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Note 1. Description of Business and Summary of Significant Accounting Policies
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 January 30, 2016 includes only the Vince businesses 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 best known for modern effortless style and everyday luxury essentials. Established in 2002, the brand now offers a wide range of women’s and men’s apparel, women’s and men’s footwear, and handbags. We reach our customers through a variety of channels, specifically through major 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 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”).
The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The amounts and disclosures included in the notes to the 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. As used in this report, unless the context requires otherwise, “our,” “us” and “we” 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 reclassification had no impact on previously reported net income or stockholders’ equity.
(C) Fiscal Year: VHC operates on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52 or 53-week period ending on the Saturday closest to January 31 of the following year.
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· |
References to “fiscal year 2015” or “fiscal 2015” refer to the fiscal year ended January 30, 2016; |
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· |
References to “fiscal year 2014” or “fiscal 2014” refer to the fiscal year ended January 31, 2015; |
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· |
References to “fiscal year 2013” or “fiscal 2013” refer to the fiscal year ended February 1, 2014. |
Fiscal years 2015, 2014 and 2013 consisted of a 52-week period.
(D) Our Business and Liquidity: During fiscal 2015 we have experienced declining sales and additional costs associated with making strategic investments for the future growth of the VINCE brand, including costs associated with the write-down of excess inventory, consulting agreements with our co-founders and the reorganization of our management team. We have undertaken steps to enhance our liquidity position that we expect will allow us to maintain a net debt balance sufficient to comply with any covenants under the Term Loan Facility and the Revolving Credit Facility, as well as provide additional cash for use in our operations as we make these investments. Accordingly, on December 9, 2015 we received a Rights Offering Commitment Letter from Sun Capital Partners V, L.P. (“Sun Fund V”) that commits Sun Fund V to provide the Company with an amount equal to $65,000 of cash proceeds in the event that the Company conducts a rights offering for its common stock to its stockholders (a “Rights Offering”). Such contribution was to be reduced by any proceeds received from the Rights Offering. On March 15, 2016, the Company entered into an Investment Agreement with Sun Cardinal, LLC and SCSF Cardinal, LLC, affiliates of Sun Capital Partners, Inc. (collectively the “Investors”), which supersedes the Rights Offering Commitment Letter.
Pursuant to the terms of the Investment Agreement, the Investors have agreed to backstop the Rights Offering by purchasing at the subscription price of $5.50 per share any and all shares not subscribed through the exercise of rights, including the oversubscription. Consummation of the Rights Offering and the transactions contemplated by the Investment Agreement are subject to customary closing conditions as well as specific representations, warranties and covenants that all parties are required to satisfy up to and through the closing of the transactions contemplated in the Investment Agreement, which is estimated to occur on about April 21, 2016, but can be no later than April 30, 2016. The Investment Agreement can be terminated by either party if the counterparty breaches any of the representations, warranties and covenants, as applicable to them, as set forth in the agreement. Representations, warranties and covenants that require adherence by the Company include among others, compliance with debt covenant requirements under the Company’s credit agreements and closing the backstop commitment by no later than April 30, 2016.
On March 29, 2016, the Company commenced the Rights Offering, whereby the Company distributed, at no charge, to stockholders of record as of March 23, 2016 (the “Rights Offering Record Date”), rights to purchase 11,818,181 new shares of the Company’s common stock at $5.50 per share. Each stockholder as of the Rights Offering Record Date (“Rights Holder”) received one non-transferrable right for every share of common stock owned on the Rights Offering Record Date (the “subscription right”). Rights Holders who fully exercise their subscription rights are entitled to subscribe for additional shares that remain unsubscribed as a result of any unexercised subscription rights (the “over-subscription right”). The over-subscription right allows a Rights Holder to subscribe for an additional number of shares equal to up to 20% of the shares of common stock for which such holder was otherwise entitled to subscribe. Subscription rights may only be exercised for whole numbers of shares; no fractional shares of common stock will be issued in the Rights Offering. The Rights Offering period expired on April 14, 2016 at 5:00 p.m. New York City time, prior to which payment for all subscription rights required an irrevocable funding of cash to the transfer agent, to be held in an account for the benefit of the Company. The Investors have fully subscribed in the Rights Offering and exercised their oversubscription right. Under the terms of the Investment Agreement, the Investors will fund the difference between the Rights Offering proceeds and $65,000 on or about April 21, 2016, but no later than April 30, 2016, concurrently with the closing of the Rights Offering.
The Company intends to use a portion of the net proceeds received from the Rights Offering to (1) repay the amount owed by us under the Tax Receivable Agreement with Sun Cardinal, for itself and as a representative of the other stockholders party thereto, for the tax benefit with respect to the 2014 taxable year, equal to $21,762 plus accrued interest (see Note 15 “Related Party Transactions” for additional details), and (2) repay all outstanding indebtedness under our Revolving Credit Facility. The Company intends to use the remaining net proceeds for general corporate purposes, which may include future amounts owed by us under the Tax Receivable Agreement.
The Company believes that proceeds from the Rights Offering and Investment Agreement along with cash flows generated from operations will provide sufficient liquidity for the Company to comply with covenants under the Term Loan Facility and Revolving Credit Facility as well as provide additional cash for use in our operations. Failure to receive the proceeds from Rights Offering and Investment Agreement could have a material adverse effect on our ability to comply with our debt covenant requirements and fund operations and capital expenditures in fiscal 2016.
(E) Use of Estimates: The preparation of consolidated financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements which affect revenues and expenses during the period reported. Estimates are adjusted when necessary to reflect actual experience. Significant estimates and assumptions may affect many items in the financial statements. Actual results could differ from estimates and assumptions in amounts that may be material to the consolidated financial statements.
Significant estimates inherent in the preparation of the consolidated financial statements include accounts receivable allowances, customer returns, the realizability of inventory, reserves for contingencies, useful lives and impairments of long-lived tangible and intangible assets, and accounting for income taxes and related uncertain tax positions, among others.
(F) Cash and cash equivalents: All demand deposits and highly liquid short-term deposits with original maturities of three months or less maintained under cash management activities are considered cash equivalents. The effect of foreign currency exchange rate fluctuations on cash and cash equivalents was not significant for fiscal 2015, fiscal 2014, or fiscal 2013.
(G) Accounts Receivable and Concentration of Credit Risk: We maintain an allowance for accounts receivable estimated to be uncollectible. The activity in this allowance for continuing operations is summarized as follows:
(in thousands) |
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2015 |
|
|
2014 |
|
|
2013 |
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|||
Balance, beginning of year |
|
$ |
379 |
|
|
$ |
353 |
|
|
$ |
279 |
|
Provisions for bad debt expense, net of reversals |
|
|
(34 |
) |
|
|
168 |
|
|
|
249 |
|
Bad debts written off |
|
|
(157 |
) |
|
|
(142 |
) |
|
|
(175 |
) |
Balance, end of year |
|
$ |
188 |
|
|
$ |
379 |
|
|
$ |
353 |
|
The provision for bad debts is included in selling, general and administrative expense. Substantially all of our trade receivables are derived from sales to retailers and are recorded at the invoiced amount and do not bear interest. We perform ongoing credit evaluations of our wholesale partners’ financial condition and require collateral as deemed necessary. The past due status of a receivable is based on its contractual terms. Account balances are charged off against the allowance when it is probable the receivable will not be collected.
Accounts receivable are recorded net of allowances for expected future chargebacks and margin support from wholesale partners. It is the nature of the apparel and fashion industry that suppliers like us face significant pressure from customers in the retail industry to provide allowances to compensate for wholesale partner margin shortfalls. This pressure often takes the form of customers requiring us to provide price concessions on prior shipments as a prerequisite for obtaining future orders. Pressure for these concessions is largely determined by overall retail sales performance and, more specifically, the performance of our products at retail. To the extent our wholesale partners have more of our goods on hand at the end of the season, there will be greater pressure for us to grant markdown concessions on prior shipments. Our accounts receivable balances are reported net of expected allowances for these matters based on the historical level of concessions required and our estimates of the level of markdowns and allowances that will be required in the coming season in order to collect the receivables. We evaluate the allowance balances on a continual basis and adjust them as necessary to reflect changes in anticipated allowance activity. We also provide an allowance for sales returns based on historical return rates.
In fiscal 2015, sales to three wholesale partners each accounted for more than ten percent of our net sales from continuing operations. These sales represented 18.3%, 13.8% and 10.8% of fiscal 2015 net sales. In fiscal 2014, sales to three wholesale partners each accounted for more than ten percent of our net sales from continuing operations. These sales represented 23.2%, 13.2% and 12.3% of fiscal 2014 net sales. In fiscal 2013, sales to three wholesale partners each accounted for more than ten percent of our net sales from continuing operations. These sales represented 19.8%, 12.8% and 12.8% of fiscal 2013 net sales.
In fiscal 2015, accounts receivable from three wholesale partners each accounted for more than ten percent of our gross accounts receivable in continuing operations. These receivables represented 19.3%, 17.8% and 14.7% of fiscal 2015 gross accounts receivable. In fiscal 2014 accounts receivable from four wholesale partners each accounted for more than ten percent of our gross accounts receivable in continuing operations. These receivables represented 24.5%, 13.8%, 12.7% and 11.4% of fiscal 2014 gross accounts receivable.
(H) Inventories: Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. The cost of inventory includes manufacturing or purchase cost as well as sourcing, transportation, duty and other processing costs associated with acquiring, importing and preparing inventory for sale. Inventory costs are included in cost of products sold at the time of their sale. Product development costs are expensed in selling, general and administrative expense when incurred. Inventory values are reduced to net realizable value when there are factors indicating that certain inventories will not be sold on terms sufficient to recover their cost.
Inventories of continuing operations consist of the following:
(in thousands) |
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January 30, 2016 |
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January 31, 2015 |
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Finished goods |
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$ |
36,576 |
|
|
$ |
37,395 |
|
Raw materials |
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|
— |
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|
|
24 |
|
Total inventories, net |
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$ |
36,576 |
|
|
$ |
37,419 |
|
Net of reserves of: |
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$ |
13,261 |
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$ |
6,471 |
|
As of January 30, 2016, the lower of cost or market reserve included a write-down of the carrying value for certain excess inventory and aged product to its estimated net realizable value, as during the three months ended August 1, 2015 the Company recorded a charge of $14,447 associated with inventory that no longer supports the Company's prospective brand positioning strategy. As a result of changes in our estimates, during the three months ended October 31, 2015 and January 30, 2016, the Company recorded pre-tax income of $1,986 and $2,161, respectively, associated with the recovery of the inventory write-down taken in the three months ended August 1, 2015.
(I) Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is computed on the straight-line method over estimated useful lives of 3 to 10 years for furniture, fixtures, and computer equipment. Leasehold improvements are amortized on the straight-line basis over the shorter of their estimated useful lives or the remaining lease term, excluding renewal terms. Capitalized software is amortized on the straight-line basis over the estimated economic useful life of the software, generally three to five years. Maintenance and repair costs are charged to earnings while expenditures for major renewals and improvements are capitalized. Upon the disposition of property, plant and equipment, the accumulated depreciation is deducted from the original cost and any gain or loss is reflected in current earnings. Property, plant and equipment consist of the following:
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January 30, |
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January 31, |
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(in thousands) |
|
2016 |
|
|
2015 |
|
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Building and improvements |
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$ |
38,452 |
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|
$ |
27,645 |
|
Machinery and equipment |
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|
8,236 |
|
|
|
5,384 |
|
Capitalized software |
|
|
1,764 |
|
|
|
1,341 |
|
Construction in process |
|
|
4,716 |
|
|
|
3,369 |
|
Total property, plant and equipment |
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|
53,168 |
|
|
|
37,739 |
|
Less: accumulated depreciation and amortization |
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|
(15,399 |
) |
|
|
(9,390 |
) |
Property, plant and equipment, net |
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$ |
37,769 |
|
|
$ |
28,349 |
|
Depreciation expense related to continuing operations was $6,426, $3,381 and $1,562 for fiscal 2015, fiscal 2014 and fiscal 2013, respectively.
(J) Impairment of Long-lived Assets: We review long-lived assets with a finite life for existence of facts and circumstances which indicate that the useful life is shorter than previously estimated or the carrying amount may not be recoverable from future operations based on undiscounted expected future cash flows. Impairment losses are then recognized in operating results to the extent discounted expected future cash flows are less than the carrying value of the asset. There were no material impairment charges for continuing operations related to long-lived assets recorded in fiscal 2015, fiscal 2014 or fiscal 2013.
(K) Goodwill and Other Intangible Assets: Goodwill and other indefinite-lived intangible assets are tested for impairment at least annually and in an interim period if a triggering event occurs. We completed our annual impairment testing on our goodwill and indefinite-lived intangible assets during the fourth quarters of fiscal 2015, fiscal 2014 and fiscal 2013. Goodwill is not allocated to our operating segments in the measure of segment assets regularly reported to and used by management, however goodwill is allocated to operating segments (goodwill reporting units) for the sole purpose of the annual impairment test for goodwill.
Goodwill represents the excess of the cost of acquired businesses over the fair market value of the identifiable net assets. Indefinite-lived intangible assets are primarily company-owned trademarks. As the acquisition by Kellwood Company of the net assets of Vince occurred prior to the current requirements of ASC Topic 805 Business Combinations, the additional purchase consideration paid to the former owners of Vince subsequent to the acquisition date was recorded as an addition to the purchase price, and therefore goodwill, once determined.
In September 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to the Intangibles-Goodwill and Other topic of Accounting Standards Codification (“ASC”). Under this amendment, an entity may elect to perform a qualitative impairment assessment for goodwill. If adverse qualitative trends are identified during the qualitative assessment that indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative impairment test is required. “Step one” of this quantitative impairment test requires that the fair value of the reporting unit be estimated and compared to its carrying amount. If the carrying amount exceeds the estimated fair value of the asset, “step two” of the impairment test is performed to calculate the impairment loss. An impairment loss is recognized to the extent the carrying amount of the reporting unit exceeds the implied fair value.
An entity may pass on performing the qualitative assessment for a reporting unit and directly perform “step one” of the assessment. This determination can be made on a reporting unit by reporting unit basis, and an entity may resume performing a qualitative assessment in subsequent periods. This amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this amendment during fiscal year 2012.
In light of the decline in our sales over recent periods, in fiscal 2015 we elected to perform a quantitative impairment test on the goodwill. The results of the quantitative test did not result in any impairment of goodwill because the fair values of each of the Company’s reporting units exceeded their respective carrying values. As such, we were not required to perform “step two” of the impairment test. In fiscal 2014 and fiscal 2013, we elected to perform a qualitative assessment on the goodwill and determined that it was not more likely than not that the carrying value of the reporting unit was greater than the fair value. As such, we were not required to perform “step two” of the impairment test.
In July 2012, the FASB issued Accounting Standards Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite Lived Assets for Impairment (“ASU 2012-02”). Under this amendment, an entity may elect to perform a qualitative impairment assessment for indefinite-lived intangible assets similar to the goodwill impairment testing guidance discussed above.
An entity may pass on performing the qualitative assessment for an indefinite-lived intangible asset and directly perform “step one” of the assessment. This determination can be made on an asset by asset basis, and an entity may resume performing a qualitative assessment in subsequent periods. The amendment is effective for annual and interim impairment tests for indefinite-lived intangible assets performed for fiscal years beginning after September 15, 2012. We early adopted this amendment during fiscal 2012.
In light of the decline in our sales over recent periods, in fiscal 2015 we elected to perform a quantitative assessment on indefinite-lived intangible assets. The results of the quantitative test did not result in any impairment because the fair value of the Company’s indefinite-lived intangible asset exceeded its carrying value. As such we were not required to perform “step two” of the impairment test. In fiscal 2014 and fiscal 2013, we elected to perform a qualitative assessment on indefinite-lived intangible assets and determined that it was not more likely than not that the carrying value of the assets exceeded the fair value. As such we were not required to perform “step two” of the impairment test.
Determining the fair value of goodwill and other intangible assets is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. It is possible that estimates of future operating results could change adversely and impact the evaluation of the recoverability of the carrying value of goodwill and intangible assets and that the effect of such changes could be material.
Definite-lived intangible assets are comprised of customer relationships and are being amortized on a straight-line basis over their useful lives of 20 years.
See Note 4 “Goodwill and Intangible Assets” for more information on the details surrounding goodwill and intangible assets.
(L) Deferred Financing Costs: Deferred financing costs, such as underwriting, financial advisory, professional fees, and other similar fees are capitalized and recognized in interest expense over the contractual life of the related debt instrument using the straight-line method, as this method results in recognition of interest expense that is materially consistent with that of the effective interest method.
(M) Deferred Rent and Deferred Lease Incentives: We lease various office spaces, showrooms and retail stores. Many of these operating leases contain predetermined fixed escalations of the minimum rentals during the original term of the lease. For these leases, we recognize the related rental expense on a straight-line basis over the life of the lease and record the difference between the amount charged to operations and amounts paid as deferred rent. Certain of our retail store leases contain provisions for contingent rent, typically a percentage of retail sales once a predetermined threshold has been met. These amounts are expensed as incurred. Additionally, we received lease incentives in certain leases. These allowances have been deferred and are amortized on a straight-line basis over the life of the lease as a reduction of rent expense.
(N) Revenue Recognition: Sales are recognized when goods are shipped in accordance with customer orders for our wholesale business, upon receipt by the customer for our e-commerce business, and at the time of sale to the consumer for our retail business. Revenue associated with gift cards is recognized upon redemption. The estimated amounts of sales discounts, returns and allowances are accounted for as reductions of sales when the associated sale occurs. These estimated amounts are adjusted periodically based on changes in facts and circumstances when the changes become known to us. Accrued discounts, returns and allowances are included as an offset to accounts receivable in the Consolidated Balance Sheets for our wholesale business. The activity in the accrued discounts, returns and allowances account for continuing operations is summarized as follows:
(in thousands) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
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Balance, beginning of year |
|
$ |
16,098 |
|
|
$ |
9,265 |
|
|
$ |
7,179 |
|
Provision |
|
|
55,656 |
|
|
|
54,467 |
|
|
|
39,171 |
|
Utilization |
|
|
(58,908 |
) |
|
|
(47,634 |
) |
|
|
(37,085 |
) |
Balance, end of year |
|
$ |
12,846 |
|
|
$ |
16,098 |
|
|
$ |
9,265 |
|
For our wholesale business, amounts billed to customers for shipping and handling costs are not significant. Our stated terms are FOB shipping point. There is no stated obligation to customers after shipment, other than specifically set forth allowances or discounts that are accrued at the time of sale. The rights of inspection or acceptance contained in certain sales agreements are limited to whether the goods received by our wholesale partners are in conformance with the order specifications.
(O) Cost of Products Sold: Our cost of products sold and gross margins may not necessarily be comparable to that of other entities as a result of different practices in categorizing costs. The primary components of our cost of products sold are as follows:
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the cost of purchased merchandise, including raw materials; |
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the cost of inbound transportation, including freight; |
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the cost of our production and sourcing departments; |
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other processing costs associated with acquiring and preparing the inventory for sale; and |
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shrink and valuation reserves. |
(P) Marketing and Advertising: We provide cooperative advertising allowances to certain of our customers. These allowances are accounted for as reductions in sales as discussed in “Revenue Recognition” above. Production expense related to company-directed advertising is deferred until the first time at which the advertisement runs. Communication expense related to company-directed advertising is expensed as incurred. Marketing and advertising expense recorded in selling, general and administrative expenses for continuing operations was $9,177, $7,427 and $4,858 in fiscal 2015, fiscal 2014 and fiscal 2013, respectively. At January 30, 2016 and January 31, 2015, deferred production expenses associated with company-directed advertising were $416 and $643, respectively.
(Q) Share-Based Compensation: New, modified and unvested share-based payment transactions with employees, such as stock options, are measured at fair value and recognized as compensation expense over the requisite service period and is included as a component of selling, general and administrative expenses in the Consolidated Statements of Operations. Additionally, share-based awards granted to non-employees are expensed over the period in which the related services are rendered at their fair value, using the Black Scholes Pricing Model to determine the fair value.
(R) Income Taxes: We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities at enacted rates. We determine the appropriateness of valuation allowances in accordance with the “more likely than not” recognition criteria. We recognize tax positions in the Consolidated Balance Sheets as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with tax authorities assuming full knowledge of the position and all relevant facts. Accrued interest and penalties related to unrecognized tax benefits are included in income taxes in the Consolidated Statements of Operations.
(S) Earnings Per Share: Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted net income (loss) per share is calculated similarly, but includes potential dilution from the exercise of stock options for which future service is required as a condition to deliver the underlying stock.
(T) Recent Accounting Pronouncements: In November 2015, new accounting guidance on the balance sheet classification of deferred taxes was issued, which requires entities to classify deferred tax assets and liabilities as noncurrent in the consolidated balance sheet. Currently deferred tax assets and liabilities must be classified as current and noncurrent amounts in the consolidated balance sheet. This guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company is currently evaluating the impact of adopting this guidance on the consolidated financial statements.
In July 2015, new accounting guidance on accounting for inventory was issued, which requires entities to measure inventory at the lower of cost and net realizable value. This guidance is effective for interim and annual periods beginning on or after December 15, 2016. The Company is currently evaluating the impact of the adoption of the new accounting guidance on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest.” The standard requires deferred financing costs to be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of being presented as a deferred asset in the balance sheet. ASU 2015-03 does not change the recognition and measurement guidance for deferred financing costs. Once adopted, entities are required to apply the new guidance retrospectively to all prior periods presented. ASU 2015-03 is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years and early application is permitted. The Company has elected to early adopt the standard, effective February 1, 2015 and accordingly, the consolidated balance sheets as of January 30, 2016 and January 31, 2015 reflect the deferred financing costs as a direct deduction from the carrying amount of our long-term debt. Refer to Note 7 “Long-Term Debt”, for further information.
In April 2015, the FASB issued ASU No. 2015-05, “Customer's Accounting for Fees Paid in a Cloud Computing Arrangement,” which provides guidance on accounting for cloud computing fees. If a cloud computing arrangement includes a software license, then the customer should account for the license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. This guidance is effective for arrangements entered into, or materially modified, in interim and annual periods beginning after December 15, 2015. Retrospective application is permitted but not required. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.
In May 2014, FASB issued revenue recognition guidance (ASU No. 2014-09). The new accounting guidance requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, FASB elected to defer the effective dates (ASU No. 2015-14). The updated guidance is now effective for interim and annual periods beginning on or after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of the adoption of the new guidance on its financial statements.
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Note 2. The IPO and Restructuring Transactions
Initial Public Offering
On November 27, 2013, VHC completed an initial public offering (“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 IPO. 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 offering expenses from its sale of shares in the IPO. The Company retained approximately $5,000 of such proceeds for general corporate purposes and used the remaining net proceeds, together with net borrowings under the Term Loan Facility (described under Note 7 “Long-Term Debt”) to repay a promissory note (“the Kellwood Note Receivable”) issued to Kellwood Company, LLC in connection with the Restructuring Transactions (described below) which occurred immediately prior to the consummation of the IPO. 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 and the Restructuring Transactions described below, we separated the Vince and non-Vince businesses on November 27, 2013. Any and all debt obligations outstanding at the time of the transactions either remained 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 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 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; |
|
· |
Revolving Credit Facility—Vince, LLC entered into a new senior secured revolving credit facility. Bank of America, N.A. (“BofA”) serves as administrative agent under this new facility. This revolving credit facility provided for a revolving line of credit of up to $50,000 (see Note 6 “Financing Arrangements” for additional details); |
|
· |
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 (see Note 7 “Long-Term Debt” for additional details); |
|
· |
Shared Services Agreement—Vince, LLC entered into the Shared Services Agreement with Kellwood Company, LLC pursuant to which Kellwood Company, LLC would provide 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 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 the Wells Fargo Facility. 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 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 Management pursuant to the 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% 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 nor Vince, LLC are a guarantor or obligor of such notes.
In addition, Kellwood Company, LLC refinanced the Wells Fargo Facility (as defined below), to among other things, remove Vince, LLC as an obligor thereunder.
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 was $175,000 outstanding under the Term Loan Facility.
|
Note 3. 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, of which 100% of the membership interests are owned by the Pre-IPO Stockholders. 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 borrowings under the 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 are 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 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. 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 “Related Party Transactions”. 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 results of the non-Vince businesses included in discontinued operations (through the separation of the non-Vince businesses on November 27, 2013) for the fiscal year ended February 1, 2014 is summarized in the following table:
|
|
Fiscal Year |
|
|
(in thousands, except effective tax rate) |
|
2013 |
|
|
Net sales |
|
$ |
400,848 |
|
Cost of products sold |
|
|
313,620 |
|
Gross profit |
|
|
87,228 |
|
Selling, general and administrative expenses |
|
|
98,016 |
|
Restructuring, environmental and other charges |
|
|
1,628 |
|
Impairment of long-lived assets |
|
|
1,399 |
|
Change in fair value of contingent consideration |
|
|
1,473 |
|
Interest expense, net |
|
|
46,677 |
|
Other expense, net |
|
|
498 |
|
Loss before income taxes |
|
|
(62,463 |
) |
Income taxes |
|
|
(11,648 |
) |
Net loss from discontinued operations, net of taxes |
|
$ |
(50,815 |
) |
Effective tax rate |
|
|
18.6 |
% |
The fiscal 2013 effective tax rate for discontinued operations differs from the U.S. statutory rate of 35% primarily due to the release of valuation allowance. The release in valuation allowance is primarily due to the allocation of the disallowed tax loss on the sale of a 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.
Financing arrangements of the non-Vince business
Wells Fargo Facility
On October 19, 2011 Kellwood Company and certain of its domestic subsidiaries, as borrowers, entered into a credit agreement with Wells Fargo Bank, National Association, as agent, and lenders from time to time (the “Wells Fargo Facility”). The Wells Fargo Facility provided a non-amortizing senior revolving credit facility with aggregate lending commitments of $160,000, of which $5,000 was permanently extinguished during fiscal 2012. The amount which the borrowers could borrow was determined on the basis of a borrowing base formula, and borrowings were secured by a first-priority security interest in substantially all of the assets of the borrowers, including the assets of Vince, LLC. Borrowings bore interest at a rate per annum equal to an applicable margin (generally 1.25%-1.75% per annum at the borrowers’ election, LIBOR or a Base Rate (as defined in the Wells Fargo Facility)). On November 27, 2013, in connection with the consummation of the IPO and Restructuring Transactions, the Wells Fargo Facility was amended and restated in accordance with its terms. After such amendment and restatement, neither VHC nor any of its subsidiaries have any obligations thereunder.
Cerberus Term Loan
On October 19, 2011, Kellwood Company and certain of its domestic subsidiaries, as borrowers (the “Cerberus Borrowers”), entered into a term loan agreement (the “Term Loan Agreement”), as amended, with Cerberus Business Finance, LLC (the “Agent”), as agent and the lenders from time to time party thereto. The Term Loan Agreement provided the Cerberus Borrowers with a non-amortizing secured Cerberus Term Loan in an aggregate amount of $55,000 (the “Cerberus Term Loan”), of which $10,000 was repaid during fiscal 2012. All borrowings under the Cerberus Term Loan bore interest at a rate per annum equal to an applicable margin (10.25%-11.25% per annum for LIBOR Rate Loans (as defined in the Term Loan Agreement) and 7.75%-8.75% for Reference Rate Loans (as defined in the Term Loan Agreement)) plus, at the Cerberus Borrowers’ election, LIBOR or a Reference Rate as defined in the Term Loan Agreement. The agreement also provided for a portion of such interest equal to 1% per annum to be paid-in-kind and added to the principal amount of such term loans. The Cerberus Term Loan was secured by a security interest in substantially all of the assets of the Cerberus Borrowers, including Vince, LLC. On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, the Cerberus Term Loan was repaid with the proceeds from the repayment of the Kellwood Note Receivable, as such neither VHC nor any of its subsidiaries have any obligations thereunder.
Sun Term Loan Agreements
Since fiscal year 2009, Kellwood Company and certain of its domestic subsidiaries, as borrowers (the “Sun Term Loan Borrowers”), entered into various term loan agreements (“Sun Term Loan Agreements”) with affiliates of Sun Capital, as lenders, and Sun Kellwood Finance, as collateral agent. The Sun Term Loan Agreements were secured by a security interest in substantially all of the assets of the Sun Term Loan Borrowers, which included the assets of Vince, LLC, which security interest was contractually subordinated to the security interests of the lenders under the Wells Fargo Facility and the Cerberus Term Loan. These term loans bore interest at a rate per annum of 5.0%-6.0% paid-in-kind and added to the principal amounts of such term loans. On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, the Sun Term Loan Agreements were discharged through (i) the application of the Kellwood Note Receivable proceeds and (ii) capital contributions by Sun Capital affiliates, as such neither VHC nor any of its subsidiaries have any obligations thereunder.
12.875% Notes
Interest on the 12.875% 2009 Debentures due December 31, 2014 of Kellwood Company (the “12.875% Notes”) was paid (a) in cash at a rate of 7.875% per annum payable in January and July; and (b) in the form of PIK interest at a rate of 5.0% per annum (“PIK Interest”) payable either by increasing the principal amount of the outstanding 12.875% Notes, or by issuing additional 12.875% Notes with a principal amount equal to the PIK Interest accrued for the interest period. The 12.875% Notes were guaranteed by various of Kellwood Company’s subsidiaries on a secured basis (including the assets of Vince, LLC), which security interest was contractually subordinated to security interests of lenders under the Wells Fargo Facility, the Cerberus Term Loan and the Sun Term Loan Agreements. On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, the 12.875% Notes were redeemed with proceeds from the repayment of the Kellwood Note Receivable, at which time VHC and all subsidiaries were released as a guarantor and the obligations under the indenture were satisfied and discharged.
7.625% Notes
Interest on the 7.625% 1997 Debentures due October 15, 2017 of Kellwood Company (the “7.625% Notes”) was payable in cash at a rate of 7.625% per annum in April and October. 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 $48,809 of the 7.625% Notes remain issued and outstanding; provided, that neither VHC nor its subsidiaries are a guarantor or obligor of such notes.
|
Note 4. Goodwill and Intangible Assets
Net goodwill balances and changes therein subsequent to the February 1, 2014 Consolidated Balance Sheet by segment are as follows:
(in thousands) |
|
Wholesale |
|
|
Direct-to-consumer |
|
|
Total Net Goodwill |
|
|||
Balance as of February 1, 2014 |
|
$ |
41,435 |
|
|
$ |
22,311 |
|
|
$ |
63,746 |
|
Balance as of January 31, 2015 |
|
$ |
41,435 |
|
|
$ |
22,311 |
|
|
$ |
63,746 |
|
Balance as of January 30, 2016 |
|
$ |
41,435 |
|
|
$ |
22,311 |
|
|
$ |
63,746 |
|
The total carrying amount of goodwill for all periods presented was net of accumulated impairments of $46,942. There were no impairments recorded as a result of our annual goodwill impairment test during fiscal 2015, 2014 or 2013.
Identifiable intangible assets summary:
(in thousands) |
|
Gross Amount |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
|||
Balance as of January 31, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
11,970 |
|
|
$ |
(4,176 |
) |
|
$ |
7,794 |
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
101,850 |
|
|
|
— |
|
|
|
101,850 |
|
Total intangible assets |
|
$ |
113,820 |
|
|
$ |
(4,176 |
) |
|
$ |
109,644 |
|
(in thousands) |
|
Gross Amount |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
|||
Balance as of January 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
11,970 |
|
|
|
(4,774 |
) |
|
$ |
7,196 |
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
101,850 |
|
|
|
— |
|
|
|
101,850 |
|
Total intangible assets |
|
$ |
113,820 |
|
|
$ |
(4,774 |
) |
|
$ |
109,046 |
|
Amortization of identifiable intangible assets was $598, $599 and $599 for fiscal 2015, 2014 and 2013, respectively, which is included in selling, general and administrative expenses on the Consolidated Statements of Operations. Amortization expense for each of the fiscal years 2016 to 2020 is expected to be as follows:
|
|
Future |
|
|
(in thousands) |
|
Amortization |
|
|
2016 |
|
$ |
598 |
|
2017 |
|
|
598 |
|
2018 |
|
|
598 |
|
2019 |
|
|
598 |
|
2020 |
|
|
598 |
|
Total next 5 fiscal years |
|
$ |
2,990 |
|
Identifiable indefinite-lived intangible assets represent the Vince trademark. No impairments of the Vince trademark were recorded as a result of our annual asset impairment tests during fiscal years 2015, 2014 or 2013. In fiscal 2015, we elected to perform a quantitative assessment on indefinite-lived intangible assets. The results of the quantitative test did not result in any impairment because the fair value of the Company’s indefinite-lived intangible asset exceeded its carrying value. In fiscal 2014 and 2013, we elected to perform the qualitative assessment on the Vince Trademark as allowed by the Intangible—Goodwill and Other Topic of ASC and determined that it was not more likely than not that the carrying value exceeded the fair value of the asset.
|
Note 5. Fair Value
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 January 30, 2016 or January 31, 2015. At January 30, 2016 and January 31, 2015, 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 instruments and would be measured using Level 1 inputs. As the Company’s debt obligations as of January 30, 2016 are at variable rates, the fair value approximates the carrying value of the Company’s debt and would be measured using Level 2 inputs.
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, if applicable, written down to (and recorded at) fair value.
|
Note 6. Financing Arrangements
Revolving Credit Facility
On November 27, 2013, Vince, LLC entered into a $50,000 senior secured revolving credit facility (as amended from time to time, the “Revolving Credit Facility”) with Bank of America, N.A. (“BofA”) as administrative agent. Vince, LLC is the borrower and VHC and Vince Intermediate Holding, LLC, a direct subsidiary of VHC and the direct parent company of Vince, LLC (“Vince Intermediate”), are the guarantors under the Revolving Credit Facility. On June 3, 2015, Vince LLC entered into a first amendment to the Revolving Credit Facility, that among other things, increased the aggregate commitments under the facility from $50,000 to $80,000, subject to a loan cap which is the lesser of (i) the Borrowing Base, as defined in the loan agreement, (ii) the aggregate commitments or (iii) $70,000 until debt obligations under the Company’s term loan facility have been paid in full, and extended the maturity date from November 27, 2018 to June 3, 2020. The Revolving Credit Facility also provides for a letter of credit sublimit of $25,000 (plus any increase in aggregate commitments) and an accordion option that allows for an increase in aggregate commitments up to $20,000. Interest is payable on the loans under the Revolving Credit Facility at either the LIBOR or the Base Rate, in each case, plus an applicable margin of 1.25% to 1.75% for LIBOR loans or 0.25% to 0.75% for Base Rate loans, and in each case subject to a pricing grid based on an average daily 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 maintenance requirement that, at any point when “Excess Availability” is less than the greater of (i) 15% percent of an adjusted loan cap (without giving effect to item (iii) of the loan cap described above) or (ii) $10,000, and continuing until Excess Availability exceeds the greater of such amounts for 30 consecutive days, during which time, we must maintain a consolidated EBITDA (as defined in the Revolving Credit Facility) equal to or greater than $20,000 measured at the end of each applicable fiscal month for the trailing twelve-month period. We have not been subject to this maintenance requirement as Excess Availability was greater than the required minimum.
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 adjusted loan cap and $10,000 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 1.0 to 1.0 (provided that the Consolidated Fixed Charge Coverage Ratio may be less than 1.0 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 adjusted loan cap and $15,000). We are in compliance with applicable financial covenants.
As of January 30, 2016, the availability under the $80,000 Revolving Credit Facility was $28,127. As of January 30, 2016 there was $15,000 of borrowings outstanding and $7,522 of letters of credit outstanding under the Revolving Credit Facility. The weighted average interest rate for borrowings outstanding under the Revolving Credit Facility as of January 30, 2016 was 2.1%.
As of January 31, 2015, the availability under the $50,000 Revolving Credit Facility was $19,353. As of January 31, 2015, there was $23,000 of borrowings outstanding and $7,647 of letters of credit outstanding under the Revolving Credit Facility. The weighted average interest rate for borrowings outstanding under the Revolving Credit Facility as of January 31, 2015 was 2.1%.
|
Note 7. Long-Term Debt
Long-term debt consisted of the following as of, January 30, 2016 and January 31, 2015:
(in thousands) |
|
January 30, 2016 |
|
|
January 31, 2015 |
|
||
Term Loan Facility |
|
$ |
45,000 |
|
|
$ |
65,000 |
|
Revolving Credit Facility |
|
|
15,000 |
|
|
|
23,000 |
|
Total long-term debt principal |
|
|
60,000 |
|
|
|
88,000 |
|
Less: Deferred financing costs (1) |
|
|
2,385 |
|
|
|
3,550 |
|
Total long-term debt |
|
$ |
57,615 |
|
|
$ |
84,450 |
|
(1) |
Pursuant to new accounting guidance issued by the Financial Accounting Standards Board (“FASB”) in April 2015, entities are no longer required to present deferred financing costs as a deferred asset. The guidance is effective for our fiscal year beginning in 2016, however, the Company has early adopted this accounting standard update effective as of February 1, 2015 and accordingly, the January 31, 2015 comparative balance sheet was adjusted to conform to the new classification presentation. There was no other impact on the financial statements related to the adoption other than the reclassification change on the consolidated balance sheet. Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies”, for further information regarding the accounting standard update. |
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. Vince, LLC and Vince Intermediate are borrowers and VHC is a guarantor under the Term Loan Facility. 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 (adjusted to reflect any prepayments), 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 an applicable margin of 4.75% to 5.00% based on a consolidated net total leverage ratio or (ii) the base rate applicable margin of 3.75% to 4.00% based on a consolidated net total leverage ratio. 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 requires Vince, LLC and Vince Intermediate to make mandatory prepayments upon the occurrence of certain events, including additional debt issuances, common and preferred stock issuances, certain asset sales, and annual payments of 50% of excess cash flow, subject to reductions to 25% and 0% if Vince, LLC and Vince Intermediate maintain a Consolidated Net Total Leverage Ratio of 2.50 to 1.00 and 2.00 to 1.00, respectively, and subject to reductions for voluntary prepayments made during such fiscal year.
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 1.00 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 in an amount not to exceed the excess available amount, as defined in the loan agreement. 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. We are in compliance with applicable financial covenants.
Through January 30, 2016, on an inception to date basis, the Company has made voluntary prepayments totaling $130,000 in the aggregate on the original $175,000 Term Loan Facility entered into on November 27, 2013. Of the $130,000 of aggregate voluntary prepayments made to date, $20,000 was paid during fiscal 2015. As of January 30, 2016 the Company had $45,000 of debt outstanding under the Term Loan Facility.
Sun Promissory Notes
On May 2, 2008, VHC entered into a $225,000 Senior Subordinated Promissory Note and a $75,000 Senior Subordinated Promissory Note with Sun Kellwood Finance, LLC (“Sun Kellwood Finance”), an affiliate of Sun Capital Partners, Inc. We collectively refer to these notes as our “Sun Promissory Notes”. The unpaid principal balance of the notes accrue interest at 15% per annum until the maturity date of October 15, 2011, at which point any unpaid principal balance of the notes shall accrue interest at a rate of 17% per annum until the notes are paid in full. All interest which is not paid in cash on or before the last day of each calendar month are deemed paid in kind and added to the principal balance of the notes unless an election is made otherwise.
On July 19, 2012, Vince Holding Corp. amended the Sun Promissory Notes to extend the maturity date to October 15, 2016 and reduce the interest rate to 12% per annum until maturity, at which point any unpaid principal balance of the notes shall accrue interest at a rate of 14% per annum until the notes are paid in full.
On December 28, 2012, Sun Kellwood Finance, LLC (“Sun Capital Finance”) waived all interest capitalized and accrued under the notes prior to July 19, 2012. As both parties were under the common control of affiliates of Sun Capital Partners, Inc. (“Sun Capital”), this transaction resulted in a capital contribution of $270,852 which was recorded as an adjustment to additional paid in capital on our Consolidated Balance Sheet as of February 2, 2013.
On June 18, 2013, Sun Kellwood Finance assigned all title and interest in the Sun Promissory Notes to Sun Cardinal, LLC (“Sun Cardinal”). Immediately following the assignment, Sun Cardinal contributed all outstanding principal and interest due under these notes as of June 18, 2013 to the capital of VHC. As both parties were under common control of affiliates of Sun Capital at such time, this transaction resulted in a capital contribution of $334,595, which was recorded as an adjustment to VHC’s additional paid in capital on the Consolidated Balance Sheet as of February 1, 2014.
Sun Capital Loan Agreement
VHC was party to a Loan Authorization Agreement, originally dated February 13, 2008, by and between VHC (as the successor entity to Cardinal Integrated, LLC), SCSF Kellwood Finance, LLC (“SCSF Finance”) and Sun Kellwood Finance (as successors to Bank of Montreal) for a $72,000 line of credit, and $69,485 principal balance, which we refer to as the “Sun Capital Loan Agreement”. Under the terms of this agreement, as amended from time to time, interest accrued at a rate equal to the rate per annum announced by the Bank of Montreal, Chicago, Illinois, from time to time as its prime commercial rate, or equivalent, for U.S. dollar loans to borrowers located in the U.S. plus 2%. Interest on the loan was due by the last day of each fiscal quarter and is payable either in immediately available funds on each interest payment date or by adding such interest to the unpaid principal balance of the loan on each interest payment date. The original maturity date of the loan was August 6, 2009. On July 19, 2012, the maturity date of the loan was extended to August 6, 2014.
On December 28, 2012, Sun Kellwood Finance and SCSF Finance waived all interest capitalized and accrued under the loan authorization agreement prior to July 19, 2012. As all parties were under the common control of affiliates of Sun Capital, this transaction resulted in a capital contribution of $18,249, which was recorded as an adjustment to additional paid in capital on our Consolidated Balance Sheet as of February 2, 2013.
On June 18, 2013, Sun Kellwood Finance and SCSF Finance assigned all title and interest in the note under the Sun Capital Loan Agreement to Sun Cardinal. Immediately following the assignment, Sun Cardinal contributed all outstanding principal and interest due under this note as of June 18, 2013 to the capital of VHC. As all parties were under common control of affiliates of Sun Capital at such time, this transaction resulted in a capital contribution of $72,932, which was recorded as an adjustment to VHC’s additional paid in capital on the Consolidated Balance Sheet as of February 1, 2014.
|
Note 8. Commitments and Contingencies
Leases
We lease substantially all of our office and showroom space, retail stores and certain machinery and equipment under operating leases having remaining terms up to eleven years, excluding renewal terms. Most of our real estate leases contain covenants that require us to pay real estate taxes, insurance, and other executory costs. Certain of these leases require contingent rent payments, kick-out clauses and/or opt-out clauses, based on the operating results of the retail operations utilizing the leased premises. Rent under leases with scheduled rent changes or lease concessions are recorded on a straight-line basis over the lease term. Rent expense under all operating leases was $20,015, $16,161 and $10,467 for fiscal 2015, fiscal 2014 and fiscal 2013, respectively, the majority of which is recorded within selling, general and administrative expenses.
The future minimum lease payments under operating leases at January 30, 2016 were as follows:
|
|
Minimum Lease |
|
|
(in thousands) |
|
Payments |
|
|
Fiscal 2016 |
|
$ |
20,083 |
|
Fiscal 2017 |
|
|
20,891 |
|
Fiscal 2018 |
|
|
20,712 |
|
Fiscal 2019 |
|
|
20,653 |
|
Fiscal 2020 |
|
|
19,584 |
|
Thereafter |
|
|
67,444 |
|
Total minimum lease payments |
|
$ |
169,367 |
|
Other Contractual Cash Obligations
At January 30, 2016, our other contractual cash obligations of $25,981 consist primarily of inventory purchase obligations and service contracts.
Restructuring Charges
In the second quarter of fiscal 2015, a number of senior management departures and announced departures occurred. In connection with these departures and announced departures, the Company has certain obligations under existing employment arrangements with respect to severance and employee related benefits. As a result, the Company recognized a charge of $3,717 for these expected departures within selling, general, and administrative expenses on the condensed consolidated statement of operations for the three months ended August 1, 2015. In the fourth quarter of fiscal 2015, the Company recorded $323 of pre-tax income within selling, general and administrative expenses associated with the recovery of severance expense. This net charge is reflected within the “unallocated corporate expenses” for segment disclosures. These amounts will be paid over a period of six to eighteen months, which began in the third quarter of fiscal 2015.
The following is a reconciliation of the accrued severance and employee related benefits included within total current liabilities on the consolidated balance sheet:
(in thousands) |
|
|
|
|
Balance at August 1, 2015 |
|
$ |
3,717 |
|
Cash payments |
|
|
(1,557 |
) |
Non-cash recovery |
|
|
(323 |
) |
Balance at January 30, 2016 |
|
$ |
1,837 |
|
Litigation
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.
|
Note 10. Stockholders’ Equity
Common Stock:
We currently have authorized for issuance 100,000,000 shares of our Voting Common Stock, par value of $0.01 per share. As of January 30, 2016 and January 31, 2015 we had 36,779,417 and 36,748,245 shares issued and outstanding, respectively (after giving effect to the conversion of all our issued and outstanding non-voting common stock into common stock on a one-for-one basis and the subsequent split of our common stock on a one for 28.5177 basis, as part of the Restructuring Transactions).
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 fiscal 2014.
Dividends:
We have not paid dividends, and our current ability to pay such dividends is restricted by the terms of our debt agreements. Our future dividend policy will be determined on a yearly basis and will depend on earnings, financial condition, capital requirements, and certain other factors. We do not expect to declare dividends with respect to our common stock in the foreseeable future.
|
Note 12. Income Taxes
The provision for income taxes for continuing operations consists of the following:
(in thousands) |
|
Fiscal 2015 |
|
|
Fiscal 2014 |
|
|
Fiscal 2013 |
|
|||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(53 |
) |
|
$ |
759 |
|
|
$ |
— |
|
State |
|
|
522 |
|
|
|
344 |
|
|
|
43 |
|
Foreign |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total current |
|
|
469 |
|
|
|
1,103 |
|
|
|
43 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
2,994 |
|
|
|
20,416 |
|
|
|
6,333 |
|
State |
|
|
(249 |
) |
|
|
2,475 |
|
|
|
905 |
|
Foreign |
|
|
— |
|
|
|
— |
|
|
|
(13 |
) |
Total deferred |
|
|
2,745 |
|
|
|
22,891 |
|
|
|
7,225 |
|
Total provision for income taxes |
|
$ |
3,214 |
|
|
$ |
23,994 |
|
|
$ |
7,268 |
|
The sources of income (loss) for continuing operations before provision for income taxes are from the United States for all years. We file U.S. federal income tax returns and income tax returns in various state and local jurisdictions.
Current income taxes are the amounts payable under the respective tax laws and regulations on each year’s earnings. A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows:
|
|
Fiscal 2015 |
|
|
Fiscal 2014 |
|
|
Fiscal 2013 |
|
|||
Statutory federal rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State taxes, net of federal benefit |
|
|
6.5 |
% |
|
|
5.7 |
% |
|
|
9.5 |
% |
Nondeductible Tax Receivable Agreement adjustment |
|
|
4.1 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Nondeductible interest |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
18.1 |
% |
Nondeductible transaction costs |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
6.7 |
% |
Valuation allowance |
|
|
(0.5 |
)% |
|
|
(0.7 |
)% |
|
|
(45.5 |
)% |
Return to provision adjustment |
|
|
(2.4 |
)% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Changes in tax laws |
|
|
(3.2 |
)% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Other |
|
|
(0.8 |
)% |
|
|
0.2 |
% |
|
|
(0.1 |
)% |
Total |
|
|
38.7 |
% |
|
|
40.2 |
% |
|
|
23.7 |
% |
Deferred income tax assets and liabilities for continuing operations consisted of the following:
(in thousands) |
|
January 30, 2016 |
|
|
January 31, 2015 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
17,071 |
|
|
$ |
29,935 |
|
Employee related costs |
|
|
2,163 |
|
|
|
3,503 |
|
Allowance for asset valuations |
|
|
2,551 |
|
|
|
3,172 |
|
Accrued expenses |
|
|
6,088 |
|
|
|
3,933 |
|
Net operating losses |
|
|
72,465 |
|
|
|
65,111 |
|
Tax credits |
|
|
812 |
|
|
|
888 |
|
Other |
|
|
457 |
|
|
|
90 |
|
Total deferred tax assets |
|
|
101,607 |
|
|
|
106,632 |
|
Less: valuation allowances |
|
|
(1,024 |
) |
|
|
(1,074 |
) |
Net deferred tax assets |
|
|
100,583 |
|
|
|
105,558 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Cancellation of debt income |
|
|
(6,657 |
) |
|
|
(8,876 |
) |
Other |
|
|
(482 |
) |
|
|
(493 |
) |
Total deferred tax liabilities |
|
|
(7,139 |
) |
|
|
(9,369 |
) |
Net deferred tax assets |
|
$ |
93,444 |
|
|
$ |
96,189 |
|
Included in: |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
4,164 |
|
|
$ |
4,015 |
|
Deferred income taxes and other assets |
|
|
89,280 |
|
|
|
92,174 |
|
Net deferred income tax assets |
|
$ |
93,444 |
|
|
$ |
96,189 |
|
As of January 30, 2016, various federal and state net operating losses were available for carryforward to offset future taxable income. Substantially all of these net operating losses will expire between 2030 and 2036. The valuation allowance of $1,024 at January 30, 2016 and $1,074 at January 31, 2015, reflects management’s assessment, based on available information, that it is more likely than not that a portion of the deferred tax assets will not be realized due to the inability to generate sufficient state taxable income. Adjustments to the valuation allowance are made when there is a change in management’s assessment of the amount of deferred tax assets that are realizable.
Net operating losses as of January 30, 2016 presented above do not include fiscal 2015, fiscal 2014 and fiscal 2013 deductions related to stock options that exceeded expenses previously recognized for financial reporting purposes since they have not yet reduced income taxes payable. The excess deduction will reduce income taxes payable and increase additional paid in capital by $2,732 when ultimately deducted in a future year. Net operating losses as of January 31, 2015 presented above do not include fiscal 2014 and fiscal 2013 deductions related to stock options that exceeded expenses previously recognized for financial reporting purposes since they have not yet reduced income taxes payable. The excess deduction will reduce income taxes payable and increase additional paid in capital by $2,675 when ultimately deducted in a future year.
As discussed in Note 2 “The IPO and Restructuring Transactions”, we completed an IPO during fiscal 2013. The completion of the IPO and Restructuring Transactions resulted in the non-Vince businesses being separated from the Vince business. As a result, the Company determined that the full valuation allowance on the U.S. net deferred tax assets was no longer necessary. Since the IPO and Restructuring Transactions occurred between related parties and were considered one integrated transaction along with the establishment of the Tax Receivable Agreement liability, the offset of the release of the valuation allowance was recorded as an adjustment to additional paid-in capital on our Consolidated Balance Sheet at February 1, 2014 in accordance with ASC 740-20-45-11(g). The total valuation allowance on deferred tax assets for continuing operations decreased on a net basis by $50 in the fiscal year ended January 30, 2016 and decreased by $769 in the fiscal year ended January 31, 2015.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, is as follows:
(in thousands) |
|
Fiscal 2015 |
|
|
Fiscal 2014 |
|
|
Fiscal 2013 |
|
|||
Beginning balance |
|
$ |
4,487 |
|
|
$ |
3,693 |
|
|
$ |
9,378 |
|
Increases for tax positions in current year |
|
|
72 |
|
|
|
2,397 |
|
|
|
3,743 |
|
Increases for tax positions in prior years |
|
|
27 |
|
|
|
135 |
|
|
|
356 |
|
Decreases for tax positions in prior years |
|
|
(2,459 |
) |
|
|
(1,738 |
) |
|
|
(4,186 |
) |
Settlements |
|
|
— |
|
|
|
— |
|
|
|
(3,022 |
) |
Lapse in statute of limitations |
|
|
— |
|
|
|
— |
|
|
|
(102 |
) |
Restructuring Transactions |
|
|
— |
|
|
|
— |
|
|
|
(2,474 |
) |
Ending balance |
|
$ |
2,127 |
|
|
$ |
4,487 |
|
|
$ |
3,693 |
|
As of January 30, 2016 and January 31, 2015, unrecognized tax benefits in the amount of $2,161 (net of tax) and $2,195 (net of tax), respectively, would impact our effective tax rate if recognized. It is reasonably possible that within the next 12 months certain temporary unrecognized tax benefits could fully reverse. Should this occur, our unrecognized tax benefits could be reduced by up to $72.
We include accrued interest and penalties on underpayments of income taxes in our income tax provision. As of January 30, 2016 and January 31, 2015, we did not have any interest and penalties accrued on our Consolidated Balance Sheets. Net interest and penalty provisions (benefit) of $0, $0 and $(232) were recognized in our Consolidated Statements of Operations for the years ended January 30, 2016, January 31, 2015 and February 1, 2014, respectively. Interest is computed on the difference between the tax position recognized net of any unrecognized tax benefits and the amount previously taken or expected to be taken in our tax returns.
All amounts above related to unrecognized tax benefits include continuing and discontinued operations until the separation of the Vince and non-Vince businesses on November 27, 2013, and the Vince business after such date.
With limited exceptions, we are no longer subject to examination for U.S. federal and state income tax for 2007 and prior.
|
Note 13. Defined Contribution Plan
We maintain the Vince Holding Corp. 401k Plan, which is a defined contribution plan covering all U.S.-based employees. Employees who meet certain eligibility requirements may participate in this program by contributing between 1% and 100% of annual compensation, subject to IRS limitations. We will make matching contributions in an amount equal to 50% of employee contributions up to 3% of eligible compensation. The annual expense incurred by the Company for this defined contribution plan was $426, $344, and $232 in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.
|
Note 14. Segment and Geographical 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 major department stores and specialty stores in the United States and select international markets. |
|
· |
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 “Description of Business and Summary of Significant Accounting Policies”. 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 the carrying values of our goodwill and unamortized trademark, 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 $29,063, $22,595 and $16,916 have been excluded from the net sales totals presented below for fiscal 2015, fiscal 2014, and fiscal 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.
|
|
Fiscal Year |
|
|||||||||
(in thousands) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
201,182 |
|
|
$ |
259,418 |
|
|
$ |
229,114 |
|
Direct-to-consumer |
|
|
101,275 |
|
|
|
80,978 |
|
|
|
59,056 |
|
Total net sales |
|
$ |
302,457 |
|
|
$ |
340,396 |
|
|
$ |
288,170 |
|
Income from Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
61,571 |
|
|
$ |
100,623 |
|
|
$ |
81,822 |
|
Direct-to-consumer |
|
|
7,839 |
|
|
|
14,556 |
|
|
|
10,435 |
|
Subtotal |
|
|
69,410 |
|
|
|
115,179 |
|
|
|
92,257 |
|
Unallocated expenses |
|
|
(53,684 |
) |
|
|
(44,929 |
) |
|
|
(42,904 |
) |
Total income from operations |
|
$ |
15,726 |
|
|
$ |
70,250 |
|
|
$ |
49,353 |
|
Depreciation & Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
2,058 |
|
|
$ |
1,962 |
|
|
$ |
1,204 |
|
Direct-to-consumer |
|
|
4,498 |
|
|
|
2,950 |
|
|
|
1,581 |
|
Unallocated corporate |
|
|
1,794 |
|
|
|
355 |
|
|
|
— |
|
Total depreciation & amortization |
|
$ |
8,350 |
|
|
$ |
5,267 |
|
|
$ |
2,785 |
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
1,629 |
|
|
$ |
2,076 |
|
|
$ |
1,832 |
|
Direct-to-consumer |
|
|
9,442 |
|
|
|
8,117 |
|
|
|
8,241 |
|
Unallocated corporate |
|
|
6,520 |
|
|
|
9,506 |
|
|
|
— |
|
Total capital expenditure |
|
$ |
17,591 |
|
|
$ |
19,699 |
|
|
$ |
10,073 |
|
(in thousands) |
|
January 30, 2016 |
|
|
January 31, 2015 |
|
||
Total Assets: |
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
47,757 |
|
|
$ |
70,635 |
|
Direct-to-consumer |
|
|
35,433 |
|
|
|
33,793 |
|
Unallocated corporate |
|
|
280,378 |
|
|
|
274,220 |
|
Total assets |
|
$ |
363,568 |
|
|
$ |
378,648 |
|
Sales results are presented on a geographic basis below. We predominately operate within the U.S. and sell our products in 38 countries either directly to major department and specialty stores, or through distribution relationships with international partners with exclusive rights to certain territories. Sales are presented based on customer location. Substantially all long-lived assets, including property, plant and equipment and fixtures installed at our retailer sites, are located in the U.S.
|
|
Fiscal Year |
|
|||||||||
(in thousands) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
273,655 |
|
|
$ |
310,179 |
|
|
$ |
265,622 |
|
Other countries |
|
|
28,802 |
|
|
|
30,217 |
|
|
|
22,548 |
|
Total net sales |
|
$ |
302,457 |
|
|
$ |
340,396 |
|
|
$ |
288,170 |
|
Our net sales by major product category are as follows:
|
|
Fiscal Year |
|
|||||||||||||||||||||
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||||||||||||||
(in thousands) |
|
Amount |
|
|
% of Total |
|
|
Amount |
|
|
% of Total |
|
|
Amount |
|
|
% of Total |
|
||||||
Women's collection |
|
$ |
272,338 |
|
|
|
90 |
% |
|
$ |
301,076 |
|
|
|
89 |
% |
|
$ |
253,647 |
|
|
|
88 |
% |
Men's collection |
|
|
22,685 |
|
|
|
8 |
% |
|
|
35,417 |
|
|
|
10 |
% |
|
|
33,612 |
|
|
|
12 |
% |
Other |
|
|
7,434 |
|
|
|
2 |
% |
|
|
3,903 |
|
|
|
1 |
% |
|
|
911 |
|
|
|
0 |
% |
|
|
$ |
302,457 |
|
|
|
100 |
% |
|
$ |
340,396 |
|
|
|
100 |
% |
|
$ |
288,170 |
|
|
|
100 |
% |
|
Note 15. Related Party Transactions
Shared Services Agreement
On November 27, 2013, Vince, LLC entered into the Shared Services Agreement with Kellwood pursuant to which Kellwood would provide certain 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. Since the IPO, we have been working on transitioning certain back office functions performed by Kellwood under the Shared Services Agreement. Among these functions that have transitioned to Vince are certain accounting related functions as well as benefits administration. We have also been working on developing our own information technology infrastructure and are now in the process of implementing our own enterprise resource planning (“ERP”) system, point-of-sale systems, e-commerce platform and supporting systems. We are also in the process of migrating our U.S. distribution system from Kellwood to a new third party provider. Until those systems are implemented, we will continue to utilize the Kellwood information technology infrastructure, including e-commerce platform systems, under the Shared Services Agreement.
The Shared Services Agreement may be modified or supplemented to include new services under terms and conditions to be mutually agreed upon in good faith by the parties. The fees for all services received by Vince, LLC from Kellwood, including any new services mutually agreed upon by the parties, will be at cost. Such costs shall be the full amount of any and all actual and direct out-of-pocket expenses (including base salary and wages but without providing for any margin of profit or allocation of depreciation or amortization expense) incurred by the service provider or its affiliates in connection with the provision of the services.
We may terminate any or all of the services at any time for any reason (with or without cause) upon giving Kellwood the required advance notice for termination for that particular service. Additionally, the provision of the following services, which are services which require a term as a matter of law and services which are based on a third-party agreement with a set term, shall terminate automatically upon the related date specified on the schedules to the Shared Services Agreement: Building Services NY; Tax; and Compensation & Benefits. If no specific notice requirement has been provided, 90 days prior written notice shall be required to be given. Upon the termination of certain services, Kellwood may no longer be in a position to provide certain other related services. Kellwood must notify us within 10 days following our request to terminate any services if they will no longer be able to provide other related services. Assuming we proceed with our request to terminate the original services, such related services shall also be terminated in connection with such termination.
We are invoiced by Kellwood monthly for these amounts and generally be 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. For the years ended January 30, 2016, January 31, 2015 and February 1, 2014 we recognized $9,357, $11,436 and $13,729, respectively, of expense within the statement of operations for services provided under the Shared Services Agreement. As of January 30, 2016 and January 31, 2015, we have recorded $858 and $753, respectively in other accrued expenses to recognize amounts payable to Kellwood under the Shared Services Agreement.
Tax Receivable Agreement
VHC entered into a Tax Receivable Agreement with the Pre-IPO Stockholders on November 27, 2013. We and our former subsidiaries generated certain tax benefits (including NOLs and tax credits) prior to the Restructuring Transactions consummated in connection with our IPO 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.
While the Tax Receivable Agreement is designed with the objective of causing our annual cash costs attributable to federal, state and local income taxes (without regard to our continuing 15% interest in the Pre-IPO Tax Benefits) to be the same as that which we would have paid had we not had the Pre-IPO Tax Benefits available to offset our federal, state and local taxable income, there are circumstances in which this may not be the case. In particular, the Tax Receivable Agreement provides that any payments by us thereunder shall not be refundable. In that regard, the payment obligations under the Tax Receivable Agreement differ from a payment of a federal income tax liability in that a tax refund would not be available to us under the Tax Receivable Agreement even if we were to incur a net operating loss for federal income tax purposes in a future tax year. Similarly, the Pre-IPO Stockholders will not reimburse us for any payments previously made if any tax benefits relating to such payments are subsequently disallowed, although the amount of any such tax benefits subsequently disallowed will reduce future payments (if any) otherwise owed to such Pre-IPO Stockholders. In addition, depending on the amount and timing of our future earnings (if any) and on other factors including the effect of any limitations imposed on our ability to use the Pre-IPO Tax Benefits, it is possible that all payments required under the Tax Receivable Agreement could become due within a relatively short period of time following consummation of our IPO.
If we had not entered into the Tax Receivable Agreement, we would be entitled to realize the full economic benefit of the Pre-IPO Tax Benefits to the extent allowed by federal, state and local law. The Tax Receivable Agreement is designed with the objective of causing our annual cash costs attributable to federal, state and local income taxes (without regard to our continuing 15% interest in the Pre-IPO Tax Benefits) to be the same as we would have paid had we not had the Pre-IPO Tax Benefits available to offset our federal, state and local taxable income. As a result, stockholders who purchased shares in the IPO are not entitled to the economic benefit of the Pre-IPO Tax Benefits that would have been available if the Tax Receivable Agreement were not in effect, except to the extent of our continuing 15% interest in the Pre-IPO Benefits.
Additionally, the payments we make to the Pre-IPO Stockholders under the Tax Receivable Agreement are not expected to give rise to any incidental tax benefits to us, such as deductions or an adjustment to the basis of our assets.
An affiliate of Sun Capital may elect to terminate the Tax Receivable Agreement upon the occurrence of a Change of Control (as defined below). In connection with any such termination, we are obligated to pay the present value (calculated at a rate per annum equal to LIBOR plus 200 basis points as of such date) of all remaining Net Tax Benefit payments that would be required to be paid to the Pre-IPO Stockholders from such termination date, applying the valuation assumptions set forth in the Tax Receivable Agreement (the “Early Termination Period”). “Change of control,” as defined in the Tax Receivable Agreement shall mean an event or series of events by which (i) Vince Holding Corp. shall cease directly or indirectly to own 100% of the capital stock of Vince, LLC; (ii) any “person” or “group” (as such terms are used in Section 13(d) and 14(d) of the Exchange Act), other than one or more permitted investors, shall be the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of capital stock having more, directly or indirectly, than 35% of the total voting power of all outstanding capital stock of Vince Holding Corp. in the election of directors, unless at such time the permitted investors are direct or indirect “beneficial owners” (as so defined) of capital stock of Vince Holding Corp. having a greater percentage of the total voting power of all outstanding capital stock of Vince Holding Corp. in the election of directors than that owned by each other “person” or “group” described above; (iii) for any reason whatsoever, a majority of the board of directors of Vince Holding Corp. shall not be continuing directors; or (iv) a “Change of Control” (or comparable term) shall occur under (x) any term loan or revolving credit facility of Vince Holding Corp. or its subsidiaries or (y) any unsecured, senior, senior subordinated or subordinated indebtedness of Vince Holding Corp. or its subsidiaries, if, in each case, the outstanding principal amount thereof is in excess of $15,000. We may also terminate the Tax Receivable Agreement by paying the Early Termination Payment to the Pre-IPO Stockholders. Additionally, the Tax Receivable Agreement provides that in the event that we breach any material obligations under the Tax Receivable Agreement by operation of law as a result of the rejection of the Tax Receivable Agreement in a case commenced under the Bankruptcy Code, then the Early Termination Payment plus other outstanding amounts under the Tax Receivable Agreement shall become due and payable.
The Tax Receivable Agreement will terminate upon the earlier of (i) the date all such tax benefits have been utilized or expired, (ii) the last day of the tax year including the tenth anniversary of the IPO Restructuring Transactions and (iii) the mutual agreement of the parties thereto, unless earlier terminated in accordance with the terms thereof.
As of January 30, 2016, our obligation under the Tax Receivable Agreement was $169,913, which has a remaining term of eight years. The obligation was originally recorded in connection with the IPO as an adjustment to additional paid-in capital on our Consolidated Balance Sheet. Approximately $29,075 is recorded as a component of other accrued expenses and $140,838 as other liabilities on our Consolidated Balance Sheet as of January 30, 2016. During fiscal 2015, we adjusted the obligation under the Tax Receivable Agreement in connection with the filing of our 2014 income tax returns and as a result of changes in tax laws that impacted the net operating loss deferred tax assets. These adjustments resulted in a net increase of $1,154 to the pre-IPO deferred tax assets and a net increase of $981 to the liability under the Tax Receivable Agreement with the corresponding net increase accounted for as an adjustment to other expense, net on the Consolidated Statement of Operations. During fiscal year 2014, we adjusted the obligation under the Tax Receivable Agreement in connection with the filing of our 2013 income tax returns. The return to provision adjustment resulted in a net reduction of $818 to the pre-IPO deferred tax assets and a net reduction of $1,442 to the liability under the Tax Receivable Agreement with the corresponding net increase of $624 accounted for as an adjustment to additional paid in-capital. In addition, we made our first tax benefit payment with respect to the 2013 taxable year of $3,199 including accrued interest which was paid during the fourth quarter of fiscal 2014.
The Company had expected to make a required payment under the Tax Receivable Agreement in the fourth quarter of fiscal 2015. As a result of lower than expected cash from operations due to weaker than projected performance, and the level of projected availability under the Company’s Revolving Credit Facility, we concluded that we would not be able to fund the payment when due. Accordingly, on September 1, 2015, we entered into an amendment to the Tax Receivable Agreement with Sun Cardinal, LLC, an affiliate of Sun Capital Partners, Inc., for itself and as a representative of the other stockholders parties thereto. Pursuant to this amendment, Sun Cardinal agreed to postpone payment of the tax benefit with respect to the 2014 taxable year, currently estimated at $21,762 plus accrued interest to September 15, 2016. The amendment to the Tax Receivable Agreement also waived the application of a default interest rate at LIBOR plus 500 basis points per annum on the postponed payment. The interest rate on the postponed payment will remain at LIBOR plus 200 basis points per annum. The tax benefit payment with respect to the 2015 taxable year totaling $7,313 plus accrued interest is expected to be paid in the fourth quarter of 2016.
Rights Offering Commitment Letter
On December 9, 2015 we received a Rights Offering Commitment Letter from Sun Fund V that provides the Company with an amount equal to $65,000 of cash proceeds in the event that the Company conducts a Rights Offering (the “Contribution Obligation”). Such Contribution Obligation will be reduced by any proceeds received from the Rights Offering. The Company is required, simultaneously with the funding of the Contribution Obligation by Sun Fund V, or one or more of its affiliates, to issue to Sun Fund V or one or more of its affiliates the applicable number of shares of the Company’s common stock at the lesser of (i) a price per share equal to a 20% discount to the 30 day average trading price of the Company’s common stock on The New York Stock Exchange immediately prior to the date of the Rights Offering Commitment Letter, (ii) a price per share equal to a 20% discount to the 30 day average trading price of the Company’s common stock on The New York Stock Exchange immediately prior to the commencement of the Rights Offering and (iii) the price per share at which participants in the Rights Offering are entitled to purchase shares of new common stock issued by the Company. Sun Fund V will receive customary terms and conditions, to be negotiated between Sun Fund V and the Company, for providing the Contribution Obligation. If the Rights Offering has not commenced by March 8, 2016, the Company will pay Sun Fund V an amount equal to $950 in the event that the Company completes a Rights Offering. Sun Fund V subsequently extended the commencement deadline to March 29, 2016. Sun Fund V’s obligations terminate upon the earliest to occur of (A) the consummation of the Rights Offering whereby the Company receives proceeds equal to or exceeding $65,000, (B) 11:59 p.m. New York City time on April 7, 2016 if the Rights Offering has not commenced by such time, (C) 11:59 p.m. New York City time on April 30, 2016, and (D) the date Sun Fund V, or its affiliates, funds the Contribution Obligation. The Company would be required to use a portion of proceeds from the Rights Offering or the Contribution Obligation to satisfy its current obligation with respect to the 2014 taxable year under the Tax Receivable Agreement as amended (as discussed above), currently estimated at $21,762 plus accrued interest, and payable on September 15, 2016. On March 29, 2016, the Company commenced the rights offering. The Rights Offering Commitment Letter was superseded by the Investment Agreement entered into by and among the Company, Sun Cardinal, LLC and SCSF Cardinal, LLC. See Note 17 “Subsequent Event” for additional details.
Transfer Agreement
On November 27, 2013, Kellwood and Vince Intermediate Holding, LLC entered into a transfer agreement (the “Transfer Agreement”). Pursuant to the terms of the Transfer Agreement, the following transactions occurred:
|
· |
Kellwood distributed the Vince, LLC equity interests to Vince Intermediate Holding, LLC in exchange for a $341,500 promissory note issued by Vince Intermediate Holding, LLC (the “Kellwood Note Receivable”). |
|
· |
Vince Intermediate Holding, LLC immediately repaid the Kellwood Note Receivable in full using approximately $172,000 of net proceeds from the IPO along with $169,500 of net borrowings under the new Term Loan Facility. Using the proceeds from the repayment of the Kellwood Note Receivable, after giving effect to the contribution of $70,100 of indebtedness under the Sun Term Loan Agreements to the capital of Vince Holding Corp. by affiliates of Sun Capital, Kellwood repaid and discharged the indebtedness outstanding under its revolving credit facility and the Sun Term Loan Agreements, and redeemed all of its issued and outstanding 12.875% Notes. Kellwood also redeemed $38,100 aggregate principal amount of its 7.125% Notes, at par pursuant to a tender offer. In addition, Kellwood also used such proceeds to pay certain restructuring fees to Sun Capital Management. Kellwood also paid a debt recovery bonus of $6,000 to our Chief Executive Officer. |
|
· |
Kellwood refinanced its Wells Fargo Facility to, among other things, release Vince, LLC as a guarantor or obligor thereunder. |
In accordance with the terms of the Transfer Agreement, Kellwood has agreed to indemnify us for any losses which we may suffer, sustain or become subject to, relating to the Kellwood business or in connection with any contract contributed to us by Kellwood which is not by its terms permitted to be assigned. Kellwood has also agreed to indemnify us for any losses associated with its failure to satisfy its obligations under the Transfer Agreement with respect to the repayment, repurchase, discharge or refinancing of certain of its indebtedness, as described in the immediately prior paragraph (including with respect to the removal of Vince, LLC as an obligor or guarantor under its refinanced revolving credit facility). Additionally, Vince Intermediate Holding, LLC has agreed to indemnify Kellwood against any losses which Kellwood may suffer, sustain or become subject to relating to the Vince business. The parties also agreed, upon the request of either the other party to, without further consideration, execute and deliver, or cause to be executed and delivered, such other instruments of conveyance, transfer, assignment and confirmation, and shall take or cause to be taken, such further or other actions as the other party may deem necessary or desirable to carry out the intent and purpose of the Transfer Agreement and give effect to the transactions contemplated thereby.
Kellwood Note Receivable
Vince Intermediate Holding, LLC issued the Kellwood Note Receivable in the aggregate principal amount of $341,500 to Kellwood Company, LLC on November 27, 2013, immediately prior to the consummation of our IPO. Vince Intermediate Holding, LLC repaid the Kellwood Note Receivable on the same day, using net proceeds from our IPO and net borrowings under the Term Loan Facility. No interest accrued under the Kellwood Note Receivable as the Kellwood Note Receivable was repaid on the date of issuance.
Debt Recovery Bonus to Our Former Chief Executive Officer (“CEO”)
Our former CEO received a debt recovery bonus of $6,000 (which included $440 of a prior unpaid debt recovery bonus) in connection with the repayment of certain Kellwood indebtedness, calculated as 4.4% of the related debt recovery, on November 27, 2013. Kellwood used proceeds from the repayment of the Kellwood Note Receivable to pay this bonus to our former CEO at the closing of our IPO.
Certain Indebtedness to Affiliates of Sun Capital
We had substantial indebtedness owed to affiliates of Sun Capital after giving effect to the acquisition of Kellwood Company by affiliates of Sun Capital Partners, Inc. in February 2008 under the Sun Promissory Notes and Sun Capital Loan Agreement (as defined in Note 7 “Long-Term Debt”). Subsequent to 2008, Kellwood Company made borrowings under the Sun Term Loan Agreements (as defined in Note 3 “Discontinued Operations”) to fund negative cash flows of the non-Vince business. All amounts owed by Vince Holding Corp. under these agreements were discharged as of February 1, 2014, as further discussed below.
On December 28, 2012, Sun Kellwood Finance waived all interest capitalized and accrued under the Sun Promissory notes prior to July 19, 2012. Additionally, Sun Kellwood Finance and SCSF Finance waived all interest capitalized and accrued under the Sun Capital Loan Agreement prior to July 19, 2012. As all parties were under the common control of affiliates of Sun Capital, both transactions resulted in capital contributions of $270,852 and $18,249 for the Sun Promissory Notes and Sun Capital Loan Agreement, respectively. The capital contributions were recorded as adjustments to additional paid in capital on our Consolidated Balance Sheet as of February 2, 2013. These transactions had no significant income tax consequences. The remaining principal and capitalized PIK interest owed under these agreements of $391,434 were reported within long-term debt on the Consolidated Balance Sheet as of February 2, 2013.
On June 18, 2013, Sun Kellwood Finance and SCSF Finance assigned all title and interest in both the Sun Promissory Notes and note under our Sun Capital Loan Agreement to Sun Cardinal, LLC. Immediately following the assignment of these notes, Sun Cardinal contributed all outstanding principal and interest due under these notes as of June 18, 2013 to the capital of Vince Holding Corp. As all parties were under the common control of Sun Capital at such time, these transactions were recorded in the second quarter of fiscal 2013 as increases to Vince Holding Corp.’s additional paid in capital in the amounts of $334,595 and $72,932 for the Sun Promissory Notes and Sun Capital Loan Agreement, respectively. As a result, Vince Holding Corp. has been discharged of all obligations under both agreements. See Note 7 “Long-Term Debt”. Immediately prior to the Restructuring Transactions, affiliates of Sun Capital contributed $38,683 of principal under the Sun Term Loan Agreements to the capital of Kellwood Company.
On November 27, 2013, subsequent to the closing of the IPO and in connection with the Restructuring Transactions, all remaining debt obligations to affiliates of Sun Capital under the Sun Term Loan Agreements were retained by Kellwood Company, amounting to $83,355 (including accrued interest). Kellwood Company immediately discharged all obligations under these agreements through the application of a portion of the Kellwood Note Receivable proceeds. See Note 3 “Discontinued Operations”.
Management Services Agreement
In connection with the acquisition of Kellwood Company by affiliates of Sun Capital in 2008, Sun Capital Partners Management V, LLC, an affiliate of Sun Capital, entered into the Management Services Agreement (the “Management Services Agreement”) with Kellwood Company. Under this agreement, Sun Capital Management provided Kellwood Company with consulting and advisory services, including services relating to financing alternatives, financial reporting, accounting and management information systems. In exchange, Kellwood Company reimbursed Sun Capital Management for reasonable out-of-pocket expenses incurred in connection with providing consulting and advisory services, additional and customary and reasonable fees for management consulting services provided in connection with corporate events, and also paid an annual management fee equal to $2,200 which was prepaid in equal quarterly installments, a portion of which was charged to the Vince business. We reported $0, $79, and $404 for management fees to Sun Capital in other expense, net, in the Consolidated Statements of Operations for fiscal 2015, fiscal 2014 and fiscal 2013, respectively. The remaining fees charged to the non-Vince businesses of $1,537 are included within net loss from discontinued operations in the Consolidated Statements of Operations for fiscal 2013.
Upon the consummation of certain corporate events involving Kellwood Company or its direct or indirect subsidiaries, Kellwood Company was required to pay Sun Capital Management a transaction fee in an amount equal to 1% of the aggregate consideration paid to or by Kellwood Company and any of its direct or indirect subsidiaries or stockholders. We incurred no material transaction fees payable to Sun Capital Management during all periods presented on the Consolidated Statement of Operations.
On November 27, 2013, in connection with the closing of the IPO and Restructuring Transactions, VHC was released from the terms of the Management Services Agreement between Kellwood Company and Sun Capital Management.
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.
The agreement is scheduled to terminate on the tenth anniversary of our IPO (i.e. November 27, 2023). Under the consulting agreement, we have no obligation to pay Sun Capital Management or any of its affiliates any consulting fees other than those which are approved by a majority of our directors that are not affiliated with Sun Capital. To the extent such fees are approved in the future, we will be obligated to pay such fees in addition to reimbursing Sun Capital Management or any of its affiliates that provide us services under the consulting agreement for all reasonable out-of-pocket fees and expenses incurred by such party in connection with the provision of consulting services under the consulting agreement and any related matters. Reimbursement of such expenses shall not be conditioned upon the approval of a majority of our directors that are not affiliated with Sun Capital Management, and shall be payable in addition to any fees that such directors may approve.
Neither Sun Capital Management nor any of its affiliates are liable to us or our affiliates, security holders or creditors for (1) any liabilities arising out of, related to, caused by, based upon or in connection with the performance of services under the consulting agreement, unless such liability is proven to have resulted directly and primarily from the willful misconduct or gross negligence of such person or (2) pursuing any outside activities or opportunities that may conflict with our best interests, which outside activities we consent to and approve under the consulting agreement, and which opportunities neither Sun Capital Management nor any of its affiliates will have any duty to inform us of. In no event will the aggregate of any liabilities of Sun Capital Management or any of its affiliates exceed the aggregate of any fees paid under the consulting agreement.
In addition, we are required to indemnify Sun Capital Management, its affiliates and any successor by operation of law against any and all liabilities, whether or not arising out of or related to such party’s performance of services under the consulting agreement, except to the extent proven to result directly and primarily from such person’s willful misconduct or gross negligence. We are also required to defend such parties in any lawsuits which may be brought against such parties and advance expenses in connection therewith. In the case of affiliates of Sun Capital Management that have rights to indemnification and advancement from affiliates of Sun Capital, we agree to be the indemnitor of first resort, to be liable for the full amounts of payments of indemnification required by any organizational document of such entity or any agreement to which such entity is a party, and that we will not make any claims against any affiliates of Sun Capital Partners for contribution, subrogation, exoneration or reimbursement for which they are liable under any organizational documents or agreement. Sun Capital Management may, in its sole discretion, elect to terminate the consulting agreement at any time. We may elect to terminate the consulting agreement if SCSF Cardinal, Sun Cardinal or any of their respective affiliates’ aggregate ownership of our equity securities falls below 30%.
During fiscal 2015, fiscal 2014 and fiscal 2013, we paid Sun Capital Management $114, $76 and $0, respectively, for reimbursement of expenses under the Sun Capital Consulting Agreement.
Indemnification Agreements
We entered into indemnification agreements with each of our executive officers and directors on November 27, 2013. The indemnification agreements provide the executive officers and directors with contractual rights to indemnification, expense advancement and reimbursement, to the fullest extent permitted under the DGCL.
Amended and Restated Certificate of Incorporation
Our amended and restated certificate of incorporation provides that for so long as affiliates of Sun Capital own 30% or more of our outstanding shares of common stock, Sun Cardinal, a Sun Capital affiliate, has the right to designate a majority of our board of directors. For so long as Sun Cardinal has the right to designate a majority of our board of directors, the directors designated by Sun Cardinal are expected to constitute a majority of each committee of our board of directors (other than the Audit Committee), and the chairman of each of the committees (other than the Audit Committee) is expected to be a director serving on the committee who is selected by affiliates of Sun Capital, provided that, at such time as we are not a “controlled company” under the NYSE corporate governance standards, our committee membership will comply with all applicable requirements of those standards and a majority of our board of directors will be “independent directors,” as defined under the rules of the NYSE, subject to any applicable phase in requirements.
Executive Officers
Mark E. Brody served as the Company’s Interim Chief Executive Officer from September 1, 2015 through October 22, 2015 when the Board approved the appointment of Brendan L. Hoffman to serve as the Chief Executive Officer of the Company, effective immediately. Mr. Brody remained with the Company in a non-executive capacity through a transition period which ended on November 20, 2015. Mr. Brody also served as Interim Chief Financial Officer and Treasurer of the Company from June 2015 through September 1, 2015. Mr. Brody received $63 per month and the reimbursement of reasonable cost of transportation and housing on a tax grossed-up basis during his employment with the Company. Mr. Brody also serves, and will continue to serve, as a member of the Board and received no additional compensation for serving as a director of the Company.
David Stefko served as the Interim Chief Financial Officer and Treasurer of the Company from September 1, 2015 through January 14, 2016, when he was appointed our permanent Chief Financial Officer, effective immediately. Mr. Stefko received $43 per month and the reimbursement of reasonable cost of transportation and housing on a tax grossed-up basis during the period he served as the Interim Chief Financial Officer and Treasurer of the Company.
Both Mr. Brody and Mr. Stefko were employees of Sun Capital Partners, Inc. prior to their appointment to the positions at the Company, remained covered by Sun Capital Partners, Inc.’s health and welfare benefit plans and continued to be eligible to receive a bonus under the Sun Capital Partners, Inc. annual bonus plan related to their work at Sun Capital Partners, Inc. Affiliates of Sun Capital Partners, Inc. owed approximately 56% of the outstanding shares of our common stock as of January 30, 2016. Mr. Brody has returned to his former position and is a partner in one or more investment partnerships that are affiliated with Sun Capital Partners, Inc. that beneficially own shares of common stock of the Company. Mr. Stefko resigned from his position at Sun Capital Partners, Inc. on January 13, 2016.
|
Note 16. Quarterly Financial Information (unaudited)
Summarized quarterly financial results for fiscal 2015 and fiscal 2014:
(in thousands, except per share data) |
|
|
|
First Quarter |
|
|
Second Quarter (1) |
|
|
Third Quarter (2) |
|
|
Fourth Quarter (3) |
|
||||
Fiscal 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
|
$ |
59,842 |
|
|
$ |
79,993 |
|
|
$ |
80,859 |
|
|
$ |
81,763 |
|
Gross profit |
|
|
|
|
30,741 |
|
|
|
20,789 |
|
|
|
40,005 |
|
|
|
40,981 |
|
Net income (loss) |
|
|
|
|
2,454 |
|
|
|
(5,026 |
) |
|
|
5,893 |
|
|
|
1,778 |
|
Basic earnings (loss) per share (4) |
|
|
|
$ |
0.07 |
|
|
$ |
(0.14 |
) |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
Diluted earnings (loss) per share (4) |
|
|
|
$ |
0.06 |
|
|
$ |
(0.14 |
) |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
|
|
|
|
First Quarter |
|
|
Second Quarter (5) |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
||||
Fiscal 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
|
$ |
53,452 |
|
|
$ |
89,326 |
|
|
$ |
102,947 |
|
|
$ |
94,671 |
|
Gross profit |
|
|
|
|
26,411 |
|
|
|
44,014 |
|
|
|
50,648 |
|
|
|
45,756 |
|
Net income |
|
|
|
|
1,384 |
|
|
|
10,501 |
|
|
|
13,311 |
|
|
|
10,527 |
|
Basic earnings per share (4) |
|
|
|
$ |
0.04 |
|
|
$ |
0.29 |
|
|
$ |
0.36 |
|
|
$ |
0.29 |
|
Diluted earnings per share (4) |
|
|
|
$ |
0.04 |
|
|
$ |
0.27 |
|
|
$ |
0.35 |
|
|
$ |
0.28 |
|
(1) |
Includes the impact of $14,447 of pre-tax expense within cost of products sold associated with inventory write-downs primarily related to excess out of season and current inventory and $2,861 of pre-tax expense within selling, general and administrative expenses associated with executive severance costs partly offset by the favorable impact of executive stock option forfeitures. |
(2) |
Includes the impact of $1,986 of pre-tax income within cost of products sold associated with the favorable impact of the recovery on inventory write downs taken in the second quarter and $164 pre-tax expense within selling, general and administrative expenses associated with executive search costs partly offset by the favorable impact of executive stock option forfeitures. |
(3) |
Includes the impact of $2,161 of pre-tax income within cost of products sold associated with the favorable impact of the recovery on inventory write downs taken in the second quarter and $323 pre-tax income within selling, general and administrative expenses associated with the favorable adjustment to management transitions costs taken in the second quarter. Additionally, gross profit, net income (loss) and diluted earnings (loss) per share in the fourth quarter were overstated by $530, $313 and $0.01, respectively, as a result of an immaterial error in inventory valuation during the third quarter. |
(4) |
The sum of the quarterly earnings per share may not equal the full-year amount as the computation of weighted-average number of shares outstanding for each quarter and the full-year are performed independently. |
(5) |
Includes the impact of $571 of pre-tax expense within selling, general and administrative expenses associated with costs incurred by the Company related to the Secondary Offering completed in July 2014. |
|
Note 17. Subsequent Event
On March 29, 2016, the Company commenced a rights offering (the “Rights Offering”), whereby the Company distributed, at no charge, to stockholders of record as of March 23, 2016 (the “Rights Offering Record Date”), rights to purchase new shares of the Company’s common stock at $5.50 per share. Each stockholder as of the Rights Offering Record Date (“Rights Holders”) received one non-transferrable right for every share of common stock owned on the Rights Offering Record Date (the “subscription right”). Rights Holders who fully exercise their subscription rights are entitled to subscribe for additional shares that remain unsubscribed as a result of any unexercised subscription rights (the “over-subscription right”). The over-subscription right allows a Rights Holder to subscribe for an additional number of shares equal to up to 20% of the shares of common stock for which such holder was otherwise entitled to subscribe. Subscription rights may only be exercised for whole numbers of shares; no fractional shares of common stock will be issued in the Rights Offering. The Rights Offering period expired on April 14, 2016 at 5:00 p.m. New York City time, prior to which payment for all subscription rights required an irrevocable funding of cash to the transfer agent, to be held in an account for the benefit of the Company. The Investors have fully subscribed in the Rights Offering and exercised their oversubscription right. Under the terms of the Investment Agreement, the Investors will fund the difference between the Rights Offering proceeds and $65,000 on or about April 21, 2016, but no later than April 30, 2016, concurrently with the closing of the Rights Offering.
The Company intends to issue 11,818,181 additional shares to raise gross proceeds of $65,000. The Company intends to use a portion of the net proceeds received from the Rights Offering to (1) repay the amount owed by us under the Tax Receivable Agreement with Sun Cardinal, for itself and as a representative of the other stockholders party thereto, for the tax benefit with respect to the 2014 taxable year, equal to $21,762 plus accrued interest (see Note 15 “Related Party Transactions” for additional details), and (2) repay all outstanding indebtedness under our Revolving Credit Facility. The Company intends to use the remaining net proceeds for general corporate purposes, which may include future amounts owed by us under the Tax Receivable Agreement.
On March 15, 2016, the Company also entered into an Investment Agreement with Sun Cardinal, LLC and SCSF Cardinal, LLC, affiliates of Sun Capital Partners, Inc., pursuant to which Sun Cardinal and SCSF Cardinal have agreed to backstop the rights offering by purchasing at the subscription price of $5.50 per share any and all shares not subscribed through the exercise of rights, including the oversubscription. Consummation of the rights offering and the transactions contemplated by the Investment Agreement are subject to customary closing conditions. The Investment Agreement supersedes the Rights Offering Commitment Letter, dated December 9, 2015, from Sun Capital Partners V, L.P., which is disclosed in further detail in Note 15 “Related Party Transactions.”
|
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
|
|
Beginning of Period |
|
|
Expenses Charges, net of Reversals |
|
|
Deductions and Write-offs net of Recoveries |
|
|
End of Period |
|
||||
Sales Allowances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015 |
|
$ |
(16,098 |
) |
|
$ |
(55,656 |
) |
|
$ |
58,908 |
|
|
$ |
(12,846 |
) |
Fiscal 2014 |
|
|
(9,265 |
) |
|
|
(54,467 |
) |
|
|
47,634 |
|
|
|
(16,098 |
) |
Fiscal 2013 |
|
|
(7,179 |
) |
|
|
(39,171 |
) |
|
|
37,085 |
|
|
|
(9,265 |
) |
Allowance for Doubtful Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015 |
|
|
(379 |
) |
|
|
34 |
|
|
|
157 |
|
|
|
(188 |
) |
Fiscal 2014 |
|
|
(353 |
) |
|
|
(168 |
) |
|
|
142 |
|
|
|
(379 |
) |
Fiscal 2013 |
|
|
(279 |
) |
|
|
(249 |
) |
|
|
175 |
|
|
|
(353 |
) |
Provision for Inventories |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015 |
|
|
(6,464 |
) |
|
|
(16,263 |
) |
|
|
9,479 |
|
|
|
(13,248 |
) |
Fiscal 2014 |
|
|
(3,868 |
) |
|
|
(3,719 |
) |
|
|
1,123 |
|
|
|
(6,464 |
) |
Fiscal 2013 |
|
|
(1,263 |
) |
|
|
(3,738 |
) |
|
|
1,133 |
|
|
|
(3,868 |
) |
Valuation Allowances on Deferred Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015 |
|
|
(1,074 |
) |
|
|
— |
|
|
|
50 |
|
|
|
(1,024 |
) |
Fiscal 2014 |
|
|
(1,843 |
) |
|
|
— |
|
|
|
769 |
|
|
|
(1,074 |
) |
Fiscal 2013 |
|
|
(64,767 |
) |
|
|
(78,855 |
) |
|
|
141,779 |
|
(a) |
|
(1,843 |
) |
(a) |
The reduction in the Valuation Allowance on Deferred Income Taxes recorded in Fiscal 2013 includes $127,833 that was recognized as an increase to additional paid-in capital in Stockholders’ Equity. |
|
(A) Description of Business: Vince is a leading contemporary fashion brand best known for modern effortless style and everyday luxury essentials. Established in 2002, the brand now offers a wide range of women’s and men’s apparel, women’s and men’s footwear, and handbags. We reach our customers through a variety of channels, specifically through major 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 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”).
The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The amounts and disclosures included in the notes to the 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. As used in this report, unless the context requires otherwise, “our,” “us” and “we” 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 reclassification had no impact on previously reported net income or stockholders’ equity.
(C) Fiscal Year: VHC operates on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52 or 53-week period ending on the Saturday closest to January 31 of the following year.
|
· |
References to “fiscal year 2015” or “fiscal 2015” refer to the fiscal year ended January 30, 2016; |
|
· |
References to “fiscal year 2014” or “fiscal 2014” refer to the fiscal year ended January 31, 2015; |
|
· |
References to “fiscal year 2013” or “fiscal 2013” refer to the fiscal year ended February 1, 2014. |
Fiscal years 2015, 2014 and 2013 consisted of a 52-week period.
(D) Our Business and Liquidity: During fiscal 2015 we have experienced declining sales and additional costs associated with making strategic investments for the future growth of the VINCE brand, including costs associated with the write-down of excess inventory, consulting agreements with our co-founders and the reorganization of our management team. We have undertaken steps to enhance our liquidity position that we expect will allow us to maintain a net debt balance sufficient to comply with any covenants under the Term Loan Facility and the Revolving Credit Facility, as well as provide additional cash for use in our operations as we make these investments. Accordingly, on December 9, 2015 we received a Rights Offering Commitment Letter from Sun Capital Partners V, L.P. (“Sun Fund V”) that commits Sun Fund V to provide the Company with an amount equal to $65,000 of cash proceeds in the event that the Company conducts a rights offering for its common stock to its stockholders (a “Rights Offering”). Such contribution was to be reduced by any proceeds received from the Rights Offering. On March 15, 2016, the Company entered into an Investment Agreement with Sun Cardinal, LLC and SCSF Cardinal, LLC, affiliates of Sun Capital Partners, Inc. (collectively the “Investors”), which supersedes the Rights Offering Commitment Letter.
Pursuant to the terms of the Investment Agreement, the Investors have agreed to backstop the Rights Offering by purchasing at the subscription price of $5.50 per share any and all shares not subscribed through the exercise of rights, including the oversubscription. Consummation of the Rights Offering and the transactions contemplated by the Investment Agreement are subject to customary closing conditions as well as specific representations, warranties and covenants that all parties are required to satisfy up to and through the closing of the transactions contemplated in the Investment Agreement, which is estimated to occur on about April 21, 2016, but can be no later than April 30, 2016. The Investment Agreement can be terminated by either party if the counterparty breaches any of the representations, warranties and covenants, as applicable to them, as set forth in the agreement. Representations, warranties and covenants that require adherence by the Company include among others, compliance with debt covenant requirements under the Company’s credit agreements and closing the backstop commitment by no later than April 30, 2016.
On March 29, 2016, the Company commenced the Rights Offering, whereby the Company distributed, at no charge, to stockholders of record as of March 23, 2016 (the “Rights Offering Record Date”), rights to purchase 11,818,181 new shares of the Company’s common stock at $5.50 per share. Each stockholder as of the Rights Offering Record Date (“Rights Holder”) received one non-transferrable right for every share of common stock owned on the Rights Offering Record Date (the “subscription right”). Rights Holders who fully exercise their subscription rights are entitled to subscribe for additional shares that remain unsubscribed as a result of any unexercised subscription rights (the “over-subscription right”). The over-subscription right allows a Rights Holder to subscribe for an additional number of shares equal to up to 20% of the shares of common stock for which such holder was otherwise entitled to subscribe. Subscription rights may only be exercised for whole numbers of shares; no fractional shares of common stock will be issued in the Rights Offering. The Rights Offering period expired on April 14, 2016 at 5:00 p.m. New York City time, prior to which payment for all subscription rights required an irrevocable funding of cash to the transfer agent, to be held in an account for the benefit of the Company. The Investors have fully subscribed in the Rights Offering and exercised their oversubscription right. Under the terms of the Investment Agreement, the Investors will fund the difference between the Rights Offering proceeds and $65,000 on or about April 21, 2016, but no later than April 30, 2016, concurrently with the closing of the Rights Offering.
The Company intends to use a portion of the net proceeds received from the Rights Offering to (1) repay the amount owed by us under the Tax Receivable Agreement with Sun Cardinal, for itself and as a representative of the other stockholders party thereto, for the tax benefit with respect to the 2014 taxable year, equal to $21,762 plus accrued interest (see Note 15 “Related Party Transactions” for additional details), and (2) repay all outstanding indebtedness under our Revolving Credit Facility. The Company intends to use the remaining net proceeds for general corporate purposes, which may include future amounts owed by us under the Tax Receivable Agreement.
The Company believes that proceeds from the Rights Offering and Investment Agreement along with cash flows generated from operations will provide sufficient liquidity for the Company to comply with covenants under the Term Loan Facility and Revolving Credit Facility as well as provide additional cash for use in our operations. Failure to receive the proceeds from Rights Offering and Investment Agreement could have a material adverse effect on our ability to comply with our debt covenant requirements and fund operations and capital expenditures in fiscal 2016.
(E) Use of Estimates: The preparation of consolidated financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements which affect revenues and expenses during the period reported. Estimates are adjusted when necessary to reflect actual experience. Significant estimates and assumptions may affect many items in the financial statements. Actual results could differ from estimates and assumptions in amounts that may be material to the consolidated financial statements.
Significant estimates inherent in the preparation of the consolidated financial statements include accounts receivable allowances, customer returns, the realizability of inventory, reserves for contingencies, useful lives and impairments of long-lived tangible and intangible assets, and accounting for income taxes and related uncertain tax positions, among others.
(F) Cash and cash equivalents: All demand deposits and highly liquid short-term deposits with original maturities of three months or less maintained under cash management activities are considered cash equivalents. The effect of foreign currency exchange rate fluctuations on cash and cash equivalents was not significant for fiscal 2015, fiscal 2014, or fiscal 2013.
(G) Accounts Receivable and Concentration of Credit Risk: We maintain an allowance for accounts receivable estimated to be uncollectible. The activity in this allowance for continuing operations is summarized as follows:
(in thousands) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
Balance, beginning of year |
|
$ |
379 |
|
|
$ |
353 |
|
|
$ |
279 |
|
Provisions for bad debt expense, net of reversals |
|
|
(34 |
) |
|
|
168 |
|
|
|
249 |
|
Bad debts written off |
|
|
(157 |
) |
|
|
(142 |
) |
|
|
(175 |
) |
Balance, end of year |
|
$ |
188 |
|
|
$ |
379 |
|
|
$ |
353 |
|
The provision for bad debts is included in selling, general and administrative expense. Substantially all of our trade receivables are derived from sales to retailers and are recorded at the invoiced amount and do not bear interest. We perform ongoing credit evaluations of our wholesale partners’ financial condition and require collateral as deemed necessary. The past due status of a receivable is based on its contractual terms. Account balances are charged off against the allowance when it is probable the receivable will not be collected.
Accounts receivable are recorded net of allowances for expected future chargebacks and margin support from wholesale partners. It is the nature of the apparel and fashion industry that suppliers like us face significant pressure from customers in the retail industry to provide allowances to compensate for wholesale partner margin shortfalls. This pressure often takes the form of customers requiring us to provide price concessions on prior shipments as a prerequisite for obtaining future orders. Pressure for these concessions is largely determined by overall retail sales performance and, more specifically, the performance of our products at retail. To the extent our wholesale partners have more of our goods on hand at the end of the season, there will be greater pressure for us to grant markdown concessions on prior shipments. Our accounts receivable balances are reported net of expected allowances for these matters based on the historical level of concessions required and our estimates of the level of markdowns and allowances that will be required in the coming season in order to collect the receivables. We evaluate the allowance balances on a continual basis and adjust them as necessary to reflect changes in anticipated allowance activity. We also provide an allowance for sales returns based on historical return rates.
In fiscal 2015, sales to three wholesale partners each accounted for more than ten percent of our net sales from continuing operations. These sales represented 18.3%, 13.8% and 10.8% of fiscal 2015 net sales. In fiscal 2014, sales to three wholesale partners each accounted for more than ten percent of our net sales from continuing operations. These sales represented 23.2%, 13.2% and 12.3% of fiscal 2014 net sales. In fiscal 2013, sales to three wholesale partners each accounted for more than ten percent of our net sales from continuing operations. These sales represented 19.8%, 12.8% and 12.8% of fiscal 2013 net sales.
In fiscal 2015, accounts receivable from three wholesale partners each accounted for more than ten percent of our gross accounts receivable in continuing operations. These receivables represented 19.3%, 17.8% and 14.7% of fiscal 2015 gross accounts receivable. In fiscal 2014 accounts receivable from four wholesale partners each accounted for more than ten percent of our gross accounts receivable in continuing operations. These receivables represented 24.5%, 13.8%, 12.7% and 11.4% of fiscal 2014 gross accounts receivable.
(H) Inventories: Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. The cost of inventory includes manufacturing or purchase cost as well as sourcing, transportation, duty and other processing costs associated with acquiring, importing and preparing inventory for sale. Inventory costs are included in cost of products sold at the time of their sale. Product development costs are expensed in selling, general and administrative expense when incurred. Inventory values are reduced to net realizable value when there are factors indicating that certain inventories will not be sold on terms sufficient to recover their cost.
Inventories of continuing operations consist of the following:
(in thousands) |
|
January 30, 2016 |
|
|
January 31, 2015 |
|
||
Finished goods |
|
$ |
36,576 |
|
|
$ |
37,395 |
|
Raw materials |
|
|
— |
|
|
|
24 |
|
Total inventories, net |
|
$ |
36,576 |
|
|
$ |
37,419 |
|
Net of reserves of: |
|
$ |
13,261 |
|
|
$ |
6,471 |
|
As of January 30, 2016, the lower of cost or market reserve included a write-down of the carrying value for certain excess inventory and aged product to its estimated net realizable value, as during the three months ended August 1, 2015 the Company recorded a charge of $14,447 associated with inventory that no longer supports the Company's prospective brand positioning strategy. As a result of changes in our estimates, during the three months ended October 31, 2015 and January 30, 2016, the Company recorded pre-tax income of $1,986 and $2,161, respectively, associated with the recovery of the inventory write-down taken in the three months ended August 1, 2015.
(I) Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is computed on the straight-line method over estimated useful lives of 3 to 10 years for furniture, fixtures, and computer equipment. Leasehold improvements are amortized on the straight-line basis over the shorter of their estimated useful lives or the remaining lease term, excluding renewal terms. Capitalized software is amortized on the straight-line basis over the estimated economic useful life of the software, generally three to five years. Maintenance and repair costs are charged to earnings while expenditures for major renewals and improvements are capitalized. Upon the disposition of property, plant and equipment, the accumulated depreciation is deducted from the original cost and any gain or loss is reflected in current earnings. Property, plant and equipment consist of the following:
|
|
January 30, |
|
|
January 31, |
|
||
(in thousands) |
|
2016 |
|
|
2015 |
|
||
Building and improvements |
|
$ |
38,452 |
|
|
$ |
27,645 |
|
Machinery and equipment |
|
|
8,236 |
|
|
|
5,384 |
|
Capitalized software |
|
|
1,764 |
|
|
|
1,341 |
|
Construction in process |
|
|
4,716 |
|
|
|
3,369 |
|
Total property, plant and equipment |
|
|
53,168 |
|
|
|
37,739 |
|
Less: accumulated depreciation and amortization |
|
|
(15,399 |
) |
|
|
(9,390 |
) |
Property, plant and equipment, net |
|
$ |
37,769 |
|
|
$ |
28,349 |
|
Depreciation expense related to continuing operations was $6,426, $3,381 and $1,562 for fiscal 2015, fiscal 2014 and fiscal 2013, respectively.
(J) Impairment of Long-lived Assets: We review long-lived assets with a finite life for existence of facts and circumstances which indicate that the useful life is shorter than previously estimated or the carrying amount may not be recoverable from future operations based on undiscounted expected future cash flows. Impairment losses are then recognized in operating results to the extent discounted expected future cash flows are less than the carrying value of the asset. There were no material impairment charges for continuing operations related to long-lived assets recorded in fiscal 2015, fiscal 2014 or fiscal 2013.
(K) Goodwill and Other Intangible Assets: Goodwill and other indefinite-lived intangible assets are tested for impairment at least annually and in an interim period if a triggering event occurs. We completed our annual impairment testing on our goodwill and indefinite-lived intangible assets during the fourth quarters of fiscal 2015, fiscal 2014 and fiscal 2013. Goodwill is not allocated to our operating segments in the measure of segment assets regularly reported to and used by management, however goodwill is allocated to operating segments (goodwill reporting units) for the sole purpose of the annual impairment test for goodwill.
Goodwill represents the excess of the cost of acquired businesses over the fair market value of the identifiable net assets. Indefinite-lived intangible assets are primarily company-owned trademarks. As the acquisition by Kellwood Company of the net assets of Vince occurred prior to the current requirements of ASC Topic 805 Business Combinations, the additional purchase consideration paid to the former owners of Vince subsequent to the acquisition date was recorded as an addition to the purchase price, and therefore goodwill, once determined.
In September 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to the Intangibles-Goodwill and Other topic of Accounting Standards Codification (“ASC”). Under this amendment, an entity may elect to perform a qualitative impairment assessment for goodwill. If adverse qualitative trends are identified during the qualitative assessment that indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative impairment test is required. “Step one” of this quantitative impairment test requires that the fair value of the reporting unit be estimated and compared to its carrying amount. If the carrying amount exceeds the estimated fair value of the asset, “step two” of the impairment test is performed to calculate the impairment loss. An impairment loss is recognized to the extent the carrying amount of the reporting unit exceeds the implied fair value.
An entity may pass on performing the qualitative assessment for a reporting unit and directly perform “step one” of the assessment. This determination can be made on a reporting unit by reporting unit basis, and an entity may resume performing a qualitative assessment in subsequent periods. This amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this amendment during fiscal year 2012.
In light of the decline in our sales over recent periods, in fiscal 2015 we elected to perform a quantitative impairment test on the goodwill. The results of the quantitative test did not result in any impairment of goodwill because the fair values of each of the Company’s reporting units exceeded their respective carrying values. As such, we were not required to perform “step two” of the impairment test. In fiscal 2014 and fiscal 2013, we elected to perform a qualitative assessment on the goodwill and determined that it was not more likely than not that the carrying value of the reporting unit was greater than the fair value. As such, we were not required to perform “step two” of the impairment test.
In July 2012, the FASB issued Accounting Standards Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite Lived Assets for Impairment (“ASU 2012-02”). Under this amendment, an entity may elect to perform a qualitative impairment assessment for indefinite-lived intangible assets similar to the goodwill impairment testing guidance discussed above.
An entity may pass on performing the qualitative assessment for an indefinite-lived intangible asset and directly perform “step one” of the assessment. This determination can be made on an asset by asset basis, and an entity may resume performing a qualitative assessment in subsequent periods. The amendment is effective for annual and interim impairment tests for indefinite-lived intangible assets performed for fiscal years beginning after September 15, 2012. We early adopted this amendment during fiscal 2012.
In light of the decline in our sales over recent periods, in fiscal 2015 we elected to perform a quantitative assessment on indefinite-lived intangible assets. The results of the quantitative test did not result in any impairment because the fair value of the Company’s indefinite-lived intangible asset exceeded its carrying value. As such we were not required to perform “step two” of the impairment test. In fiscal 2014 and fiscal 2013, we elected to perform a qualitative assessment on indefinite-lived intangible assets and determined that it was not more likely than not that the carrying value of the assets exceeded the fair value. As such we were not required to perform “step two” of the impairment test.
Determining the fair value of goodwill and other intangible assets is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. It is possible that estimates of future operating results could change adversely and impact the evaluation of the recoverability of the carrying value of goodwill and intangible assets and that the effect of such changes could be material.
Definite-lived intangible assets are comprised of customer relationships and are being amortized on a straight-line basis over their useful lives of 20 years.
See Note 4 “Goodwill and Intangible Assets” for more information on the details surrounding goodwill and intangible assets.
(L) Deferred Financing Costs: Deferred financing costs, such as underwriting, financial advisory, professional fees, and other similar fees are capitalized and recognized in interest expense over the contractual life of the related debt instrument using the straight-line method, as this method results in recognition of interest expense that is materially consistent with that of the effective interest method.
(M) Deferred Rent and Deferred Lease Incentives: We lease various office spaces, showrooms and retail stores. Many of these operating leases contain predetermined fixed escalations of the minimum rentals during the original term of the lease. For these leases, we recognize the related rental expense on a straight-line basis over the life of the lease and record the difference between the amount charged to operations and amounts paid as deferred rent. Certain of our retail store leases contain provisions for contingent rent, typically a percentage of retail sales once a predetermined threshold has been met. These amounts are expensed as incurred. Additionally, we received lease incentives in certain leases. These allowances have been deferred and are amortized on a straight-line basis over the life of the lease as a reduction of rent expense.
(N) Revenue Recognition: Sales are recognized when goods are shipped in accordance with customer orders for our wholesale business, upon receipt by the customer for our e-commerce business, and at the time of sale to the consumer for our retail business. Revenue associated with gift cards is recognized upon redemption. The estimated amounts of sales discounts, returns and allowances are accounted for as reductions of sales when the associated sale occurs. These estimated amounts are adjusted periodically based on changes in facts and circumstances when the changes become known to us. Accrued discounts, returns and allowances are included as an offset to accounts receivable in the Consolidated Balance Sheets for our wholesale business. The activity in the accrued discounts, returns and allowances account for continuing operations is summarized as follows:
(in thousands) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
Balance, beginning of year |
|
$ |
16,098 |
|
|
$ |
9,265 |
|
|
$ |
7,179 |
|
Provision |
|
|
55,656 |
|
|
|
54,467 |
|
|
|
39,171 |
|
Utilization |
|
|
(58,908 |
) |
|
|
(47,634 |
) |
|
|
(37,085 |
) |
Balance, end of year |
|
$ |
12,846 |
|
|
$ |
16,098 |
|
|
$ |
9,265 |
|
For our wholesale business, amounts billed to customers for shipping and handling costs are not significant. Our stated terms are FOB shipping point. There is no stated obligation to customers after shipment, other than specifically set forth allowances or discounts that are accrued at the time of sale. The rights of inspection or acceptance contained in certain sales agreements are limited to whether the goods received by our wholesale partners are in conformance with the order specifications.
(O) Cost of Products Sold: Our cost of products sold and gross margins may not necessarily be comparable to that of other entities as a result of different practices in categorizing costs. The primary components of our cost of products sold are as follows:
|
· |
the cost of purchased merchandise, including raw materials; |
|
· |
the cost of inbound transportation, including freight; |
|
· |
the cost of our production and sourcing departments; |
|
· |
other processing costs associated with acquiring and preparing the inventory for sale; and |
|
· |
shrink and valuation reserves. |
(P) Marketing and Advertising: We provide cooperative advertising allowances to certain of our customers. These allowances are accounted for as reductions in sales as discussed in “Revenue Recognition” above. Production expense related to company-directed advertising is deferred until the first time at which the advertisement runs. Communication expense related to company-directed advertising is expensed as incurred. Marketing and advertising expense recorded in selling, general and administrative expenses for continuing operations was $9,177, $7,427 and $4,858 in fiscal 2015, fiscal 2014 and fiscal 2013, respectively. At January 30, 2016 and January 31, 2015, deferred production expenses associated with company-directed advertising were $416 and $643, respectively.
(Q) Share-Based Compensation: New, modified and unvested share-based payment transactions with employees, such as stock options, are measured at fair value and recognized as compensation expense over the requisite service period and is included as a component of selling, general and administrative expenses in the Consolidated Statements of Operations. Additionally, share-based awards granted to non-employees are expensed over the period in which the related services are rendered at their fair value, using the Black Scholes Pricing Model to determine the fair value.
(R) Income Taxes: We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities at enacted rates. We determine the appropriateness of valuation allowances in accordance with the “more likely than not” recognition criteria. We recognize tax positions in the Consolidated Balance Sheets as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with tax authorities assuming full knowledge of the position and all relevant facts. Accrued interest and penalties related to unrecognized tax benefits are included in income taxes in the Consolidated Statements of Operations.
(S) Earnings Per Share: Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted net income (loss) per share is calculated similarly, but includes potential dilution from the exercise of stock options for which future service is required as a condition to deliver the underlying stock.
(T) Recent Accounting Pronouncements: In November 2015, new accounting guidance on the balance sheet classification of deferred taxes was issued, which requires entities to classify deferred tax assets and liabilities as noncurrent in the consolidated balance sheet. Currently deferred tax assets and liabilities must be classified as current and noncurrent amounts in the consolidated balance sheet. This guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company is currently evaluating the impact of adopting this guidance on the consolidated financial statements.
In July 2015, new accounting guidance on accounting for inventory was issued, which requires entities to measure inventory at the lower of cost and net realizable value. This guidance is effective for interim and annual periods beginning on or after December 15, 2016. The Company is currently evaluating the impact of the adoption of the new accounting guidance on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest.” The standard requires deferred financing costs to be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of being presented as a deferred asset in the balance sheet. ASU 2015-03 does not change the recognition and measurement guidance for deferred financing costs. Once adopted, entities are required to apply the new guidance retrospectively to all prior periods presented. ASU 2015-03 is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years and early application is permitted. The Company has elected to early adopt the standard, effective February 1, 2015 and accordingly, the consolidated balance sheets as of January 30, 2016 and January 31, 2015 reflect the deferred financing costs as a direct deduction from the carrying amount of our long-term debt. Refer to Note 7 “Long-Term Debt”, for further information.
In April 2015, the FASB issued ASU No. 2015-05, “Customer's Accounting for Fees Paid in a Cloud Computing Arrangement,” which provides guidance on accounting for cloud computing fees. If a cloud computing arrangement includes a software license, then the customer should account for the license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. This guidance is effective for arrangements entered into, or materially modified, in interim and annual periods beginning after December 15, 2015. Retrospective application is permitted but not required. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.
In May 2014, FASB issued revenue recognition guidance (ASU No. 2014-09). The new accounting guidance requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, FASB elected to defer the effective dates (ASU No. 2015-14). The updated guidance is now effective for interim and annual periods beginning on or after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of the adoption of the new guidance on its financial statements.
|
We maintain an allowance for accounts receivable estimated to be uncollectible. The activity in this allowance for continuing operations is summarized as follows:
(in thousands) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
Balance, beginning of year |
|
$ |
379 |
|
|
$ |
353 |
|
|
$ |
279 |
|
Provisions for bad debt expense, net of reversals |
|
|
(34 |
) |
|
|
168 |
|
|
|
249 |
|
Bad debts written off |
|
|
(157 |
) |
|
|
(142 |
) |
|
|
(175 |
) |
Balance, end of year |
|
$ |
188 |
|
|
$ |
379 |
|
|
$ |
353 |
|
Inventories of continuing operations consist of the following:
(in thousands) |
|
January 30, 2016 |
|
|
January 31, 2015 |
|
||
Finished goods |
|
$ |
36,576 |
|
|
$ |
37,395 |
|
Raw materials |
|
|
— |
|
|
|
24 |
|
Total inventories, net |
|
$ |
36,576 |
|
|
$ |
37,419 |
|
Net of reserves of: |
|
$ |
13,261 |
|
|
$ |
6,471 |
|
Property, plant and equipment consist of the following:
|
|
January 30, |
|
|
January 31, |
|
||
(in thousands) |
|
2016 |
|
|
2015 |
|
||
Building and improvements |
|
$ |
38,452 |
|
|
$ |
27,645 |
|
Machinery and equipment |
|
|
8,236 |
|
|
|
5,384 |
|
Capitalized software |
|
|
1,764 |
|
|
|
1,341 |
|
Construction in process |
|
|
4,716 |
|
|
|
3,369 |
|
Total property, plant and equipment |
|
|
53,168 |
|
|
|
37,739 |
|
Less: accumulated depreciation and amortization |
|
|
(15,399 |
) |
|
|
(9,390 |
) |
Property, plant and equipment, net |
|
$ |
37,769 |
|
|
$ |
28,349 |
|
The activity in the accrued discounts, returns and allowances account for continuing operations is summarized as follows:
(in thousands) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
Balance, beginning of year |
|
$ |
16,098 |
|
|
$ |
9,265 |
|
|
$ |
7,179 |
|
Provision |
|
|
55,656 |
|
|
|
54,467 |
|
|
|
39,171 |
|
Utilization |
|
|
(58,908 |
) |
|
|
(47,634 |
) |
|
|
(37,085 |
) |
Balance, end of year |
|
$ |
12,846 |
|
|
$ |
16,098 |
|
|
$ |
9,265 |
|
|
The results of the non-Vince businesses included in discontinued operations (through the separation of the non-Vince businesses on November 27, 2013) for the fiscal year ended February 1, 2014 is summarized in the following table:
|
|
Fiscal Year |
|
|
(in thousands, except effective tax rate) |
|
2013 |
|
|
Net sales |
|
$ |
400,848 |
|
Cost of products sold |
|
|
313,620 |
|
Gross profit |
|
|
87,228 |
|
Selling, general and administrative expenses |
|
|
98,016 |
|
Restructuring, environmental and other charges |
|
|
1,628 |
|
Impairment of long-lived assets |
|
|
1,399 |
|
Change in fair value of contingent consideration |
|
|
1,473 |
|
Interest expense, net |
|
|
46,677 |
|
Other expense, net |
|
|
498 |
|
Loss before income taxes |
|
|
(62,463 |
) |
Income taxes |
|
|
(11,648 |
) |
Net loss from discontinued operations, net of taxes |
|
$ |
(50,815 |
) |
Effective tax rate |
|
|
18.6 |
% |
|
Net goodwill balances and changes therein subsequent to the February 1, 2014 Consolidated Balance Sheet by segment are as follows:
(in thousands) |
|
Wholesale |
|
|
Direct-to-consumer |
|
|
Total Net Goodwill |
|
|||
Balance as of February 1, 2014 |
|
$ |
41,435 |
|
|
$ |
22,311 |
|
|
$ |
63,746 |
|
Balance as of January 31, 2015 |
|
$ |
41,435 |
|
|
$ |
22,311 |
|
|
$ |
63,746 |
|
Balance as of January 30, 2016 |
|
$ |
41,435 |
|
|
$ |
22,311 |
|
|
$ |
63,746 |
|
Identifiable intangible assets summary:
(in thousands) |
|
Gross Amount |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
|||
Balance as of January 31, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
11,970 |
|
|
$ |
(4,176 |
) |
|
$ |
7,794 |
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
101,850 |
|
|
|
— |
|
|
|
101,850 |
|
Total intangible assets |
|
$ |
113,820 |
|
|
$ |
(4,176 |
) |
|
$ |
109,644 |
|
(in thousands) |
|
Gross Amount |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
|||
Balance as of January 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
11,970 |
|
|
|
(4,774 |
) |
|
$ |
7,196 |
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
101,850 |
|
|
|
— |
|
|
|
101,850 |
|
Total intangible assets |
|
$ |
113,820 |
|
|
$ |
(4,774 |
) |
|
$ |
109,046 |
|
Amortization of identifiable intangible assets was $598, $599 and $599 for fiscal 2015, 2014 and 2013, respectively, which is included in selling, general and administrative expenses on the Consolidated Statements of Operations. Amortization expense for each of the fiscal years 2016 to 2020 is expected to be as follows:
|
|
Future |
|
|
(in thousands) |
|
Amortization |
|
|
2016 |
|
$ |
598 |
|
2017 |
|
|
598 |
|
2018 |
|
|
598 |
|
2019 |
|
|
598 |
|
2020 |
|
|
598 |
|
Total next 5 fiscal years |
|
$ |
2,990 |
|
|
Long-term debt consisted of the following as of, January 30, 2016 and January 31, 2015:
(in thousands) |
|
January 30, 2016 |
|
|
January 31, 2015 |
|
||
Term Loan Facility |
|
$ |
45,000 |
|
|
$ |
65,000 |
|
Revolving Credit Facility |
|
|
15,000 |
|
|
|
23,000 |
|
Total long-term debt principal |
|
|
60,000 |
|
|
|
88,000 |
|
Less: Deferred financing costs (1) |
|
|
2,385 |
|
|
|
3,550 |
|
Total long-term debt |
|
$ |
57,615 |
|
|
$ |
84,450 |
|
(1) |
Pursuant to new accounting guidance issued by the Financial Accounting Standards Board (“FASB”) in April 2015, entities are no longer required to present deferred financing costs as a deferred asset. The guidance is effective for our fiscal year beginning in 2016, however, the Company has early adopted this accounting standard update effective as of February 1, 2015 and accordingly, the January 31, 2015 comparative balance sheet was adjusted to conform to the new classification presentation. There was no other impact on the financial statements related to the adoption other than the reclassification change on the consolidated balance sheet. Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies”, for further information regarding the accounting standard update. |
|
The future minimum lease payments under operating leases at January 30, 2016 were as follows:
|
|
Minimum Lease |
|
|
(in thousands) |
|
Payments |
|
|
Fiscal 2016 |
|
$ |
20,083 |
|
Fiscal 2017 |
|
|
20,891 |
|
Fiscal 2018 |
|
|
20,712 |
|
Fiscal 2019 |
|
|
20,653 |
|
Fiscal 2020 |
|
|
19,584 |
|
Thereafter |
|
|
67,444 |
|
Total minimum lease payments |
|
$ |
169,367 |
|
The following is a reconciliation of the accrued severance and employee related benefits included within total current liabilities on the consolidated balance sheet:
(in thousands) |
|
|
|
|
Balance at August 1, 2015 |
|
$ |
3,717 |
|
Cash payments |
|
|
(1,557 |
) |
Non-cash recovery |
|
|
(323 |
) |
Balance at January 30, 2016 |
|
$ |
1,837 |
|
|
The provision for income taxes for continuing operations consists of the following:
(in thousands) |
|
Fiscal 2015 |
|
|
Fiscal 2014 |
|
|
Fiscal 2013 |
|
|||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(53 |
) |
|
$ |
759 |
|
|
$ |
— |
|
State |
|
|
522 |
|
|
|
344 |
|
|
|
43 |
|
Foreign |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total current |
|
|
469 |
|
|
|
1,103 |
|
|
|
43 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
2,994 |
|
|
|
20,416 |
|
|
|
6,333 |
|
State |
|
|
(249 |
) |
|
|
2,475 |
|
|
|
905 |
|
Foreign |
|
|
— |
|
|
|
— |
|
|
|
(13 |
) |
Total deferred |
|
|
2,745 |
|
|
|
22,891 |
|
|
|
7,225 |
|
Total provision for income taxes |
|
$ |
3,214 |
|
|
$ |
23,994 |
|
|
$ |
7,268 |
|
A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows:
|
|
Fiscal 2015 |
|
|
Fiscal 2014 |
|
|
Fiscal 2013 |
|
|||
Statutory federal rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State taxes, net of federal benefit |
|
|
6.5 |
% |
|
|
5.7 |
% |
|
|
9.5 |
% |
Nondeductible Tax Receivable Agreement adjustment |
|
|
4.1 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Nondeductible interest |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
18.1 |
% |
Nondeductible transaction costs |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
6.7 |
% |
Valuation allowance |
|
|
(0.5 |
)% |
|
|
(0.7 |
)% |
|
|
(45.5 |
)% |
Return to provision adjustment |
|
|
(2.4 |
)% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Changes in tax laws |
|
|
(3.2 |
)% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Other |
|
|
(0.8 |
)% |
|
|
0.2 |
% |
|
|
(0.1 |
)% |
Total |
|
|
38.7 |
% |
|
|
40.2 |
% |
|
|
23.7 |
% |
Deferred income tax assets and liabilities for continuing operations consisted of the following:
(in thousands) |
|
January 30, 2016 |
|
|
January 31, 2015 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
17,071 |
|
|
$ |
29,935 |
|
Employee related costs |
|
|
2,163 |
|
|
|
3,503 |
|
Allowance for asset valuations |
|
|
2,551 |
|
|
|
3,172 |
|
Accrued expenses |
|
|
6,088 |
|
|
|
3,933 |
|
Net operating losses |
|
|
72,465 |
|
|
|
65,111 |
|
Tax credits |
|
|
812 |
|
|
|
888 |
|
Other |
|
|
457 |
|
|
|
90 |
|
Total deferred tax assets |
|
|
101,607 |
|
|
|
106,632 |
|
Less: valuation allowances |
|
|
(1,024 |
) |
|
|
(1,074 |
) |
Net deferred tax assets |
|
|
100,583 |
|
|
|
105,558 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Cancellation of debt income |
|
|
(6,657 |
) |
|
|
(8,876 |
) |
Other |
|
|
(482 |
) |
|
|
(493 |
) |
Total deferred tax liabilities |
|
|
(7,139 |
) |
|
|
(9,369 |
) |
Net deferred tax assets |
|
$ |
93,444 |
|
|
$ |
96,189 |
|
Included in: |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
4,164 |
|
|
$ |
4,015 |
|
Deferred income taxes and other assets |
|
|
89,280 |
|
|
|
92,174 |
|
Net deferred income tax assets |
|
$ |
93,444 |
|
|
$ |
96,189 |
|
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, is as follows:
(in thousands) |
|
Fiscal 2015 |
|
|
Fiscal 2014 |
|
|
Fiscal 2013 |
|
|||
Beginning balance |
|
$ |
4,487 |
|
|
$ |
3,693 |
|
|
$ |
9,378 |
|
Increases for tax positions in current year |
|
|
72 |
|
|
|
2,397 |
|
|
|
3,743 |
|
Increases for tax positions in prior years |
|
|
27 |
|
|
|
135 |
|
|
|
356 |
|
Decreases for tax positions in prior years |
|
|
(2,459 |
) |
|
|
(1,738 |
) |
|
|
(4,186 |
) |
Settlements |
|
|
— |
|
|
|
— |
|
|
|
(3,022 |
) |
Lapse in statute of limitations |
|
|
— |
|
|
|
— |
|
|
|
(102 |
) |
Restructuring Transactions |
|
|
— |
|
|
|
— |
|
|
|
(2,474 |
) |
Ending balance |
|
$ |
2,127 |
|
|
$ |
4,487 |
|
|
$ |
3,693 |
|
|
Summary information for our operating segments is presented below.
|
|
Fiscal Year |
|
|||||||||
(in thousands) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
201,182 |
|
|
$ |
259,418 |
|
|
$ |
229,114 |
|
Direct-to-consumer |
|
|
101,275 |
|
|
|
80,978 |
|
|
|
59,056 |
|
Total net sales |
|
$ |
302,457 |
|
|
$ |
340,396 |
|
|
$ |
288,170 |
|
Income from Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
61,571 |
|
|
$ |
100,623 |
|
|
$ |
81,822 |
|
Direct-to-consumer |
|
|
7,839 |
|
|
|
14,556 |
|
|
|
10,435 |
|
Subtotal |
|
|
69,410 |
|
|
|
115,179 |
|
|
|
92,257 |
|
Unallocated expenses |
|
|
(53,684 |
) |
|
|
(44,929 |
) |
|
|
(42,904 |
) |
Total income from operations |
|
$ |
15,726 |
|
|
$ |
70,250 |
|
|
$ |
49,353 |
|
Depreciation & Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
2,058 |
|
|
$ |
1,962 |
|
|
$ |
1,204 |
|
Direct-to-consumer |
|
|
4,498 |
|
|
|
2,950 |
|
|
|
1,581 |
|
Unallocated corporate |
|
|
1,794 |
|
|
|
355 |
|
|
|
— |
|
Total depreciation & amortization |
|
$ |
8,350 |
|
|
$ |
5,267 |
|
|
$ |
2,785 |
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
1,629 |
|
|
$ |
2,076 |
|
|
$ |
1,832 |
|
Direct-to-consumer |
|
|
9,442 |
|
|
|
8,117 |
|
|
|
8,241 |
|
Unallocated corporate |
|
|
6,520 |
|
|
|
9,506 |
|
|
|
— |
|
Total capital expenditure |
|
$ |
17,591 |
|
|
$ |
19,699 |
|
|
$ |
10,073 |
|
(in thousands) |
|
January 30, 2016 |
|
|
January 31, 2015 |
|
||
Total Assets: |
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
47,757 |
|
|
$ |
70,635 |
|
Direct-to-consumer |
|
|
35,433 |
|
|
|
33,793 |
|
Unallocated corporate |
|
|
280,378 |
|
|
|
274,220 |
|
Total assets |
|
$ |
363,568 |
|
|
$ |
378,648 |
|
Sales results are presented on a geographic basis below
|
|
Fiscal Year |
|
|||||||||
(in thousands) |
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
273,655 |
|
|
$ |
310,179 |
|
|
$ |
265,622 |
|
Other countries |
|
|
28,802 |
|
|
|
30,217 |
|
|
|
22,548 |
|
Total net sales |
|
$ |
302,457 |
|
|
$ |
340,396 |
|
|
$ |
288,170 |
|
Our net sales by major product category are as follows:
|
|
Fiscal Year |
|
|||||||||||||||||||||
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||||||||||||||
(in thousands) |
|
Amount |
|
|
% of Total |
|
|
Amount |
|
|
% of Total |
|
|
Amount |
|
|
% of Total |
|
||||||
Women's collection |
|
$ |
272,338 |
|
|
|
90 |
% |
|
$ |
301,076 |
|
|
|
89 |
% |
|
$ |
253,647 |
|
|
|
88 |
% |
Men's collection |
|
|
22,685 |
|
|
|
8 |
% |
|
|
35,417 |
|
|
|
10 |
% |
|
|
33,612 |
|
|
|
12 |
% |
Other |
|
|
7,434 |
|
|
|
2 |
% |
|
|
3,903 |
|
|
|
1 |
% |
|
|
911 |
|
|
|
0 |
% |
|
|
$ |
302,457 |
|
|
|
100 |
% |
|
$ |
340,396 |
|
|
|
100 |
% |
|
$ |
288,170 |
|
|
|
100 |
% |
|
Summarized quarterly financial results for fiscal 2015 and fiscal 2014:
(in thousands, except per share data) |
|
|
|
First Quarter |
|
|
Second Quarter (1) |
|
|
Third Quarter (2) |
|
|
Fourth Quarter (3) |
|
||||
Fiscal 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
|
$ |
59,842 |
|
|
$ |
79,993 |
|
|
$ |
80,859 |
|
|
$ |
81,763 |
|
Gross profit |
|
|
|
|
30,741 |
|
|
|
20,789 |
|
|
|
40,005 |
|
|
|
40,981 |
|
Net income (loss) |
|
|
|
|
2,454 |
|
|
|
(5,026 |
) |
|
|
5,893 |
|
|
|
1,778 |
|
Basic earnings (loss) per share (4) |
|
|
|
$ |
0.07 |
|
|
$ |
(0.14 |
) |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
Diluted earnings (loss) per share (4) |
|
|
|
$ |
0.06 |
|
|
$ |
(0.14 |
) |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
|
|
|
|
First Quarter |
|
|
Second Quarter (5) |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
||||
Fiscal 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
|
$ |
53,452 |
|
|
$ |
89,326 |
|
|
$ |
102,947 |
|
|
$ |
94,671 |
|
Gross profit |
|
|
|
|
26,411 |
|
|
|
44,014 |
|
|
|
50,648 |
|
|
|
45,756 |
|
Net income |
|
|
|
|
1,384 |
|
|
|
10,501 |
|
|
|
13,311 |
|
|
|
10,527 |
|
Basic earnings per share (4) |
|
|
|
$ |
0.04 |
|
|
$ |
0.29 |
|
|
$ |
0.36 |
|
|
$ |
0.29 |
|
Diluted earnings per share (4) |
|
|
|
$ |
0.04 |
|
|
$ |
0.27 |
|
|
$ |
0.35 |
|
|
$ |
0.28 |
|
(1) |
Includes the impact of $14,447 of pre-tax expense within cost of products sold associated with inventory write-downs primarily related to excess out of season and current inventory and $2,861 of pre-tax expense within selling, general and administrative expenses associated with executive severance costs partly offset by the favorable impact of executive stock option forfeitures. |
(2) |
Includes the impact of $1,986 of pre-tax income within cost of products sold associated with the favorable impact of the recovery on inventory write downs taken in the second quarter and $164 pre-tax expense within selling, general and administrative expenses associated with executive search costs partly offset by the favorable impact of executive stock option forfeitures. |
(3) |
Includes the impact of $2,161 of pre-tax income within cost of products sold associated with the favorable impact of the recovery on inventory write downs taken in the second quarter and $323 pre-tax income within selling, general and administrative expenses associated with the favorable adjustment to management transitions costs taken in the second quarter. Additionally, gross profit, net income (loss) and diluted earnings (loss) per share in the fourth quarter were overstated by $530, $313 and $0.01, respectively, as a result of an immaterial error in inventory valuation during the third quarter. |
(4) |
The sum of the quarterly earnings per share may not equal the full-year amount as the computation of weighted-average number of shares outstanding for each quarter and the full-year are performed independently. |
(5) |
Includes the impact of $571 of pre-tax expense within selling, general and administrative expenses associated with costs incurred by the Company related to the Secondary Offering completed in July 2014. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|