Commitments and Contingencies | 3 Months Ended |
Mar. 31, 2014 |
Commitments And Contingencies Disclosure [Abstract] | ' |
Commitments and Contingencies | ' |
7. Commitments and Contingencies |
Hotel Development Related Commitments |
In order to obtain long-term management, franchise and license contracts, the Company has committed to contribute capital in various forms on hotel development projects. These include equity investments, key money, debt financing and cash flow guarantees to hotel owners. The cash flow guarantees generally have a stated maximum amount of funding and a defined term. The terms of the cash flow guarantees to hotel owners generally require the Company to fund if the hotels do not attain specified levels of operating profit. Oftentimes, cash flow guarantees to hotel owners may be recoverable as loans repayable to the Company out of future hotel cash flows and/or proceeds from the sale of hotels. |
The following table details, as of March 31, 2014 and December 31, 2013, the Company’s key money, equity investment and debt financing commitments for hotels under development as well as potential funding obligations under cash flow guarantees at operating hotels and hotels under development at the maximum amount under the applicable contracts, but excluding contracts where the maximum amount cannot be determined (in thousands): |
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| | As of | | | As of | | | | | |
March 31, | December 31, | | | | |
2014 (1) | 2013 (1) | | | | |
Key money, equity investment and debt financing commitments (2) | | $ | 23,339 | | | $ | 22,499 | | | | | |
Key money commitments in dispute (3) | | | 10,000 | | | | 10,000 | | | | | |
Cash flow guarantees | | | 13,000 | | | | 13,000 | | | | | |
Cash flow guarantees in dispute (4) | | | 8,000 | | | | 8,000 | | | | | |
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Total maximum future funding commitments | | $ | 54,399 | | | $ | 53,499 | | | | | |
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Amounts due within one year (5) | | $ | 26,339 | | | $ | 25,499 | | | | | |
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-1 | The currency translation is based on an exchange rate of the applicable local currency to U.S. dollar using the exchange rate as of the end of the applicable reporting period. | | | | | | | | | | | |
-2 | As of March 31, 2014 and December 31, 2013, these commitments consist of key money commitments. The Company had no equity or debt financing commitments at March 31, 2014 and December 31, 2013. | | | | | | | | | | | |
-3 | Reflects funding of $10.0 million in key money for Mondrian at Baha Mar secured by a cash collateralized letter of credit, which the Company believes it is not obligated to fund due to the owner’s defaults under the management agreement terms, discussed further below. | | | | | | | | | | | |
-4 | Reflects an $8.0 million performance cash flow guarantee related to Delano Marrakech, which the Company believes it is not obligated to fund due to the owner’s defaults under the management agreement terms. The Company has terminated its management agreement effective November 12, 2013, discussed further below. | | | | | | | | | | | |
-5 | Amount represents £9.4 million (or approximately $15.6 million as of March 31, 2014) in key money for Mondrian London, which is expected to open in the third quarter of 2014, and funding of $10.0 million in key money for Mondrian at Baha Mar secured by a cash collateralized letter of credit, which the Company believes it is not obligated to fund due to the owner’s defaults under the management agreement terms, discussed further below. | | | | | | | | | | | |
On March 26, 2014, the Company notified Baha Mar Ltd. (“Baha Mar Owner”) that, effective on April 25, 2014, it was terminating the management agreement relating to Mondrian at Baha Mar in Nassau, the Bahamas due to the failure of Baha Mar Owner to obtain a Non-Disruption Agreement from its lender as required by the management agreement. Baha Mar Owner has disputed the termination and on April 22, 2014, the Company learned that Baha Mar Owner had submitted a draw certificate seeking payment of the $10.0 million letter of credit posted by the Company to secure certain payments under the management agreement. On April 23, 2014, the Company sought and was granted a temporary restraining order enjoining the payment of the $10.0 million letter of credit. A preliminary injunction hearing is scheduled for June 5, 2014. |
In September 2012, the Company opened Delano Marrakech, a 71 room hotel in Marrakech, Morocco. The management agreement included certain cash flow guarantees by the Company which stipulate certain minimum levels of operating performance and could result in potential future funding obligations related to Delano Marrakech, which are in dispute and disclosed in the hotel commitments and guarantees table above. As discussed further below, the Company and the hotel owner are in litigation surrounding the termination of the hotel management agreement, performance-based cash flow guarantee and related matters. Both parties are seeking arbitration of the dispute, which is expected to occur in March 2015. |
In January 2014, the Company signed a franchise agreement for a Morgans Original branded hotel in Istanbul, Turkey. The hotel, which is currently under development, is being converted from office and retail space, is expected to have 78 rooms and open in late 2014. The Company has a $0.7 million key money obligation that will be funded upon the hotel opening, which is included in the table above. |
As the Company pursues its growth strategy, it may continue to invest in new management, franchise and license agreements through key money and equity investments. To fund any such future investments, the Company may from time to time pursue additional potential financing opportunities it has available. |
The Company has signed management, license or franchise agreements for new hotels which are in the development stage. As of March 31, 2014, these include the following: |
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| | Expected Room | | | Anticipated | | | Initial | |
Count | Opening | Term |
Hotels Currently Under Construction or Renovation: | | | | | | | | | | | | |
Mondrian London | | | 360 | | | | 2014 | | | | 25 years | |
Delano Las Vegas (1) | | | 1,114 | | | | 2014 | | | | 10 years | |
Morgans Original, Istanbul (1) | | | 78 | | | | 2014 | | | | 15 years | |
Mondrian at Baha Mar (2) | | | 310 | | | | 2014 | | | | 20 years | |
Mondrian Doha | | | 270 | | | | 2015 | | | | 30 years | |
Delano Moscow | | | 160 | | | | 2015 | | | | 20 years | |
Other Signed Agreements: | | | | | | | | | | | | |
Mondrian Istanbul | | | 105 | | | | | | | | 20 years | |
Delano Aegean Sea | | | 150 | | | | | | | | 20 years | |
Delano Cartagena | | | 211 | | | | | | | | 20 years | |
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-1 | Hotel is subject to a license or franchise agreement. | | | | | | | | | | | |
-2 | Management agreement is currently in dispute, as discussed above. | | | | | | | | | | | |
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Financing has not been obtained for the hotel projects listed under “Other Signed Agreements” in the table above, and there can be no assurances that any or all of the Company’s development stage projects will be developed as planned. If adequate project financing is not obtained, these projects may need to be limited in scope, deferred or cancelled altogether, and to the extent the Company has previously funded key money, an equity investment or debt financing on a cancelled project, the Company may be unable to recover the amounts funded. |
For example, due to the Company’s joint venture partner’s failure to achieve certain agreed milestones in the development of the Mondrian Istanbul hotel, in early 2014, the Company exercised its put option under the joint venture agreement that requires the Company’s joint venture partner to buy back the Company’s equity interests in the Mondrian Istanbul joint venture. The Company’s rights under that joint venture agreement are secured by, among other things, a mortgage on the property. In February 2014, the Company issued a notice of default to its joint venture partner, as they failed to buy back the Company’s equity interests by the contractual deadline, and further notified its joint venture partner that the Company plans to begin foreclosure proceedings as a result of the event of default. The Company does not currently anticipate that these proceeding will have an impact on its management agreement should the hotel development continue. |
Other Guarantees to Hotel Owners |
As discussed above, the Company has provided certain cash flow guarantees to hotel owners in order to secure management contracts. |
The Company’s hotel management agreements for Royalton and Morgans contain cash flow guarantee performance tests that stipulate certain minimum levels of operating performance. These performance test provisions give the Company the option to fund a shortfall in operating performance limited to the Company’s earned base fees. If the Company chooses not to fund the shortfall, the hotel owner has the option to terminate the management agreement. As of March 31, 2014, approximately $0.2 million was accrued as a reduction to management fees related to these performance test provisions. The Company’s maximum potential amount of future fundings related to the Royalton and Morgans performance guarantee cannot be determined as of March 31, 2014, but under the hotel management agreements is limited to the Company’s base fees earned. |
Operating Joint Venture Hotels Commitments and Guarantees |
The following details obligations the Company has or may have related to its operating joint venture hotels as of March 31, 2014. |
Mondrian South Beach Mortgage and Mezzanine Agreements. Morgans Group and affiliates of its joint venture partner have agreed to provide standard nonrecourse carve-out guaranties and provide certain limited indemnifications for the Mondrian South Beach mortgage and mezzanine loans. In the event of a default, the lenders’ recourse is generally limited to the mortgaged property or related equity interests, subject to standard nonrecourse carve-out guaranties for “bad boy” type acts. Morgans Group and affiliates of its joint venture partner also agreed to guarantee the joint venture’s obligation to reimburse certain expenses incurred by the lenders and indemnify the lenders in the event such lenders incur liability in connection with certain third-party actions. Morgans Group and affiliates of its joint venture partner have also guaranteed the joint venture’s liability for the unpaid principal amount of any seller financing note provided for condominium sales if such financing or related mortgage lien is found unenforceable, provided they shall not have any liability if the seller financed unit becomes subject to the lien of the lender’s mortgage or title to the seller financed unit is otherwise transferred to the lender or if such seller financing note is repurchased by Morgans Group and/or affiliates of its joint venture at the full amount of unpaid principal balance of such seller financing note. In addition, although construction is complete and Mondrian South Beach opened on December 1, 2008, Morgans Group and affiliates of its joint venture partner may have continuing obligations under construction completion guaranties until all outstanding payables due to construction vendors are paid. As of March 31, 2014, there are remaining payables outstanding to vendors of approximately $0.4 million. Pursuant to a letter agreement with the lenders for the Mondrian South Beach loan, the joint venture agreed that these payables, many of which are currently contested or under dispute, will not be paid from operating funds but only from tax abatements and settlements of certain lawsuits. In the event funds from tax abatements and settlements of lawsuits are insufficient to repay these amounts in a timely manner, the Company and its joint venture partner are required to fund the shortfall amounts. |
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The Company and affiliates of its joint venture partner also have each agreed to purchase approximately $14 million of condominium units under certain conditions, including an event of default. In the event of a default under the lender’s mortgage or mezzanine loan, the joint venture partners are each obligated to purchase selected condominium units, at agreed-upon sales prices, having aggregate sales prices equal to 1/2 of the lesser of $28.0 million, which is the face amount outstanding on the lender’s mezzanine loan, or the then outstanding principal balance of the lender’s mezzanine loan. The joint venture is not currently in an event of default under the mortgage or mezzanine loan. As of March 31, 2014, there has been no triggering event that would require the Company to recognize a liability related to the construction completion or the condominium purchase guarantees. |
Mondrian SoHo. Certain affiliates of the Company’s joint venture partner have agreed to provide a standard nonrecourse carve-out guaranty for “bad boy” type acts and a completion guaranty to the lenders for the Mondrian SoHo loan, for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates up to 20% of such entities’ guaranty obligations, provided that each party is fully responsible for any losses incurred as a result of its own gross negligence or willful misconduct. As of March 31, 2014, there has been no triggering event that would require the Company to recognize a liability related to this indemnity. |
Ames. On April 26, 2013, the joint venture closed on a new loan agreement with the mortgage lenders that provided for a reduction of the mortgage debt and an extension of maturity in return for a cash paydown. The Company did not contribute to the cash paydown and instead entered into an agreement with its joint venture partner pursuant to which, among other things, (1) the Company assigned its equity interests in the joint venture to its joint venture partner, (2) the Company agreed to give its joint venture partner the right to terminate its management agreement upon 60 days prior notice in return for an aggregate payment of $1.8 million, and (3) a creditworthy affiliate of the Company’s joint venture partner has assumed all or a portion of the Company’s potential liability with respect to historic tax credit guaranties, with the Company’s liability for any tax credit guaranties capped, in any event, at $3.0 million in the aggregate. The potential liability for historic tax credit guaranties relates to approximately $16.9 million of federal and state historic rehabilitation tax credits that Ames qualified for at the time of its development. As of March 31, 2014, there has been no triggering event that would require the Company to accrue any potential liability related to the historic tax credit guarantee. In May 2013, the hotel owner exercised its right to terminate the Company’s management agreement and it was terminated on July 17, 2013. The termination fee was recorded by the Company in the second and third quarters of 2013. |
Guaranteed Loans and Commitments |
The Company has made payment guarantees to lenders and lessors of its owned and leased hotels, namely related to the Hudson/Delano 2014 Mortgage Loan and Clift lease payments, as discussed further in note 6. |
Litigations Regarding Mondrian SoHo |
On January 16, 2013, German American Capital Corporation, the lender for the mortgage loans on Mondrian SoHo (“GACC” or the “lender”), filed a complaint in the Supreme Court of the State of New York, County of New York against Sochin Downtown Realty, LLC, the joint venture that owns Mondrian SoHo (“Sochin JV”), Morgans Management, the manager for the hotel, Morgans Group, Happy Bar LLC and MGMT LLC, seeking foreclosure including, among other things, the sale of the mortgaged property free and clear of the management agreement, entered into on June 27, 2007, as amended on July 30, 2010, between Sochin JV and Morgans Management. According to the complaint, Sochin JV defaulted by failing to repay the approximately $217 million outstanding on the loans when they became due on November 15, 2012. Cape Advisors Inc. indirectly owns 80% of the equity interest in Sochin JV and Morgans Group indirectly owns the remaining 20% equity interest. |
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On March 11, 2013, the Company moved to dismiss the lender’s complaint on the grounds that, among other things, the Company’s management agreement is not subject to foreclosure. On April 2, 2013, the lender opposed the Company’s motion to dismiss and cross-moved for summary judgment. On August 12, 2013, the court heard oral argument on both motions, as well as a third motion brought by the Company to strike an affirmation submitted by lender’s attorney. On January 27, 2014, the court granted Morgans Management’s motion to dismiss on the ground that the Company’s subsidiary that manages the hotel is not a proper party to the foreclosure action and that a management contract does not constitute an interest subject to foreclosure, and denied lender’s motion for summary judgment as moot. On March 20, 2014, the lender moved for summary judgment against the remaining four defendants who are seeking foreclosure on four mortgages secured by Mondrian SoHo. That motion is pending. |
On February 25, 2013, Sochin JV filed a complaint in the Delaware Chancery Court against Morgans Hotel Group Management LLC and Morgans Group, seeking, among other things, a declaration that plaintiff terminated the management agreement for the hotel, injunctive relief, and an award of damages in an amount to be determined, but alleged to exceed $10 million, plus interest. In addition, the Company, through its equity affiliate, filed a separate action against the owner and its parent in the Delaware Chancery Court for, among other things, breaching fiduciary duties and their joint venture agreement for failing to obtain consent prior to the termination. That action was subsequently consolidated with the termination action. On September 17, 2013, the Delaware Chancery Court heard oral argument on various motions to dismiss and for partial summary judgment in the consolidated actions, following which the court entered orders, on September 20, 2013, ruling that Sochin JV properly terminated the hotel management agreement on agency principles, that Morgans must vacate the hotel forthwith or on whatever other timetable the hotel owner chooses, and that certain claims by the Company’s equity affiliate are dismissed but not its breach of fiduciary duty claim. On September 30, 2013, the Company filed a motion for reconsideration and/or to certify the judgment for appeal. That motion is still pending, and no final order has as yet been issued. By joint stipulation of the parties, granted on March 18, 2014, Sochin JV will file its opposition to the motion for reconsideration and to stay by May 9, 2014, following which the court will issue its ruling. The parties have also stipulated to move, answer or otherwise respond to the operative complaints, by May 9, 2014. Should the Company not prevail on its motion for reconsideration and to stay, the Company intends to vigorously pursue its rights on appeal, but no assurance can be provided that the Company will prevail or otherwise retain management of the hotel. |
On April 30, 2013, the Company filed a lawsuit against the majority member of Sochin JV’s parent and its affiliate in New York Supreme Court for damages based on the attempted wrongful termination of the management agreement, defamation, and breach of fiduciary and other obligations under the parties’ joint venture agreement. On August 23, 2013, the owner moved to dismiss that complaint. That motion has been fully briefed and oral argument has been set for June 5, 2014. It is not possible to predict with reasonable certainty the outcome of this action, nor the amount of damages the Company is likely to recover should it ultimately prevail on one or more of its claims. |
Litigation Regarding Delano Marrakech |
In June 2013, the Company served the owner of Delano Marrakech with a notice of default for, among other things, failure to pay fees and reimbursable expenses and to operate the hotel in accordance with the standards under the management agreement. In September 2013, the Company served notice of termination of its management agreement for Delano Marrakech following the failure by the owner of Delano Marrakech to remedy numerous breaches of the agreement. As a result, the Company discontinued all affiliation with the hotel, including removal of the Delano name, and terminated management of the property, effective November 12, 2013. Pursuant to the management agreement, in the event of an owner default, the Company has no further obligations under the performance-based cash flow guarantee. In addition, as a result of the breaches by the hotel owner, the Company has asserted a claim for losses and damages against the owner that is currently estimated at in excess of $30.0 million, including interest. The owner of the hotel is disputing the circumstances surrounding termination and therefore its liability for this amount. On April 17, 2014, the owner submitted a counterclaim against the Company under both the performance-based cash flow guarantee and for loss of profits. The total counterclaim made by the owner is in excess of $119.0 million, excluding interest. The Company considers the counterclaim made by the owner to be entirely without merit and intends to vigorously defend itself. Both parties are seeking arbitration of the dispute, which is expected to occur in March 2015. |
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Litigation Regarding TLG Promissory Notes |
On August 5, 2013, Messrs. Andrew Sasson and Andy Masi filed a lawsuit in the Supreme Court of the State of New York against TLG Acquisition LLC and Morgans Group LLC relating to the $18 million TLG Promissory Notes. See note 1 and note 6 regarding the background of the TLG Promissory Notes. The complaint alleges, among other things, a breach of contract and an event of default under the TLG Promissory Notes as a result of the Company’s failure to repay the TLG Promissory Notes following an alleged “Change of Control” that purportedly occurred upon the election of the Company’s current Board of Directors on June 14, 2013. The complaint sought payment of Mr. Sasson’s $16 million TLG Promissory Note and Mr. Masi’s $2 million TLG Promissory Note, plus interest compounded to principal, as well as default interest, and reasonable costs and expenses incurred in the lawsuit. On September 26, 2013, the Company filed a motion to dismiss the complaint in its entirety. On February 6, 2014, the Court granted the Company’s motion to dismiss. Messrs. Sasson and Masi have appealed the decision and a timeline for an appeal process is currently unclear. |
Litigation Regarding 2013 Deleveraging Transaction, Proxy Litigation Between Mr. Burkle and OTK and the Company’s Current Directors, and Litigation Regarding Yucaipa Board Observer Rights |
On February 28, 2014, the Company entered into a binding Memorandum of Understanding (“MOU”) which contemplates the partial settlement and dismissal with prejudice of the action entitled OTK Associates, LLC v. Friedman, et al., C.A. No. 8447-VCL (Del. Ch.) (the “Delaware Shareholder Derivative Action”) and the complete settlement and dismissal with prejudice of the actions entitled Yucaipa American Alliance Fund II L.P., et al. v. Morgans Hotel Group Co., et al., Index No. 652294/2013 (NY Sup.) (the “New York Securities Action”); Burkle v. OTK Associates, LLC, et al., Case No. 13-CIV-4557 (S.D.N.Y.) (the “Proxy Action”); and Yucaipa American Alliance Fund II L.P., et al. v. Morgans Hotel Group Co., Index No. 653455/2013 (NY Sup.) (the “Board Observer Action”) (the foregoing four actions are collectively referred to as the “Actions”). The parties to the MOU have executed a Stipulation of Settlement, dated as of May 5, 2014 (the “Settlement Stipulation”), incorporating the terms of the MOU, which is being submitted to the Court in the Delaware Shareholder Derivative Action for approval. An overview of the Actions and the terms of the MOU and the Settlement Stipulation follows. |
Delaware Shareholder Derivative Action |
On April 1, 2013, director Jason T. Kalisman filed in the Delaware Chancery Court the Delaware Shareholder Derivative Action, a purported derivative action on the Company’s behalf against former directors Robert Friedman, Thomas L. Harrison, Michael D. Malone, Jeffrey Gault, Andrew Sasson, Michael J. Gross and Ronald W. Burkle, and the following companies with which Mr. Burkle is affiliated: Yucaipa American Alliance Fund II, L.P., Yucaipa American Alliance (Parallel) Fund II, L.P., Yucaipa Aggregator Holdings, LLC and The Yucaipa Companies LLC (collectively, the “Yucaipa Defendants”). The action arose from a proposed deleveraging transaction between the Company and certain of the Yucaipa Defendants (the “2013 Deleveraging Transaction”), which a majority of the Board of Directors voted to approve on March 30, 2013. On April 4, 2013, OTK, a stockholder of the Company, filed a motion to intervene as a plaintiff in the Delaware Action, which the court granted, and thereafter OTK and Mr. Kalisman filed an amended complaint (the “Amended Complaint”). |
On May 14, 2013, the court issued a preliminary injunction (a) prohibiting the Company from taking any steps to consummate the 2013 Deleveraging Transaction until the earlier of a trial or the taking of certain action by the Board of Directors and one of its committees; and (b) requiring the Company to hold its 2013 Annual Meeting on the date originally scheduled, using the originally scheduled record date. The court further determined that all claims asserted by plaintiffs, including those resolved on a preliminary basis by the court in its May 14, 2013 Order, were subject to final resolution following trial. |
On July 9, 2013, the court granted plaintiff OTK’s motion to file a Second Amended and Supplemental Complaint (the “Second Amended Complaint”). The Second Amended Complaint excludes Mr. Kalisman as a plaintiff but continues to assert claims, both directly and derivatively on the Company’s behalf, against all persons and entities previously named as defendants in the Amended Complaint, except that no claims were made against the Company. |
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On July 17, 2013, Mr. Kalisman and OTK filed in the Delaware Shareholder Derivative Action a motion seeking the interim award from the Company of approximately $2.7 million in attorneys’ fees and expenses incurred prior to June 1, 2013 by their counsels in prosecuting the Delaware Shareholder Derivative Action. On October 31, 2013, the court, after directing that notice of the application be given to the Company’s stockholders and having not received any objections, issued an order granting the award. The Company’s directors and officers liability insurance carrier paid this award in late 2013. |
On January 21, 2014, the court granted an unopposed motion to dismiss with prejudice (subject to certain exceptions) all claims asserted against Mr. Gross, a former director and chief executive officer of the Company, in the Delaware Shareholder Derivative Action. On February 5, 2014, the court issued an opinion denying, in most part, the motions to dismiss the Second Amended Complaint made by certain of the remaining defendants. |
On March 4, 2014, plaintiff filed a letter with the court informing it that certain parties had entered into the MOU and on March 20, 2014, all parties filed a proposed stipulation requesting that the court stay the action pending submission of a stipulation of settlement and the court’s consideration of a motion to approve the settlement. On March 21, 2014, the court granted that request. |
New York Securities Action |
On June 27, 2013, Yucaipa American Alliance Fund II, L.P., Yucaipa American Alliance (Parallel) Fund II, L.P., Yucaipa Aggregator Holdings, LLC and Vintage Deco Hospitality LLC (collectively the “Yucaipa Securities Action Plaintiffs”) filed a complaint against the Company and Morgans Group in the Supreme Court of the State of New York alleging, among other things, that the Company and Morgans Group had refused to use commercially reasonable best efforts to close the various putative agreements comprising the 2013 Deleveraging Transaction, and that there has “effectively” been a withdrawal or adverse modification of the approval of the 2013 Deleveraging Transaction by the Company’s Board of Directors. Alternatively, the Yucaipa Securities Action Plaintiffs contended that the Company and Morgans Group breached certain representations and warranties under the putative contracts comprising the 2013 Deleveraging Transaction. The Yucaipa Securities Action Plaintiffs asserted various claims and sought, among other things, an award of damages equal to a termination fee of $9 million, as well as payment of out-of-pocket costs, indemnification in excess of $1 million, pre-judgment interest and attorney’s fees. |
On July 22, 2013, the Company and Morgans Group filed a motion in the New York Securities Action to stay (or alternatively to dismiss) that action pending the disposition of the Delaware Shareholder Derivative Action. On January 29, 2014, the court in the New York Securities Action denied on a “without prejudice” basis, that motion. On February 26, 2014, the Company and Morgans Group served an answer to the complaint in the New York Securities Action. |
On March 24, 2014, the parties filed a letter with the court requesting that the court stay the action pending consideration by the Delaware Chancery Court of the settlement contemplated by the MOU. The court granted that request. |
Proxy Action |
On July 1, 2013, Mr. Burkle filed a complaint in the U.S. District Court for the Southern District of New York against OTK and the seven current members of the Board of Directors. The complaint purports to assert a claim against all defendants arising under Section 14(a) of the Securities Exchange Act of 1934, as amended, for allegedly using false and materially misleading proxy solicitation materials during the 2013 annual election of directors. The complaint seeks, among other things, an injunction requiring defendants to cause the Company to hold a new election of the Board of Directors. |
On August 30, 2013, Mr. Burkle filed a motion for preliminary injunction requesting that defendants be ordered to call a stockholders’ meeting and to schedule a new board of directors election. On that same date, defendants filed a motion to dismiss Mr. Burkle’s complaint. On November 13, 2013, the court issued a decision denying Mr. Burkle’s preliminary injunction motion and on February 25, 2014, the court converted the dismissal motion to one for summary judgment and gave the parties 30 days to submit any additional relevant material. |
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On March 7, 2014, the parties filed a letter with the court requesting that the court postpone the deadline for filing additional material for summary judgment until such time as the Delaware Chancery Court had ruled on the proposed settlement. On March 10, 2014, the Court ordered the action stayed for 90 days. The Company is not a party to the Proxy Action. |
Board Observer Action |
On October 4, 2013, Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II L.P. filed a complaint against the Company in the Supreme Court of the State of New York. The plaintiffs assert in the complaint, among other things, that the Company has breached the terms of a Securities Purchase Agreement, dated as of October 15, 2009, that the Company entered with the plaintiffs by not providing plaintiffs with the “observer” rights to the Board of Directors meetings that plaintiffs contend they are entitled to under the Securities Purchase Agreement. In addition to attorneys’ fees and other unspecified relief, the complaint seeks preliminary and permanent injunctions ordering the Company to “honor fully” plaintiffs’ alleged observer rights by, among other things, refraining from holding informal board meetings, from failing to provide notice, and from improperly delegating board duties to a committee of the Board of Directors. On January 27, 2014, the Company filed an answer, denying material allegations of the complaint, and the Company served demands for discovery. |
On March 24, 2014, the parties filed a letter with the court requesting that the court stay the action pending consideration by the Delaware Chancery Court of the settlement contemplated by the MOU. The court granted that request. |
The MOU and Settlement Stipulation |
The MOU was executed by all parties to the Actions, except for the following three defendants in the Delaware Shareholder Derivative Action: Michael J. Gross (who was previously dismissed as a defendant as discussed above) and Messrs. Harrison and Malone (the “Non-Settling Former Directors”). The parties to the MOU subsequently documented its terms in the Settlement Stipulation. The Settlement Stipulation is being submitted to the Delaware Court of Chancery in the Delaware Shareholder Derivative Action for review and approval and will not become effective, pursuant to its terms, until such approval is given and is no longer subject to further court review (the “Effective Date”). |
The Settlement Stipulation provides, among other things, for the following: |
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| • | | The Company will pay to the Yucaipa Securities Action Plaintiffs in the New York Securities Action an amount equal to $3 million less the aggregate amount of any reasonable and necessary attorneys’ fees and expenses incurred by Mr. Burkle in his defense of the Delaware Shareholder Derivative Action that are paid to him by the Company’s insurers prior to the Effective Date (the “Securities Action Payment”). | | | | | | | | | |
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| • | | Mr. Burkle will pay to the Company the amount of all insurance proceeds he recovers from the Company’s insurers after the Effective Date for the reasonable and necessary attorneys’ fees and expenses that he incurred in defense of the Delaware Shareholder Derivative Action and assign to the Company any claims he may have against the Company’s insurers relating to any such reasonable and necessary attorneys’ fees and expenses that the Company’s insurers may fail to pay Mr. Burkle. | | | | | | | | | |
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| • | | To the extent not paid by the Company’s insurers, the Company will pay the amount of any reasonable and necessary attorneys’ fees and expenses incurred by Messrs. Friedman, Gault and Sasson (collectively, the “Settling Former Directors”) in defending the Delaware Shareholder Derivative Action, subject to the Settling Former Directors’ assignment to the Company of any claims they have against the Company’s insurers relating to any such unpaid amounts. | | | | | | | | | |
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| • | | The Settling Former Directors will pay to the Company a portion of the Securities Action Payment (which cannot presently be quantified because the amount depends on the resolution of pending claims submitted to the Company’s insurers) unless the Company’s insurers pay such amounts to the Company or the Settling Former Directors assign to the Company any claims they have against the Company’s insurers relating to any such amounts that the Company’s insurers fail to pay. | | | | | | | | | |
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| • | | OTK and current director Jason T. Kalisman will apply to the Delaware Court of Chancery for an award of payment from the Company of the reasonable and necessary fees and expenses incurred by their counsel in connection with the Delaware Shareholder Derivative Action, excluding those fees and expenses encompassed in the court’s October 31, 2013 order in the Delaware Shareholder Derivative Action. Any such award may be subject to recovery by the Company from its insurers. | | | | | | | | | |
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| • | | Plaintiffs and defendants in each of the Actions, apart from the Non-Settling Former Directors who chose not to participate in the MOU and the Settlement Stipulation and against whom the Delaware Shareholder Derivative Action continues, will exchange customary releases which release the parties and certain of their affiliates from claims arising from the subject matters of each of the Actions. | | | | | | | | | |
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| • | | Each of the Actions will be dismissed with prejudice and on the merits with each party bearing its own costs, except as to the Non-Settling Former Directors against whom the Delaware Shareholder Derivative Action continues or as specified in the Settlement Stipulation. | | | | | | | | | |
The Company cannot currently predict the amount of any funds it might be required to pay under the Settlement Stipulation; whether the Company’s insurers will pay some or all of the amounts that the Company would otherwise be obligated to pay under the Settlement Stipulation; whether the Company would be successful in asserting against its insurers any claims that will or may be assigned to the Company under the terms of the Settlement Stipulation or that the Company might assert on its own behalf; or what the amount of any such recovery might be. Furthermore, the Company cannot predict whether the Delaware Court of Chancery will approve the Settlement Stipulation or whether the court’s decision will be challenged on appeal and, if so challenged, affirmed. Notwithstanding the foregoing, the Company does not expect that the net amount of all payments the Company might ultimately be required to make under the terms of the Settlement Stipulation, if approved, and after recovery of all insurance proceeds, will be material to financial position of the Company, and as of March 31, 2014, the Company believes its accruals are adequate to cover its contingencies relating to these matters. |
Other Litigation |
From time to time, the Company is involved in various litigation matters arising in the ordinary course of its business. The Company is not currently a party to any legal or administrative proceedings, other than as noted above, the adverse outcome of which, individually or in the aggregate, the Company believes would have a material impact on the Company’s financial condition, results of operations or cash flow. |