Safe Harbor
Statement under the Private Securities Litigation Reform Act of
1995
Information
included in this Current Report on Form 8-K may contain statements which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
both as amended. Those statements include statements regarding our intent,
belief or current expectations. Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties include, among other things, our ability to face stiff
competition, our ability to profitably manage our business, the financial
strength of our customers, the continued acceptance of our existing and new
products by our existing and new customers, the risks of foreign manufacturing,
competitive and economic factors in the textile and apparel markets, the
availability of raw materials, the ability to manage growth, weather-related
delays, dependence on key personnel, general economic conditions, global
manufacturing costs and restrictions, and other risks and uncertainties that may
be detailed herein, or from time to time in our other filings made with the
Securities and Exchange Commission.
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Item
1.01
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Entry
into a Material Definitive
Agreement.
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As
reported in its Current Report on Form 8-K filed on November 4, 2008, effective
October 31, 2008, Blue Holdings, Inc. (the “Registrant”) entered into a Joint
Venture Agreement with Headgear, Inc. pursuant to which the Registrant and
Headgear formed a limited liability company named “Blue Holdings Headgear JV
LLC” (the “JV”) to act as the distributor of the Registrant’s apparel lines
within the United States.
On
February 13, 2009, the Registrant and Headgear entered into a JV Modification
Memo (“Memo”) wherein they agreed to amend the original agreement in certain
respects, described below. The modifications to be effectuated by the Memo are
subject to the approval of the Registrant’s factor, FTC Commercial Corp.
(“FTC”), and Gemini Master Fund, Ltd. (“Gemini”). Specifically, the Memo
provides that:
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1.
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The
JV will be the operating company 50% owned by each of the Registrant and
Headgear and that the Registrant will not provide any goods or services to
the JV.
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2.
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The JV will source, acquire and
finance new inventory. Twenty percent of the cost of the newly purchased
inventories will be loaned by the JV to the Registrant but paid directly
to the Registrant’s creditors, including FTC, Gemini and trade creditors,
as selected by the JV. All loans to the Registrant from the JV
will bear the same interest rate that the JV pays either to FTC or its
other lenders. The JV will act as sales agent for the sale of
the Registrant’s available-to-sell inventories, in process or in the
finished goods inventories, and will pay the proceeds from the sale of
those inventories to the Registrant’s creditors, after deducting a 5.0%
handling fee and actual sales commissions paid
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All accounts sold by the JV will
become accounts of the JV. The provisions of the original agreement
related to purchases by the JV from the Registrant are superseded by the
terms of the amendment.
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3.
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The
JV will hire any existing employees of the registrant as it deems
necessary for its operations.
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4.
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The
JV will be responsible for all operations necessary to design, source and
deliver products to all existing credit worthy customers of the
Registrant, including international sales. All royalties and
license fees from sales (other than certain international sales) will
belong to the JV, including royalties for products developed by the JV
that are not denim jeans,
and the JV will have
unrestricted ability to license the Registrant’s products and
brands.
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5.
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The
JV will have the right to use the Registrant’s Marina Del Rey, California
facility, which is owned by Paul Guez, rent free for one year, and if the
JV elects to use that facility thereafter, at the prevailing market rental
rate.
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6.
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The
Registrant’s brands, including Taverniti, Yanuk and Antik, will be
deposited in escrow. The sales and profitability targets
established in the original agreement for the 12 month period ended June
30, 2010, are amended so that the measuring period is the 12 month period
ended December 31, 2010. If the sales and profitability “targets”
specified in the original agreement are attained by December 31, 2010, the
escrowed brands will be transferred to the JV for no additional
consideration. All other shares required to be placed in escrow
under the terms of the original agreement, as described below, shall
remain unchanged. Upon attainment of the “targets” for sales
and profitability by December 31, 2010, the escrowed shares will be
transferred in accordance with the original agreement, as described
below. The Taverniti label is owned 60.0% by Paul Guez and
40.0% by Jimmy Taverniti; however, Jimmy Taverniti has a 50.0% interest in
the income (royalties) earned.
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7.
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When
the escrow is dissolved and the “targets” have been met, Headgear will
sign a guaranty, if Paul Guez’s guarantee has not been released, in favor
of FTC for up to 50.0% of the then existing FTC loan to the Registrant, if
any.
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8.
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Previously,
Headgear had advanced $500,000 to the Registrant to finance an initial
order of merchandise. Pursuant to the original agreement,
Headgear advanced an additional $750,000 to the Registrant and was to
advance an additional $250,000 to the Registrant in each of February and
March 2009, which amounts were available to the Registrant as working
capital and were to be repaid out of the Registrant’s portion of the
operating profits of the JV. Under the amended agreement, Headgear’s
obligation to provide $250,000 in each of February and March 2009 is
deemed to have been satisfied by the initial advance of $500,000, and the
total existing obligations of $1,250,000 is only payable out of future
profits of the JV.
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9.
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Actual development costs will, to
the extent actually paid and demonstrated to the satisfaction of the JV as
being for products that the JV will sell, will be an obligation of the JV
and remain an obligation of the JV and upon documentation of such payments
be payable to the creditors of the Registrant, including past due payroll
to the former employees of the Registrant hired by the
JV
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Concurrently
with the effectiveness of the original agreement, the Registrant, Headgear and
Paul Guez entered into an Ancillary Agreement (the “Ancillary Agreement”) with
respect to certain other matters related to the formation of the JV and the
operations of the Registrant. Pursuant to the Ancillary Agreement Mr. Guez and
his affiliates are to convert the 1,000,000 shares of Series A Preferred Stock
of the Registrant they currently hold into 4,623,589 shares of the Registrant’s
Common Stock. The Ancillary Agreement further provides that Mr.
Guez and his affiliates are to deposit into escrow 10,415,975 shares of the
Registrant’s common stock and 707,916 warrants to purchase the Common Stock of
the Registrant currently held by them (collectively, the “Escrowed
Securities”). If, as a result of the modifications contemplated by
the Memo, (a) the JV achieves (i) sales during the twelve months ended December
31, 2010, equal to or greater than 150% of the full price sales revenue of the
Registrant during the year ended December 31, 2008, and (ii) a net
profit of $1.5 million, (b) Headgear signs a guaranty in favor of FTC for up to
50% of the Registrant’s then existing indebtedness to FTC, (c) neither the
Registrant nor Headgear defaults in any of its material obligations under the
Agreement or the Operating Agreement of the JV, and (d) certain other conditions
are met, the Escrowed Securities will be delivered to Headgear. In
addition, if the Escrowed Securities are delivered to Headgear and Mr. Guez
shall exercise his right to convert any of the Registrant’s 8% Senior Secured
Convertible Promissory Note in the principal amount of $1,618,093 into shares of
the Registrant’s Common Stock, Headgear shall have the right to purchase
one-half of such shares from Mr. Guez at the conversion price.
As
consideration for their entry into the Ancillary Agreement, the Company issued
to Headgear an option to purchase 10 million shares of its Common Stock at 25
cents per share and to Mr. Guez an option to purchase 3 million shares of its
Common Stock at 25 cents per share, provided that both options may only be
exercised if the Escrowed Securities are released to Headgear as described
above.
Pursuant
to the Ancillary Agreement Mr. Guez assigned his 60% membership interest in
Taverniti Holdings, LLC, the entity that owns the “Taverniti So Jeans” brand to
the Registrant. The assignment of such interest is to be effective
upon the release of the Escrowed Securities to Headgear and requires receipt of
the approval of such transfer by Jimmy Taverniti, the other member of Taverniti
Holdings LLC. Mr. Guez also assigned to the Registrant all revenues
and distributions to be derived from his interest in Taverniti Holdings pending
receipt of the consent of Mr. Taverniti and release of the Escrowed Securities.
In consideration for such assignments, effective upon the release of the
Escrowed Securities to Headgear, Mr. Guez is to receive 5 million shares of the
Registrant’s Common Stock. In addition, Mr. Guez, effective
upon the release of the Escrowed Securities to Headgear, assigned his interest
in the Yanuk brand to the Registrant, along with all revenues and distributions
to be derived from the Yanuk brand pending completion of the assignment of the
brand to the Registrant, except that Mr. Guez retained the right to all revenues
derived from the brand outside the United States. In consideration
for such assignments of the Yanuk brand, effective upon the release of the
Escrowed Securities to Headgear, Mr. Guez is to receive 2 million shares of the
Registrant’s Common Stock.
In
addition to the rights and obligations described above, the Ancillary Agreement
provides that if the Escrowed Securities are released to Headgear and certain
other conditions are satisfied, than no later than January 2, 2011, for no
additional consideration, the operations of the JV shall be merged or
consolidated into the Registrant. Pending such merger, Headgear shall
have the right to appoint one individual to the Board of Directors of the
Registrant.
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Item
8.01
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Other
Information.
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The
Registrant’s financial condition and lack of liquidity has impaired its ability
to continue its operations as previously conducted. Further, the
Registrant financial condition and liquidity continue to deteriorate
precipitously. Consequently, the Registrant intends to file a Form 15
with the Securities and Exchange Commission terminating its registration under
section 12 (g) of the Securities and Exchange Act of 1934, as amended, and
suspending its obligation to file reports under the Securities and Exchange Act
of 1934, as amended, since the number of record holders of its common stock as
of January 1, 2009 was less than 300.
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Item
9.01
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Financial
Statements and Exhibits
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(c)
Exhibits.
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Exhibit
No.
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Description
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10.1
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JV
Modifications Memo
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, Blue Holdings, Inc.
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.