Commitments and Contingencies |
9 Months Ended |
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Aug. 31, 2011 | |
Commitments and Contingencies [Abstract] | |
COMMITMENTS AND CONTIGENCIES |
NOTE 10 — COMMITMENTS AND CONTINGENCIES
Litigation
The Company has a license agreement with Alleghany Pharmacal Corporation (“Alleghany”),
which it entered into in 1986 for the use of certain trademarks, including Nutra Nail
and Hair Off. The license agreement provides that if, and when, in the aggregate,
$9,000,000 in royalties had been paid thereunder, the royalty rate for those products
charged at 6% would be reduced to 1%. The Company paid an aggregate of $9,000,000 in
royalties to Alleghany as of April 2003, and commencing on May 1, 2003, the license
royalty was reduced to 1%. On March 25, 2011, the Company received a letter
on behalf of Alleghany claiming that the Company was in default of the license
agreement, and that minimum annual royalties of $360,000 per year were due to
Alleghany
for fiscal 2003 and subsequent years. The Company had understood since the inception of the
license agreement, that once the royalty rate was reduced to 1%, the minimum royalties
would end. On July 8, 2011, the Company reached a settlement in which it agreed to a
one-time payment to Alleghany of $600,000, an increase in the royalty rate from 1% to
2.5%, and a minimum annual royalty of $250,000 in order to settle this matter in full.
Although management believed that the Company had a meritorious defense and could
prevail in a court of law, it was decided to settle the dispute due to the risk of loss
of two profitable core brands, “Nutra Nail” and “Hair Off”, and possible substantial
liabilities that the Company estimated could be as high as $1,900,000. An expense of
$695,000 was recorded in the second quarter of fiscal 2011 to reflect the anticipated
costs of settling this matter and the increased royalty rate, with the expense included
in selling, general and administrative expenses in the statement of operations. The
one-time payment of $600,000 was paid by the Company to Alleghany on July 18, 2011.
We may be subject to additional various claims, complaints and legal actions that arise
from time to time in the normal course of business. Other than as described above, we
do not believe we are party to any currently pending legal proceedings that will result
in a material adverse effect on our business. There can be no assurance that existing
or future legal proceedings arising in the ordinary course of business or otherwise
will not have a material adverse effect on our business, consolidated financial
position, results of operations or cash flows.
Dividends and Capital Transactions
On January 28, 2011, the board of directors declared a $0.07 per share dividend for the
first quarter ended February 28, 2011. The dividend was payable to all shareholders of
record as of February 10, 2011 and was paid on March 10, 2011.
On February 9, 2011, the Board of Directors of the Company declared a dividend, payable
to holders of record as of the close of business on February 22, 2011 of one preferred
stock purchase right (a Right) for each outstanding share of common stock, par value
$0.01 per share, and of Class A common stock, par value $0.01 per share, of the Company
(together, the Common Stock). In addition, the Company will issue one Right with each
new share of Common Stock issued. In connection therewith, on February 9, 2011, the
Company entered into a Stockholder Protection Rights Agreement (as amended from time to
time, the Rights Agreement) with American Stock Transfer & Trust Company LLC, as Rights
Agent, which has a term of one year, unless amended by the Board of Directors (and in
certain circumstances with certain stockholder approval) in accordance with the terms
of the Rights Agreement. The Rights will initially trade with and be inseparable from
our Common Stock and will not be evidenced by separate certificates unless they become
exercisable. Each Right entitles its holder to purchase from the Company
one-hundredth
of a share of participating preferred stock having economic and voting terms similar to the Common
Stock at an exercise price of $18 per Right, subject to adjustment in accordance
with the terms of the Rights Agreement, once the Rights become exercisable. Under the
Rights Agreement, the Rights become exercisable if any person or group acquires 20% or
more of
the Common Stock or, in the case of any person or group that owned 20% or more of the
Common Stock as of February 9, 2011, upon the acquisition of any additional shares by
such person or group. The Company, its subsidiaries, employee benefit plans of the
Company or any of its subsidiaries and any entity holding Common Stock for or pursuant
to the terms of any such plan are excepted. Upon exercise of the Right in accordance
with the
Rights Agreement, the holder would be able to purchase a number of shares of Common
Stock from the Company having an aggregate market price (as defined in the Rights
Agreement) equal to twice the then-current exercise price for an amount in cash equal
to the then-current exercise price. In addition, the Company may, in certain
circumstances and pursuant to the terms of the Rights Agreement, exchange the Rights
for one share of Common Stock or an equivalent security for each Right or,
alternatively, redeem the Rights for $0.001 per Right. The Rights will not prevent a
takeover of our Company, but may cause substantial dilution to a person that acquires
20% or more of the Company’s Common Stock.
On February 28, 2011, the Board of Directors of the Company declared a $0.07 per share
dividend for the second quarter ended May 31, 2011. The dividend was payable to all
shareholders of record as of May 2, 2011, and was paid on June 2, 2011.
On July 15, 2011, the Board of Directors of the Company declared a $0.07 per share
dividend for the third quarter ended August 31, 2011. The dividend was payable to all
shareholders of record as of August 2, 2011, and was paid on September 2, 2011.
Change of Control Agreements
On March 15, 2011, the compensation committee of the board of directors, acting on
behalf of the Company, entered into a Change of Control Agreement (together, the “COC
Agreements”) with each of Ira W. Berman and David Edell (the “Consultants”). Each of
Mr. Berman and Mr. Edell was employed as a senior executive of the Company until
December 31, 2010, at which point they each became consultants to the Company pursuant
to the terms of their respective Amended and Restated Employment Agreements, as amended
(each, an “Employment/Consulting Agreement”), which are listed as Exhibits 10.1 and
10.2 to the Company’s Annual Report on Form 10-K for the year ended November 30, 2010.
Mr. Edell is a director of the Company, and Mr. Berman was a director until August 4,
2011.
The COC Agreements contained identical terms and conditions to each other and provide
that, in the event of a Change of Control of the Company, each of the Consultants is
entitled to cease performing consulting services under his respective Employment/Consulting
Agreement, and is entitled to certain payments from the Company, including a lump sum
payment of all fees under the Employment/Consulting Agreement from the date of
occurrence of the Change of Control through the end of the original term of that
Employment/Consulting Agreement. In addition, upon on Change of Control, all of the
Consultants’ unvested awards under the Company’s equity-based compensation plans, if
any, automatically vest in full.
Under the COC Agreements, each Consultant has agreed to a non-competition and
non-solicitation restriction for two years, during which two-year period the Consultant
is entitled to continued coverage under the Company’s group health, dental, long-term
disability and life insurance plans. The foregoing summary of the COC Agreements are
qualified in their entirety by the full text of the COC Agreements, copies of which may
be found in Form 8-K, filed by the Company with the United States Securities and
Exchange Commission on March 17, 2011.
Employment Agreements
On March 21, 2011, the compensation committee of the board of directors, acting on
behalf of the Company, entered into an Employment Agreement (each, an “Employment
Agreement”) with each of Dunnan Edell, Stephen A. Heit, and Drew Edell (each, an
“Executive”). Pursuant their respective Employment Agreements, Mr. Dunnan Edell has
been engaged to continue to serve as the Company’s President and Chief Executive
Officer, Mr. Heit has been engaged to continue to serve as the Company’s Executive Vice
President
and Chief Financial Officer, and Mr. Drew Edell has been engaged to continue to serve
as the Company’s Executive Vice President, Product Development and Production.
Mr. Dunnan Edell and Mr. Drew Edell are brothers and are the sons of David Edell, who
is a member of the Board of Directors of the Company and serves as a consultant to the
Company.
Except as set forth below, the Employment Agreements contain substantially similar
terms to each other. The term of employment under each of the Employment Agreements
runs from March 21, 2011 through December 31, 2013, and will continue thereafter for
successive one-year periods unless the Company or the Executive chooses not to renew
the respective Employment Agreement.
Under the respective Employment Agreements, the base salaries of Mr. Dunnan Edell, Mr.
Heit, and Mr. Drew Edell are $350,000, $250,000, and $275,000 per annum, respectively,
and may be increased each year at the discretion of the Company’s Board of Directors.
The Executives are eligible to receive an annual performance-based bonus under their
respective Employment Agreement, and are entitled to participate in Company
equity compensation plans. In addition, each of the Executives will receive an
automobile allowance, health insurance and certain other benefits.
In the event of termination of the respective Employment Agreement as a result of the
disability or death of the Executive, the Executive (or his estate or beneficiaries)
shall be entitled to receive all base salary and other benefits earned and accrued
until such termination as well as a single-sum payment equal to the Executive’s base
salary and a single-sum payment equal to the value of the highest bonus earned by the
Executive in the
one-year period preceding the date of termination pro-rated for the number of days
served in that fiscal year.
If the Company terminates the Executive for Cause (as defined in the respective
Employment Agreement), or the Executive terminates his employment in a manner not
considered to be for Good Reason, the Executive shall be entitled to receive all base
salary and other benefits earned and accrued prior to the date of termination. If the
Company terminates the Executive in a manner that is not for Cause or due to the
Executive’s death or disability, the Executive terminates his employment for Good
Reason, or the Company does not renew the Employment Agreement after December 31, 2013,
the Executive shall be entitled to receive a single-sum payment equal to his unpaid
base salary and other benefits earned and accrued prior to the date of termination and
a single-sum payment of an amount equal to three times (a) the average of the base
salary amounts paid to Executive over the three calendar years prior to the date of
termination, (b) if less than three years have elapsed between March 21, 2011 and the
date of termination, the highest base salary paid to the Executive in any calendar year
prior to the date of termination, or (c) if less than twelve months have elapsed
between March 21, 2011 and the date of termination, the highest base salary received in
any month times twelve. In addition, each Executive is entitled to certain benefits in
connection with a Change of Control (as defined in their respective Employment
Agreements).
Under the Employment Agreements, each Executive has agreed to non-competition
restrictions for a period of six months following the end of the term of his Employment
Agreement, during which period the Executive will be paid an amount equal to his base
salary for a period of six months, and an amount equal to the pro rata share of any
bonus attributable to the portion of the year completed prior to the date of
termination. The Executives have also agreed to confidentiality and non-solicitation
restrictions under the Employment Agreements.
The foregoing summary of the Employment Agreements are qualified in their entirety by
the full text of the Employment Agreements, copies of which may be found in Form 8-K
that was filed by Company on March 21, 2011 with the United States Securities and
Exchange Commission.
The Company also entered into an Employment Agreement with another Company executive,
who is not a “named executive officer” within the meaning of the Securities Exchange
Act of 1934, as amended and related regulations. The additional Employment Agreement
referred to in the preceding sentence contains substantially similar terms as the
Employment Agreements discussed above, except that the employee’s base salary is
$135,000 per annum.
As a result of the execution of the Employment Agreements referred to above, the
Amended and Restated Employment Agreement, by and between Mr. Dunnan Edell and the
Company, effective as of December 1, 2002 and amended on February 10, 2007 and May 17,
2007, has been terminated. Similarly, as a result of the execution of the Employment
Agreement referred to above, the Amended and Restated Employment Agreement, by and
between Mr. Drew Edell and the Company, effective as of December 1, 2002 and amended on
February 10, 2007 and May 17, 2007, has also been terminated.
Collective Bargaining Agreement
The Company signed a collective bargaining agreement with Local 108, L.I.U. of N.A.,
AFL-CIO that became effective January 1, 2011. The agreement is effective for a one
year term expiring December 31, 2011. Other than standard wage, holiday, vacation and
sick day provisions, the agreement calls for CCA to contribute to the Recycling and
General Industrial Union Local 108 Welfare Fund (“Welfare Fund”) certain benefit costs.
The Welfare Fund provides medical, dental and life insurance for the Company’s
employees covered under the collective bargaining agreement. This agreement pertains
to 28% of the CCA labor force.
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