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Note 1. Description of Business and Basis of Presentation
On November 27, 2013, Vince Holding Corp. (“VHC”), previously known as Apparel Holding Corp., closed an initial public offering of its common stock and completed a series of restructuring transactions through which (i) Kellwood Holding, LLC acquired the non-Vince businesses, which include Kellwood Company, LLC, from the Company and (ii) the Company continues to own and operate the Vince business, which includes Vince, LLC.
The historical financial information presented herein as of August 2, 2014 includes only the Vince business and all historical financial information prior to November 27, 2013 includes the Vince business as continuing operations and the non-Vince businesses as a component of discontinued operations.
(A) Description of Business: Vince is a leading contemporary fashion brand known for modern, effortless style and everyday luxury essentials. We reach our customers through a variety of channels, specifically through premier wholesale department stores and specialty stores in the United States (“U.S.”) and select international markets, as well as through our branded retail locations and our website. We design our products in the U.S. and source the vast majority of our products from contract manufacturers outside the U.S., primarily in Asia and South America. Products are manufactured to meet our product specifications and labor standards.
(B) Basis of Presentation: The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these financial statements should be read in conjunction with VHC’s audited financial statements for the fiscal year ended February 1, 2014, as set forth in the 2013 Annual Report on Form 10-K.
The condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries as of August 2, 2014. All intercompany accounts and transactions have been eliminated. The amounts and disclosures included in the notes to the condensed consolidated financial statements, unless otherwise indicated, are presented on a continuing operations basis. In the opinion of management, the financial statements contain all adjustments (consisting solely of normal recurring adjustments) and disclosures necessary to make the information presented therein not misleading. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or the fiscal year as a whole. As used in this report, unless the context requires otherwise, “our,” “us,” “we” and the “Company” refer to VHC and its consolidated subsidiaries.
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation. The reclassifications had no impact on previously reported net income or stockholders’ equity.
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Note 2. The IPO and Restructuring Transactions
Initial Public Offering
On November 27, 2013, VHC completed an initial public offering (the “IPO”) of 10,000,000 shares of VHC common stock at a public offering price of $20.00 per share. The selling stockholders in the offering sold an additional 1,500,000 shares of VHC common stock to the underwriters in the initial public offering. Shares of the Company’s common stock are listed on the New York Stock Exchange under the ticker symbol “VNCE”. VHC received net proceeds of $177,000, after deducting underwriting discounts, commissions and estimated offering expenses from its sale of shares in the initial public offering. The Company retained approximately $5,000 of such proceeds for general corporate purposes and used the remaining net proceeds, together with net borrowings under our new term loan facility to repay a promissory note (the “Kellwood Note Receivable”) issued to Kellwood Company, LLC in connection with the restructuring transactions which occurred immediately prior to the consummation of the IPO (the “Restructuring Transactions”). Proceeds from the repayment of the Kellwood Note Receivable were used to repay or discharge certain existing debt of Kellwood Company.
In connection with the IPO noted above and the Restructuring Transactions described below, we separated the Vince and non-Vince businesses on November 27, 2013. Any and all Kellwood debt obligations outstanding at the time of the transactions either remain with Kellwood Intermediate Holding, LLC and its subsidiaries (i.e. the non-Vince businesses) and/or were discharged, repurchased or refinanced. See information below for a summary of the Company’s new revolving credit facility and term loan facility.
Stock Split
In connection with the IPO, VHC’s board of directors approved the conversion of all non-voting common stock into voting common stock on a one-for-one basis, and a 28.5177-for-one split of its common stock. Accordingly, all references to share and per share information in all periods presented have been adjusted to reflect the stock split. The par value per share of common stock was changed to $0.01 per share.
Restructuring Transactions
The following transactions were consummated as part of the Restructuring Transactions:
• | Affiliates of Sun Capital Partners, Inc. (“Sun Capital”) contributed certain indebtedness under the Sun Term Loan Agreements as a capital contribution to Vince Holding Corp. (the “Additional Sun Capital Contribution”); |
• | Vince Holding Corp. contributed such indebtedness to Kellwood Company as a capital contribution, at which time such indebtedness was cancelled; |
• | Vince Intermediate Holding, LLC was formed and became a direct subsidiary of Vince Holding Corp.; |
• | Kellwood Company, LLC (which was converted from Kellwood Company in connection with the Restructuring Transactions) was contributed to Vince Intermediate Holding, LLC; |
• | Vince Holding Corp. and Vince Intermediate Holding, LLC entered into the transfer agreement with Kellwood Company, LLC; |
• | Kellwood Company, LLC distributed 100% of Vince, LLC’s membership interests to Vince Intermediate Holding, LLC, who issued the Kellwood Note Receivable to Kellwood Company, LLC. Proceeds from the repayment of the Kellwood Note Receivable were used to, among other things, repay, discharge or repurchase indebtedness of Kellwood Company, LLC; |
• | Kellwood Holding, LLC was formed by Vince Intermediate Holding, LLC and Vince Intermediate Holding, LLC, through a series of steps, contributed 100% of the membership interests of Kellwood Company, LLC to Kellwood Intermediate Holding, LLC (which was formed as a wholly-owned subsidiary of Kellwood Holding, LLC); |
• | 100% of the membership interests of Kellwood Holding, LLC were distributed to the Pre-IPO Stockholders (as defined below); |
• | Revolving Credit Facility—Vince, LLC entered into a new senior secured revolving credit facility (the “Revolving Credit Facility”). Bank of America, N.A. (“BofA”) serves as administrative agent under the Revolving Credit Facility. This Revolving Credit Facility provides for a revolving line of credit of up to $50,000; |
• | Term Loan Facility—Vince, LLC and Vince Intermediate Holding, LLC entered into a new $175,000 senior secured term loan credit facility with the lenders party thereto, BofA, as administrative agent, J.P. Morgan Chase Bank and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers (“Term Loan Facility”); |
• | Shared Services Agreement—Vince, LLC entered into a shared services agreement (the “Shared Services Agreement”) with Kellwood Company, LLC pursuant to which Kellwood Company, LLC provides support services to Vince, LLC in various operational areas including, among other things, distribution, logistics, information technology, accounts payable, credit and collections, and payroll and benefits; |
• | Tax Receivable Agreement—The Company entered into a tax receivable agreement (the “Tax Receivable Agreement”) with its stockholders immediately prior to the consummation of the Restructuring Transactions (the “Pre-IPO Stockholders”). The Tax Receivable Agreement provides for payments to the Pre-IPO Stockholders in an amount equal to 85% of the aggregate reduction in taxes payable realized by the Company and its subsidiaries from the utilization of certain tax benefits (including net operating losses and tax credits generated prior to the IPO and certain section 197 intangible deductions); and |
• | the conversion of all of our issued and outstanding non-voting common stock into common stock on a one-for-one basis and the subsequent stock split of our common stock on a 28.5177-for-one basis, at which time Apparel Holding Corp. became Vince Holding Corp. |
As a result of the IPO and Restructuring Transactions, the non-Vince businesses were separated from the Vince business, and the Pre-IPO Stockholders (through their ownership of Kellwood Holding, LLC) retained the full ownership and control of the non-Vince businesses. The Vince business is now the sole operating business of Vince Holding Corp., with the Pre-IPO stockholders retaining approximately a 68% ownership (calculated immediately after consummation of the IPO).
Immediately after the consummation of the IPO and as described below, Vince Holding Corp. contributed the net proceeds from the IPO to Vince Intermediate Holding, LLC. Vince Intermediate Holding, LLC used such proceeds, less approximately $5,000 retained for general corporate purposes, and approximately $169,500 of net borrowings under its Term Loan Facility to immediately repay the Kellwood Note Receivable. There was no outstanding balance on the Kellwood Note Receivable after giving effect to such repayment. Proceeds from the repayment of the Kellwood Note Receivable were used to (i) repay, discharge or repurchase indebtedness of Kellwood Company, LLC in connection with the closing of the IPO (including approximately $9,100 of accrued and unpaid interest on such indebtedness), and (ii) pay (A) the restructuring fee payable to Sun Capital Management and (B) the debt recovery bonus payable to our Chief Executive Officer, all after giving effect to the Additional Sun Capital Contribution. The Kellwood Note Receivable did not include amounts outstanding under Kellwood’s revolving credit facility, which was refinanced in connection with consummation of the IPO. Kellwood Company, LLC refinanced the Wells Fargo Facility in connection with the consummation of the IPO. Neither Vince Holding Corp. nor Vince, LLC guarantee or are a borrower party to the refinanced credit facility.
Kellwood Company, LLC used the proceeds from the repayment of the Kellwood Note Receivable to, after giving effect to the Additional Sun Capital Contribution, (i) repay, at closing, all indebtedness outstanding under (A) the Cerberus Term Loan and (B) the Sun Term Loan Agreements, (ii) redeem at par all of its outstanding 12.875% Second-Priority Senior Secured Payment-In-Kind Notes due 2014 (the “12.875% Notes”), pursuant to an unconditional redemption notice issued at the closing of the IPO, plus, with respect to clauses (i) and (ii), fees, expenses and accrued and unpaid interest thereon, (iii) pay a restructuring fee equal to $3,300 to Sun Capital Partners Management pursuant to a management services agreement, and (iv) pay a debt recovery bonus to our Chief Executive Officer.
In addition, Kellwood Company conducted a tender offer for all of its outstanding 7.625% 1997 Debentures due 2017 (the “7.625% Notes”), at par plus accrued and unpaid interest thereon, using proceeds from the repayment of the Kellwood Note Receivable. On November 27, 2013, in connection with the closing of the IPO and as an early settlement of the tender offer, Kellwood Company, LLC accepted for purchase (and cancelled) approximately $33,474 in aggregate principal amount of the 7.625% Notes. On December 12, 2013, as part of the final settlement of the tender offer, Kellwood Company, LLC accepted for purchase (and cancelled) an additional $4,670 in aggregate principal amount of the 7.625% Notes. After giving effect to these settlements, approximately $48,808 of the 7.625% Notes remain issued and outstanding; provided, that neither VHC, nor Vince Intermediate Holding, LLC nor Vince, LLC are a guarantor or obligor of such notes.
After completion of these various transactions (including the Additional Sun Capital Contribution) and payments and application of the net proceeds from the repayment of the Kellwood Note Receivable, Vince, LLC’s obligations under the Wells Fargo Facility, the Cerberus Term Loan, the Sun Term Loan Agreements and the 12.875% Notes were terminated or discharged. Neither VHC, nor Vince Intermediate Holding, LLC nor Vince, LLC is a guarantor or obligor of the 7.625% Notes or the refinanced Wells Fargo Facility. Thereafter, VHC is not responsible for the obligations described above and the only outstanding obligations of Vince Holding Corp. and its subsidiaries immediately after the consummation of the IPO is $175,000 outstanding under our new Term Loan Facility.
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Note 3. Secondary Offering of Common Stock
In July 2014, certain selling stockholders of VHC, including affiliates of Sun Capital (the “Selling Stockholders”), sold 4,975,254 shares of VHC’s common stock at a public offering price of $34.50 per share in a secondary public offering (the “Secondary Offering”). The total shares sold include 648,946 shares sold by the Selling Stockholders pursuant to the exercise by the underwriters of their option to purchase additional shares. The Company did not receive any proceeds from the Secondary Offering. Immediately following the Secondary Offering, affiliates of Sun Capital beneficially owned 54.6% of VHC’s issued and outstanding common stock. The Company incurred approximately $571 of expenses in connection with the Secondary Offering during the three and six months ended August 2, 2014.
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Note 4. Discontinued Operations
On November 27, 2013, in connection with the IPO and Restructuring Transactions, we separated the Vince and non-Vince businesses whereby the non-Vince business is now owned by Kellwood Holding, LLC, which is controlled by affiliates of Sun Capital. In connection with the Restructuring Transactions, the Company issued the Kellwood Note Receivable to Kellwood Company, LLC, in the amount of $341,500, which was immediately repaid with proceeds from the IPO and new Term Loan Facility. There was no remaining balance on the Kellwood Note Receivable after such repayment. Proceeds from the repayment of the Kellwood Note Receivable were used by Kellwood to (i) repay, discharge or repurchase indebtedness of Kellwood Company, LLC (including approximately $9,100 of accrued and unpaid interest on such indebtedness), and (ii) pay (A) the restructuring fee payable to Sun Capital Management and (B) the debt recovery bonus payable to our Chief Executive Officer.
As the Company and Kellwood Holding, LLC were under the common control of affiliates of Sun Capital, this separation transaction resulted in a $73,081 adjustment to additional paid-in capital on our condensed consolidated balance sheet at February 1, 2014.
As a result of the separation with the non-Vince businesses, the financial results of the non-Vince businesses through the separation date of November 27, 2013, are now included in results from discontinued operations, including the three and six months ended August 3, 2013. The non-Vince businesses continue to operate as a stand-alone company. Due to differences in the basis of presentation for discontinued operations and the basis of presentation as a stand-alone company, the financial results of the non-Vince businesses included within discontinued operations of the Company may not be indicative of actual financial results of the non-Vince businesses as a stand-alone company.
On November 27, 2013, we entered into a Shared Services Agreement with Kellwood pursuant to which Kellwood provides support services in various operational areas as further discussed in Note 15. Other than the payments for services provided under this agreement, we do not expect any future cash flows related to the non-Vince business.
The separation of the non-Vince businesses was completed on November 27, 2013. Accordingly, there are no results from discontinued operations reflected on the condensed consolidated statement of operations for the three and six months ended August 2, 2014. The results of the non-Vince businesses included in discontinued operations for the three and six months ended August 3, 2013 are summarized in the following table (in thousands).
Three Months Ended August 3, 2013 |
Six Months Ended August 3, 2013 |
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Net sales |
$ | 119,692 | $ | 250,406 | ||||
Cost of products sold |
91,734 | 194,282 | ||||||
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Gross profit |
27,958 | 56,124 | ||||||
Selling, general and administrative expenses |
30,880 | 62,036 | ||||||
Restructuring, environmental and other charges |
491 | 1,335 | ||||||
Impairment of long-lived assets (excluding goodwill) |
434 | 434 | ||||||
Change in fair value of contingent consideration |
(54 | ) | (54 | ) | ||||
Interest expense, net |
14,111 | 27,790 | ||||||
Other expense (income), net |
644 | (49 | ) | |||||
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Loss before income taxes |
(18,548 | ) | (35,368 | ) | ||||
Income taxes |
381 | (11,109 | ) | |||||
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Net loss from discontinued operations, net of taxes |
$ | (18,929 | ) | $ | (24,259 | ) | ||
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Effective tax rate |
2.1 | % | 31.4 | % | ||||
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The effective tax rate for the three months ended August 3, 2013 differs from the U.S. statutory rate of 35% primarily due to additional valuation allowance. The effective tax rate for the six months ended August 3, 2013 differs from the U.S. statutory rate of 35% primarily due to a release of valuation allowance. The release in valuation allowance is primarily due to the allocation of the disallowed tax loss on the sale of the Baby Phat trademark to intangible assets with indefinite lives resulting in fewer deferred tax liabilities that cannot be offset against deferred tax assets for valuation allowance purposes.
At August 2, 2014 and February 1, 2014, there are no remaining assets or liabilities of the non-Vince businesses reflected in the condensed consolidated balance sheet.
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Note 5. Goodwill and Intangible Assets
Goodwill balances and changes therein subsequent to the February 1, 2014 condensed consolidated balance sheet are as follows (in thousands):
Gross Goodwill | Accumulated Impairment |
Net Goodwill | ||||||||||
Balance as of February 1, 2014 |
$ | 110,688 | $ | (46,942 | ) | $ | 63,746 | |||||
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Balance as of August 2, 2014 |
$ | 110,688 | $ | (46,942 | ) | $ | 63,746 | |||||
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Identifiable intangible assets summary (in thousands):
Gross Amount | Accumulated Amortization |
Net Book Value |
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Balance as of February 1, 2014: |
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Amortizable intangible assets: |
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Customer relationships |
$ | 11,970 | $ | (3,577 | ) | $ | 8,393 | |||||
Indefinite-lived intangible assets: |
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Trademarks |
101,850 | — | 101,850 | |||||||||
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Total intangible assets |
$ | 113,820 | $ | (3,577 | ) | $ | 110,243 | |||||
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Gross Amount | Accumulated Amortization |
Net Book Value |
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Balance as of August 2, 2014: |
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Amortizable intangible assets: |
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Customer relationships |
$ | 11,970 | $ | (3,876 | ) | $ | 8,094 | |||||
Indefinite-lived intangible assets: |
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Trademarks |
101,850 | — | 101,850 | |||||||||
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Total intangible assets |
$ | 113,820 | $ | (3,876 | ) | $ | 109,944 | |||||
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Amortization of identifiable intangible assets for continuing operations was $149 and $150 for the three months ended August 2, 2014 and August 3, 2013, respectively, and $299 and $300 for the six months ended August 2, 2014 and August 3, 2013, respectively. The estimated amortization expense for identifiable intangible assets is expected to be $598 for each fiscal year for the next five fiscal years.
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Note 6. Fair Value
Accounting Standards Codification (“ASC”) Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This guidance outlines a valuation framework, creates a fair value hierarchy to increase the consistency and comparability of fair value measurements, and details the disclosures that are required for items measured at fair value. Financial assets and liabilities are to be measured using inputs from three levels of the fair value hierarchy as follows:
Level 1 | — | quoted market prices in active markets for identical assets or liabilities | ||
Level 2 |
— |
observable market-based inputs (quoted prices for similar assets and liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active) or inputs that are corroborated by observable market data | ||
Level 3 |
— |
significant unobservable inputs that reflect our assumptions and are not substantially supported by market data |
The Company did not have any non-financial assets or non-financial liabilities recognized at fair value on a recurring basis at August 2, 2014 or February 1, 2014. At August 2, 2014 and February 1, 2014, the Company believes that the carrying value of cash and cash equivalents, receivables and accounts payable approximates fair value, due to the short maturity of these items. As the Company’s debt obligation as of August 2, 2014 are at variable rates, there is no significant difference between the fair value and carrying value of the Company’s outstanding debt.
The Company’s non-financial assets, which primarily consist of goodwill, intangible assets, and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at their carrying value. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and intangible assets), non-financial assets are assessed for impairment, and if applicable, written down to (and recorded at) fair value.
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Note 7. Financing Arrangements
Revolving Credit Facility
On November 27, 2013, Vince, LLC entered into the Revolving Credit Facility in connection with the closing of the IPO and Restructuring Transactions. BofA serves as administrative agent for this new facility. The Revolving Credit Facility provides for a revolving line of credit of up to $50,000 and matures on November 27, 2018. The Revolving Credit Facility also provides for a letter of credit sublimit of $25,000 (plus any increase in aggregate commitments) and for an increase in aggregate commitments of up to $20,000. Vince, LLC is the borrower and VHC and Vince Intermediate Holding, LLC (“Vince Intermediate”) are the guarantors under the new Revolving Credit Facility. Interest is payable on the loans under the Revolving Credit Facility, at either the LIBOR or the Base Rate, in each case, with applicable margins subject to a pricing grid based on an excess availability calculation. The “Base Rate” means, for any day, a fluctuating rate per annum equal to the highest of (i) the rate of interest in effect for such day as publicly announced from time to time by BofA as its prime rate; (ii) the Federal Funds Rate for such day, plus 0.50%; and (iii) the LIBOR Rate for a one month interest period as determined on such day, plus 1.0%. During the continuance of an event of default and at the election of the required lender, interest will accrue at a rate of 2% in excess of the applicable non-default rate.
The Revolving Credit Facility contains a requirement that, at any point when “Excess Availability” is less than the greater of (i) 15% percent of the loan cap or (ii) $7,500, and continuing until Excess Availability exceeds the greater of such amounts for 30 consecutive days, during which time, Vince must maintain a consolidated EBITDA (as defined in the Revolving Credit Facility) equal to or greater than $20,000.
The Revolving Credit Facility contains representations and warranties, other covenants and events of default that are customary for this type of financing, including limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, the repurchase of capital stock, transactions with affiliates, and the ability to change the nature of its business or its fiscal year. The Revolving Credit Facility generally permits dividends in the absence of any event of default (including any event of default arising from the contemplated dividend), so long as (i) after giving pro forma effect to the contemplated dividend, for the following six months Excess Availability will be at least the greater of 20% of the aggregate lending commitments and $7,500 and (ii) after giving pro forma effect to the contemplated dividend, the “Consolidated Fixed Charge Coverage Ratio” for the 12 months preceding such dividend shall be greater than or equal to 1.1 to 1.0 (provided that the Consolidated Fixed Charge Coverage Ratio may be less than 1.1 to 1.0 if, after giving pro forma effect to the contemplated dividend, Excess Availability for the six fiscal months following the dividend is at least the greater of 35% of the aggregate lending commitments and $10,000).
As of August 2, 2014, the availability on the Revolving Credit Facility was $50,000. As of August 2, 2014, there was $22,600 of borrowings outstanding and $7,289 of letters of credit outstanding under the Revolving Credit Facility.
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Note 8. Long-Term Debt
Long-term debt consisted of the following as of August 2, 2014 and February 1, 2014 (in thousands).
August 2, 2014 |
February 1, 2014 |
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Term Loan Facility |
$ | 117,000 | $ | 170,000 | ||||
Revolving Credit Facility |
22,600 | — | ||||||
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Total long-term debt |
$ | 139,600 | $ | 170,000 | ||||
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Term Loan Facility
On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, Vince, LLC and Vince Intermediate entered into the $175,000 Term Loan Facility with the lenders party thereto, BofA, as administrative agent, JPMorgan Chase Bank and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers, and Cantor Fitzgerald as documentation agent. The Term Loan Facility will mature on November 27, 2019. On November 27, 2013, net proceeds from the Term Loan Facility were used, at closing, to repay the Kellwood Note Receivable.
The Term Loan Facility also provides for an incremental facility of up to the greater of $50,000 and an amount that would result in the consolidated net total secured leverage ratio not exceeding 3.00 to 1.00, in addition to certain other rights to refinance or repurchase portions of the term loan. The Term Loan Facility is subject to quarterly amortization of principal equal to 0.25% of the original aggregate principal amount of the Term Loan Facility, with the balance payable at final maturity. Interest is payable on loans under the Term Loan Facility at a rate of either (i) the Eurodollar rate (subject to a 1.00% floor) plus 5.00% or (ii) the base rate (subject to a 2.00% floor) plus 3.00%. During the continuance of a payment or bankruptcy event of default, interest will accrue (i) on the overdue principal amount of any loan at a rate of 2% in excess of the rate otherwise applicable to such loan and (ii) on any overdue interest or any other outstanding overdue amount at a rate of 2% in excess of the nondefault interest rate then applicable to base rate loans.
The Term Loan Facility contains a requirement that Vince, LLC and Vince Intermediate maintain a “Consolidated Net Total Leverage Ratio” as of the last day of any period of four fiscal quarters not to exceed 3.75 to 1.00 for the fiscal quarters ending February 1, 2014 through November 1, 2014, 3.50 to 1.0 for the fiscal quarters ending January 31, 2015 through October 31, 2015, and 3.25 to 1.00 for the fiscal quarter ending January 30, 2016 and each fiscal quarter thereafter. In addition, the Term Loan Facility contains customary representations and warranties, other covenants, and events of default, including but not limited to, limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, the repurchase of capital stock, transactions with affiliates, and the ability to change the nature of its business or its fiscal year, and distributions and dividends. The Term Loan Facility generally permits dividends to the extent that no default or event of default is continuing or would result from the contemplated dividend and the pro forma Consolidated Net Total Leverage Ratio after giving effect to such contemplated dividend is at least 0.25 lower than the maximum Consolidated Net Total Leverage Ratio for such quarter. All obligations under the Term Loan Facility are guaranteed by VHC and any future material domestic restricted subsidiaries of Vince, LLC and secured by a lien on substantially all of the assets of VHC, Vince, LLC and Vince Intermediate and any future material domestic restricted subsidiaries.
Through August 2, 2014, the Company has made voluntary pre-payments totaling $58,000 in the aggregate on the original $175,000 Term Loan Facility. These voluntary prepayments of $5,000, $20,000 and $33,000 were made during the three months ended February 1, 2014, the three months ended May 3, 2014 and the three months ended August 2, 2014, respectively. The voluntary prepayment of $33,000 made during the three months ended August 2, 2014 was partially funded by $22,600 of borrowings under the Revolving Credit Facility. As of August 2, 2014 the Company had $117,000 of debt outstanding under the Term Loan Facility.
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Note 9. Inventory
Inventories of continuing operations consist of the following:
August 2, 2014 |
February 1, 2014 |
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Finished goods |
$ | 58,632 | $ | 32,946 | ||||
Work in process |
— | 98 | ||||||
Raw materials |
— | 912 | ||||||
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Total inventories, net |
$ | 58,632 | $ | 33,956 | ||||
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Note 12. Commitments and Contingencies
We are currently party to various legal proceedings. While management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse impact on our financial position or results of operations or cash flows, litigation is subject to inherent uncertainties.
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Note 13. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The Company is evaluating the new standard and its impact on the Company’s financial position and results of operations.
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Note 14. Segment Financial Information
We operate and manage our business by distribution channel and have identified two reportable segments, as further described below. We considered both similar and dissimilar economic characteristics, internal reporting and management structures, as well as products, customers, and supply chain logistics to identify the following reportable segments:
• | Wholesale segment—consists of our operations to distribute products to premier department stores and specialty stores in the United States and select international markets; and |
• | Direct-to-consumer segment—consists of our operations to distribute products directly to the consumer through our branded full-price specialty retail stores, outlet stores, and e-commerce platform. |
The accounting policies of our segments are consistent with those described in Note 1 to the audited Consolidated Financial Statements of Vince Holding Corp. for the fiscal year ended February 1, 2014 included in the 2013 Annual Report on Form 10-K filed with the SEC on April 4, 2014. Unallocated corporate expenses are comprised of selling, general, and administrative expenses attributable to corporate and administrative activities, and other charges that are not directly attributable to our operating segments. Unallocated corporate assets are comprised of capitalized deferred financing costs, the carrying values of our goodwill and unamortized trademark, debt and deferred tax assets, and other assets that will be utilized to generate revenue for both of our reportable segments.
Our wholesale segment sells apparel to our direct-to-consumer segment at cost. The wholesale intercompany sales of $5,871 and $3,546 have been excluded from the net sales totals presented below for the three months ended August 2, 2014 and August 3, 2013, respectively. The wholesale intercompany sales of $7,902 and $5,973 have been excluded from the net sales totals presented below for the six months ended August 2, 2014 and August 3, 2013, respectively. Furthermore, as intercompany sales are sold at cost, no intercompany profit is reflected in operating income presented below.
Summary information for our operating segments is presented below (in thousands).
Three Months Ended | Six Months Ended | |||||||||||||||
August 2, 2014 |
August 3, 2013 |
August 2, 2014 |
August 3, 2013 |
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Net Sales |
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Wholesale |
$ | 74,344 | $ | 63,580 | $ | 111,666 | $ | 92,551 | ||||||||
Direct-to-consumer |
14,982 | 10,714 | 31,112 | 22,106 | ||||||||||||
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Total net sales |
$ | 89,326 | $ | 74,294 | $ | 142,778 | $ | 114,657 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating Income |
||||||||||||||||
Wholesale |
$ | 30,549 | $ | 23,863 | $ | 43,627 | $ | 31,311 | ||||||||
Direct-to-consumer |
1,336 | 476 | 3,813 | 2,511 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
31,885 | 24,339 | 47,440 | 33,822 | ||||||||||||
Unallocated expenses |
(11,941 | ) | (9,354 | ) | (22,289 | ) | (16,937 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating income |
$ | 19,944 | $ | 14,985 | $ | 25,151 | $ | 16,885 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Capital Expenditures |
||||||||||||||||
Wholesale |
$ | 475 | $ | 496 | $ | 565 | $ | 621 | ||||||||
Direct-to-consumer |
1,971 | 1,968 | 3,086 | 2,785 | ||||||||||||
Unallocated corporate |
3,567 | — | 3,700 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total capital expenditures |
$ | 6,013 | $ | 2,464 | $ | 7,351 | $ | 3,406 | ||||||||
|
|
|
|
|
|
|
|
August 2, 2014 | February 1, 2014 | |||||||
Total Assets |
||||||||
Wholesale |
$ | 97,021 | $ | 78,122 | ||||
Direct-to-consumer |
28,344 | 24,169 | ||||||
Unallocated corporate |
288,996 | 312,051 | ||||||
|
|
|
|
|||||
Total assets |
$ | 414,361 | $ | 414,342 | ||||
|
|
|
|
|
Note 15. Related Party Transactions
Shared Services Agreement
On November 27, 2013, Vince, LLC entered into the Shared Services Agreement pursuant to which Kellwood Company, LLC provides support services in various operational areas including, among other things, e-commerce operations, distribution, logistics, information technology, accounts payable, credit and collections and payroll and benefits.
We are invoiced by Kellwood monthly for these amounts and generally are required to pay within 15 business days of receiving such invoice. The payments will be trued-up and can be disputed once each fiscal quarter. As of August 2, 2014, we have recorded $533 in other accrued expenses to recognize amounts payable to Kellwood under the Shared Services Agreement.
Tax Receivable Agreement
Vince Holding Corp. entered into a Tax Receivable Agreement with the Pre-IPO Stockholders on November 27, 2013. We and our former subsidiaries have generated certain tax benefits (including NOLs and tax credits) prior to the restructuring transactions consummated in connection with our initial public offering and will generate certain section 197 intangible deductions (the “Pre-IPO Tax Benefits”), which would reduce the actual liability for taxes that we might otherwise be required to pay. The Tax Receivable Agreement provides for payments to the Pre-IPO Stockholders in an amount equal to 85% of the aggregate reduction in taxes payable realized by us and our subsidiaries from the utilization of the Pre-IPO Tax Benefits (the “Net Tax Benefit”).
For purposes of the Tax Receivable Agreement, the Net Tax Benefit equals (i) with respect to a taxable year, the excess, if any, of (A) our liability for taxes using the same methods, elections, conventions and similar practices used on the relevant company return assuming there were no Pre-IPO Tax Benefits over (B) our actual liability for taxes for such taxable year (the “Realized Tax Benefit”), plus (ii) for each prior taxable year, the excess, if any, of the Realized Tax Benefit reflected on an amended schedule applicable to such prior taxable year over the Realized Tax Benefit reflected on the original tax benefit schedule for such prior taxable year, minus (iii) for each prior taxable year, the excess, if any, of the Realized Tax Benefit reflected on the original tax benefit schedule for such prior taxable year over the Realized Tax Benefit reflected on the amended schedule for such prior taxable year; provided, however, that to extent any of the adjustments described in clauses (ii) and (iii) were reflected in the calculation of the tax benefit payment for any subsequent taxable year, such adjustments shall not be taken into account in determining the Net Tax Benefit for any subsequent taxable year.
As of August 2, 2014 we had an obligation of $173,523 under the Tax Receivable Agreement, which has a term of ten years, with approximately $4,131 included as a component of other accrued expenses and $169,392 included as other liabilities on our condensed consolidated balance sheet as of August 2, 2014.
Sun Capital Consulting Agreement
On November 27, 2013, we entered into an agreement with Sun Capital Management to (i) reimburse Sun Capital Management or any of its affiliates providing consulting services under the agreement for out-of-pocket expenses incurred in providing consulting services to us and (ii) provide Sun Capital Management with customary indemnification for any such services.
During the quarter ended August 2, 2014 we paid Sun Capital Management approximately $19 for reimbursement of expenses under the Sun Capital Consulting Agreement.
|
(A) Description of Business: Vince is a leading contemporary fashion brand known for modern, effortless style and everyday luxury essentials. We reach our customers through a variety of channels, specifically through premier wholesale department stores and specialty stores in the United States (“U.S.”) and select international markets, as well as through our branded retail locations and our website. We design our products in the U.S. and source the vast majority of our products from contract manufacturers outside the U.S., primarily in Asia and South America. Products are manufactured to meet our product specifications and labor standards.
(B) Basis of Presentation: The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these financial statements should be read in conjunction with VHC’s audited financial statements for the fiscal year ended February 1, 2014, as set forth in the 2013 Annual Report on Form 10-K.
The condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries as of August 2, 2014. All intercompany accounts and transactions have been eliminated. The amounts and disclosures included in the notes to the condensed consolidated financial statements, unless otherwise indicated, are presented on a continuing operations basis. In the opinion of management, the financial statements contain all adjustments (consisting solely of normal recurring adjustments) and disclosures necessary to make the information presented therein not misleading. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or the fiscal year as a whole. As used in this report, unless the context requires otherwise, “our,” “us,” “we” and the “Company” refer to VHC and its consolidated subsidiaries.
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation. The reclassifications had no impact on previously reported net income or stockholders’ equity.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The Company is evaluating the new standard and its impact on the Company’s financial position and results of operations.
|
The results of the non-Vince businesses included in discontinued operations for the three and six months ended August 3, 2013 are summarized in the following table (in thousands).
Three Months Ended August 3, 2013 |
Six Months Ended August 3, 2013 |
|||||||
Net sales |
$ | 119,692 | $ | 250,406 | ||||
Cost of products sold |
91,734 | 194,282 | ||||||
|
|
|
|
|||||
Gross profit |
27,958 | 56,124 | ||||||
Selling, general and administrative expenses |
30,880 | 62,036 | ||||||
Restructuring, environmental and other charges |
491 | 1,335 | ||||||
Impairment of long-lived assets (excluding goodwill) |
434 | 434 | ||||||
Change in fair value of contingent consideration |
(54 | ) | (54 | ) | ||||
Interest expense, net |
14,111 | 27,790 | ||||||
Other expense (income), net |
644 | (49 | ) | |||||
|
|
|
|
|||||
Loss before income taxes |
(18,548 | ) | (35,368 | ) | ||||
Income taxes |
381 | (11,109 | ) | |||||
|
|
|
|
|||||
Net loss from discontinued operations, net of taxes |
$ | (18,929 | ) | $ | (24,259 | ) | ||
|
|
|
|
|||||
Effective tax rate |
2.1 | % | 31.4 | % | ||||
|
|
|
|
|
Goodwill balances and changes therein subsequent to the February 1, 2014 condensed consolidated balance sheet are as follows (in thousands):
Gross Goodwill | Accumulated Impairment |
Net Goodwill | ||||||||||
Balance as of February 1, 2014 |
$ | 110,688 | $ | (46,942 | ) | $ | 63,746 | |||||
|
|
|
|
|
|
|||||||
Balance as of August 2, 2014 |
$ | 110,688 | $ | (46,942 | ) | $ | 63,746 | |||||
|
|
|
|
|
|
Identifiable intangible assets summary (in thousands):
Gross Amount | Accumulated Amortization |
Net Book Value |
||||||||||
Balance as of February 1, 2014: |
||||||||||||
Amortizable intangible assets: |
||||||||||||
Customer relationships |
$ | 11,970 | $ | (3,577 | ) | $ | 8,393 | |||||
Indefinite-lived intangible assets: |
||||||||||||
Trademarks |
101,850 | — | 101,850 | |||||||||
|
|
|
|
|
|
|||||||
Total intangible assets |
$ | 113,820 | $ | (3,577 | ) | $ | 110,243 | |||||
|
|
|
|
|
|
Gross Amount | Accumulated Amortization |
Net Book Value |
||||||||||
Balance as of August 2, 2014: |
||||||||||||
Amortizable intangible assets: |
||||||||||||
Customer relationships |
$ | 11,970 | $ | (3,876 | ) | $ | 8,094 | |||||
Indefinite-lived intangible assets: |
||||||||||||
Trademarks |
101,850 | — | 101,850 | |||||||||
|
|
|
|
|
|
|||||||
Total intangible assets |
$ | 113,820 | $ | (3,876 | ) | $ | 109,944 | |||||
|
|
|
|
|
|
|
Long-term debt consisted of the following as of August 2, 2014 and February 1, 2014 (in thousands).
August 2, 2014 |
February 1, 2014 |
|||||||
Term Loan Facility |
$ | 117,000 | $ | 170,000 | ||||
Revolving Credit Facility |
22,600 | — | ||||||
|
|
|
|
|||||
Total long-term debt |
$ | 139,600 | $ | 170,000 | ||||
|
|
|
|
|
Inventories of continuing operations consist of the following:
August 2, 2014 |
February 1, 2014 |
|||||||
Finished goods |
$ | 58,632 | $ | 32,946 | ||||
Work in process |
— | 98 | ||||||
Raw materials |
— | 912 | ||||||
|
|
|
|
|||||
Total inventories, net |
$ | 58,632 | $ | 33,956 | ||||
|
|
|
|
|
Summary information for our operating segments is presented below (in thousands).
Three Months Ended | Six Months Ended | |||||||||||||||
August 2, 2014 |
August 3, 2013 |
August 2, 2014 |
August 3, 2013 |
|||||||||||||
Net Sales |
||||||||||||||||
Wholesale |
$ | 74,344 | $ | 63,580 | $ | 111,666 | $ | 92,551 | ||||||||
Direct-to-consumer |
14,982 | 10,714 | 31,112 | 22,106 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total net sales |
$ | 89,326 | $ | 74,294 | $ | 142,778 | $ | 114,657 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating Income |
||||||||||||||||
Wholesale |
$ | 30,549 | $ | 23,863 | $ | 43,627 | $ | 31,311 | ||||||||
Direct-to-consumer |
1,336 | 476 | 3,813 | 2,511 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
31,885 | 24,339 | 47,440 | 33,822 | ||||||||||||
Unallocated expenses |
(11,941 | ) | (9,354 | ) | (22,289 | ) | (16,937 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating income |
$ | 19,944 | $ | 14,985 | $ | 25,151 | $ | 16,885 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Capital Expenditures |
||||||||||||||||
Wholesale |
$ | 475 | $ | 496 | $ | 565 | $ | 621 | ||||||||
Direct-to-consumer |
1,971 | 1,968 | 3,086 | 2,785 | ||||||||||||
Unallocated corporate |
3,567 | — | 3,700 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total capital expenditures |
$ | 6,013 | $ | 2,464 | $ | 7,351 | $ | 3,406 | ||||||||
|
|
|
|
|
|
|
|
August 2, 2014 | February 1, 2014 | |||||||
Total Assets |
||||||||
Wholesale |
$ | 97,021 | $ | 78,122 | ||||
Direct-to-consumer |
28,344 | 24,169 | ||||||
Unallocated corporate |
288,996 | 312,051 | ||||||
|
|
|
|
|||||
Total assets |
$ | 414,361 | $ | 414,342 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|