annual EBITDA targets set by the Compensation and Stock Option Committee after consultation with Mr. Buckley.
The Buckley Employment Agreement also provides that the Company will grant Mr. Buckley a RSU award in respect of 433,764 shares of our common stock (the “Buckley RSU Award”). The Buckley RSU Award will vest in equal, annual installments over a three-year period with the first installment vesting on December 31, 2016. The Company will also grant Mr. Buckley a performance share unit award in respect of 347,011 shares of our common stock (the “Buckley PSU Award”). The Buckley PSU Award will vest in annual installments over a performance period beginning on January 28, 2016 and ending on December 31, 2018, based on the our achievement of EBITDA targets set by the Compensation and Stock Option Committee. Unvested portions of the Buckley PSU Award in any completed year will be eligible for vesting in subsequent years to the extent that the subsequent year EBITDA target is exceeded and the excess is sufficient to make up for a prior year shortfall. The Buckley Employment Agreement further provides that the Buckley RSU Award and the Buckley PSU Award will be settled in cash in the event that there are insufficient shares of the Company’s common stock available to settle the applicable award in our common stock. Upon a “change in control” (as defined in the Buckley Employment Agreement), any unvested portions of the Buckley RSU Award and Buckley PSU Award will immediately vest.
In the event of a termination of Mr. Buckley’s employment by us without “cause” or in the event that Mr. Buckley resigns for “good reason” (each, as defined in the Buckley Employment Agreement), in either case, prior to the expiration of the agreement’s then-current term, we are required to make a severance payment to Mr. Buckley equal to 3.75 times his base salary, payable in a full lump sum. Additionally, any unvested portion of the Buckley RSU Award will immediately vest, 50% of the unvested portion of the Buckley PSU Award will immediately vest and 50% of the unvested portion of the Buckley PSU Award will remain outstanding through completion of the applicable performance period and vest based on actual achievement of the performance metrics. Further, upon such termination or resignation, Mr. Buckley and his dependents will receive continued coverage under our group health insurance plans for a period of up to 18 months. In the event such resignation or termination occurs following our first fiscal quarter of any year, the Buckley Employment Agreement provides that Mr. Buckley will also be entitled to a prorated annual bonus for the year in which his employment terminates in addition to his earned but unpaid bonus for the year prior to such resignation or termination. Our obligation to provide the foregoing severance benefits is subject to Mr. Buckley’s execution and non‑revocation of a release of claims against us and our affiliates.
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The Buckley Employment Agreement also contains customary provisions relating to non-disclosure of Company confidential information and non-disparagement of Company, our subsidiaries and our affiliates. In addition, the Buckley Employment Agreement includes non-competition and non-solicitation covenants that extend for12-months after termination.
Amended and Restated 2004 Stock Incentive Plan, 2004 Stock Incentive Plan, Restricted Stock Agreement and Restricted Stock Unit Awards
Under the terms both of the Amended and Restated 2004 Stock Incentive Plan and the 2004 Stock Incentive Plan, all unvested awards accelerate and immediately vest upon the occurrence of a Change in Control for all grantees. Further, Mr. Crossman’s restricted stock agreement and each RSU Award contains certain provisions regarding the terms and conditions of the grant. Each vests upon the earliest to occur of the participant’s Death, Disability (each as defined in the relevant Plan), or separation from service by us without Just Cause (as defined below). Upon a separation from service for any other reason (including, without limitation, termination by us for Just Cause or by participant for any reason) prior to the date that participant becomes 100 percent vested in the award, the unvested units or shares are forfeited immediately. Under the award agreements, “Just Cause” means (a) a conviction for, or a plea of guilty or nolo contendere to, a felony or any other crime which involves fraud, dishonesty or moral turpitude, or (b) a material breach of any written employment policies or rules, including our Code of Business Conduct and Ethics.
Further details regarding our Amended and Restated 2004 Stock Incentive Plan and 2004 Stock Incentive Plan, as well as our other equity compensation plans, see “Equity Compensation Plans” below.
Potential Payments Upon Termination or Change in Control
See “Executive Compensation— Employment Contracts and Termination of Employment and Change in Control Arrangements” above.
Equity Compensation Plan Information
The following table sets forth certain information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance as of November 30, 2015, which includes our Amended and Restated 2004 Stock Incentive Plan and our 2004 Stock Incentive Plan. We stopped granting options under our 2004 Stock Incentive Plan after the adoption and approval of our Amended and Restated 2004 Stock Incentive Plan on October 26, 2011. These amounts have not been adjusted to reflect the Reverse Stock Split that was declared on January 28, 2016.
Plan category |
|
Number of securities to be |
|
Weighted‑average |
|
Number of securities |
|
|
|
|
(a) |
|
|
(b) |
|
(c) |
|
Equity compensation plans approved by security holders |
|
|
|
|
|
|
|
|
Amended and Restated 2004 Stock Incentive Plan |
|
13,333 |
|
$ |
0.38 |
|
2,715,345 |
|
2004 Incentive Plan |
|
75,000 |
|
$ |
1.02 |
|
N/A |
(1) |
|
|
88,333 |
|
$ |
0.92 |
|
3,085,935 |
|
(1) |
As discussed below, while there are shares available, we no longer grant options under our 2004 Stock Incentive Plan since the adoption and approval of our Amended and Restated 2004 Stock Incentive Plan on October 26, 2011. |
On June 3, 2004, we adopted the 2004 Stock Incentive Plan, and in October 2011, we adopted an Amended and Restated 2004 Stock Incentive Plan to update it with respect to certain provisions and changes in the tax code since its original adoption. Under the Amended and Restated 2004 Stock Incentive Plan, the number of shares authorized for issuance is 6,825,000 shares of common stock. After the adoption of the Amended and Restated 2004 Stock Incentive Plan in October 2011, we no longer grant awards pursuant to the 2004 Stock Incentive Plan; however, it remains in effect for awards outstanding as of the adoption of the Amended and Restated 2004 Stock Incentive Plan.
Under the Amended and Restated 2004 Stock Incentive 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,
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restricted common stock, RSUs or performance shares. The Amended and Restated 2004 Stock Incentive 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. The Amended and Restated 2004 Stock Incentive Plan includes a provision for the acceleration of vesting of all awards upon a change of control as well as a provision that allows 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 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 Amended and Restated 2004 Stock Incentive 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, 2015, 2,715,345 shares remained available for issuance under the 2004 Amended and Restated Stock Incentive Plan.
Certain Relationships and Related Transactions and Director Independence
Review and Approval of Related Party Transactions
Our Audit Committee charter provides that our Audit Committee must review and approve all transactions to which the Company is a participant and in which our executive officers, directors, director nominees or principal stockholders or other related persons have a material interest, to the extent that disclosure would be required under Item 404 of Regulation S-K. We believe that this policy requiring Audit Committee approval of any material transaction involving us and such related parties ensures that such transactions are on terms no less favorable to us than reasonably could have been obtained in arm’s-length transactions with independent third parties. Our related party transactions entered into between December 31, 2014 and the date of this Proxy Statement, all of which were previously approved by our Audit Committee, are described below.
Reportable Related Party Transactions
Agreements with Directors, Officers and Family Members
Joseph 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 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 year ended 2013, expense of $311,000 was 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 ten 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 our 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
27
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 CIT Revolving Credit Agreement and the Garrison Term Loan Credit Agreement. However, as discussed above under “Executive Compensation—Employment Contracts and Termination of Employment and Change in Control Arrangements—Joseph Dahan,” as a result of our defaults under the Garrison Term Loan Credit Agreement and CIT Revolving Credit Agreement, we did not make any buy-out payments to Mr. Dahan during fiscal 2015 or the subsequent period until the completion of the RG Merger. In connection with the Joe’s Asset Sale, Mr. Dahan was repaid a portion of the buy-out payment owed to him and the remainder was paid at the closing of the RG Merger and related transactions.
Albert Dahan
In April 2009, we entered into a commission-based sales agreement with Albert Dahan, brother of Mr. Joseph Dahan, for the sale of our products into the off-price channels of distribution that was subsequently terminated beginning in fiscal 2014. Under the agreement, Mr. Albert Dahan was entitled to a commission for purchase orders entered into by us where he acts as a salesperson. For the fiscal year ended 2014 and 2015, there were no payments made to Mr. Albert Dahan under this arrangement. For the fiscal year ended 2013, payments of $453,000 were made to Mr. Albert Dahan under this arrangement.
In October 2011, we entered into an agreement with Ever Blue LLC (“Ever Blue”), an entity for which Mr. 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 paid 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 2015, 2014 and 2013, we recognized $45,000, $504,000 and $612,000, respectively in royalty income under the license agreement. In connection with the Joe’s Asset Sale, this agreement was assigned to GBG USA Inc.
Peter Kim
In connection with the acquisition of Hudson completed in September 2013, we 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 RG Merger completed in January 2016, we entered into the Rollover Agreement (as defined below) and a new employment agreement with Mr. Kim. Mr. Kim also currently has rights under a registration rights agreement described below with respect to shares of our common stock issuable upon conversion of his Modified Convertible Notes (as defined below) as part of the RG Merger.
For a discussion of the Rollover Agreement and terms of the Modified Convertible Notes, see “Hudson Convertible Notes” below. For a discussion of Mr. Kim’s previous and current employment agreements and non-competition agreements, see “Executive Compensation—Employment Contracts and Termination of Employment and Change in Control Arrangements” above. For information on the past and current registration rights agreements involving Mr. Kim, see the discussion in “Agreements Related to the RG Merger—Registration Rights Agreement” below.
Other Officers and Directors
We have entered into employment agreements with Mr. Buckley, our Chief Executive Officer, Mr. Crossman, our former President and Chief Executive Officer, Mr. Joseph Dahan, our former Creative Director, Mr. Kim, our Chief Executive Office of our Hudson subsidiary and Mr. Sandhu, our Chief Financial Officer. Mr. Joseph Dahan was previously a member of our Board of Directors until September 2015 and Mr. Kim was previously a member of our Board of Directors until February 2015. See “Executive Compensation—Employment Contracts and Termination of Employment and Change in Control Arrangements” for a further discussion of these agreements.
Agreements Related to the Joe’s Asset Sale and the RG Merger
Hudson Convertible Notes
We issued convertible notes in connection with the acquisition of Hudson with different interest rates and conversion features for Hudson’s management stockholders, including Mr. Kim, and for our major stockholder Fireman Capital CPF Hudson Co-Invest LP (“Fireman”), respectively. On September 8, 2015, the Company entered into a rollover
28
agreement (the “Rollover Agreement”) with the holders of convertible notes originally issued in connection with the Hudson acquisition, pursuant to which, on January 28, 2016, the holders of the notes contributed the notes to the Company in exchange for the following:
· |
1,167,317 shares of common stock; |
· |
a cash payment of approximately $8.6 million, before expenses; and |
· |
an aggregate principal amount of approximately $16.5 million of modified convertible notes (the “Modified Convertible Notes”). |
The Modified Convertible Notes are structurally and contractually subordinated to our senior debt and will mature on July 28, 2021. The Modified Convertible Notes accrue interest quarterly on the outstanding principal amount at a rate of 6.5% per annum (increased to 7% as of October 1, 2016 with respect to the Modified Convertible Notes issued to Fireman), which is payable 50% in cash and 50% in additional paid-in-kind notes; provided, however, that the Company may, in its sole discretion, elect to pay 100% of such interest in cash. Beginning on January 28, 2016, the Modified Convertible Notes are 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 we make a pro rata prepayment on all of the Modified Convertible Notes.
RG Stock Purchase Agreement
In connection with the RG Merger, we entered into the RG Stock Purchase Agreement with TCP Denim, LLC, one of our major stockholders, pursuant to which we issued and sold to TCP Denim, LLC an aggregate of 50,000 shares of the Series A Preferred Stock, for an aggregate purchase price of $50 million in cash. The proceeds from the sale of Series A Preferred Stock were used to consummate the RG Merger. Under the form of certificate of designation for the Series A Preferred Stock, 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. As of March 31, 2016, the cumulative dividends totaled $1,268,000. Additionally, if our Board of Directors 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.
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. For so long as a to-be-determined percentage of the shares of the Series A Preferred Stock remains outstanding, the holders of the Series A Preferred Stock, exclusively and as a separate class, will be entitled to elect six members of the board of directors, each of whom may only be removed without cause by the affirmative vote of the holders of a majority of the shares of Series A Preferred Stock. The holders of the Series A Preferred Stock have separate class voting rights with respects to certain matters affecting their rights. 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. Each share of the Series A 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 $11.16 (after taking into account the Reverse Stock Split (as defined below)).
Registration Rights Agreement
On the closing date of the RG Merger, we entered into a registration rights agreement (the “Registration Rights Agreement”) with TCP Denim, LLC and certain of its affiliates, who are major stockholders of us, the noteholder party to the Rollover Agreement and Michael Buckley, our Chief Executive Officer. Pursuant to the Registration Rights
29
Agreement, and subject to certain limitations described therein, we are required to provide certain demand and piggyback registration rights to the parties to the Registration Rights Agreement. In particular, we are required to prepare and file a registration statement on Form S-1 or S-3 (or any similar form or successor thereto) for the registration under the Securities Act of 1933, as amended (the “Securities Act”), of shares of our common stock (i) issued to the parties to the Registration Rights Agreement in connection with the RG Merger Agreement and the Rollover Agreement and (ii) issuable upon conversion of the Series A Preferred Stock and the Modified Convertible Notes. Prior to the closing date of the RG Merger, we had a substantially similar registration rights agreement with the holders of the original convertible notes, which included Mr. Kim.
Payments to Tengram Capital Partners
From time to time, we expect to reimburse Tengram Capital Partners, one of our major stockholders, for certain travel and other related expenses of its employees related to services performed on our behalf and at our request. For fiscal 2015 and the subsequent period until the date of this Proxy Statement, we have recorded expenses of $2,932,000, which also included for fiscal 2015 reimbursements for legal fees incurred by TCP Denim, LLC, one of our major stockholders and an affiliate of Tengram Capital Partners, in connection with the purchase of the Series A Preferred Stock and RG Merger, pre-closing RG Merger management fees that were paid by RG that are non-recurring as a result of the RG Merger and other fees and expenses that are non-recurring as a result of the RG Merger. There are no management fees paid to Tengram Capital Partners or its affiliates after the completion of the RG Merger.
SWIMS® Transaction
On July 18, 2016, we completed the acquisition of all of the outstanding share capital of Norwegian private limited company (aksjeselskap) SWIMS AS (“SWIMS”). SWIMS® is a Scandinavian lifestyle brand known for its range of fashion-forward, water-resistant footwear and sportswear. To finance the acquisition, we issued the following to one of our major stockholders, Tengram Capital Partners Fund II, L.P. (“Tengram Fund II”): (i) a warrant for the purchase of 500,000 shares of our common stock at an exercise price of $3.00 per share; and (ii) a convertible promissory note in an original principal amount of $13.0 million convertible into up to 4,500,000 shares of our Class A-1 Preferred Stock bearing interest at the rate of 3.75% per annum and which matures on January 18, 2017 (the “SWIMS Convertible Note”).
Director Independence
See “Corporate Governance Matters—Director Independence” above.
In accordance with the written charter of the Audit Committee, which was originally adopted by our Board of Directors on November 21, 2013, the Audit Committee assists the Board of Directors in overseeing the quality and integrity of our accounting, auditing, and financial reporting practices. In addition, the Audit Committee recommends to the full Board of Directors the selection of the independent auditors. The Audit Committee’s function is one of oversight, recognizing that the Company’s management is primarily responsible for the Company’s financial statements as well as the Company’s financial reporting processes, principles and internal controls, and that the Company’s independent registered public accounting firm is responsible for performing an audit of the Company’s consolidated financial statements in accordance with generally accepted accounting principles, issuing a report relating to its audit and expressing an opinion as to the conformity of such financial statements with generally accepted accounting principles. Moss Adams LLP (“Moss Adams”) audited our consolidated financial statements for the fiscal year ended November 30, 2015 and included a report thereon in our Annual Report on Form 10-K for the fiscal year ended November 30, 2015.
Currently, all Audit Committee members are “independent” under Nasdaq listing standards and as such term is defined in the rules and regulations of the SEC, and Mr. Savage has also been designated to be an “audit committee financial expert” as such term is defined in the rules and regulations of the SEC.
In performing its oversight function, the Audit Committee reviewed and discussed our audited consolidated financial statements as of and for the year ended November 30, 2015, and the audit of the effectiveness of the Company’s internal control over financial reporting as of November 30, 2015, with management and Moss Adams. The Audit Committee also discussed with Moss Adams all matters required by the standards of the Public Company Accounting Oversight Board, including those described in Auditing Standard No. 16, Communications with Audit Committees, and,
30
with and without management present, discussed and reviewed the results of Moss Adams’s examination of the financial statements.
The Audit Committee obtained from the independent auditors a formal written statement required by the applicable requirements of the Public Company Accounting Oversight Board regarding Moss Adams’s independence and discussed such independence with Moss Adams.
Based on the above-mentioned review and discussions with management and the independent auditors, the Audit Committee recommended to the Board of Directors that our audited consolidated financial statements be included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2015 for filing with the SEC.
After conducting a process to determine the audit firm that would serve as the Company’s independent registered public accounting firm for the year ending December 31, 2016, on July 6, 2016, the Audit Committee dismissed Moss Adams as the Company’s independent registered public accounting firm. Moss Adams’s reports on the Company’s financial statements for the fiscal years ended November 30, 2015 and 2014 did not contain an adverse opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles; provided, however, that the report for the fiscal year ended November 30, 2014 included an explanatory paragraph related to the existence of substantial doubt about the Company’s ability to continue as a going concern. Additionally, during the fiscal years ended November 30, 2015 and November 30, 2014 and in the interim period from January 1, 2016 through July 6, 2016, (i) there were no disagreements with Moss Adams on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which subject matter of the disagreements, if not resolved to Moss Adams’s satisfaction, would have caused it to make reference to the subject matter of the disagreement in connection with its report, and (ii) there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. The Company provided Moss Adams with a copy of the foregoing disclosures and requested that Moss Adams furnish a letter addressed to the SEC stating whether it agrees with the above statements made by the Company. A copy of Moss Adam’s letter, dated July 8, 2016, is filed as Exhibit 16.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 8, 2016.
Contemporaneous with the determination to dismiss Moss Adams, the Audit Committee approved the engagement of CohnReznick LLP (“CohnReznick”) as the Company’s independent registered public accounting firm for the year ending December 31, 2016 with immediate effect. During the fiscal years ended November 30, 2015 and November 30, 2014, which were audited by Moss Adams, and during the interim period from January 1, 2016 through July 6, 2016, neither the Company nor anyone acting on its behalf consulted with CohnReznick regarding the Company’s financial statements, with respect to: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report was provided to the Company or oral advice was provided that CohnReznick concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).
The Audit Committee has selected CohnReznick as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2016, and has asked the stockholders to ratify the appointment.
The Audit Committee:
Kent Savage, Chairman of the Audit Committee
Kelly Hoffman
Walter McLallen
The information in this report of the Audit Committee shall not be deemed to be “soliciting material,” or to be “filed” with the SEC or subject to Regulation 14A or 14C as promulgated by the SEC, or to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically requests that the information be treated as soliciting material or specifically incorporates it by reference into a document filed under the Securities Act or the Exchange Act. The information in this report of the Audit Committee also shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
31
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of October 5, 2016 concerning beneficial ownership, as that term is defined in Rule 13d-3 under the Exchange Act, of common stock held by (i) each person or entity known by us to beneficially own more than 5% of our outstanding common stock, (ii) each of our directors and nominees for election as a director, (iii) each of our named executive officers, and (iv) all of our directors and executive officers as a group. The information as to beneficial ownership has been furnished by our respective common stockholders, directors and executive officers, and, unless otherwise indicated, to our knowledge, each of our common stockholders has sole voting and investment power with respect to the shares beneficially owned, subject to community property laws where applicable. Pursuant to the rules of the SEC, certain shares of our common stock that a beneficial owner set forth in this table has a right to acquire within 60 days of the date hereof (pursuant to the exercise of options or warrants for the purchase of shares of common stock) are deemed to be outstanding for the purpose of computing the percentage ownership of that owner, but are not deemed outstanding for the purpose of computing percentage ownership of any other beneficial owner shown in the table. Percentages are calculated based on 13,083,923 shares of common stock outstanding (excluding treasury shares) as of October 5, 2016. The address for the officers and directors is our corporate office located at 1231 S. Gerhart Avenue, Commerce, California, 90022.
Beneficial Owner |
|
Number of |
|
Percentage |
|
5% Stockholders (Excluding Directors and Officers) |
|
|
|
|
|
Tengram Capital Partners, L.P. |
|
6,636,050 |
(1) |
50.7 |
% |
Barry Sternlicht |
|
877,103 |
(2) |
6.7 |
% |
Knight’s Bridge Capital Partners Fund I L.P. |
|
720,927 |
(3) |
5.5 |
% |
Fireman Capital CPF Hudson Co‑Invest LP |
|
704,834 |
(4) |
5.4 |
% |
Directors and Officers (including Former Officers) |
|
|
|
|
|
Michael Buckley |
|
469,148 |
(5) |
3.6 |
% |
Chief Executive Officer and Director |
|
|
|
|
|
Samuel J. (Sam) Furrow |
|
33,373 |
(6) |
* |
|
Former Chairman of Board of Directors and Interim Chief Executive Officer |
|
|
|
|
|
Marc B. Crossman |
|
91,266 |
(7) |
* |
|
Former Chief Executive Officer, President and Director |
|
|
|
|
|
Samuel Joseph (Jay) Furrow, Jr. |
|
2,832 |
(8) |
* |
|
Former Interim Chief Executive Officer |
|
|
|
|
|
Hamish Sandhu |
|
5,493 |
|
* |
|
Chief Financial Officer |
|
|
|
|
|
Joseph M. Dahan |
|
403,602 |
(9) |
3.1 |
% |
Former Creative Director and Director |
|
|
|
|
|
Peter Kim |
|
1,021,492 |
(10) |
7.8 |
% |
Chief Executive Officer of Hudson |
|
|
|
|
|
William Sweedler |
|
6,636,050 |
(11) |
50.7 |
% |
Director, Chairman of the Board |
|
|
|
|
|
Matthew Eby |
|
6,636,050 |
(12) |
50.7 |
% |
Director |
|
|
|
|
|
Kelly Hoffman |
|
0 |
|
* |
|
Director |
|
|
|
|
|
Walter McLallen |
|
0 |
|
* |
|
Director |
|
|
|
|
|
Kent Savage |
|
7,985 |
(13) |
* |
|
Director |
|
|
|
|
|
Andrew Tarshis |
|
0 |
|
* |
|
Director |
|
|
|
|
|
All directors and executive officers, as a group (13 persons) |
|
8,172,299 |
|
62.5 |
% |
*Represents beneficial ownership of less than 1%.
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(1) |
This information as to beneficial ownership is based on a Schedule 13D and information provided by the reporting persons to the Company. The Schedule 13D was filed on February 8, 2016 by and on behalf of TCP RG, LLC, Tengram Capital Partners Gen2 Fund, L.P. (“Tengram Fund I”), Tengram Capital Associates, LLC (“TCA”), TCP Denim, LLC, Tengram Fund II, Tengram Capital Associates II, LLC (“TCA II”), Matthew Eby and William Sweedler. TCP RG, LLC received 1,245,418 shares of common stock pursuant to the RG Merger, TCP RG II, LLC received 410,345 shares of common stock pursuant to the RG Merger and TCP Denim, LLC received 50,000 shares of the Series A Convertible Preferred Stock in connection with the RG Merger, which are convertible into 4,480,287 shares of common stock issuable upon conversion of issued to TCP Denim, LLC. Additionally, Tengram Fund II received a warrant for the purchase of 500,000 shares of our common stock at an exercise price of $3.00 per share, which is currently exercisable, in connection with the Company’s acquisition of Norwegian lifestyle brand SWIMS. The above shares exclude the SWIMS Convertible Note with principal of $13.0 million issued to Tengram Fund II in connection with the acquisition of Norwegian lifestyle brand SWIMS, which accrues interest at a rate of 3.75% per annum, compounding on the first day of each month starting August 1, 2016, and will convert, at Tengram Fund II’s option or on the maturity date of January 18, 2017 if not already repaid in cash on or prior to that date, into up to 4,500,000 newly issued shares of our Class A-1 Preferred Stock at a conversion price of $3.00 per share. The Class A-1 Preferred Stock may convert into shares of our common stock at an initial price of $3.00 per share, subject to various conditions. For more information on the SWIMS Convertible Note, see the Company’s Current Report on Form 8-K filed with the SEC on July 19, 2016. |
Each of TCP RG, LLC and TCP RG II, LLC is managed by its managing member, Tengram Fund I. TCP Denim, LLC is managed by its sole member, Tengram Fund II. TCA is the general partner of Tengram Fund I. TCP Denim, LLC is managed by its sole member, Tengram Fund II. TCA II is the general partner of Tengram Fund II. Matthew Eby and William Sweedler are the co-managing members of both TCA and TCA II. TCP RG, LLC, TCP RG II, LLC and TCP Denim, LLC have shared voting and dispositive power with respect to their shares. Each of Matthew Eby, William Sweedler, TCA and Tengram Fund I may be deemed to share the voting and dispositive power of the shares held by TCP RG, LLC and TCP RG II, LLC. Each of Matthew Eby, William Sweedler, TCA II and Tengram Fund II may be deemed to share the voting and dispositive power of the shares held by TCP Denim, LLC. The address of each of the entities mentioned in this footnote is c/o Tengram Capital Partners, 15 Riverside Avenue, First Floor, Westport, CT 06880.
(2) |
This information as to beneficial ownership is based on a Schedule 13G filed on February 8, 2016 by and on behalf of Barry Sternlicht. The address of Mr. Sternlicht is 591 West Putnam Ave Greenwich, CT 06830. |
(3) |
This information as to beneficial ownership is based on a Schedule 13G filed on February 25, 2016 by Knight’s Bridge Capital Partners Fund I L.P. and Knight’s Bridge Capital Partners Fund I (U.S.) L.P. These shares consist of (i) 643,716 shares of common stock beneficially owned by Knight’s Bridge Capital Partners Fund I L.P., over which there is shared voting and dispositive power, and (ii) 77,211 shares of common stock beneficially owned by Knight’s Bridge Capital Partners Fund I (U.S.) L.P., over which there is shared voting and dispositive power. The address of each of Knight’s Bridge Capital Partners Fund I L.P. and Knight’s Bridge Capital Partners Fund I (U.S.) L.P. is 181 Bay Street, Suite 3830, Toronto, Ontario, Canada M5J 2T3. |
(4) |
This information as to beneficial ownership is based on a Schedule 13D/A filed on February 4, 2016 by and on behalf of Fireman Capital CPF Hudson Co-Invest LP, or Fireman, and Daniel Fireman. These shares, which are beneficially owned by Fireman and its Managing Partner, Daniel Fireman, consist of (i) 494,807 shares of common stock; plus (ii) 210,027 shares of common stock issuable upon conversion of the Modified Convertible Note held by Fireman, which, because it is convertible at any time, is deemed to be outstanding pursuant to Rule 13d-3(1) under the Exchange Act. Each of Fireman and Daniel Fireman has shared voting and dispositive power with respect to the shares. The address of each of Fireman and Daniel Fireman is c/o Fireman Capital Partners, LLC, Watermill Center, 800 South Street, Suite 600, Waltham, MA 02453. |
(5) |
Excludes 433,764 RSUs, which will vest in annual installments over a three-year period with the first installment vesting on December 31, 2016, subject to Mr. Buckley’s continued employment through the applicable vesting dates. Each RSU represents a contingent right to receive one share of our common stock and will be settled in cash in the event that there are insufficient shares of common stock available to settle the applicable RSUs in common stock. |
(6) |
Includes (i) 32,863 shares held for the personal account of Mr. Furrow and (ii) 510 shares held for the account of Mr. Furrow’s spouse. Mr. Furrow has pledged under the terms of certain loan agreements and lines of credit an aggregate of 30,004 shares of common stock held in his personal account. This information is based upon a Form 4 |
33
filed with the SEC on March 3, 2014, after giving effect to the reverse stock split of our issued and outstanding common stock that was declared on January 28, 2016 and effective as of the date of the RG Merger, whereby each 30 shares of our issued and outstanding common stock were reclassified into one share of our issued and outstanding common stock without changing the par value or the amount of authorized shares of our common stock (the “Reverse Stock Split”). |
(7) |
Includes (i) 89,600 shares held for Mr. Crossman’s personal account, including 20,000 (after giving effect to the Reverse Stock Split) shares of restricted stock pursuant to his consulting agreement, which fully vested on January 19, 2016; and (ii) 1,666 shares held for the accounts in trust for Mr. Crossman’s minor children, for which Mr. Crossman’s father is the trustee. Mr. Crossman disclaims beneficial ownership of shares held for the accounts in trust for his minor children. This information is based upon a Form 4 filed with the SEC on December 18, 2014 and the subsequent issuance of the 20,000 shares of restricted stock (after giving effect to the Reverse Stock Split) pursuant to his consulting agreement, which fully vested on January 19, 2016. |
(8) |
Includes (i) 2,387 shares held for the personal account of Mr. Furrow; and (ii) 444 shares issuable upon the exercise of currently exercisable (or exercisable within 60 days) options (after giving effect to the Reverse Stock Split). This information is based upon a Form 3 filed with the SEC on January 29, 2015 (after giving effect to the Reverse Stock Split). |
(9) |
This information is based upon a Form 4 filed with the SEC on December 22, 2015 (after giving effect to the Reverse Stock Split). |
(10) |
This information is based upon a Schedule 13D/A filed on February 2, 2016 by and on behalf of Peter Kim. The above shares include (i) 418,024 shares of common stock and (ii) 603,468 shares of common stock issuable upon conversion of the Modified Convertible Note, issued to Mr. Kim on January 28, 2016 in connection with the RG Merger, with a principal amount equal to $8,418,382.94. Because the Modified Convertible Note is convertible at any time by Mr. Kim, it is deemed to be outstanding pursuant to Rule 13d-3 of the Exchange Act. For more information on the Modified Convertible Note, see “Certain Relationships and Related Transactions and Director Independence—Agreements Related to the Joe’s Asset Sale and the RG Merger—Hudson Convertible Notes.” The above shares exclude 166,667 RSUs, which will vest in annual installments over a three-year period with the first installment beginning on the first anniversary of January 28, 2017, subject to Mr. Kim’s continued employment. |
(11) |
See Note 1. |
(12) |
See Note 1. |
(13) |
Includes, after giving effect to the Reverse Stock Split, (i) 7,644 shares held for the personal account of Mr. Savage and (ii) 341 shares held for the account of Savage Interests LP, a limited partnership in which Mr. Savage and his spouse are limited partners. Mr. Savage disclaims beneficial ownership of such shares held for the account of Savage Interests LP. |
34
PROPOSAL NO. 2 — TO ADOPT THE DIFFERENTIAL BRANDS GROUP INC. 2016 STOCK INCENTIVE
COMPENSATION PLAN AND TO APPROVE THE MATERIAL TERMS OF THE PERFORMANCE GOALS
OF THE 2016 PLAN UNDER SECTION 162(M) OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED
The Board of Directors proposes that stockholders approve the 2016 Plan, which was unanimously adopted by our Board on October 5, 2016. The 2016 Plan provides for grants of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, other equity-based awards and cash awards to employees and consultants of the Company and its affiliates and nonemployee directors of the Company. The Board of Directors believes that the adoption of the 2016 Plan is necessary in order to allow the Company to continue to attract, retain and motivate employees, to enhance long-term performance and competitiveness of the Company and its affiliates and to further align the interests of our employees and non-employee directors with those of our stockholders.
The 2016 Plan is designed to comply with the requirements of the Section 162(m) of Internal Revenue Code (“Section 162(m)”). Section 162(m) limits our tax deduction for expenses in connection with compensation for our Chief Executive Officer and certain other most highly-compensated executive officers for any fiscal year to the extent that the compensation of such person exceeds $1 million during such fiscal year, excluding compensation that qualifies as “performance-based compensation.” Section 162(m) provides that in order for compensation to be treated as qualified performance-based compensation, the material terms of the 2016 Plan pursuant to which the performance-based compensation is paid must be disclosed to and approved periodically by our stockholders. The material terms subject to stockholder approval include: (i) the employees eligible to receive compensation; (ii) a description of the business criteria upon which the performance goal is based; and (iii) the maximum amount of compensation to be paid during a specified period.
These material terms are described below. Certain of our executive officers are eligible to receive annual cash incentive and long term equity awards under the 2016 Plan and have an interest in the passage of this Proposal no. 2. We generally intend that awards made under the 2016 Plan to our executive officers will be eligible for treatment as performance-based compensation under Section 162(m). However, our Board of Directors and Compensation and Stock Option Committee retains discretion to approve annual, long-term or other compensation arrangements under the 2016 Plan that may not permit such compensation to qualify for tax deductibility under Section 162(m). In addition, it is possible that performance-based compensation that is intended to be exempt from the deduction limit under Section 162(m) may not meet the requirements to qualify for such exemption.
Material Terms of the 2016 Plan
General. The 2016 Plan permits the granting of any or all of the following types of awards: (i) nonqualified stock options; (ii) incentive stock options (iii) stock appreciation rights (“SARs”); (iv) restricted stock; (v) RSUs; (vi) performance compensation awards; (vii) other stock-based awards; (viii) dividend equivalents; and (ix) cash-based awards. The maximum number of shares that may be issued with respect to awards granted under the 2016 Plan is 3,529,109 (subject to adjustment in accordance with the provisions described under caption “Adjustments Upon Certain Events” below).
The aggregate number of shares treated as issued under the 2016 Plan at any time shall equal only the number of shares issued upon exercise or settlement of an award. Shares underlying awards that are forfeited, cancelled, terminated or expire unexercised, or settled in cash in lieu of issuance of shares, shall be available for issuance pursuant to future awards to the extent that such shares are forfeited, repurchased or not issued under any such award. Any shares tendered to pay the exercise price of an option or other purchase price of an award, or withholding tax obligations with respect to an award, shall be available for issuance pursuant to future awards. In addition, if any shares subject to an award are not delivered to a participant because (i) such shares are withheld to pay the exercise price or other purchase price of such award, or withholding tax obligations with respect to such award (or other award), or (ii) a payment upon exercise of an SAR is made in shares, the number of shares subject to the exercised or purchased portion of any such award that are not delivered to the participant shall be available for issuance pursuant to future awards.
Subject to adjustment as provided in the 2016 Plan, the maximum number of shares with respect to which awards may be granted to any participant in any calendar year may not exceed 500,000 shares. The maximum cash amount payable
35
to any participant pursuant to any cash-based award granted to a participant in any calendar year and that is intended to qualify as “performance-based compensation” under Section 162(m) of the Code may not exceed $1,500,000.
Eligibility. Current and prospective employees, non-employee directors and consultants of the Company and its affiliates are eligible to receive awards under the 2016 Plan selected by the Compensation and Stock Option Committee or any other committee designated by our Board. Approximately 400 employees are currently eligible to participate in the 2016 Plan.
Administration. The 2016 Plan is administered by the Compensation and Stock Committee of the Board of Directors or by any other committee designated by the Board of Directors (the “Administering Committee”). Such committee determines the persons who are eligible to receive awards, the number of shares subject to an award and the terms and conditions of such awards. The Administering Committee has the authority to interpret the provisions of the 2016 Plan and of any awards granted thereunder and to waive or amend the terms or conditions of awards granted under the 2016 Plan. Further, the Administering Committee establishes performance measures in connection with awards, including “qualified performance awards” (as defined below).
Adjustments upon Certain Events. If the outstanding Company shares are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of any divided, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, split-off, combination, repurchase or exchange of shares or other securities of the Company, issuance of warrants or other rights to acquire shares or other securities of the Company, or other similar corporate transaction or event, or other unusual or nonrecurring events affecting the Company or an affiliate, such that in any case an adjustment is determined by the Administering Committee in its sole discretion to be necessary or appropriate, then the Administering Committee shall make any such adjustments in such manner as it may deem equitable to the shares available for issuance under the 2016 Plan, the shares subject to outstanding awards and the grant or exercise price of outstanding awards.
Except to the extent otherwise provided in an award agreement, in the event of a “change in control” (as defined in the 2016 Plan), the Administering Committee may, in its discretion, provide that, with respect to all or any portion of a particular outstanding award or awards, (i) any outstanding option, SAR or other award (as applicable) that is not then exercisable shall immediately become exercisable as to all or any portion of the shares covered thereby as of a time prior to the “change in control”; (ii) all or any portion of the restrictions applicable to any outstanding award shall immediately lapse as of a time prior to the “change in control” (including a waiver of any applicable performance goals); (iii) performance periods in effect on the date the “change in control” occurs shall end on such date, and (A) determine the extent to which performance goals or other performance goals with respect to each such performance period have been met based upon such audited or unaudited financial information or other information then available as it deems relevant and (B) cause the participant to receive partial or full payment of awards for each such performance period based upon the Administering Committee’s determination of the degree of attainment of the performance goals or other performance goals, or by assuming that the applicable “target” levels of performance have been attained or on such other basis determined by the Administering Committee; (iv) awards previously deferred shall be settled in full as soon as practicable; (v) any outstanding awards shall be adjusted, substituted, converted, settled and/or terminated as the Administering Committee, in its discretion, deems appropriate and consistent with the 2016 Plan’s purposes; and (vi) with respect to any options having a per share exercise price equal to, or in excess of, the fair market value of a share, such options shall be canceled and terminated without any payment or consideration therefor.
Stock Options. Stock options awarded may be in the form of either nonqualified stock options or incentive stock options, or a combination of the two, at the discretion of the Administering Committee. The 2016 Plan provides that the option price pursuant to which shares of our common stock may be purchased shall be determined by the Administering Committee, but shall not be less than the fair market value of our shares of common stock on the date the option is granted. The term of each option shall be determined by the Administering Committee, but no incentive stock option shall be exercisable more than ten years after the date of grant. The exercise price for shares under a stock option may be paid by one or more of the following methods, as approved by the Administering Committee or in the award agreement: (i) in cash, check or cash equivalents; (ii) by delivery of shares already owned that were purchased on the open market or that have been held for at least six months that have a fair market value equal to the aggregate exercise price; (iii) by a broker-assisted cashless exercise procedure; (iv) by having shares withheld that have a fair market value equal to the aggregate exercise price; or (v) by any other means that the Administering Committee approves.
In general, unvested stock options are forfeited when a participant terminates employment or service with the Company or its affiliates. In addition, under the 2016 Plan, if a participant terminates service or employment with the
36
Company or any of its affiliates as a result of disability or death, the stock option will remain exercisable with respect to the number of shares as to which it was vested on the date of such termination until the earlier of the expiration date and the date that is one year or three years, respectively from the date of termination, unless the award agreement expressly provides for a different expiration date. If a participant terminates service or employment with the Company or any of its affiliates for cause, any stock option held by such individual (whether vested or unvested) will be immediately forfeited. If a participant terminates service or employment with the Company or any of its affiliates for any other reason, the stock option will remain exercisable with respect to the number of shares as to which it was vested on the date of such termination and will expire on the earlier of the expiration date and the date that is 90 days following the date of such termination, unless the award agreement expressly provides for a different expiration period. The aggregate fair market value on the date of grant of the shares with respect to which incentive stock options first become exercisable during any calendar year for any participant may not exceed $100,000.
Incentive stock options may not be transferred by a participant other than by will or the laws of descent and distribution and may be exercised only by a participant, unless the participant is deceased. In general, similar transfer restrictions apply to nonqualified stock options, except that, in the case of nonqualified stock options, the Administering Committee has the discretion to permit a participant to transfer a nonqualified stock option to another individual. Any nonqualified stock option so transferred will be subject to the same terms and conditions of the original grant and may be exercised by the transferee only to the extent the stock option would have been exercisable by the participant had no transfer occurred.
Stock Appreciation Rights. The Administering Committee has the authority under the 2016 Plan to grant SARs. An SAR is an award that gives the participant the right to benefit from appreciation in the value of shares over the grant price established in the award. The terms and conditions of an SAR are specified in the award agreement. If and when payable, the appreciation may be paid in cash, shares of common stock or such other form or combination of forms of payout, at times and upon conditions as determined at the discretion of the Administering Committee. SARs will be subject to the terms and conditions specified in the award agreement. SARs granted in connection with an option will be granted at the time of grant of the option. SARs granted in connection with an option are subject to the same terms and conditions as the related option and are exercisable only at such times and to such extent as the related option is exercisable. The grant price of SARs must generally be at least equal to the fair market value of the common stock on the date of grant. Under the 2016 Plan, an SAR is generally treated in the same manner as a stock option on termination of employment.
No Repricing. No option or SAR may be repriced, regranted through cancellation, including cancellation in exchange for cash or other awards, or otherwise amended to reduce its option price or exercise price (other than with respect to adjustments made in connection with a transaction or other change in the Company’s capitalization as described in the provisions described below under “Adjustments Upon Certain Events”) without the approval of the stockholders of the Company.
Restricted Stock and Restricted Stock Units. In general, restricted stock is an award of shares granted to a participant that is subject to vesting conditions and restrictions on transfer for a period of time. An RSU provides for the issuance of shares or cash to its holder following the vesting date or dates associated with the award. If an RSU is settled in cash, the award holder will be entitled to payment equal to the fair market value of the shares subject to such awards on the date the award vests, less applicable withholding taxes. Holders of RSUs are not entitled to any privileges of ownership of the shares of common stock underlying their RSUs until the underlying shares are actually delivered to them following vesting of the RSUs. Unless otherwise provided in the applicable award agreement, unvested restricted stock and unvested RSUs are forfeited when a holder terminates employment or service with the Company or its affiliates.
Other Stock-Based Awards. The Administering Committee may grant other types of equity-based or equity-related awards not otherwise described above in such amounts and subject to such terms and conditions, as the Administering Committee shall determine as set forth in the applicable award agreement. Such other stock-based awards may involve the transfer of actual shares to participants, or payment in cash or otherwise of amounts based on the value of shares.
Dividend Equivalents. Dividend equivalents will be subject to the terms and conditions specified in an award agreement. The award agreement may provide for the dividend equivalents to be paid in cash or deemed reinvested in additional shares. Dividend equivalents may be settled in cash and/or shares. In addition, if the dividend equivalents are awarded as a component of another award, the Administering Committee, in its sole discretion, may subject the dividend equivalents to the same terms and conditions that apply to such award.
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Cash-Based Awards. Cash-based awards may be granted to participants in such amounts and upon such terms, and at any time and from time to time, as shall be determined by the Administering Committee. A cash-based award entitles the participant who receives such award to receive a payment in cash upon the attainment of applicable performance goals for the applicable performance period, and/or satisfaction of other terms and conditions, in each case determined by the Administering Committee.
Performance Compensation Awards. Restricted stock awards, restricted stock units, other stock-based awards and cash-based awards subject to performance conditions may, in the Administering Committee’s discretion, be structured to qualify as performance-based compensation that is exempt from the deduction limitations of section 162(m), as described under “Certain Federal Income Tax Consequences” below (referred to in this summary as “performance compensation awards”). These performance compensation awards will be conditioned on the achievement by the Company or its affiliates, divisions or operational units, or any combination of the foregoing, of objectively determinable performance goals, based on one or more of the following performance measures, over a specified performance: (i) net earnings or net income (before or after interest, taxes and/or other adjustments); (ii) basic or diluted earnings per share (before or after interest, taxes and/or other adjustments); (iii) book value per share; (iv) net revenue or revenue growth; (v) net interest margin; (vi) operating profit (before or after taxes); (vii) profit growth; (viii) profit-related return ratios; (ix) return on assets, equity, capital, revenue, investment or similar measure; (x) cash flow (including operating cash flow and free cash flow); (xi) share price (including growth measures and total stockholder return); (xii) working capital; (xiii) expense targets; (xiv) margins; (xv) operating efficiency; (xvi) measures of economic value added; (xvii) asset quality; (xviii) asset growth; (xix) employee retention; (xx) attainment of strategic or operational initiatives; (xxi) enterprise value; (xxii) dividend payout ratios; (xxiii) dividend yield; (xxiv) market share, mergers, acquisitions, or sales of assets; (xxv) revenue per employee; (xxvi) employee satisfaction/engagement; (xxvii) customer satisfaction; or (xviii) any combination of the foregoing that are selected by the Administering Committee.
These performance measures may be used on an absolute or relative basis or may be compared to the performance of a selected group of comparison companies, a published or special index or various stock market indices. No more than 500,000 shares of common stock may be earned in respect of performance compensation awards granted to any one participant for a single fiscal year during a performance period (or, in the event the award is settled in cash, other securities, other awards or other property, no more than the fair market value of that number of shares, calculated as of the last day of the performance period to which the award relates). If a performance compensation award is not denominated in shares of common stock, the maximum amount that can be paid to any one participant in any one fiscal year in respect of that award is $1,500,000.
The Administering Committee will, within the first 90 days of the performance period, define in an objective fashion the manner of calculating the performance measures and performance goals it selects to use for the performance period. After the end of the performance period, the Administering Committee will determine and certify in writing the extent to which the performance goals have been achieved and the amount of the performance compensation award to be paid to the participant. The Administering Committee may, in its discretion, reduce or eliminate, but may not increase, the amount of a performance compensation award otherwise payable to a participant. The Administering Committee may not waive the achievement of performance goals applicable to these awards (except in the case of the participant’s death, disability or a change in control of the Company). Subject to the limitations of Section 162(m), the Administering Committee may adjust or modify the calculation of a performance goal based on and to appropriately reflect the following events: (i) asset write-downs, (ii) litigation or claim judgments or settlements, (iii) the effect of changes in tax laws, accounting principles, or other rules affecting the results, (iv) any reorganization or restructuring, (v) the cumulative effect of changes in accounting principles, (vi) extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 (or any successor pronouncement), (vii) acquisitions, divestitures or discontinued operations, (viii) gains or losses on refinancing or extinguishment of debt, (ix) foreign exchange gains and losses, (x) a change in the Company’s fiscal year (xi) any other specific unusual events, or objectively determinable category thereof, or (xii) any other specific nonrecurring events, or objectively determinable category thereof.
Non-employee Director Awards Maximum. No non-employee director of the Company may be granted one or more awards within any fiscal year of the Company, solely with respect to service as a director, that exceed $1,500,000 in aggregate value of cash-based and other awards, with such value determined by the Administering Committee as of the date of grant of the awards.
Amendments to the 2016 Plan. The Board of Directors may, subject to stockholder approval to the extent necessary and desirable to comply with applicable legal and regulatory requirements, at any time amend, alter, suspend, or terminate the 2016 Plan or award agreements granted thereunder. However, no amendment, alteration, suspension, or
38
termination may be made that would materially impair the previously accrued rights of any award recipient without the written consent of such recipient, except any such amendment made to comply with applicable law, tax rules, stock exchange rules or accounting rules. In addition, no amendment may be made to reduce the exercise or grant price of any outstanding stock option or SAR unless approved by the Company’s stockholders.
Transferability. Unless determined otherwise by the Administering Committee, awards granted under the 2016 Plan may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution following the recipient’s death, and may be exercised during the lifetime of the award recipient, only by the award recipient. Each award holder may, from time to time, on a form approved by the Administering Committee name any beneficiary or beneficiaries who shall be permitted to exercise his or her stock option or SAR or to whom any benefit under the 2016 Plan is to be paid in case of the participant’s death before he or she fully exercises his or her stock option or SAR or receives any or all of such benefit.
Participants Based Outside of the United States. The Administering Committee may grant awards to eligible individuals who are non-United States nationals, who reside outside the United States, who are not compensated from a payroll maintained in the United States, or who are otherwise subject to (or could cause the Company to be subject to) legal or regulatory provisions of countries or jurisdictions outside the United States, on such terms and conditions different from those specified in the 2016 Plan to foster and promote achievement of the purposes of the 2016 Plan and comply with those non-United States legal or regulatory provisions.
Effectiveness. The 2016 Plan will become effective upon approval by the stockholders at the Annual Meeting.
Federal Income Tax Consequences. The following is a brief summary of the principal U.S. federal income tax consequences of certain awards under the 2016 Plan, under current United States federal income tax laws. This summary is not intended to constitute tax advice and is not intended to be exhaustive and, among other things, does not describe state, local or foreign tax consequences.
A participant who is granted a nonqualified stock option will not recognize income at the time the option is granted. Upon the exercise of the option, however, the excess, if any, of the fair market value of the stock on the date of exercise over the option price will be treated as ordinary income to the participant, and the Company will generally be entitled to an income tax deduction in the same year in an amount measured by the amount of ordinary income taxable to the participant. The participant will be entitled to a cost basis for the stock for income tax purposes equal to the amount paid for the stock plus the amount of ordinary income taxable at the time of exercise. Upon a subsequent sale of such stock, the participant will recognize short-term or long-term capital gain or loss, depending upon his or her holding period for such stock.
The exercise of an incentive stock option by the option holder is exempt from income tax, although not from the alternative minimum tax, and does not result in a tax deduction for the Company if the holder has been an employee of the Company at all times beginning with the option grant date and ending three months before the date the holder exercises the option (or twelve months in the case of termination of employment due to disability). If the option holder has not been so employed during that time, the holder will be taxed as described above for nonqualified stock options. If the option holder disposes of the shares purchased more than two years after the option was granted and more than one year after the option was exercised, then the option holder will recognize any gain or loss upon disposition of those shares as capital gain or loss. However, if the option holder disposes of the shares prior to satisfying these holding periods (known as a “disqualifying disposition”), the option holder will be obligated to report as taxable ordinary income for the year in which that disposition occurs the excess, with certain adjustments, of the fair market value of the shares disposed of, on the date the incentive stock option was exercised, over the exercise price paid for those shares. The Company would be entitled to a tax deduction equal to that amount of ordinary income reported by the option holder. Any additional gain realized by the option holder on the disqualifying disposition would be capital gain. If the total amount realized in a disqualifying disposition is less than the exercise price of the incentive stock option, the difference would be a capital loss for the holder.
Upon exercise of an SAR, a participant will recognize taxable income in the amount of the aggregate cash received. A participant who is granted unrestricted shares will recognize ordinary income in the year of grant equal to the fair market value of the shares received. In either such case, the Company will be entitled to an income tax deduction in the amount of such income recognized by the participant.
A participant will not recognize any income at the time an award of restricted stock, restricted stock units or other stock-based award is granted, nor will the Company be entitled to a deduction at that time. In the year in which restrictions
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on shares of restricted stock lapse, the participant will recognize ordinary income in an amount equal to the excess of the fair market value of the shares on the date of vesting over the amount, if any, the participant paid for the shares. A participant may, however, elect within 30 days after receiving an award of restricted stock to recognize ordinary income in the year of receipt of the award, instead of the year of vesting, equal to the excess of the fair market value of the shares on the date of receipt over the amount, if any, the participant paid for the shares. Similarly, upon the vesting of RSUs, the participant will recognize ordinary income in an amount equal to the fair market value of the shares received. With respect to awards of restricted stock, restricted stock units and other stock-based awards, the Company will be entitled to a tax deduction at the same time and in the same amount as the participant recognizes income.
With respect to cash-based awards, the participant generally will recognize ordinary income, and we will receive a corresponding tax deduction, at the time the cash is paid. With certain exceptions, Section 162(m) limits deduction for compensation in excess of $1,000,000 paid to certain “covered employees” whose compensation is reported in the Summary Compensation Table included in the Company’s annual proxy statements. However, compensation paid to such employees will not be subject to such deduction limitation if it is considered “qualified performance-based compensation” (within the meaning of Section 162(m), which, among other requirements, requires stockholder approval of the performance measures available under a plan). Notwithstanding the adoption of the 2016 Plan by stockholders, we reserve the right to pay our employees, including recipients of awards under the 2016 Plan, amounts that may or may not be deductible under Section 162(m) or other provisions of the Internal Revenue Code. In addition, it is possible that performance-based compensation that is intended to be exempt from the deduction limit under Section 162(m) may not meet the requirements to qualify for such exemption.
Other. The amounts that will be received by participants in the future under the 2016 Plan are not yet determinable, as awards are at the discretion of the Administering Committee.
The above is only a brief summary of the material terms of the 2016 Plan, and does not describe all the terms of the 2016 Plan. This summary is qualified in its entirety by reference to, and should be read in conjunction with, the complete text of the 2016 Plan, attached to this Proxy Statement as Annex A. Any capitalized terms that are used but not defined in this summary have the meaning as defined in the 2016 Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE “FOR” THE ADOPTION OF THE 2016 PLAN AND THE APPROVAL OF THE
Material Terms of the Performance Goals of the 2016 Plan Under Section 162(M)
FOR THE REASONS OUTLINED ABOVE.
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Proposal No. 3 — To Approve the issuance of more than 19.99% of the company’s
outstanding common stock in Accordance with the Stockholder Approval
Requirements of Nasdaq Listing Rule 5635(D) in One or More Private Placements
We intend to raise additional capital, subject to the limitations described below, through the issuance of our common stock (and/or other equity securities convertible into our common stock) in one or more private placements. On October 5, 2016, our Board unanimously passed resolutions approving and declaring in the best interests of the Company and our stockholders the issuance of up to 4,000,000 shares of our common stock in one or more private placements to institutional and/or accredited investors, in transaction(s) exempt from registration under the Securities Act. Our Board now proposes that our stockholders approve this proposal.
The Company intends to use the net proceeds generated from the issuance of shares in such private placement(s): (i) to pay off the SWIMS Convertible Note; and (ii) for general corporate purposes.
We have not determined the particular terms for any such prospective private placement(s). Because we intend to raise additional capital that triggers the requirements of Nasdaq Listing Rule 5635(d), we are seeking stockholder approval now so that we will be able to move quickly to take full advantage of any opportunities that may develop in the equity markets.
Stockholder Approval Requirement
Pursuant to Nasdaq Listing Rule 5635(d), stockholder approval is required prior to the issuance of securities in connection with a transaction other than a public offering involving: (1) the sale, issuance or potential issuance by the Company of common stock (or securities convertible into or exercisable for common stock) at a price less than the greater of book or market value of the common stock, which, together with sales by officers, directors or substantial stockholders of the Company, equals 20% or more of common stock or 20% or more of the voting power outstanding before the issuance; or (2) the sale, issuance or potential issuance by the Company of common stock (or securities convertible into or exercisable common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the common stock. Stockholder approval of this proposal will constitute stockholder approval for purposes of Nasdaq Listing Rule 5635(d).
Any purchase agreement we may enter into for the sale of our securities in any such private placement(s) prior to the Annual Meeting to which this Proxy Statement relates will provide that, until the relevant transaction contemplated by the purchase agreement has been approved by our stockholders, we will not effect sales of our common stock and the purchaser(s) in such private placement(s) will not have the right or the obligation to purchase shares of our common stock under the relevant purchase agreement.
We are submitting to our stockholders for their approval the potential issuance of shares of our common stock, or securities convertible into our common stock, in one or more capital-raising private placement transactions subject to the following limitations:
· |
The aggregate number of shares issued in such transactions will not exceed 4,000,000 shares of our common stock, subject to adjustment for any reverse stock split effected prior to the offerings (including pursuant to preferred stock, options, warrants, convertible debt or other securities exercisable for or convertible into common stock); |
· |
The total aggregate consideration will not exceed $25 million; |
· |
The maximum discount at which securities will be offered (which may consist of a share of common stock and a warrant for the issuance of up to an additional share of common stock) will be approximately 15% below the market price of our common stock at the time of issuance, in recognition of the limited public float of our traded common stock and historical volatility making the pricing discount of our stock required by investors at any particular time difficult to predict; |
· |
Such transactions will occur, if at all, on or before March 31, 2017; and |
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· |
Such other terms as the Board of Directors shall deem to be in the best interests of the Company and its stockholders, not inconsistent with the foregoing. |
Effect on Current Stockholders
The issuance of shares of our common stock, or other securities convertible into shares of our common stock, in accordance with any private placement would dilute, and thereby reduce, each existing stockholder’s proportionate ownership in our common stock. Our stockholders do not have preemptive rights to subscribe to additional shares that may be issued by the Company in order to maintain their proportionate ownership of the common stock.
The issuance of shares of common stock in one or more private placements could have an anti-takeover effect. Such issuance could dilute the voting power of a person seeking control of the Company, thereby deterring or rendering more difficult a merger, tender offer, proxy contest or an extraordinary corporate transaction opposed by the Company.
The Board of Directors has not yet determined the terms and conditions of any prospective private placement. As a result, the aggregate level of potential dilution cannot be determined at this time, but as discussed above, we may not issue more than 4,000,000 shares of common stock in the aggregate pursuant to the authority requested from stockholders under this proposal (subject to adjustment for any reverse stock split). It is possible that if we conduct one or more private placements, some of the shares we sell could be purchased by one or more investors who could acquire a large block of our common stock. This would concentrate voting power in the hands of a few stockholders who could exercise greater influence on our operations or the outcome of matters put to a vote of stockholders in the future.
We cannot determine what the aggregate net proceeds of any prospective private placement will be until they are completed, but as discussed above, the aggregate dollar amount of any such private placement(s) will be no more than $25 million. If any private placement is completed, the net proceeds will: (i) be used to pay off the SWIMS Convertible Note; and (ii) be used for general corporate purposes. We currently have no arrangements or understandings regarding any specific transaction with investors, so we cannot predict whether we will be successful should we seek to raise capital through any private placement.
Consequences if Stockholders Do Not Approve this Proposal
If this proposal is not approved by our stockholders, the Company will not be able to issue shares in any proposed private placement. In such event, the Company anticipates it would need to seek alternative sources of financing, which may not be available on terms acceptable to the Company or at all. The Company believes that, in order to pursue its business strategies, it needs to complete one or more private placements to pay off the SWIMS Convertible Note and have the ability to move quickly to raise additional capital should opportunities develop in the capital markets in the future. In addition, if our stockholders do not approve this proposal, we may not have sufficient liquidity to pay off the SWIMS Convertible Note prior to the maturity date of January 18, 2017.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE “FOR” THE APPROVAL OF THE ISSUANCE OF COMMON STOCK EXCEEDING
19.99% OF OUR OUTSTANDING COMMON STOCK IN ACCORDANCE WITH THE STOCKHOLDER
APPROVAL REQUIREMENTS OF NASDAQ LISTING RULE 5635(D) FOR THE REASONS OUTLINED
ABOVE.
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Proposal No. 4 — To Approve Amendments to our Bylaws to Permit any Action
Required or Permitted to be Taken by Stockholders at an ANNUAL OR SPECIAL
Meeting OF STOCKHOLDERS TO be Effected by Written Consent IN LIEU OF A MEETING
On October 5, 2016, our Board of Directors unanimously passed resolutions approving, and declaring it in the best interests of the Company and our stockholders to make, certain amendments to our Bylaws. The Board of Directors is proposing adoption of such amendments, subject to the approval of our stockholders. These Bylaws amendments are detailed below.
Pursuant to the Delaware General Corporation Law, unless a company’s certificate of incorporation provides otherwise, its stockholders may take corporate action without a meeting if the holders of stock with the minimum number of votes necessary to authorize such action execute a written consent. Our Bylaws currently provide that, except as otherwise expressly provided by the terms of any series of preferred stock permitting the holders of such series of preferred stock to act by written consent, any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by written consent in lieu of a meeting. Our Eighth Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) is silent on stockholder action by written consent.
Our Board of Directors is requesting that stockholders approve amendments to our Bylaws to permit that any action required or permitted to be taken by stockholders at a duly called annual or special meeting of stockholders may be effected by written consent in lieu of such meeting (the “Proposed Bylaw”).
Proposed Amendments to our Bylaws
If approved, the Proposed Bylaw would generally provide the following changes from our existing Bylaws:
Generally. Any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing setting forth the action so taken is signed by holders of record (as of the record date for such written consent established pursuant to the procedures of the Proposed Bylaw) of the outstanding common stock having not less than the minimum number of votes that would be necessary to take such action at a meeting at which all shares entitled to vote thereon were present and voted.
Record Date for Written Consents. Our Board of Directors may fix a record date to determine the stockholders entitled to consent to corporate action in writing without a meeting. Additionally, any stockholder of record seeking to have the stockholders authorize or take any action by written consent must first request in writing that our Board of Directors fix such record date by delivering a notice. The notice must comply with the notice requirements described below. In both cases, the record date may take place at most ten days after the date on which the Board adopts such record date.
Where a stockholder requests that our Board fix a record date by delivering a notice, the request must be delivered to the Company by written notice to the Company’s Secretary with evidence of ownership attached. The request must also be signed by holders of record of at least 20% of the voting power of the then outstanding shares of capital stock of the Company entitled to vote on the matter. Notwithstanding this requirement, under the Proposed Bylaw, stockholders will still be able to use the mechanisms available under our existing Bylaws and the federal securities laws to bring business for consideration at an annual or special meeting of stockholders.
Assuming our Board has not already fixed such a record date, our Board of Directors must adopt a resolution fixing a record date within ten days after receipt of a request from any such stockholder in proper form as set forth in the Proposed Bylaw. If our Board does not resolve to fix a record date within the allotted ten-day time period, the record date will be as follows: (i) where prior action by our Board is not required by applicable law, the first date after the expiration of such ten-day period on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Company in accordance with the Proposed Bylaw; and (ii) where prior action by our Board is indeed required by applicable law, the close of business on the date on which our Board adopts the resolution taking such prior action.
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Notice Requirements for Written Consents. A stockholder’s written notice stating that it seeks to have the stockholders authorize or take corporate action by written consent must meet the following criteria:
· |
It must describe the action proposed to be taken by written consent of stockholders. |
· |
It must contain such information and representations, to the extent applicable, required by our Bylaws as though such stockholder was intending to make a nomination or to bring any other matter before a meeting of stockholders. |
· |
It must contain the text of the proposal(s). |
The Company may require the stockholder(s) submitting such notice to furnish such other information to determine the validity of the request for a record date and to determine whether the request relates to an action that may be effected by written consent. The stockholder(s) seeking such action or actions must also update and supplement any information previously provided to the Company in connection therewith, if necessary, as required by Section 2.7 of our existing Bylaws relating to business brought by a stockholder for consideration at an annual or special meeting of stockholders. The Proposed Bylaw does not change the provisions of our existing Bylaws relating to business brought by stockholders before a meeting of stockholders, including Section 2.7.
Validity and Effectiveness of Written Consents. Every written consent must bear the date of signature of each stockholder signing it. No written consent will be effective to take the corporate action referred to therein unless, within 60 days after the earliest dated written consent received in accordance with the Proposed Bylaw, valid written consents signed by a sufficient number of stockholders to take such action are (i) delivered to Company in accordance with the Proposed Bylaw and applicable law and (ii) not revoked.
Inspectors of Written Consents. In the event of the delivery of written consents to take corporate action and/or any related revocation or revocations, the Company will engage an independent inspector for the purpose of promptly performing a ministerial review of the validity of the consents and revocations. No action by written consent without a meeting may be effective until the Secretary of the Company or the independent inspectors certify that the valid and unrevoked consents delivered to the Company in accordance with the Proposed Bylaw and applicable law represent a minimum number of votes necessary to take corporate action under the relevant provisions of our Certificate of Incorporation and the Delaware General Corporation Law.
Situations Where Right Is Not Available. Stockholders may not act by written consent in the following situations:
· |
the action relates to an item of business that is not a proper subject for stockholder action under applicable law; |
· |
the stockholder request for a record date is received by the Company during the period between 90 days before the one-year anniversary of the immediately preceding annual meeting of stockholders and the next annual meeting of stockholders; |
· |
an identical or substantially similar item was included in the Company’s notice as an item of business at a stockholder meeting held 120 days before the Company received the stockholder request for a record date, with the election of directors considered an “identical or substantially similar item” with respect to all items of business involving election of directors; or |
· |
the record date was made in a manner violating Regulation 14A of the Exchange Act or other applicable law. |
Existing Requirements. Actions taken by written consent in accordance with the Proposed Bylaw will not relieve the stockholders or the Company of their duty to comply with federal and state securities laws with respect to the solicitation of written consents.
Board’s Right to Contest. Our Board of Directors is expressly entitled to contest the validity of any consent or revocation, whether before or after certification by the Secretary of the Company or independent inspectors, and may take any other action, including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief.
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Effectiveness of Proposed Bylaw. In addition to approving and declaring advisable the Proposed Bylaw, our Board of Directors has also approved certain conforming changes to the Bylaws, which are subject to, and will become effective only upon, the effectiveness of the Proposed Bylaw. The Proposed Bylaw will become effectively immediately upon its approval by the Company’s stockholders.
The above is only a brief summary of the material terms of the Proposed Bylaw, and does not describe all the terms of the Proposed Bylaw. This summary is qualified in its entirety by reference to, and should be read in conjunction with, the complete text of the amended Bylaws. A copy of our Bylaws, marked to show the proposed changes from the Proposed Bylaw and certain other conforming changes, with deleted text shown in strikethrough and added text shown as double-underlined, is attached to this Proxy Statement as Annex B.
Effect on Current Stockholders
Our Board of Directors has carefully considered the advantages and disadvantages to both stockholders and the Company of permitting stockholder action by written consent without a meeting of stockholders. Based on this rigorous analysis, our Board of Directors has concluded that the best interests of our stockholders and the Company would be to support the Proposed Bylaw.
The Proposed Bylaw would enhance corporate governance for our stockholders and the Company while aiding the Company’s overall efforts to reduce expenses, thus helping to optimize income and stockholder value. Provisions restricting action by written consent may limit stockholders’ ability to participate effectively in corporate governance and do not recognize the full extent of rights of stockholders made available by Delaware law. Additionally, approval of the Proposed Bylaw would allow for corporate action consistent with stockholder interests, without necessitating the significant financial costs and management attention associated with convening a meeting of stockholders.
As our Board recognizes, there may also be instances where it would be inefficient to hold a meeting of stockholders if the holders of a significant number of voting stock have already determined how a matter will be decided. Unlike proxy solicitations ending in a meeting of stockholders, consent solicitations may be logistically easier for stockholders, who can respond to the proposal by mail rather than voting through a proxy. Furthermore, in contrast with proposals subject to proxy solicitations, which may not pass until a meeting of stockholders takes place, proposals subject to consent solicitation may be ratified as soon as the threshold level of consents is delivered. The ability to obtain stockholder approval by written consent may thus facilitate and accelerate transactions by the Company without the delays related to calling a meeting and distributing meeting materials.
At the same time, our Board acknowledges that limiting stockholder action to that taken at a stockholder meeting may increase the likelihood that the Company’s stockholders have an opportunity to review carefully and respond prudently to important stockholder proposals, and may avoid untimely action by providing stockholders with the benefits of the knowledge, advice and participation of the Company’s management. Thus, as described above, our Board has set forth in the Proposed Bylaw certain requirements for the validity, ministerial review and notice of stockholder written consents to increase the information available to stockholders about proposals to be acted on via such consents and to ensure that stockholders may only initiate proposals by written consent where they receive the requisite levels of approval under the Company’s Certificate of Incorporation and Bylaws and applicable law. Furthermore, the requirements in the Proposed Bylaw for the establishment of a record date for any stockholder action by written consent are designed to protect the rights of all stockholders entitled to vote in any given consent solicitation. The mandate that stockholders must own at least 20% of voting power of the Company’s outstanding capital stock would similarly protect stockholder interests, by limiting consent solicitations to those commenced by holders with interests representative of the larger body of stockholders. Our Board of Directors believes that these proposed amendments represent reasonable procedural protections which take into account the rights and interests of all stockholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE “FOR” THE APPROVAL OF THE AMENDMENTS TO OUR BYLAWS FOR THE
REASONS DISCUSSED ABOVE.
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Proposal No. 5 — To Ratify the appointment of Cohnreznick as the Company’s
Independent Registered Public Accounting Firm for the Fiscal Year Ending
December 31, 2016
In July 2016, our Audit Committee determined it to be in the best interest of the Company and our stockholders to select CohnReznick to replace Moss Adams as the Company’s independent registered public accounting firm for the year ending December 31, 2016, and subsequently approved such appointment. Moss Adams served as the Company’s independent registered public accounting firm for the fiscal year ended November 30, 2015 and for the fourth quarter of the fiscal year ended November 30, 2014 (“fiscal 2014”), after it replaced Ernst & Young LLP (“Ernst & Young”), our previous independent registered public accounting firm for the first three quarters of fiscal 2014. Moss Adams also audited our consolidated financial statements for the fiscal year ended November 30, 2014.
We have been advised by CohnReznick that it is an independent registered public accounting firm with the Public Company Accounting Oversight Board, and complies with the auditing, quality control and independence standards and rules of the Public Company Accounting Oversight Board.
While the Audit Committee retains CohnReznick as our independent registered public accounting firm, the Board of Directors is submitting the selection of CohnReznick to our stockholders for ratification upon recommendation to do so by the Audit Committee and as a matter of good corporate governance.
Unless contrary instructions are given, shares represented by proxies solicited by the Board of Directors will be voted for the ratification of the selection of CohnReznick as our independent registered public accounting firm for the fiscal year ending December 31, 2016. If the selection of CohnReznick is not ratified by affirmative vote of the majority of the shares present or represented by proxy at the Annual Meeting and entitled to vote on this proposal, the Audit Committee will review its future selection of an independent registered public accounting firm in the light of that vote result. Even if the selection of CohnReznick is ratified, the Audit Committee in its discretion may direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change is in our best interests.
CohnReznick has no financial interest of any kind in the Company, except the professional relationship between auditor and client. Representatives of CohnReznick will be invited to attend the Annual Meeting. If a representative of CohnReznick does attend the Annual Meeting, the representative will have an opportunity to make a statement if he or she so chooses, and will be available to respond to questions from stockholders.
The table below shows the aggregate fees billed by Ernst & Young for professional services rendered in fiscal 2014 prior to its dismissal in October 2014.
|
|
FY 2014 |
|
FY 2015 |
|
||
Audit Fees(1) |
|
$ |
395,000 |
|
$ |
— |
|
Audit Related Fees(2) |
|
|
57,000 |
|
|
65,000 |
|
Tax Fees |
|
|
— |
|
|
— |
|
All Other Fees |
|
|
— |
|
|
— |
|
Total |
|
$ |
452,000 |
|