Item 2.01 Completion of Acquisition or Disposition of Assets.
Merger Agreement
As previously reported on Current Reports on Form 8-K filed on February 7, 2007, February 12, 2007 and June 26, 2007, on February 6, 2007 and June 25, 2007, Joe’s Jeans Inc. (the "Company"), a Delaware corporation, its wholly owned subsidiary, Joe’s Jeans Subsidiary Inc. ("Joe’s Subsidiary"), a Delaware corporation, JD Holdings, Inc. ("JD Holdings"), a California corporation, and Joseph Dahan ("Mr. Dahan"), the sole stockholder of JD Holdings, entered into a definitive Agreement and Plan of Merger, as amended (the "Merger Agreement"). JD Holdings primary asset is all rights, title and interest in all intellectual property, including the trademarks, related to the Joes(R), Joe's Jeans(TM) and JD brand and marks (the "Brand"). The Company licensed the Brand from JD Holdings.
Under the terms and subject to the conditions set forth in the Merger Agreement, on October 25, 2007, the Company and JD Holdings completed the Merger. In connection with the Merger, Joe’s Subsidiary merged with and into JD Holdings, with Joe’s Subsidiary as the surviving entity and a wholly owned subsidiary of the Company (the "Merger"). In addition, the Company issued 14,000,000 shares of its common stock and made a cash payment of $300,000 to JD Holdings in exchange for all of its outstanding shares. As a result of the Merger, the Company now owns all rights, title and interest in the Brand.
Furthermore, under the revised Merger Agreement, Mr. Dahan will continue to be entitled to, for a period of 120 months following October 25, 2007, a certain percentage of the gross profit earned by the Company in any applicable fiscal year. Mr. Dahan will be entitled to the following percentages of the gross profit earned by the Company in the applicable fiscal year: (i) 11.33% of the gross profit from $11,251,000 to $22,500,000; plus (ii) 3% of the gross profit from $22,501,000 to $31,500,000; plus (iii) 2% of the gross profit from $31,501,000 to $40,500,000; plus (iv) 1% of the gross profit above $40,501,000. The payments will be made in advance and then be compared against amounts actually earned after the applicable quarter or fiscal year with shortfalls paid immediately and overpayments offset against future earnings. No payment will be made if the gross profit is less than $11,250,000. "Gross Profit" is defined as net sales of the Joe’s Jeans brand less cost of goods sold as reported in the Company’s periodic filings with the SEC. In addition, the Merger Agreement contains a restrictive covenant relating to non-competition and non-solicitation for one year following the termination of Dahan’s service to the Company.
The assets were acquired from JD Holdings, a privately held company headquartered in Los Angeles, California. At the time of entering into the Merger Agreement, Mr. Dahan was a current employee of the Company, serving as president of Joe’s Subsidiary. In addition, JD Holdings was the successor to JD Design, the entity from whom the Company licensed the Brand which terminated automatically upon completion of the Merger.
Effective upon completion of the Merger, on October 25, 2007, Mr. Dahan became an officer, director and greater than 10% stockholder of the Company. In connection with the completion of the Merger, an Employment Agreement and Investor Rights Agreement became effective.
A copy of the press release announcing the closing of the Merger issued by the Company on October 26, 2007 is filed herewith as Exhibit 99.1 and incorporated herein by reference. The preceding description of the Merger Agreement is a summary of its material terms, does not purport to be complete, and is qualified in its entirety by the copy of the agreements which are incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed on September 5, 2007 and Exhibits 2.1, 2.2 and 2.3 are incorporated herein by reference.
Employment Agreement
In connection with the completion of the Merger, Mr. Dahan’s employment agreement automatically became effective upon the closing of the Merger for Mr. Dahan to serve as Creative Director for the Joe’s Brand.
The initial term of employment is 5 years with automatic renewals for successive 1 year periods thereafter, unless terminated earlier in accordance with the agreement. Under the employment agreement, Mr. Dahan is entitled to an annual salary of $300,000 and other discretionary benefits that the Compensation Committee of the Board of Directors may deem appropriate in its sole and absolute discretion.
Under the terms of the employment agreement, the Company may terminate Mr. Dahan for Cause or if he becomes Disabled. "Cause" is defined as (i) a conviction, plea of guilty or nolo contendere to a felony or a crime of moral turpitude; (ii) a material breach of any provision of the employment agreement that is not cured within 45 days of receipt of written notice of such breach; (iii) the solicitation, persuasion or attempt at persuasion for any employee, consultant, contractor, customer or potential customer to engage in an act prohibited by the employment agreement; or (iv) a violation of any of our policies in our handbook or code of ethics and such violation constitutes a breach of the Code of Ethics or warrants termination. "Disability" is defined as inability to perform duties for 180 consecutive days or shorter periods aggregating 270 days during any 12 month period. Should the Company terminate Mr. Dahan’s employment for Cause or Disability, the Company would only be required to pay him through the date of termination. The Company may terminate Mr. Dahan’s employment without Cause at any time upon two weeks notice, provided that it pays to him the present value of the annual salary amounts otherwise due to him for the remainder of the initial term of employment or any renewal term. Mr. Dahan may terminate his employment for Good Reason at any time within 30 days written notice. "Good Reason" is defined as (i) a material breach of the employment agreement by the Company that is not cured within 30 days of written notice; or (ii) Mr. Dahan’s decision to terminate employment at any time after 18 months following a Change in Control. A "Change in Control" is defined as (i) the sale or disposal of all or substantially all of the assets; (ii) the merger or consolidation with another company provided that the Company’s stockholders as a group no longer own at least 50% of the voting power of the surviving corporation; (iii) any person or entity becoming the beneficial owner of 50% or more of the Company’s combined voting power; or (iv) the approval by the Company’s stockholders to liquidate or dissolve. In the event that Mr. Dahan terminates his employment for Good Reason, then he will be entitled to the present value of the annual salary amounts otherwise due to him for the remainder of the initial term of employment or any renewal term. Further, Mr. Dahan may terminate his employment for any reason upon ten business days’ notice and only be entitled to his salary as of the date of termination on a pro rata basis.
The employment agreement contains customary terms and conditions related to confidentiality of information, ownership by the Company of all intellectual property, including future designs and trademarks, alternative dispute resolution and Mr. Dahan’s duties and responsibilities to us and the Brand as Creative Director.
The preceding description of the Employment Agreement is a summary of its material terms, does not purport to be complete, and is qualified in its entirety by the copy of the agreement which is incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed on September 5, 2007 and incorporated herein by reference.
Investor Rights Agreement
Upon the closing of the Merger, the Company also entered into an investor rights agreement. Pursuant to the investor rights agreement, the Company agreed to register for resale, on a periodic basis at the request of Mr. Dahan, the shares of common stock eligible for resale issued in connection with the Merger. The shares of common stock issued as Merger consideration become eligible for resale beginning on the six month anniversary of the closing date of the Merger at an initial rate of 1/6 of the shares issued and every six months thereafter at the same rate until all the shares are fully released on the third anniversary of the closing date. The Company agreed to bear all expenses associated with registering these shares for resale and have granted to Mr. Dahan certain piggyback rights with respect to future registration statements filed by the Company.
In addition, under the investor rights agreement, the Company’s Board of Directors elected Mr. Dahan as member effective as of October 25, 2007.
The investor rights agreement contains customary terms and conditions related to registration procedures, trading suspensions, and indemnification of the parties.
The preceding description of the Investor Rights Agreement is a summary of its material terms, does not purport to be complete, and is qualified in its entirety by the copy of the agreement which is filed herewith as Exhibit 10.2. Exhibit 10.2 is incorporated herein by reference.