<PAGE>
As filed with the Securities and Exchange Commission on May 26, 1999.
Registration No. 333-73107
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
(Exact name of Registrant as specified in its charter)
Delaware 2253 52-2061057
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
Incorporation or Code Number)
Organization)
17422 Derian Avenue, Irvine, California 92614
(949) 863-1171
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
ROGER G. RUPPERT
Senior Vice President--Finance and Chief Financial Officer
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
17422 Derian Avenue, Irvine, California 92614
(949) 863-1171
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
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DAVID A. KRINSKY, ESQ. BRIAN J. MCCARTHY, ESQ. PHILIP T. RUEGGER III, ESQ.
O'Melveny & Myers LLP Skadden, Arps, Slate, Meagher & Flom, LLP Simpson Thacher & Bartlett
610 Newport Center Drive, 17th Floor 300 South Grand Avenue, Suite 3400 425 Lexington Avenue
Newport Beach, California 92660-6429 Los Angeles, California 90071 New York, New York 10017-3954
(949) 760-9600 (213) 687-5000 (212) 455-2000
</TABLE>
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE AND UPON
CONSUMMATION OF THE TRANSACTIONS DESCRIBED IN THE ENCLOSED PROXY STATEMENT.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] __________________________
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
SPECIAL MEETING OF SHAREHOLDERS
MERGERS PROPOSED -- YOUR VOTE IS VERY IMPORTANT
St. John Knits, Inc. has signed a merger agreement providing for two
mergers, a reorganization merger and an acquisition merger. If both of the
mergers are completed, each share of St. John common stock owned before the
mergers will be exchanged, at the holder's election and subject to proration,
for either $30 in cash or one share of common stock of St. John Knits
International, Incorporated, with a total of 456,047 shares of common stock of
St. John Knits International to be issued in the mergers, before eliminating
fractional shares.
St. John Knits International is currently a wholly owned subsidiary of
St. John. As a result of the reorganization merger, St. John will become a
wholly owned subsidiary of St. John Knits International. As a result of the
acquisition merger, St. John Knits International will be approximately 7% owned
by existing shareholders of St. John and approximately 93% owned by Vestar/Gray
Investors LLC. Vestar/Gray LLC will be approximately 84% owned by Vestar
Capital Partners III, L.P. and approximately 16% owned by Robert E. Gray, Marie
Gray and Kelly A. Gray after the mergers. We do not expect the shares of common
stock of St. John Knits International to be listed on any national securities
exchange or inter-dealer quotation system.
Before we can complete these transactions, St. John shareholders must
approve the principal terms of the reorganization merger found in the merger
agreement. The affirmative vote of holders of a majority of outstanding shares
of St. John's common stock entitled to vote and the affirmative vote of holders
of a majority of outstanding shares of St. John's common stock voting at the
special meeting, excluding shares held by the Grays, are required to approve
the reorganization merger.
Your vote is very important. Whether or not you plan to attend the special
meeting, please take the time to vote by completing and mailing the enclosed
proxy card. If you sign, date and mail your proxy card without indicating how
you want to vote, we will vote your proxy in favor of the principal terms of
the reorganization merger found in the merger agreement. If you do not return
your card, the effect will be a vote against the reorganization merger.
The date and time of the special meeting is June 28, 1999, 1:00 p.m. local
time. The meeting will be held at St. John's office located at 17522 Armstrong
Avenue, Irvine, California 92614.
This proxy statement-prospectus provides you with detailed information about
the proposed mergers. You can also get information about St. John from
documents that have been filed with the Securities and Exchange Commission. We
encourage you to read this entire document carefully.
After careful consideration, a special committee of your board of directors
and your board of directors have determined that the mergers are advisable and
in the best interests of St. John and its shareholders. Your board of directors
has approved and adopted the merger agreement, the reorganization merger and
the acquisition merger, and it recommends that you vote "FOR" approval of the
principal terms of the reorganization merger found in the merger agreement at
the special meeting.
/s/ ROBERT E. GRAY
Robert E. Gray
Chairman of the Board and Chief
Executive Officer
For a discussion of risk factors which you should consider in evaluating the
mergers, see "Risk Factors" beginning on page 19.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of this transaction or the securities
offered by this proxy statement-prospectus, or passed upon the fairness or
merits of this transaction or the adequacy or accuracy of this proxy
statement-prospectus. Any representation to the contrary is a criminal
offense.
This proxy statement-prospectus is dated May 26, 1999
and was first mailed to shareholders on or about May 27, 1999.
<PAGE>
We have not authorized anyone to give any information or make any
representation about the mergers, St. John or St. John Knits International that
differs from or adds to the information in this proxy statement-prospectus or
in our documents that are publicly filed with the Securities and Exchange
Commission. Therefore, if anyone does give you different or additional
information, you should not rely on it.
If you are in a jurisdiction where it is unlawful to offer to exchange or
sell, or to ask for offers to exchange or buy, the securities offered by this
proxy statement-prospectus or to ask for proxies, or if you are a person to
whom it is unlawful to direct such activities, then the offer presented by this
proxy statement-prospectus does not extend to you.
The information contained in this proxy statement-prospectus speaks only as
of its date unless the information specifically indicates that another date
applies.
As allowed by the Commission rules, this proxy statement-prospectus
incorporates important business and financial information about St. John that
is not included in or delivered with the proxy statement-prospectus. This
information is available to shareholders of St. John without charge upon
written request to Roger G. Ruppert, Senior Vice President-Finance and Chief
Financial Officer, St. John Knits, Inc., 17422 Derian Avenue, Irvine,
California 92614. Telephone requests may be directed to Roger G. Ruppert at
(949) 863-1171. To obtain timely delivery, shareholders must request this
information no later than June 18, 1999.
<PAGE>
ST. JOHN KNITS, INC.
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on June 28, 1999
----------------
St. John Knits, Inc. will hold a special meeting of shareholders at its
offices located at 17522 Armstrong Avenue, Irvine, California, at 1:00 p.m.
local time on June 28, 1999, for the following purposes:
. to consider and vote upon a proposal to approve the principal terms of
the reorganization merger found in the Agreement and Plan of Merger,
dated as of February 2, 1999, by and among St. John Knits, Inc., St. John
Knits International, Incorporated, SJKAcquisition, Inc. and Pearl
Acquisition Corp., pursuant to which St. John Knits, Inc. will become a
wholly owned subsidiary of St. John Knits International, Incorporated, a
Delaware corporation, which is currently a wholly owned subsidiary of St.
John, and to approve the form of agreement of merger to be filed with the
California Secretary of State to effect the reorganization merger. The
consummation of the reorganization merger is a condition precedent to the
acquisition merger and the other transactions contemplated in the merger
agreement; and
. to transact such other business as may properly come before the special
meeting or any adjournments or postponements of the special meeting.
A copy of the merger agreement is attached as Appendix A to the proxy
statement-prospectus accompanying this notice.
Record holders of St. John common stock at the close of business on May 24,
1999 will receive notice of and will be entitled to vote at the special
meeting, including any adjournments or postponements of the special meeting.
The affirmative vote of:
. the holders of a majority of the outstanding shares of St. John common
stock entitled to vote on the reorganization merger; and
. the holders of a majority of the shares of St. John common stock present
either in person or by proxy and voting at the special meeting, excluding
any shares of St. John common stock owned beneficially by Robert E. Gray,
Marie Gray and Kelly A. Gray and Vestar Capital Partners III, L.P. and
any of its affiliates
is required for approval of the principal terms of the reorganization merger
found in the merger agreement.
Your vote is important and we urge you to complete, sign, date and return
your proxy card as promptly as possible, whether or not you expect to attend
the special meeting. If you are unable to attend in person and you return your
proxy card, your shares will be voted at the special meeting. A return envelope
is included for your convenience. If your shares are held in "street name" by
your broker or other nominee, only that holder can vote your shares. You should
follow the directions provided by your broker or nominee regarding how to
instruct them to vote your shares.
By Order of the Board of Directors,
ST. JOHN KNITS, INC.
/s/ ROBERT E. GRAY
--------------------------
Robert E. Gray
Chairman of the Board and
Chief Executive Officer
Irvine, California
May 26, 1999
Please mark, sign, date and return your proxy promptly, whether or not
you plan to attend the special meeting.
Your board of directors recommends that you vote FOR approval of the
reorganization merger, which is described in detail in the accompanying
proxy statement-prospectus.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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Questions and Answers About the Mergers................................... 1
Diagram of the Structure of the Proposed Mergers.......................... 4
Summary................................................................... 7
The Mergers............................................................. 7
What You Will Receive in the Mergers.................................... 7
Election Procedures and Proration....................................... 8
Merger Financing........................................................ 8
Reasons for the Mergers; Recommendations to Shareholders................ 9
New York Stock Exchange Delisting....................................... 9
Interests of the Grays That Are Different From Yours.................... 9
Material Federal Income Tax Consequences................................ 10
Comparison of Rights of St. John Common Stock and St. John Knits
International Common Stock............................................. 10
Dissenters' Rights...................................................... 10
Opinions of Financial Advisors.......................................... 10
Procedural and Substantive Fairness..................................... 11
The Special Meeting..................................................... 11
Vote Required........................................................... 11
Percentage of Shares Held by Directors and Executive Officers........... 11
Conditions to Completion of the Mergers................................. 12
Termination of the Merger Agreement..................................... 12
Termination Fees and Expenses........................................... 13
St. John and St. John Knits International............................... 13
Description of Capital Stock of St. John Knits International............ 14
Market Price and Dividend Information................................... 15
Selected Historical Condensed Financial Data and Selected Pro Forma
Condensed Consolidated Financial Data (Unaudited)...................... 16
Risk Factors.............................................................. 19
We Will Be Controlled By Vestar After The Mergers....................... 19
The Fairness Opinions and the Board Recommendation May Not Apply to
Shareholders Electing to Receive St. John Knits International Common
Stock.................................................................. 19
You May Not Receive the Type of Consideration Specified in Your
Election............................................................... 19
Our Common Stock Will Not Be Listed, Which May Make it More Difficult
For You to Sell Shares................................................. 19
Failure to Register St. John Knits International Common Stock Under the
Securities Exchange Act of 1934 Will Reduce Stockholder Protection..... 20
Our Company Will Be Substantially Leveraged, Which May Adversely Affect
Our Operations......................................................... 20
Issuance of Options to Management May Dilute the Interests of St. John
Knits International Stockholders....................................... 21
We Do Not Expect to Pay Dividends....................................... 21
Our Increased Leverage May Make it Difficult for Us to Compete
Effectively With Other Apparel Manufacturers........................... 21
Some Members of St. John's Management and Some Directors Have Interests
That Are in Addition to the Interests of the St. John Shareholders..... 21
Reincorporation from California to Delaware May Have Adverse
Consequences for St. John Shareholders................................. 22
A Warning About Forward-Looking Statements.............................. 22
Special Factors........................................................... 23
Background of the Mergers............................................... 23
Purpose and Structure for the Mergers................................... 29
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
Reasons for the Mergers; Recommendations to Shareholders................ 30
Fairness Opinions of Financial Advisors................................. 35
Interests of the Grays and Other Officers and Directors of St. John in
the Mergers; Conflicts of Interests.................................... 48
Effects of the Mergers; Operations of St. John After the Mergers; New
York Stock Exchange Delisting.......................................... 53
Accounting Treatment.................................................... 55
Material Federal Income Tax Consequences................................ 55
Financial Projections..................................................... 59
The Mergers............................................................... 60
Merger Consideration.................................................... 60
Conversion/Retention of Shares; Procedures for Exchange of
Certificates........................................................... 63
Fractional Shares....................................................... 64
Governmental and Regulatory Approval.................................... 65
Dissenters' Rights of Appraisal......................................... 65
Treatment of Options.................................................... 67
Board of Directors and Officers of St. John Knits International
Following the Mergers.................................................. 68
Other Information Regarding Directors and Executive Officers............ 69
Resale of St. John Knits International Common Stock After the Mergers... 69
Merger Financing........................................................ 69
Rights Plan............................................................. 74
Pro Forma Condensed Consolidated Financial Statements (Unaudited)....... 76
The Merger Agreement...................................................... 82
The Mergers............................................................. 82
Closing of the Mergers; Effective Time of the Mergers; Surviving
Corporations........................................................... 82
Representations and Warranties.......................................... 83
Covenants............................................................... 84
No Solicitation......................................................... 85
Employee Benefits....................................................... 86
Access to Information................................................... 86
Cooperation and Reasonable Best Efforts................................. 86
Indemnification and Insurance........................................... 86
Conditions to the Consummation of the Mergers........................... 87
Termination............................................................. 88
Amendment and Waiver.................................................... 89
Termination Fees and Expenses........................................... 89
The Voting Agreement...................................................... 92
The Stockholders' Agreement............................................... 93
Voting Agreements....................................................... 93
Registration Rights..................................................... 93
Transfers of St. John Knits International Common Stock.................. 94
Termination............................................................. 95
The Limited Liability Company Agreement................................... 96
Voting of Shares........................................................ 96
Registration Rights..................................................... 96
Transfers of St. John Knits International Common Stock.................. 97
Non-Compete............................................................. 98
Termination............................................................. 98
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(continued)
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Page
<S> <C>
The Special Meeting...................................................... 99
General................................................................ 99
Matters to be Considered............................................... 99
Proxies................................................................ 99
Solicitation of Proxies................................................ 100
Forms of Non-Cash Election............................................. 100
Record Date and Voting Rights.......................................... 100
Recommendation of the St. John Board and the Special Committee of the
Board................................................................. 101
Comparison of the Rights of Holders of St. John Common Stock and St. John
Knits International Common Stock........................................ 102
Dividends and Repurchases of Shares.................................... 102
Special Meetings of Shareholders; Quorum; Shareholder Action by Written
Consent............................................................... 103
Voting Rights in Reorganizations....................................... 104
Size and Classification of the Board of Directors...................... 105
Election of Directors.................................................. 106
Removal of Directors; Filling Vacancies on the Board of Directors...... 106
Amendment of Charter and Bylaws........................................ 107
Dissenters' Appraisal Rights........................................... 108
Business Combinations and Reorganizations.............................. 110
Limitation on Directors' Liability..................................... 112
Indemnification of Officers and Directors; Insurance................... 114
Loans to Officers and Employees........................................ 116
Inspection of Shareholders' List....................................... 117
Interested Director Transactions....................................... 117
Voting By Ballot....................................................... 118
Shareholder Derivative Suits........................................... 119
Dissolution............................................................ 119
Rights Plan............................................................ 119
Doctrine of Independent Legal Significance............................. 120
Application of the California General Corporation Law to Delaware
Corporations.......................................................... 120
Pending Litigation Relating to the Mergers .............................. 120
Information About St. John and St. John Knits International.............. 122
General................................................................ 122
Management and Additional Information.................................. 122
St. John Knits International........................................... 122
Security Ownership of Five Percent Beneficial Owners and Management...... 123
Description of St. John Knits International Capital Stock................ 124
Purchases of Shares...................................................... 124
Information Concerning Pearl, Vestar and the Grays....................... 126
Where You Can Find More Information...................................... 127
St. John Incorporated Documents........................................ 127
Legal Opinions........................................................... 128
Independent Public Accountants........................................... 128
Shareholder Proposals.................................................... 129
Other Matters............................................................ 129
APPENDIX A--Agreement and Plan of Merger................................. A-1
APPENDIX B--Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................................ B-1
APPENDIX C--Opinion of Wasserstein Perella & Co., Inc. .................. C-1
APPENDIX D--Dissenters' Rights........................................... D-1
APPENDIX E--Voting Agreement............................................. E-1
APPENDIX F--Form of Agreement of Merger.................................. F-1
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGERS
Q: What will St. John shareholders receive for each St. John share?
A: Each St. John shareholder will have the right to elect to receive in
exchange for each share of St. John common stock either $30 in cash or one
share of common stock of St. John Knits International.
Q: Will I receive the type of consideration in the mergers I elect to receive?
A: You may not receive the type of consideration that you elect and will not
know at the time of your vote or election what you will ultimately receive
in exchange for your shares of St. John common stock. This result occurs
because only 456,047 shares of St. John Knits International will be issued
in the acquisition merger and the allocation of these shares among St. John
shareholders depends on the elections made by all of the shareholders of
St. John.
Q: Will the shares of St. John Knits International be listed on the New York
Stock Exchange?
A: No. We do not expect that the shares of common stock of St. John Knits
International will be listed on any national securities exchange or any
inter-dealer quotation system.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
document, please fill out and sign your proxy card. Then mail your
completed, signed and dated proxy card in the enclosed return envelope as
soon as possible so that your shares can be voted at the St. John special
meeting.
Q: What should I do if I want to elect to receive shares of St. John Knits
International common stock in the mergers?
A: If you want to elect to receive shares of St. John Knits International
common stock in the acquisition merger, mail your completed form of non-
cash election to St. John's exchange agent. We have enclosed a separate
envelope in order for you to return your form of non-cash election to the
exchange agent. If you do not want to elect to receive shares of St. John
Knits International common stock, do not
1
<PAGE>
complete a form of non-cash election, although this will not guarantee
that you will not receive shares. If your shares are held in "street name"
through your broker, your broker will mail your form of non-cash election
to you under separate cover, together with a letter of instructions for
making a non-cash election. You should read your form of non-cash election
together with this proxy statement-prospectus.
Q: If my shares are held in "street name" by my broker, will my broker vote
my shares for me?
A: Your broker will not be able to vote your shares without instructions from
you. You should follow the directions provided by your broker to vote your
shares.
Q: How do I change my vote or election to receive shares after I have mailed
my signed proxy card and form of non-cash election?
A: You may change your vote by sending a written notice stating that you
would like to revoke your proxy or by completing and submitting a new,
later dated proxy card to the Corporate Secretary of St. John. You also
can attend the St. John special meeting and vote in person. You may change
your election by sending a written notice to St. John's exchange agent
prior to 5:00 p.m., Eastern time, on June 25, 1999, stating that you would
like to revoke your election, as described more fully in the form of non-
cash election.
Q: Should I send in my stock certificates now?
A: If you have elected to receive shares of St. John Knits International
common stock, you must send in with your form of non-cash election your
St. John stock certificates or an appropriate guarantee of delivery as
described in the form of non-cash election. If you have not elected to
receive shares of St. John Knits International common stock, you should
not send in your stock certificates now. After the mergers are completed,
you will receive written instructions for exchanging your St. John stock
certificates for cash, St. John Knits International stock certificates or
both cash and St. John Knits International stock certificates.
Q: When do you expect the mergers to be completed?
A: We are working toward completing the mergers as quickly as possible after
the St. John special meeting. We hope to complete the mergers late in the
second calendar quarter or early in the third calendar quarter of 1999.
2
<PAGE>
Q: Who can help answer my questions?
A: If you have more questions about the mergers, you should contact:
St. John Knits, Inc.
17422 Derian Avenue
Irvine, California 92614
(949) 863-1171
Attention: Roger G. Ruppert, Chief Financial Officer
3
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[DIAGRAM OF THE STRUCTURE OF THE PROPOSED MERGERS APPEARS HERE]
4
<PAGE>
[DIAGRAM OF THE STRUCTURE OF THE PROPOSED MERGERS APPEARS HERE]
5
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(THIS PAGE INTENTIONALLY LEFT BLANK)
6
<PAGE>
SUMMARY
This Summary, together with the "Questions and Answers About the Mergers"
and the "Diagram of the Structure of the Proposed Mergers" on the preceding
pages, highlights important selected information from this proxy statement-
prospectus and may not contain all of the information that is important to you.
To understand fully the mergers and related transactions and for a more
complete description of the legal terms of the mergers and related
transactions, you should read carefully this entire document and the other
documents to which we have referred you. For more information about St. John,
see "Where You Can Find More Information" (page 127). We have included page
references parenthetically to direct you to more complete descriptions of the
topics presented in this summary.
The Mergers (See Page 60)
The merger agreement is attached as Appendix A to this proxy statement-
prospectus. We encourage you to read the merger agreement as it is the legal
document that governs the mergers.
If the reorganization merger is approved by St. John shareholders and all
other conditions to the reorganization merger and the acquisition merger are
satisfied or, where permissible, waived, St. John will complete the mergers as
follows:
1. The Reorganization Merger. St. John will merge with SJKAcquisition,
-------------------------
Inc., with St. John surviving the reorganization merger. As a result,
St. John will become a subsidiary of St. John Knits International and,
for a brief period of time prior to the acquisition merger, all St. John
shareholders will become stockholders of St. John Knits International.
2. The Acquisition Merger. Immediately after the reorganization merger, St.
----------------------
John Knits International will merge with Pearl Acquisition Corp., with
St. John Knits International surviving the acquisition merger. Pearl is
a Delaware corporation which is wholly owned by Vestar/Gray Investors
LLC. Vestar/Gray LLC is a limited liability company indirectly wholly
owned by Vestar Capital Partners III, L.P.
Prior to the reorganization merger, Vestar/Gray LLC will purchase 1,205,983
shares of St. John common stock from the Grays, and in exchange the Grays will
receive $7,110,000 in cash for 237,000 of these shares and an approximately 16%
ownership interest in Vestar/Gray LLC, valued at approximately $29.1 million,
for 968,983 of these shares. The Grays will not retain any shares of St. John
common stock and therefore will not participate directly in the mergers along
with other St. John shareholders, except that they will receive cash in respect
of their vested options, together with all other holders of vested options. In
the reorganization merger, Vestar/Gray LLC will exchange each of the 1,205,983
shares of St. John common stock for one share of St. John Knits International
common stock. In the acquisition merger, the shares of common stock of Pearl
owned by Vestar/Gray LLC will be converted into shares of St. John Knits
International common stock and the shares of St. John Knits International held
by Vestar/Gray LLC will be canceled in accordance with Delaware corporate law.
As a result of the mergers, St. John Knits International will be
approximately 7% owned by existing shareholders of St. John, other than the
Grays, and approximately 93% owned by Vestar/Gray LLC, which will be owned by
Vestar, through Vestar/SJK Investors LLC, and the Grays. Throughout this
document, the term "Vestar" is used to refer to both Vestar Capital Partners
III, L.P. and Vestar/SJK Investors LLC.
St. John anticipates completing the mergers as promptly as practicable after
the St. John special meeting.
What You Will Receive in the Mergers (See Page 60)
For each share of St. John common stock owned before the mergers, a St. John
shareholder who has not exercised his or her dissenters' rights in the
reorganization merger will be entitled to receive, at his or her election and
subject to proration, $30 in cash or one share of common stock of St. John
Knits International. St. John shareholders, other than the Grays, will receive
a total of 456,047 shares of common stock of St. John Knits International in
the acquisition merger. Approximately 3% of the outstanding shares of St. John
common stock held
7
<PAGE>
by the public will be exchanged for 456,047 shares of St. John Knits
International common stock, and approximately 97% of the outstanding shares of
St. John common stock held by the public will be exchanged for cash. The
aggregate cash consideration that St. John Knits International will pay to
holders of St. John common stock in the acquisition merger is approximately
$447.6 million.
Election Procedures and Proration (See Page 60)
Because only 456,047 shares of St. John Knits International will be issued
in the acquisition merger, you may not receive the type of consideration that
you elect and will not know at the time of your vote or election what you will
ultimately receive in exchange for your shares of St. John. If St. John
shareholders elect to receive, in the aggregate, less than 456,047 shares of
St. John Knits International common stock, then the balance of the 456,047
shares will be allocated among shares for which no election to receive stock
was made. If, on the other hand, St. John shareholders elect to receive, in the
aggregate, more than 456,047 shares, then the 456,047 shares of St. John Knits
International common stock will be allocated pro rata among St. John
shareholders who have elected to receive shares of St. John Knits
International. Consequently, these shareholders will receive fewer shares than
they had elected. If no St. John shareholder elects to receive stock in the
acquisition merger, each St. John shareholder will receive for each share of
St. John common stock $29.10 and .03 of a share of St. John Knits International
stock.
You may elect to receive stock for some or all of your St. John shares by
mailing the form of non-cash election enclosed with this proxy statement-
prospectus to St. John's exchange agent, who must receive your form of non-cash
election prior to 5:00 p.m., Eastern time, on June 25, 1999. You may revoke
your election prior to the special meeting by sending written notice to St.
John's exchange agent, as described in the form of non-cash election.
Merger Financing (See Page 69)
We expect the sources and uses of funds in the acquisition merger to be as
follows:
<TABLE>
<CAPTION>
SOURCES OF CASH
<S> <C>
Vestar/Gray LLC's cash equity contribution........................ $146,527,000
Senior subordinated notes......................................... 160,000,000
Senior bank credit facilities..................................... 155,000,000
------------
Total sources................................................... $461,527,000
</TABLE>
<TABLE>
<CAPTION>
USES OF CASH
<S> <C>
Cash payment to shareholders..................................... $447,584,000
Estimated transaction fees and costs............................. 22,427,000
Settlement of outstanding stock options.......................... 14,300,000
------------
Total uses..................................................... $484,311,000
------------
Net use........................................................ $(22,784,000)
============
</TABLE>
These numbers are as of January 31, 1999, as reflected in the pro forma
financial statements.
The rest of the necessary financing will come from available cash of St.
John. Because the Grays are contributing, or "rolling over," 968,983 of their
shares, valued at approximately $29.1 million, by transferring them in exchange
for a continued equity interest in St. John Knits International through an
interest in Vestar/Gray LLC, St. John Knits International does not need to
provide additional cash financing to purchase these shares.
We expect to pay approximately $18.7 million of the $22.4 million estimated
fees and costs to Vestar, the independent financial advisors and the bankers
supplying the financing for the transaction, including a $4 million transaction
fee payable to Vestar at closing. We expect to pay an additional $3.7 million
for miscellaneous expenses, including legal and accounting fees, printing and
mailing fees, solicitation expenses, SEC filing fees and Vestar's out-of-pocket
expenses estimated at approximately $200,000.
Vestar will not make its cash equity contribution unless St. John Knits
International obtains $315 million of long-term debt financing and satisfies
all conditions to the closing of the mergers described in the merger agreement
and all conditions in the commitment letters relating to the debt financing.
8
<PAGE>
As described above, St. John Knits International will incur approximately
$315 million of long-term debt to help finance the mergers. This additional
leverage may impair our ability to obtain additional financing and may reduce
funds that would otherwise be available to us for operations and future
business opportunities. In addition, the increased debt could make us more
vulnerable to economic and competitive pressures and increases in interest
rates and could force us to modify our operations.
St. John Knits International will settle outstanding stock options by paying
to the holders of these options an amount of cash equal to the excess of $30
over the exercise price per share of each option. The $14.3 million estimated
cost to settle outstanding options is based on options to purchase 814,652
shares of St. John common stock which were outstanding as of January 31, 1999.
These options have an average exercise price of $12.48 per share.
Reasons for the Mergers; Recommendations to Shareholders (See Page 30)
Your board of directors and the special committee believe the proposed
mergers are in the best interests of St. John shareholders in light of the
aggregate value to be paid to St. John shareholders in the mergers. However,
the board of directors and the special committee make no recommendation to
shareholders who elect to receive shares of St. John Knits International common
stock in the acquisition merger and, as a result of that election, receive more
than their pro rata share of St. John Knits International common stock.
New York Stock Exchange Delisting (See Page 53)
Once the mergers are completed, St. John will delist the St. John common
stock from the New York Stock Exchange. We do not expect to list the shares of
common stock of St. John Knits International on any national securities
exchange or any inter-dealer quotation system. Because these shares may not be
listed on an exchange or inter-dealer quotation system, the value and
marketability of St. John Knits International common stock will be different
from the value and marketability of St. John common stock prior to the mergers.
Interests of the Grays That Are Different From Yours (See Page 48)
In considering the recommendation of the St. John board regarding the
mergers, you should be aware of the interests that the Grays have in the
mergers that are different from your and their interests as shareholders. Some
of these interests are listed below.
1. Prior to the reorganization merger, the Grays will transfer to Vestar/Gray
LLC 237,000 shares of St. John common stock in exchange for a total cash
payment of $7,110,000 and will contribute 968,983 shares of St. John
common stock, valued by Vestar and the Grays at approximately $29.1
million, in exchange for an approximately 16% interest in Vestar/Gray LLC.
The Grays' interest in Vestar/Gray LLC will result in their ownership of
approximately 15% of the common stock of St. John Knits International
after the mergers. The Grays own, as of the record date, approximately
7.3% of the outstanding common stock of St. John.
2. Following the mergers, each of the Grays will be granted as incentive
compensation new employee stock options to acquire shares of St. John
Knits International common stock representing in the aggregate 5% of the
total shares of St. John Knits International common stock following the
mergers on a fully diluted basis. The exercise price of any options
granted on the closing date will be $30. The exercise price of any options
granted subsequent to the closing date will reflect the fair market value
of the underlying shares, as determined by the board of St. John Knits
International in its best judgment. The options will vest and become
exercisable based on the Grays' continued employment by St. John Knits
International for a specified period of time and the achievement of
specified performance criteria. If the applicable performance criteria are
not met, the options will not become exercisable and will terminate.
3. The Grays will also have board designation rights, registration rights and
buy/sell rights through a stockholders' agreement among St. John Knits
International, the Grays, Vestar and Vestar/Gray LLC.
9
<PAGE>
4. Robert E. Gray may become entitled to receive a lump sum payment, unless
Mr. Gray has otherwise previously elected to defer receipt of this
payment, in an amount equal to approximately $2,000,000, which represents
deferred compensation payable to Mr. Gray under his employment agreement
with St. John as of the closing of the mergers. Any portion of this
payment and any other compensation paid to him in the same taxable year in
excess of $1 million may not be deductible by St. John.
5. The Grays will receive cash payments from Merrill Lynch from the
settlement of existing hedging arrangements with respect to some of the
shares of St. John common stock that they beneficially own.
6. In the event that St. John is obligated to reimburse Pearl for expenses
under the merger agreement, Vestar may reimburse Mr. Gray for a
proportionate share of his expenses.
7. The Grays will receive a cash payment of $9,890,000 in respect of
outstanding, vested options, net of the exercise price for these options.
8. Vestar has agreed that following the consummation of the mergers, it will
cause St. John Knits International to reimburse Mr. Gray for his
reasonable out-of-pocket expenses in connection with the mergers.
9. Mr. Gray and Kelly A. Gray will serve as directors of St. John Knits
International after the mergers.
Material Federal Income Tax Consequences (See Page 55)
The mergers are intended to be tax-free to you to the extent you have
exchanged your shares of St. John common stock for St. John Knits International
common stock. The mergers will be taxable to you to the extent cash received
exceeds your tax basis in St. John shares exchanged for cash. However, it is
possible that the mergers will be fully taxable to the extent of the difference
between the fair market value of your St. John common stock and your tax basis
in your shares. In addition, the tax treatment of the cash received by St. John
shareholders depends upon how each shareholder holds the St. John shares and
upon whether such shares are deemed to have been sold to Vestar/Gray LLC or
instead to have been redeemed by St. John Knits International or St. John. No
opinions are being issued and no rulings from the IRS are being sought
concerning the tax treatment of the mergers.
Tax matters can be complicated and the tax consequences of the mergers to
you will depend on the facts of your own situation. You should consult your own
tax advisors to understand fully the tax consequences of the mergers to you.
Comparison of Rights of St. John Common Stock and St. John Knits International
Common Stock (See Page 102)
The rights of St. John shareholders are governed by California law and by
St. John's restated articles of incorporation and restated bylaws, whereas the
rights of St. John Knits International's stockholders will be governed by
Delaware law and by St. John Knits International's restated certificate of
incorporation and bylaws. As a result of these different governing laws and
organizational documents, St. John shareholders will have different rights as
holders of St. John Knits International common stock than they currently have
as holders of St. John common stock.
Dissenters' Rights (See Page 65)
California law permits holders of St. John common stock to dissent from the
reorganization merger and to have the fair value of their stock appraised and
paid to them in cash. If you hold shares of St. John common stock and you
dissent from the reorganization merger and follow the required formalities, you
will receive neither the $30 cash price nor shares of stock of St. John Knits
International. Instead, your only right will be to receive the appraised value
of your shares of St. John in cash. Although shareholders of St. John will have
dissenters' rights with respect to the reorganization merger, they will not
have dissenters' rights with respect to the acquisition merger.
Opinions of Financial Advisors (See Page 35)
In deciding to approve the mergers, your board of directors considered the
opinion delivered to it by
10
<PAGE>
Merrill Lynch, Pierce, Fenner & Smith Incorporated that, as of the date of the
opinion, and based on the assumptions, limitations and qualifications found in
the opinion, the consideration to be received by the holders of St. John common
stock, other than the Grays, pursuant to the mergers was fair from a financial
point of view to such holders. In deciding to recommend that the board of
directors approve the mergers, the special committee considered the opinions of
its financial advisors, Merrill Lynch and Wasserstein Perella & Co., Inc., that
as of the date of each opinion and based on the assumptions, limitations and
qualifications found in each opinion, the consideration to be received by the
holders of St. John common stock, other than the Grays, pursuant to the
mergers, was fair from a financial point of view to such holders. However,
neither Merrill Lynch nor Wasserstein Perella addressed the fairness, from a
financial point of view, of the consideration to be received by any holder of
St. John common stock who elects to receive St. John Knits International common
stock in the acquisition merger and, as a result of that election, receives
more than his or her pro rata share of St. John Knits International common
stock. We have attached as Appendix B and Appendix C the written opinions of
Merrill Lynch and Wasserstein Perella, respectively, each dated February 2,
1999. You should read those documents carefully to understand the assumptions
made, matters considered and limitations of the review undertaken by the
financial advisors in providing their opinions.
Procedural and Substantive Fairness (See Page 35)
Each of the Grays, St. John, St. John Knits International, SJKAcquisition,
Pearl, Vestar/Gray LLC, Vestar/SJK Investors LLC, Vestar Capital Partners III,
L.P., Vestar Associates III, L.P. and Vestar Associates Corporation III
believes that the mergers are both procedurally and substantively fair to the
unaffiliated shareholders of St. John.
The Special Meeting (See Page 99)
At the special meeting, the holders of St. John common stock will be asked
to approve the principal terms of the reorganization merger found in the merger
agreement. You may vote at the special meeting if you were the record owner of
St. John common stock at the close of business on May 24, 1999. You will have
one vote for each share of St. John common stock you own.
Vote Required (See Page 100)
The vote of a majority of the outstanding shares of St. John common stock
entitled to vote on the
reorganization merger and a majority of the outstanding shares of St. John
common stock present and voting at the special meeting, excluding any shares of
stock owned beneficially by Vestar or the Grays, is required to approve the
principal terms of the reorganization merger found in the merger agreement.
Because approval of the reorganization merger requires the affirmative vote of
a majority of outstanding shares of St. John common stock, abstentions and
broker non-votes will have the same effect as negative votes.
No further approval of the acquisition merger is required and neither the
shareholders of St. John nor the stockholders of St. John Knits International
after the reorganization merger will have the right to vote on the acquisition
merger. Consequently, your vote on the reorganization merger will effectively
be a vote on both mergers.
Percentage of Shares Held by Directors and Executive Officers (See Page 123)
On the record date, directors and executive officers of St. John owned and
had the right to vote 1,482,108 shares of St. John common stock (approximately
8.9% of the shares of St. John common stock then outstanding). We expect that
they will vote all of their shares in favor of the reorganization merger. In
addition, the Grays have entered into a voting agreement with Vestar and
Vestar/Gray LLC in which they have agreed to vote the shares of St. John common
stock owned beneficially by them, excluding shares subject to options, in favor
of the mergers. As of the record date, the Grays owned and had the right to
vote a total of 1,205,983 shares of St. John common stock, representing
approximately 7.3% of the total shares outstanding on the record date.
11
<PAGE>
Conditions to Completion of the Mergers (See Page 87)
The completion of the mergers depends on the satisfaction of a number of
conditions, including the following:
1. St. John shareholders must approve the reorganization merger;
2. we must receive financing for the transactions contemplated by the
merger agreement;
3. we must receive all required consents and approvals, including
regulatory approvals, and any waiting periods required by law must have
expired;
4. there must be no governmental order blocking completion of the mergers,
no proceedings by a government body trying to block the mergers and no
significant litigation by any governmental body with respect to the
mergers;
5. St. John must not have suffered any event which has had, or is
reasonably likely to have, a "material adverse effect" on St. John (for
the definition of material adverse effect, see "The Merger Agreement--
Conditions to the Consummation of the Mergers" on page 87); and
6. the representations and warranties made by St. John in the merger
agreement must be true and correct in all material respects at the
closing date, and St. John must have performed in all material respects
its obligations under the merger agreement.
Unless prohibited by law, St. John or Pearl could elect to waive a condition
that has not been satisfied and complete the mergers anyway. We cannot be
certain whether or when any of these conditions will be satisfied, or, where
permissible, waived, or that we will complete the mergers. In addition, we will
not complete the reorganization merger unless all conditions to the acquisition
merger are satisfied or, where permissible, waived.
Termination of the Merger Agreement (See Page 88)
Pearl and St. John may agree at any time to terminate the merger agreement
before completing the mergers, even if the St. John shareholders have already
approved the reorganization merger.
Either party may also terminate the merger agreement if:
1. the parties do not complete the mergers by July 15, 1999;
2. any government body has issued a final order enjoining or otherwise
prohibiting the mergers;
3. St. John shareholders do not approve the reorganization merger; or
4. the other party is in material breach of any of its representations,
warranties or covenants under the merger agreement and the breach is not
cured within 20 days.
In addition, Pearl may terminate the merger agreement if:
1. our board has withdrawn or modified in a manner adverse to Pearl its
recommendation of the mergers;
2. our board has approved an acquisition proposal made by a third party; or
3. we have failed to recommend rejection of any tender or exchange offer
for shares of St. John common stock.
Finally, St. John may terminate the merger agreement prior to approval of
the reorganization merger by its shareholders if, among other reasons:
1. our board has withdrawn or modified in a manner adverse to Pearl our
recommendation of the mergers in compliance with the terms of the merger
agreement; or
2. our board has approved a superior proposal in compliance with the terms
of the merger agreement.
12
<PAGE>
Termination Fees and Expenses (See Page 89)
St. John has agreed to pay Pearl a $14 million termination fee if the
following events occur:
1. Pearl terminates the merger agreement because our board has withdrawn or
modified in a manner adverse to Pearl its recommendation of the mergers
or if our board has approved or we have consummated an acquisition
proposal made by a third party or if we have failed to recommend
rejection of any tender or exchange offer for shares of St. John common
stock;
2. we terminate the merger agreement because, in compliance with the merger
agreement, our board has withdrawn or modified in a manner adverse to
Pearl its recommendation of the mergers or our board has approved a
superior proposal in accordance with the terms of the merger agreement;
or
3. an acquisition proposal is made by a third party and
(a) either Pearl or we terminate the merger agreement because St. John
shareholders have not approved the reorganization merger,
(b) either Pearl or we terminate the merger agreement because the mergers
have not been consummated by July 15, 1999, unless the consummation
has not occurred due to the failure to receive financing based on
market conditions, or
(c) Pearl terminates the merger agreement because we are in material
breach of any of our representations, warranties or covenants
contained in the merger agreement,
and, in any of these events, within twelve months after the date of such
termination, we enter into a definitive agreement or consummate either an
acquisition proposal made by a third party other than Pearl prior to the
date of such termination or a superior proposal.
In addition, we have agreed to pay up to $1.5 million of the expenses
incurred by Pearl in connection with the mergers if the following events occur:
1. either Pearl or we terminate the merger agreement if the mergers have
not been consummated by July 15, 1999 because conditions to the mergers
have not been satisfied by such date; or
2. the circumstances described in paragraphs (1) or (2) above have
occurred.
If we have to pay both the termination fee and the expense amount, the
expense amount will be credited against the termination fee.
Pearl has agreed to pay up to $1.5 million of the expenses incurred by us in
connection with the mergers if we terminate the merger agreement because Pearl
is in material breach of any of its representations, warranties or covenants
contained in the merger agreement.
St. John and St. John Knits International (See Page 122)
St. John Knits, Inc.
St. John Knits International, Incorporated
17422 Derian Avenue
Irvine, California 92614
(949) 863-1171
St. John is a leading designer, manufacturer and marketer of women's
clothing and accessories, principally under the St. John trade name. For over
thirty-five years, the St. John name has been associated with high quality and
a specific look in knitwear characterized by vibrant colors and classic,
timeless styling. The St. John "look," combined with limited production runs
and selective distribution, has created an exclusive image, engendering
consumer loyalty.
St. John Knits International is a Delaware corporation and a wholly owned
subsidiary of St. John. As a result of the reorganization merger, St. John will
become a wholly owned subsidiary of St. John Knits International. St. John
Knits International does not currently conduct any business other than holding
the capital stock of SJKAcquisition, Inc.
13
<PAGE>
Description of Capital Stock of St. John Knits International (See Page 124)
Holders of St. John Knits International common stock are entitled to share
ratably in assets available for distribution on liquidation, dissolution or
winding up, subject, if preferred stock of St. John Knits International is then
authorized and outstanding, to any preferential rights of such preferred stock.
Each share of the St. John International common stock entitles its holder to
one vote at all meetings of stockholders, and such votes are non-cumulative.
The St. John Knits International common stock is not redeemable, has no
subscription or conversion rights and does not entitle its holders to any
pre-emptive rights.
14
<PAGE>
Market Price and Dividend Information
Shares of St. John common stock are traded on the New York Stock Exchange
under the symbol "SJK." The table below shows, for the fiscal quarters
indicated, the high and low sales prices of shares of St. John common stock as
reported by the New York Stock Exchange.
<TABLE>
<CAPTION>
High Low Dividend
------ ------ --------
<S> <C> <C> <C>
1997
First Quarter (13 weeks ended February 2, 1997)...... $48.13 $41.13 $0.025
Second Quarter (13 weeks ended May 4, 1997).......... 45.50 37.50 0.025
Third Quarter (13 weeks ended August 3, 1997)........ 54.50 38.75 0.025
Fourth Quarter (13 weeks ended November 2, 1997)..... 49.19 38.50 0.025
1998
First Quarter (13 weeks ended February 1, 1998)...... $44.50 $36.38 $0.025
Second Quarter (13 weeks ended May 3, 1998).......... 48.31 38.63 0.025
Third Quarter (13 weeks ended August 2, 1998)........ 44.75 34.00 0.025
Fourth Quarter (13 weeks ended November 1, 1998)..... 33.88 13.00 0.025
1999
First Quarter (13 weeks ended January 31, 1999)...... $27.94 $17.56 $0.025
Second Quarter (13 weeks ended May 2, 1999) ......... 27.88 25.81 0.025
Third Quarter (through May 20, 1999) ................ 27.94 27.13 --
</TABLE>
On December 8, 1998, the last full trading day prior to the public
announcement of the proposed mergers, the reported closing price of St. John
common stock on the New York Stock Exchange was $21.94 per share.
On May 25, 1999, the most recent practicable date prior to the printing of
this proxy statement-prospectus, the reported closing price of St. John common
stock on the New York Stock Exchange was $27.81 per share.
St. John's ability to pay dividends depends upon limitations under
applicable law, covenants under its line of credit and other factors your board
of directors deems relevant, including results of operations, financial
condition and capital and surplus requirements. St. John does not expect St.
John Knits International to pay dividends on its common stock following the
mergers.
Following the mergers, St. John Knits International's ability to pay
dividends will depend on receipt of dividends from St. John, which will be its
wholly owned subsidiary. In addition, St. John Knits International's ability to
pay dividends will be limited by the agreements governing the terms of the
indebtedness incurred in connection with the mergers, limitations under
applicable law and other factors its board of directors deems relevant.
15
<PAGE>
Selected Historical Condensed Financial Data and
Selected Pro Forma Condensed Consolidated Financial Data (Unaudited)
The following tables show selected historical condensed consolidated
financial data of St. John and selected pro forma condensed consolidated
financial data of St. John. The selected historical condensed consolidated
financial data for the three fiscal years ended November 1, 1998, November 2,
1997 and November 3, 1996 and for the thirteen weeks ended January 31, 1999 and
February 1, 1998 are derived from the historical consolidated financial
statements of St. John and the related notes, which are incorporated by
reference in this document. The selected historical condensed consolidated
financial data for the two fiscal years ended October 29, 1995 and October 30,
1994 are derived from the historical consolidated financial statements of St.
John, which are not included in this document. See "Where You Can Find More
Information" on page 127.
The selected pro forma condensed consolidated financial data of St. John has
been derived by the application of pro forma adjustments to St. John's
historical consolidated financial statements incorporated by reference in this
document. The pro forma condensed consolidated statements of income for the
periods presented gives effect to the mergers and related transactions,
including the merger financing, settlement of outstanding stock options and
payment of estimated fees and costs, as if such transactions were consummated
as of November 3, 1997 for the fiscal year ended November 1, 1998 and for the
thirteen weeks ended January 31, 1999. The pro forma condensed consolidated
balance sheet data gives effect to the mergers and related transactions as if
such transactions had occurred as of January 31, 1999. The adjustments are
described in the notes accompanying the pro forma financial statements found on
page 76. The selected pro forma condensed consolidated financial data should
not be considered indicative of actual results that would have been achieved
had the mergers and related transactions been consummated on the date or for
the periods indicated and do not purport to be indicative of balance sheet data
or results of operations as of any future date or for any future period. This
data should be read in conjunction with St. John's historical financial
statements and the notes thereto which are incorporated in this proxy
statement-prospectus by reference. See "Where You Can Find More Information" on
page 127.
The pro forma adjustments were applied to the respective historical
consolidated financial statements to reflect the accounting for the mergers as
a recapitalization. Accordingly, the historical basis of St. John's assets and
liabilities has not been impacted by the transaction.
In these tables, the terms "EBITDA," "EBITDA margin," "ratio of earnings to
fixed charges," and "total debt" have the meanings stated below.
. ""EBITDA'' represents earnings before interest expense, interest income,
income taxes, depreciation and amortization expense, non-cash write-off
of assets and excludes minority interest and other non-royalty income
and the fee paid to the special committee. It is not intended to
represent cash flow from operations as defined by generally accepted
accounting principles and should not be used as an alternative to net
income as an indicator of St. John's operating performance or to cash
flow as a measure of liquidity. EBITDA is included in this proxy
statement-prospectus as it is a basis upon which St. John assesses its
financial performance, and covenants in St. John's borrowing
arrangements will be tied to similar measures. EBITDA and EBITDA margin,
as presented, present useful measures of assessing St. John's ongoing
operating activities without the impact of financing activity and non-
recurring charges. While EBITDA is frequently used as a measure of
operations and the ability to meet debt service requirements, it is not
necessarily comparable to other similar titled captions of other
companies due to potential inconsistencies in the method of calculation.
. EBITDA margin represents EBITDA divided by net sales.
. For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes and extraordinary
items, plus fixed charges. Fixed charges consist of interest expense,
including amortization of debt issuance costs and a portion of operating
lease rental expense deemed to be representative of the interest factor.
. Total debt includes long-term debt and the current portion of long-term
debt.
16
<PAGE>
Selected Historical Condensed Financial Data
<TABLE>
<CAPTION>
For the years ended Thirteen weeks ended
----------------------------------------------------------- -----------------------
October 30, October 29, November 3, November 2, November 1, February 1, January 31,
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------- ----------- -----------
(amounts in thousands except per share and ratio data)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF INCOME:
Net sales.............. $127,953 $161,795 $202,951 $242,101 $281,961 $ 68,761 $ 73,389
Cost of sales.......... 59,179 74,252 88,871 99,545 120,883 28,983 33,829
-------- -------- -------- -------- -------- -------- --------
Gross profit........... 68,774 87,543 114,080 142,556 161,078 39,778 39,560
Selling, general and
administrative
expenses.............. 43,288 54,550 68,385 84,545 107,026 24,193 30,135
-------- -------- -------- -------- -------- -------- --------
Operating income....... 25,486 32,993 45,695 58,011 54,052 15,585 9,425
Other income........... 340 803 1,355 713 1,369 228 426
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes................. 25,826 33,796 47,050 58,724 55,421 15,813 9,851
Income taxes........... 10,880 14,243 19,929 24,300 22,001 6,593 4,027
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 14,946 $ 19,553 $ 27,121 $ 34,424 $ 33,420 $ 9,220 $ 5,824
-------- -------- -------- -------- -------- -------- --------
Net income per common
share--basic.......... $ 0.91 $ 1.19 $ 1.64 $ 2.07 $ 2.00 $ 0.55 $ 0.35
-------- -------- -------- -------- -------- -------- --------
Net income per common
share--diluted........ $ 0.90 $ 1.16 $ 1.59 $ 2.01 $ 1.94 $ 0.54 $ 0.34
-------- -------- -------- -------- -------- -------- --------
Dividends per share.... $ 0.075 $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.025 $ 0.025
-------- -------- -------- -------- -------- -------- --------
Shares used in the
calculation of net
income per share --
basic................ 16,396 16,433 16,519 16,615 16,694 16,645 16,580
-------- -------- -------- -------- -------- -------- --------
Shares used in the
calculation of net
income per share --
diluted.............. 16,651 16,869 17,016 17,134 17,235 17,075 16,961
-------- -------- -------- -------- -------- -------- --------
OTHER DATA:
EBITDA................. $ 29,251 $ 38,539 $ 52,999 $ 67,126 $ 66,294 $ 18,204 $ 12,979
EBITDA margin.......... 22.9% 23.8% 26.1% 27.7% 23.5% 26.5% 17.7%
Depreciation and
amortization.......... $ 3,673 $ 5,313 $ 7,042 $ 8,859 $ 11,371 $ 2,619 $ 3,322
Capital expenditures... $ 7,796 $ 17,571 $ 21,400 $ 22,751 $ 23,648 $ 8,047 $ 5,447
Ratio of earnings to
fixed charges......... 17.5x 18.7x 21.8x 22.6x 16.6x 22.9x 13.0x
Net cash provided by
operating activities.. $ 12,637 $ 18,014 $ 16,841 $ 30,459 $ 24,982 $ 19,230 $ 19,012
Net cash used in
investing activities.. $ 14,292 $ 17,714 $ 20,114 $ 21,542 $ 22,377 $ 8,057 $ 5,308
Net cash provided by
(used in) financing
activities............ $ (998) $ (444) $ 748 $ (817) $ (2,724) $ 793 $ (430)
BALANCE SHEET DATA:
Working capital........ $ 31,442 $ 38,130 $ 49,628 $ 69,693 $ 89,190 $ 74,471 $ 92,457
Total assets........... 62,634 85,973 116,494 153,904 182,390 166,956 189,173
Total debt............. -- -- -- -- 408 -- 349
Stockholders' equity... 50,530 69,227 97,093 130,680 161,574 140,629 166,911
Book value per share... 3.08 4.20 5.85 7.86 9.75 8.41 10.07
</TABLE>
17
<PAGE>
Selected Pro Forma Condensed Consolidated Financial Data (Unaudited)
(amounts in thousands except per share and ratio data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
------------ -----------
Fiscal
Year Thirteen
Ended Weeks Ended
November 1, January 31,
1998 1999
------------ -----------
<S> <C> <C>
CONSOLIDATED STATEMENT OF INCOME:
Net sales....................................... $281,961 $ 73,389
Cost of sales................................... 120,883 33,829
-------- ---------
Gross profit.................................... 161,078 39,560
Selling, general and administrative expenses.... 107,526 30,260
-------- ---------
Operating income................................ 53,552 9,300
Interest expense................................ 32,816 7,959
Other income.................................... 252 142
-------- ---------
Income before income taxes...................... 20,988 1,483
Income taxes.................................... 8,331 604
-------- ---------
Net income...................................... $ 12,657 $ 879
-------- ---------
Net income per common share-basic............... $ 1.93 $ 0.13
-------- ---------
Net income per common share-diluted............. $ 1.93 $ 0.13
-------- ---------
Dividends per share............................. $ -- $ --
-------- ---------
Shares used in the calculation of net income per
share -- basic................................. 6,546 6,546
-------- ---------
Shares used in the calculation of net income per
share -- diluted............................... 6,546 6,546
-------- ---------
OTHER DATA:
EBITDA.......................................... $ 65,624 $ 12,854
EBITDA margin................................... 23.3% 17.5%
Depreciation and amortization................... $ 11,371 $ 3,322
Capital expenditures............................ $ 23,648 $ 5,447
Ratio of earnings to fixed charges.............. 1.58x 1.17x
BALANCE SHEET DATA AS OF JANUARY 31, 1999:
Working capital................................. $ 72,273
Total assets.................................... 184,489
Total debt...................................... 315,349
Stockholders' deficit........................... (152,773)
Book value per share............................ (23.34)
</TABLE>
18
<PAGE>
RISK FACTORS
You should carefully consider the following factors, together with the other
information contained in this proxy statement-prospectus, before determining
whether to vote to approve the reorganization merger. If any of the following
risks actually occur, our business, financial condition or our results of
operations could be seriously harmed. If that happens, the value of St. John
Knits International common stock could decline, and you may lose all or part of
your investment.
We Will Be Controlled By Vestar After The Mergers
Stockholders other than Vestar, through Vestar/Gray LLC, will have little or
no influence on decisions regarding significant corporate matters for St. John
Knits International. Vestar's total ownership interest of St. John Knits
International will be approximately 78% after the acquisition merger. As a
result, Vestar will have the power to control the direction and policies of St.
John Knits International, the election of a majority of the directors and the
outcome of any matter requiring stockholder approval, including adopting
amendments to St. John Knits International's certificate of incorporation and
approving mergers or sales of all or substantially all of St. John Knits
International's assets.
In addition, the existence of a single controlling stockholder of St. John
Knits International makes it virtually impossible for a third party to acquire
St. John Knits International without Vestar's consent. A third party would be
required to negotiate any such transaction with Vestar, through Vestar/Gray
LLC, and Vestar's interests may be different from the interests of other
St. John Knits International stockholders.
The Fairness Opinions and the Board Recommendation May Not Apply to
Shareholders Electing to Receive St. John Knits International Common Stock
Shareholders should bear in mind that the fairness opinions of Merrill Lynch
and Wasserstein Perella do not apply to any St. John shareholder who elects to
receive St. John Knits International common stock in the acquisition merger
and, as a result of that election, receives more than his or her pro rata share
of St. John Knits International common stock. In addition, the board of
directors and the special committee make no recommendation with respect to
shareholders who elect to receive shares of St. John Knits International common
stock in the acquisition merger and, as a result of that election, receive more
than their pro rata share of St. John Knits International common stock.
You May Not Receive the Type of Consideration Specified in Your Election
The election of record holders of St. John common stock to receive shares of
St. John Knits International or $30 in cash per share is subject to proration
procedures. If the mergers are consummated, you will not necessarily receive
the type of consideration specified in your election. See "The Mergers--Merger
Consideration" on page 60 for a description of the proration procedures.
Our Common Stock Will Not Be Listed, Which May Make it More Difficult for You
to Sell Shares
We expect that the volume of shares of St. John Knits International traded
following the mergers will be substantially smaller than the trading volume of
shares of St. John before the mergers. After the acquisition merger, neither
St. John nor St. John Knits International common stock will be listed on any
securities exchange or any inter-dealer quotation system. We expect that this
fact, combined with the substantial decrease in the number of shares of our
common stock to be held by stockholders other than Vestar/Gray LLC, may make it
more difficult for holders of common stock to sell their shares. In addition,
quotes for shares of our common stock will not be readily available because our
common stock will trade only in the over-the-counter market. This may make it
more difficult for holders to sell their shares at an attractive price.
19
<PAGE>
Failure to Register St. John Knits International Common Stock Under the
Securities Exchange Act of 1934 Will Reduce Stockholder Protection
If St. John Knits International common stock is not registered, some
provisions of the Securities Exchange Act of 1934 which offer protection to
stockholders will not be applicable to St. John Knits International. For
example, the short-swing profit recovery provisions of Section 16(b) and the
requirement of furnishing a proxy or information statement under Section 14(a)
in connection with stockholder meetings will no longer apply.
Our Company Will Be Substantially Leveraged, Which May Adversely Affect Our
Operations
As of January 31, 1999, after giving pro forma effect to the mergers and the
merger financing and the application of the net proceeds from the financing,
St. John Knits International would have had $336.6 million of total liabilities
and $152.8 million of consolidated shareholders' deficit as compared to $21.6
million of total liabilities and $166.9 million of consolidated shareholders'
equity as of January 31, 1999 on a historical basis. This substantial leverage
may have important consequences for St. John Knits International, including the
following:
. our ability to obtain additional financing for working capital, capital
expenditures or other purposes may be impaired or any such financing may
not be on terms favorable to us;
. a substantial portion of our cash flow available from operations will be
dedicated to the payment of principal and interest expenses, thereby
reducing the funds that would otherwise be available to us for
operations and future business opportunities;
. a substantial decrease in net operating income and cash flows or an
increase in expenses may make it difficult for us to meet our debt
service requirements or force us to modify our operations;
. our substantial leverage may make us more vulnerable to economic
downturns and competitive pressure; and
. some of the borrowings may be at variable rates of interest, which would
make us vulnerable to increases in interest rates.
In addition, substantial leverage will have a negative effect on our net
income. Pro forma net income for the 1998 fiscal year ended November 1, 1998
and the thirteen weeks ended January 31, 1999 would have been $12.7 million and
$0.9 million, respectively, as compared to $33.4 million and $5.8 million,
respectively, for the same periods on a historical basis, and pro forma
interest expense for fiscal 1998 and the thirteen weeks ended January 31, 1999
would have been increased to $32.8 million and $8.0 million, respectively.
The definitive terms of the merger financing have not been finalized.
However, based on a commitment letter from The Chase Manhattan Bank, which we
have filed as an exhibit to the registration statement to which this proxy
statement-prospectus relates and to the Rule 13e-3 Transaction Statement, we
expect that the terms will include significant operating and financial
restrictions, including limits on our ability to incur indebtedness, create
liens, sell assets, engage in mergers or consolidations, make investments and
pay dividends.
The financing documents will include covenants that will require St. John
Knits International to meet certain financial ratios and financial conditions
that may require that St. John Knits International take action to reduce debt
or to act in a manner contrary to its business objectives. In addition, the new
financing documents will contain restrictions that may affect our operations,
including St. John Knits International's ability to incur additional
indebtedness and make acquisitions and capital expenditures beyond a certain
level.
We expect the merger financing to be finalized shortly before the mergers
close. If we do not receive the merger financing, we cannot complete the
mergers. See "The Mergers--Merger Financing" on page 69.
20
<PAGE>
Issuance of Options to Management May Dilute the Interests of St. John Knits
International Stockholders
Following the mergers, St. John Knits International intends to grant members
of management as incentive compensation employee stock options to purchase St.
John Knits International common stock. If the value of St. John Knits
International common stock rises above the exercise price of the options and
the holders have the right to exercise their options, the holders will be more
likely to exercise their options. As the number of shares outstanding
increases, St. John Knits International's earnings will be spread over a
greater number of shares, resulting in lower earnings per share of St. John
Knits International common stock.
We Do Not Expect to Pay Dividends
We do not expect that St. John Knits International will pay dividends to
stockholders following the mergers. St. John Knits International will be
substantially leveraged. The agreements governing the terms of the indebtedness
will contain covenants limiting the amount of dividends that may be paid by us.
In addition, it is likely that we will use any retained earnings for working
capital and to finance our strategic plans and not to pay dividends.
Our Increased Leverage May Make It Difficult for Us to Compete Effectively With
Other Apparel Manufacturers
The apparel business is extremely competitive and some of our competitors
have greater financial resources than we do. In addition, companies in the
apparel business may have different financial results during certain seasons or
during good or bad economic times. As a result of the substantial leverage of
St. John Knits International after the mergers, we may have less financial
resources to compete effectively and will not have the financial flexibility we
currently have in the event our financial results differ from season to season.
Some Members of St. John's Management and Some Directors Have Interests That
Are in Addition to the Interests of St. John Shareholders
Some members of St. John's management and some directors of St. John have
interests in the mergers that are in addition to the interests of St. John
shareholders generally. These include the following:
. the Grays, who will transfer the shares of St. John common stock owned
beneficially by them to Vestar/Gray LLC in exchange for cash and
interests in Vestar/Gray LLC and who will be granted as incentive
compensation new employee stock options to acquire shares of St. John
Knits International common stock;
. Robert E. Gray and Kelly A. Gray, who will serve as directors of St. John
Knits International after the mergers;
. some other members of management, who will receive as incentive
compensation employee stock options to acquire shares of St. John Knits
International common stock that will have an exercise price equal to the
market value of such stock on the date of the grant; and
. some members of senior management, other than the Grays, who will be
offered the opportunity to purchase shares of St. John Knits
International common stock which, together with the employee stock
options referred to in the preceding bullet point, will represent
approximately 5% of the outstanding capital of St. John Knits
International on a fully diluted basis.
See "Special Factors--Interests of the Grays and Other Officers and
Directors of St. John in the Mergers; Conflicts of Interests" on page 48.
21
<PAGE>
Reincorporation from California to Delaware May Have Adverse Consequences for
St. John Shareholders
Delaware law has been criticized by some commentators on the grounds that it
does not afford minority shareholders the same substantive rights and
protections as are available in a number of other states. Before voting on the
reorganization merger, you should carefully consider the significant
differences between the corporation laws of California and Delaware and the
differences between the charter and bylaws of St. John and St. John Knits
International. See "Comparison of the Rights of Holders of St. John Common
Stock and St. John International Common Stock" on page 102.
A Warning About Forward-Looking Statements
St. John and St. John Knits International make forward-looking statements in
this document and in the St. John public documents to which we refer you. These
forward-looking statements are subject to risks and uncertainties, and there
can be no assurance that such statements will prove to be correct. Forward-
looking statements include some of the statements set forth under "Summary--
Reasons for the Mergers; Recommendations to Shareholders," "--Selected
Historical Condensed Financial Data and Selected Pro Forma Condensed
Consolidated Financial Data (Unaudited)," "Risk Factors--Our Company Will Be
Substantially Leveraged, Which May Adversely Affect Our Operations," "Special
Factors--Reasons for the Mergers; Recommendations to Shareholders," "--Fairness
Opinions of Financial Advisors," "--Effects of the Mergers; Operations of St.
John After the Mergers; New York Stock Exchange Delisting," "Financial
Projections," "The Mergers--Merger Financing" and "--Pro Forma Condensed
Consolidated Financial Statements (Unaudited)." In addition, when we use any of
the words "believes," "expects," "anticipates," "plans," "intends," "hopes,"
"will" or similar expressions, we are making forward-looking statements. Many
possible events or factors could affect the future financial results and
performance of St. John Knits International after the mergers. This could cause
results or performance to differ materially from those expressed in our
forward-looking statements. You should consider these risks when you vote on
the reorganization merger. These possible events or factors include, in
addition to those discussed elsewhere in this document, those discussed in the
public documents to which we referred you.
22
<PAGE>
SPECIAL FACTORS
Background of the Mergers
The board of directors and management of St. John have from time to time
considered strategic alternatives for St. John. In the early summer of 1998,
management began to question whether St. John could continue to sustain the
growth rate Wall Street had come to expect of St. John without jeopardizing St.
John's long term profitability. Specifically, management began to form a view
that some of the problems St. John experienced in 1998 were due to St. John's
efforts to maintain its historical growth rates in accordance with Wall
Street's expectations. This led management to question whether the public
shareholders of St. John would be willing to accept a slower growth rate in the
short term to maintain product quality and profitability in the long term. At
the same time, St. John entered into discussions with Merrill Lynch regarding
the retention of Merrill Lynch as its financial advisor to explore strategic
options for St. John, including the sale of St. John. In July of 1998, Mr. Gray
and outside directors of St. John met with representatives of Merrill Lynch to
discuss this engagement. On October 6, 1998, St. John retained Merrill Lynch.
On November 4, 1998, after consulting with Merrill Lynch, St. John's board of
directors approved a shareholder rights plan, or "poison pill," designed to
provide the board of directors of St. John with the ability to maximize
shareholder value with respect to any offer made to acquire St. John. St. John
issued the rights as a dividend to shareholders on November 18, 1998.
In July 1998, a former director of St. John, Mr. Rick Rozar, introduced Mr.
Gray to a potential financial buyer for St. John. After discussions with Mr.
Gray, in September 1998, the financial buyer indicated that it did not have any
interest in completing a transaction with St. John.
On November 12, 1998, Mr. Gray first met with Daniel S. O'Connell, Chief
Executive Officer of Vestar, James P. Kelley, Managing Director of Vestar, and
Elizabeth M. Eveillard, Managing Director of PaineWebber Inc. The meeting was
the result of an initial contact with Mr. Gray made in late October 1998 by
PaineWebber Inc., on behalf of Vestar, indicating Vestar's potential interest
in a transaction such as the mergers. During the course of that initial
meeting, Messrs. O'Connell and Kelley provided a brief history of Vestar's
experience with private equity investments, including management buyouts. They
also discussed Vestar's experience with companies in the apparel sector.
Messrs. O'Connell and Kelley suggested a partnership between Vestar and
Mr. Gray, his wife, Marie Gray, Vice Chairwoman and Secretary of St. John, and
his daughter, Kelly A. Gray, President of St. John, to take St. John private in
a management-led buyout as a possible strategy for maximizing shareholder
value. Mr. Gray expressed preliminary interest in considering a transaction and
agreed to meet again with the representatives of Vestar in the second week of
November.
On November 13, 1998, Vestar signed a confidentiality agreement with St.
John. This confidentiality agreement contained an agreement by Vestar that it
would not, for a period of three years from November 13, 1998, seek to acquire
any voting securities of St. John or seek to influence or gain control of St.
John without the approval of the board of directors of St. John.
On November 17 and 18, 1998, Messrs. O'Connell and Kelley, Sander M. Levy,
Managing Director of Vestar, Christopher Henderson, Vice President of Vestar,
Ms. Eveillard and David M. Reed, Jr., Managing Director of PaineWebber Inc.,
went to Irvine and met with the Grays, Roger G. Ruppert, Chief Financial
Officer of St. John, and other representatives of St. John for the purpose of
conducting a general investigation of St. John. At that time, in a side
meeting, Mr. Gray told Messrs. O'Connell and Kelley that, in the event that an
agreement was reached, he and his family would like to sell shares of St. John
common stock and/or options valued at approximately $17 million in cash based
on the price per share to be offered in any transaction, and that any other
shares would be retained by him and his family and invested in the transaction
with Vestar.
On November 24, 1998, Mr. Gray held a meeting in Irvine with Messrs. Kelley
and Henderson and Ms. Eveillard. At that meeting, Vestar presented alternative
acquisition models that could be used in connection with an acquisition by
Vestar of St. John, including a part cash, part stock structure where
approximately 80% of the consideration would be $25.00 in cash and the rest
would be a combination of preferred and common
23
<PAGE>
stock, and a nearly all cash merger transaction valued at $26.50 per share. Mr.
Gray expressed his belief that St. John shareholders, other than the Grays,
would benefit more from, and would look more favorably upon, a transaction with
a larger cash component. Mr. Gray also expressed his desire, and Vestar agreed,
that the Grays and the other shareholders should receive consideration having
equivalent value for their shares of St. John common stock. As a result, Vestar
determined to focus on structuring a leveraged acquisition, to be accounted for
as a recapitalization, in which the consideration to St. John shareholders
would consist primarily of cash.
On November 25, 1998, Mr. Kelley telephoned Mr. Gray and advised him that he
believed that Vestar would be able to structure a proposal for an acquisition
transaction with St. John whereby substantially all of the outstanding St. John
common stock would be acquired for $28 per share in cash with some shares to be
retained by the existing St. John shareholders in order to qualify for
recapitalization accounting. Vestar determined that, based on its evaluation of
St. John's growth prospects, multiples of earnings at which comparable
companies' stock was traded and other analyses it considered relevant, as well
as its expected return on its investment in St. John, $28 per share in cash was
an appropriate price to pay for St. John.
Following these meetings, Vestar engaged Simpson Thacher & Bartlett as its
legal counsel and Deloitte & Touche as its independent accountants. These firms
were retained to assist Vestar in its investigation of St. John and in
determining the optimal transaction structure.
Between November 25 and December 7, 1998, Mr. Kelley and Mr. Gray continued
a dialogue regarding the possible terms and structure of the proposed
transaction.
On December 2, 1998, Messrs. Kelley and Levy met with Mr. Gray and
representatives of Merrill Lynch in New York to discuss the proposed
transaction and possible arrangements for financing the acquisition.
On December 7, 1998, The Chase Manhattan Bank and Chase Securities Inc.
informally agreed with Vestar to arrange for senior credit facilities and
subordinated debt financing to finance the proposed transaction.
On December 8, 1998, representatives of Vestar, The Chase Manhattan Bank,
Chase Securities Inc., Bear Stearns & Co. Inc., who was retained to assist
Vestar in raising subordinated debt financing, PaineWebber Inc. and Merrill
Lynch met with St. John's management in Irvine to review St. John's historical
and projected business, financial condition and operations.
Later that day, Mr. Gray and Vestar submitted to the board of directors of
St. John a proposal to purchase 98% of the outstanding St. John common stock.
The proposal, as modified on December 16, 1998 to correct a technical
inaccuracy, stated as follows:
"December 8, 1998
Board of Directors
St. John Knits, Inc.
17422 Derian Avenue
Irvine, California 92614
Ladies and Gentlemen:
Robert E. Gray, together with Vestar Capital Partners III, L.P. ("Vestar"
and, together with Robert Gray, the "Purchasers") are pleased to submit the
following proposal to purchase 98% of the outstanding common stock of St. John
Knits, Inc. (the "Company"). The Purchasers are prepared to move quickly toward
the execution of a definitive acquisition agreement and are confident that the
proposed transaction (the "Transaction") can be completed expeditiously.
1. Purchase Price. The Purchasers propose to acquire 98% of the outstanding
common stock of the Company at a price of $28 per share in cash, for an
aggregate purchase price of approximately $490 million. Approximately 5% of the
outstanding common stock will remain in the hands of the remaining current
public stockholders following the consummation of the Transaction.
24
<PAGE>
2. Conditions. Consummation of the Transaction will be subject to: (a) the
-----------
negotiation and execution of a definitive acquisition agreement (the
"Definitive Agreement") and related documents; (b) the receipt of any necessary
consents and approvals from third parties and the expiration or termination of
any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended; (c) the receipt by the Purchasers, on terms satisfactory to
them, of all financing necessary to complete the Transaction; (d) satisfactory
completion by Vestar and the Purchasers' financing sources prior to the
execution of the Definitive Agreement of confirmatory due diligence
investigations of the Company; and (e) the reincorporation of the Company as a
Delaware corporation. Given the amount of diligence Vestar has completed to
date and its knowledge of the Company's business, together with Robert Gray's
intimate familiarity with the company, we expect to complete our confirmatory
due diligence and to be in a position to execute a Definitive Agreement within
the next two weeks.
3. Financing. Although consummation of the Transaction will be subject to
----------
the receipt of financing, the Purchasers are confident that they can obtain
within the next two weeks definitive commitments with respect to the senior
debt financing and a "highly confident" letter with respect to any subordinated
debt financing necessary to consummate the Transaction. In that regard, the
Purchasers have retained Chase Manhattan Bank to lead in arranging the
necessary debt financing. Chase's expertise in financing transactions of this
nature buttresses the Purchasers' confidence that the necessary financing
arrangements will be completed expeditiously and on favorable terms. In
addition, Vestar Capital Partners III, L.P., Vestar's $800 million private
equity fund, is prepared to commit the necessary equity funds to complete the
transaction.
4. No Binding Commitment. Because the Board cannot accept our proposal
----------------------
without a more thorough evaluation of the proposed Transaction, this letter
constitutes only a preliminary indication of our interest in consummating a
Transaction on the terms described above, and does not constitute a binding
commitment with respect to a Transaction. A binding commitment with respect to
a Transaction will result only from the execution of a Definitive Agreement,
and will be subject to the conditions set forth therein.
5. Process. We believe that the Transaction will provide superior value to
--------
the Company's shareholders. We recognize of course that the Board will require
some time to evaluate the proposed Transaction before it can make its own
determination whether to endorse it. Given Robert Gray's and the Gray family's
involvement in the proposed Transaction, we appreciate that the Board may want
to establish a special committee to review the proposed Transaction, and that
such a committee may choose to engage counsel and investment bankers to assist
it in such review. While we appreciate and respect the Board's need to conduct
an appropriate process in evaluating our proposal, we must reserve the right to
terminate our proposal if a Definitive Agreement has not been executed by the
Company and the Purchasers by December 31, 1998.
Yours truly,
/s/ Robert Gray
_____________________________________
Robert Gray
VESTAR CAPITAL PARTNERS III, L.P.
By: Vestar Associates III, L.P.,
its General Partner
By: Vestar Associates Corporation III,
its General Partner
/s/ James P. Kelley
By: _________________________________
Name: James P. Kelley
Title: Vice President"
25
<PAGE>
After receiving the offer, St. John issued a press release after the close
of the market on December 8, 1998, stating that St. John had received the
offer. The full text of the press release follows below:
"St. John Knits Receives Definitive Offer For $28 Per Share From Group Led
by Founder And CEO Bob Gray
IRVINE, California--December 8, 1998--St. John Knits Inc. (NYSE: SJK), today
announced that its Board of Directors has formed an independent committee to
evaluate a definitive proposal it has received from company founder, Chairman,
and Chief Executive Officer Bob Gray and his family to buy the company's
outstanding shares not owned by the Gray family for $28 per share in cash. The
proposal represents a premium of approximately 28 percent over Tuesday's
closing stock price of 21 15/16 and has a total value of approximately $490
million.
Gray has informed the company that he has received a commitment to provide
equity financing from Vestar Capital Partners, a private equity investment firm
with offices in New York and Denver. Gray and Vestar are working with Chase
Manhattan Bank to provide the balance of required financing for the
transaction.
In a letter proposing his offer to the Board of St. John Knits, Gray said,
"I believe our offer delivers substantial, certain value to shareholders as we
undertake a strategy to refocus on our core business lines. After carefully
considering the company's business performance this year and evaluating our
strategic options for the future, I have concluded that rather than pushing for
top-line growth at our historic growth rate of 25 percent per year through
further product and market diversification, it is in the company's best long-
term interest to slow the growth rate to about 10 percent per year and focus on
doing what we do best -- delivering the highest quality merchandise and service
to our loyal customers. I believe we can best accomplish this objective as a
private company.'
St. John Knits designs, manufactures, and markets women's clothing and
accessories. The company's products are sold under the St. John, Griffith &
Gray, SJK by St. John and Marie Gray trade names. St. John's retail division
operates 17 boutiques and nine outlet stores."
In response to this proposal, the board of directors determined that in
order to mitigate the potential conflicts of interests inherent in analyzing
and responding to the Vestar proposal, it was in the best interests of St. John
shareholders for the board to form a special committee comprised of a majority
of the non-employee directors of St. John. On Friday, December 11, 1998, St.
John appointed a special committee comprised of Messrs. Mark Goldston,
Dan Reiner and Robert Davis, newly appointed members of the board who do not
otherwise have a current affiliation with St. John. Mr. Davis, a former
director and officer of St. John, served as a consultant to St. John from the
time he resigned from his executive positions with St. John on April 24, 1996
through June 30, 1998. However, at the time of his appointment to the special
committee, he was no longer affiliated with St. John.
Following their appointment, the members of the special committee discussed
the following relationships and associations relating to members of the board
of directors:
. Richard Gadbois is a personal investment advisor to the Grays, Mr. Davis,
Mr. Reiner and Mr. Goldston and a senior vice president at Merrill Lynch;
. Mr. Davis had formally acted as the president and chief operating officer
of, and later as a consultant to, St. John;
. Mr. Goldston had once offered to be a consultant to St. John, which St.
John rejected;
. Mr. Reiner and Mr. Gray are passive limited partners in three limited
partnerships; and
. David A. Krinsky is a partner in the law firm of O'Melveny & Myers, which
has rendered legal services to St. John in the past and in connection
with the mergers.
The special committee determined that these relationships were not material to
the independence of the special committee. Accordingly, the special committee
did not believe it was necessary to retain an unaffiliated representative to
act solely on behalf of St. John's unaffiliated shareholders in negotiating the
terms of the mergers.
26
<PAGE>
Mr. Goldston, who serves as the chairman of the special committee, is the
chairman and chief executive officer of the Goldston Group, a Los Angeles based
strategic advisory firm specializing in repositioning companies. Mr. Reiner was
the founder, chairman and chief executive officer of Optical Devices, Inc., a
manufacturer of enhancement filters for computer monitors. Mr. Davis is a
former president and chief operating officer of St. John who rejoined the board
after having served as a director from 1984 to 1996. The special committee was
charged with the responsibility of evaluating and negotiating the Vestar
proposal as well as soliciting and evaluating other expressions of interest in
St. John. The appointment of the special committee was announced publicly in a
press release on December 11, 1998.
Following their appointment by the board, the special committee considered
several law firms and several financial advisory firms based on the reputation
and experience of such firms in representing special committees in change of
control transactions. The special committee engaged Skadden, Arps, Slate,
Meagher & Flom LLP as its legal advisor. The special committee also reviewed
the prior engagement of Merrill Lynch by St. John and the terms of its
engagement. The special committee decided to appoint Merrill Lynch as an
independent financial advisor to the special committee. The special committee
determined that it would also be advisable to engage a co-advisor to represent
the special committee exclusively in light of the prior engagement of Merrill
Lynch by St. John. Accordingly, the special committee decided to engage
Wasserstein Perella as the co-advisor to Merrill Lynch. Both Merrill Lynch and
Wasserstein Perella's fees were structured in a manner designed to provide an
incentive to the financial advisors to obtain a price per share significantly
in excess of the price offered in the Vestar proposal.
In late December, the special committee and its advisors began their
investigation of St. John. The members of the special committee visited St.
John's various facilities in California. The special committee also met with
management to discuss the business plan for St. John. The special committee
also considered St. John's performance during fiscal 1997 and fiscal 1998, St.
John's outlook for the first quarter of fiscal 1999 and the reasonable outlook
for such full fiscal year as well as management's concern regarding St. John's
ability to maintain its historical rates of growth and profit margins. The
financial advisors met with Vestar to discuss Vestar's projections and
valuation analysis of St. John. On December 31, 1998, the special committee
requested and received an extension of the Vestar proposal to January 15, 1999
in order to allow the special committee and its advisors additional time to
complete their investigation of St. John and to allow Merrill Lynch and
Wasserstein Perella to explore and evaluate any potential alternative
transactions.
At meetings of the special committee held on January 4 and 8, 1999, the
special committee authorized its financial advisors to contact 11 selected
apparel manufacturers whose businesses complemented those of St. John,
including a number of national competitors of St. John, and six selected
private investment funds recommended by the financial advisors to determine
their interest in making a competing offer and to provide information about St.
John on a confidential basis to prospective buyers.
In early January, representatives of Vestar met with Mr. Gray to discuss the
status of the financing of the proposed transaction.
On January 11, 1999, Vestar delivered drafts of the merger agreement, the
voting agreement and a stock option agreement to the special committee and its
advisors, including a summary of the proposed structure for the transaction.
Under the terms of the merger agreement, approximately 97% of St. John's common
stock would be converted in a series of merger transactions into the right to
receive $28 in cash per share. Subject to an election and proration process,
the remaining shares of St. John would represent approximately 7% of the
outstanding common stock in the recapitalized company. In addition, under the
terms of the stock option agreement, Vestar would have the option to purchase
up to 19.9% of the outstanding stock of St. John in the event that the merger
agreement was terminated because of a competing offer.
Vestar and the Grays proposed to purchase 97% of the outstanding St. John
common stock (initially 98% in the December 8 proposal) so that, based on the
value of the equity in St. John Knits International following the mergers,
approximately 7% of the equity of St. John Knits International would remain
with St. John's
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shareholders, other than the Grays. The parties chose this percentage because,
based on the advice of Vestar's accountants and other recent recapitalization
transactions, they determined that more than 5% of the equity of St. John Knits
International after the mergers would have to remain with the unaffiliated
public shareholders in order for the acquisition merger to be treated as a
recapitalization for accounting purposes. Vestar and the Grays set the target
numbers of shares outstanding at 456,047 to provide a cushion in the event the
proration procedure described on page 60 under "The Mergers--Merger
Consideration" would reduce this number due to the elimination of fractional
shares, as well as to provide room for dilution from future option grants.
On January 14, 1999, the special committee met with its advisors to discuss
the details of the Vestar proposal. Vestar was invited to make a detailed
presentation to the special committee, discussing its valuation assumptions,
financing, the risks of the transaction and the business of St. John. Upon
Vestar concluding its presentation, the special committee questioned the Vestar
representatives at length, particularly regarding Vestar's arrangement with the
Grays with respect to the Grays' ongoing investment in St. John after the
mergers. Vestar explained the rights and obligations of the Gray family
following the transaction with St. John. The special committee's advisors also
discussed among themselves the details of the Vestar proposal, the merger
agreement and the strategic alternatives for St. John, including the result of
preliminary contacts with prospective buyers. Merrill Lynch and Wasserstein
Perella then made a joint presentation to the special commmittee, in which they
discussed their preliminary valuation analysis of St. John.
On January 15, 1999, at the request of the special committee, the expiration
of the Vestar proposal was further extended to January 22, 1999. The expiration
of the Vestar proposal was subsequently extended twice through February 2, 1999
at the request of the special committee. From January 15 to January 20,
representatives of Merrill Lynch and Wasserstein Perella met with Vestar to
discuss the possibility of a higher offer price. Counsel for the special
committee also had several conversations with Vestar's counsel regarding the
provisions and terms in the merger agreement and the structure of the
transaction. The special committee received periodic updates from its advisors
regarding the progress of these discussions.
On January 21, 1999, the special committee met with its advisors.
Representatives of Merrill Lynch and Wasserstein Perella indicated that, as of
such date, they had contacted each of the apparel manufacturers and private
investment funds identified by the special committee. The representatives
informed the special committee that these potential buyers had been provided
with public information about St. John and had been subsequently contacted to
determine their interest in receiving any further information. Only one of the
potential buyers, an apparel manufacturer, had requested further non-public
information about St. John. Merrill Lynch sent this potential buyer the
requested information, but neither this potential buyer nor any of the other
potential buyers contacted had indicated any interest in meeting with the
financial advisors or in making a competing proposal. Concurrently, the special
committee authorized its advisors to continue negotiations with Vestar
including negotiations as to the price and other terms of the Vestar proposal.
On January 25, 1999, representatives of Vestar met with the special
committee's financial advisors to continue negotiations, which included
discussing alternative structures, including having the public retain
additional shares to create more liquidity and having Vestar and the Grays
acquire 100% of the outstanding shares of St. John.
On January 27 and January 28, 1999, the special committee's financial and
legal advisors met with Vestar to further negotiate the terms of the merger
agreement. On January 28, 1999, the advisors updated the special committee on
the status of their negotiations with Vestar. Representatives of Merrill Lynch
and Wasserstein Perella also indicated to the special committee that none of
the financial buyers or strategic buyers that had been contacted had expressed
any interest in making a competing offer. In addition, on January 28, 1999, the
St. John board of directors delegated to the special committee its authority to
amend or rescind the shareholder rights plan of St. John.
On February 2, 1999, the special committee met at the Los Angeles offices of
Skadden, Arps. The special committee heard a presentation from its legal
counsel regarding the terms of the merger agreement and the voting agreement
and was informed that Vestar had agreed to increase the price per share to $30
for 97% of the
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outstanding shares of St. John, to lower the combined termination fee and
expense reimbursement to $14 million from the originally proposed $18 million,
to reimburse St. John for some out of pocket expenses if the merger agreement
were terminated in specified circumstances, to eliminate the stock option
agreement that had been proposed and to provide that the reorganization merger
would require the approval of both the holders of a majority of the outstanding
shares of St. John common stock and the approval of the holders of a majority
of shares of St. John common stock voting at the special meeting, excluding
shares owned by the Grays. See "The Merger Agreement" on page 82.
Merrill Lynch and Wasserstein Perella presented to the special committee oral
fairness opinions regarding the revised Vestar proposal, which were
subsequently confirmed in writing. For reasons listed under "--Reasons for the
Mergers; Recommendations to Shareholders" on page 30, the special committee
determined to recommend for adoption and approval the Vestar proposal as
revised and the merger agreement to the board of directors. See "--Fairness
Opinions of Financial Advisors" on page 35.
In connection with their agreement to increase the price to be paid to
acquire St. John from $28 to $30 per share for 97% of the outstanding shares,
Vestar and the Grays determined the allocation of the Grays' consideration for
their shares and their outstanding, vested, in-the-money stock options, which
was agreed to be $30 per share, between cash and interests in Vestar/Gray LLC.
Based on the Grays' previously expressed desire to receive, in the aggregate,
$17 million in cash for their shares and outstanding options, the parties
determined that the Grays would receive $9,890,000 in cash in respect of their
outstanding options, net of the aggregate exercise price, $7,110,000 in cash in
respect of 237,000 of their shares of St. John common stock and an
approximately 16% interest in Vestar/Gray LLC, which represents approximately
15% of St. John Knits International after the mergers, in respect of 968,983 of
their shares of St. John common stock, valued at $29,069,490. The total
consideration to be paid to the Grays in respect of their St. John common stock
and in respect of their outstanding, vested, in-the-money options to buy St.
John common stock was disclosed to the St. John board prior to its approval of
the mergers.
Later that day, the full board of directors of St. John met with its counsel
and Merrill Lynch to review the merger agreement. At this meeting, the special
committee unanimously recommended to the board to adopt and approve the merger
agreement and the transactions contemplated by the merger agreement and to
recommend to St. John shareholders to approve the principal terms of the
reorganization merger found in the merger agreement. After a presentation by
Merrill Lynch and the delivery by Merrill Lynch of its oral fairness opinion to
the board of directors, which was subsequently confirmed in writing, and a
discussion of the terms of the merger agreement and the interests of the Grays
and St. John's officers in the transaction, the board of directors unanimously
approved the merger agreement, with the Grays and Mr. Ruppert abstaining. See
"--Fairness Opinions of Financial Advisors" on page 35.
Purpose and Structure for the Mergers
The purpose of the mergers is for Vestar/Gray LLC to acquire a majority of
St. John Knits International common stock and thus control of St. John Knits
International, which will wholly own St. John after the reorganization merger.
If the reorganization merger is approved by St. John shareholders and all
other conditions to the reorganization merger and the acquisition merger are
satisfied or, where permissible, waived, St. John will consummate the mergers
as follows:
1. The Reorganization Merger. St. John will merge with SJKAcquisition, with
--------------------------
St. John surviving the reorganization merger. As a result, St. John will
become a subsidiary of St. John Knits International, and, for a brief
period of time prior to the acquisition merger, St. John shareholders
will become stockholders of St. John Knits International.
2. The Acquisition Merger. Immediately after the reorganization merger, St.
-----------------------
John Knits International will merge with Pearl, with St. John Knits
International surviving the acquisition merger.
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Prior to the reorganization merger, the Grays will transfer to Vestar/Gray
LLC 237,000 shares of St. John common stock in exchange for a total cash
payment of $7,110,000 and 968,983 shares of St. John common stock in exchange
for an approximately 16% interest in Vestar/Gray LLC. In the reorganization
merger, Vestar/Gray LLC will exchange each of the 1,205,983 shares of St. John
common stock for one share of St. John Knits International common stock. In the
acquisition merger, the shares of common stock of Pearl owned by Vestar/Gray
LLC will be converted into shares of St. John Knits International common stock
and the shares of St. John Knits International held by Vestar/Gray LLC will be
canceled and will no longer be outstanding in accordance with Delaware
corporate law.
Following the mergers, St. John Knits International will be approximately 7%
owned by existing shareholders of St. John, other than the Grays, and
approximately 93% owned by Vestar/Gray LLC. In addition, following the mergers,
Vestar will own approximately 84% of Vestar/Gray LLC while the Grays will own
approximately 16%. Robert E., Marie and Kelly A. Gray are directors and
executive officers of St. John.
The parties determined the Grays' and Vestar's relative interest in
Vestar/Gray LLC based on the acquisition price of $30 per share of common
stock. The Grays' percentage of ownership in Vestar/Gray LLC is in proportion
to the value of the shares that they will contribute to Vestar/Gray LLC, which
is approximately $29,069,490, relative to the $153.6 million in cash
contributed to Vestar/Gray LLC by Vestar.
The special committee and the board of directors believe that the proposed
mergers are in the best interests of St. John shareholders in light of the
value to the shareholders represented by the mergers. The structure of the
mergers is known as a "leveraged recapitalization." St. John expects that St.
John Knits International will incur substantial indebtedness to pay the cash
consideration and the transaction costs and fees of the mergers. St. John Knits
International will incur approximately $315 million in long-term debt,
consisting of approximately $155 million in senior secured credit facilities
and approximately $160 million in senior subordinated notes. In addition,
Vestar will contribute approximately $153.6 million to Vestar/Gray LLC in
connection with the acquisition merger, of which approximately $7.1 million
will be paid to the Grays as consideration for 237,000 shares of St. John
common stock and approximately $146.5 million will be contributed to Pearl to
help finance the acquisition merger. St. John also expects St. John Knits
International to enter into a $25 million revolving credit facility to assist
St. John Knits International in meeting its working capital needs.
If the mergers are consummated, St. John shareholders who receive only cash
for their St. John common stock and do not receive any shares of St. John Knits
International in the acquisition merger will not have an equity interest in St.
John Knits International and will therefore not share in the future earnings
and potential growth of St. John Knits International.
The reorganization merger, which is a condition to the acquisition merger,
requires the vote of both the holders of a majority of the outstanding shares
of St. John common stock entitled to vote and the holders of a majority of the
outstanding shares of St. John common stock present in person or by proxy and
voting at the special meeting, other than the shares owned beneficially by the
Grays and Vestar.
Reasons for the Mergers; Recommendations to Shareholders
Reorganization Merger
The parties to the acquisition merger intend that the acquisition merger be
treated as a recapitalization for accounting purposes. Recapitalization
accounting treatment would avoid the creation of substantial goodwill, which
would have a significant negative impact on St. John Knits International's
financial results in future years. Based upon the advice of legal counsel and
accountants, the board and the special committee have concluded that the
acquisition merger can better be implemented if Delaware law were to be applied
to the acquisition merger for the following reasons:
1. California statutory law does not permit the payment of dividends or the
redemption or repurchase by a corporation of its shares if the total
payout would exceed the corporation's retained earnings. It is unclear
under California law whether the acquisition of St. John by merger of
Pearl into St. John in a
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recapitalization transaction would violate this statute. Under some
circumstances, it is possible that the directors of St. John approving
such a transaction could be personally liable for the total payments
made.
2. California statutory law does not permit differing treatment of holders
of the same class of shares in a merger transaction unless all holders
of that class of shares approve the differing treatment. Because the
Grays are transferring their St. John shares to Vestar/Gray LLC in
advance of the mergers, the Grays will be assured of receiving in
exchange for their shares consideration, valued at $30 per share,
comprised of approximately 20% in cash and 80% in St. John Knits
International common stock. In comparison, the other St. John
shareholders in the aggregate will not receive more than 3% of their
consideration in St. John Knits International common stock. Furthermore,
these shareholders cannot be assured that they will receive the type of
consideration that they elect to receive. It is unclear whether, under
California law, the fact that the Grays will receive more stock and less
cash in the mergers compared to St. John's unaffiliated public
shareholders who, in the aggregate, will receive more cash and less
stock, and the fact that the Grays can determine with certainty what
their consideration for their shares will be comprised of, would violate
this statute.
St. John has concluded that if St. John were reorganized so that St. John
Knits International, a Delaware corporation and wholly owned subsidiary of St.
John, would become the parent holding company of St. John and would consummate
the acquisition merger, the desired results could be better implemented for
the following reasons:
1. Delaware's statutory restrictions on the payment of dividends and stock
redemptions or repurchases would not apply to the merger consideration
payments when the acquisition merger is completed pursuant to Delaware's
merger statutes.
2. Delaware merger statutes do not require that all stockholders of St.
John Knits International receive the same treatment in a merger.
One of the conditions to the proposed transaction found in both the
December 8 proposal submitted to the St. John board of directors by Vestar and
Robert E. Gray and in the original draft of the merger agreement proposed by
Vestar's counsel was that St. John be reorganized so that the acquisition
merger be governed by Delaware law. Accordingly, the special committee and the
board of directors concluded that it is in the best interests of St. John and
its shareholders to effect the reorganization merger as part of an integrated
plan to effect the acquisition merger.
Despite the belief of the board and the special committee that the
reorganization merger is in the best interests of St. John and its
shareholders, it should be noted that Delaware law has been criticized by some
commentators on the grounds that it does not afford minority shareholders the
same substantive rights and protections as are available in a number of other
states. Before voting on the reorganization merger, St. John shareholders
should carefully consider the significant differences between the corporation
laws of California and Delaware and the differences between the charter and
bylaws of St. John and St. John Knits International. For a comparison of
shareholders' rights under Delaware and California laws, see "Comparison of
the Rights of Holders of St. John Common Stock and St. John Knits
International Common Stock" on page 102.
Acquisition Merger
At its February 2, 1999 meeting, the special committee unanimously
determined that, taken together, the mergers are fair to, and in the best
interests of, St. John and its shareholders. In addition, at this meeting, the
special committee unanimously determined to recommend to the board to approve
the merger agreement and the transactions contemplated by the merger agreement
and to recommend to St. John shareholders that they approve the principal
terms of the reorganization merger found in the merger agreement. At its
February 2, 1999 meeting, the board, after receiving the recommendations of
the special committee and following a presentation by Merrill Lynch,
determined that the mergers are fair to, and in the best interests of, St.
John and its shareholders and resolved to recommend to St. John shareholders
that they approve the principal terms of the
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reorganization merger found in the merger agreement. St. John's independent
directors unanimously approved the merger agreement and the transactions
contemplated by the merger agreement, with the following members of the board
abstaining from voting: Robert E. Gray, Marie Gray, Kelly A. Gray and Roger G.
Ruppert.
In light of the reduced liquidity and uncertain value of the St. John Knits
International common stock, in their analysis of the acquisition merger the
board and the special committee assigned only nominal value to the shares of
St. John Knits International common stock to be issued to non-affiliated
shareholders of St. John in the acquisition merger. Accordingly, the board and
the special committee make no recommendation and express no opinion as to the
fairness of the consideration to be received in the acquisition merger by any
shareholder who elects to receive shares of St. John Knits International common
stock and, as a result of that election, receives more than his or her pro rata
share of St. John Knits International common stock.
The special committee, and the full board, in adopting the recommendations
of the special committee, considered a number of factors in recommending and
approving the mergers. Listed below are the material factors considered. In its
consideration of these factors, the special committee met several times and
convened informally by telephone on several other occasions between December
1998 and February 1999. The special committee's and the board's respective
recommendations are the product of the business judgment of the respective
members thereof, exercised in light of their fiduciary duties to St. John
shareholders:
1. The special committee considered the presentations made by each of
Merrill Lynch and Wasserstein Perella and their respective oral
opinions, which were subsequently confirmed in writing, that, as of the
date of such opinions, and based upon and subject to the assumptions,
limitations and qualifications reviewed with the special committee, the
consideration to be received by the holders of St. John common stock,
other than the Grays, pursuant to the mergers was fair from a financial
point of view to such holders. The St. John board also considered the
presentation made, and the oral opinion to the same effect delivered,
by Merrill Lynch. The special committee also took into account the fact
that the fairness opinions assigned only nominal value to the common
stock of St. John Knits International to be issued in the acquisition
merger.
2. The special committee and the board considered the recent trading
activity of shares of St. John common stock and the fact that the cash
consideration of $30 per share paid in the mergers would enable St.
John shareholders to realize an approximately 37% premium over the
$21.94 per share closing price for shares of St. John common stock on
the New York Stock Exchange the day the original proposal was
announced. The fact that the cash consideration to be paid in the
mergers represents a significant premium over such value gave the
special committee and the board one indication that the per share price
in the mergers represents an attractive value for St. John
shareholders.
3. The special committee and the board considered information with respect
to the financial condition, results of operations, business and
prospects of St. John, including the risks involved in achieving these
prospects, and current industry, economic and market conditions.
4. The special committee and the board reviewed the possible alternatives
to the mergers, including continuing to operate St. John as a publicly-
owned entity. Both the special committee and the board rejected
continued operation of St. John as a public company as an acceptable
alternative to the proposed mergers in light of the value to be paid to
the shareholders in the mergers. In this regard, the special committee
and the board considered management's concern over St. John's ability
to sustain its historical growth rate and the effect that would have on
shareholder value.
5. The other alternative to the mergers considered by the special
committee and the board was the sale of St. John to a party
unaffiliated with the Grays or Vestar. St. John issued a press release
on December 8, 1998 announcing the receipt of the Vestar/Gray offer for
a cash acquisition of substantially all of the shares of St. John
common stock at a price of $28 per share. In addition, the special
committee directed Merrill Lynch and Wasserstein Perella to pursue
potential strategic and
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financial buyers, which they did by contacting 17 potential buyers of
St. John during January 1999. No proposal to effect such a sale was
received despite the December 8th public announcement and the efforts of
Merrill Lynch and Wasserstein Perella.
6. The special committee and the board also considered the fact that the
terms of the merger agreement permit the board to negotiate and
consummate third party proposals submitted after February 2, 1999 if
the board believes in good faith that such proposal is a superior
proposal, if negotiations are required in order for the board to act in
a manner consistent with its fiduciary duties under applicable law and
if St. John pays Pearl a termination fee of $14 million.
7. The special committee and the board considered the fact that it is a
condition to the consummation of the transactions contemplated by the
merger agreement that the holders of a majority of the outstanding
shares of St. John entitled to vote on the reorganization merger
approve the reorganization merger and that the holders of a majority of
outstanding shares of St. John present in person or by proxy and voting
at the special meeting, other than shares held by Vestar or the Grays,
approve the reorganization merger.
8. The special committee and the board considered the nature of the
financing arrangements made by Vestar with The Chase Manhattan Bank and
Chase Securities Inc. with respect to the mergers, including the
receipt by Vestar of a commitment letter from The Chase Manhattan Bank
and a "highly confident" letter from Chase Securities Inc. as well as
the conditions to the obligations of such institutions to fund such
financing arrangements and to complete the mergers.
9. The special committee and the board considered the experience and past
success of Vestar in structuring and closing transactions similar to
the mergers.
10. The special committee and the board considered the fact that the
initial negotiations between St. John and Vestar led to an increase in
the cash price offered to be paid in the mergers for substantially all
of the outstanding St. John common stock from $26.50 per share to $28
per share, and the subsequent negotiations between the special
committee and Vestar led to a further increase in the cash price from
$28 per share to $30 per share.
11. The special committee also evaluated the mergers in light of the equity
investment of approximately $182.7 million to be made by the Grays and
Vestar.
12. The special committee also considered the fact that the voting
agreement allows the Grays to vote in favor of a superior proposal in
the event the board withdraws its recommendation of the mergers in
accordance with the merger agreement as described above.
13. The special committee and the board considered the fact that the terms
of the merger agreement and the price paid to the St. John shareholders
were determined through arms-length negotiations between Vestar and the
special committee, which was comprised of entirely non-management
directors of St. John and was assisted by unaffiliated investment
banking advisors and an unaffiliated legal advisor.
14. The special committee and the board considered the fact that, in light
of the active role that the special committee took in negotiating the
merger agreement on behalf of the unaffiliated stockholders, the board
did not believe it was necessary to appoint an unaffiliated
representative to act solely on behalf of St. John's unaffiliated
shareholders.
15. The special committee and the board considered a comparison of the
financial terms of certain other transactions which had recently been
effected in the apparel industry, reviewing, among other things, the
premium paid compared to the pre-offer market price per share and the
multiple of aggregate consideration to earnings before interest, taxes,
depreciation and amortization, or "EBITDA," in such transactions. See
"--Fairness Opinions of Financial Advisors" on page 35.
16. The special committee and the board considered that the merger
agreement contemplated the reimbursement to St. John of up to $1.5
million of its fees and expenses in some circumstances if the mergers
are not completed through the fault of Vestar.
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17. The special committee and the board considered the fact that the
shareholders of St. John, other than the Grays, would own only
approximately 7% of the outstanding common stock of St. John Knits
International after the mergers, which would limit the shareholders'
opportunity as a group to participate in any future growth of St. John
Knits International following the consummation of the mergers. They
considered that, if the projections described under "Financial
Projections" on page 55 are realized, the common stock of St. John
Knits International after the mergers could significantly increase in
value. The special committee and the board also considered St. John's
recent operating performance relative to these projections. In
addition, the special committee and the board considered the fact that
there would be limited liquidity for the shares of St. John Knits
International after the mergers as a result of not listing those shares
on any exchange.
18. The special committee and the board considered the possible conflicts
of interest arising from the interests of the Grays and some other
directors and executive officers of St. John in the mergers. For more
information regarding these conflicts of interest see "--Interests of
the Grays and Other Officers and Directors of St. John in the Mergers;
Conflicts of Interests" on page 48.
19. The special committee and the board considered St. John's performance
during fiscal 1997 and fiscal 1998, St. John's outlook for the first
quarter of fiscal 1999 and the reasonable outlook for the full 1999
fiscal year as well as management's concern regarding St. John's
ability to maintain its historical rates of growth and profit margins.
20. The special committee and the board considered the terms and conditions
of the merger agreement, including the fact that Pearl's obligation to
consummate the mergers is based on the receipt of financing and that
the merger agreement contemplates the payment or reimbursement to Pearl
of up to $14 million in termination fees and expenses in some
circumstances. In analyzing these conditions, the special committee and
the board considered the risk of not consummating the mergers. In
addition, in analyzing the fee and expense provisions, the special
committee and the board considered that their effect would be to
increase the costs to a third party other than Pearl of acquiring St.
John in the event the mergers did not occur for certain reasons, which
amount is not, in the view of the special committee and the board,
likely to unduly deter other bidders in the context of the proposed
mergers.
21. The special committee and the board also considered the possible
recognition of taxable gain to the St. John shareholders.
In view of the wide variety of factors considered in connection with their
evaluation of the mergers, the special committee and the board did not find it
practicable to, and did not, quantify or otherwise assign relative weight to
the individual factors considered in reaching their determinations. In
considering the factors listed above, the special committee and the board
believe that these factors as a whole supported their determination that the
acquisition merger is fair to shareholders even though factors 17, 18, 20 and
21 detracted from this determination. Of primary importance to the special
committee and the board was the opinion delivered by Wasserstein Perella to the
special committee and the opinion delivered by Merrill Lynch to the special
committee and the board on February 2, 1999 that, in each case, as of such
date, the consideration to be received by the holders of St. John common stock,
other than the Grays, pursuant to the mergers was fair from a financial point
of view to such holders. To that extent, the special committee and the board
relied on the analyses of Merrill Lynch and Wasserstein Perella. See "--
Fairness Opinions of Financial Advisors" on page 35. Also of importance was the
fact that the consideration represented a premium over the price of shares of
St. John common stock prior to the first public announcement of the mergers and
the lack of any competing proposal following the public announcement of the
Vestar proposal and efforts by the financial advisors to find an alternate
buyer.
The rules of the Securities and Exchange Commission require each of the
Grays, St. John Knits International, Pearl, SJKAcquisition, Vestar/Gray LLC,
Vestar/SJK Investors LLC, Vestar Capital Partners III, L.P., Vestar Associates
III, L.P. and Vestar Associates Corporation III to express its belief as to the
fairness of the mergers to the holders of St. John common stock. Each of the
Grays, St. John Knits International,
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Pearl, SJKAcquisition, Vestar/Gray LLC, Vestar/SJK Investors LLC, Vestar
Capital Partners III, L.P., Vestar Associates III, L.P. and Vestar Associates
Corporation III has considered the factors noted above, which were taken into
account by the board and the special committee. In addition, each of the Grays,
St. John Knits International, Pearl, SJKAcquisition, Vestar/Gray LLC,
Vestar/SJK Investors LLC, Vestar Capital Partners III, L.P., Vestar Associates
III, L.P. and Vestar Associates Corporation III regards the mergers as an
attractive investment opportunity because each one of them believes that St.
John Knits International's future business prospects are favorable. Although
the investment will involve a substantial risk to holders of St. John Knits
International common stock, each of the Grays, St. John Knits International,
Pearl, SJKAcquisition, Vestar/Gray LLC, Vestar/SJK Investors LLC, Vestar
Capital Partners III, L.P., Vestar Associates III, L.P. and Vestar Associates
Corporation III believes that the long-term value of the equity investment
could appreciate significantly.
Although the Grays, St. John Knits International, Pearl, SJKAcquisition,
Vestar/Gray LLC, Vestar/SJK Investors LLC, Vestar Capital Partners III, L.P.,
Vestar Associates III, L.P. and Vestar Associates Corporation III did not find
it practicable to quantify or otherwise attach relative weight to the specific
factors they considered, each of them considered particularly important to
their analysis the delivery on February 2, 1999 by Merrill Lynch and
Wasserstein Perella to the special committee of opinions that, as of such date,
the consideration to be received by the holders of St. John common stock, other
than the Grays, pursuant to the mergers was fair from a financial point of view
to such holders. They also considered the fact that the cash price represented
an approximately 37% premium over the price of shares of St. John common stock
prior to the first public announcement of the mergers. Each of Pearl,
Vestar/Gray LLC, Vestar/SJK Investors LLC, Vestar Capital Partners III, L.P.,
Vestar Associates III, L.P. and Vestar Associates Corporation III also
considered the recent and historical prices of St. John common stock and their
investigation of St. John.
On the basis of the foregoing considerations, each of the Grays, St. John,
St. John Knits International, Pearl, SJKAcquisition, Vestar/Gray LLC,
Vestar/SJK Investors LLC, Vestar Capital Partners III, L.P., Vestar Associates
III, L.P. and Vestar Associates Corporation III determined that the mergers are
both procedurally and substantively fair to the holders of St. John common
stock.
The special committee has recommended to the St. John board, and the St.
John board has approved, the merger agreement and the transactions contemplated
by the merger agreement. The St. John board and the special committee believe
that the merger agreement and the related transactions are in the best
interests of St. John and St. John shareholders, and recommend that St. John
shareholders vote "FOR" approval of the principal terms of the reorganization
merger found in the merger agreement. Neither the board nor the special
committee makes any recommendations as to the fairness of the consideration to
be received in the acquisition merger by any shareholder who elects to receive
shares of St. John Knits International common stock and, as a result of that
election, receives more than his or her pro rata share of St. John Knits
International common stock.
Fairness Opinions of Financial Advisors
Opinion of Merrill Lynch
On February 2, 1999, at a meeting of the special committee, Merrill Lynch
delivered an oral opinion that, as of that date and based on the assumptions
made, matters considered and limitations reviewed with the special committee,
the consideration to be received by the holders of St. John common stock, other
than the Grays, pursuant to the mergers was fair from a financial point of view
to those holders. Immediately following the meeting of the special committee,
at a meeting of the St. John board, Merrill Lynch orally delivered the same
opinion to the St. John board. Merrill Lynch subsequently confirmed the opinion
in writing.
The full text of the Merrill Lynch opinion, which states the assumptions
made, procedures followed, matters considered and limitations on the scope of
the review undertaken by Merrill Lynch in rendering its opinion, is included in
this proxy statement-prospectus at Appendix B. A copy of the Merrill Lynch
opinion is
35
<PAGE>
available for inspection and copying by any holder of St. John common stock or
any representative of such holder who has been so designated in writing, at the
principal executive offices of St. John during normal business hours. Holders
of St. John common stock are urged to, and should, read the Merrill Lynch
opinion carefully and in its entirety. The Merrill Lynch opinion was for the
use and benefit of the St. John board and the special committee and addresses
only the fairness, from a financial point of view, to the holders of St. John
common stock, other than the Grays, of the consideration to be received
pursuant to the mergers. The Merrill Lynch opinion does not address the merits
of the underlying decision by St. John to engage in the mergers and does not
constitute a recommendation to any holder of St. John common stock as to how
any holder should vote on the reorganization merger.
In arriving at the Merrill Lynch opinion, Merrill Lynch:
1. reviewed publicly available business and financial information relating
to St. John that Merrill Lynch deemed to be relevant;
2. reviewed information, including financial forecasts, relating to the
business, earnings, cash flow, assets, liabilities and prospects of St.
John furnished to Merrill Lynch by St. John and Vestar;
3. conducted discussions with members of senior management of St. John and
representatives of Vestar concerning the matters described in clauses
(1) and (2) above;
4. reviewed the market prices and valuation multiples for the shares of St.
John common stock and compared them with those of publicly traded
companies that Merrill Lynch deemed to be relevant;
5. reviewed the results of operations of St. John and compared them with
those of publicly traded companies that Merrill Lynch deemed to be
relevant;
6. compared the proposed financial terms of the mergers with the financial
terms of other transactions that Merrill Lynch deemed to be relevant;
7. participated in discussions and negotiations among representatives of
St. John and Vestar and their financial and legal advisors;
8. reviewed drafts dated February 2, 1999 of the merger agreement and the
voting agreement; and
9. reviewed other financial studies and analyses and took into account
other matters that Merrill Lynch deemed necessary, including Merrill
Lynch's assessment of general economic, market and monetary conditions.
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to it,
discussed with or reviewed by or for it, or publicly available, and it did not
assume any responsibility for independently verifying this information. Merrill
Lynch did not undertake an independent evaluation or appraisal of any of the
assets or liabilities of St. John, nor was Merrill Lynch furnished with any
such evaluation or appraisal. In addition, Merrill Lynch did not assume any
obligation to conduct any physical inspection of the properties or facilities
of St. John. With respect to the financial forecast information furnished to or
discussed with Merrill Lynch by St. John and Vestar, Merrill Lynch assumed that
it had been reasonably prepared and reflected the best currently available
estimates and judgment of the management of St. John and representatives of
Vestar as to the expected future financial performance of St. John.
Merrill Lynch was not requested to, and did not, address the fairness, from
a financial point of view, of the consideration to be received by any holder of
St. John common stock who elects to receive St. John Knits International common
stock rather than cash in the acquisition merger and, as a result of that
election, receives more than his or her pro rata share of St. John Knits
International common stock. Accordingly, Merrill Lynch assumed that none of the
holders of St. John common stock would elect to receive St. John Knits
International common stock in the acquisition merger and, accordingly, that all
holders of St. John common stock would
36
<PAGE>
receive their pro rata amount of St. John Knits International common stock and
cash. Merrill Lynch was also of the view, as of the date of its opinion, that
the consideration to be received by any holder of St. John common stock who
elects to receive cash in the acquisition merger was fair, from a financial
point of view, to such holder even if other holders of St. John common stock
elect to receive St. John Knits International common stock in the acquisition
merger.
In addition, Merrill Lynch assumed that, in the course of obtaining the
necessary regulatory or other consents or approvals for the mergers, no
restrictions, including any divestiture requirements or amendments or
modifications, would be imposed that would have a material adverse effect on
the contemplated benefits of the mergers. Merrill Lynch assumed that the merger
agreement and the voting agreement would be substantially similar to the last
drafts reviewed by it.
The Merrill Lynch opinion was necessarily based upon market, economic and
other conditions as they existed and could be evaluated on, and on the
information made available to Merrill Lynch as of, the date of its opinion.
In connection with the preparation of the Merrill Lynch opinion, Merrill
Lynch solicited third-party indications of interest for the acquisition of St.
John. Merrill Lynch was not asked to consider, and its opinion does not in any
manner address, the value of St. John Knits International common stock or the
prices at which St. John Knits International common stock would actually trade
following the mergers.
Richard A. Gadbois III, Senior Vice President of Corporate Executive
Services at Merrill Lynch, currently serves as a director of St. John and St.
John Knits International. In addition, Merrill Lynch has in the past provided
financial advisory and financing services to Vestar and has received fees for
such services. In the ordinary course of Merrill Lynch's business, it may
actively trade shares of St. John common stock as well as debt securities of
Vestar and its affiliates, for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
these securities.
The following is a description of the financial analyses used by Merrill
Lynch in preparing the Merrill Lynch opinion and reviewed with the St. John
board and the special committee.
These descriptions of financial analyses include information presented in
tabular format. In order to fully understand the financial analyses performed
by Merrill Lynch, the tables must be read together with the text of each
description. The tables alone do not constitute a complete description of the
financial analyses. Considering the data in the tables without considering the
full narrative description of the financial analyses, including the
methodologies and assumptions underlying the analyses, could create a
misleading or incomplete view of the financial analyses performed by Merrill
Lynch.
Implied Premium Analysis. Merrill Lynch reviewed the historical trading
prices for St. John common stock and compared them with the merger
consideration of $30 per share. This analysis indicated that the merger
consideration represented:
1. a premium of 37% over the market price of St. John common stock of
$21.94 per share at the close of business on December 8, 1998, which was
the last closing price prior to Vestar's initial proposal;
2. a premium of 53% over the one-month average market price of $19.59 per
share for the one month period beginning November 8, 1998 and ending
December 8, 1998;
3. a premium of 70% over the three-month average market price of $17.72 per
share for the three month period beginning September 8, 1998 and ending
December 8, 1998;
4. a premium of 18% over the six-month average market price of $25.50 per
share for the six month period beginning June 8, 1998 and ending
December 8, 1998;
5. a discount of 12% over the one-year average market price of $33.94 per
share for the one year period beginning December 8, 1997 and ending
December 8, 1998;
37
<PAGE>
6. a discount of 37% over the 52-week high market price of $47.75 per share
for the 52 week period ending December 8, 1998; and
7. a premium of 126% over the 52-week low market price of $13.25 per share
for the 52 week period ending December 8, 1998.
Post-Announcement Trading Range Analysis. Merrill Lynch reviewed the high,
low and closing stock prices of St. John common stock on each trading day from
December 8, 1998 to February 1, 1999. This analysis indicated that the stock
price over this time period was never equal to or greater than Vestar's initial
offer price of $28 per share.
Discounted Cash Flow Analysis. Merrill Lynch performed a discounted cash
flow analysis of the projected after-tax unlevered free cash flows of St. John.
After-tax unlevered free cash flow means operating cash flow after changes in
working capital, capital spending, taxes and other operating requirements. This
analysis was based on both "Management Case" and "Vestar Case" projections for
fiscal years 1999 through 2003. The Management Case projections were prepared
by senior management of St. John and the Vestar Case projections were prepared
by Vestar. Merrill Lynch noted the following differences between the Management
Case and the Vestar Case projections:
<TABLE>
<CAPTION>
Fiscal Year Ended November 1
-----------------------------
1999E 2000E 2001E 2002E 2003E
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net Sales Growth
Management Case............................. 11.4% 8.0% 8.0% 8.0% 8.0%
Vestar Case................................. 8.2% 7.4% 7.6% 6.9% 7.1%
Gross Margin
Management Case............................. 56.6% 57.0% 57.5% 57.5% 57.5%
Vestar Case................................. 56.7% 56.7% 56.7% 56.6% 56.6%
SG&A Expenses (% of Sales)
Management Case............................. 38.0% 37.5% 37.5% 37.5% 37.5%
Vestar Case................................. 37.9% 37.8% 37.6% 37.6% 37.6%
EBITDA Margin
Management Case............................. 22.8% 23.7% 24.1% 23.9% 23.7%
Vestar Case................................. 23.1% 23.3% 23.4% 23.4% 23.3%
EBIT Margin
Management Case............................. 18.6% 19.5% 20.0% 20.0% 20.0%
Vestar Case................................. 18.8% 18.9% 19.1% 19.0% 19.0%
</TABLE>
See also "Financial Projections" on page 59.
Merrill Lynch calculated implied equity values per share of St. John common
stock by utilizing discount rates ranging from 12.5% to 13.5% and terminal
value multiples of estimated 2003 EBITDA ranging from 6.0x to 8.0x. Merrill
Lynch arrived at these discount rates based on its judgement of the weighted
average cost of capital of selected publicly traded apparel companies, and
arrived at these terminal multiples based on its review of the trading
characteristics of the common stock of selected publicly traded apparel
companies and of comparable acquisitions of selected apparel companies.
38
<PAGE>
The following table presents the ranges of implied equity values per share
of St. John common stock implied by this analysis as compared with the merger
consideration of $30.00 per share and the pro rated cash component of the
merger consideration of $29.10 per share:
<TABLE>
<CAPTION>
Implied Equity Value
Per Share of St. John
Common Stock
----------------------
Low High
---------- -----------
<S> <C> <C>
Discounted Cash Flow Analysis
Management Case...................................... $26.64 $34.13
Vestar Case.......................................... $24.94 $31.89
Per Share Merger Consideration....................... $30.00
Per Share Pro Rated Cash Component of the Merger
Consideration....................................... $29.10
</TABLE>
Selected Publicly Traded Comparable Companies Analysis. Merrill Lynch
compared financial data relating to St. John to corresponding financial data
for six publicly traded corporations, which we refer to in this document as the
"Merrill Lynch Selected Companies": Jones Apparel Group, Inc., Polo Ralph
Lauren Corporation, Gucci Group N.V., Tommy Hilfiger Corporation, Liz
Claiborne, Inc. and Nautica Enterprises, Inc. The Merrill Lynch Selected
Companies were chosen because they are publicly traded companies with
operations that for purposes of this analysis may be considered reasonably
similar to the operations of St. John.
For each of the Merrill Lynch Selected Companies and St. John, Merrill Lynch
calculated multiples of the following financial metrics:
1. market price per share of common stock to estimated earnings, or "P/E
Multiple";
2. P/E Multiple to five-year estimated earnings per share, or "EPS," growth
rate;
3. market capitalization to estimated fiscal year 1998 sales; and
4. market capitalzation to estimated fiscal year 1998 EBITDA.
For purposes of calculating the P/E Multiples of the Merrill Lynch Selected
Companies, Merrill Lynch used the closing price per share of their common stock
on January 29, 1999, except for Gucci Group N.V. for which Merrill Lynch
utilized the closing price on January 5, 1999, the day prior to the acquisition
by LVMH Moet Hennessy Louis Vuitton of a 5% stake in Gucci Group N.V., and
their calendar year estimated 1999 EPS, as reported by First Call Corporation
as of January 29, 1999. Five-year estimated EPS growth rates for the Merrill
Lynch Selected Companies were obtained from First Call Corporation as of
January 29, 1999. The multiples of market capitalization to estimated fiscal
year 1998 sales and to estimated fiscal year 1998 EBITDA, respectively, for the
Merrill Lynch Selected Companies were based on estimated fiscal year 1998 sales
and EBITDA obtained from selected publicly available Wall Street research
reports. The multiples for St. John were based on St. John's audited
consolidated financial statements as of November 1, 1998 and Management Case
projections.
39
<PAGE>
The following table sets forth information concerning the range of multiples
and the means of selected financial metrics for the Merrill Lynch Selected
Companies and the multiples of the same financial metrics for St. John at both
the December 8, 1998 closing price of $21.94 per share and the merger
consideration of $30.00 per share:
<TABLE>
<CAPTION>
Merrill Lynch St. John -- St. John --
Metric Selected Companies $21.94 per share $30.00 per share
------ ------------------ ---------------- ----------------
<S> <C> <C> <C>
1999 P/E................ Range: 9.3x to 17.7x 10.7x 14.6x
Mean: 14.7x*
1999 P/E to 5-year
Estimated EPS Growth
Rate................... Range: 0.58x to 1.28x 1.11x 1.52x
Mean: 0.93x*
Market Capitalization to
Estimated Fiscal Year Range: 0.94x to 2.85x 1.25x 1.75x
1998 Sales............. Mean: 1.57x*
Market Capitalization to
Estimated Fiscal Year Range: 4.8x to 12.1x 5.4x 7.5x
1998 EBITDA............ Mean: 8.7x*
</TABLE>
- --------
* Excludes Gucci Group N.V.
Merrill Lynch calculated implied equity values per share of St. John common
stock by applying P/E multiples ranging from 13.0x to 15.0x, and P/E to five-
year estimated EPS growth rates ranging from 0.70x to 1.10x, which were derived
from the foregoing analysis, to the Management Case estimated fiscal year 1999
EPS and five-year estimated EPS growth rate based on the five-year EBIT growth
rate Management Case estimates.
The following table presents the ranges of implied equity values per share
of St. John common stock implied by this analysis as compared with the merger
consideration of $30.00 per share and the pro rated cash component of the
merger consideration of $29.10 per share:
<TABLE>
<CAPTION>
Implied Equity Value
Per Share of St. John
Common Stock
----------------------
Low High
---------- -----------
<S> <C> <C>
Selected Publicly Traded Comparable Companies Trading
Analysis
Management Case Estimated 1999 EPS................... $26.65 $30.75
Management Case Estimated 1999 P/E to Five-Year
Estimated EPS Growth Rate........................... $13.78 $21.65
Per Share Merger Consideration....................... $30.00
Per Share Pro Rated Cash Component of the Merger
Consideration....................................... $29.10
</TABLE>
Selected Acquisitions Transaction Analysis. Merrill Lynch analyzed
information relating to the following selected transactions, which we refer to
in this document as the "Merrill Lynch Selected Transactions," in the apparel
industry since January 1, 1996:
<TABLE>
<CAPTION>
Acquiror Acquired Company
-------- ----------------
<S> <C>
Citicorp Venture Capital,
Ltd. ....................... Gerber Childrenswear, Inc.
The Warnaco Group, Inc. ..... Lejaby-Euralis S.A.
Investcorp S.A. ............. The William Carter Company
The Jordan Co. .............. Winning Ways Inc.
The Warnaco Group, Inc. ..... Designer Holdings Ltd.
Vestar....................... Sun Apparel, Inc.
Gucci Group N.V. ............ Severin Montres
Tommy Hilfiger Corporation... Pepe Jeans USA, Inc., TJ Far East Limited and
Tomcan Investments Inc.
Vestar....................... Bidermann Industries USA Inc.
Tropical Sportswear Int'l
Corporation................. Farah Incorporated
Jones Apparel Group, Inc..... Sun Apparel, Inc.
</TABLE>
40
<PAGE>
The following table sets forth multiples of transaction value for the
Merrill Lynch Selected Transactions to the sales and EBITDA, respectively, of
the acquired businesses for the latest twelve month periods preceding the
acquisition announcements and corresponding multiples for the mergers, which
Merrill Lynch calculated based on St. John's fiscal 1998 sales and EBITDA,
respectively. For purposes of this analysis, transaction value was calculated
as the consideration offered for the common equity, including the net cost of
"in-the-money" options, plus liquidation value of preferred equity and the
value of debt and minority interest less cash and marketable securities.
<TABLE>
<CAPTION>
Merrill Lynch St. John--
Transaction Value To: Selected Transactions $30.00 per share
--------------------- --------------------- ----------------
<S> <C> <C>
Latest 12 month sales................... Range: 0.40x to 3.00x 1.75x
Mean: 0.77x*
Latest 12 month EBITDA.................. Range: 4.0x to 16.5x 7.5x
Mean: 6.3x**
</TABLE>
- --------
* Excludes the acquisition of Pepe Jeans USA, Inc., TJ Far East Limited and
Tomcan Investments Inc. by Tommy Hilfiger Corporation
** Excludes the acquisitions of Pepe Jeans USA, Inc., TJ Far East Limited and
Tomcan Investments Inc. by Tommy Hilfiger Corporation and of Tropical
Sportswear Int'l Corporation by Farah Incorporated
Merrill Lynch calculated implied equity values per share of St. John common
stock by applying multiples, which were derived from the foregoing analysis, of
transaction value to the latest twelve months EBITDA ranging from 6.5x to 8.5x
to the St. John Management Case estimated latest twelve month EBITDA ended
January 31, 1999.
The following table presents the ranges of implied equity values per share
of St. John common stock implied by this analysis as compared with the merger
consideration of $30.00 per share and the pro rated cash component of the
merger consideration of $29.10 per share:
<TABLE>
<CAPTION>
Implied Equity Value
Per Share of St. John
Common Stock
----------------------
Low High
---------- -----------
<S> <C> <C>
Selected Acquisitions Transactions Analysis
Management Case estimated latest twelve-month EBITDA
ended January 31, 1999.............................. $24.37 $31.35
Per Share Merger Consideration....................... $30.00
Per Share Pro Rated Cash Component of the Merger
Consideration....................................... $29.10
</TABLE>
LBO Analysis. Using Management Case projections and Vestar Case projections,
Merrill Lynch performed a leveraged buyout analysis to determine, under current
market conditions, the maximum price per share that a leveraged buyout
purchaser, such as Vestar, could theoretically pay for St. John. In performing
this analysis, Merrill Lynch assumed that acquisition financing could be
obtained in the high yield and bank finance market in an amount not in excess
of 5.2x the latest twelve month EBITDA and that a minimum internal rate of
return from 20% to 30% on equity invested during a three to five year period
would be required.
The following table sets forth the ranges of prices per share of St. John
common stock that Merrill Lynch determined that a prospective purchaser could
theoretically pay as compared with the merger consideration of $30.00 per share
and the pro rated cash component of the merger consideration of $29.10 per
share:
<TABLE>
<CAPTION>
Implied Price
Per Share of St. John
Common Stock
----------------------
Low High
---------- -----------
<S> <C> <C>
Leveraged Buyout Analysis
Management Case...................................... $28.00 $31.00
Vestar Case.......................................... $27.00 $30.00
Per Share Merger Consideration....................... $30.00
Per Share Pro Rated Cash Component of the Merger
Consideration....................................... $29.10
</TABLE>
41
<PAGE>
The preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, is not necessarily susceptible to partial analysis or summary
description. Selecting portions of the analyses or of the summary set forth
above, without considering the analyses as a whole, could create an incomplete
view of the processes underlying the Merrill Lynch opinion. In arriving at its
fairness determination, Merrill Lynch considered the results of all such
analyses and did not attribute any particular weight to any factor or analysis
considered by it; Merrill Lynch made its determination as to fairness on the
basis of its experience and professional judgment after considering the results
of all such analyses.
No company or transaction used in the above analyses as a comparison is
directly comparable to St. John or the mergers.
The analyses were prepared solely for purposes of Merrill Lynch providing
its opinion to the St. John board and the special committee and does not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities actually may be sold. Analyses based upon forecasts of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by these analyses. These
analyses are inherently uncertain, being based upon numerous factors or events
beyond the control of the parties or their respective advisors.
As described above, the Merrill Lynch opinion was among many factors taken
into consideration by the St. John board and the special committee in making
their respective determinations to approve the mergers.
Fee Arrangement. Merrill Lynch acted as financial advisor to the St. John
special committee in connection with the mergers. Pursuant to a letter
agreement dated December 28, 1998 among St. John, the special committee and
Merrill Lynch, Merrill Lynch will receive a fee from St. John for its services,
$500,000 of which was payable upon delivery of Merrill Lynch's opinion and the
remainder of which is contingent on the completion of the mergers. Assuming
completion of the mergers, Merrill Lynch's total fee would be approximately
$3.1 million. In addition, St. John has agreed to reimburse Merrill Lynch for
its reasonable out-of-pocket expenses incurred in connection with rendering
financial advisory services, including fees and disbursements of its legal
counsel. St. John has agreed to indemnify Merrill Lynch and its directors,
officers, agents, employees and controlling persons, for some costs, expenses,
losses, claims, damages and liabilities related to or arising out of its
rendering of services under its engagement as financial advisor.
Opinion of Wasserstein Perella
On February 2, 1999, at a meeting of the special committee, Wasserstein
Perella delivered an oral opinion to the special committee, which was
subsequently confirmed in writing that, as of that date and based on the
assumptions made, matters considered and limitations reviewed with the special
committee, the consideration to be received by the holders of St. John common
stock, other than the Grays, pursuant to the mergers was fair from a financial
point of view to those holders.
The full text of the Wasserstein Perella opinion, which states assumptions
made, procedures followed, matters considered and limitations on the scope of
the review undertaken by Wasserstein Perella in rendering its opinion, is
included in this proxy statement-prospectus at Appendix C. A copy of the
Wasserstein Perella opinion is available for inspection and copying by any
holder of St. John common stock or any representative of such holder who has
been so designated in writing, at the principal executive offices of St. John
during normal business hours. Holders of St. John common stock are urged to,
and should, read the Wasserstein Perella opinion carefully and in its entirety.
The Wasserstein Perella opinion was for the benefit and use of the special
committee in its consideration of the mergers. The Wasserstein Perella opinion
addresses only the fairness, from a financial point of view, to the holders of
St. John common stock, other than the Grays, of the consideration to be
received pursuant to the mergers, and Wasserstein Perella does not express any
views on any other terms of the mergers. The Wasserstein Perella opinion does
not address St. John's underlying business decision to engage in the mergers
and does not address the solvency of St. John or any other entity
42
<PAGE>
following consummation of the mergers or at any time. The Wasserstein Perella
opinion does not constitute a recommendation to any holder of St. John common
stock with respect to how any holder should vote with respect to the mergers,
and should not be relied upon by any holder as such.
In arriving at the Wasserstein Perella opinion, Wasserstein Perella reviewed
drafts of the merger agreement and voting agreement, and for purposes of its
review, assumed that the final forms of these documents would not differ in any
material respect from the drafts provided to it. Wasserstein Perella also
reviewed and analyzed publicly available business and financial information
relating to St. John for recent years and interim periods to the date of the
Wasserstein Perella opinion, as well as internal financial and operating
information, including financial forecasts, analyses, and projections prepared
by or on behalf of St. John and Vestar and provided to it for purposes of its
analysis. Wasserstein Perella also met with management of St. John and
representatives of Vestar to review and discuss this information and, among
other matters, St. John's business, operations, assets, financial condition,
and future prospects.
Wasserstein Perella reviewed and considered financial and stock market data
relating to St. John, and compared that data with similar data for other
companies, the securities of which are publicly traded, that it believed may
have been relevant or comparable to St. John or one or more of its businesses
or assets. Wasserstein Perella also reviewed and considered the financial terms
of recent acquisitions and business combination transactions in the apparel
industry specifically, and in other industries generally, that it believed to
be reasonably comparable to the mergers or otherwise relevant to its inquiry.
Wasserstein Perella also performed other financial studies, analyses and
investigations and reviewed other information as it considered appropriate for
purposes of the Wasserstein Perella opinion.
In Wasserstein Perella's review and analysis and in formulating its opinion,
Wasserstein Perella assumed and relied upon the accuracy and completeness of
all of the financial and other information provided to or discussed with it or
publicly available, and Wasserstein Perella did not assume any responsibility
for independent verification of any of this information. Wasserstein Perella
also assumed and relied upon the reasonableness and accuracy of the financial
projections, forecasts and analyses provided to it, and it assumed that these
projections, forecasts and analyses were reasonably prepared in good faith and
on bases reflecting the best currently available judgments and estimates of the
management of St. John and of Vestar. Wasserstein Perella expressed no opinion
with respect to these projections, forecasts and analyses or the assumptions
upon which they are based. In addition, Wasserstein Perella did not review any
of the books and records of St. John, or assume any responsibility for
conducting a physical inspection of the properties or facilities of St. John or
for making or obtaining an independent valuation or appraisal of the assets or
liabilities of St. John, and no such independent valuation or appraisal was
provided to it.
Wasserstein Perella was not requested to, and did not, address the fairness,
from a financial point of view, of the consideration to be received by any
holder of St. John common stock who elects to receive St. John Knits
International common stock rather than cash in the acquisition merger and, as a
result of that election, receives more than his or her pro rata share of St.
John Knits International common stock. Accordingly, Wasserstein Perella assumed
that none of the holders of St. John common stock would elect to receive
St. John Knits International common stock in the acquisition merger and,
accordingly, that all holders of St. John common stock would receive their pro
rata amount of St. John Knits International common stock and cash. Wasserstein
Perella was also of the view, as of the date of its opinion, that the
consideration to be received by any holder of St. John common stock who elects
to receive cash in the acquisition merger was fair, from a financial point of
view, to such holder even if other holders of St. John common stock elect to
receive St. John Knits International common stock in the acquisition merger.
Wasserstein Perella also assumed that the transactions described in the
merger agreement would be consummated without waiver or modification of any of
its material terms or conditions. Wasserstein Perella was not asked to consider
and the Wasserstein Perella opinion does not in any manner address the value of
St. John Knits International common stock or the prices at which St. John Knits
International common stock would actually trade following the mergers.
43
<PAGE>
The Wasserstein Perella opinion is necessarily based on economic and market
conditions and other circumstances as they existed and could be evaluated by it
as of the date thereof.
In the ordinary course of Wasserstein Perella's business, Wasserstein
Perella may actively trade the debt and equity securities of St. John for its
own account and for the account of its customers and, accordingly, may at any
time hold a long or short position in these securities. Wasserstein Perella has
performed various investment banking services for Vestar and its affiliates
from time to time in the past and has received customary fees for rendering
these services.
The following is a brief description of the analyses performed and factors
considered by Wasserstein Perella in connection with rendering the Wasserstein
Perella opinion and reviewed with the special committee at the February 2, 1999
meeting.
Implied Premium Analysis. Wasserstein Perella reviewed the historical
trading prices for St. John common stock and compared them with the merger
consideration of $30.00 per share. Such analysis indicated that the merger
consideration represented:
1. a 37% premium over the single day closing price of $21.94 per share on
December 8, 1998;
2. a 53% premium over the one-month daily average closing price of $19.59
per share for the one month period ending December 8, 1998;
3. an 18% premium over the six-month daily average closing price of $25.39
per share for the six month period ending December 8, 1998;
4. a 12% discount to the one-year daily average closing price of $33.91 per
share for the one year period ending December 8, 1998;
5. a 37% discount to the 52-week high of $47.75 per share for the 52-week
period ending December 8, 1998; and
6. a 126% premium over the 52-week low of $13.25 per share for the 52-week
period ending December 8, 1998.
Discounted Cash Flow Analysis. Wasserstein Perella performed a discounted
cash flow analysis for St. John using actual results for 1998 and Management
Case projections for net sales, gross profit, EBITDA and earnings before
interest and taxes, or "EBIT," for fiscal years 1999 through 2003. See
"Financial Projections" on page 59.
All cash flows were discounted at rates ranging from 12.5% to 13.5%. The
terminal values were computed using a range of multiples of 6.0x to 8.0x for
fiscal year 2003 EBITDA. Wasserstein Perella arrived at the discount rates
based on its judgment of the weighted average cost of capital of selected
publicly traded apparel companies, and arrived at the terminal values based on
its review of the trading characteristics of the common stock of selected
publicly traded apparel companies. This analysis indicated a range of values
for St. John common stock of $26.65 and $34.14 per share.
44
<PAGE>
Analysis of Selected Companies. Wasserstein Perella compared financial data
for St. John to corresponding data for a group of seven publicly traded apparel
companies, which we refer to in this document as the "Wasserstein Selected
Companies," comprised of Tommy Hilfiger Corporation, Jones Apparel Group Inc.,
Polo Ralph Lauren Corporation, Liz Claiborne, Inc., Nautica Enterprises, Inc.,
Hartmarx Corporation and Donna Karan International Inc. The Wasserstein
Selected Companies were chosen because they are publicly traded companies with
operations that for purposes of this analysis may be considered reasonably
similar to the operations of St. John. The following table contains information
concerning the range of multiples, the means and the medians of selected
financial metrics for the Wasserstein Selected Companies and the multiples of
the same financial metrics for St. John at both the December 8, 1998 closing
price of $21.94 per share and the merger consideration of $30.00 per share:
<TABLE>
<CAPTION>
St. John -- St. John --
Wasserstein $21.94 $30.00
Metric Selected Companies per share per share
------ --------------------- ----------- -----------
<S> <C> <C> <C>
Ratio of Adjusted Market Range: 0.2x to 2.6x 1.3x 1.7x
Value to Latest Twelve Mean: 1.3x
Months Sales Median: 1.0x
Ratio of Adjusted Market Range: 0.2x to 2.2x 1.2x 1.6x
Value to Next Fiscal Year Mean: 1.1x
Sales Median: 0.9x
Ratio of Price to Latest Range: 10.3x to 22.3x 10.1x 16.8x
Twelve Months Earnings Mean: 16.4x
Median: 16.3x
Ratio of Price to Next Fiscal Range: 9.2x to 20.6x 9.8x 14.6x
Year Earnings Mean: 14.6x
Median: 15.4x
Ratio of Adjusted Market Range: 5.1x to 12.0x 4.9x 8.1x
Value to Latest Twelve Mean: 9.0x
Months EBITDA Median: 9.0x
Ratio of Adjusted Market Range: 4.0x to 9.9x 4.9x 6.9x
Value to Next Fiscal Year Mean: 7.2x
EBITDA Median: 6.8x
Ratio of Adjusted Market Range: 5.7x to 15.2x 5.8x 10.0x
Value to Latest Twelve Mean: 10.7x
Months EBIT Median: 10.7x
Ratio of Adjusted Market Range: 5.0x to 11.9x 5.6x 8.4x
Value to Next Fiscal Year Mean: 8.9x
EBIT Median: 8.1x
</TABLE>
For purposes of this analysis, Wasserstein Perella used closing prices for
each of the Wasserstein Selected Companies on January 29, 1999. St. John
multiples at $21.94 per share were based on results for the latest
twelve months ended in the third quarter of fiscal 1998, August 2, 1998, while
multiples at $30.00 per share were based on estimates of the management of St.
John for the latest twelve months ending in the first quarter of fiscal year
1999.
Wasserstein Perella calculated implied equity values per share of St. John
common stock by:
1. applying multiples of 12.5x to 14.5x to St. John's estimated fiscal year
1999 EPS;
2. applying multiples of 6.0x to 8.0x to St. John's estimated fiscal year
1999 EBITDA; and
3. applying multiples of 7.0x to 9.0x to St. John's estimated first quarter
fiscal year 1999 latest twelve months EBITDA.
45
<PAGE>
The analysis implied the following equity values for St. John common stock:
<TABLE>
<CAPTION>
Implied Equity Value
Per Share of St. John
Common Stock
----------------------
Low High
---------- -----------
<S> <C> <C>
Analysis of Selected Companies
Estimated fiscal year 1999 EPS..................... $ 25.63 $ 29.73
Estimated fiscal year 1999 EBITDA.................. $ 26.39 $ 34.62
Estimated first quarter fiscal year 1999 latest
twelve months EBITDA.............................. $ 26.13 $ 33.11
</TABLE>
Analysis of Selected Comparable Transactions. Wasserstein Perella reviewed
the financial terms, to the extent publicly available, of the following fifteen
transactions, which we refer to in this document as the "Wasserstein Selected
Transactions," in the apparel industry completed since January 1, 1996:
<TABLE>
<CAPTION>
Acquiror Acquired Company
-------- ----------------
<S> <C>
Tommy Hilfiger Corporation Pepe Jean USA Inc., TJ Far East
Limited and Tomcan Investments Inc.
Holding di Partecipazioni Industriali,
S.p.A Valentino
The Jordan Co. Winning Ways Inc.
Jones Apparel Group, Inc. Sun Apparel, Inc.
Investcorp S.A. Helly Hansen ASA
The Warnaco Group, Inc. Designer Holdings Ltd.
Gucci Group N.V. Severin Montres
Investcorp S.A. The William Carter Company
The Warnaco Group, Inc. Lejaby-Euralis S.A.
Haggar Corp. Jerrell Inc.
Vestar Sun Apparel, Inc.
Tropical Sportswear Int'l Corporation Farah Incorporated
Citicorp Venture Capital, Ltd Gerber Childrenswear, Inc.
Wuensche AG Joop! GmbH
Vestar Bidermann Industries USA Inc.
</TABLE>
The following table sets forth multiples of adjusted market value to sales
and EBITDA, respectively, for each of the Wasserstein Selected Transactions,
which Wasserstein Perella calculated by using publicly available information
and the corresponding multiples for the mergers, which Wasserstein Perella
calculated based on estimates provided by St. John management for the latest 12
months ended January 31, 1999.
<TABLE>
<CAPTION>
Wasserstein St. John--
Adjusted Market Value To: Selected Transactions $30.00 per share
------------------------- ---------------------- ----------------
<S> <C> <C>
Latest 12 month sales................... Range: 0.3x to 3.4x* 1.7x
Mean: 1.1x*
Median: 0.8x*
Latest 12 month EBITDA.................. Range: 4.0x to 17.4x** 8.1x
Mean: 8.7x**
Median: 6.7x**
</TABLE>
- --------
* Excludes the acquisition of Bidermann Industries USA Inc. by Vestar as the
necessary financial information was not available
** Excludes the acquisitions of Bidermann Industries USA Inc. by Vestar,
Valentino by Holding di Partecipazioni Industriali, S.p.A., Severin Montres
by Gucci Group N.V., Joop! GmbH by Wuensche AG and Jerrell Inc. by Haggar
Corp. as the necessary financial information was not available
46
<PAGE>
Wasserstein Perella calculated implied equity values per share of St. John
common stock by applying multiples of 6.0x to 9.0x to St. John's EBITDA
estimates provided by St. John management for the latest twelve months ending
January 1999. The analysis implied the following equity value for St. John
common stock:
<TABLE>
<CAPTION>
Implied Equity Value
Per Share of St. John
Common Stock
---------------------
Low High
---------- -----------
Analysis of Selected Comparable Transactions
<S> <C> <C>
Estimated EBITDA for latest twelve months ending
January 1999........................................ $ 22.64 $ 33.11
</TABLE>
No company used in the analysis of selected companies nor any transaction
used in the analysis of selected comparable transactions summarized above is
identical to St. John or the mergers. In addition, Wasserstein Perella believes
that both the analysis of selected companies and the analysis of selected
comparable transactions are not simply mathematical. Rather, these analyses
must take into account differences in the financial and operating
characteristics of these companies and other factors, such as general economic
conditions, and markets in which these companies compete and strategic and
operating plans for these companies, that could affect the public trading value
and acquisition value of these companies and therefore any analysis must be
made as of a specific date.
Leveraged Buyout Analysis. Wasserstein Perella calculated the projected
internal rates of return that could be realized on the equity invested in a
leveraged acquisition of St. John at a purchase price per share of St. John
common stock of $27.00 to $30.00 using Management Case projections. In
performing this analysis, Wasserstein Perella assumed that Vestar would cause
St. John to borrow $155 million of bank debt at an average interest rate of
8.0% and issue $160 million of high yield bonds at 11.0% and that Vestar would
contribute between $104.5 and $153.9 million of common equity. Assuming 6.0x to
8.0x multiples of fiscal year 2003 EBITDA, this analysis indicated a five-year
internal rate of return ranging from 14.1% to 32.2%.
Leveraged Recapitalization Analysis. Wasserstein Perella estimated the
implied equity value of shares of St. John common stock assuming a repurchase
of 40% to 60% of St. John common stock at $30.00 per share. In performing this
analysis, Wasserstein Perella assumed that the repurchase would be funded with
between $36.6 and $138.2 million of bank debt at an average interest rate of
8.0% and $150 million of high yield debt at 11.0% and that the remaining
outstanding St. John common stock would trade in a range of 8.0x to 12.0x pro
forma 1999 P/E. This analysis resulted in a range of blended equity values of
shares repurchased and outstanding of $22.70 to $30.15 per share, pro rata.
Premiums Paid Analysis. Wasserstein Perella reviewed 167 change in control
transactions completed during the period from January 1998 to February 1999
with a transaction value of between $100 million and $1 billion. Using data
obtained from Securities Data Company, Wasserstein Perella calculated the
following premiums paid in these transactions:
% Stock Premium Before Announcement Date
<TABLE>
<CAPTION>
1 Day 1 Week 4 Weeks
----- ------ -------
<S> <C> <C> <C>
High 126.4% 172.6% 166.7%
Low (48.5%) (42.1%) (36.8%)
Mean 25.8% 31.9% 37.6%
Adjusted Mean* 24.1% 28.9% 34.7%
Median 20.0% 28.4% 33.2%
</TABLE>
--------
* Excludes highest and lowest 10% of premiums
47
<PAGE>
Based on the foregoing analysis, Wasserstein Perella applied a premium range
of 20% to 30% to the $21.94 per share closing price for St. John common stock
on December 8, 1998. The analysis indicated a range of implied prices for St.
John common stock of $26.33 to $28.52.
While the foregoing summary describes the analyses and factors that
Wasserstein Perella deemed material in its presentation to the special
committee, it is not a comprehensive description of all analyses and factors
considered by Wasserstein Perella. The preparation of a fairness opinion is a
complex process involving various determinations as to the most appropriate and
relevant methods of financial analysis and the applications of these methods to
the particular circumstances and, therefore, an opinion is not readily
susceptible to summary description. Wasserstein Perella believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, would create an incomplete view of the evaluation process
underlying the Wasserstein Perella opinion. The analyses performed by
Wasserstein Perella are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than those suggested
by the analyses. Accordingly, the analyses and estimates are inherently
uncertain. Additionally, analyses relating to the value of a business do not
purport to be appraisals or to reflect the prices at which the business
actually may be sold.
The terms of the mergers were determined through negotiations between St.
John and Vestar and were approved by the St. John board and the St. John Knits
International board. Although Wasserstein Perella provided advice to the
special committee during the course of these negotiations, the decision to
enter into the merger agreement was solely that of the St. John board, the St.
John Knits International board and the special committee. As described above,
the Wasserstein Perella opinion and the presentation of Wasserstein Perella to
the special committee were only one of a number of factors taken into
consideration by the special committee in making their recommendation to the
St. John board and the St. John Knits International board.
The special committee of St. John retained Wasserstein Perella to act as its
advisor based upon Wasserstein Perella's qualifications, reputation, experience
and expertise. Wasserstein Perella is an internationally recognized investment
banking firm and, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwriting transactions, private
placements and valuations for corporate and other purposes.
Fee Arrangement. Wasserstein Perella acted as financial advisor to the
special committee in connection with the mergers. Pursuant to a letter
agreement dated December 29, 1998 and amended on February 2, 1999 among the
special committee, Wasserstein Perella and, as amended, the St. John Knits
International special committee. St. John has paid Wasserstein Perella an
aggregate financial advisory fee of $700,000 for its services in connection
with the mergers. In addition, St. John has agreed to reimburse Wasserstein
Perella for its reasonable out-of-pocket expenses incurred in connection with
rendering financial advisory services, including fees and disbursements of its
legal counsel. St. John has agreed to indemnify Wasserstein Perella and its
directors, officers, agents, employees and controlling persons, for costs,
expenses, losses, claims, damages and liabilities related to or arising out of
its rendering of services under its engagement as financial advisor.
Interests of the Grays and Other Officers and Directors of St. John in the
Mergers; Conflicts of Interests
The Grays, as well as some other directors and executive officers of St.
John, have interests which may present them with potential conflicts of
interests in connection with the mergers. The special committee and the board
of directors were aware of the matters described below and considered them in
addition to the other matters described under "--Reasons for the Mergers;
Recommendations to Shareholders" on page 30.
48
<PAGE>
The following table summarizes the interests in the mergers of these persons
that may be different from yours:
<TABLE>
<CAPTION>
Party Interest in the Mergers
----- -----------------------
<S> <C> <C>
The Grays . Ownership of approximately 16% of Vestar/Gray LLC in
exchange for an aggregate of 968,983 shares valued initially
at $30 per share or $29,069,490
. Cash payment of $7,110,000 in exchange for 237,000 shares
. Cash payment of $9,890,000 in respect of vested options to
purchase St. John common stock
. Parties to the stockholders' agreement
. Employee stock options as incentive compensation to acquire
shares of St. John Knits International
. Cash payments from Merrill Lynch from settlement of existing
hedging arrangements with respect to St. John common stock
Robert E. Gray . Reimbursement for reasonable out-of-pocket expenses
following mergers (not expected to exceed $100,000)
. Possible reimbursement for proportionate share of expenses
if merger agreement terminated under some circumstances (not
expected to exceed $240,000)
. Continuation of service as a director of St. John Knits
International following the mergers
. Lump sum payment of approximately $2,000,000 in deferred
compensation (unless Mr. Gray has otherwise previously
elected to defer receipt of all or part of this payment)
Kelly A. Gray . Continuation of service as a director of St. John Knits
International following the mergers
Other members of senior . Employee stock options as incentive compensation to acquire
management shares of St. John Knits International
David A. Krinsky . Cash payment of $160,008 in respect of options to purchase
St. John common stock which will accelerate as a result of
the mergers
Richard A. Gadbois, III . Cash payment of $160,008 in respect of options to purchase
St. John common stock which will accelerate as a result of
the mergers
Roger G. Ruppert . Cash payment of $38,341 in respect of options to purchase
St. John common stock which will accelerate as a result of
the mergers
Robert C. Davis . Cash payment of $50,000 for serving on the special committee
Daniel T. Reiner . Cash payment of $50,000 for serving on the special committee
Mark R. Goldston . Cash payment of $75,000 for serving as chair of the special
committee
Vestar . Post-merger advisory fee of $4,000,000
. Post-merger annual advisory fee of $500,000
. Expense reimbursement of approximately $200,000
</TABLE>
The Grays and Vestar have proposed to acquire St. John together and to hold
their ownership in the company through Vestar/Gray LLC. In connection with
funding the purchase of St. John, the Grays and Vestar agreed that Vestar would
contribute equity to Vestar/Gray LLC in the form of cash, while the Grays would
contribute as equity to Vestar/Gray LLC a portion of the shares of St. John
common stock they currently own, excluding their options. The Grays currently
own in the aggregate 1,205,983 shares of St. John common stock, which amounts
to approximately 7.3% of St. John's outstanding shares of common stock,
calculated on a fully
49
<PAGE>
diluted basis, in addition to vested options to purchase 560,000 shares,
100,000 of which have an exercise price in excess of $30 per share and
therefore are not entitled to be paid in the acquisition merger.
After the Grays transfer their shares of St. John common stock to
Vestar/Gray LLC in exchange for cash and a membership interests in Vestar/Gray
LLC, they will own approximately 16% of Vestar/Gray LLC, which will result in
their ownership of approximately 15% of the common stock of St. John Knits
International. The Grays will receive cash in exchange for approximately 37% of
their equity interest in St. John, taking into account the cash they will
receive in exchange for their vested options, and an interest in stock of St.
John Knits International for the remaining 63%. The Grays will not retain any
shares of St. John common stock and therefore will not participate directly in
the mergers along with other St. John shareholders, except that they will
receive cash in respect of their vested options, together with all other
holders of vested options. The other shareholders of St. John, in the
aggregate, will receive cash in exchange for approximately 97% of the shares
they currently own and stock in St. John Knits International in exchange for
the remaining 3% based on the $30 per share price. Because of the changed
capital structure of St. John following the mergers, this will result in St.
John's current shareholders, other than the Grays, owning approximately 7% of
the company.
The implied value of the consideration to be received by the Grays for their
shares of St. John stock is $30 per share, or a total of $36,179,490, in
addition to the $9,890,000 in cash, at $30 per share, to be received by the
Grays in exchange for their vested options. The Grays will transfer their
shares to Vestar/Gray LLC, and in exchange they will receive a mixture of cash
and ownership interests in Vestar/Gray LLC. For 237,000 of the shares the Grays
transfer, Vestar/Gray LLC will pay the Grays $7,110,000 million in cash. In
exchange for their remaining 968,983 shares, valued at $29,069,490, the Grays
will receive ownership interests in Vestar/Gray LLC valued at $30 each,
resulting in an equity interest of approximately 16% in Vestar/Gray LLC. Vestar
will contribute approximately $153.6 million to Vestar/Gray LLC, resulting in
an ownership interest of approximately 84% in Vestar/Gray LLC. The total amount
of equity in Vestar/Gray LLC will be approximately $182.7 million.
Ownership of Vestar/Gray LLC
Prior to the reorganization merger, the Grays will transfer all shares of
St. John common stock owned beneficially by them, excluding shares subject to
options, to Vestar/Gray LLC in exchange for cash and interests in Vestar/Gray
LLC as follows:
<TABLE>
<CAPTION>
Current Ownership Shares
Interest In Shares Transferred
St. John, Transferred for Membership Interest
Name Excluding Options for Cash Cash Received Interests in Vestar/Gray LLC
---- ----------------------------- ------------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
The Gray Family Trust 603,439 3.64% 46,667 $1,400,010 556,772 9.14%
Kelly A. Gray 547,904 3.30% 190,333 5,709,990 357,571 5.87%
The Kelly Ann Gray Trust 54,640 0.33% -- -- 54,640 0.90%
---------- ------ ------- ---------- ------- -----
1,205,983 7.27% 237,000 $7,110,000 968,983 15.91%
</TABLE>
Each of the Grays will receive consideration from Vestar/Gray LLC for their
shares in a different proportion of cash and interests in Vestar/Gray LLC, each
of which is valued at $30 per share. The Grays determined these proportions
based on the understanding that among them they would have an aggregate
interest in St. John Knits International, through Vestar/Gray LLC, of
approximately 15%.
The Gray Family Trust is a revocable living trust of which Robert E. and
Marie Gray serve as co-trustees and are the co-beneficiaries. The Kelly Ann
Gray Trust is a trust of which Robert E. and Marie Gray serve as co-trustees
and of which Kelly A. Gray is the sole beneficiary.
The remaining 84.09% interest in Vestar/Gray LLC will be held by Vestar/SJK
Investors LLC, which will also act as managing member of Vestar/Gray LLC.
50
<PAGE>
Stockholders' Agreement
The Grays will also be parties to a stockholders' agreement. This agreement
will provide the Grays with governance and other rights, including the
following:
1. the Grays may designate two members of the board of directors of St.
John Knits International;
2. prior to an initial public offering of St. John Knits International
common stock, if the Grays no longer work for St. John Knits
International, they may sell shares of St. John Knits International
common stock back to St. John Knits International or cause Vestar/Gray
LLC to sell shares on their behalf;
3. the Grays will have the right, 12 months following an initial public
offering by St. John Knits International, to cause St. John Knits
International to register the sale of their shares of St. John Knits
International common stock with the Securities and Exchange Commission,
as well as other rights to participate in registrations of St. John
Knits International common stock; and
4. the Grays will have the right to participate in some sales of St. John
Knits International common stock by Vestar.
The reason that the Grays will be given the right to sell shares to St. John
Knits International as described in clause (2) above is that their shares will
not be freely transferable. Following the mergers, the public stockholders will
hold unrestricted securities that may be sold without restriction at any time.
As executive officers and directors of St. John Knits International, the Grays
are affiliates of St. John Knits International. Accordingly, they may not sell
their shares except in limited amounts and circumstances. Even if any of the
Grays were no longer employed by St. John Knits International, so long as he or
she remains a director of St. John Knits International, he or she would be an
affiliate of St. John Knits International and therefore own restricted shares.
The amount of liquidity provided by the stockholders' agreement is only $5
million in the aggregate in any 12-month period for all of the Grays if Mr.
Gray ceases to serve as Chairman or Chief Executive Officer of, or Marie Gray
or Kelly Gray ceases to be employed by, St. John Knits International. In the
event that any of the Grays is terminated without cause or resigns for good
reason, the total amount of liquidity provided by St. John Knits International
would be limited to the fair market value of 25% of the shares of St. John
Knits International of all terminated family members. The total value of the
Grays investment in St. John Knits International as of the closing of the
mergers will be approximately $29 million.
For additional information regarding the Grays' rights under this agreement,
see "The Stockholders' Agreement" on page 93.
Indemnification and Insurance
Following the mergers, St. John's articles of incorporation and bylaws will
contain provisions identical to those existing prior to the mergers with
respect to elimination of personal liability and indemnification. These
provisions will not be amended for a period of six years in any manner that
would adversely affect the rights of directors, officers, agents or employees
of St. John or St. John Knits International at the time of the mergers.
In addition, St. John has agreed to maintain for six years directors' and
officers' liability insurance policies on terms and conditions that are at
least as favorable as those in effect on February 2, 1999, covering events
occurring prior to the mergers. In no event will St. John be required to spend
in any year more than $162,000 for this insurance. If St. John would be
required to spend more than $162,000 for any year, St. John must buy a policy
with the best coverage available, in the reasonable discretion of the board of
St. John, for a cost not exceeding this amount. St. John may instead decide to
buy one or more "tail" policies for all or any portion of the six-year period.
Options and Common Stock
Following the mergers, the Grays will be granted as incentive compensation
new employee stock options to acquire shares of St. John Knits International
common stock representing approximately 5% of the total shares of
51
<PAGE>
St. John Knits International common stock following the mergers on a fully
diluted basis. The exercise price of any options granted on the closing date
will be $30. The exercise price of any options granted subsequent to the
closing date will reflect the fair market value of the underlying shares, as
determined by the board of directors of St. John Knits International in its
best judgment. These options will vest and become exercisable in specified
circumstances, including upon the continued employment of the Grays for a
specified period of time and achievement of specified performance criteria and
will have up to a 10-year term. Any unvested options will expire following
specified terminations of the optionee's employment with St. John Knits
International. In addition, if the applicable performance criteria are not met,
the options will not become exercisable and will terminate.
In connection with pending litigation relating to the mergers, a California
state court has imposed a constructive trust on any amount in excess of $30 per
share that the Grays may receive for their St. John shares in the mergers until
a full trial on the merits is held. Prior to the determination of the final,
definitive terms of the stock options to be granted to the Grays after the
mergers, the plaintiffs in this litigation had argued that these options
represent additional consideration for the Grays' St. John shares. It is St.
John's belief that these employee stock options represent compensation for the
Grays' services as officers of St. John Knits International after the mergers
and are not additional consideration for their St. John shares. For more
information about this ruling, see "Pending Litigation Relating to the Mergers"
on page 120.
In addition, some members of senior management other than the Grays will be
offered the opportunity to purchase shares of St. John Knits International
common stock. These members of senior management will also receive, as
incentive compensation, employee stock options to acquire shares of St. John
Knits International common stock. The exercise price of any options granted on
the closing date will be $30. The exercise price of any options granted
subsequent to the closing date will reflect the fair market value of the
underlying shares, as determined by the board of directors of St. John Knits
International in its best judgment. The members of senior management who will
be offered the opportunity to purchase these shares and who will receive these
options will be determined by the board of directors of St. John Knits
International.
The shares of St. John Knits International common stock that these members
of senior management will be offered the opportunity to purchase and the shares
of St. John Knits International common stock underlying the options that these
members of senior management will receive as incentive compensation will, in
the aggregate, represent approximately 5% of the outstanding capital stock of
St. John Knits International on a fully diluted basis.
Options to purchase 13,334 shares of St. John common stock issued to each of
David A. Krinsky and Richard A. Gadbois III, directors of St. John, will
accelerate as a result of the mergers, and each of these directors will
receive, subject to the limitations described below, a cash payment equal to
$160,008 for these accelerated options upon consummation of the mergers. In
addition, options to purchase 3,334 shares of St. John common stock issued to
Roger G. Ruppert, a director and executive officer of St. John, will accelerate
as a result of the mergers, and Mr. Ruppert will receive a cash payment equal
to $38,341 for these accelerated options.
In connection with pending litigation relating to the mergers, a California
state court has imposed a constructive trust on options to acquire 15,000
shares of St. John common stock granted to each of Messrs. Krinsky and Gadbois
which were repriced in September 1998 until a full trial on the merits is held.
For more information about this ruling, see "Pending Litigation Relating to the
Mergers" on page 120.
Other Interests
For their services as members of the special committee, Messrs. Davis and
Reiner each will receive $50,000 from St. John and Mr. Goldston, as chairman of
the special committee, will receive $75,000 from St. John. No further
compensation was paid or is payable on a per meeting basis or otherwise for
service on the special committee. These payments are not dependent upon the
successful consummation of the mergers.
Robert E. Gray and Kelly A. Gray will serve as directors of St. John Knits
International after the mergers. See "The Mergers--Board of Directors and
Officers of St. John Knits International Following the Mergers" on page 68.
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The Grays are parties to employment agreements with St. John. These
agreements generally will not be affected by the mergers. However, as of the
closing of the mergers, Robert E. Gray will receive a lump sum payment, unless
Mr. Gray has otherwise previously elected to defer receipt of this payment, of
approximately $2,000,000, which represents the expected total amount of
compensation otherwise deferred into a grantor trust under Mr. Gray's
employment agreement with St. John as of the closing of the mergers. Under the
terms of his employment agreement, the deferred compensation would not
otherwise be distributed to Mr. Gray until the earlier of (1) the termination
of his employment and (2) June 1, 2000, on an installment basis, subject to the
$1 million compensation limit under Section 162(m) of the Internal Revenue Code
of 1986. To the extent that Mr. Gray elects to receive a lump sum payment
which, when aggregated with other compensation paid to him in the same taxable
year, is more than $1 million, the amount in excess of $1 million may not be
deductible by St. John. In addition, Mr. Gray has agreed to amend his
employment agreement to provide that after the mergers, no portion of the
annual compensation that Mr. Gray may receive from St. John or St. John Knits
International will be deferred and all provisions of his employment agreement
regarding compensation deferrals will be terminated. You can find more
information concerning his and other executive officers' employment agreements
in St. John's Annual Report on Form 10-K and Form 10-K/A for the fiscal year
ended November 1, 1998, which is incorporated in this document. See "Where You
Can Find More Information" on page 127.
In connection with the consummation of the mergers, the Grays expect to
receive cash payments from Merrill Lynch in connection with the settlement of
existing hedging arrangements equal to the difference between the price at
which the Grays are entitled to sell the subject shares to Merrill Lynch and
the market price of the common stock of St. John on the date of the settlement,
adjusted to reflect the early settlement of such arrangements. For a
description of these arrangements, see "Purchases of Shares" at page 124.
Vestar, St. John Knits International and St. John will enter into a
management agreement effective upon closing of the mergers. The management
agreement will provide that St. John Knits International and St. John will pay
to Vestar a transaction fee of $4,000,000 at closing and will reimburse Vestar
for all out-of-pocket expenses incurred in connection with the mergers. Vestar
will also provide management services, including advisory and consulting
services in relation to the selection, supervision and retention of independent
auditors, outside legal counsel, investment bankers or other financial advisors
or consultants. For these services, the management agreement will provide that
St. John Knits International and St. John will pay Vestar an annual fee of
$500,000 and will reimburse Vestar for all out-of pocket expenses, estimated at
approximately $200,000. The management agreement will terminate:
. if the merger agreement terminates; or
. if after the effective time of the mergers, Vestar and its partners and
their respective affiliates, through Vestar/Gray LLC or otherwise, hold,
in the aggregate, less than 50% of the stock of St. John Knits
International beneficially owned by Vestar immediately following the
closing of the mergers and cease to control a majority of St. John Knits
International's board of directors.
Payment of Expenses
In the event that expenses are payable by St. John to Pearl as described in
"The Merger Agreement -- Termination Fees and Expenses" on page 89, Vestar may
reimburse Robert E. Gray for his proportionate share of these expenses. In
addition, Vestar has agreed that following the consummation of the mergers, it
will cause St. John Knits International to reimburse Robert E. Gray for his
reasonable out-of-pocket expenses incurred in connection with the mergers.
Effects of the Mergers; Operations of St. John After the Mergers; New York
Stock Exchange Delisting
As a result of the mergers, Vestar, through Vestar/Gray LLC, will own
approximately 78% of St. John Knits International. Vestar, through Vestar/Gray
LLC, will have the power to control the direction and policies of St. John
Knits International, the election of a majority of its directors and the
outcome of any matter requiring stockholder approval, including adopting
amendments to St. John Knits International's certificate of
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incorporation and approving mergers or sales of all or substantially all of St.
John Knits International's assets. Vestar, through Vestar/Gray LLC, will
acquire an interest in St. John Knits International's net book value and net
earnings to the extent of the approximately 78% equity interest in St. John
Knits International acquired by Vestar in the mergers. In addition, if the
mergers are consummated, Vestar would be entitled to most of the benefits
resulting from its interest in St. John Knits International's net earnings,
including income generated by St. John Knits International's operations and any
future increase in St. John Knits International's value.
As described in "--Interests of the Grays and Other Officers and Directors
of St. John in the Mergers; Conflicts of Interests" on page 48, the Grays will
receive cash in exchange for approximately 37% of their equity interest in St.
John, taking into account the cash they will receive in exchange for their
vested options, and an interest in St. John Knits International common stock
for the remaining 63%. The Grays, through their ownership of approximately 16%
of Vestar/Gray LLC, will acquire an approximately 15% equity interest in St.
John Knits International and will be entitled to some benefits resulting from
their interest in St. John Knits International's net earnings, including income
generated by St. John Knits International's operations and any future increase
in St. John Knits International's value. In addition, Robert E. Gray and Kelly
A. Gray will continue to serve as directors of St. John Knits International
after the mergers.
As a result of the indebtedness to be incurred in connection with the merger
financing, the consolidated indebtedness of St. John Knits International will
be greater than it was prior to the merger financing, the equity of St. John
Knits International will be lower than it was prior to the merger financing, a
substantial portion of St. John Knits International's and St. John's assets
will be pledged to secure its indebtedness, and the new financing arrangements
will contain more restrictions on St. John Knits International's and St. John's
operations, thereby possibly reducing St. John Knits International's and St.
John's financial and operational flexibility. In addition, substantial cash
payments will be necessary to repay the merger financing. See "Risk Factors--
Our Company Will Be Substantially Leveraged, Which May Adversely Affect Our
Operations" on page 20 and "--Our Increased Leverage May Make It Difficult for
Us to Compete Effectively With Other Apparel Manufacturers" on page 21.
The primary benefit of the mergers to St. John shareholders is that they are
being afforded an opportunity to sell approximately 97% of their shares for
cash at a price which, in the opinion of St. John, St. John Knits
International, Pearl, SJKAcquisition, the Grays, Vestar/Gray LLC, Vestar/SJK
Investors LLC, Vestar Capital Partners III, L.P., Vestar Associates III, L.P.
and Vestar Associates Corporation III, is fair to St. John shareholders. The
$30 cash price to be paid for approximately 97% of the outstanding shares held
by unaffiliated shareholders is at a premium of approximately 37% over the
trading price of the shares of St. John common stock prior to the first public
announcement of the mergers. At the same time, however, St. John shareholders
who receive only cash for their St. John common stock and do not receive any
shares of St. John Knits International in the acquisition merger will not have
an equity interest in St. John Knits International and will therefore not share
in any of the future earnings and potential growth of St. John Knits
International.
Shareholders who own shares of St. John Knits International common stock
after the mergers will have a limited opportunity to share in any future
earnings and potential growth of St. John Knits International. Although an
investment in St. John Knits International following the consummation of the
mergers involves substantial risk resulting from the limited liquidity of such
investment and the high debt-to-equity ratio, if the projections made by St.
John Knits International are realized, such investment could be worth
considerably more. Except as otherwise described in this proxy statement-
prospectus, St. John currently expects that St. John Knits International and
its subsidiaries will initially be operated after the mergers in a manner
similar to that of St. John and its subsidiaries' current operations. See
"Financial Projections" on page 59.
Upon consummation of the mergers, St. John common stock will be delisted
from the New York Stock Exchange and deregistered under the Securities Exchange
Act of 1934. In addition, St. John does not expect to list the St. John Knits
International common stock on any exchange or inter-dealer quotation system or
to maintain its registration under the Securities and Exchange Act of 1934. The
deregistration of St. John common stock under the Securities Exchange Act of
1934 and the failure to maintain the registration of St. John Knits
International will make certain of the provisions of the Securities Exchange
Act of 1934, such as the short-swing profit recovery provisions of Section
16(b) and the requirement of furnishing a proxy or information statement in
connection with shareholder
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meetings, no longer applicable. However, St. John Knits International will be
required to maintain the registration of its shares of common stock under the
Securities Exchange Act of 1934 if the number of St. John Knits International
stockholders exceeds 300. In the event that the number of St. John Knits
International stockholders exceeds 300 following the mergers, St. John Knits
International may take other actions, including purchasing or soliciting the
purchase of shares of St. John Knits International common stock in open market
transactions, negotiated transactions or otherwise, in order to reduce the
number of stockholders below 300.
Accounting Treatment
The reorganization merger will be accounted for as a reorganization of
entities under common control and will have no impact on the historical
financial statements of St. John as there will be no change in ownership
resulting from the reorganization merger. In the acquisition merger, St. John
will continue as the surviving company and the proceeds resulting from new
indebtedness and capital contributions will be used to acquire St. John Knits
International's common shares. As a result of the mergers, St. John Knits
International will be approximately 7% owned by existing shareholders of St.
John, other than the Grays, and approximately 93% owned by Vestar/Gray LLC.
Because Vestar/Gray LLC will acquire less than substantially all of St. John
Knits International's common stock, the acquisition merger will be accounted
for as a recapitalization under generally accepted accounting principles. As a
result, "push-down" accounting is not required, and accordingly, the historical
basis of St. John's assets and liabilities will not be impacted by the
transaction. If push-down accounting were required, substantial goodwill would
be created in the transaction. The amortization of this goodwill would have a
significant negative impact on St. John Knits International's financial results
in future years.
Material Federal Income Tax Consequences
The following discussion summarizes the material United States federal
income tax consequences of the reorganization merger and the acquisition merger
to St. John Knits International and the shareholders of St. John. The
discussion deals only with shareholders that hold shares of St. John's common
stock as capital assets, which generally means property held for investment.
The discussion does not address all aspects of federal income taxation that may
be relevant to particular shareholders in light of their personal circumstances
or to some types of shareholders who are subject to special treatment under the
federal income tax laws, including some financial institutions, broker dealers,
insurance companies, tax-exempt organizations, foreign persons and persons
acquiring shares of St. John's common stock pursuant to the exercise of
employee stock options or otherwise as compensation. In addition, the
discussion does not address any state, local or foreign tax consequences of any
aspect of the mergers. The discussion is based upon the Internal Revenue Code
of 1986, or the "Code," applicable Treasury regulations promulgated under the
Code, judicial decisions and current administrative pronouncements, all as in
effect as of the date of this proxy statement-prospectus, and which may change
at any time, potentially with retroactive effect. No ruling from the Internal
Revenue Service will be applied for with respect to the federal income tax
consequences discussed in this proxy statement-prospectus and, accordingly,
there can be no assurance that the Internal Revenue Service will agree with the
conclusions stated in this proxy statement-prospectus.
Although this discussion summarizes all material U.S. federal income tax
considerations generally applicable to shareholders of St. John as a
consequence of their receipt of cash and/or St. John Knits International common
stock pursuant to the mergers, the discussion does not address every U.S.
federal income tax concern that may be applicable to a particular holder of St.
John common stock in light of such holder's particular circumstances. All
shareholders are urged to consult their own tax advisors as to the particular
tax consequences to them of the mergers.
Characterization of the Mergers for U.S. Federal Income Tax Purposes
The merger agreement contemplates a series of transactions, which, taken as
a whole, are intended to be treated as:
1. an exchange of St. John common stock for cash and stock of St John
Knits International qualifying under Section 351 of the Code; and
2. a sale of a portion of the St. John Knits International stock to
Vestar/Gray LLC.
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St. John believes that the reorganization merger and the acquisition merger
will be treated for federal income tax purposes as two interdependent and
simultaneous components of a single overall Section 351 transaction and St.
John intends to report the transactions consistently with such treatment.
However, due to the factual determinations required, no opinion is rendered as
to whether the mergers will so qualify under Section 351. Moreover, because
there is no legislative, judicial or administrative authority that directly
addresses the tax consequences of the transactions similar to the
reorganization merger and the acquisition merger, tax counsel cannot opine
that the series of transactions will qualify under Section 351. The balance of
this tax disclosure constitutes the opinion of O'Melveny & Myers LLP as to the
material federal income tax consequences of the transactions, qualified as
described below.
Tax Consequences to the St. John Shareholders
If the mergers constitute an exchange qualifying under Section 351 of the
Code, the material federal income tax consequences to the St. John
shareholders will be the following:
1. Except as provided below, no gain or loss will be recognized by the St.
John shareholders on their receipt of St. John Knits International
common stock, if any, in exchange for their respective shares of St.
John common stock. The amount of St. John common stock exchanged for St.
John Knits International common stock should equal the number of St.
John shares surrendered, multiplied by the percentage that the common
stock portion of the merger consideration received by the shareholder
bears to the total merger consideration received, rounded down to the
nearest whole number of shares.
2. Except as described in paragraph 5 below, the tax basis of the shares of
St. John Knits International, if any, received by each shareholder in
such exchange will be the same as such shareholder's tax basis in the
stock of St. John exchanged for such shares, and the holding period of
the St. John Knits International common stock in the hands of each
shareholder will include the holding period of such shareholder's St.
John common stock.
3. For those St. John shareholders who receive cash in connection with
their transfers of St. John stock, the federal income tax treatment of
the cash paid would depend upon whether such stock is deemed to have
been sold to Vestar/Gray LLC or to St. John Knits International, or to
St. John. There is no authority directly addressing the method of
allocation of the proceeds received by a St. John shareholder between
the portion treated as received from the Vestar/Gray LLC and the portion
treated as received from St. John Knits International, or St. John. St.
John intends to take the position that
. the percentage of St. John Knits International shares disposed of by
shareholders for cash that will be treated as if sold to Vestar/Gray
LLC will be equal to
. the cash consideration provided by Vestar/Gray LLC in the
acquisition merger divided by
. the aggregate amount of cash paid to the St. John shareholders in
exchange for their shares pursuant to the acquisition merger, and
that
. the remainder of the shares of St. John Knits International disposed
of by a shareholder in exchange for cash in the mergers will be
treated by St. John as sold to St. John Knits International.
However, the IRS could determine such percentage under a different
approach or could treat all of the cash paid to the shareholders as
having been paid by St. John Knits International, or St. John, and, in
such event, the shareholders' tax consequences, would be as described in
paragraph 5 below.
4. Shareholders who receive cash will recognize gain or loss on the portion
of such cash received over the shareholder's adjusted tax basis of each
share deemed sold to Vestar/Gray LLC by such shareholder. Such gain or
loss will be long-term capital gain or loss if the shares of St. John
were held for more than one year, and if recognized by individual
shareholders will be subject to a maximum federal income tax rate of
20%. There are limitations on the deductibility of capital losses.
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5. For those St. John shareholders who receive cash, to the extent such a
shareholder's stock is deemed to have been sold to St. John Knits
International, or to St. John, assuming that the deemed redemption
satisfies the requirements of Section 302(b) of the Code, the
shareholder will recognize either capital gain or loss equal to the
difference between the amount realized on the deemed redemption, that
is, the cash proceeds properly allocated to such shares, and the
shareholder's adjusted tax basis in such shares. Under Section 302(b),
cash received will be treated as a payment in exchange for shares if the
payment completely terminates the shareholder's indirect interest in
St. John, if there is a "substantially disproportionate" reduction in
the equity ownership of the shareholder in St. John, or if the payment
is deemed to be "not essentially equivalent to a dividend."
For purposes of some of these tests, shareholders must take into account
not only shares they actually own but also shares they are deemed to own
under the constructive ownership rules of Section 318. For those
shareholders who do not meet the requirements of Section 302 with
respect to stock deemed to have been sold to St. John Knits
International, or to St. John, the amount received will be treated as a
distribution taxable as ordinary income to the extent of St. John's and
St. John Knits International's earnings and profits. Because the complex
rules under Section 302 and Section 318 apply on a shareholder-by-
shareholders basis, shareholders should consult with their individual
tax advisors to determine whether a deemed sale of their shares would be
impacted by the limitations of Section 302 on capital gain treatment.
Alternatively, for shareholders that receive St. John Knits
International common stock as well as cash, it is possible that the cash
received from St. John Knits International could be treated as "boot"
received in the Section 351 transaction, rather than in a redemption of
such shares under Section 302. In such a case, the shareholders will
recognize capital gain, but not loss, to the extent of the total merger
consideration received over their basis in all of their St. John shares,
including shares exchanged for shares of St. John Knits International,
but not in excess of the cash received, and a shareholder's tax basis in
the St. John Knits International shares received will be equal to the
tax basis of the St. John shares exchanged, decreased by the cash
received, and increased by any gain recognized. Any such capital gain
will be treated as described above.
6. St. John shareholders who exercise dissenters' rights under applicable
state law will recognize gain or loss equal to the difference between
the proceeds received and the shareholders' stock bases, with such
capital gain or loss treated as described above.
If the mergers are treated as fully taxable transactions, the material
federal income tax consequences will be the following:
1. A St. John shareholder that receives cash or St. John Knits
International common stock or both in the mergers in a fully taxable
transaction will recognize capital gain or loss, with such capital gain
or loss as described above, in an amount equal to the difference between
the fair market value of the St. John common stock surrendered and the
shareholder's tax basis in the St. John common stock, provided that, to
the extent such common stock is deemed to have been sold to St. John
Knits International, or to St. John, the shareholder will be treated as
having received the cash as a payment in exchange for such shareholder's
common stock under Section 302 of the Code, as summarized above. For
shareholders that do not meet the requirements of Section 302 of the
Code, with respect to stock that is treated as having been sold to St.
John Knits International, the amount received will be treated as a
distribution taxable as ordinary income to the extent of St. John's and
St. John Knits International's earnings and profits.
2. St. John shareholders that receive St. John Knits International common
stock in the mergers will take an initial tax basis in the St. John
Knits International common stock equal to the fair market value of the
St. John Knits International common stock at the time of the mergers.
The holding period for such St. John Knits International common stock
will commence on the day after the mergers.
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Tax Consequences to St. John Knits International
St. John Knits International will not recognize any gain or loss upon the
receipt of the St. John common stock in exchange for the issuance of its own
stock.
Information Reporting Requirements and Backup Withholding Tax
A shareholder that has exchanged stock in a transaction under Section 351 is
required to report certain information specified by the IRS relating to the
exchange with such shareholder's income tax return for the taxable year in
which the transaction takes place. That information generally consists of a
statement attached to the return, stating that such shareholder has engaged in
a Section 351 transaction, and identifying the shares exchanged. Shareholders
are urged to consult their tax advisors as to the information to be provided.
Under circumstances specified by the IRS, U.S. persons, as defined under
Section 7701 of the Code, may be subject to backup withholding at a rate of 31%
on payments made with respect to, or cash proceeds of a sale or exchange of a
capital asset. Backup withholding will apply only if the holder:
1. fails to furnish his or her taxpayer identification number, or TIN,
which, for an individual, would be his or her Social Security Number;
2. furnishes an incorrect TIN;
3. is notified by the Internal Revenue Service that he or she has failed
properly to report payments of interest and dividends or is otherwise
subject to backup withholding; or
4. under circumstances specified by the IRS, fails to certify, under
penalties of perjury, that he or she has furnished a correct TIN and
. that he or she has not been notified by the Internal Revenue Service
that he or she is subject to backup withholding for failure to
report interest and dividend payments; or
. that he or she has been notified by the Internal Revenue Service
that he or she is no longer subject to backup withholding. Backup
withholding will not apply with respect to payments made to
recipients that are exempt from such withholding, such as
corporations and tax-exempt organizations.
U.S. persons should consult their own tax advisors regarding their
qualifications for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
U.S. person will be allowed as a credit against the U.S. person's United States
federal income tax liability and may entitle the U.S. person to a refund,
provided that the required information is furnished to the Service.
Additional issues may arise pertaining to information reporting and backup
withholding for St. John shareholders that are not U.S. persons. Non-U.S.
persons should consult their tax advisors with regard to U.S. information
reporting and backup withholding.
Shareholders Should Seek Their Own Tax Advice
The preceding summary describes the material federal income tax
considerations potentially affecting St. John shareholders and St. John Knits
International. This discussion is based on the current state of the law, which
is subject to legislative, administrative or judicial actions, which may apply
retroactively. Moreover, as noted in the beginning of this section, the
discussion does not address considerations that may adversely affect the
treatment of some shareholders. All shareholders are urged to consult their own
tax advisors as to the particular tax consequences to them of the mergers.
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FINANCIAL PROJECTIONS
St. John provided Vestar, in connection with its evaluation of the mergers,
and Merrill Lynch and Wasserstein Perella, in connection with their analyses
described above under "Special Factors--Fairness Opinions of Financial
Advisors" on page 35 with non-public financial projections for St. John
prepared by its senior management. The material portions of these projections
are stated below:
<TABLE>
<CAPTION>
Projected Fiscal Year
----------------------------------
1999 2000 2001 2002 2003
------ ------ ------ ------ ------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Net Sales.................................. $314.2 $339.4 $366.5 $395.9 $427.5
Gross Profit............................... 177.8 193.4 210.8 227.6 245.8
Selling General and Administrative
Expense................................... 119.5 127.3 137.5 148.4 160.3
Income from Operations..................... 58.3 66.1 73.3 79.2 85.5
EBITDA..................................... 71.6 80.4 88.3 94.7 101.5
</TABLE>
St. John does not usually publicly disclose projections of future revenues,
earnings or other financial information. We are not including these projections
in this proxy statement-prospectus to influence your vote with respect to the
mergers. Our projections were based upon a variety of assumptions, including
our ability to achieve strategic goals, objectives and targets over the
applicable periods. These assumptions involve judgments with respect to future
economic, competitive and regulatory conditions, financial market conditions
and future business decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond our control or, after the
mergers, St. John Knits International's control.
St. John's projections were not prepared with a view to public disclosure,
use in this proxy statement-prospectus or compliance with published guidelines
of the Securities and Exchange Commission, nor were they prepared in accordance
with the guidelines established by the American Institute of Certified Public
Accountants for preparation and presentation of financial projections. Arthur
Andersen LLP, St. John's accountants, has not examined or compiled these
projections and does not assume any responsibility for them. In the past, we
have made projections which we did not achieve. Shareholders are cautioned not
to rely on the projections. See "Risk Factors" on page 19.
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THE MERGERS
The following is a summary of the material terms of the mergers and the
merger agreement. However, because the description of the merger agreement
contained in this document is a summary, it does not contain all the
information that may be important to you. You should read carefully the entire
copy of the merger agreement, which, with the exception of some schedules and
exhibits, is attached as Appendix A to this proxy statement-prospectus.
Merger Consideration
Reorganization Merger Consideration
As a result of the reorganization merger, each issued and outstanding share
of St. John common stock prior to the reorganization merger will be converted
into one share of common stock of St. John Knits International.
Acquisition Merger Consideration
Except for fractional shares, dissenting shares in the reorganization merger
and shares owned by St. John, Pearl, Vestar/Gray LLC and the Grays, and subject
to proration, each issued and outstanding share of St. John Knits International
common stock will be converted into the right to receive either $30 in cash or,
for each issued and outstanding share of St. John Knits International common
stock with respect to which an election has been made and not withdrawn in
accordance with the merger agreement, one fully paid and non-assessable share
of St. John Knits International common stock.
The Grays and Vestar have proposed to acquire St. John together and to hold
their ownership in the company through Vestar/Gray LLC. In connection with
funding the purchase of St. John, the Grays and Vestar agreed that Vestar would
contribute equity to Vestar/Gray LLC in the form of cash, while the Grays would
contribute as equity to Vestar/Gray LLC a portion of the shares of St. John
common stock they currently own, excluding their options to purchase shares of
St. John common stock.
After the Grays transfer their shares of St. John common stock to
Vestar/Gray LLC, they will own approximately 16% of Vestar/Gray LLC, which will
result in their ownership of approximately 15% of the common stock of St. John
Knits International. The Grays will receive cash in exchange for approximately
37% of their equity interest in St. John, taking into account the cash they
will receive in exchange for their vested options, and St. John Knits
International common stock for the remaining 63%. The Grays will not retain any
shares of St. John common stock and therefore will not participate directly in
the mergers along with other St. John shareholders, except that they will
receive cash in exchange for their vested options, together with all other
holders of vested options. The implied value of the consideration to be
received by the Grays for their common stock is $30 per share, for a total of
$36,179,490, consisting of $7,110,000 in cash and an approximately 16%
ownership interest in Vestar/Gray LLC, valued at $29,069,490. In addition, the
Grays will receive $9,890,000 in cash in exchange for their vested options, at
a price of $30 per share. For more information regarding the treatment of the
Grays' shares in the mergers, see "Special Factors--Interests of the Grays and
Other Officers and Directors of St. John in the Mergers; Conflicts of
Interests" on page 48.
Election Procedures and Proration
St. John shareholders, other than Vestar and the Grays, will receive a total
of 456,047 shares of common stock of St. John Knits International in the
acquisition merger, which will represent approximately 7% of the total
outstanding common stock of St. John Knits International after the mergers.
This may be reduced to the extent of any fractional shares. If St. John
shareholders elect to receive, in the aggregate, less than 456,047 shares, then
the amount of shares equal to the difference between 456,047 and the number of
shares elected to be received will be allocated pro rata among shareholders
based on the number of shares for which an election
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to receive stock was not received. If St. John shareholders elect to receive,
in the aggregate, more than 456,047 shares, then the 456,047 shares will be
allocated pro rata among the St. John shareholders who have elected to receive
shares based on the number of shares each shareholder has elected to receive.
The merger agreement provides formulas to determine the proration among St.
John shareholders of the 456,047 shares of St. John Knits International common
stock issued in the acquisition merger in the event shareholders elect to
receive more or less than 456,047 shares of St. John Knits International common
stock.
If shareholders elect to receive more than 456,047 shares, a proration
factor will be determined by dividing 456,047 shares by the total number of
shares for which a valid election to receive shares of St. John Knits
International common stock was made, which we refer to as the "electing
shares." The number of electing shares in each form of election will be
multiplied by this proration factor to determine the number of shares each
electing shareholder will receive under his or her form of election, rounded
down to the nearest whole number.
If, on the other hand, shareholders elect to receive less than 456,047
shares, the proration factor will be determined by dividing the difference
between 456,047 and the number of electing shares by the total number of shares
of St. John Knits International common stock, less the electing shares. In this
case, all electing shares will be exchanged for shares of St. John Knits
International common stock. In addition, the number of additional shares of St.
John Knits International common stock to be issued will be determined by
multiplying the proration factor by the total number of shares of St. John
Knits International common stock, less the electing shares, rounded down to the
nearest whole number. These additional shares will be issued on a consistent
basis among shareholders who held shares as to which they did not make an
election to receive shares of St. John Knits International common stock, pro
rata in accordance with the number of shares as to which they did not make such
an election.
A form of non-cash election is being mailed to holders of record of St. John
common stock as of the record date for the special meeting together with this
proxy statement-prospectus. Only shareholders of record on the record date will
have the right to elect to receive shares of St. John Knits International stock
in the acquisition merger. Shareholders of St. John who do not wish to make an
election to receive shares of St. John Knits International common stock in the
acquisition merger should not submit the form of non-cash election, although
this will not guarantee that you will not receive some shares. If your shares
are held in "street name" through your broker, your broker will mail your form
of non-cash election to you under separate cover, together with a letter of
instructions for making a non-cash election. You should read your form of non-
cash election together with this proxy statement-prospectus.
For a form of non-cash election to be effective, you must properly complete
the form of non-cash election, and send the form, together with all
certificates for shares of St. John common stock held by you, duly endorsed in
blank or otherwise in a form which is acceptable for transfer on the books of
St. John or by appropriate guarantee of delivery as described in the form of
non-cash election, to Harris Trust Company of New York, St. John's exchange
agent. Harris Trust must receive the completed form of non-cash election and
share certificates by 5:00 p.m., Eastern time, on June 25, 1999, the business
day preceding the date of the special meeting.
Except for St. John common stock certificates surrendered with a form of
non-cash election, you should not forward stock certificates to the exchange
agent until you have received a letter of transmittal from the exchange agent.
You may revoke your form of non-cash election prior to 5:00 p.m., Eastern
time, on June 25, 1999 by sending written notice executed by you to the
exchange agent. In addition, the notice must specify the person in whose name
the St. John shares to be withdrawn had been deposited, the number of shares to
be withdrawn, the registered holder of the shares and the serial numbers shown
on the certificates representing shares to be withdrawn. If you properly revoke
your election, the exchange agent will return to you the St. John share
certificates submitted with your form of non-cash election.
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The determinations of the exchange agent as to whether or not elections to
receive shares of St. John Knits International in the acquisition merger have
been properly made or revoked, and which of these elections or revocations were
received, will be binding.
The following examples illustrate the potential effects of the prorations
described above and are summarized in the table below.
. Example A. Holder A owns 100 shares and does not elect to retain any
shares.
If other stockholders elect to retain 456,047 or more shares in the
aggregate, then Holder A will receive $3,000 in cash, or $30 for each of his or
her 100 shares.
If other stockholders elect to retain fewer than 456,047 shares in the
aggregate, then Holder A will not receive all cash for his or her 100 shares
and will be required to retain some shares. Each stockholder will be required
to retain a small number of shares in order to increase the number of retained
shares to 456,047. However, even in the case where no stockholder elects to
retain shares, Holder A will still be assured of receiving at least $2,910 in
cash (97 shares at $30 per share) and will receive three shares of St. John
Knits International common stock.
. Example B. Holder B owns 100 shares and elects to receive 100 St. John
Knits International shares.
If the stockholders, including Holder B, elect to receive more than 456,047
shares in the aggregate, the number of shares retained by stockholders must be
reduced to 456,047 and Holder B will not be able to receive all of his or her
shares and will be required to receive some cash. For example, if stockholders
elected to receive 506,719 shares in the aggregate, then each holder electing
to receive shares, including Holder B, would be able to receive only 90% of the
shares he or she elected to receive in order to reduce the number of issued
shares to 456,047. Therefore, Holder B would be able to receive only 90 shares
(or 90% of his 100 shares) and would receive $300 in cash (10 shares at $30 per
share). If all stockholders elect to receive shares, Holder B would be able to
receive only three shares (or 3% of his 100 shares) and would receive $2,910 in
cash.
If the stockholders, including Holder B, elect to retain fewer than 456,047
shares in the aggregate, then Holder B will be able to retain all 100 of his or
her shares.
. Example C. Holder C owns 100 shares and elects to retain 50 shares and
convert 50 shares into cash.
In the unlikely event that stockholders, including Holder C, elect to
receive exactly 456,047 shares in the aggregate, then Holder C will be able to
receive 50 shares and will receive $1,500 in cash (50 shares at $30 per share).
If the stockholders, including Holder C, elect to receive more than 456,047
shares in the aggregate, then Holder C will not be able to receive all 50
shares. For example, if stockholders elected to receive 506,719 shares in the
aggregate, then each holder, including Holder C, would be able to receive only
90% of the shares he or she elected to receive in order to reduce the number of
retained shares to 456,047. Therefore, Holder C would be able to receive only
45 shares (or 90% of his 50 shares) and would receive $1,650 in cash (55 shares
at $30 per share). If the stockholders, including Holder C, elected to retain
more than 456,047 shares in the aggregate, Holder C would receive fewer shares
than in the example above, but would receive a proportionately greater amount
of cash.
If the stockholders, including Holder C, elect to receive fewer than 456,047
shares in the aggregate, then Holder C would be required to receive more than
50 shares. For example, if stockholders elected to receive 145,625 shares, then
all stockholders must collectively receive an additional 310,422 shares in
order to reach the 456,047 share threshold. In this example, Holder C would be
required to receive an additional share (for a total of 51 shares) and would
receive $1,470 in cash (49 shares at $30 per share). The additional share is
calculated by multiplying the 50 shares Holder C wants to convert to cash by a
fraction, the numerator of
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which is 310,422 and the denominator of which is the total number of
outstanding shares less the electing shares. If the stockholders elected to
receive fewer than 145,625 shares than in the example above, Holder C would
receive more shares than in the example above, but would receive commensurately
less cash.
<TABLE>
<CAPTION>
What Shareholder Receives if What Shareholder Receives if
Shareholder's Election With Other Shareholders Elect to Other Shareholders Elect to
Respect to 100 Shares Retain 456,047 or More Shares Retain Less Than 456,047 Shares
- --------------------------- --------------------------------- ----------------------------------
<S> <C> <C>
All cash .All cash ($3,000) . No more than 3 shares and no
($3,000) less than $2,910 in cash
All . At least 3 shares and no more . All shares (100 shares)
shares than $2,910 in cash
(100
shares)
Half cash . If all shareholders elect to . No more than 51 shares and
and half receive exactly 456,047 no less than $1,470 in cash(/1/)
shares shares, half cash and half
($1,500 shares ($1,500 and 50 shares)
and 50
shares)
Otherwise, at least 1 share and
no more than $2,970 in cash(/1/)
</TABLE>
- --------
(/1/)Assumes that the cash payment for fractional shares equals the product of
such fraction multiplied by $30.
Fractional shares of St. John Knits International common stock will not be
issued in the mergers. Holders otherwise entitled to a fractional share of St.
John Knits International common stock following the acquisition merger will be
paid cash instead of such fractional share. As a result, if there would be any
fractional shares, fewer than 456,047 shares of St. John Knits International
common stock will be issued in the acquisition merger. For more information
regarding the treatment of fractional shares, see "--Fractional Shares" on
page 64.
Conversion/Retention of Shares; Procedures for Exchange of Certificates
Reorganization Merger
Your shares of common stock of St. John Knits International will be
represented and evidenced by the same stock certificates that previously
represented shares of St. John common stock.
Acquisition Merger
The conversion of shares of St. John Knits International common stock into
the right to receive cash or the right to receive shares of St. John Knits
International following the acquisition merger will occur at the effective time
of the acquisition merger.
As soon as practicable after the effective time of the acquisition merger,
Harris Trust will send a letter of transmittal to each holder of St. John Knits
International common stock. The letter of transmittal will contain instructions
with respect to the surrender of certificates representing shares of St. John
Knits International common stock in exchange for cash, certificates
representing shares of St. John Knits International common stock or the amount
of cash in lieu of any fractional interest in a share of St. John Knits
International common stock, if applicable.
Except for St. John common stock certificates surrendered with a form of
non-cash election as described above, you should not forward stock certificates
to the exchange agent until you have received the letter of transmittal.
As soon as practicable after the effective time of the acquisition merger
and once you surrender your outstanding certificates representing shares of St.
John Knits International common stock to the exchange agent
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and the exchange agent accepts those certificates, you will be entitled to
receive the cash merger consideration, certificates representing the number of
full shares of St. John Knits International common stock and cash in lieu of
fractional shares into which the shares represented by such St. John share
certificates have been converted pursuant to the merger agreement. The exchange
agent will accept such certificates upon compliance with such reasonable terms
and conditions as the exchange agent may impose to effect an orderly exchange
in accordance with normal exchange practices.
After the effective time of the reorganization merger, there will be no
further transfer on the records of St. John or its transfer agent of
certificates representing shares of stock which have converted pursuant to the
reorganization merger. After the effective time of the acquisition merger,
there will be no further transfer on the records of St. John Knits
International or its transfer agent of certificates representing shares of
stock which have been converted pursuant to the acquisition merger. If such
certificates are presented to St. John or St. John Knits International for
transfer, they will be cancelled against delivery of cash, and if appropriate,
certificates for shares of St. John Knits International common stock.
Until surrendered as contemplated by the merger agreement, each certificate
for shares of St. John Knits International common stock will be deemed at any
time after the effective time of the acquisition merger to represent only the
right to receive upon such surrender the acquisition consideration contemplated
by the merger agreement. No interest will be paid or will accrue on any cash
payable as consideration in the acquisition merger or in lieu of any fractional
shares of retained St. John Knits International common stock.
No dividends or other distributions with respect to retained St. John Knits
International common stock with a record date after the effective time of the
acquisition merger will be paid to the holder of any unsurrendered certificate
for shares of St. John Knits International common stock with respect to the
shares of retained St. John Knits International common stock represented by
those certificates and no cash payment in lieu of fractional shares will be
paid to any such holder pursuant to the merger agreement until the surrender of
such certificate in accordance with the merger agreement. In accordance with
applicable laws, following surrender of any such certificate, there will be
paid to the holder of the certificate representing whole shares of retained St.
John Knits International common stock issued in connection with such
certificates, without interest:
1. at the time of such surrender or as promptly as practicable, the amount
of any cash payable in lieu of a fractional share of retained St. John
Knits International common stock to which such holder is entitled
pursuant to the merger agreement and the proportionate amount of
dividends or other distributions, if any, with a record date after the
effective time of the acquisition merger paid with respect to whole
shares of retained St. John Knits International common stock; and
2. at the appropriate payment date, the proportionate amount of dividends
or other distributions, if any, with a record date after the effective
time of the acquisition merger but prior to such surrender and a
payment date subsequent to such surrender payable with respect to such
whole shares of retained St. John Knits International common stock.
Fractional Shares
St. John Knits International will not issue certificates or scrip
representing fractional shares of retained St. John Knits International common
stock in connection with the acquisition merger. Any fractional interests will
not entitle the owner of such interests to vote or to have any other rights of
a stockholder of St. John Knits International after the acquisition merger.
Each St. John Knits International stockholder who would otherwise be entitled
to receive a fraction of a share of retained St. John Knits International
common stock will receive, in lieu of such fractional share, a cash payment,
without interest, in an amount equal to the product of such fraction multiplied
by the average of the last reported sales price, regular way, per share of St.
John common stock on the New York Stock Exchange Composite Transactions Tape
for the ten business days prior to and including the last business day prior to
the day on which the effective time of the acquisition merger occurs.
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Governmental and Regulatory Approval
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
or the "HSR Act," and the related rules by the Federal Trade Commission, or
"FTC," the mergers may not be completed until notifications have been given and
information has been furnished to the FTC and the Antitrust Division of the
Department of Justice and specified waiting period requirements have been
satisfied. St. John and Pearl filed notification and report forms under the HSR
Act with the FTC and the Antitrust Division on March 9, 1999. St. John and
Pearl were notified by the FTC on March 22, 1999 of early termination of the
HSR Act waiting period for this transaction.
At any time before or after consummation of the mergers, the Antitrust
Division, the FTC or state attorneys' general could take such action under the
antitrust laws as they deem necessary or desirable in the public interest,
including seeking to enjoin the consummation of the mergers. Private parties
may also seek to take legal action under the antitrust laws under some
circumstances.
Based on the information available to them, St. John and Pearl believe that
the mergers can be effected in compliance with federal and state antitrust
laws. However, there can be no assurance that a challenge to the consummation
of the mergers on antitrust grounds will not be made or that, if such challenge
were made, St. John and Pearl would prevail or would not be required to accept
conditions, including the divestitures of assets, in order to complete the
mergers.
Dissenters' Rights of Appraisal
The rights of shareholders of St. John to dissent from approval of the
reorganization merger and demand payment for their shares are governed by
Chapter 13 of the California General Corporation Law, or "CGCL," the full text
of which is reprinted as Appendix D to this proxy statement-prospectus.
Although a summary of the material rights follows below, this summary is not
intended to be complete. You should carefully read the provisions of the CGCL
found in Appendix D for the information that may be important to you.
Although shareholders of St. John will have dissenters' rights with respect
to the reorganization merger, they will have no dissenters' rights with respect
to the acquisition merger.
Under the CGCL, shareholders of St. John will not have any dissenters'
rights with respect to the reorganization merger unless demands for payment are
duly filed with respect to five percent (5%) or more of the outstanding shares
of St. John common stock. If the holders of five percent (5%) or more of the
outstanding shares of St. John common stock duly file demands for payment and
fully comply with Chapter 13 of the CGCL, they will have the right to be paid
in cash the fair market value of their shares in accordance with Chapter 13 of
the CGCL.
Under the CGCL, "fair market value" is determined as of the day before the
first announcement of the terms of the proposed transaction, excluding any
appreciation or depreciation as a consequence of the transaction, but adjusted
for any stock split, reverse stock split, or share dividend which becomes
effective thereafter. If the parties are unable to agree on a fair market
value, the dissenting shareholder may request the Superior Court for Orange
County to determine the fair market value of the shares. The court's decision
would be subject to appellate review.
The terms of the proposed transaction were initially publicly announced
after the close of the market on December 8, 1998. On December 8, 1998, the
last trading day prior to the public announcement of the proposed transaction,
the high and low sales prices for St. John common stock were $21.94 and $20.75,
respectively.
Dissenters' rights cannot be validly exercised by persons other than
shareholders of record regardless of the beneficial ownership of the shares.
Persons who are beneficial owners of shares held of record by another
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person, such as a broker, a bank or a nominee, should instruct the record
holder to follow the procedures outlined below if such beneficial owners wish
to dissent from the approval of the reorganization merger.
As described more fully below, in order to perfect their dissenters'
rights, shareholders of record must:
. make written demand for the purchase of their dissenting shares to St.
John or its transfer agent on or before the date of the special meeting,
. vote their dissenting shares against approval of the reorganization
merger, and
. within 30 days after the mailing to shareholders by St. John of notice of
approval of the reorganization merger, submit the certificates
representing their dissenting shares to St. John or its transfer agent,
for notation on such certificates that they represent dissenting shares.
Failure to follow any of these procedures may result in the loss of
statutory dissenters' rights.
Demand for Purchase
Dissenting shareholders of St. John must submit to St. John at its
principal office, 17422 Derian Avenue, Irvine, California 92614, or to its
transfer agent, Harris Trust Company of California, a written demand that
St. John purchase for cash those shares with respect to which they wish to act
as dissenting shareholders.
A demand will not be effective unless it is received by St. John or the
exchange agent not later than the date of the special meeting, or June 28,
1999.
The demand must state the number and class of shares held of record which
the shareholder demands to be purchased and the amount claimed to be the "fair
market value" of those shares on December 8, 1998. That statement of fair
market value will constitute an offer by the dissenting shareholder to sell
such shares at that price. Such demand will not be effective unless it is
received by not later than the date of the special meeting.
Dissenting shareholders may not withdraw their demand for payment without
the consent of the St. John board. The rights of dissenting shareholders to
demand payment terminate:
. if the reorganization merger is abandoned, even though dissenting
shareholders are entitled upon demand to reimbursement of expenses
incurred in a good faith assertion of their dissenters' rights,
. if the shares are transferred prior to submission for endorsement as
dissenting shares, or
. if St. John and the dissenting shareholders do not agree upon the status
of the shares as dissenting shares or upon the purchase price, and
neither files a complaint or intervenes in a pending action within six
months after the date on which notice of approval of the reorganization
merger was mailed to the shareholders.
No shareholder who has a right to demand payment of cash for such
shareholder's shares will have any right to attack the validity of the
reorganization merger or have the reorganization merger set aside or
rescinded, except in an action to test whether St. John has received the
number of shares required to approve the reorganization merger.
Vote Against Approval of the Reorganization Merger
Dissenting shareholders must vote their dissenting shares against approval
of the reorganization merger. Record shareholders may vote part of the shares
that they are entitled to vote in favor of the reorganization merger or
abstain from voting a part of such shares without jeopardizing their
dissenters' rights to other shares; however, if record shareholders vote part
of the shares they are entitled to vote in favor of the reorganization merger
and fail to specify the number of shares they are so voting, it is
conclusively presumed under California law that their approving vote is with
respect to all shares that they are entitled to vote. Voting against the
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reorganization merger will not of itself, absent compliance with the provisions
of Chapter 13 of the CGCL summarized herein, satisfy the requirement of the
CGCL for exercise and perfection of dissenters' rights.
Notice of Approval
If shareholders have a right to require St. John to purchase their shares
for cash under the dissenters' rights provisions of the CGCL, St. John will
mail to each such shareholder a notice of approval of the reorganization merger
within ten days after the date of shareholder approval, stating the price
determined by it to represent the "fair market value" of the dissenting shares.
The statement of price will constitute an offer to purchase any dissenting
shares at that price.
Submission of Stock Certificates
Within 30 days after the mailing of the notice of approval of the
reorganization merger, dissenting shareholders must submit to St. John or its
transfer agent, at the address stated above, certificates representing the
dissenting shares to be purchased, to be stamped or endorsed with a statement
that the shares are dissenting shares or are to be exchanged for certificates
of appropriate denomination so stamped or endorsed. The notice of approval of
the reorganization merger will specify the date by which the submission of
certificates for endorsement must be made and a submission made after that date
will not be effective for any purpose.
Purchase of Dissenting Shares
If a dissenting shareholder and St. John agree that the shares are
dissenting shares and agree upon the price of the shares, St. John will, upon
surrender of the certificates, make payment of that amount, plus interest on
such amount at the legal rate on judgments from the date of such agreement,
within 30 days after the agreement on price. Any agreement between dissenting
shareholders and St. John fixing the "fair market value" of any dissenting
shares must be filed with the Corporate Secretary of St. John.
If St. John denies that the shares are dissenting shares, or St. John and a
dissenting shareholder fail to agree upon the "fair market value" of the
shares, the dissenting shareholder may, within six months after the date on
which notice of approval of the reorganization merger was mailed to the
shareholder, but not after this date, file a complaint, or intervene in a
pending action, if any, in the Superior Court for Orange County, State of
California, requesting that the Superior Court determine whether the shares are
dissenting shares and the "fair market value" of such dissenting shares. The
Superior Court may determine, or appoint one or more impartial appraisers to
determine, the "fair market value" per share of the dissenting shares. The
costs of the action, including reasonable compensation to the appraisers to be
fixed by the court, will be assessed or apportioned as the Superior Court
considers equitable, but if the "fair market value" is determined to exceed the
price offered to the shareholder by St. John, then St. John will be required to
pay such costs, including, in the discretion of the Superior Court, attorneys'
fees, fees of expert witnesses and interest at the legal rate on judgments, if
such "fair market value" is determined to exceed 125% of the price offered by
St. John. A dissenting shareholder must bring this action within six months
after the date on which notice of approval of the reorganization merger was
mailed to the shareholder whether or not the corporation responds within such
time to the shareholder's written demand that St. John purchase for cash shares
voted against the approval of the reorganization merger.
Treatment of Options
At the effective time of the reorganization merger, St. John Knits
International will assume all of St. John's obligations with respect to any
then-outstanding options to acquire shares of St. John common stock under the
St. John Knits, Inc. 1993 Stock Option Plan, as amended. Each holder of an
outstanding option to acquire shares of common stock of St. John immediately
prior to the reorganization merger will have the right to acquire, on the same
terms and conditions that were applicable under the corresponding St. John
option, the number of shares of St. John Knits International common stock
identical to the number of shares of St. John
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common stock that were subject to such corresponding option at the same price
applicable to the respective shares of St. John common stock that were subject
to such corresponding option.
At the effective time of the acquisition merger, each outstanding option to
acquire shares of St. John Knits International common stock will be cancelled
and replaced with the right to receive a cash payment equal to the excess of
$30 over the exercise price per share of St. John Knits International common
stock previously subject to such option.
As of May 17, 1999, 752,985 shares of St. John common stock were subject to
options which had an exercise price less than or equal to $30. The average
exercise price of these options was $11.99 per share.
Board of Directors and Officers of St. John Knits International Following the
Mergers
The merger agreement requires all directors of St. John and St. John Knits
International, other than Robert E. and Kelly A. Gray, to resign effective as
of the effective time of the acquisition merger. It is expected that Daniel S.
O'Connell, James P. Kelley and Sander M. Levy will become directors of St. John
and St. John Knits International at the effective time of the acquisition
merger. After the effective time of the acquisition merger, the boards of
directors of St. John and St. John Knits International will be subject to
change from time to time. The total number of members of the board of directors
will be reduced from the current nine to five.
The officers of St. John are presently the officers of St. John Knits
International. It is expected that the officers of St. John Knits International
at the effective time of the acquisition merger will be officers of
St. John Knits International following the mergers until such time as may be
determined by the board of directors following the mergers.
We have provided information regarding the directors of St. John Knits
International and St. John after the mergers:
Robert E. Gray, 73, a co-founder of St. John, has served as Chairman of the
Board and Chief Executive Officer of St. John since its inception in 1962.
Prior to forming St. John, Mr. Gray held various sales and production positions
with Cannady Creations, a small sportswear company, from 1952 to 1962, his last
position being General Manager. He graduated from the University of Southern
California with a B.A. degree in political science and psychology. Mr. Gray is
the husband of Marie Gray and the father of Kelly A. Gray.
Kelly A. Gray, 32, a director of St. John since October 1994, became
President of St. John in April 1996. She served as Creative Director of St.
John from June 1991 and Executive Vice President--Creative Director from
December 1995 until April 1996. Ms. Gray also heads St. John's retail boutique
division and has design responsibilities for the St. John product line and the
St. John's Griffith & Gray line. In addition, she has also been the St. John's
signature model since 1982. Prior to becoming Creative Director, Ms. Gray
headed St. John's advertising department from 1988 to June 1991. Prior to
heading the advertising department of St. John, Ms. Gray held various other
administrative positions with St. John. Ms. Gray is the daughter of Robert E.
Gray and Marie Gray.
Daniel S. O'Connell, 45, is the Chief Executive Officer and founder of
Vestar. Mr. O'Connell is a director of Advanced Organics, Inc., Aearo
Corporation, Cluett American Corp., Insight Communications Company, L.P.,
Remington Products Company L.L.C., Russell-Stanley Holdings, Inc., Sheridan
Healthcare, Inc. and Siegel & Gale Holdings, Inc., all companies in which
Vestar or its affiliates have a significant equity interest. Mr. O'Connell
received an A.B. degree from Brown University and an M.B.A. degree from Yale
University.
Sander M. Levy, 37, is a Managing Director of Vestar and was a founding
partner of Vestar at its inception in 1988. Mr. Levy is a director of Cluett
American Corp. Mr. Levy received a B.S. degree from The Wharton School of the
University of Pennsylvania and an M.B.A. degree from Columbia University.
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James P. Kelley, 44, is a Managing Director of Vestar and was a founding
partner of Vestar at its inception in 1988. Mr. Kelley is a director of
Celestial Seasonings, Inc., Reid Plastics, Inc. and Westinghouse Air Brake
Company, all companies in which Vestar or its affiliates have or previously had
a significant equity interest. Mr. Kelley received a B.S. degree from the
University of Northern Colorado, a J.D. degree from the University of Notre
Dame and an M.B.A. degree from Yale University.
Other Information Regarding Directors and Executive Officers
Information concerning directors and officers of St. John and executive
compensation is contained in St. John's Annual Report on Form 10-K and Form 10-
K/A for the fiscal year ended November 1, 1998 and is incorporated in this
proxy statement-prospectus by reference. See "Where You Can Find More
Information" on page 127.
Resale of St. John Knits International Common Stock After the Mergers
The St. John Knits International common stock to be received and not
converted into cash in the mergers will be freely transferable under federal
securities laws, except that shares received by any stockholder who may be
deemed an "affiliate" of St. John Knits International under applicable
securities laws will not be transferable except in compliance with such laws
and in compliance with any agreements entered into by such affiliates
restricting their resale. Federal securities laws generally deem directors,
some executive officers and beneficial owners of 10% or more of a class of
capital stock of a company "affiliates" of such company. This proxy statement-
prospectus does not cover sales of St. John Knits International common stock
retained by any person who may be deemed an affiliate of St. John Knits
International. After the acquisition merger, neither St. John nor St. John
Knits International common stock will be listed on any securities exchange or
any inter-dealer quotation system. We expect that this fact, combined with the
substantial decrease in the number of shares of our common stock to be held by
stockholders other than Vestar/Gray LLC, may make it more difficult for holders
of common stock to sell their shares.
Merger Financing
General
St. John Knits International will incur approximately $315 million of long-
term debt to help finance the mergers. Vestar will contribute approximately
$153.6 million to Vestar/Gray LLC, of which approximately $7.1 million will be
used to acquire shares from the Grays and approximately $146.5 million will be
used to make a cash equity contribution to Pearl to help finance the
acquisition merger. The rest of the necessary financing is expected to come
from the contribution of 968,983 shares of St. John common stock owned by the
Grays to Vestar/Gray LLC and available cash of St. John. These amounts will be
used to fund payment of the cash consideration in the acquisition merger,
including in respect of outstanding, in-the-money options, and pay the fees and
expenses incurred in connection with the mergers.
We currently contemplate that the mergers will be funded by approximately
$155 million in senior secured credit facilities provided to St. John Knits
International by a group of banks led by The Chase Manhattan Bank and
approximately $160 million in senior subordinated notes arranged by Chase
Securities Inc.
Term Loan Facilities and Revolving Facility
The Chase Manhattan Bank has delivered a commitment letter, dated February
2, 1999, providing for the establishment of senior secured credit facilities to
be provided to St. John Knits International by a syndicate of financial
institutions in accordance with the terms of a credit agreement to be entered
into prior to the consummation of the mergers. The commitment letter and
related term sheet is filed as an exhibit to the registration statement to
which this proxy statement-prospectus relates and to the Rule 13e-3 Transaction
Statement and is available for inspection and copying by any holder of St. John
common stock or any
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<PAGE>
representative of such person who has been so designated in writing, at the
principal executive offices of St. John. The Chase Manhattan Bank will act as
administrative agent, collateral agent and syndication agent in connection with
the credit facilities, and Chase Securities Inc. will act as advisor, lead
arranger and book manager.
The terms of the commitment letter provide for the following facilities:
1. two senior secured term loan facilities in an aggregate principal amount
of $155 million to be allocated between a term loan in an aggregate amount
of $75 million, which we refer to in this document as "Term Loan A," and a
term loan in an aggregate amount of $80 million, which we refer to in this
document as "Term Loan B," which facilities will be used to finance the
mergers and are collectively referred to as "term loan facilities" in this
proxy statement-prospectus, and
2. a senior secured revolving credit facility in an aggregate principal
amount of up to $25 million (a portion of which will be available in the
form of a swingline facility and in the form of letters of credit), which
will be used for working capital requirements and, in an amount not to
exceed $2 million, to finance the mergers.
Other material terms of the commitment letter are set forth in detail below.
Maturities; Amortization
Term Loan A and the revolving facility will mature six years after the
closing date, and Term Loan B will mature eight years after the closing date.
Each term loan will amortize in quarterly installments. The revolving facility
will be payable in full at maturity.
Interest
The commitment letter provides that the interest rates under the term loan
facilities and the revolving facility will be as follows:
1. Term Loan A and the revolving facility will, in general, bear interest
at a rate per annum equal to, at the option of St. John Knits
International, either
a. Adjusted LIBOR (the London interbank offered rate for eurodollar
deposits as adjusted for statutory reserve requirements) plus the
Applicable Margin (as defined below), or
b. the Alternate Base Rate, which is the highest of (a) The Chase
Manhattan Bank's Prime Rate, (b) the Federal Funds Effective Rate plus
of 1% and (c) the Base CD Rate plus 1%, plus the Applicable Margin,
which is a percentage determined by reference to St. John Knits
International's ratio of Total Debt to EBITDA (each term to be defined)
as of the end of and for the most recent period of four quarters for
which financial statements have been delivered (all swingline loans
will bear interest at the Alternate Base Rate plus the Applicable
Margin) and
2. Term Loan B will, in general, bear interest at a rate per annum equal
to, at the option of St. John Knits International, either
a. Adjusted LIBOR plus the Applicable Margin, or
b. the Alternate Base Rate plus the Applicable Margin.
Prior to the date that is six months after the closing date, (i) Term Loan A
loans and the revolving facility will bear interest at (A) Adjusted LIBOR plus
3.00% or (B) the Alternate Base Rate plus 2.00% and (ii) Term Loan B loans will
bear interest at (A) Adjusted LIBOR plus 3.50% or (B) the Alternate Base Rate
plus 2.50%.
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Overdue principal will bear interest at the otherwise applicable interest
rate plus 2% per annum, and overdue interest and other amounts will bear
interest at the rate otherwise applicable to loans bearing interest at the
Alternate Base Rate plus 2% per annum.
Fees
The commitment letter provides that a commitment fee on the undrawn portion
of the commitment of each lender, including The Chase Manhattan Bank, under the
revolving facility will begin to accrue on the closing date and will be payable
quarterly in arrears and upon the termination of such lender's commitment. For
purposes of calculating the commitment fee, outstanding swingline loans will be
considered to be undrawn commitments under the revolving facility. The
commitment fee will accrue at a rate of 0.50% per annum, subject to reduction
based on St. John Knits International's ratio of Total Debt to EBITDA as of the
end of and for the most recent period of four fiscal quarters for which
financial statements have been delivered.
Mandatory Prepayment
The commitment letter provides that St. John Knits International will be
required to prepay the loans under the term loan facilities with:
1. 100% of the net cash proceeds of all non-ordinary course asset sales or
other dispositions of property by St. John Knits International and its
subsidiaries, including insurance and condemnation proceeds, other than in
the case of limited exceptions to be agreed upon and with a provision to
allow reinvestment of asset sale proceeds subject to limitations on amount
and during a period to be agreed upon;
2. 100% of the net cash proceeds of issuances of equity and debt obligations
of St. John Knits International and its subsidiaries, subject to limited
exceptions to be agreed upon; and
3. 75% of annual Excess Cash Flow (to be defined) which percentages will be
subject to reduction in increments to be agreed upon based on the
achievement by St. John Knits International of performance standards to be
agreed upon.
To the extent that the amount of any mandatory prepayment exceeds the
outstanding loans under the term loan facilities, the commitments under the
revolving facility will be reduced.
Voluntary Prepayment
The commitment letter provides that St. John Knits International may, at its
option, prepay the loans under the term loan facilities, in minimum principal
amounts to be agreed upon, without premium or penalty, subject to reimbursement
of the lenders' redeployment costs in the case of prepayment of Adjusted LIBOR
borrowings other than on the last day of the relevant interest period.
Guarantees
The commitment letter provides that all obligations of St. John Knits
International under the term loan facilities and the revolving facility will be
unconditionally guaranteed by each existing and each subsequently acquired or
organized domestic and, to the extent no adverse tax consequences to St. John
Knits International or such subsidiary would result from such guarantees, each
foreign subsidiary of St. John Knits International.
Security
Under the commitment letter, the facilities and the related guarantees, as
well as hedging agreements entered into with counterparties that are lenders,
will be secured by a first priority security pledge of all the equity
securities of St. John and by substantially all the assets of St. John Knits
International and each existing
71
<PAGE>
and each subsequently acquired or organized domestic or foreign subsidiary,
other than as described below, of St. John Knits International, including:
1. a first priority pledge of all the capital stock of and other
investments in each existing and each subsequently acquired or organized
subsidiary of St. John Knits International, which pledge, in the case of
any foreign subsidiary, will be limited to 65% of the capital stock of
such foreign subsidiary to the extent the pledge of any greater
percentage would result in adverse tax consequences to St. John Knits
International or such subsidiary, and
2. perfected first priority security interests in substantially all
tangible and intangible assets, including trademarks, copyrights and all
other intellectual property, of St. John Knits International and each
existing and each subsequently acquired or organized domestic, or other
than as described in the immediately preceding paragraph, foreign
subsidiary of St. John Knits International.
Covenants
The commitment letter provides that the term loan facilities and the
revolving facility will contain a number of affirmative covenants and negative
covenants. The negative covenants generally impose limitations on:
1.indebtedness and certain equity securities;
2.liens;
3.fundamental changes;
4.investments, loans, advances, guarantees and acquisitions;
5.asset sales;
6.sale-leaseback transactions;
7.hedging agreements;
8.restricted payments and certain payments on subordinated indebtedness;
9.transactions with affiliates;
10.capital expenditures;
11.restrictive agreements; and
12.amendments of material documents.
In addition, the credit agreement will contain the following financial
covenants, with definitions of financial terms and compliance levels to be
agreed upon:
1. maximum ratio of Total Debt to EBITDA;
2. minimum ratio of EBITDA to Interest Expense; and
3. minimum Fixed Charge Coverage ratio.
Events of Default
The commitment letter provides that events of default under the term loan
facilities and the revolving facility will include:
1. nonpayment of principal, with no grace period;
2. nonpayment of interest or other amounts, with three business days'
grace period;
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3. inaccuracy of representations and warranties;
4. default in the performance of covenants, with grace periods to be
agreed with respect to certain affirmative covenants;
5. failure to pay material indebtedness;
6. cross-default to material indebtedness;
7. bankruptcy and similar events;
8. material judgments;
9. failure to satisfy certain material requirements of the Employee
Retirement Income Security Act of 1974, as amended;
10. actual or asserted invalidity of liens on any collateral; and
11. the occurrence of a change in control (to be defined).
The commitment letter provides that, in the event they reasonably deem it
necessary to ensure a successful syndication of the credit facilities, The
Chase Manhattan Bank and Chase Securities Inc. will be entitled, after
consultation with Vestar, to (A) change the structure, terms, pricing or
relative amounts of the credit facilities, provided that no such change will
result in any interest rate on the credit facilities set forth in the
commitment letter being increased by more than 0.50%, and (B) reduce the amount
of the credit facilities and increase the amount of the senior subordinated
notes being arranged by Chase Securities Inc., provided that the aggregate
amount of the credit facilities and the senior subordinated notes is not
reduced and that any such adjustment would not materially adversely affect the
marketing of the senior subordinated notes.
Senior Subordinated Notes Financing
Vestar has received from Chase Securities Inc. a letter dated February 2,
1999, indicating that, based upon market conditions existing at the time of
delivery of the letter and other terms and conditions, Chase Securities Inc.
was highly confident of its ability to sell or place senior subordinated notes
of St. John Knits International in an aggregate principal amount of $160
million. The "highly confident" letter is filed as an exhibit to the
registration statement to which this proxy statement-prospectus relates and to
the Rule 13e-3 Transaction Statement and is available for inspection and
copying by any holder of St. John common stock or any representative of such
person who has been so designated in writing, at the principal executive
offices of St. John.
The senior subordinated notes will be general unsecured obligations of St.
John Knits International, junior to all existing and future senior indebtedness
of St. John Knits International and pari passu in right of payment to all other
existing and future senior subordinated indebtedness of St. John Knits
International. Some subsidiaries of St. John Knits International will guarantee
payment on the notes on an unsecured senior subordinated basis. The interest
rate, interest payment dates, maturity and other material terms for the senior
subordinated notes will be determined prior to the consummation of the mergers.
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<PAGE>
Estimated Fees and Costs
The estimated fees and costs of St. John and St. John Knits International in
connection with the mergers, the financing and the related transactions, are as
follows:
<TABLE>
<S> <C>
Financial advisory fees......................................... $ 8,769,000
Placement agent fees and expenses............................... 4,800,000
Bank commitment fees............................................ 5,100,000
Legal and accounting fees....................................... 3,000,000
Printing and mailing fees....................................... 100,000
Solicitation expenses........................................... 10,000
SEC filing fees................................................. 103,000
Other regulatory filing fees.................................... 45,000
Miscellaneous................................................... 500,000
-----------
Total........................................................... $22,427,000
===========
</TABLE>
Arrangements to Repay Borrowings
After the mergers are consummated, we plan to rely principally on cash flow
from operations to meet our debt service requirements.
Rights Plan
Because the special committee has exempted Pearl and its affiliates from
triggering St. John's rights agreement in connection with the mergers and
because St. John intends to amend the rights agreement to terminate it at the
effective time of the reorganization merger, shareholders of St. John will not
have the right to acquire stock under the rights agreement by reason of the
mergers or following the mergers.
On November 4, 1998, the board of directors of St. John declared a dividend
distribution of one right for each outstanding share of St. John common stock
to shareholders of record at the close of business on November 18, 1998. Each
right entitles the registered holder to purchase from St. John one one-
hundredth of a share of Series A Junior Participating Preferred Stock, at a
price of $85 per one one-hundredth of a share, subject to adjustment. The
description and terms of the rights are found in the rights agreement dated as
of November 9, 1998, as amended, between St. John and Harris Trust Company of
California, as rights agent.
The rights are evidenced by the St. John common stock certificates. The
rights will separate from the St. John common stock and a distribution date
will occur upon the earliest of:
1. ten days following a public announcement that a person or group of
affiliated or associated persons has acquired beneficial ownership of
15% or more of the outstanding shares of St. John common stock, thereby
becoming an "acquiring person" under the rights agreement, or
2. ten business days, or such later date as may be determined by action of
a majority of the board of directors, following the commencement of or
announcement of an intention to make a tender offer or exchange offer
that would result in a person or group beneficially owning 15% or more
of the outstanding shares of St. John common stock. The rights
agreement provides that the board of directors of St. John may exempt
some persons from becoming acquiring persons and triggering the
exercisability of the rights.
The rights are not exercisable until the distribution date and will expire
at the close of business on November 18, 2008, unless extended or earlier
redeemed by St. John as described below.
In the event that St. John is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets, or earning
power is sold, proper provision will be made so that each holder of a right
shall thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a
74
<PAGE>
value equal to two times the purchase price. In the event that any person or
group of affiliated or associated persons becomes an acquiring person, proper
provision will be made so that each holder of a right, other than rights
beneficially owned by the acquiring person, which will thereafter be void, will
thereafter have the right to receive upon exercise that number of common shares
of St. John having a market value of two times the exercise price of the right.
At any time after any person or group becomes an acquiring person and prior
to the acquisition by such person or group of 50% or more of the outstanding
common shares of St. John, the board of directors may exchange the rights,
other than rights owned by such person or group which will have become void, in
whole or in part, at an exchange ratio of one common share, or one one-
hundredth of a preferred share, or of a share of a class or series of the
Company's preferred stock having equivalent rights, preferences and privileges,
per right, subject to adjustment.
The purchase price payable, and the number of shares of preferred stock or
other securities or property issuable, upon exercise of the rights are subject
to adjustment from time to time to prevent dilution. With certain exceptions,
no adjustment of the purchase price will be required until cumulative
adjustments require an adjustment of at least 1% of the purchase price.
Preferred shares purchasable upon exercise of the rights will not be
redeemable. Each preferred share will be entitled to an aggregate dividend of
100 times the dividend declared per common share, but at least a preferential
quarterly dividend payment of $1 per share. In the event of liquidation, the
holders of the preferred shares will be entitled to an aggregate payment of 100
times the payment made per common share, but at least a preferential
liquidation payment of $100 per share. Each preferred share will have 100
votes, voting together with the common shares. Finally, in the event of any
merger, consolidation or other transaction in which common shares are
exchanged, each preferred share will be entitled to receive 100 times the
amount received per common share. These rights are protected by customary
antidilution provisions.
Because of the nature of the preferred shares' dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a preferred share
purchasable upon exercise of each right should approximate the value of one
share of St. John common stock.
Until the right is exercised, the holder of the right, as such, will have no
rights as a shareholder of St. John, including the right to vote or to receive
dividends.
At any time prior to the first date of public announcement of an acquisition
by a person or group of affiliated or associated persons of beneficial
ownership of 15% or more of the outstanding common shares, the board of
directors of St. John may redeem the rights in whole, but not in part, at a
price of $.01 per right. The redemption of the rights may be made effective at
such time on such basis with such conditions as the board of directors in its
sole discretion may establish. Immediately upon any redemption of the rights,
the right to exercise the rights will terminate and the only right of the
holders of rights will be to receive the redemption price.
The board of directors may supplement or amend the rights agreement in order
to cure any ambiguity, to correct or supplement any provision which may be
defective or inconsistent with any other provisions, or to make any other
provisions with respect to the rights which St. John may deem necessary or
desirable; provided, however, that from and after such time as any person
becomes an acquiring person, the rights agreement cannot be amended in any
manner which would adversely affect the interests of the holders of rights.
The board of directors of St. John delegated its authority under the rights
agreement to the special committee of the board of directors. The special
committee has exempted Pearl and its affiliates in connection with the mergers
from triggering the rights agreement. In addition, the special committee
intends to amend the rights agreement to provide that it will terminate at the
effective time of the reorganization merger. Because of these facts,
shareholders will not have any right to acquire stock under the rights
agreement either by virtue of the mergers or following the mergers.
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Pro Forma Condensed Consolidated Financial Statements (Unaudited)
We have provided on the following pages the unaudited pro forma condensed
consolidated financial statements of St. John Knits International, which have
been derived by the application of pro forma adjustments to St. John's
historical consolidated financial statements incorporated by reference in this
proxy statement-prospectus. The pro forma condensed consolidated balance sheet
gives effect to the mergers and related transactions, including the merger
financing, settlement of outstanding stock options and payment of estimated
fees and costs, as if such transactions had occurred as of January 31, 1999.
The pro forma condensed consolidated statements of income for the periods
presented give effect to the mergers and related transactions as if such
transactions were consummated as of November 3, 1997 for the fiscal year ended
November 1, 1998 and for the thirteen weeks ended January 31, 1999. The
adjustments are described in the accompanying notes. You should not consider
the pro forma condensed consolidated financial statements indicative of actual
results that would have been achieved had the mergers and related transactions
been consummated on the date or for the periods indicated and these financial
statements do not purport to indicate balance sheet data or results of
operations as of any future date or for any future period. You should read this
data in conjunction with St. John's historical financial statements and the
notes to such statements incorporated in this proxy statement-prospectus by
reference. See "Where You Can Find More Information" on page 127.
We applied the pro forma adjustments to the respective historical
consolidated financial statements to reflect the accounting for the mergers as
a recapitalization. Accordingly, the historical basis of St. John's assets and
liabilities has not been impacted by the transaction.
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<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS: (amounts in thousands)
Current assets:
Cash and short-term cash investments.. $ 28,673 $ (22,784)(a) $ 5,889
Accounts receivable, net.............. 26,821 26,821
Inventories........................... 47,730 47,730
Deferred income tax benefit........... 7,744 7,744
Prepaid income taxes.................. -- 5,600 (b) 5,600
Other................................. 2,760 2,760
-------- --------- ---------
Total current assets................ 113,728 (17,184) 96,544
Property and equipment, net........... 72,067 72,067
Deferred debt issuance costs.......... -- 12,500 (c) 12,500
Other................................. 3,378 3,378
-------- --------- ---------
$189,173 $ (4,684) $ 184,489
======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable...................... $ 6,142 $ $ 6,142
Accrued expenses...................... 11,155 11,155
Revolving credit facility............. -- -- --
Current portion of term loan
facilities........................... -- 3,000 (a) 3,000
Income taxes payable.................. 3,974 3,974
-------- --------- ---------
Total current liabilities........... 21,271 3,000 24,271
Long-term debt........................ 349 349
Term loan facilities, net of current
portion.............................. -- 152,000 (a) 152,000
Senior subordinated notes............. -- 160,000 (a) 160,000
-------- --------- ---------
Total liabilities................... 21,620 315,000 336,620
Minority interest..................... 642 642
Total shareholders' equity (deficit).. 166,911 (319,684)(d)(e) (152,773)
-------- --------- ---------
$189,173 $ (4,684) $ 184,489
======== ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
77
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(amounts in thousands, except share data)
The unaudited pro forma financial data has been derived by the application
of pro forma adjustments to St. John's historical financial statement as of the
date noted. The mergers have been accounted for as a recapitalization which
will have no impact on the historical basis of St. John's assets and
liabilities.
(a) This adjustment represents the net effect of the mergers on the cash
balance as follows:
<TABLE>
<S> <C>
SOURCES OF CASH:
Capital contribution -- Vestar/Gray LLC........................ $146,527
Senior subordinated notes...................................... 160,000
Term loan facilities proceeds.................................. 155,000
--------
Total sources................................................ 461,527
--------
USES OF CASH:
Payment of cash merger consideration........................... 447,584
Estimated transaction fees and costs........................... 22,427
Settlement of stock options outstanding........................ 14,300
--------
Total uses................................................... 484,311
--------
Net use...................................................... $(22,784)
========
</TABLE>
(b) This adjustment represents the estimated tax benefit received by St. John
on the settlement of stock options in connection with the transaction.
(c) This adjustment represents the portion of the estimated transaction fees
and costs attributable to the Term Loan Facilities, Senior Subordinated
Notes and Revolving Credit Facility which will be amortized over the life
of the related debt. Such estimated deferred debt issuance costs include
estimated fees and costs payable to banks, underwriters, outside
professionals and related advisors.
(d) This adjustment represents the net change in equity resulting from the
mergers as follows:
<TABLE>
<S> <C>
Convert to cash 14,919,452 shares of common stock............... $(447,584)
Issuance of 4,884,222 shares of common stock to Vestar/Gray LLC. 146,527
Settlement of stock options -- net of tax benefit............... (8,700)
Estimated transaction fees and costs............................ (9,927)
---------
$(319,684)
=========
</TABLE>
(e) Reconciliation of historical shares outstanding for St. John to the pro
forma number for St. John Knits International:
<TABLE>
<S> <C>
Beginning shares outstanding.................................. 16,581,482
Publicly held shares to be redeemed in acquisition merger..... (14,919,452)
Gray shares which were contributed to Vestar/Gray LLC......... (1,205,983)
-----------
Shares to be retained by existing shareholders................ 456,047
Shares to be issued to Vestar/Gray LLC in the acquisition
merger....................................................... 6,090,205
-----------
Ending shares outstanding..................................... 6,546,252
===========
</TABLE>
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<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED NOVEMBER 1, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- --------
(amounts in thousands, except
per share and ratio data)
<S> <C> <C> <C>
Net sales............................... $281,961 $ -- $281,961
Cost of sales........................... 120,883 120,883
-------- --------
Gross profit............................ 161,078 161,078
Selling, general and administrative
expenses............................... 107,026 500 (a)(e) 107,526
-------- -------- --------
Operating income........................ 54,052 (500) 53,552
Interest expense........................ -- 32,816 (b) 32,816
Other income............................ 1,369 (1,117)(c) 252
-------- -------- --------
Income before income taxes.............. 55,421 (34,433) 20,988
Income taxes............................ 22,001 (13,670)(d) 8,331
-------- -------- --------
Net income.............................. $ 33,420 $(20,763) $ 12,657
======== ======== ========
Net income per common share from
continuing operations -- basic......... $ 2.00 $ 1.93
======== ========
Net income per common share from
continuing operations -- diluted....... $ 1.94 $ 1.93
======== ========
Dividends per share..................... $ 0.10 --
======== ========
Shares outstanding -- basic............. 16,694 6,546
======== ========
Shares outstanding -- diluted........... 17,235 6,546
======== ========
Ratio of earnings to fixed charges...... 16.60x 1.58x
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income
79
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THIRTEEN WEEKS ENDED JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- -------
(amounts in thousands, except
per share and ratio data)
<S> <C> <C> <C>
Net sales................................. $73,389 $ -- $73,389
Cost of sales............................. 33,829 33,829
------- -------
Gross profit.............................. 39,560 39,560
Selling, general and administrative
expenses................................. 30,135 125 (a)(e) 30,260
------- ------- -------
Operating income.......................... 9,425 (125) 9,300
Interest expense.......................... -- 7,959 (b) 7,959
Other income.............................. 426 (284)(c) 142
------- ------- -------
Income before income taxes................ 9,851 (8,368) 1,483
Income taxes.............................. 4,027 (3,423)(d) 604
------- ------- -------
Net income................................ $ 5,824 $(4,945) $ 879
======= ======= =======
Net income per common share from
continuing operations -- basic........... $ 0.35 $ 0.13
======= =======
Net income per common share from
continuing operations -- diluted......... $ 0.34 $ 0.13
======= =======
Dividends per share....................... $ 0.025 --
======= =======
Shares outstanding -- basic............... 16,580 6,546
======= =======
Shares outstanding -- diluted............. 16,961 6,546
======= =======
Ratio of earnings to fixed charges........ 13.02x 1.17x
======= =======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income
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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
The pro forma financial data has been derived by the application of pro
forma adjustments to St. John's historical financial statements of income for
the periods noted. The mergers have been accounted for as a recapitalization,
which will have no impact on the historical basis of St. John's assets and
liabilities.
(a) This adjustment represents an annual advisory fee paid to Vestar.
(b) The pro forma adjustment to interest expense for the periods presented
reflects the following items (in thousands):
<TABLE>
<CAPTION>
Thirteen
Weeks
Year Ended Ended
November 1, January 31,
1998 1999
----------- -----------
<S> <C> <C>
Interest expense on the Senior Subordinated Notes..... $16,800 $4,200
Interest expense on the Term Loan Facilities.......... 13,602 3,200
Interest expense on the Revolving Credit Facility..... 771 145
Amortization of deferred debt issuance costs.......... 1,563 392
Commitment fee of the unused portion of the Revolving
Credit Facility...................................... 80 22
------- ------
Total................................................. $32,816 $7,959
======= ======
</TABLE>
The interest expense above is based upon a weighted average interest rate of
9.66% for the year ended November 1, 1998 and 9.60% for the 13 weeks ended
January 31, 1999. Interest expense assumes a fixed interest rate of 10.5% on
the senior subordinated notes, LIBOR + 3.00% on Term Loan A and the revolving
credit facility and LIBOR + 3.50% on Term Loan B. The average LIBOR used for
the year ended November 1, 1998 and for the quarter ended January 31, 1999 were
5.58% and 5.00%, respectively. The commitment fee on the unused portion of the
revolving credit facility is assumed to be 0.5%.
The deferred debt issuance costs reflect direct estimated costs associated with
obtaining the debt financing. These amounts are being amortized straight line
over the estimated weighted average life of eight years.
An increase or decrease in the interest rate of 0.125% would change the pro
forma interest expense by approximately $400,000 for fiscal 1998 and
approximately $100,000 for the 13 weeks ended January 31, 1999. This would
change the pro forma net income and the pro forma net income per share by
approximately $241,000 and $0.04 for fiscal 1998 and approximately $59,000 and
$0.01 for the 13 weeks ended January 31, 1999.
(c) This adjustment eliminates interest income on cash and short-term
investments which is not expected to be received after the mergers have
been completed.
(d) This adjustment represents the tax effect of the pro forma adjustments
using an effective tax rate of 39.7% for the year ended November 1, 1998
and 40.9% for the quarter ended January 31, 1999.
(e) Upon completion of the transaction, all stock options outstanding will be
cancelled and converted to the right to receive a cash payment equal to
the excess of $30 over the exercise price per share. This payment of
approximately $14.3 million will be reflected as an expense to St. John in
the period the mergers are effected and has not been included in the pro
forma adjustment.
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THE MERGER AGREEMENT
The merger agreement contemplates the acquisition by Vestar and the Grays of
control of St. John Knits International and St. John. This section of the
document describes material provisions of the merger agreement. Because the
description of the merger agreement in this document is a summary, it does not
contain all the information that may be important to you. You should read
carefully the entire copy of the merger agreement, which, with the exception of
some schedules and exhibits, is attached as Appendix A to this document, before
you decide how to vote.
The Mergers
The merger agreement requires that St. John shareholders approve the
reorganization merger by both the vote of a majority of the outstanding shares
of St. John common stock entitled to vote on the reorganization merger and the
vote of a majority of the outstanding shares present at the St. John special
meeting, excluding those shares of St. John common stock owned beneficially by
the Grays. Following receipt of this approval and the satisfaction or waiver of
the other conditions to the mergers, St. John will consummate the
reorganization merger and the acquisition merger.
In the reorganization merger, St. John will merge into SJKAcquisition, a
wholly owned subsidiary of St. John Knits International, with St. John
surviving the reorganization merger. St. John Knits International is a Delaware
corporation and a wholly owned subsidiary of St. John. As a result of the
reorganization merger, St. John will become a subsidiary of St. John Knits
International and St. John shareholders will become stockholders of St. John
Knits International. In the acquisition merger, St. John Knits International
will merge into Pearl, with St. John Knits International surviving the
acquisition merger. Pearl is wholly owned by Vestar/Gray LLC, which, following
the mergers, will be approximately 84% owned by Vestar and approximately 16%
owned by the Grays. Robert E., Marie and Kelly A. Gray are directors and
executive officers of St. John.
As a result of the mergers, St. John Knits International will be
approximately 7% owned by existing shareholders of St. John, other than the
Grays, and approximately 93% owned by Vestar/Gray LLC. St. John anticipates
that the mergers will occur as promptly as practicable after the St. John
special meeting.
You may find more information regarding the merger consideration in the
following sections of this proxy statement-prospectus: "The Mergers--Merger
Consideration" on page 60, "--Conversion/Retention of Shares; Procedures for
Exchange of Certificates" on page 63 and "--Fractional Shares" on page 64.
You may find information regarding the treatment in the mergers of
outstanding St. John stock options under "The Mergers--Treatment of Options" on
page 67.
Closing of the Mergers; Effective Time of the Mergers; Surviving Corporations
Closing of the Mergers
Unless the parties agree otherwise, the closing of the mergers will take
place as soon as practicable after the date on which all closing conditions
have been satisfied or waived. The closing of the mergers is expected to take
place shortly after the approval of the St. John shareholders at the special
meeting, which is expected to occur late in the second calendar quarter or
early in the third calendar quarter of 1999.
Effective Time of the Mergers
The reorganization merger will become effective upon the filing of an
agreement of merger with the Secretary of State of the State of California or
such later date as is specified in the agreement of merger. The filing of the
agreement of merger will occur as soon as practicable after the special
meeting. We have attached as
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Appendix F the form of agreement of merger to be filed with the California
Secretary of State after the closing of the mergers. This agreement of merger
contains terms of the reorganization merger found in the merger agreement to be
approved by St. John shareholders at the special meeting. The acquisition
merger will become effective upon the filing of a certificate of merger with
the Secretary of State of the State of Delaware or such later date as is
specified in the certificate of merger. The filing of the certificate of merger
will occur as soon as practicable after the effective time of the
reorganization merger.
Surviving Corporations
St. John will be the surviving corporation of the reorganization merger. St.
John Knits International will be the surviving corporation of the acquisition
merger. After the mergers, the certificate of incorporation and bylaws of St.
John Knits International as in effect immediately prior to the reorganization
merger will continue to be the certificate of incorporation and bylaws of St.
John Knits International, until thereafter further lawfully amended. The
initial directors and senior executive officers of St. John Knits International
following the mergers will be as described in "The Mergers--Board of Directors
and Officers of St. John Knits International Following the Mergers" on page 68.
Representations and Warranties
The merger agreement contains customary representations and warranties of
St. John and St. John Knits International relating to, with respect to St.
John, St. John Knits International and their respective subsidiaries, including
also the following matters:
1. organization, standing and similar corporate matters;
2. capital structure;
3. the authorization, execution, delivery, performance and enforceability
of the merger agreement;
4. the accuracy of information contained in documents filed by St. John
with the Securities and Exchange Commission and the absence of
undisclosed liabilities;
5. the accuracy of information supplied by St. John in connection with
this proxy statement-prospectus;
6. the absence of changes or events specified in the merger agreement
since the date of the most recent audited financial statements filed
with the Securities and Exchange Commission;
7. the absence of pending or threatened material litigation and compliance
with applicable laws;
8. benefit plans and other related employment matters;
9. filing of tax returns and payment of taxes;
10. real property and other real-estate related matters;
11. environmental matters;
12. the absence of defaults under material contracts;
13. brokers' fees and expenses;
14. the receipt of opinions of St. John's financial advisors;
15. intellectual property matters;
16. the board of directors' exemption of Vestar, its affiliates,
Vestar/Gray LLC and Pearl under the rights plan;
17. the inapplicability of state anti-takeover laws; and
18. the recommendation of the board of directors and approval of the
special committee with respect to the merger agreement, the mergers and
related transactions.
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The merger agreement also contains customary representations and warranties
of Pearl, including also the following matters:
1. organization, standing and similar corporate matters;
2. the authorization, execution, delivery, performance and enforceability
of the merger agreement;
3. brokers' fees and expenses;
4. the accuracy of information supplied by Pearl in connection with this
proxy statement-prospectus; and
5. financing commitments obtained from third parties in connection with
the mergers.
All the representations and warranties are subject to various qualifications
and limitations.
Covenants
St. John has agreed that, prior to the mergers, it will conduct its business
only in the ordinary course and in compliance with applicable laws, and will
use its reasonable best efforts to preserve substantially intact its business
organization, to keep available the services of its present officers, employees
and consultants and to preserve its present relationships with customers,
suppliers and other persons with which it has significant business relations.
Accordingly, St. John agreed that, subject to exceptions described generally
below, it will not, prior to the effective time of the acquisition merger,
without the prior written consent of Pearl:
1. amend its articles of incorporation or bylaws;
2. issue its securities or dispose of assets outside the ordinary course;
3. pay dividends beyond current levels;
4. change its share capital, including, among other things, by effecting a
stock split, combination or reclassification, or repurchase or redeem
capital stock;
5. repay any debt or guarantee the debt of others, or make any loan to or
investment in any other person, or enter into or amend any material
contract, outside the ordinary course;
6. increase the compensation of directors and officers, or other employees
other than in the ordinary course, or provide any new or change any
existing benefit plans;
7. make changes in its accounting methods other than as required by
generally accepted accounting principles, or make any material tax
election;
8. adopt a plan of liquidation or dissolution, merger or other
reorganization;
9. acquire the stock or assets of other companies or other businesses;
10. pay any material liabilities or obligations other than in the ordinary
course, or forfeit any rights of value;
11. settle or compromise any litigation;
12. close any of its facilities;
13. change its board of directors;
14. amend or waive any provision of its rights agreement or redeem the
rights or make them inapplicable to any other transaction;
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15. amend or enter into any intellectual property license, or dispose of
any intellectual property or subject it to any lien or other
encumbrance; or
16. take, or offer or propose to take, or agree to take in writing or
otherwise, any of the above actions.
These restrictions are subject to exceptions, including provisions which
permit St. John to open and close retail boutiques, make capital expenditures,
settle outstanding lawsuits and take other actions without Pearl's prior
written consent, provided generally that St. John gives Pearl at least two full
business days' notice of such actions and Pearl does not object to such
actions.
No Solicitation
The merger agreement provides that neither St. John nor any of its
subsidiaries, directly or indirectly, may solicit, initiate, encourage,
including by way of furnishing information, or take any action knowingly to
facilitate the submission of any inquiries, proposals or offers from any person
relating to any "transaction proposal" described below, agree to or endorse a
transaction proposal, enter into or participate in any discussions or
negotiations regarding any transaction proposal, furnish to any other person
any information with respect to its business, properties or assets in
connection with a transaction proposal or otherwise cooperate in any way with,
or knowingly assist or participate in, facilitate or encourage, any effort or
attempt by any other person to do or seek any transaction proposal. The merger
agreement defines a transaction proposal to mean:
1. any acquisition or purchase of 10% or more of the consolidated assets or
any class of equity securities of St. John or St. John Knits
International or any of their respective subsidiaries;
2. any tender offer, including a self tender offer, or exchange offer that
if consummated would result in any person beneficially owning 10% or
more of any class of equity securities of St. John or St. John Knits
International or any of their subsidiaries;
3. any merger, consolidation, business combination, sale of substantially
all the assets, recapitalization, liquidation, dissolution or similar
transaction involving St. John or any of its subsidiaries whose assets,
individually or in the aggregate, constitute 10% or more of the
consolidated assets of St. John or St. John Knits International; or
4. any other transaction the consummation of which would or would
reasonably be expected to impede, interfere with, prevent or materially
delay the mergers or which would or would reasonably be expected to
materially dilute the benefits to Pearl of the transactions contemplated
by the merger agreement.
The merger agreement provides that these restrictions will not prohibit St.
John, prior to the approval by its shareholders of the reorganization merger,
from:
1. complying with Rule 14e-2 and Rule 14d-9 under the Securities Exchange
Act of 1934, as amended, with regard to a bona fide tender offer or
exchange offer, which rules require a target company to respond publicly
to a tender offer; or
2. participating in negotiations or discussions with, or furnishing
information to, any person concerning a transaction proposal not
solicited after February 2, 1999 which the board of directors receives
in writing after February 2, 1999 if all of the following conditions are
met:
. prior to participating in any such discussions or negotiations, or
furnishing any information, St. John must receive from the person
making the transaction proposal, and provide a copy to Pearl of, an
executed confidentiality agreement on terms at least as favorable to
St. John as the confidentiality agreement entered into with Vestar;
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. the board of directors of St. John must have concluded in good faith,
after consulting its outside financial and legal advisors, that such
transaction proposal is a "superior proposal," and that it must
participate in such negotiations or discussions or furnish such
information in order to comply with its fiduciary duties to the
shareholders; and
. the board of directors must promptly notify Pearl of such
negotiations or discussions or that it has provided any information.
In addition, St. John agreed that if its board of directors receives a
transaction proposal, then St. John will, to the extent not prohibited in good
faith by the terms of such transaction proposal, promptly inform Pearl of the
terms and conditions of such proposal and the identity of the person making it.
St. John also agreed to cease all existing activities, discussions or
negotiations with any parties conducted prior to February 2, 1999 with respect
to any transaction proposal other than the mergers and to use its reasonable
best efforts to cause anyone who has confidential information about St. John
that was furnished by or on behalf of St. John to return or destroy such
information. Finally, St. John agreed not to release any third party from, or
waive any provisions of, any confidentiality or standstill agreement to which
St. John is a party.
For purposes of this covenant, the term "superior proposal" means any of the
transaction proposals described in clause (1), (2) or (3) of the definition of
transaction proposal described above, with all of the percentages raised to
51%, with respect to which St. John's board of directors has concluded in good
faith, after consulting with its outside legal counsel and financial advisors,
is reasonably capable of being completed, and would, if consummated, result in
a transaction more favorable to St. John shareholders from a financial point of
view than the transactions contemplated by the merger agreement, including the
mergers.
Employee Benefits
Under the merger agreement, St. John Knits International will assume all
obligations of St. John, including any accrued benefits under existing employee
benefit arrangements. In addition, for at least 12 months following the
mergers, St. John Knits International will cause St. John and its subsidiaries
to provide to their employees benefits that are no less favorable, in the
aggregate, than those provided to employees as of February 2, 1999, other than
under plans relating to St. John common stock. So long as St. John Knits
International complies with this covenant, it or its subsidiaries may amend or
terminate their respective benefit plans and may terminate employees at any
time, provided that the companies continue to satisfy the conditions in the
preceding sentence.
Access to Information
Subject to existing confidentiality obligations, St. John has agreed to
afford Pearl and its representatives and the potential financing sources for
the mergers reasonable access during normal business hours to its officers,
employees, agents, properties, offices, centers and other facilities and to all
of its books, contracts and records. In addition, St. John has agreed to
furnish Pearl and such financing sources with all financial, operating and
other data and information as any of them may from time to time reasonably
request.
Cooperation and Reasonable Best Efforts
Pursuant to the merger agreement and subject to conditions and limitations
specified in the merger agreement, the parties have agreed to cooperate with
each other and to use their reasonable best efforts to take specified actions,
including cooperation in the arrangement of financing, so that the transactions
contemplated by the merger agreement may be consummated.
Indemnification and Insurance
You may find information regarding the indemnification of our directors,
other employees and agents, and the maintenance of our directors' and officers'
liability insurance, under "Special Factors--Interests of the Grays and Other
Officers and Directors of St. John in the Mergers; Conflicts of Interests," on
page 48.
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Conditions to the Consummation of the Mergers
The respective obligations of St. John, St. John Knits International and
Pearl to effect the mergers are subject to various conditions which include,
in addition to other customary closing conditions, the following:
1. the St. John shareholders must approve the reorganization merger;
2. the waiting period under the HSR Act must have terminated or expired;
3. there may be no law, order, injunction or other legal restraint or
prohibition enjoining or preventing the consummation of either or both
mergers or the transfer by the Grays of their shares of St. John common
stock to Vestar/Gray LLC;
4. there may be no stop order suspending the effectiveness of the
registration statement of which this proxy statement-prospectus is a
part, and any material state securities laws applicable to the
registration and qualification of St. John Knits International common
stock following the mergers must have been complied with;
5. St. John Knits International must have completed its migration from
Barbados to Delaware; and
6. with respect to the parties' obligations to effect the acquisition
merger, the reorganization merger must have become effective in
accordance with the California General Corporations Law.
As of the date of this proxy statement-prospectus, the condition described
in clause (2) has been satisfied.
Pearl's obligations to effect the acquisition merger are also subject, in
addition to other customary conditions, to the following additional
conditions:
1. Pearl must have received evidence that all consents and approvals of
governmental bodies and other specified third parties have been
obtained, without, in the case of these third parties, the payment or
imposition of any material costs or obligations or the exercise of any
preemptive rights;
2. there must be no pending or threatened proceeding by any governmental
body:
. seeking to restrain or prohibit the consummation of either merger or
any transactions contemplated by the merger agreement or the voting
agreement or seeking to obtain material damages from Pearl or any of
its affiliates;
. seeking to limit St. John's ownership or operations of any material
portion of its or its subsidiaries' business or assets; or
. seeking to limit the ability of Pearl, or any designee of Pearl
pursuant to the voting agreement, or any stockholder of Pearl or
shareholder of St. John to acquire or hold, or exercise full rights of
ownership of, any shares of St. John common stock, including the right
to vote such St. John common stock on all matters properly presented
to St. John shareholders;
3. Pearl must have received an agreement from each affiliate of St. John
with respect to securities laws matters described in the merger
agreement;
4. St. John must have received the proceeds of financing on the terms and
conditions identified in the commitment letters that are filed as
exhibits to the registration statement to which this proxy statement-
prospectus relates and to the Rule 13e-3 Transaction Statement or upon
equivalent terms and conditions; and
5. since February 2, 1999, no event has occurred that has had, or is
reasonably likely to have, a material adverse effect on the business,
operations, assets, liabilities, financial condition or results of
operations of St. John or its subsidiaries.
The obligation of St. John Knits International to effect the acquisition
merger is also subject to customary closing conditions.
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Termination
The merger agreement provides that at any time prior to the effective time
of the acquisition merger, the merger agreement may be terminated:
1. by mutual written consent of Pearl and St. John;
2. by either Pearl or St. John if:
. any court or other governmental body issues a non-appealable final
order, decree or ruling or takes any other final action restraining,
enjoining or otherwise prohibiting the consummation of either
merger, or any of the transactions contemplated by the merger
agreement or the voting agreement;
. the mergers have not been completed on or prior to July 15, 1999, so
long as the party seeking to terminate did not prevent consummation
by failing to fulfill any of its obligations under the merger
agreement;
. the St. John shareholders fail to approve the reorganization merger;
. the other party breaches any of its representations, warranties,
covenants or agreements in the merger agreement which, in the case
of a breach by St. John, is reasonably likely to have a material
adverse effect on St. John or is reasonably likely to affect St.
John's ability to consummate either or both mergers, or in the case
of a breach by Pearl, is reasonably likely to affect Pearl's ability
to consummate the acquisition merger, and in each case, with respect
to any such breach that is reasonably capable of being remedied,
such breach is not remedied within 20 days;
3. by Pearl, if St. John or its board of directors has:
. withdrawn, modified or amended in any respect adverse to Pearl its
approval or recommendation of the merger agreement or any of the
transactions contemplated in the merger agreement;
. failed as promptly as reasonably practicable after the registration
statement associated with this proxy statement-prospectus is
declared effective to mail this proxy statement-prospectus to its
shareholders;
. approved, recommended or entered into an agreement with respect to
any transaction proposal from a person other than Pearl or any of
its affiliates;
. resolved to do any of the foregoing; or
. failed to recommend the rejection of any exchange or tender offer
commenced for 10% or more of the outstanding shares of St. John
common stock; and
4. by St. John, if, prior to the approval by its shareholders of the
reorganization merger:
. St. John, in compliance with the merger agreement, withdraws,
modifies or amends in a manner adverse to Pearl its recommendation
of the mergers (or publicly announces its intention to do so); or
. St. John or its board of directors approves a superior proposal, but
only if:
. St. John is in compliance with the no-solicitation covenant
described under "--No Solicitation" on page 85;
. its board of directors has concluded in good faith after
consultation with its outside legal counsel and financial
advisors that such proposal is a superior proposal;
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. its board of directors has concluded in good faith, after
consulting with its outside legal counsel, that it must approve
such superior proposal in order to comply with its fiduciary
duties to St. John shareholders;
. St. John pays a termination fee of $14 million to Pearl; and
. St. John has given Pearl at least 48 hours prior notice of
termination.
Amendment and Waiver
The parties may amend the merger agreement by action taken by or on behalf
of their boards of directors at any time prior to the effective time of the
reorganization merger. After St. John shareholders approve the reorganization
merger, the parties may not amend the merger agreement in any way by law which
would require further shareholder approval without such shareholder approval.
At any time prior to the effective time of the reorganization merger any party
may, to the extent legally allowed:
1. extend the time for the performance of any of the obligations or other
acts of the other parties;
2. waive any inaccuracies in the representations and warranties contained
in the merger agreement or in any document delivered pursuant to the
merger agreement; and
3. waive compliance with any of the agreements or conditions in the merger
agreement.
Any extension or waiver described above will be valid if set forth in
writing and signed by the parties to be bound. To the extent required by law,
St. John and Pearl will resolicit shareholder votes in the event the parties to
the merger agreement amend the merger agreement in any material respect or
waive a material condition before the effective time of the reorganization
merger.
Termination Fees and Expenses
The merger agreement provides that St. John will pay up to $1.5 million of
the reasonable out-of-pocket expenses Pearl incurred in connection with the
mergers if the merger agreement is terminated under the following
circumstances:
1. either party terminates the merger agreement because the mergers have
not been completed on or before July 15, 1999 because:
. the migration of the jurisdiction of incorporation of St. John Knits
International from Barbados to Delaware has not been completed;
. all relevant conditions to the reorganization merger have been
satisfied or waived and St. John fails to consummate the
reorganization merger;
. St. John is in material breach of its representations, warranties,
covenants or agreements under the merger agreement;
. the required consents and approvals to the mergers have not been
obtained;
. the required St. John affiliate letters have not been executed and
delivered to St. John;
. the financing for the transactions contemplated by the merger
agreement has not been received, except if such failure to receive
financing is based on market conditions;
. an event has occurred that has had or is reasonably likely to have a
material adverse effect on St. John; or
. either St. John or St. John Knits International has failed to
perform its obligations under the merger agreement;
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2. Pearl terminates the merger agreement because St. John or its board of
directors has:
. withdrawn, modified or amended in any respect adverse to Pearl its
approval or recommendation of the merger agreement or any of the
transactions contemplated in it;
. failed as promptly as reasonably practicable after the registration
statement associated with this proxy statement-prospectus is
declared effective to mail this proxy statement-prospectus to its
shareholders;
. approved, recommended or entered into an agreement with respect to,
or consummated, any transaction proposal from a person other than
Pearl or any of its affiliates;
. resolved to do any of the foregoing; or
. failed to recommend rejection of any exchange or tender offer
commenced for 10% or more of the shares of St. John common stock;
3. St. John terminates the merger agreement because:
. in compliance with the merger agreement, the board of directors of
St. John withdraws, modifies or amends in a manner adverse to Pearl
its recommendation of the mergers, or publicly announces its
intention to do so; or
. St. John or its board of directors approves a superior proposal, but
only if:
. St. John is in compliance with the no-solicitation covenant
described in "--No Solicitation" on page 85;
. the board of directors of St. John has concluded in good faith
after consultation with its outside legal counsel and financial
advisors that such proposal is a superior proposal;
. the board of directors has concluded in good faith, after
consultation with its outside legal counsel, that approving such
superior proposal is required in order to comply with its
fiduciary duties to the shareholders of St. John;
. St. John pays a termination fee of $14 million to Pearl; and
. St. John has given Pearl at least 48 hours prior notice of
termination; or
4. Pearl terminates the merger agreement because St. John is in material
breach of any of its representations, warranties, covenants or
agreements and St. John does not remedy the breach within 20 days.
The merger agreement also provides that if Pearl terminates the merger
agreement pursuant to clause (2) above or if St. John terminates the merger
agreement pursuant to clause (3) above, St. John will pay to Pearl a
termination fee of $14 million, less any amount previously paid to Pearl in
respect of expenses.
In addition, St. John will pay Pearl a termination fee of $14 million, with
one-third of such fee payable upon execution of a transaction agreement and the
remainder upon consummation of the related transaction, less any amount
previously paid to Pearl in respect of expenses, if all of the following
conditions are met:
1. a transaction proposal is commenced or otherwise formally communicated
to St. John, St. John Knits International or the special committee of
the St. John board at any time on or after February 2, 1999 but prior to
any termination of the merger agreement, and either:
. Pearl or St. John terminates the merger agreement because the
mergers have not been consummated on or before July 15, 1999, unless
the termination occurs because of the failure to receive financing
based on market conditions;
. Pearl or St. John terminates the merger agreement because St. John
shareholders fail to approve the reorganization merger; or
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. Pearl terminates the merger agreement because St. John is in
material breach of any of its representations, warranties, covenants
or agreements; and
2. within 12 months of the date of such termination, St. John or St. John
Knits International enters into a definitive agreement with respect to,
or consummates, the transaction proposal commenced or communicated on or
after February 2, 1999 referred to in clause (1) above or a superior
proposal, whether or not the superior proposal was commenced or
communicated to St. John or St. John Knits International prior to such
termination.
To the extent that Pearl is entitled to the payment of expenses under
circumstances where the termination fee is also payable, the expense payment
amount will be credited against the termination fee payable.
The merger agreement provides that Pearl will pay up to $1.5 million of the
reasonable out-of-pocket expenses St. John incurred in connection with the
mergers upon the termination of the merger agreement for the following reasons:
1. the mergers have not been consummated on or before July 15, 1999 because
Pearl is in material breach of its representations, warranties,
covenants or agreements; or
2. Pearl is in breach of any of its representations, warranties, covenants
or agreements and this breach is reasonably likely to materially
adversely effect Pearl's ability to consummate the acquisition merger
and Pearl has not remedied the breach within 20 days.
The parties have agreed that the payment of these expenses, together with
any termination fee which may be paid under the merger agreement, will serve as
full liquidated damages in respect of any breach by the other party. In
addition, except as otherwise specifically provided in the merger agreement,
each party has agreed to bear its own expenses in connection with the merger
agreement and the transactions contemplated by the merger agreement, except
that all of the expenses of Pearl will be paid by St. John Knits International
after the effective time of the acquisition merger.
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THE VOTING AGREEMENT
As a condition to the willingness of Pearl to enter into the merger
agreement, the Grays entered into a voting agreement with Vestar and
Vestar/Gray LLC dated as of February 2, 1999. The following summary describes
the material terms of the voting agreement. However, because the description of
the voting agreement contained in this document is a summary, it does not
contain all the information that may be important to you. You should read
carefully the entire copy of the voting agreement, which, with the exception of
some schedules and exhibits, is attached as Appendix E to this document.
Pursuant to the voting agreement, the Grays have agreed to vote, and have
given Vestar/Gray LLC their irrevocable proxy to vote, all the shares of St.
John common stock issued and outstanding and beneficially owned by them,
excluding shares subject to options, as of the date of the voting agreement, as
well as any shares with respect to which any of them becomes the owner after
the date of the voting agreement and prior to the record date for the special
meeting:
1. in favor of the mergers, the merger agreement and the transactions
contemplated by the merger agreement;
2. against certain other actions or agreements that would result in a
material breach by St. John or St. John Knits International of the
merger agreement or would impede or reasonably be expected to discourage
the mergers;
3. against any extraordinary corporate transaction involving St. John or
St. John Knits International, other than the mergers;
4. against any amendment to the charter documents of St. John or St. John
Knits International which would in any manner impede or prevent the
mergers;
5. against any change in the management or the board of directors of St.
John or St. John Knits International; and
6. against any material change in either company's corporate structure or
business.
In the event St. John's board of directors withdraws, amends or modifies its
recommendation of the mergers in compliance with the merger agreement, the
voting agreement permits the Grays to vote their shares in favor of a superior
proposal.
In accordance with the terms and conditions of the voting agreement, the
Grays have agreed:
1. to refrain from soliciting or responding to specified inquiries or
proposals regarding St. John;
2. to refrain from selling, pledging, encumbering, assigning or otherwise
disposing of, including by gift, any of their shares or from agreeing to
do the same;
3. to waive any rights of appraisal available in the reorganization merger;
and
4. to take or refrain from taking other specified actions.
If the merger agreement is terminated in accordance with its terms, the
covenants and agreements contained in the voting agreement with respect to the
Grays' shares will terminate at the same time.
The voting agreement provides that prior to the reorganization merger the
Grays will transfer any shares of St. John common stock held by them to
Vestar/Gray LLC in exchange for cash and an interest in Vestar/Gray LLC. Please
refer to "Special Factors--Interests of the Grays and Other Officers and
Directors of St. John in the Mergers; Conflicts of Interests" on page 48 for a
breakdown of the shares to be transferred and the cash payment and ownership
interest to be received by each of the Grays.
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THE STOCKHOLDERS' AGREEMENT
Upon consummation of the acquisition merger, St. John Knits International
will enter into a stockholders' agreement with Vestar/Gray LLC, Vestar, the
Grays and certain members of management who become stockholders of St. John
Knits International. The following summary describes the material terms of the
stockholders' agreement. However, because the description of the stockholders'
agreement contained in this document is a summary, it does not contain all the
information that may be important to you.
The stockholders' agreement sets forth the rights of Vestar/Gray LLC and
stockholders of St. John Knits International that are also members of
management with respect to their shares of St. John Knits International common
stock. Upon any dissolution of Vestar/Gray LLC while the stockholders'
agreement remains in effect, the stockholders' agreement will govern the
rights of the members of Vestar/Gray LLC with respect to their shares of St.
John Knits International common stock.
Voting Agreements
Each stockholder that is a party to the stockholders' agreement will be
required to vote all shares of St. John Knits International common stock held
by it to elect a board of directors of St. John Knits International and St.
John consisting solely of five designees of Vestar/Gray LLC, or a lesser
number as required by the limited liability company agreement or the
stockholders' agreement.
So long as Vestar and its affiliates, whether through Vestar/Gray LLC or
otherwise, beneficially own at least half of the common stock of St. John
Knits International allocated to Vestar as of the date of the acquisition
merger and Vestar/Gray LLC (or Vestar and the Grays together) beneficially
owns not less than 25% of the total voting power of St. John Knits
International, all stockholders party to the stockholders' agreement will be
required to vote all common stock of St. John Knits International held by them
to ratify, approve and adopt any and all actions adopted or approved by the
board of directors of St. John Knits International.
In the event the stockholders' agreement is in effect at the time of any
dissolution of Vestar/Gray LLC:
1. Vestar will be entitled to designate directors to the board of directors
of St. John Knits International on the following terms: Vestar may
appoint three directors as long as Vestar owns at least half of the
common stock of St. John Knits International allocated to Vestar as of
the date of the acquisition merger. Vestar may appoint two directors as
long as Vestar owns less than half of the common stock of St. John Knits
International allocated to Vestar as of the date of the acquisition
merger but not less than one third of the common stock of St. John Knits
International allocated to Vestar as of such date. Finally, Vestar may
appoint one director as long as Vestar owns less than one-third of the
common stock of St. John Knits International allocated to Vestar as of
the date of the acquisition merger, but not less than one-tenth of the
common stock of St. John Knits International allocated to Vestar as of
such date; provided that so long as Vestar owns at least as many shares
as the Grays, Vestar will retain the right to appoint at least as many
directors as the Grays have the right to appoint.
2. the Grays will be entitled to designate directors to the board of
directors of St. John Knits International on the following terms: the
Grays may appoint two directors as long as the Grays own not less than
half of the common stock of St. John Knits International allocated to
the Grays as of the date of the acquisition merger. The Grays may
appoint one director as long as they own less than half of the common
stock of St. John Knits International allocated to the Grays as of the
date of the acquisition merger, but not less than one-fifth of the
common stock of St. John Knits International that will be allocated to
the Grays as of such date.
Registration Rights
The stockholders' agreement will permit Vestar/Gray LLC to require that St.
John Knits International registers under the Securities Act of 1933 the sale
of some or all of the shares of St. John Knits International
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common stock that it holds. Vestar/Gray LLC will be limited to six such demand
registrations which it may exercise at any time after the acquisition merger.
If St. John Knits International terminates any of the Grays without "cause" or
if any of the Grays resigns for "good reason," as these terms are defined in
their current respective employment contracts with St. John, then Vestar/Gray
LLC on behalf of the Grays or, in the event of the dissolution of Vestar/Gray
LLC, that member of the Gray family, along with all other Grays terminated
without "cause" or who resign for "good reason," will have the right, beginning
six months following the consummation of the initial public offering of St.
John Knits International common stock, to four additional requests for
registration, which may be used not more often than once in any 12-month
period.
In addition, the member or members of the Gray family who so resigns or is
terminated will have first priority, alone, to register 25% of the common stock
of St. John Knits International held by it or them in the registration. If St.
John Knits International is not able to register shares within 90 days (or 135
days under some circumstances), St. John Knits International will purchase the
Grays' shares on the terms and conditions found in the limited liability
company agreement. In addition, if St. John Knits International proposes to
file a registration statement under the Securities Act with respect to any
offering of its common stock, other than some registrations relating to common
stock issued in business combinations or pursuant to employee benefit plans,
then St. John Knits International will provide all parties to the stockholders'
agreement an opportunity to register their shares of St. John Knits
International common stock, subject to priority provisions, on the same terms
and conditions.
In connection with any demand registration as described above, St. John Knits
International will be responsible for all expenses incurred in connection with
such registration, except for underwriting expenses, which will be paid by the
stockholders requesting registration. In addition, St. John Knits International
will indemnify the stockholders requesting registration and the underwriters
and each of their employees and affiliates against liabilities, including
liabilities under the Securities Act.
Transfers of St. John Knits International Common Stock
The stockholders' agreement will provide that the stockholders who are also
members of St. John management, including, if the limited liability company
agreement has been terminated, the Grays, cannot transfer their shares of St.
John Knits International common stock prior to the earlier of the fifth
anniversary of the acquisition merger or a public offering of the common stock
of St. John Knits International.
We expect that the stockholders' agreement will provide that:
1. the management stockholders, and, if the limited liability company
agreement has terminated, the Grays, will have the right to participate
pro rata in some sales of St. John Knits International common stock by
Vestar/Gray LLC, and, if the limited liability company agreement is
terminated, by Vestar;
2. Vestar will have the right to require the management stockholders, and,
if the limited liability company agreement is terminated, the Grays, to
participate in some sales of St. John Knits International common stock
by Vestar/Gray LLC, and, if the limited liability company agreement is
terminated, by Vestar;
3. St. John Knits International will have a right of first refusal on some
sales of St. John Knits International common stock by the management
holders, and, if the limited liability company agreement is terminated,
by the Grays;
4. management holders, Vestar/Gray LLC and, if the limited liability
company agreement is terminated, Vestar and the Grays may, after a
public offering of St. John Knits International common stock subject to
some limitations, request the transfer of all or any portion of their
St. John Knits International common stock in accordance with Rule 144
under the Securities Act;
5. management holders, Vestar/Gray LLC and, if the limited liability
company agreement is terminated, the Grays may, upon the earlier to
occur of a public offering of St. John Knits International common
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stock or the fifth anniversary of the acquisition merger and subject to
some restrictions, effect a transfer of all or a portion of their St.
John Knits International common stock pursuant to any available exemption
from the registration requirement under the Securities Act;
6. Vestar/Gray LLC and, if the limited liability company agreement is
terminated, Vestar, may, at any time, effect a transfer of all or a
portion of its St. John Knits International common stock pursuant to any
available exemption from the registration requirement under the
Securities Act;
7. Vestar/Gray LLC (on behalf of the Grays) and, if the limited liability
company agreement is terminated, prior to a public offering of St. John
Knits International common stock, if Robert E. Gray ceases to serve as
Chairman or Chief Executive Officer of St. John or St. John Knits
International or if the employment of Marie Gray or Kelly A. Gray ceases
for any reason then he or she will have the right to require St. John
Knits International, or, under some circumstances, St. John, to purchase
such employee's St. John Knits International common stock up to a
maximum of $5 million worth of such common stock for all Gray employees
during any 12-month period; and
8. Vestar/Gray LLC (on behalf of the Grays) and, if the limited liability
company agreement is terminated, prior to a public offering of St. John
Knits International common stock, if any of the Grays is terminated
without "cause" or resigns for "good reason," as these terms are
defined in their current respective employment contracts with St. John,
then he or she will have the right to require St. John Knits
International, or, under some circumstances, St. John, to purchase such
employee's shares of St. John Knits International common stock up to a
maximum of 25% of the common stock owned by or allocated to all such
terminated Gray employees during any 12-month period.
The reason that the Grays will be given the right to sell shares to St. John
Knits International as described in clauses (7) and (8) above is that their
shares will not be freely transferable. Following the mergers, the public
stockholders will hold unrestricted securities that may be sold without
restriction at any time. As executive officers and directors of St. John Knits
International, the Grays will be affiliates of St. John Knits International.
Accordingly, they may not sell their shares except in limited amounts and
circumstances. Even if any of the Grays were no longer employed by St John
Knits International, so long as he or she remains a director of St. John Knits
International, he or she would be an affiliate and own restricted shares. The
total value of the Grays' investment as of the closing of the mergers will be
approximately $29 million.
Termination
The stockholders' agreement will terminate when Vestar/Gray LLC, the Grays
and Vestar and their respective affiliates do not own in the aggregate at least
10% of the outstanding common stock of St. John Knits International on a fully
diluted basis.
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THE LIMITED LIABILITY COMPANY AGREEMENT
The following summary describes the material terms of the limited liability
company agreement. However, because the description of the limited liability
company agreement contained in this document is a summary, it may not contain
all the information that may be important to you. The entire copy of the
limited liability company agreement is filed as an exhibit to the registration
statement to which this proxy statement-prospectus relates.
Upon consummation of the acquisition merger, St. John Knits International
will be 93% owned by Vestar/Gray LLC. Following the mergers, Vestar/Gray LLC
will be owned approximately 84% by Vestar, through Vestar/SJK Investors LLC,
and approximately 16% by the Grays. Vestar/SJK Investors LLC and the Grays will
be the sole members of Vestar/Gray LLC following the mergers. The limited
liability company agreement governs the exercise of Vestar/Gray LLC's rights
under the stockholders' agreement.
Voting of Shares
The limited liability company agreement will provide that Vestar/Gray LLC
will vote the shares of St. John Knits International it holds as directed in
writing by the members of Vestar/Gray LLC in proportion to their percentage
interests in Vestar/Gray LLC. The limited liability company agreement also
provides that so long as Vestar and its affiliates beneficially own at least
half of the common stock of St. John Knits International allocated to Vestar as
of the date of the acquisition merger and Vestar/Gray LLC beneficially owns at
least 25% of the total voting power of St. John Knits International,
Vestar/Gray LLC will vote all common stock of St. John Knits International held
by it to ratify, approve and adopt any and all actions adopted or approved by
the board of directors of St. John Knits International.
Under the limited liability company agreement, Vestar may designate
directors to the board of directors of St. John Knits International on the
following terms: Vestar may appoint three directors as long as Vestar owns at
least half of the common stock of St. John Knits International allocated to
Vestar as of the date of the acquisition merger. Vestar may appoint two
directors as long as Vestar owns less than half of the common stock of St. John
Knits International that will be allocated to Vestar as of the date of the
acquisition merger but not less than one-third of the common stock of St. John
Knits International allocated to Vestar as of such date. Finally, Vestar may
appoint one director as long as Vestar owns less than one-third of the common
stock of St. John Knits International allocated to Vestar as of the date of the
acquisition merger, but not less than one-tenth of the common stock of St. John
Knits International allocated to Vestar as of such date, provided that so long
as Vestar owns at least as many shares as the Grays, Vestar will retain the
right to appoint at least as many directors as the Grays have the right to
appoint.
The limited liability company agreement will also provide that the Grays may
designate directors to the board of directors of St. John Knits International
on the following terms: the Grays may appoint two directors as long as the
Grays own not less than half of the common stock of St. John Knits
International allocated to the Grays as of the date of the acquisition merger.
The Grays may appoint one director as long as they own less than half of the
common stock of St. John Knits International allocated to the Grays as of the
date of the acquisition merger, but not less than one-fifth of the common stock
of St. John Knits International that will be allocated to the Grays as of such
date.
Registration Rights
The stockholders' agreement will grant Vestar/Gray LLC registration rights
with respect to the common stock of St. John Knits International. See "The
Stockholders' Agreement" on page 93. The limited liability company agreement
will govern the exercise of these registration rights. At any time when
Vestar/Gray LLC is permitted under the stockholders' agreement, Vestar may
request Vestar/Gray LLC to exercise a right to register its allocable share of
the St. John Knits International common stock held by Vestar/Gray LLC. Vestar
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is limited to four requests for registration. Only Vestar may cause an initial
public offering of St. John Knits International common stock to occur.
No earlier than 12 months following the consummation of the initial public
offering of the common stock of St. John Knits International and subject to
requirements as to the minimum number of shares to be registered, any time when
Vestar/Gray LLC is permitted under the stockholders' agreement, the Grays may
request Vestar/Gray LLC to exercise a right to register the St. John Knits
International common stock held by Vestar/Gray LLC. The Grays are limited to
two requests for registration.
In addition, if St. John Knits International terminates any of the Grays
without "cause" or if any of the Grays resigns for "good reason," as these
terms are defined in their current respective employment contracts with St.
John, then that member of the Gray family, along with all other Grays
terminated without "cause" or who resign for "good reason," will have the
right, beginning six months following the consummation of the initial public
offering of St. John Knits International common stock, to four additional
requests for registration, which may be used not more often than once in any
12-month period. In addition, the member or members of the Gray family who so
resigns or is terminated will have first priority, alone, to register 25% of
the common stock of St. John Knits International held by it or them in the
registration.
If St. John Knits International is not able to register shares within 90
days (or 135 days under some circumstances), St. John Knits International will
purchase the Grays' shares on the terms and conditions found in the limited
liability company agreement. In addition, under the limited liability company
agreement, whenever Vestar/Gray LLC receives notice that St. John Knits
International proposes to register any of its common stock under the Securities
Act, it is required to give prompt notice to each of its members and each
member will have the opportunity, subject to certain priority provisions, to
include in such a registration shares of common stock of St. John Knits
International held by Vestar/Gray LLC which are allocated to such member.
Transfers of St. John Knits International Common Stock
The limited liability company agreement will provide that:
1. under some circumstances the Grays will have the right to participate
pro rata in some sales by Vestar/Gray LLC of St. John Knits
International common stock allocated to Vestar;
2. Vestar will have the right to require the Grays to participate in some
sales by Vestar/Gray LLC of St. John Knits International common stock
allocated to Vestar;
3. St. John Knits International will have a right of first refusal on some
sales by Vestar/Gray LLC of St. John Knits International common stock
allocated to the Grays;
4. after a public offering of St. John Knits International common stock,
Vestar and the Grays may, subject to some limitations, request the
transfer in accordance with Rule 144 under the Securities Act of all or
any portion of the St. John Knits International common stock allocated
to Vestar or the Grays;
5. upon the earlier to occur of a public offering of St. John Knits
International common stock or the fifth anniversary of the acquisition
merger and subject to restrictions, the Grays may request that
Vestar/Gray LLC effect a transfer pursuant to any available exemption
from the registration requirement under the Securities Act of all or a
portion of the St. John Knits International common stock allocated to
the Grays;
6. Vestar may, at any time, request that Vestar/Gray LLC effect a transfer
pursuant to any available exemption from the registration requirement
under the Securities Act of all or a portion of the St. John Knits
International common stock allocated to Vestar;
7. prior to a public offering of St. John Knits International common stock,
if Robert E. Gray ceases to serve as Chairman or Chief Executive Officer
of St. John or St. John Knits International or if the employment of
Marie Gray or Kelly A. Gray ceases for any reason, then he or she will
have the right,
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subject to some limitations, to require St. John Knits International, or,
in some cases, St. John, to purchase from Vestar/Gray LLC during any 12-
month period up to $5 million worth of St. John Knits International
common stock allocated to all members of the Gray family; and
8. prior to a public offering of St. John Knits International common stock,
if any of the Grays is terminated without "cause" or resigns for "good
reason," as these terms are defined in their current respective
employment contracts with St. John, then he or she will have the right,
subject to some restrictions, to require St. John Knits International
or, in some cases, St. John, to purchase from Vestar/Gray LLC not more
than 25% during any 12-month period of the shares of St. John Knits
International allocated to all such terminated members of the Gray
family.
Non-Compete
The limited liability company agreement will provide that each of the Grays,
so long as he or she is employed by St. John, St. John Knits International or
one of their respective subsidiaries and for a period of five years after he or
she ceases to be so employed, will not, directly or indirectly, engage in the
design, manufacturing, production, marketing, sale or distribution of women's
clothing or accessories anywhere in the world in which St. John Knits
International and its subsidiaries are doing business, other than through his
or her employment with St. John, St. John Knits International or one of their
subsidiaries. The limited liability company agreement also provides that if
Kelly Gray is terminated without "cause" or resigns for "good reason," as
defined under her current employment contract, the term of the non-compete
period will be reduced to three years, and, subject to restrictions, she will
be permitted to engage in some otherwise competitive activities.
Each of the Grays will agree that he or she will not, without the prior
written consent of St. John Knits International, directly or indirectly, use or
grant a third party the right to use, the names "Marie Gray," "St. John" or
"St. John by Marie Gray" or any combination or variation of these names, in any
competing business or in any other manner that would be reasonably likely to
dilute or endanger the validity or value of any trademarks or trade names of
St. John Knits International, St. John or any of their respective subsidiaries.
Termination
Vestar/Gray LLC will dissolve upon the first to occur of any of the
following events:
1. December 31, 2009;
2. the bankruptcy, dissolution, resignation or expulsion of Vestar as
managing member;
3. the sale of all of the assets of Vestar/Gray LLC;
4. the unanimous agreement of Vestar and the Grays to dissolve Vestar/Gray
LLC;
5. on or after the earlier of the consummation of a public offering of St.
John Knits International and the fifth anniversary of the date of the
acquisition merger, upon the request of Vestar or the Grays; or
6. less than 10% of the number of shares of common stock of St. John Knits
International allocated to Vestar as of the date of the acquisition
merger are allocated to Vestar. In the event the stockholders' agreement
is in effect at the time of any dissolution of Vestar/Gray LLC, all
rights of Vestar and the Grays described above will be incorporated into
the stockholders' agreement.
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THE SPECIAL MEETING
General
This proxy statement-prospectus is accompanied by the notice of special
meeting, a form of non-cash election and a form of proxy that is solicited by
the St. John board of directors for use at the special meeting of St. John
shareholders to be held on June 28, 1999, at 1:00 p.m., local time, at 17522
Armstrong Avenue, Irvine, California and at any adjournments or postponements
of the special meeting.
Matters to be Considered
At the special meeting, St. John shareholders will be asked to consider and
vote upon a proposal to approve the principal terms of the reorganization
merger found in the merger agreement and to approve the form of agreement of
merger to be filed with the California Secretary of State to effect the
reorganization merger.
The consummation of the reorganization merger is a condition to the
acquisition merger. The board of directors of St. John Knits International has
approved the acquisition merger. In addition, St. John, as sole stockholder of
St. John Knits International, has approved the acquisition merger. No further
approval of the acquisition merger is required and neither the shareholders of
St. John nor the stockholders of St. John Knits International after the
reorganization merger will have the right to vote on the acquisition merger.
Consequently, your vote on the reorganization merger will effectively be a vote
on both mergers.
We anticipate that the mergers will occur as promptly as practicable after
the St. John special meeting. You may also be asked to vote upon a proposal to
adjourn or postpone the St. John special meeting, which adjournment or
postponement could be used for the purpose, among others, of allowing
additional time for the soliciting of additional votes to approve the
reorganization merger.
Proxies
If you are a St. John shareholder, you may use the accompanying proxy if you
are unable to attend the special meeting in person or wish to have your shares
voted by proxy even if you do attend the special meeting. You may revoke any
proxy given by you pursuant to this solicitation by delivering to Marie Gray,
the Corporate Secretary of St. John, prior to or at the special meeting, a
written notice revoking the proxy or a duly executed proxy relating to the same
shares bearing a later date or by attending the special meeting and electing to
vote in person. However, your attendance at the special meeting will not in and
of itself constitute a revocation of a proxy; you must vote in person at the
meeting to effectively revoke your proxy. You should address any written notice
of revocation and other communications with respect to the revocation of St.
John proxies to the Corporate Secretary of St. John at 17422 Derian Avenue,
Irvine, California 92614. In all cases, the latest dated proxy revokes an
earlier dated proxy, regardless of which method is used to give or revoke a
proxy, or if different methods are used to give and revoke a proxy. For such
notice of revocation or later proxy to be valid, however, it must actually be
received by St. John prior to the vote of the St. John shareholders at the
special meeting. If your broker has been instructed to vote your shares, you
must follow directions received from your broker in order to change your vote.
All shares represented by valid proxies received pursuant to this
solicitation and not revoked before they are exercised will be voted in the
manner specified in such proxies. If you do not specify how your proxy is to be
voted, it will be voted in favor of approval of the principal terms of the
reorganization merger found in the merger agreement. The St. John board is
unaware of any other matters that may be presented for action at the special
meeting. If other matters do properly come before the special meeting, however,
it is intended that shares represented by proxies in the accompanying form will
be voted or not voted by the persons named in the proxies, in their discretion.
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Solicitation of Proxies
The cost of soliciting the proxies from the St. John shareholders will be
borne by St. John. In addition to the solicitation of proxies by mail, St. John
will request banks, brokers and other record holders to send proxies and proxy
material to the beneficial owners of shares of St. John and secure their voting
instructions, if necessary. St. John will reimburse such record holders for
their reasonable out-of-pocket expenses in doing so. D.F. King & Co., Inc. will
assist in the solicitation of proxies by St. John for an estimated fee of
$6,000, plus reasonable out-of-pocket expenses.
Forms of Non-Cash Election
St. John has mailed a form for making a non-cash election with this proxy
statement-prospectus to shareholders of record of St. John common stock as of
the record date for the special meeting. Only shareholders of record on the
record date will have the right to elect to receive shares of St. John Knits
International common stock in the acquisition merger. If you do not wish to
receive shares of St. John Knits International common stock in the acquisition
merger, you should not submit the form of non-cash election, although this will
not guarantee that you will not receive shares. If your shares are held in
"street name" through your broker, your broker will mail your form of non-cash
election to you under separate cover, together with a letter of instructions
for making a non-cash election. You should read your form of non-cash election
together with this proxy statement-prospectus. See "The Mergers--Merger
Consideration" on page 60.
For a form of non-cash election to be effective, holders of St. John common
stock must properly complete the form of non-cash election, and send the form,
together with all certificates for shares of St. John common stock held by the
holder, duly endorsed in blank or otherwise in a form which is acceptable for
transfer on the books of St. John or by appropriate guarantee of delivery as
described in the form of non-cash election, to Harris Trust Company of
New York, St. John's exchange agent. Harris Trust must receive the completed
form of non-cash election and share certificates by 5:00 p.m., Eastern time, on
June 25, 1999, the business day preceding the date of the special meeting.
The determinations of the exchange agent as to whether or not elections to
receive shares of St. John Knits International in the acquisition merger have
been properly made or revoked, and which of these elections or revocations were
received, will be binding.
Record Date and Voting Rights
Record Date. The St. John Board has fixed May 24, 1999 as the record date
for the determination of the St. John shareholders entitled to receive notice
of and to vote at the special meeting. Accordingly, only St. John shareholders
of record at the close of business on such date will be entitled to notice of
and to vote at the special meeting. At the close of business on the record
date, there were 16,618,147 shares of St. John common stock entitled to vote at
the special meeting held by 318 holders of record.
Quorum Requirement. The presence, in person or by proxy, of shares of St.
John common stock representing a majority of the outstanding shares of the St.
John Knits common stock entitled to vote on the record date is necessary to
constitute a quorum at the special meeting.
Voting Rights. Each share of St. John common stock outstanding on the record
date entitles its holder to one vote as to (1) the proposal to approve the
principal terms of the reorganization merger found in the merger agreement and
(2) any other proposal that may properly come before the special meeting.
Vote Required. Under the California General Corporation Law, or the "CGCL,"
the adoption and approval of the principal terms of the reorganization merger
found in the merger agreement require the affirmative vote of the holders of a
majority of the outstanding shares of St. John common stock entitled to vote on
the reorganization merger. In addition, under the merger agreement, the
approval of the reorganization merger requires the affirmative vote of the
holders of a majority of outstanding shares of St. John common
100
<PAGE>
stock present in person or by proxy and voting at the special meeting,
excluding the shares of St. John stock owned beneficially by Vestar and the
Grays.
Agreement of Merger. We have attached as Appendix F the form of agreement of
merger to be filed with the California Secretary of State after the closing of
the mergers to consummate the reorganization merger. This form of agreement of
merger contains terms of the reorganization merger found in the merger
agreement.
Abstentions and Broker Non-Votes. St. John intends to count shares of St.
John common stock present in person at the special meeting but not voting, and
shares of St. John common stock for which it has received proxies but with
respect to which holders of such shares have abstained, as present at the St.
John special meeting for purposes of determining the presence or absence of a
quorum for the transaction of business. Brokers who hold shares of St. John
common stock in "street" name for customers who are the beneficial owners of
such shares are prohibited from giving a proxy to vote shares held for such
customers with respect to the matters to be considered and voted at the special
meeting without specific instructions from such customers. Shares of St. John
common stock represented by proxies returned by a broker holding such shares in
nominee or "street" name will be counted for purposes of determining whether a
quorum exists, even if such shares are broker non-votes.
Because approval of the reorganization merger requires the affirmative vote
of a majority of outstanding shares of St. John common stock, abstentions and
broker non-votes will have the same effect as negative votes. Accordingly, the
St. John board urges St. John shareholders to complete, date and sign the
accompanying proxy and return it promptly in the enclosed, postage-paid
envelope.
As of the record date, approximately 1,482,108 shares of St. John common
stock, or approximately 8.9% of the shares entitled to vote at the special
meeting, were owned by directors and executive officers of St. John. It is
currently expected that each such director and executive officer will vote the
shares of the St. John common stock beneficially owned by him or her for
approval of the reorganization merger. Furthermore, the Grays have agreed in
the voting agreement to vote their shares of St. John common stock, which in
the aggregate represent approximately 7.3% of the shares outstanding as of the
close of business on the record date, in favor of the reorganization merger.
Recommendation of the St. John Board and the Special Committee of the Board
The special committee has recommended to the St. John board, and the St.
John board has approved, the merger agreement and the transactions contemplated
by the merger agreement. The St. John board and the special committee of the
board believe that the merger agreement and the transactions contemplated by
the merger agreement are in the best interests of St. John and the St. John
shareholders, and recommend that the St. John shareholders vote "FOR" approval
of the principal terms of the reorganization merger found in the merger
agreement. Neither the board nor the special committee makes any recommendation
as to the fairness of the consideration to be received in the acquisition
merger by any shareholder who elects to receive shares of St. John Knits
International common stock and, as a result of that election, receives more
than his or her pro rata share of St. John Knits International common stock.
See "Special Factors--Reasons for the Mergers; Recommendations to Shareholders"
on page 30.
101
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COMPARISON OF THE RIGHTS OF HOLDERS OF ST. JOHN COMMON STOCK AND
ST. JOHN KNITS INTERNATIONAL COMMON STOCK
As a consequence of the consummation of the proposed reorganization merger,
the shareholders of St. John, a California corporation, will become
stockholders of St. John Knits International, a Delaware corporation. Delaware
corporations are governed by the Delaware General Corporation Law, or the DGCL.
California corporations are governed by the California General Corporation Law,
or the CGCL. Thus, the rights of former St. John shareholders will be governed
by the DGCL rather than the CGCL.
Differences between the CGCL and the DGCL and between the charters and
bylaws of St. John and St. John Knits International will result in several
changes in the rights of shareholders of St. John if the mergers are effected.
The material differences between the rights of holders of shares of St. John
Knits International common stock and shares of St. John common stock are
summarized below. Because the following summary is not a complete statement of
the rights of holders of St. John common stock under the CGCL, the restated
articles of incorporation of St. John, as amended, and the restated bylaws of
St. John, as compared with the rights of holders of St. John Knits
International common stock under the DGCL, the restated certificate of
incorporation of St. John Knits International and the bylaws of St. John Knits
International, it does not contain all the information which is important to
you. You should read carefully the CGCL, the DGCL and the governing corporate
instruments of St. John Knits International and St. John, to which shareholders
are referred. Copies of the St. John Knits International restated certificate
of incorporation and St. John Knits International bylaws are available for
inspection at the offices of St. John Knits International and copies will be
sent to the holders of St. John common stock upon request. Pursuant to Sections
1500 and 213 of the CGCL, copies of the St. John restated articles of
incorporation and the St. John restated bylaws are available for inspection at
the principal executive offices of St. John.
<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<C> <S> <C>
Dividends and California law dispenses with the The concepts of par value, capital
Repurchases concepts of par value of shares as and surplus are retained under
of Shares well as statutory definitions of Delaware law. Under the DGCL, a
capital, surplus and the like. corporation may declare and pay
Generally, a California dividends out of surplus or, if
corporation may pay dividends or there is no surplus, out of net
repurchase shares out of retained profits for the fiscal year in
earnings. Dividends or repurchases which the dividend is declared
of shares may also be made if, and/or for the preceding fiscal
immediately after giving effect year as long as the amount of
thereto, the sum of: capital of the corporation
following the declaration and
1. the assets, excluding goodwill payment of the dividend is not
and some other assets, of the less than the aggregate amount of
corporation are at least equal the capital represented by the
to 1.25 times its liabilities, issued and outstanding stock of
excluding some deferred all classes having a preference
credits, and upon the distribution of assets.
In addition, the DGCL generally
2. the current assets of such provides that a corporation may
corporation are at least equal redeem or repurchase its shares
to its current liabilities or, only if such redemption or
if the average of the earnings repurchase would not impair the
of the corporation before taxes capital of the corporation.
and interest expense for the
two preceding fiscal years were
less than the average of the
interest expense of such
corporation for such fiscal
years, at least equal to 1.25
times its current liabilities.
</TABLE>
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<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Dividends Under the CGCL, there are
and exceptions to the foregoing rules
Repurchases for repurchases of shares in
of Shares connection with some rescission
(continued) actions or pursuant to some
employee stock plans.
The St. John restated articles
generally provide that some
repurchases of St. John common
stock from some affiliates and 5%
shareholders requires the vote of
a majority of the outstanding
shares, excluding shares owned by
such interested shareholders.
Special Under the CGCL, a special meeting Under the DGCL, a special meeting
Meetings of of shareholders may be called by of stockholders may be called by
Shareholders; the board of directors, the the board of directors or by any
Quorum; chairman of the board, the other person authorized to do so
Shareholder president or the holders of shares in the certificate of
Action by entitled to cast not less than 10% incorporation or the bylaws. The
Written of the votes at the meeting or bylaws of St. John Knits
Consent such additional persons as may be International grant the President
provided in the charter or bylaws. for any purpose and the President
The St. John restated articles and or Secretary, if directed by the
restated bylaws do not provide for board of directors as requested in
any such additional persons. writing by the holders of not less
than 100% of the capital stock of
A quorum for a meeting of St. John Knits International, the
shareholders of St. John is right to call a special meeting.
generally a majority of the
outstanding shares of St. John The DGCL provides that, unless
entitled to vote at such a limited by the certificate of
meeting. An action by shareholders incorporation, any action that
of St. John requires a majority of could be taken by stockholders at
votes cast at a meeting of a meeting may be taken without a
shareholders. The CGCL provides meeting if a consent in writing,
that these quorum requirements may stating the action so taken, is
be increased or decreased by signed by the holders of record of
amendment of the charter, except outstanding stock having not less
that in no event shall a quorum than the minimum number of votes
consist of less than one-third of that would be necessary to
the shares entitled to vote. authorize or take such action at a
meeting at which all shares
Under the CGCL, unless otherwise entitled to vote thereon were
provided in the articles of present and voted. The St. John
incorporation, any action which Knits International restated
may be taken at a meeting of certificate of incorporation does
shareholders may also be taken by not limit the right of the
the written consent of the holders stockholders to take action by
of at least the same proportion of written consent.
outstanding shares as would be
necessary to take such action at a
meeting at which all shares
entitled to vote were present and
voted, except that the election of
directors by written consent
requires the unanimous consent of
all shares entitled to vote. The
St. John restated articles and
restated bylaws contain provisions
that prohibit actions by written
consent of its shareholders so
long as St. John is a listed
corporation within the meaning of
Section 301.5 of the CGCL.
</TABLE>
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<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Voting California law generally requires Delaware law provides that, unless
Rights in approval of any reorganization, otherwise specified in a
Reorganizations which includes a merger, some corporation's certificate of
exchange reorganizations and some incorporation, a sale or other
sale-of-asset reorganizations, or disposition of all or
sale of all or substantially all substantially all of the
of the assets of a corporation, by corporation's assets, a merger or
the affirmative vote of the consolidation of the corporation
holders of a majority, unless the with another corporation or a
charter requires a higher dissolution of the corporation
percentage, of the outstanding requires the affirmative vote of
shares of each class of capital the board of directors, except in
stock of the corporation entitled limited circumstances, plus
to vote on such reorganizations. generally, the affirmative vote of
The St. John restated articles do a majority of the outstanding
not require a higher percentage of stock entitled to vote on such
the holders of shares of St. John transactions.
common stock to approve any such
reorganization. Under the DGCL, unless a
corporation's
certificate of incorporation
In general, under the CGCL, no expressly provides otherwise,
approval of a reorganization is there is no requirement that the
required by the holders of the holders of the outstanding shares
outstanding shares in the case of approve a reorganization if
any corporation if such conditions specified in the DGCL
corporation, or its shareholders are met, including:
immediately before such
reorganization, or both, own, 1. the corporation and its
immediately after such subsidiary are the only
reorganization, equity securities, constituent corporations to the
other than warrants or rights, of merger;
the surviving or acquiring
corporation, or the parent of 2. the corporation's stockholders
either of the constituent receive in the merger the same
corporations, possessing more than number of shares of stock in
five-sixths of the voting power of the new company as they owned
such surviving or acquiring prior to the reorganization,
corporation or such parent. and this stock must have the
same voting powers as the stock
Under the CGCL, a parent of the corporation before the
corporation may, without reorganization;
shareholder approval, merge a
subsidiary into itself if the 3. the parent company after the
parent corporation owns at least reorganization must be a
90% of the outstanding shares of Delaware company with the
each class of stock of such generally same certificate of
subsidiary. incorporation and bylaws that
the corporation had prior to
the reorganization;
4. after the reorganization, the
corporation or its successors
becomes a subsidiary of the
parent;
5. the directors of the
corporation immediately prior
to the reorganization become
the directors of the parent
following the reorganization;
and
</TABLE>
104
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<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Voting 6. the certificate of
Rights in incorporation of the subsidiary
Reorganizations is amended to provide that any
(continued) action involving the subsidiary
that would have required the
vote of its stockholders prior
to the merger will require,
following the merger, the
approval of the stockholders of
the parent.
The St. John Knits International
restated certificate of
incorporation does not contain
vote requirements for
extraordinary corporate
transactions in addition to or
different from the approvals
mandated by law.
Size and Under the CGCL, although changes Under the DGCL, directors, unless
Classification in the number of directors must in their terms are staggered, are
of the Board general be approved by a majority elected at each annual
of Directors of the outstanding shares, the stockholders meeting. The
board of directors may fix the certificate of incorporation may
exact number of directors within a authorize the election of some
stated range set forth in the directors by one or more classes
articles of incorporation or or series of shares, and the
bylaws, if that stated range has certificate of incorporation, an
been approved by the shareholders. initial bylaw or a bylaw adopted
by a vote of the stockholders may
Under the CGCL, a listed provide for staggered terms for
corporation may, by amendment to the directors. The certificate of
its charter or bylaws, divide its incorporation or the bylaws also
board of directors into as many as may allow the stockholders or the
three classes, and directors can board of directors to fix or
be elected to serve staggered change the number of directors,
terms. The St. John articles of but a corporation must have at
incorporation and bylaws contain least one director. The St. John
no such provision and, Knits International restated
accordingly, all directors are certificate of incorporation and
elected annually for a term of one bylaws contain no such provision
year or until a successor is and accordingly, all directors
elected. A "listed corporation" is will be elected annually for a
defined under the CGCL as a term of one year or until their
corporation with: successors are elected.
1. securities listed on the New
York Stock Exchange or the
American Stock Exchange; or
2. securities designated as a
National Market System security
or the Nasdaq National Market.
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Election of Under the CGCL, unless the Under the DGCL, stockholders do
Directors corporate charter provides not have cumulative voting rights
otherwise, any shareholder of a unless the certificate of
listed corporation is entitled to incorporation so provides. The St.
cumulate his votes for the John Knits International restated
election of directors provided certificate does not contain such
that at least one shareholder has a provision.
given notice at the meeting prior
to the voting of such
shareholder's intention to
cumulate his votes and the
corporation's charter does not
specifically eliminate cumulative
voting. The St. John restated
articles provide for the
elimination of cumulative voting
so long as the corporation is a
listed corporation.
Removal of Under the CGCL, the holders of at Under the DGCL, a director of a
Directors; least 10% of the number of corporation that does not have a
Filling outstanding shares of any class of classified board of directors or
Vacancies on stock may initiate a court action cumulative voting may be removed,
the Board of to remove any director for cause. with or without cause, with the
Directors In addition, any or all of the approval of a majority of the
directors of a California outstanding shares entitled to
corporation may be removed without vote. The St. John Knits
cause by the affirmative vote of a International restated certificate
majority of the outstanding shares of incorporation does not provide
entitled to vote. However, no for cumulative voting or for a
director may be removed, unless classified board of directors.
the entire board is removed, when Consequently, any director may be
the votes cast against removal removed from office at any time
would be sufficient to elect the with or without cause upon the
director if voted cumulatively at affirmative vote of the holders of
an election at which the same a majority of the then outstanding
total number of votes were cast voting stock.
and the entire number of the
directors authorized at the time Under the DGCL, vacancies and
of the director's most recent newly created directorships may be
election were then being elected. filled by a majority of the
In the case of a corporation whose directors then in office, even
board is classified, a director though less than a quorum, unless
may not be removed if the votes otherwise provided in the
cast against removal would be certificate of incorporation or
sufficient to elect the director bylaws. The St. John Knits
if voted cumulatively at an International bylaws provide that
election at which the same number any vacancy or newly created
of votes were cast. directorship resulting from any
increase in the number of
Under the CGCL, unless otherwise directors may be filled by a
provided in the charter or bylaws majority of the directors then in
and except for a vacancy created office, even though less than a
by the removal of a director, quorum.
vacancies on the board of
directors may be filled by
approval of the board. The St.
John restated articles of
incorporation and restated bylaws
contain no provisions to the
contrary. In addition, any vacancy
not filled by the directors and
any vacancies on the board
resulting from the removal of
directors may be filled by
approval of the shareholders.
</TABLE>
106
<PAGE>
<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Amendment of Under the CGCL, amendments to the Under the DGCL, unless a higher
Charter and charter of a corporation generally vote is required in the
Bylaws require approval by vote of the certificate of incorporation, an
directors and the holders of a amendment to the certificate of
majority of outstanding shares incorporation of a corporation may
entitled to vote on such be approved by a majority of the
amendments and, where their rights outstanding shares and a majority
are affected, by the holders of a of the outstanding shares of each
majority of the outstanding shares class entitled to vote upon the
of a class, whether or not such proposed amendment.
class is entitled to vote on such
amendments by the provision of the Delaware law provides that a
charter. corporation's bylaws may be
amended by that corporation's
Under the CGCL, bylaws may be stockholders, or, if so provided
adopted, amended or repealed in the corporation's certificate
either by the vote of a majority of incorporation, by the
of the outstanding shares or by corporation's directors. The St.
the approval of the board of John Knits International restated
directors except: certificate of incorporation gives
its directors the power to alter,
1. if the number of directors is amend, or repeal the bylaws.
specified in the charter, in
which case such number may only
be changed by an amendment to
the charter; or
2. if the charter requires a
larger percentage of
shareholder or director vote to
approve a given action.
The St. John restated articles
also give St. John's directors
the power to adopt, amend or
repeal the St. John restated
bylaws. In addition, the
St. John restated articles give
St. John shareholders the right
to adopt, amend or repeal the
St. John restated bylaws, but
only with the affirmative vote
of the holders of not less than
66-2/3% of the outstanding
shares of St. John common stock
entitled to vote on such
matters.
</TABLE>
107
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<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Dissenters' The provisions of the CGCL Under Delaware law, in some
Appraisal relating to dissenters' rights of circumstances, a stockholder of a
Rights appraisal are described in "The Delaware corporation is entitled
Mergers--Dissenters' Rights of to demand appraisal and obtain
Appraisal" on page 65. payment of the judicially
determined fair value of his or
her shares in the event of any
plan of merger or consolidation to
which the corporation, the shares
of which he or she holds, is a
party, provided such stockholder
continuously holds such shares
through the effective date of the
merger, otherwise complies with
the requirements of Delaware law
for the perfection of appraisal
rights and does not vote in favor
of the merger. However, this right
to demand appraisal does not apply
to stockholders if:
1. they are stockholders of a
surviving corporation and if a
vote of the stockholders of
such corporation is not
necessary to authorize the
merger or consolidation; or
2. the shares held by the
stockholders are of a class or
series listed on a national
securities exchange, designated
as a national market system
security on an interdealer
quotation system by the NASD or
are held of record by more than
2,000 stockholders on the date
set to determine the
stockholders entitled to vote
on the merger or consolidation.
Notwithstanding the above,
appraisal rights are available for
the shares of any class or series
of stock of a Delaware corporation
if the holders of such shares are
required by the terms of an
agreement of merger or
consolidation to accept for their
stock anything except:
1. shares of stock of the
corporation surviving or
resulting from the merger or
consolidation;
</TABLE>
108
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<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Dissenters' 2. shares of stock of any other
Appraisal corporation which at the
Rights effective date of the merger or
(continued) consolidation will be listed on
the New York Stock Exchange or
the American Stock Exchange,
designated as a national market
system security on an
interdealer quotation system by
the NASD or held of record by
more than 2,000 shareholders;
3. cash in lieu of fractional
shares of the corporations
described in (1) and (2); or
4. any combination of the shares
of stock and cash in lieu of
fractional shares described
above.
A Delaware corporation may provide
in its certificate of
incorporation that appraisal
rights will be available for the
shares of any class or series of
its stock as the result of an
amendment to its certificate of
incorporation, any merger or
consolidation to which the
corporation is a party or a sale
of all or substantially all of the
assets of the corporation. The St.
John Knits International restated
certificate of incorporation does
not contain any provision
regarding appraisal rights.
Although shareholders of St. John
have dissenters' appraisal rights
in the reorganization merger,
stockholders of St. John Knits
International after the
reorganization merger will not
have dissenters' appraisal rights
in the acquisition merger.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Business The CGCL generally requires that, Under Section 203 of the DGCL,
Combinations unless all shareholders of a class some "business combinations" with
and or series consent, each share of "interested stockholders" of
Reorganizations such class or series of any party Delaware corporations are subject
to a merger must be treated to a three-year moratorium unless
equally with respect to any specified conditions are met.
distribution of cash, property,
rights or securities. The CGCL Section 203 prohibits a Delaware
also provides generally that if a corporation from engaging in a
corporation that is party to a "business combination" with an
merger, or its parent, owns more "interested stockholder" for three
than 50% but less than 90% of the years following the time that such
voting power of the other person becomes an interested
corporation that is party to such stockholder. With some exceptions,
merger, the nonredeemable shares an interested stockholder is a
of common stock of the controlled person who or group which owns 15%
corporation may be converted only or more of the corporation's
into nonredeemable shares of the outstanding voting stock,
surviving corporation or a parent including any rights to acquire
party unless all of the stock pursuant to an option,
shareholders of the class consent. warrant, agreement, arrangement or
understanding, or upon the
The CGCL also provides generally exercise of conversion or exchange
that if a tender offer or a rights, and stock with respect to
written proposal for some business which the person has voting rights
combinations is made to some or only, or is an affiliate or
all of a corporation's associate of the corporation and
shareholders by an "interested was the owner of 15% or more of
party," an affirmative written such voting stock at any time
opinion as to the fairness of the within the previous three years.
consideration to such shareholders
must be delivered. An "interested For purposes of Section 203, the
party" is generally a control term "business combination" is
person of the target corporation, defined broadly to include:
an entity directly or indirectly
controlled by an officer or 1. mergers with or caused by the
director of such corporation or an interested stockholder;
entity in which a material
financial interest is held by any 2. sales or other dispositions to
director or executive officer of the interested stockholder,
such corporation. except proportionately with the
corporation's other
stockholders, of assets of the
corporation or a subsidiary
equal 10% or more of the
aggregate market value of the
corporation's consolidated
assets or its outstanding
stock;
3. the issuance or transfer by the
corporation or a subsidiary of
stock of the corporation or
such subsidiary to the
interested stockholder, except
for transfers in a conversion
or exchange or a pro rata
distribution or some other
transactions, none of which
increase the interested
stockholder's proportionate
ownership of any class or
series of the corporation's or
such subsidiary's stock; or
</TABLE>
110
<PAGE>
<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Business 4. any receipt by the interested
Combinations stockholder, except
and proportionately as a
Reorganizations stockholder, directly or
(continued) indirectly, of any loans,
advances, guarantees, pledges
or other financial benefits
provided by or through the
corporation or a subsidiary.
The three-year moratorium imposed
on business combinations by
Section 203 does not apply if:
1. prior to the time at which such
stockholder becomes an
interested stockholder the
board of directors approves
either the business combination
or the transaction which
resulted in the person becoming
an interested stockholder;
2. the interested stockholder owns
at least 85% of the
corporation's voting stock upon
consummation of the transaction
which made him or her an
interested stockholder,
excluding from the 85%
calculation shares owned by
directors who are also officers
of the target corporation and
shares held by employee stock
plans which do not permit
employees to decide
confidentially whether to
accept a tender or exchange
offer; or
3. on or after the time such
person becomes an interested
stockholder, the board approves
the business combination and it
is also approved at a
stockholder meeting by 66-2/3%
of the voting stock not owned
by the interested stockholder.
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Business Section 203 applies only to
Combinations Delaware corporations which have a
and class of voting stock that is
Reorganizations listed on a national securities
(continued) exchange, are quoted on an
interdealer quotation system such
as Nasdaq, or are held of record
by more than 2,000 stockholders.
However, a Delaware corporation
may elect not to be governed by
Section 203 by a provision in its
original certificate of
incorporation or an amendment to
its certificate or to the bylaws,
which amendment must be approved
by a majority of the shares
entitled to vote and, in the case
of a bylaw amendment, may not be
further amended by the board of
directors. St. John Knits
International does not intend to
elect not to be governed by
Section 203.
Limitation The CGCL provides that a Delaware law permits a corporation
on corporation's charter may contain to adopt a provision in its
Directors' a provision eliminating or certificate of incorporation
Liability limiting the personal liability of eliminating or limiting the
a director for monetary damages in personal liability of a director,
an action brought by or in the but not an officer, to the
right of the corporation for corporation or its shareholders
breach of a director's duties to for monetary damages for breach of
the corporation and its fiduciary duty as a director,
shareholders. However, no such except that such provision shall
provision may eliminate or limit not limit the liability of a
the liability of directors: director for:
1. for acts or omissions that 1. any breach of the director's
involve intentional misconduct duty of loyalty to the
or a knowing and culpable corporation or its
violation of law; shareholders;
2. for acts or omissions that a 2. acts or omissions not in good
director believes to be faith or which involve
contrary to the best interests intentional misconduct or a
of the corporation or its knowing violation of law;
shareholders or that involve
the absence of good faith on 3. liability under Section 174 of
the part of the director; the DGCL for unlawful payment
of dividends or stock purchases
3. for any transaction from which or redemptions; or
a director derived an improper
personal benefit;
</TABLE>
112
<PAGE>
<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Limitation 4. for acts or omissions that show 4. any transaction from which the
on a reckless disregard for the director derived an improper
Directors' director's duty to the personal benefit. The St. John
Liability corporation or its shareholders Knits International restated
(continued) in circumstances in which the certificate of incorporation
director was aware, or should provides that no director of
have been aware, in the St. John Knits International
ordinary course of performing a shall be personally liable to
director's duties, of a risk of it or its stockholders for
serious injury to the monetary damages for breach of
corporation or its fiduciary duty as a director,
shareholders; except to the extent such an
exemption from liability or
5. for acts or omissions that limitation thereof is not
constitute an unexcused pattern permitted under the DGCL.
of inattention that amounts to
an abdication of the director's
duty to the corporation or its
shareholders;
6. for any improper transaction
between a director and a
corporation in which the
director has a material
financial interest;
7. for any unlawful distribution
to the shareholders of a
corporation or any unlawful
loan of money and property to,
or guarantee of the obligations
of, any director or officer of
the corporation;
8. for any act or omission
occurring prior to effective
date of the provision; or
9. for the liability of an officer
for any act or omission as an
officer, notwithstanding that
the officer is also a director
or that his or her actions, if
negligent or improper, have
been ratified by the directors.
The St. John restated articles
provides that the liability of St.
John directors for monetary
damages will be eliminated to the
fullest extent permissible under
the CGCL.
</TABLE>
113
<PAGE>
<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Indemnification Under California law, a Under Delaware law, a corporation
of Officers corporation generally has the may indemnify any person made a
and power to indemnify any agent who party or threatened to be made a
Directors; is a party to any action, other party to any type of proceeding,
Insurance than an action by or in the right other than action by or in the
of the corporation to procure a right of the corporation, because
judgment in its favor, against he is or was an officer, director,
expenses, judgments, fines and employee or agent of the
settlements if that person acted corporation or was serving at the
in good faith and in a manner that request of the corporation as a
person reasonably believed to be director, officer, employee or
in the best interests of the agent of another corporation or
corporation and, in the case of a entity, against expenses,
criminal proceeding, had no judgments, fines and amounts paid
reasonable cause to believe his or in settlement actually and
her conduct was unlawful. In reasonably incurred in connection
addition, a corporation generally with such proceeding:
has the power to indemnify any
agent who is a party to any action 1. if he acted in good faith and
by or in the right of the in a manner he reasonably
corporation, against expenses believed to be in or not
actually and reasonably incurred opposed to the best interests
by that person in connection with of the corporation; or
the defense or settlement of the
action if that person acted in
good faith and in a manner that
person believed to be in the best
interests of the corporation and
its shareholders. An agent of a
corporation for purposes of the
CGCL includes directors, officers
and employees of such corporation.
The indemnification authorized by
the CGCL is not exclusive and a
corporation may grant its
directors some additional rights
to indemnification. The St. John
restated bylaws permit St. John to
indemnify each of its agents in
excess of the indemnification
otherwise permitted by the CGCL
with respect to actions for breach
of duty to St. John, subject to
limitations imposed by the CGCL.
</TABLE>
114
<PAGE>
<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Indemnification 2. in the case of a criminal
of Officers proceeding, he had no
and reasonable cause to believe
Directors; that his conduct was unlawful.
Insurance A corporation may indemnify any
(continued) person made a party or
threatened to be made a party
to any threatened, pending or
completed action or suit
brought by or in the right of
the corporation because he was
an officer, director, employee
or agent of the corporation, or
is or was serving at the
request of the corporation as a
director, officer, employee or
agent of another corporation or
other entity, against expenses
actually and reasonably
incurred in connection with
such action or suit if he acted
in good faith and in a manner
he reasonably believed to be in
or not opposed to the best
interests of the corporation,
except that there may be no
such indemnification if the
person is found liable to the
corporation unless, in such a
case, the court determines the
person is entitled to such
indemnification. A corporation
must indemnify a director,
officer, employee or agent who
successfully defends himself in
a proceeding to which he was a
party because he was a
director, officer, employee or
agent of the corporation
against expenses actually and
reasonably incurred by him.
Expenses incurred by an officer
or director, or other employees
or agents as deemed appropriate
by the board of directors, in
defending a civil or criminal
proceeding may be paid by the
corporation in advance of the
final disposition of such
proceeding upon receipt of an
undertaking by or on behalf of
such director or officer to
repay such amount if it shall
ultimately be determined that
he is not entitled to be
indemnified by the corporation.
The Delaware law
indemnification and expense
advancement provisions are not
exclusive of any other rights
which may be granted by the St.
John Knits International
bylaws, a vote of
</TABLE>
115
<PAGE>
<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Indemnification stockholders or disinterested
of Officers directors, agreement or otherwise.
and
Directors; Under the DGCL, termination of any
Insurance proceeding by conviction or upon a
(continued) plea of nolo contendere or its
equivalent shall not, of itself,
create a presumption that such
person is prohibited from being
indemnified.
The St. John Knits International
bylaws provide for the
indemnification to the fullest
extent permitted by law of any
person made, or threatened to be
made, a party to an action, suit
or proceeding, whether civil,
criminal, administrative or
investigative, by reason of the
fact that he or his testator or
intestate is or was a director,
officer or employee of St. John
Knits International or serves or
served any other enterprise at the
request of St. John Knits
International.
Loans to Under California law, the Under Delaware law, a corporation,
Officers and directors of a California its officers or other employees
Employees corporation are not authorized to may make loans to, guarantee the
approve loans or guaranties to or obligations of or otherwise assist
on behalf of officers, whether or its officers or other employees
not such officers are directors, and those of its subsidiaries,
unless: including directors who are also
officers or employees, when such
1. the outstanding shares of the action, in the judgment of the
Corporation are held by 100 or directors, may reasonably be
more shareholders; expected to benefit the
corporation, even without approval
2. the corporation has a bylaw of the stockholders.
approved by the outstanding
shares authorizing the board
alone to approve such loans or
guaranties; and
3. if the board determines,
without counting the vote of
any interested director or
directors, that such loans or
guaranties may reasonably be
expected to benefit the
corporation. St. John Knits
does not have a bylaw
authorizing the board of
directors to approve such loans
or guaranties.
</TABLE>
116
<PAGE>
<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Inspection The CGCL allows any shareholder to The DGCL allows any stockholder to
of inspect a corporation's inspect a corporation's
Shareholders' shareholders' list for a purpose stockholders' list for a purpose
List reasonably related to such reasonably related to such
person's interest as a person's interest as a
shareholder. In addition, the CGCL stockholder. The DGCL does not
provides an absolute right to provide for any absolute right of
inspect and copy the corporation's inspection, and no such right is
shareholders' list to persons granted under the restated
holding an aggregate of 5% or more certificate of incorporation or
of a corporation's voting shares, bylaws of St. John Knits
or shareholders holding an International.
aggregate of 1% or more of such
shares who have filed a
Schedule 14A with the Securities
and Exchange Commission relating
to the election of directors.
Interested Under the CGCL some contracts or The DGCL is similar to the CGCL,
Director transactions in which one or more except under the DGCL,
Transactions of a corporation's directors has transactions that are not approved
an interest are not void or by the majority of disinterested
voidable solely because of such directors (even though less than a
interest provided that conditions majority of a quorum) or a good
specified in the CGCL, such as faith vote of stockholders must be
obtaining the required approval "fair" to the corporation at the
and fulfilling the requirements of time the transaction is
good faith and full disclosure, authorized. Therefore, some
are met. Under the CGCL: transactions could be approved by
a majority of the disinterested
1. either the shareholders or the directors of St. John Knits
board of directors must approve International, although less than
any such contract or a majority of a quorum, or by a
transaction after full majority of all voting shares,
disclosure of the material which might not include a majority
facts, and in the case of board of the disinterested shares.
approval the contract or St. John Knits International is
transaction must also be "just not aware of any plans to propose
and reasonable" to the any transaction involving
corporation; or directors of St. John Knits
International which could be so
approved under the DGCL.
</TABLE>
117
<PAGE>
<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Interested 2. the contract or transaction
Director must have been just and
Transactions reasonable or fair, as
(continued) applicable, to the corporation
at the time it was approved. In
the latter case, the CGCL
explicitly places the burden of
proof on the interested
director. Under the CGCL, if
shareholder approval is sought,
the interested director is not
entitled to vote his shares at
a shareholder meeting with
respect to any action regarding
such contact or transaction. If
board approval is sought, the
contract or transaction must be
approved by a majority vote of
a quorum of the directors,
without counting the vote of
any interested directors,
except that interested
directors may be counted for
purposes of establishing a
quorum. Therefore, there are
some transactions that the
board of directors of St. John
might not be able to approve
because of the number of
interested directors, or the
exclusion of interested
director shares. St. John is
not aware of any plans to
propose any transaction
involving directors of St. John
which could not be so approved
under the CGCL.
Voting By The CGCL provides that the Under the DGCL, the right to vote
Ballot election of directors need not be by written ballot may be
by ballot unless a shareholder restricted if so provided in the
demands election by ballot at the certificate of incorporation. The
shareholders' meeting or unless restated certificate of
the bylaws require voting by incorporation of St. John Knits
ballot. St. John's bylaws provide International does not provide for
that the election of directors at such a restriction.
a shareholders' meeting may be by
voice vote or ballot, unless prior
to such vote a shareholder demands
voting by ballot, in which case
such vote must be by ballot.
</TABLE>
118
<PAGE>
<TABLE>
<CAPTION>
St. John St. John Knits International
-------- ----------------------------
<S> <C> <C>
Shareholder The CGCL provides that a Under the DGCL, a stockholder may
Derivative shareholder bringing a derivative only bring a derivative action on
Suits action on behalf of a corporation behalf of the corporation if the
need not have been a shareholder stockholder was a stockholder of
at the time of the transaction in the corporation at the time of the
question, provided that such transaction in question or his or
shareholder meets the tests her stock thereafter devolved upon
specified by the CGCL. The CGCL him or her by operation of law.
also provides that the corporation The DGCL does not have a bonding
or the defendant in a derivative requirement similar to that in
suit may make a motion to the California.
court for an order requiring the
plaintiff shareholder to furnish a
security bond.
Dissolution Under California law, shareholders Under Delaware law, unless the
holding 50% or more of the total board of directors approves the
voting power may authorize a proposal to dissolve, the
corporation's dissolution, with or dissolution must be approved by
without the approval of the stockholders holding 100% of the
corporation's board of directors, total voting power of the
and this right may not be modified corporation. Only if the
by the articles of incorporation. dissolution of a Delaware
corporation is initiated by the
board of directors may it be
approved by a simple majority of
the corporation's stockholders. In
the event of such a board-
initiated dissolution, the DGCL
allows a Delaware corporation to
include in its certificate of
incorporation a supermajority
voting requirement in connection
with dissolutions. St. John Knits
International restated certificate
of incorporation contains no such
supermajority voting requirement,
however, and a majority of shares
voting at a meeting at which a
quorum is present would be
sufficient to approve a
dissolution of St. John Knits
International which had previously
been approved by its board of
directors.
Rights Plan The CGCL does not prohibit The DGCL does not prohibit
corporations from issuing stock corporations from issuing stock
purchase rights. St. John has purchase rights. St. John Knits
adopted a shareholder rights International has not adopted a
agreement. However, St. John shareholder rights agreement.
expects to terminate such
agreement prior to the
consummation of the mergers.
</TABLE>
119
<PAGE>
Doctrine of Independent Legal Significance
The Delaware courts apply the traditional Delaware doctrine that a
corporation may choose among several possible ways to reach a result, and if it
chooses one way it need not observe statutory or common law requirements
applicable to the way not chosen. This is known as the doctrine of "independent
legal significance." The doctrine stands for the proposition that actions taken
pursuant to the authority of various sections of the law constitute acts of
independent legal significance and their validity is not dependent on other
sections of an act. The separate sections of the corporation law are considered
to be of equal dignity, and a corporation is allowed to resort to one section
without having to meet the requirements of a different section. The doctrine of
independent legal significance may not apply in California.
Application of the California General Corporation Law to Delaware Corporations
Under Section 2115 of the CGCL, some foreign corporations, or corporations
not organized under California law, are placed in a special category if they
have characteristics of ownership and operation which indicate that they have
significant contacts with California. So long as a Delaware or other foreign
corporation is in this special category and does not qualify for one of the
statutory exemptions, it is subject to a number of key provisions of the CGCL
applicable to corporations incorporated in California. Among the more important
provisions are those relating to the election and removal of directors,
cumulative voting, prohibition of classified boards of directors, standards of
liability and indemnification of directors, distributions, dividends and
repurchases of shares, shareholder meetings, approval of some corporate
transactions, dissenters' and appraisal rights and inspection of corporate
records.
One of the requirements in determining whether Section 2115 is applicable is
that more than one-half of the corporation's securities must be held of record
by persons having addresses in California. Section 2115 will not apply to St.
John Knits International, following the reorganization merger, nor will it
apply following the acquisition merger.
PENDING LITIGATION RELATING TO THE MERGERS
St. John is party to six lawsuits that allege claims against St. John's
directors for breach of fiduciary duty alleged to have arisen from the
transactions contemplated by the merger agreement. All of these lawsuits were
filed in the Superior Court of the State of California for the County of
Orange. The principal relief sought in the six actions is certification of the
putative class, an injunction against the mergers or, to the extent the mergers
are concluded, a rescission of the mergers and damages and attorneys' fees in
an unspecified amount. These six lawsuits were consolidated into one lawsuit on
February 24, 1999.
On April 15, 1999, the plaintiffs in this lawsuit filed a motion for
preliminary injunction seeking to prevent the mergers from proceeding. The
preliminary injunction motion was heard by the California state court on April
28, 1999. On April 30, 1999, the court denied the plaintiffs' preliminary
injunction motion. In denying the plaintiffs' request, the court ruled that the
plaintiffs had not shown a "reasonable probability" that they could succeed in
proving at trial that the $30 per share offer in the mergers is unfair.
Similarly, the court ruled that the plaintiffs were unlikely to show that the
special committee lacked true independence or failed to "shop" St. John
adequately to other buyers.
While declining to grant the preliminary injunction, the court imposed a
constructive trust which prevents the Grays from receiving in the mergers any
amount for their St. John shares in excess of $30 per share until a full trial
on the merits is held. Prior to the determination of the final, definitive
terms of the stock options to be granted to the Grays after the mergers, the
plaintiffs had argued that these options represent additional consideration for
the Grays' St. John shares. It is St. John's belief that these employee stock
options represent compensation for the Grays' services as officers of St. John
Knits International after the mergers and are not additional consideration for
their St. John shares.
120
<PAGE>
The court also imposed a constructive trust preventing Messrs. Gadbois and
Krinsky, directors of St. John, from exercising options that were repriced by
the board in September 1998 until a full trial on the merits is held. It is St.
John's belief that the September 1998 option repricing was not improper. The
repricing was consistent with the repricing of options held by key employees of
St. John, excluding the Grays, and occurred on September 15, 1998, which was
nearly two months in advance of Vestar's first meeting with the Grays.
In imposing the constructive trusts, the court indicated that the plaintiffs
had shown a "reasonable probability" that they could succeed at trial in
proving that the St. John directors breached their fiduciary duties with
respect to the repricing of the director options and the alleged preferential
treatment of the Grays to the extent that the Grays receive a higher price for
their shares than the public shareholders in the mergers. St. John intends to
continue to contest vigorously the plaintiffs' allegations in this lawsuit,
including any request by the plaintiffs for the imposition of a constructive
trust after a full trial on the merits is held. You may find more information
about these lawsuits in St. John's Annual Report on Form 10-K and Form 10-K/A
which is incorporated in this proxy statement-prospectus by reference.
121
<PAGE>
INFORMATION ABOUT ST. JOHN
AND ST. JOHN KNITS INTERNATIONAL
General
St. John is a leading designer, manufacturer and marketer of women's
clothing and accessories, principally under the St. John trade name. For over
thirty-five years, the St. John name has been associated with high quality and
a specific look in knitwear characterized by vibrant colors and classic,
timeless styling. The St. John "look," combined with limited production runs
and selective distribution, has created an exclusive image, engendering
consumer loyalty.
St. John's products are organized primarily into the following separate
product lines:
. Knitwear -- The breadth of St. John's knitwear collection, which
includes elegant and dressy styles, basic lines of seasonless products
and limited production designs, enables St. John to compete in most
segments of women's designer clothing.
. Accessories -- The accessories line is comprised of fine fashion
jewelry, silk scarves, suede belts and handbags.
. Sport -- St. John Sport consists of a line of activewear which includes
jackets, skirts, pants, tops and jeans.
. Griffith & Gray -- This line includes suits, coats, dresses, separates
and eveningwear.
. Shoes -- Consists of pumps, sling backs, loafers and boots.
. Fragrance -- Includes, perfume, eau de parfum, perfumed body mist, body
cream, lotion, body powder and bath products.
. Coats, Eyewear and Timepieces -- We have entered into license agreements
for the manufacture and sale of coats, eyewear and timepieces under the
"St. John" name.
In order to diversify product distribution and enhance name recognition, St.
John began operating retail boutiques in 1989 and currently operates 18 such
boutiques. St. John also operates nine outlet stores. In addition, St. John
operates two home furnishing boutiques under the name "St. John Home." These
boutiques sell upscale home furnishing and gift items.
Management and Additional Information
Information relating to executive compensation, various benefits plans,
including St. John's stock option plan, certain relationships and related
transactions and other related matters as to St. John is set forth in the
St. John Annual Report on Form 10-K, as amended, for the year ended November 1,
1998, a copy of which is incorporated in this proxy statement-prospectus by
reference.
St. John Knits International
St. John Knits International is a wholly owned subsidiary of St. John. St.
John Knits International was originally incorporated under the laws of Barbados
on August 5, 1997 and operated as a foreign sales corporation under Section 922
of the Internal Revenue Code of 1986. On January 29, 1999, St. John Knits
International transferred its FSC operations to a subsidiary. On February 1,
1999, St. John Knits International filed a certificate of domestication and a
certificate of incorporation with the Secretary of State of the State of
Delaware to domesticate St. John Knits International as a Delaware corporation.
In addition, St. John Knits International has filed a Notice of Discontinuance
in Barbados so that it would no longer be subject to Barbados law. St. John
Knits International does not conduct any business other than holding the
capital stock of SJKAcquisition.
Upon consummation of the reorganization merger, St. John Knits International
will become the parent holding company of St. John. The assets, liabilities and
businesses of St. John will not be affected by the reorganization merger.
122
<PAGE>
SECURITY OWNERSHIP OF FIVE PERCENT BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 24, 1999 regarding the
beneficial ownership of St. John's common stock by each person who is known by
St. John to beneficially own more than 5% of the outstanding shares of St.
John's common stock, each director of St. John, specified executive officers of
St. John, and all directors and executive officers as a group.
<TABLE>
<CAPTION>
Approximate
Number of
Shares
Beneficially Percentage
Name Owned Owned
---- ------------ ----------
<S> <C> <C>
Vestar Capital Partners III, L.P.(/1/)............. 1,205,983 7.3%
Robert E. Gray(/2/)................................ 1,078,079 6.3%
Marie Gray(/3/).................................... 738,079 4.4%
Kelly A. Gray(/4/)................................. 607,904 3.6%
Robert C. Davis(/5/)............................... 264,000 1.6%
Roger G. Ruppert(/6/).............................. 27,666 *
Richard A. Gadbois, III(/7/)....................... 24,999 *
David A. Krinsky(/7/).............................. 23,999 *
David C. Frankel(/8/).............................. 20,000 *
Bruce Fetter(/9/).................................. 9,957 *
Mark L. Goldston................................... -- *
Daniel T. Reiner................................... -- *
All current directors and executive officers as a
group (eleven persons)(/10/)...................... 2,140,770 12.4%
</TABLE>
- --------
* Less than 1%.
(1) Vestar, some of its affiliates and the Grays filed a fourth amendment to
their Schedule 13D on February 10, 1999 with respect to shares of St. John
common stock beneficially owned by the Grays. Vestar and its affiliates
may be deemed to have acquired beneficial ownership of this stock by
virtue of the voting agreement described in this proxy statement-
prospectus.
(2) Includes 603,439 shares which are owned by the Gray Family Trust, of which
Robert and Marie Gray serve as co-trustees and are the sole beneficiaries.
In addition, includes 54,640 shares which are owned by the Kelly Ann Gray
Trust, of which Robert and Marie Gray serve as co-trustees and of which
Kelly A. Gray is the sole beneficiary, and also includes 420,000 shares
issuable upon exercise of options exercisable at or within 60 days of May
24, 1999. 70,700 of the shares which are owned by the Gray Family Trust
are subject to "zero-premium collar" arrangements described in "Purchases
of Shares" on page 124.
(3) Includes 603,439 shares which are owned by the Gray Family Trust, of which
Robert and Marie Gray serve as co-trustees and are the sole beneficiaries.
In addition, includes 54,640 shares which are owned by the Kelly Ann Gray
Trust, of which Robert and Marie Gray serve as co-trustees and of which
Kelly A. Gray is the sole beneficiary. Includes 80,000 shares issuable
upon exercise of options exercisable within 60 days of May 24, 1999.
70,700 of the shares which are owned by the Gray Family Trust are subject
to "zero-premium collar" arrangements described in "Purchases of Shares"
on page 124.
(4) Includes 60,000 shares issuable upon exercise of options exercisable at or
within 60 days of May 24, 1999. 80,700 of these shares are subject to
"zero-premium collar" arrangements described in "Purchases of Shares" on
page 124.
(5) Includes 244,700 shares held by the Robert C. and Alison Davis Charitable
Remainder Trust. Also includes 19,230 shares held by the Robert and Alison
Davis Family Foundation. Mr. Davis serves as co-trustee for both the trust
and foundation.
(6) Includes 26,666 shares issuable upon exercise of options exercisable at or
within 60 days of May 24, 1999.
(7) Includes 19,999 shares issuable upon exercise of options exercisable at or
within 60 days of May 24, 1999.
(8) Mr. Frankel resigned as an executive officer of St. John effective as of
February 10, 1999.
(9) Includes 8,332 shares issuable upon exercise of options exercisable at or
within 60 days of May 24, 1999.
(10) Includes 565,328 shares issuable upon exercise of options exercisable at
or within 60 days of May 24, 1999.
123
<PAGE>
DESCRIPTION OF ST. JOHN KNITS INTERNATIONAL CAPITAL STOCK
We have provided below a description of the common stock of St. John Knits
International. The following statements are summaries of the St. John Knits
International certificate of incorporation and bylaws and of the relevant
provisions of the DGCL.
St. John Knits International currently is authorized to issue up to 10,000
shares of common stock, par value $.01 per share. Dividends may be paid on the
St. John Knits International common stock out of funds legally available for
dividends, when and if declared by the St. John Knits International board of
directors.
Holders of St. John Knits International common stock are entitled to share
ratably in the assets available for distribution on liquidation, dissolution or
winding up, subject, if preferred stock of St. John Knits International is then
authorized and outstanding, to any preferential rights of such preferred stock.
Each share of St. John Knits International common stock entitles its holder to
one vote at all meetings of stockholders, and such votes are noncumulative. The
St. John Knits International common stock is not redeemable, has no
subscription or conversion rights and does not entitle its holders to any pre-
emptive rights.
If the reorganization merger is approved by the requisite vote of the
shareholders of St. John and all of the conditions to the mergers are satisfied
or waived, immediately prior to the effective time of the reorganization
merger, we will restate the certificate of incorporation of St. John Knits
International. Under the restated certificate of incorporation, St. John Knits
International will be authorized to issue 20,000,000 shares of common stock and
2,000,000 shares of preferred stock as compared to the 10,000 shares of common
stock it was authorized to issue prior to the reorganization merger.
In addition, the bylaws of St. John Knits International as in effect at the
effective time will be the bylaws of St. John Knits International following the
mergers until changed or amended as provided by the bylaws or by applicable
law.
PURCHASES OF SHARES
The following table indicates, with respect to any purchases of St. John
common stock made by St. John or any affiliate of St. John since November 3,
1996, the range of prices paid for such stock, the amount of shares purchased
and the average purchase price for such shares for each quarterly period since
November 3, 1996:
<TABLE>
<CAPTION>
Amount of Range of Average
Purchaser Quarterly Period Shares Purchased Prices Purchase Price
--------- ---------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
St. John Q4 FY98 164,400 $15.50-$19.88 $17.51
Bruce Fetter,
Chief Operating
Officer Q4 FY98 1,625 $19.13-$19.31 $19.22
All St. John
and
Affiliate
Purchases Q4 FY98 166,025 $15.50-$19.88 $17.53
</TABLE>
Robert E. Gray and Marie Gray, for the benefit of the Gray Family Trust, and
Kelly A. Gray are each parties to arrangements with respect to shares of common
stock of St. John beneficially owned by each of them. These arrangements are
referred to as "zero-premium collars" because they are granted at no premium to
the individual and act as a collar, or cap on the profits and floor on the
losses resulting from a change in the price of the stock subject to the collar,
as described more fully below.
On April 8, 1998, the Gray Family Trust entered into a letter agreement with
Merrill Lynch for a "zero-premium collar," under which the Gray Family Trust:
. bought from Merrill Lynch the right to require Merrill Lynch to purchase
20,700 shares of St. John common stock at a price of $43.13 per share,
subject to adjustment, which we refer to as a "put option", and the put
option is not exercisable until, and is scheduled to expire on or about,
April 10, 2000;
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<PAGE>
. sold to Merrill Lynch the right to require the Gray Family Trust to sell
20,700 shares of St. John common stock to Merrill Lynch at a price of
$60.86 per share, subject to adjustment, which we refer to as a "call
option", and the call option is not exercisable until, and is scheduled
to expire on or about, April 10, 2000;
. would, if the market price of St. John common stock on April 10, 2000 is
less than $43.13 per share, receive from Merrill Lynch an amount equal
to the difference between $43.13 and the market price multiplied by the
20,700 shares subject to the put option, and the call option would
expire without exercise;
. would, if the market price of St. John common stock on April 10, 2000
exceeds $60.86, owe Merrill Lynch an amount equal to the difference
between the market price and $60.86 multiplied by the 20,700 shares
subject to the call option, and the put option would expire without
exercise;
. has the right to choose whether the transaction will be settled in cash
or whether it will give its shares to Merrill Lynch, provided such
shares are freely transferable;
. paid $3.70 per share for the put option and Merrill Lynch paid $3.70 per
share for the call option; and
. granted Merrill Lynch a security interest in the shares of common stock
of St. John held by Merrill Lynch on behalf of the Gray Family Trust as
security for its obligations under the zero-premium collar.
Also on April 8, 1998, Kelly A. Gray entered into a letter agreement with
Merrill Lynch for a "zero-premium collar" under which Ms. Gray:
. bought from Merrill Lynch a put option; and
. sold to Merrill Lynch a call option, in each case relating to 20,700
shares of St. John common stock on terms identical to those entered into
by the Gray Family Trust on April 8, 1998, including the granting of a
security in the common stock of St. John held by Merrill Lynch on behalf
of Ms. Gray.
On July 5, 1996, each of the Gray Family Trust and Kelly A. Gray entered
into a similar letter agreement with Merrill Lynch providing for a "zero-
premium collar" on the same terms as the April 8, 1998 collars with the
following differences:
. the Gray Family Trust letter agreement relates to 50,000 shares of
common stock and the Kelly A. Gray letter agreement relates to 60,000
shares of common stock;
. in each case, the put price is $46.16 and the call price is $59.08,
subject to adjustment;
. in each case, the put and call are scheduled to expire on or about July
6, 1999; and
. in each case, the price share for each of the put and the call was
$4.67.
In connection with the closing of the mergers, these arrangements will be
settled and the Gray Family Trust and Kelly A. Gray are expected to receive
cash payments from Merrill Lynch equal to the difference between the put price
of each of the collar arrangements and the market price of the common stock of
St. John on the date the collars are settled, adjusted to reflect the early
settlement of such arrangements. For example, if the market price of common
stock of St. John is $29.00 per share when these collar arrangements are
settled, each of the Gray Family Trust and Kelly A. Gray would receive $12.00
for each share of St. John common stock subject to the April 8, 1998 collar.
This amount is calculated by taking the difference between the $43.13 per share
put price of the collar and the $29.00 market price, adjusted by $2.13 per
share to reflect the early settlement and cancellation of such arrangements.
With respect to the July 5, 1996 collar arrangements, each of the Gray Family
Trust and Kelly A. Gray would receive $17.05 for each share of St. John common
stock subject to the July 5, 1996 collar. This amount is calculated by taking
the difference between the $46.16 per share put price of the collar and the
$29.00 market price, adjusted by $0.11 per share to reflect the early
settlement and cancellation of such arrangements. The aggregate payments from
Merrill Lynch to the Gray Family Trust and Kelly A. Gray upon settlement of the
collar arrangements would be approximately $1,100,900 and $1,271,400,
respectively. The actual aggregate payments will not be known until the
settlement of these arrangements and will reflect the adjustment of these
arrangements for early settlement, which will be determined by Merrill Lynch
based on several factors, including the time value of money, the volatility of
the underlying shares of St. John stock and prevailing interest rates at the
time of settlement.
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INFORMATION CONCERNING PEARL, VESTAR AND THE GRAYS
Vestar and Pearl. Pearl is a newly formed Delaware corporation and is wholly
owned by Vestar/Gray LLC. Vestar/Gray LLC is wholly owned by Vestar. Pearl was
formed solely to be a party to the acquisition merger. Vestar refers to Vestar
Capital Partners III, L.P., Vestar Associates III, L.P. and Vestar Associates
Corporation III. Vestar is principally engaged in the business of investing in
securities. The principal business and office address of Vestar is 245 Park
Avenue, 41st Floor, New York, New York 10167.
Vestar Capital Partners III, L.P. Vestar Capital Partners III, L.P. is a
Delaware limited partnership that was established in 1997 by Vestar Capital
Partners, a leading investment firm based in New York with an office in Denver.
Vestar Capital Partners manages over $1 billion in equity capital and
specializes in management buyouts and growth capital investments. Through
Vestar Capital Partners III, L.P., it invests, as partners with management
teams, in high-quality, middle-market companies. Vestar Capital Partners III,
L.P. has been a leading or majority shareholder in such companies as Cluett
American Group, Inc., Insight Communications Company, Reid Plastics, Inc.,
Russell-Stanley Corporation, Sheridan Healthcare, Inc. and Siegel & Gale, Inc.
Vestar Associates III, L.P. Vestar Associates III, L.P. is a Delaware
limited partnership and the sole general partner of Vestar Capital Partners
III, L.P.
Vestar Associates Corporation III. Vestar Associates Corporation III is a
Delaware corporation and the sole general partner of Vestar Associates III,
L.P. The executive officers of Vestar Associates Corporation III are as
follows: Daniel S. O'Connell is the President and Chief Executive Officer;
Prakash A. Melwani is the Vice President and Secretary; Norman W. Alpert, James
P. Kelley, Sander M. Levy, Arthur J. Nagle and Robert L. Rosner are Vice
Presidents; Nicholas A. Dovidio is the Chief Financial Officer; and Brian
Schwartz is the Controller. Mr. O'Connell is the sole member of the Board of
Directors of Vestar Associates Corporation III. The principal business address
for Messrs. O'Connell, Alpert, Levy, Melwani, Nagle, Rosner, Dovidio and
Schwartz is 245 Park Avenue, 41st Floor, New York, New York 10167. The
principal business address for Mr. Kelley is 1225 17th Street, Suite 1660,
Denver, Colorado 80202.
Messrs. O'Connell, Alpert, Kelley, Levy, Nagle, Rosner, Dovidio and Schwartz
are citizens of the United States of America. Mr. Melwani is a British National
Overseas Citizen. The present principal occupation or employment of each of
Messrs. O'Connell, Alpert, Kelley, Levy, Melwani, Nagle, Rosner, Dovidio and
Schwartz is serving his position with Vestar Associates Corporation III.
Vestar/SJK Investors LLC. Vestar/SJK Investors LLC is a Delaware limited
liability company of which Vestar is the sole member. Vestar/SJK Investors LLC
was formed to invest in Vestar/Gray Investors LLC and has not engaged in any
activities other than those incident to its formation and to such proposed
transaction. The address and principal business office of Vestar/SJK Investors
LLC is 1225 17th Street, Suite 1660, Denver, Colorado 80202.
Vestar/Gray LLC. Vestar/Gray LLC is a Delaware limited liability company of
which Vestar/SJK Investors LLC is the sole member. Vestar/Gray LLC was formed
to effect the acquisition merger as described earlier and has not engaged in
any activities other than those incident to its formation and to such proposed
transaction. The address and principal business office of Vestar/Gray LLC is
1225 17th Street, Suite 1660, Denver, Colorado 80202.
The Grays. The principal business and office address of the Grays is care of
St. John, 17422 Derian Avenue, Irvine, California 92614. Robert E. Gray is
Chairman and Chief Executive Officer of St. John, Marie Gray is Vice Chairman,
Chief Designer and Secretary of St. John, and Kelly A. Gray is President of St.
John. Each of the Grays is a citizen of the United States of America.
126
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WHERE YOU CAN FIND MORE INFORMATION
St. John files annual, quarterly and special reports, proxy statements and
other information with the Commission. You may read and copy any reports,
statements or other information that St. John files with the Commission at the
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. These Commission filings are also
available to the public from commercial document retrieval services at the
Internet world wide web site maintained by the Commission at
"http://www.sec.gov." Reports, proxy statements and other information filed by
St. John should also be available for inspection at the offices of the New York
Stock Exchange, 120 Broad Street, New York, New York 10005.
St. John Knits International filed a registration statement on Form S-4 to
register with the Commission its shares of common stock to be issued to St.
John shareholders in the reorganization merger and the common stock to be
retained by its stockholders in the acquisition merger. This proxy statement-
prospectus is a part of the registration statement and constitutes a prospectus
of St. John Knits International. As allowed by Commission rules, this proxy
statement-prospectus does not contain all of the information you can find in
St. John Knits International's registration statement or in the exhibits to
that registration statement.
In connection with this registration statement and with the proposed
registration of the senior subordinated notes to help finance the mergers,
after the mergers, St. John Knits International anticipates that it will be
subject to informational requirements of the Securities Exchange Act of 1934,
and, in accordance with these requirements, anticipates filing reports with the
Commission. These reporting requirements are based on the number of note
holders and stockholders of St. John Knits International after the mergers. The
Securities and Exchange Act of 1934 provides that the duty to file these
reports is automatically suspended as to any fiscal year, other than the fiscal
year within which a registration statement became effective, if, at the
beginning of such fiscal year, the securities of each class to which the
registration statement relates are held of record by less than 300 persons.
Therefore, if, at the beginning of any fiscal year of St. John Knits
International after the mergers, less than 300 persons hold the senior
subordinated notes of St. John Knits International and less than 300 persons
hold shares of St. John Knits International common stock, the obligation of St.
John Knits International to file reports with the Commission under these rules
will automatically terminate.
You should rely only on the information contained or incorporated by
reference in this proxy statement-prospectus. St. John has not authorized
anyone to provide you with information that is different from what is contained
in this proxy statement-prospectus. This proxy statement-prospectus is dated
May 26, 1999. You should not assume that the information contained in this
proxy statement-prospectus is accurate as of any date other than that date or
such other date as this proxy statement-prospectus indicates. The mailing of
this proxy statement-prospectus to St. John shareholders does not create any
implication to the contrary.
St. John Incorporated Documents
As allowed by the Commission rules, this proxy statement-prospectus does not
contain all the information found in St. John's Annual Report on Form 10-K and
Form 10-K/A for the year ended November 1, 1998. The Commission allows St. John
to "incorporate by reference" information into this proxy statement-prospectus,
which means that St. John can disclose important information to you by
referring you to another document filed separately with the Commission. The
information incorporated by reference is considered part of this proxy
statement-prospectus, except for any information superseded by information
contained directly in this proxy statement-prospectus or in later filed
documents incorporated by reference in this proxy statement-prospectus.
127
<PAGE>
This proxy statement-prospectus incorporates by reference the documents
stated below that St. John has previously filed with the Commission. These
documents contain important information about St. John and its finances and
should be reviewed carefully and fully. Some of these filings have been amended
by later filings, which are also listed.
<TABLE>
<CAPTION>
St. John Commission Filings Period/Date Filed with the
(File No. 001-11752) Commission
------------------------------------------------------------
<S> <C>
Annual Report on Form
10-K and Form 10-K/A... Year ended 11/1/98
Quarterly Report on Form
10-Q .................. Quarter ended 1/31/99
Current Reports on Form
8-K.................... 11/12/98; 12/14/98; 12/15/98;
1/19/99; 1/19/99; 1/19/99;
1/26/99; 2/4/99; 2/8/99 and
2/12/99
</TABLE>
All documents filed by St. John under Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, after the date of this proxy
statement-prospectus and prior to the date of the special meeting will be
deemed to be incorporated in this proxy statement-prospectus by reference and
to be a part of this proxy statement-prospectus from the date of such filing.
Any statement contained in this proxy statement- prospectus or in a document
incorporated or deemed to be incorporated in this proxy statement-prospectus by
reference will be deemed to be modified or superseded for purposes of this
proxy statement-prospectus to the extent that a statement contained in this
proxy statement-prospectus or in any other subsequently filed document which
also is, or is deemed to be, incorporated in this proxy statement-prospectus
modifies or supersedes such statement. Any such statement so modified or
superseded will not be deemed to constitute a part of this proxy statement-
prospectus, except as so modified or superseded.
Any documents filed by St. John with the Commission and incorporated by
reference, excluding exhibits, unless specifically incorporated in this proxy
statement-prospectus, are available without charge upon written request to
Roger G. Ruppert, Senior Vice President-Finance and Chief Financial Officer,
St. John Knits, Inc., 17422 Derian Avenue, Irvine, California 92614. Telephone
requests may be directed to Roger G. Ruppert at (949) 863-1171.
If you would like to receive documents from St. John, please request them by
June 18, 1999, in order to receive them before the special meeting.
LEGAL OPINIONS
The legality of the shares of St. John Knits International common stock to
be issued or retained in connection with the mergers will be passed upon by
O'Melveny & Myers LLP, Newport Beach, California, counsel to St. John Knits
International. Certain federal income tax consequences of the mergers will be
passed upon by O'Melveny & Myers LLP, Washington, D.C. A partner of such firm,
who is a director of St. John, owns 4,000 shares of common stock of St. John
and options to purchase 30,000 shares of common stock of St. John.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of St. John at November 1, 1998 and
November 2, 1997, and for each of the three years in the period ended November
1, 1998, included in St. John's Annual Report on Form 10-K and Form 10-K/A for
the year ended November 1, 1998 incorporated by reference in this proxy
statement-prospectus, have been audited by Arthur Andersen LLP, independent
auditors, as stated in the financial statements. Representatives of Arthur
Andersen LLP are expected to be present at the special meeting. Such
representatives will be available to respond to appropriate questions.
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SHAREHOLDER PROPOSALS
St. John will hold its 1999 annual meeting of St. John shareholders only if
the mergers are not consummated. In the event that such a meeting is held, any
proposals of St. John shareholders intended to be presented at the 1999 annual
meeting of St. John shareholders must be received by the Corporate Secretary of
St. John no later than July 15, 1999 in order to be considered for inclusion in
the St. John 1999 annual meeting proxy materials.
OTHER MATTERS
As of the date of this proxy statement-prospectus, the St. John board knows
of no matters that will be presented for consideration at the special meeting
other than as described in this proxy statement-prospectus. If any other
matters shall properly come before either the special meeting or any
adjournments or postponements of the special meeting to be voted upon, the
enclosed proxies will be deemed to confer discretionary authority on the
individuals named as proxies to vote the shares represented by such proxies as
to any such matters. The persons named as proxies intend to vote or not to vote
in accordance with the recommendation of the board of directors and, if
appropriate, the special committee of St. John.
129
<PAGE>
APPENDIX A
EXECUTION COPY
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
Between
ST. JOHN KNITS, INC.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SJKACQUISITION, INC.
and
PEARL ACQUISITION CORP.
Dated as of February 2, 1999
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<C> <S> <C>
ARTICLE 1. THE REORGANIZATION MERGER.................................... A-2
SECTION 1.1 The Reorganization Merger; Filing and Effective Time of
the Reorganization Merger............................. A-2
SECTION 1.2 Closing................................................ A-2
SECTION 1.3 Effects of the Reorganization Merger................... A-2
SECTION 1.4 Articles of Incorporation; By-Laws..................... A-2
SECTION 1.5 Directors and Officers................................. A-3
SECTION 1.6 Employee Benefit Plans................................. A-3
ARTICLE 2. EFFECT OF THE REORGANIZATION MERGER ON THE CAPITAL STOCK OF
THE COMPANY AND MERGER SUB............................................. A-3
SECTION 2.1 Effect on Capital Stock................................ A-3
SECTION 2.2 Company Dissenting Shares.............................. A-3
SECTION 2.3 Notification of Transfer Agent......................... A-4
SECTION 2.4 Stock Certificates..................................... A-4
ARTICLE 3. THE ACQUISITION MERGER....................................... A-4
SECTION 3.1 The Acquisition Merger; Filing and Effective Time of
the Acquisition Merger................................ A-4
SECTION 3.2 Closing................................................ A-5
SECTION 3.3 Effects of the Acquisition Merger...................... A-5
SECTION 3.4 Certificate of Incorporation; By Laws.................. A-5
SECTION 3.5 Directors and Officers................................. A-5
ARTICLE 4. EFFECT OF THE ACQUISITION MERGER ON THE CAPITAL STOCK OF
PARENT AND ACQUISITION................................................. A-5
SECTION 4.1 Effect on Capital Stock................................ A-5
SECTION 4.2 [Not Used]............................................. A-6
SECTION 4.3 Parent Common Stock Elections.......................... A-6
SECTION 4.4 Proration.............................................. A-7
SECTION 4.5 Treatment of Options and Other Employee Equity Rights.. A-8
SECTION 4.6 Surrender of Shares; Transfer Books.................... A-8
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................ A-10
SECTION 5.1 Organization and Qualification; Subsidiaries........... A-10
SECTION 5.2 Articles of Incorporation and By-Laws.................. A-10
SECTION 5.3 Capitalization......................................... A-11
SECTION 5.4 Authority Relative to This Agreement................... A-12
SECTION 5.5 No Conflict; Required Filings and Consents............. A-12
SECTION 5.6 Compliance............................................. A-13
SECTION 5.7 SEC Filings; Financial Statements; Undisclosed
Liabilities........................................... A-13
SECTION 5.8 Absence of Certain Changes or Events................... A-14
SECTION 5.9 Absence of Litigation.................................. A-14
SECTION 5.10 Properties............................................. A-14
SECTION 5.11 Employee Benefit Plans................................. A-15
SECTION 5.12 Tax Matters............................................ A-16
SECTION 5.13 Environmental Laws..................................... A-17
SECTION 5.14 Material Contract Defaults; Non-Compete................ A-18
SECTION 5.15 Intellectual Property.................................. A-18
SECTION 5.16 Transactions with Affiliates........................... A-19
</TABLE>
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ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY (Continued)
SECTION 5.17 Brokers................................................ A-19
SECTION 5.18 Opinion of Financial Advisor........................... A-19
SECTION 5.19 Board Recommendation; Approval of Independent
Committee............................................. A-19
SECTION 5.20 Vote Required; State Takeover Statutes................. A-20
SECTION 5.21 Proxy Statement........................................ A-20
SECTION 5.22 Rights Plan............................................ A-21
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF ACQUISITION................ A-21
SECTION 6.1 Corporate Organization................................. A-21
SECTION 6.2 Authority Relative to This Agreement................... A-21
SECTION 6.3 No Conflict; Required Filings and Consents............. A-21
SECTION 6.4 Proxy Statement; Schedule 13E-3........................ A-22
SECTION 6.5 Brokers................................................ A-22
SECTION 6.6 Commitment Letters..................................... A-22
SECTION 6.7 Newly Formed Entity.................................... A-22
SECTION 6.8 Capitalization......................................... A-22
ARTICLE 7. CONDUCT OF BUSINESS PENDING THE MERGERS...................... A-23
SECTION 7.1 Conduct of Business of the Company Pending the
Mergers............................................... A-23
SECTION 7.2 WARN................................................... A-24
ARTICLE 8. ADDITIONAL AGREEMENTS........................................ A-24
SECTION 8.1 Shareholders Meeting................................... A-24
SECTION 8.2 Proxy Statement; Form S-4; Schedule 13E-3.............. A-25
SECTION 8.3 Access to Information; Confidentiality................. A-26
SECTION 8.4 No Solicitation........................................ A-26
SECTION 8.5 Employee Benefits Matters.............................. A-27
SECTION 8.6 Directors' and Officers' Indemnification and
Insurance............................................. A-27
SECTION 8.7 Notification of Certain Matters........................ A-28
SECTION 8.8 Further Action; Reasonable Best Efforts................ A-28
SECTION 8.9 Public Announcements................................... A-30
SECTION 8.10 Disposition of Litigation.............................. A-30
SECTION 8.11 Affiliates............................................. A-30
SECTION 8.12 Resignation of Directors............................... A-30
SECTION 8.13 Stop Transfer Order.................................... A-30
SECTION 8.14 Certain Covenants of Parent and the Company............ A-30
ARTICLE 9. CONDITIONS TO THE MERGERS.................................... A-31
SECTION 9.1 Conditions to Obligation of Each Party to Effect the
Mergers............................................... A-31
SECTION 9.2 Additional Condition to the Acquisition Merger......... A-31
SECTION 9.3 Conditions to Obligation of Acquisition to Consummate
the Acquisition Merger................................ A-31
SECTION 9.4 Conditions to Obligation of Parent to Consummate the
Acquisition Merger.................................... A-32
ARTICLE 10. TERMINATION, AMENDMENT AND WAIVER........................... A-33
SECTION 10.1 Termination............................................ A-33
SECTION 10.2 Effect of Termination.................................. A-34
SECTION 10.3 Termination Fees and Expenses.......................... A-34
SECTION 10.4 Amendment.............................................. A-35
SECTION 10.5 Waiver................................................. A-36
</TABLE>
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ARTICLE 11. GENERAL PROVISIONS.......................................... A-36
SECTION 11.1 Non-Survival of Representations, Warranties and
Agreements........................................... A-36
SECTION 11.2 Notices............................................... A-36
SECTION 11.3 Certain Definitions and Interpretations............... A-37
SECTION 11.4 Severability.......................................... A-38
SECTION 11.5 Entire Agreement; Assignment.......................... A-38
SECTION 11.6 Parties in Interest................................... A-38
SECTION 11.7 Governing Law......................................... A-38
SECTION 11.8 Headings.............................................. A-38
SECTION 11.9 Counterparts.......................................... A-38
SECTION 11.10 Enforcement; Jurisdiction............................. A-39
Exhibit A--Form of Affiliate Letter
</TABLE>
-iii-
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of February 2, 1999 (the
"Agreement"), among St. John Knits, Inc., a California corporation (the
"Company"), St. John Knits International, Incorporated, a Delaware and Barbados
corporation ("Parent"), Pearl Acquisition Corp., a Delaware corporation
("Acquisition"), and SJKAcquisition, Inc., a California corporation which is a
direct, wholly owned subsidiary of Parent ("Merger Sub").
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the
Company have determined that it is advisable and in the best interests of each
of Parent, Merger Sub and the Company and their respective shareholders that
Merger Sub be merged with and into the Company (the "Reorganization Merger"),
with the Company as the surviving corporation (the "Company Surviving
Corporation"), in accordance with the terms and conditions set forth in this
Agreement, and such Boards of Directors have approved and authorized the
principal terms of this Agreement and the Reorganization Merger, pursuant to
which each share of common stock, no par value, of the Company (the "Company
Common Stock") issued and outstanding immediately prior to the Effective Time
of the Reorganization Merger (as defined in Section 1.1), together with the
associated purchase rights (the "Company Rights") under the Rights Agreement
(as defined in Section 5.22 hereof), will be converted into one share of Parent
Common Stock, other than (a) Company Dissenting Shares (as defined in Section
2.2) and (b) shares of Company Common Stock owned, directly or indirectly, by
the Company or any subsidiary of the Company;
WHEREAS, the respective Boards of Directors of Parent and Acquisition have
determined that it is advisable and fair to and in the best interests of their
respective shareholders that Acquisition be merged with and into Parent (the
"Acquisition Merger" and, together with the Reorganization Merger, the
"Mergers"), with Parent as the surviving corporation (the "Parent Surviving
Corporation"), in accordance with the terms and conditions set forth in this
Agreement, and such Boards of Directors have approved and authorized this
Agreement and the Acquisition Merger, pursuant to which each share of common
stock, par value $.01 per share, of Parent (the "Parent Common Stock") issued
and outstanding immediately prior to the Effective Time of the Acquisition
Merger (as defined in Section 3.1(b)), will, at the election of the holder
thereof and subject to the terms hereof, be converted into either (i) the right
to receive one share of Parent Common Stock or (ii) the right to receive $30
per share in cash, other than shares of Parent Common Stock owned, directly or
indirectly, by Parent or any subsidiary (as defined in Section 11.3) of the
Parent or by Acquisition or any subsidiary of Acquisition or Acquisition's
parent (which shall be canceled);
WHEREAS, in accordance with the California General Corporation Law (the
"California GCL") the vote of a majority of the outstanding shares of the
Company Common Stock entitled to vote thereon is required to approve the
principal terms of this Agreement and the Reorganization Merger;
WHEREAS, the vote of a majority of the outstanding shares of the Parent
Common Stock entitled to vote thereon is required to adopt this Agreement in
respect of the Acquisition Merger;
WHEREAS, Acquisition is a newly formed corporation organized at the
direction of Vestar Capital Partners III, L.P. ("Vestar") and Vestar/Gray
Investors LLC, a limited liability company formed at the direction of Vestar
("Vestar/Gray"), which prior to the consummation of the Acquisition Merger will
own all the outstanding capital stock of Acquisition;
WHEREAS, as a condition to Acquisition's willingness to enter into this
Agreement and consummate the transactions contemplated hereby, the Board of
Directors of each of the Company and Parent has approved, and the Management
Shareholders (each as defined in the Voting Agreement (as defined below)) have
entered into, the Voting Agreement, dated as of the date hereof, among Vestar
Capital Partners III, L.P., Vestar/Gray and the Management Shareholders (the
"Voting Agreement") pursuant to which, among other things, the Management
Shareholders have agreed (a) to vote the shares of Company Common Stock
beneficially owned by them (including shares of Company Common Stock issued
upon the exercise of Company Options) in accordance
A-1
<PAGE>
with the Voting Agreement and (b) prior to the consummation of the
Reorganization Merger, to contribute all of their issued and outstanding shares
of Company Common Stock to Vestar/Gray in exchange for a combination of $30 per
share in respect of 237,000 shares of Company Common Stock and an approximately
15.9% interest in Vestar/Gray in respect of 968,983 shares of Company Common
Stock;
WHEREAS, each of Merger Sub, Acquisition, the Company and Parent desire to
make certain representations, warranties, covenants and agreements in
connection with the Mergers and also to prescribe various conditions to the
Mergers;
WHEREAS, it is intended that the Acquisition Merger be recorded as a
recapitalization for financial reporting purposes; and
WHEREAS, it is intended that the Reorganization Merger and the Acquisition
Merger be treated, collectively, as a transfer to a controlled corporation
within the meaning of Section 351 of the Internal Revenue Code of 1986, as
amended (the "Code").
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE 1.
THE REORGANIZATION MERGER
SECTION 1.1 The Reorganization Merger; Filing and Effective Time of the
Reorganization Merger. Upon the terms and subject to the conditions of this
Agreement and in accordance with the California GCL, at the Effective Time of
the Reorganization Merger (as defined below), Merger Sub shall be merged with
and into the Company. As a result of the Reorganization Merger, the separate
corporate existence of Merger Sub shall cease and the Company shall be the
surviving corporation in the Reorganization Merger. The parties hereto shall
cause the Reorganization Merger to be consummated as soon as practicable after
the Reorganization Closing (as defined in Section 1.2) by filing an agreement
of merger with the Secretary of State of the State of California, in such form
as required by and executed in accordance with the relevant provisions of the
California GCL (the date and time of the filing of the agreement of merger with
the Secretary of State of the State of California (or such later time as is
agreed to by the parties hereto and set forth therein) being the "Effective
Time of the Reorganization Merger").
SECTION 1.2 Closing. Unless this Agreement shall have been terminated and
the transactions herein contemplated shall have been abandoned pursuant to
Section 10.1 and subject to the satisfaction or waiver of the conditions set
forth in Article 9, the closing of the Reorganization Merger (the
"Reorganization Closing") shall take place as soon as practicable after
satisfaction or waiver of the conditions set forth in Article 9 on the day on
which the Effective Time of the Reorganization Merger is to occur (the
"Reorganization Closing Date"), at the offices of Simpson Thacher & Bartlett,
425 Lexington Avenue, New York, New York 10017, unless another date or place is
agreed to in writing by the parties hereto.
SECTION 1.3 Effects of the Reorganization Merger. The Reorganization Merger
shall have the effects set forth in the applicable provisions of the California
GCL.
SECTION 1.4 Articles of Incorporation; By-Laws. (a) At the Effective Time of
the Reorganization Merger, the articles of incorporation of the Company as in
effect immediately prior to the Effective Time of the Reorganization Merger
shall be the articles of incorporation of the Company Surviving Corporation
until thereafter further amended as provided therein and under the California
GCL.
(b) At the Effective Time of the Reorganization Merger, the bylaws of the
Company as in effect immediately prior to the Effective Time of the
Reorganization Merger (the "Company Bylaws") shall be the
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bylaws of the Company Surviving Corporation following the Reorganization Merger
and thereafter may be amended or repealed in accordance with their terms or the
articles of incorporation of the Company following the Reorganization Merger
and under the California GCL.
SECTION 1.5 Directors and Officers. (a) The directors of the Company (the
"Company Board") immediately prior to the Effective Time of the Reorganization
Merger shall be the initial directors of the Company Surviving Corporation upon
and after the Effective Time of the Reorganization Merger, until such members'
respective successors are duly elected or appointed and qualified.
(b) Each person serving as an officer of the Company immediately prior to
the Effective Time of the Reorganization Merger shall be and continue as an
officer of the Company Surviving Corporation, holding the same office or
offices, upon and after the Effective Time of the Reorganization Merger, until
such person's successor is chosen and qualified.
SECTION 1.6 Employee Benefit Plans. Subject to Section 4.5 hereof, as of the
Effective Time of the Reorganization Merger, Parent hereby assumes all
obligations of the Company under any and all employee benefit plans in effect
as of said date or with respect to which employee rights or accrued benefits
are outstanding as of said date.
ARTICLE 2.
EFFECT OF THE REORGANIZATION MERGER ON THE CAPITAL STOCK
OF THE COMPANY AND MERGER SUB
SECTION 2.1 Effect on Capital Stock. As of the Effective Time of the
Reorganization Merger, by virtue of the Reorganization Merger and without any
action on the part of the Company, Merger Sub, Parent or any holder of any
shares of Company Common Stock or any shares of capital stock of Merger Sub:
(a) Cancellation of Company Common Stock. Each share of Company Common
Stock that is owned by the Company, Merger Sub or Parent shall
automatically be canceled and retired and shall cease to exist, and no
cash, Parent Common Stock or other consideration shall be delivered or
deliverable in exchange therefor.
(b) Conversion of Merger Sub Common Stock. Each outstanding share of
Merger Sub Common Stock shall be converted into one validly issued, fully
paid and nonassessable share of common stock, no par value ("Company
Surviving Corporation Common Stock") the Surviving Corporation, to be
issued and deemed to have been issued by the Surviving Corporation
automatically and immediately upon and as of the Effective Time of the
Reorganization Merger; and such outstanding share of Merger Sub Common
Stock shall be canceled and cease to exist.
(c) Conversion of Company Common Stock. Except as otherwise provided
herein, each issued and outstanding share of Company Common Stock (other
than any such shares to be canceled pursuant to Section 2.1(a) and any
Company Dissenting Shares), including any Company Rights associated
therewith, shall be converted into one fully paid and nonassessable share
of Parent Common Stock to be issued and deemed to have been issued by
Parent automatically and immediately upon and as of the Effective Time of
the Reorganization Merger (the "Reorganization Merger Consideration").
SECTION 2.2 Company Dissenting Shares. (a) Notwithstanding anything in this
Agreement to the contrary, shares of Company Common Stock which were
outstanding on the date for the determination of shareholders entitled to vote
on the Reorganization Merger and which were not voted in favor of or were voted
against the Reorganization Merger and the holders of which have demanded that
the Company purchase such shares at their fair market value in accordance with
Section 1301 of the California GCL and have submitted such shares for
endorsement in accordance with Section 1302 of the California GCL and have not
otherwise failed to perfect or shall not have effectively withdrawn or lost
their rights to purchase for cash under the
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California GCL (the "Company Dissenting Shares") shall not be converted into
the Reorganization Merger Consideration, but, instead, the holders thereof
shall be entitled to have their shares purchased by the Company for cash at the
fair market value of such Company Dissenting Shares as agreed upon or
determined in accordance with the provisions of Section 1300 et seq. of the
California GCL; provided, however, that if any such holder shall have failed to
perfect or shall have effectively withdrawn or lost his, her or its right to
appraisal and payment under the California GCL, such holder's shares of Company
Common Stock shall thereupon be deemed to have been converted, at the Effective
Time of the Reorganization Merger, into the Reorganization Merger Consideration
set forth in Section 2.1 of this Agreement, without any interest thereon.
(b) The Company shall give Acquisition (i) prompt notice of any demands
pursuant to Section 1300 et seq. of the California GCL received by the Company,
withdrawals of such demands and any other instruments served pursuant to the
California GCL and received by the Company and (ii) the opportunity to direct
all negotiations and proceedings with respect to demands under Section 1300 et
seq. of the California GCL. The Company shall not, except with the prior
written consent of Acquisition, make any payment with respect to any such
demands for appraisal or offer to settle or settle any such demands.
SECTION 2.3 Notification of Transfer Agent. Prior to the Reorganization
Closing Date, the Company shall notify its transfer agent of the conversion of
shares of Company Common Stock and of shares of Merger Sub Common Stock and the
cancellation of shares of Company Common Stock pursuant to Section 2.1(a)
hereof.
SECTION 2.4 Stock Certificates. Upon and as of the Effective Time of the
Reorganization Merger, by virtue of the Reorganization Merger and without any
action on the part of any of the Company or Merger Sub or Parent, the holders
of the respective shares, or any other person:
(a) The shares of Parent Common Stock into which the outstanding shares
of Company Common Stock shall have been converted pursuant to Section
2.1(c) hereof shall be represented and evidenced by the same stock
certificates that previously represented and evidenced such outstanding
shares of Company Common Stock and the holders of the outstanding shares of
Company Common Stock so converted shall, at the Effective Time of the
Reorganization Merger, become holders of record of the shares of Parent
Common Stock issued in consideration therefor upon such conversion without
any further action on the part of such holders; and
(b) Parent, as the holder of the certificate that immediately prior to
the Effective Time of the Reorganization Merger evidenced the outstanding
shares of Merger Sub Common Stock (such certificate, the "Merger Sub Common
Stock Certificate") may, at such holder's option, surrender the same to the
Company Surviving Corporation for cancellation, and such holder shall be
entitled to receive from the Company Surviving Corporation in exchange
therefor a certificate representing and evidencing the shares of Company
Surviving Corporation Common Stock into which such holder's outstanding
shares of Merger Sub Common Stock shall have been converted and, until
surrendered, the Merger Sub Common Stock Certificate shall represent and
evidence the shares of Company Surviving Corporation Common Stock into
which the outstanding shares of Merger Sub Common Stock theretofore
represented and evidenced thereby shall have been converted.
ARTICLE 3.
THE ACQUISITION MERGER
SECTION 3.1 The Acquisition Merger; Filing and Effective Time of the
Acquisition Merger. (a) Upon the terms and subject to the conditions of this
Agreement and in accordance with the Delaware General Corporation Law (the
"DGCL"), at the Effective Time of the Acquisition Merger (as defined in Section
3.1(b)), Acquisition shall be merged with and into Parent. As a result of the
Acquisition Merger, the separate
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corporate existence of Acquisition shall cease and Parent shall be the
surviving corporation following the effectiveness of the Acquisition Merger.
(b) The parties hereto shall cause the Acquisition Merger to be consummated
by filing a certificate of merger with the Secretary of State of the State of
Delaware, in such form as required by and executed in accordance with the
relevant provisions of the DGCL (the date and time of the filing of the
certificate of merger with the Secretary of State of the State of Delaware (or
such later time as is agreed to by the parties hereto and set forth therein)
being the "Effective Time of the Acquisition Merger").
SECTION 3.2 Closing. The closing of the Acquisition Merger (the "Acquisition
Closing" and, together with the Reorganization Closing, the "Closings") will
take place as soon as practicable after satisfaction or waiver of the
conditions set forth in Article 9 (the "Acquisition Closing Date" and, together
with the Reorganization Merger Closing Date, the "Closing Dates"; it being
understood that the parties shall use their best efforts to cause the Closing
Dates to be on the same date), at the offices of Simpson Thacher & Bartlett,
425 Lexington Avenue, New York, New York 10017, unless another date or place is
agreed to in writing by the parties hereto.
SECTION 3.3 Effects of the Acquisition Merger. The Acquisition Merger shall
have the effects set forth in the applicable provisions of the DGCL.
SECTION 3.4 Certificate of Incorporation; By Laws. (a) At the Effective Time
of the Acquisition Merger, the certificate of incorporation of Parent as in
effect immediately prior to the Effective Time of the Acquisition Merger shall
be the certificate of incorporation of the Parent Surviving Corporation until
thereafter further amended as provided therein and under the DGCL.
(b) At the Effective Time of the Acquisition Merger, the by-laws of Parent
as in effect immediately prior to the Effective Time of the Acquisition Merger
shall be the by-laws of the Parent Surviving Corporation following the
Acquisition Merger and thereafter may be amended or repealed in accordance with
their terms or the certificate of incorporation of Parent following the
Acquisition Merger and as provided under the DGCL.
SECTION 3.5 Directors and Officers. Subject to Section 8.12, the directors
of Acquisition immediately prior to the Effective Time of the Acquisition
Merger, together with those directors of Parent not resigning in accordance
with Section 8.12, shall be the initial directors of Parent following the
Acquisition Merger, each to hold office in accordance with the certificate of
incorporation and by-laws of Parent following the Acquisition Merger, and the
officers of Parent immediately prior to the Effective Time of the Acquisition
Merger shall be the initial officers of Parent following the Acquisition
Merger, in each case until their respective successors are duly elected or
appointed (as the case may be) and qualified.
ARTICLE 4.
EFFECT OF THE ACQUISITION MERGER ON THE CAPITAL STOCK
OF PARENT AND ACQUISITION
SECTION 4.1 Effect on Capital Stock. As of the Effective Time of the
Acquisition Merger, by virtue of the Acquisition Merger and without any action
on the part of Parent, Acquisition or any holder of any shares of Parent Common
Stock or any shares of capital stock of Acquisition:
(a) Conversion of Common Stock of Acquisition. Each share of common
stock of Acquisition issued and outstanding immediately prior to the
Effective Time of the Acquisition Merger shall be converted into one newly
issued, fully paid and non-assessable share of Parent Common Stock.
(b) Cancellation of Certain Parent Common Stock. Each share of Parent
Common Stock outstanding immediately prior to the Effective Time of the
Acquisition Merger that is owned by the Company, Acquisition or Vestar/Gray
shall automatically be cancelled and retired and shall cease to exist,
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and no cash, Parent Common Stock or other consideration shall be delivered
or deliverable in exchange therefor.
(c) Conversion of Parent Common Stock. Except as otherwise provided
herein and subject to Section 4.4, each issued and outstanding share of
Parent Common Stock (other than any such shares to be cancelled pursuant to
Section 4.1(b)) shall be converted into the following (the "Acquisition
Merger Consideration"):
(i) for each share of Parent Common Stock with respect to which an
election to receive Parent Common Stock has been effectively made and
not revoked or lost, pursuant to Sections 4.3(c), (d) and (e)
("Electing Shares"), the right to receive one fully paid and
nonassessable share of Parent Common Stock (a "Non-Cash Election
Share"); and
(ii) for each share of Parent Common Stock (other than Electing
Shares), the right to receive in cash from Parent following the
Acquisition Merger an amount equal to $30 (the "Cash Election Price").
(d) Cancellation and Retirement of Parent Common Stock. All shares of
Parent Common Stock issued and outstanding immediately prior to the
Effective Time of the Acquisition Merger shall no longer be outstanding and
shall automatically be cancelled and retired and shall cease to exist, and
each holder of a certificate representing any such shares of Parent Common
Stock shall, to the extent such certificate represents such shares, cease
to have any rights with respect thereto, except the right to receive the
Acquisition Merger Consideration (and cash in lieu of fractional shares of
Parent Common Stock to be issued or paid in consideration therefor) upon
surrender of such certificate in accordance with Section 4.6.
SECTION 4.2 [Not Used].
SECTION 4.3 Parent Common Stock Elections. (a) Each person who, on or prior
to the Election Date referred to in (c) below, is a record holder of shares of
Company Common Stock and who does not demand appraisal rights in accordance
with the California GCL will be entitled, with respect to all or any portion of
his shares, to make an unconditional election (a "Non-Cash Election") on or
prior to such Election Date to receive Non-Cash Election Shares, on the basis
hereinafter set forth.
(b) Prior to the mailing of the Proxy Statement (as defined in Section
5.23), Acquisition shall appoint a bank or trust company to act as exchange
agent (the "Exchange Agent") for the payment of the Acquisition Merger
Consideration.
(c) Parent shall, subject to any required clearance by the Securities and
Exchange Commission (the "SEC"), prepare and mail a form of election, which
form shall be subject to the reasonable approval of Acquisition (the "Form of
Election"), with the Proxy Statement to the record holders of Company Common
Stock as of the record date for the Shareholders Meeting (as defined in Section
8.1), which Form of Election shall be used by each record holder of shares of
Company Common Stock who wishes to elect (with respect to such holder's shares
of Parent Common Stock following the Reorganization Merger) to receive Non-Cash
Election Shares upon conversion of any or all of such holder's shares of Parent
Common Stock in the Acquisition Merger, subject to the provisions of Section
4.4 hereof. Parent will use its best efforts to make the Form of Election and
the Proxy Statement available to all persons who become holders of Company
Common Stock during the period between such record date and the Election Date
referred to below. Any such holder's election to receive Non-Cash Election
Shares shall have been properly made only if the Exchange Agent shall have
received at its designated office, by 5:00 p.m., New York City time on the
business day (the "Election Date") preceding the date of the Shareholders
Meeting, a Form of Election properly completed and signed.
(d) Any Form of Election may be revoked by the shareholder submitting it to
the Exchange Agent only by written notice received by the Exchange Agent prior
to 5:00 p.m, New York City time, on the Election Date. In addition, all Forms
of Election shall automatically be revoked if the Exchange Agent is notified in
writing by Acquisition and Parent that the Acquisition Merger has been
abandoned.
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(e) The determination of the Exchange Agent shall be binding whether or not
elections to receive Non-Cash Election Shares have been properly made or
revoked pursuant to this Section 4.3 and when elections and revocations were
received by it. If the Exchange Agent determines that any election to receive
Non-Cash Election Shares was not properly made with respect to shares of Parent
Common Stock, such shares shall be treated by the Exchange Agent as shares
which were not Electing Shares at the Effective Time of the Acquisition Merger,
and such shares shall be converted in the Acquisition Merger into the right to
receive cash pursuant to Section 4.1(c)(ii). The Exchange Agent shall also make
all computations as to the allocation and the proration contemplated by Section
4.4, and any such computation shall be conclusive and binding on the holders of
shares of Company Common Stock and Parent Common Stock. The Exchange Agent may,
with the mutual agreement of Acquisition and Parent, make such rules as are
consistent with this Section 4.3 for the implementation of the elections
provided for herein as shall be necessary or desirable fully to effect such
elections.
SECTION 4.4 Proration.
(a) Notwithstanding anything in this Agreement to the contrary, the
aggregate number of shares of Parent Common Stock to be converted into the
right to receive Parent Common Stock at the Effective Time of the Acquisition
Merger (the "Non-Cash Election Number") shall be equal to approximately 456,047
(excluding for this purpose any shares of Parent Common Stock to be canceled
pursuant to Section 4.1(b)).
(b) If the number of Electing Shares exceeds the Non-Cash Election Number,
then each Electing Share shall be converted into the right to receive Non-Cash
Election Shares or receive cash in accordance with the terms of Section 4.1(c)
in the following manner:
(i) A proration factor (the "Non-Cash Proration Factor") shall be
determined by dividing the Non-Cash Election Number by the total number of
Electing Shares.
(ii) The number of Electing Shares covered by each Non-Cash Election to
be converted into the right to receive Non-Cash Election Shares shall be
determined by multiplying the Non-Cash Proration Factor by the total number
of Electing Shares covered by such Non-Cash Election rounded down to the
nearest whole number.
(iii) All Electing Shares, other than those shares converted into the
right to receive Non-Cash Election Shares in accordance with Section
4.4(b)(ii), shall be converted into the right to receive cash (on a
consistent basis among shareholders who made the election referred to in
Section 4.1(c)(i), pro rata in accordance with the number of shares as to
which they made such election) as if such shares were not Electing Shares
in accordance with the terms of Section 4.1(c)(ii).
(c) If the number of Electing Shares is less than the Non-Cash Election
Number, then:
(i) all Electing Shares shall be converted into the right to receive
Parent Common Stock in accordance with the terms of Section 4.1(c)(i);
(ii) shares of Parent Common Stock other than Electing Shares shall be
converted into the right to receive Non-Cash Election Shares in accordance
with the terms of 4.1(c) in the following manner:
(A) a proration factor (the "Cash Proration Factor") shall be
determined by dividing (x) the difference between the Non-Cash Election
Number and the number of Electing Shares, by (y) the total number of
shares of Parent Common Stock other than Electing Shares; and
(B) the number of shares of Parent Common Stock in addition to
Electing Shares to be converted into the right to receive Non-Cash
Election Shares shall be determined by multiplying the Cash Proration
Factor by the total number of shares other than Electing Shares rounded
down to the nearest whole number; and
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(iii) subject to Section 4.2, shares of Parent Common Stock subject to
clause (ii) of this paragraph (c) shall be converted into the right to
receive Non-Cash Election Shares in accordance with Section 4.1(c)(i) (on a
consistent basis among shareholders who held shares of Parent Common Stock
as to which they did not make the election referred to in Section
4.1(c)(i), pro rata in accordance with the number of shares as to which
they did not make such election).
SECTION 4.5 Treatment of Options and Other Employee Equity Rights. (a) Upon
and as of the Effective Time of the Reorganization Merger and in connection
with the Reorganization Merger, to the fullest extent permitted by applicable
law, Parent shall assume all of the Company's obligations with respect to any
then-outstanding option to acquire shares of Company Common Stock issued under
the St. John Knits, Inc. 1993 Stock Option Plan that theretofore shall not have
expired or been duly exercised by the holders thereof (each, if any, a "Company
Option") and the due exercise of rights under any such Company Option shall
entitle the holder thereof to acquire, upon the same terms and conditions that
were applicable under the corresponding Company Option, a number of shares of
Parent Common Stock identical to the class and number of shares of Company
Common Stock that were subject to such corresponding Company Option (a "Parent
Option"). Parent and the Company agree to take all corporate and other action
as shall be necessary to effectuate the foregoing, and the Company shall use
its best efforts to obtain, if required, prior to the Reorganization Closing
Date, such consent of each holder of a Company Option as shall be necessary to
effectuate the foregoing. Parent shall take all corporate and other action
necessary to reserve and make available for issuance upon the due exercise of
rights under the Parent Options a sufficient number of shares of Parent Common
Stock, and as soon as practicable following the Effective Time of the
Reorganization Merger, shall provide to the record holders of the Parent
Options appropriate notice of such holders' rights thereunder.
(b) Immediately following the Effective Time of the Acquisition Merger, each
holder of a Parent Option, whether or not then exercisable, will receive in
settlement of such Parent Option a cash payment equal to the product of (i) the
total number of shares of Parent Common Stock previously subject to such Parent
Option and (ii) the excess, if any, of the Cash Election Price over the
exercise price per share of Parent Common Stock previously subject to such
Parent Option.
SECTION 4.6 Surrender of Shares; Transfer Books. (a) Exchange Agent. At or
prior to the Effective Time of the Acquisition Merger, Parent shall deposit
with the Exchange Agent, for the benefit of the holders of shares of Parent
Common Stock, the Acquisition Merger Consideration for exchange in accordance
with this Article 2. The cash portion of the Acquisition Merger Consideration
shall be invested by the Exchange Agent as directed by Parent. Any net profit
resulting from, or interest or income produced by, such investments will be
payable to Parent.
(b) Exchange Procedures for Shares of Parent Common Stock. As soon as
practicable after the Effective Time of the Acquisition Merger, each holder of
an outstanding certificate or certificates which prior thereto represented
shares of Parent Common Stock shall, upon surrender to the Exchange Agent of
such certificate or certificates and acceptance thereof by the Exchange Agent,
be entitled to a certificate or certificates representing the number of full
shares of Parent Common Stock, if any, to be received by the holder thereof
pursuant to this Agreement and the amount of cash, if any, which the holder of
such shares has the right to receive pursuant to this Agreement and the cash,
if any, payable in lieu of any fractional shares. The Exchange Agent shall
accept such certificates upon compliance with such reasonable terms and
conditions as the Exchange Agent may impose to effect an orderly exchange
thereof in accordance with normal exchange practices. After the Effective Time
of the Acquisition Merger, there shall be no further transfer on the records of
Parent or its transfer agent of certificates representing shares of Parent
Common Stock which have been converted pursuant to this Agreement into the
right to receive the Acquisition Merger Consideration, and if such certificates
are presented to Parent for transfer, they shall be canceled against delivery
of cash and, if appropriate, certificates for Non-Cash Election Shares. If any
certificate for such Non-Cash Election Shares is to be issued in, or if cash is
to be remitted to, a name other than that in which the certificate for Parent
Common Stock surrendered for exchange is registered, it shall be a condition of
such exchange that the certificate so surrendered shall be properly
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endorsed, with signature guaranteed, or otherwise in proper form for transfer
and that the person requesting such exchange shall pay to Parent or its
transfer agent any transfer or other taxes required by reason of the issuance
of certificates for such Non-Cash Election Shares in a name other than that of
the registered holder of the certificate surrendered, or establish to the
satisfaction of Parent or its transfer agent that such tax has been paid or is
not applicable. Until surrendered as contemplated by this Section 4.6(b), each
certificate for shares of Parent Common Stock which have been converted into
the right to receive the Acquisition Merger Consideration shall be deemed at
any time after the Effective Time of the Acquisition Merger to represent only
the right to receive upon such surrender the Acquisition Merger Consideration
as contemplated by Section 4.1. No interest will be paid or will accrue on any
cash payable as Acquisition Merger Consideration or in lieu of any fractional
shares of Non-Cash Election Shares.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to Non-Cash Election Shares with a record date after
the Effective Time of the Acquisition Merger shall be paid to the holder of any
unsurrendered certificate for shares of Parent Common Stock with respect to the
Non-Cash Election Shares to be received in respect thereof and no cash payment
in lieu of fractional shares shall be paid to any such holder pursuant to
Section 4.6(e) until the surrender of such certificate in accordance with this
Article 4. Subject to the effect of applicable laws, following surrender of any
such certificate, there shall be paid to the holder of the certificate
representing whole Non-Cash Election Shares issued in connection therewith,
without interest, (i) at the time of such surrender the amount of any cash
payable in lieu of a fractional share of Non-Cash Election Shares to which such
holder is entitled pursuant to Section 4.6(e) and the proportionate amount of
dividends or other distributions with a record date after the Effective Time of
the Acquisition Merger theretofore paid with respect to such whole Non-Cash
Election Shares, and (ii) at the appropriate payment date, the proportionate
amount of dividends or other distributions with a record date after the
Effective Time of the Acquisition Merger but prior to such surrender and a
payment date subsequent to such surrender payable with respect to such whole
Non-Cash Election Shares.
(d) No Further Ownership Rights in Parent Common Stock Exchanged For
Cash. All Acquisition Merger Consideration paid upon the surrender for exchange
of certificates representing shares of Parent Common Stock in accordance with
the terms of this Article 4 (including any cash paid pursuant to Section
4.6(e)) shall be deemed to have been issued and paid in full satisfaction of
all rights pertaining to the shares of Parent Common Stock exchanged therefor
theretofore represented by such certificates.
(e) No Fractional Shares. (i) No certificates or scrip representing
fractional shares of Non-Cash Election Shares shall be issued in connection
with the Acquisition Merger, and such fractional share interests will not
entitle the owner thereof to vote or to any rights of a shareholder of Parent
after the Acquisition Merger; and
(ii) Notwithstanding any other provision of this Agreement, no certificates
or scrip representing fractional shares of Parent Common Stock shall be issued
upon the surrender for exchange of certificates and such fractional shares
shall not entitle the owner thereof to vote or to any other rights of a holder
of Parent Common Stock. Each record holder of shares of Parent Common Stock
exchanged pursuant to the Acquisition Merger who would otherwise have been
entitled to receive a fraction of a Non-Cash Election Share (after taking into
account all shares of Parent Common Stock delivered by such holder) shall
receive, in lieu thereof, a cash payment (without interest) in lieu of such
fractional share in an amount equal to the product of such fraction multiplied
by the average of the last reported sales price, regular way, per share of
Company Common Stock on the New York Stock Exchange ("NYSE") Composite
Transactions Tape for the ten business days prior to and including the last
business day prior to the day on which the Effective Time of the Acquisition
Merger occurs.
(f) Termination of Exchange Fund. Any portion of the Acquisition Merger
Consideration deposited with the Exchange Agent pursuant to this Section 4.6
(the "Exchange Fund") which remains undistributed to the holders of the
certificates formerly representing shares of Parent Common Stock for six months
after the Effective Time of the Acquisition Merger shall be delivered to
Parent, upon demand, and any holders of shares of Parent Common Stock prior to
the Acquisition Merger who have not theretofore complied with this Article 4
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shall thereafter look only to Parent and only as general creditors thereof for
payment of their claim for cash, if any, Non-Cash Election Shares, if any, any
cash in lieu of fractional shares of Non-Cash Election Shares, and any
dividends or distributions with respect to Non-Cash Election Shares, as
applicable, to which such holders may be entitled.
(g) No Liability. None of Acquisition, Parent, the Company nor the Exchange
Agent shall be liable to any person in respect of any shares of Non-Cash
Election Shares (or dividends or distributions with respect thereto) or cash
from the Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any certificates
representing shares of Parent Common Stock immediately prior to the Effective
Time of the Acquisition Merger shall not have been surrendered prior to one
year after the Effective Time of the Acquisition Merger (or immediately prior
to such earlier date on which any cash, if any, any cash in lieu of fractional
shares of Non-Cash Election Shares, any dividends or distributions with respect
to Non-Cash Election Shares in respect of such certificate would otherwise
escheat to or become the property of any Governmental Entity (as defined in
Section 5.5(b)), any such cash, dividends or distributions in respect of such
certificate shall, to the extent permitted by applicable law, become the
property of Parent, free and clear of all claims or interest of any person
previously entitled thereto.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND PARENT
The Company and Parent hereby jointly and severally represent and warrant to
Acquisition that, except as specifically set forth in the SEC Reports (as
defined below) filed prior to the date hereof, or the Disclosure Schedule
delivered by the Company to Acquisition at or prior to the execution of this
Agreement (the "Disclosure Schedule") (provided that the listing of an item in
one section of the Disclosure Schedule shall be deemed to be a listing in each
section of the Disclosure Schedule to which such item relates only to the
extent that it is reasonably apparent from a reading of such disclosure that it
also qualifies or applies to such other section):
SECTION 5.1 Organization and Qualification; Subsidiaries. (a) Each of the
Company and its subsidiaries, including Parent, is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
formation and has the requisite power and authority and any necessary
governmental approvals to own, lease and operate its properties and to carry on
its business as it is now being conducted, except where the failure to be in
good standing or to have such power, authority and governmental approval would
not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect (as defined below). Each of the Company and its
subsidiaries is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and in good standing which would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect. When
used in connection with the Company or any of its subsidiaries, the term
"Material Adverse Effect" means any change or effect that, either individually
or in the aggregate with all other changes or effects, is materially adverse to
the business, operations, assets, liabilities (including contingent
liabilities), financial condition or results of operations of the Company and
its subsidiaries taken as a whole. Prior to the Closing Dates, Parent will take
such action as is necessary so that as of the day prior to the Closing Dates
Parent will be a Delaware corporation only and not a Barbados corporation.
(b) Merger Sub was formed on January 28, 1999 solely for the purpose of
engaging in the transactions contemplated hereby and, in all material respects,
has engaged in no other business activities and has conducted its operations
only as contemplated hereby.
SECTION 5.2 Articles of Incorporation and By-Laws. Included in Section 5.2
of the Disclosure Schedule are a complete and correct copy of the Company's
amended and restated articles of incorporation and
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restated by-laws as in effect on the date hereof and the certificate of
incorporation and by-laws of Parent. Such articles of incorporation and by-laws
are in full force and effect and no other organizational documents are
applicable to or binding upon the Company. Neither the Company nor Parent is in
violation of any of the provisions of its respective articles (or certificate)
of incorporation or by-laws.
SECTION 5.3 Capitalization. (a) The authorized capital stock of the Company
consists of 40,000,000 shares of Company Common Stock and 2,000,000 shares of
Preferred Stock, no par value (the "Preferred Stock"). As of January 31, 1999,
(i) 16,581,482 shares of Company Common Stock were issued and outstanding, all
of which were validly issued, fully paid and nonassessable and were issued free
of preemptive (or similar) rights, and (ii) an aggregate of 914,652 shares of
Company Common Stock were reserved for issuance and issuable upon or otherwise
deliverable in connection with the exercise of outstanding Company Options
having an exercise price of less than $30. As of the date hereof, no shares of
Preferred Stock are issued and outstanding. Since January 31, 1999, the Company
has not issued or reserved for issuance (i) any shares of capital stock or
other voting securities of the Company or any of its subsidiaries, except as a
result of the exercise of Company Options outstanding at January 31, 1999 or
(ii) any Company Options except as described in this Section 5.3.
(b) Parent was incorporated under the Company's Act of Barbados pursuant to
which it is authorized to issue an unlimited number of shares designated as
common shares. On February 1, 1999, pursuant to a Certificate of Domestication
in accordance with Section 388 of the Delaware General Corporation Law and a
Certificate of Incorporation, Parent was incorporated under the laws of the
State of Delaware, pursuant to which it is authorized to issue 10,000 shares of
Parent Common Stock, of which, as of the date hereof, 1,000 shares are issued
and outstanding (the "Outstanding Parent Common Shares") and owned of record by
the Company. The number of authorized and outstanding shares of Parent Common
Stock immediately prior to the Effective Time of the Reorganization Merger
shall be equal to the number of shares of Company Common Stock issued and
outstanding as of the date hereof plus the number of shares issuable upon the
exercise of options or other securities described in this Section 5.3.
(c) Other than Company Options outstanding as of the date hereof and the
Company Rights, neither the Company nor Parent has issued or reserved for
issuance (i) any options or other rights to acquire from the Company or Parent
or any of their respective subsidiaries, and no obligation of the Company or
Parent or any of their respective subsidiaries to issue, any capital stock,
voting securities or securities convertible into or exchangeable for capital
stock or voting securities of the Company or Parent or any of their respective
subsidiaries and (ii) no equity equivalents, interests in the ownership or
earnings of the Company or Parent or any of its subsidiaries or other similar
rights (collectively, with the Company Options, and including securities of
Parent, "Company Securities"). All shares of Company Common Stock subject to
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable and free of preemptive (or
similar) rights. There are no outstanding obligations of the Company or Parent
or any of their respective subsidiaries to repurchase, redeem or otherwise
acquire any Company Securities or to provide funds to or make any investment
(in the form of a loan, capital contribution or otherwise) in any such
subsidiary or any other entity. Except for the Company Options and the Company
Rights, there are no other options, calls, warrants or other rights,
agreements, arrangements or commitments of any character relating to the issued
or unissued capital stock of the Company or Parent or any of their respective
subsidiaries to which the Company or Parent or any of their respective
subsidiaries is a party. Section 5.3 of the Disclosure Schedule sets forth a
true and complete list of the subsidiaries of the Company which evidences,
among other things, the amount of capital stock or other equity interests owned
by the Company, directly or indirectly, in such subsidiaries or associated
entities. Each of the outstanding shares of capital stock of each of the
Company's subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and all such shares are owned by the Company or another wholly
owned subsidiary of the Company and are owned free and clear of all security
interests, liens, claims, pledges, agreements, limitations in voting rights,
charges or other encumbrances of any nature whatsoever, except as set forth on
Section 5.3 of the Disclosure Schedule. No entity in which the Company owns,
directly or indirectly,
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less than a 50% equity interest is, individually or when taken together with
all such other entities, material to the business of the Company and its
subsidiaries taken as a whole. As of the date hereof, the outstanding
indebtedness for borrowed money of the Company and its subsidiaries is set
forth in Section 5.3 of the Disclosure Schedule. The outstanding indebtedness
under the Company's line of credit with Bank of America National Trust and
Savings Association may be prepaid in full without penalty in accordance with
the terms of such line of credit.
(d) The authorized capital stock of Merger Sub consists of 1,000 shares of
common stock, no par value ("Merger Sub Common Stock"), of which, as of the
date hereof, 1,000 shares are issued and outstanding (the "Outstanding Merger
Sub Common Shares") and owned of record by Parent.
SECTION 5.4 Authority Relative to This Agreement. Each of the Company and
Parent has all necessary corporate power and authority to execute and deliver
this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby (other than, with respect to (i) the
Reorganization Merger, the approval of this Agreement by the Requisite
Shareholder Approval (as defined in Section 5.20), as required by the
California GCL, and the filing of appropriate merger documents with the
Secretary of State of the State of California as required by the California GCL
and (ii) the Acquisition Merger, the adoption of this Agreement by the Company,
as sole stockholder of Parent, as required by the DGCL, and the filing of
appropriate merger documents with the Secretary of State of the State of
Delaware as required by the DGCL). The execution, delivery and performance this
Agreement by the Company and Parent and the consummation by the Company and
Parent of the transactions contemplated by this Agreement have been duly and
validly authorized by all necessary corporate action and no other corporate
proceedings on the part of the Company or Parent are necessary to authorize
this Agreement or to consummate the transactions so contemplated (other than,
with respect to (i) the Reorganization Merger, the Requisite Shareholder
Approval, as required by the California GCL, and the filing of appropriate
merger documents with the Secretary of State of the State of California as
required by the California GCL and (ii) the Acquisition Merger, the adoption of
this Agreement by the Company, as sole stockholder of Parent, as required by
the DGCL, and the filing of appropriate merger documents with the Secretary of
State of the State of Delaware as required by the DGCL). This Agreement has
been duly and validly executed and delivered by the Company and Parent and
constitutes a legal, valid and binding obligation of the Company and Parent
enforceable against the Company and Parent in accordance with its terms, except
as such enforceability may be limited by (a) bankruptcy, reorganization,
moratorium or other laws now or hereafter in effect, relating to or limiting
creditor's rights generally, and (b) general principles of equity (whether
considered in an action in equity or at law) which provide, among other things,
that the remedies of specific performance and injunction and other forms of
equitable relief are subject to equitable defenses and to the discretion of the
court. Parent will, promptly following the execution of this Agreement, approve
this Agreement and the Reorganization Merger in its capacity as the sole
shareholder of Merger Sub. As a result of the foregoing actions, the only
approval required to authorize the Reorganization Merger on the part of Parent,
the Company and Merger Sub is the Requisite Shareholder Approval in connection
with the Reorganization Merger and the adoption of this Agreement by the
Company, as sole stockholder of Parent, in connection with the Acquisition
Merger.
SECTION 5.5 No Conflict; Required Filings and Consents. (a) The execution
and delivery of this Agreement by the Company and Parent and the consummation
of the transactions contemplated hereby would not result in or give rise to
any: (i) conflict with or violate the articles of incorporation or by-laws of
the Company or the equivalent organizational documents of any of its
subsidiaries; (ii) conflict with or violation of any law, rule, regulation,
order, judgment or decree applicable to the Company or any of its subsidiaries
or by which its or any of their respective properties are bound or affected; or
(iii) breach or violation of or default (or an event which with notice or lapse
of time or both could become a default) or loss of a material benefit under, or
right of termination, amendment, acceleration or cancellation of, or alteration
of rights under or require the consent or approval of any person under, or
creation of a lien or encumbrance on any of the properties or assets of the
Company or any of its subsidiaries pursuant to, or preemptive or similar rights
under, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit (including any Environmental Permit),
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franchise, joint venture agreement, limited liability agreement, partnership
agreement or other instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or its or any of
their respective properties are bound or affected, except, in the case of
clauses (ii) and (iii) to the extent that any of the foregoing would not
reasonably be expected to result in a Material Adverse Effect.
(b) The execution, delivery and performance of this Agreement by the
Company, Parent and Merger Sub and the consummation of the Mergers by the
Company and Parent do not and will not require any consent, approval,
authorization or permit of, action by, filing with or notification to, any
Federal, state or local government or any court, administrative agency or
commission or other governmental authority, official or agency, domestic or
foreign (a "Governmental Entity"), except for (i) the applicable requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations promulgated thereunder, (ii) the Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder, (iii) the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), state securities, takeover and Blue Sky
laws and (iv) the filing and recordation of appropriate merger or other
documents as required by the California GCL or the DGCL.
SECTION 5.6 Compliance. Neither the Company nor any of its subsidiaries is
in conflict with, or in default or violation of, (i) any law, rule, regulation,
order, judgment or decree applicable to the Company or any of its subsidiaries
or by which its or any of their respective properties are bound or affected or
(ii) any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or its or any of their respective properties are bound or
affected, except for any such conflicts, defaults or violations which would
not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
SECTION 5.7 SEC Filings; Financial Statements; Undisclosed
Liabilities. (a) The Company has filed all forms, reports, statements,
schedules, registration statements and other documents required to be filed
with the Securities and Exchange Commission (the "SEC") since November 1, 1996
(the "SEC Reports"), each of which has complied in all material respects with
the applicable requirements of the Securities Act, and the rules and
regulations promulgated thereunder, or the Exchange Act and the rules and
regulations promulgated thereunder, each as in effect on the date so filed or
as amended. No subsidiary of the Company is required to file any form, report,
statement, schedule, registration statement or other document with the SEC. No
SEC Report, when filed (or, if amended or superseded by a filing prior to the
date of this Agreement or of the Closing Dates, then on the date of such
filing) contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Except to the extent revised or superseded by a subsequent
filing with the SEC (a copy of which has been provided to Acquisition prior to
the date hereof), none of the SEC Reports filed prior to the date hereof
contains any untrue statement of a material fact or omits to state a material
fact required to be stated or incorporated by reference therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(b) Each of the audited and unaudited consolidated financial statements of
the Company (including any related notes thereto) included in the SEC Reports
filed prior to the date hereof and the audited financial consolidated financial
statements of the Company (including any related notes thereto) to be included
in the Company's Annual Report on Form 10-K for the fiscal year ended November
1, 1998, have been prepared in accordance with generally accepted accounting
principles (except in the case of unaudited statements, as permitted by Form
10-Q of the SEC) applied on a consistent basis during the relevant periods
(except as may be indicated in the notes thereto), and present fairly the
consolidated financial position and consolidated results of operations and
changes in cash flows of the Company and its subsidiaries as of the respective
dates or for the respective periods reflected therein, except, in the case of
the unaudited interim financial statements, for the absence of footnotes and to
normal and recurring year-end adjustments that are not material.
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(c) Except as set forth in the SEC Reports filed prior to the date of this
Agreement and except to the extent set forth on the consolidated balance sheet
of the Company and its subsidiaries at November 1, 1998, or in the notes
thereto, neither the Company nor any of its subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
which would be required to be reflected on a balance sheet or in the notes
thereto prepared in accordance with generally accepted accounting principles
consistently applied, except for liabilities or obligations incurred in the
ordinary course of business since November 1, 1998, none of which would,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
SECTION 5.8 Absence of Certain Changes or Events. Since November 1, 1998,
the Company and its subsidiaries have conducted their businesses only in the
ordinary course and, since such date, there has not been (i) any condition,
event or occurrence which, individually or in the aggregate, would be
reasonably likely to have a Material Adverse Effect or (ii) any action which,
if it had been taken after the date hereof, would have required the consent of
Acquisition under Section 7.1 hereof.
SECTION 5.9 Absence of Litigation. As of the date of this Agreement, there
are no suits, claims, actions, proceedings or investigations pending or, to the
knowledge of the Company, threatened against the Company or any of its
subsidiaries, or against or involving any properties or rights of the Company
or any of its subsidiaries, before any Governmental Entity (collectively,
"Litigation"), which (i) if adversely determined, would, individually or in the
aggregate in the case of related claims, result in liability to the Company in
excess of $500,000 or (ii) seek to delay or prevent the consummation of the
transactions contemplated hereby. All matters disclosed in Section 5.9 of the
Disclosure Schedule (other than the claims, suits, actions, proceedings or
investigations relating to the transactions contemplated by this Agreement (and
other claims substantially similar thereto)), and any other Litigation
involving the Company, taken together, would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. Neither
the Company nor any of its subsidiaries nor any of their respective properties
is or are subject to any order, writ, judgment, injunction, decree,
determination or award having, or which, insofar as can be reasonably foreseen
in the future, would reasonably be expected to have a Material Adverse Effect
or would prevent or delay the consummation of the transactions contemplated
hereby. As of the date of this Agreement, no officer or director of the Company
is a defendant in any litigation commenced by shareholders of the Company with
respect to the performance of his or her duties as an officer and/or director
of the Company under any federal or state law (including litigation under
federal and state securities laws). There exist no indemnification agreements
with any of the directors and officers of the Company.
SECTION 5.10 Properties. (a) The Company or its subsidiaries has good, valid
and, in the case of the Owned Properties (as defined below), marketable fee
title, to all of the (i) real property and interests in real property indicated
as being owned by the Company and its subsidiaries in the financial statements
included in the SEC Reports, except for properties sold or otherwise disposed
of in the ordinary course of business (the "Owned Properties"), and (ii)
leasehold estates in all leased real properties indicated as being leased by
the Company and its subsidiaries in the financial statements included in the
SEC Reports, except leasehold interests terminated in the ordinary course of
business (the "Leased Properties"; the Owned Properties and Leased Properties
being sometimes referred to herein as the "Real Properties"), in each case free
and clear of all mortgages, liens, security interests, easements, covenants,
rights-of-way and other similar restrictions and encumbrances ("Encumbrances"),
except where the failure to have such marketable fee title would not interfere
in any material respect with the conduct of business of the Company as
currently conducted.
(b) No consent or approval is required to be obtained under any agreement by
which the Company or any of its subsidiaries has obtained a leasehold interest
in any Leased Property (each such agreement a "Lease") by or with respect to
the Company or any subsidiary of the Company, and no right of termination shall
arise under any Lease nor does any landlord have the right to increase the rent
payable under any Lease, in each case in connection with the execution and
delivery of this Agreement by the Company or the consummation by the Company of
the transactions contemplated hereby, except to the extent that any of the
foregoing, individually or in the aggregate, would not have a Material Adverse
Effect.
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(c) Neither the Company nor any of its subsidiaries is obligated under or
bound by any option, right of first refusal, purchase contract, or other
contractual right to sell or dispose of any Owned Property or any portions
thereof or interests therein which property, portions and interests,
individually or in the aggregate, are material to the Company.
(d) Neither the Company nor any of its subsidiaries (or any of the
affiliates of any of the foregoing) has an ownership, financial or other
interest in the landlord under any of the Company Leases, which exceeds a 50%
ownership, financial or other interest in such landlord.
SECTION 5.11 Employee Benefit Plans. (a) Section 5.11(a) of the Disclosure
Schedule contains a true and complete list of each "employee benefit plan"
(within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), including, without limitation, multiemployer
plans within the meaning of Section 3(37) of ERISA), stock purchase, stock
option, severance, employment, change-in-control, fringe benefit, collective
bargaining, bonus, incentive, deferred compensation and all other employee
benefit plans, agreements, programs, policies or other arrangements, whether or
not subject to ERISA (including any funding mechanism therefor now in effect or
required in the future as a result of the transaction contemplated by this
Agreement or otherwise), whether oral or written, under which any employee or
former employee of the Company or its subsidiaries has any present or future
right to benefits or under which the Company or its subsidiaries has any
present or future liability. All such plans, agreements, programs, policies and
arrangements shall be collectively referred to as the "Company Plans".
(b) No Company Plan (i) is a multiemployer plan within the meaning of
Section 4001(a)(3) of ERISA (and neither the Company nor any of its
subsidiaries has, at any time, contributed to nor had an obligation to
contribute to any such multiemployer plan) or (ii) is an "employee pension
plan" within the meaning of Section 3(2) of ERISA that is subject to Title IV
of ERISA.
(c) With respect to each Company Plan, the Company has delivered to
Acquisition a current, accurate and complete copy (or, to the extent no such
copy exists, an accurate description) thereof and, to the extent applicable:
(i) any related trust agreement or other funding instrument; (ii) the most
recent determination letter, if applicable; (iii) the most recent summary plan
description and other written communications (or a description of any oral
communications) by the Company or its subsidiaries to their employees
concerning the extent of the benefits provided under a Company Plan; and (iv)
for the three most recent years (A) the Form 5500 and attached schedules, (B)
audited financial statements, (C) actuarial valuation reports and (D)
attorney's response to an auditor's request for information.
(d) (i) Each Company Plan has been established and administered in all
material respects in accordance with its terms, and in compliance in all
material respects with the applicable provisions of ERISA, the Internal Revenue
Code of 1986, as amended (the "Code") and other applicable laws, rules and
regulations; (ii) each Company Plan which is intended to be qualified within
the meaning of Section 401(a) of the Code is so qualified, to the knowledge of
the Company, and has received a favorable determination letter as to its
qualification, and nothing has occurred, whether by action or failure to act,
that would reasonably be expected to cause the loss of such qualification;
(iii) no event has occurred and no condition exists that would subject the
Company or its Subsidiaries, either directly or by reason of their affiliation
with any member of their "Controlled Group" (defined as any organization which
is a member of a controlled group of organizations within the meaning of
Sections 414(b), (c), (m) or (o) of the Code), to any material tax, fine, lien,
penalty or other liability imposed by ERISA, the Code or other applicable laws,
rules and regulations; (iv) for each Company Plan with respect to which a Form
5500 has been filed, no material change has occurred with respect to the
matters covered by the most recent Form since the date thereof; (v) no non-
exempt "prohibited transaction" (as such term is defined in Section 406 of
ERISA and Section 4975 of the Code) has occurred with respect to any Company
Plan; (vi) no Company Plan provides retiree welfare benefits and neither the
Company nor its subsidiaries have any obligations to provide any retiree
welfare benefits (except to the extent retirees are entitled to benefits
pursuant to Section 6.01 et seq. of ERISA); and (vii) all awards, grants or
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bonuses made pursuant to any Company Plan have been, or will be, fully
deductible to the Company or its subsidiaries notwithstanding the provisions of
Section 162(m) of the Code and the regulations promulgated thereunder.
(e) With respect to any Company Plan, (i) no actions, suits or claims (other
than routine claims for benefits in the ordinary course) are pending or, to the
knowledge of the Company, threatened and (ii) to the knowledge of the Company,
no facts or circumstances exist that would give rise to any such actions, suits
or claims.
(f) The consummation of the Mergers and other transactions contemplated by
this Agreement will not (i) entitle any Company employee or director to
severance pay, (ii) result in the payment to any present or former employee of
the Company or its subsidiaries of any money or other property or accelerate
the time of payment or vesting, or increase the amount payable or provide any
other rights or benefits to any present or former employee of the Company or
its subsidiaries, whether or not such payment would constitute a parachute
payment within the meaning of Section 280G of the Code.
SECTION 5.12 Tax Matters. Except to the extent the failure of any
representation made in this Section 5.12 to be true and correct which, when
taken in the aggregate with all other such failures (regarding the
representations made in this Section 5.12 only), would not have a Material
Adverse Effect:
(a) All Tax Returns required to be filed by or with respect to the
Company and its subsidiaries have been timely filed or requests for
extensions to file such Tax Returns have been timely filed and the Company
and its subsidiaries are within such period of extension. The Company and
its subsidiaries have (i) timely paid all Taxes shown to be due on such Tax
Returns or that have been assessed in writing by any taxing authority,
except for Taxes contested in good faith and (ii) provided adequate
reserves (in addition to reserves for deferred Taxes, which reflect
differences between the book and tax bases in assets and liabilities) for
Taxes (whether or not shown to be due on any Tax Return) on the financial
statements in accordance with generally accepted accounting principles.
(b) There are no liens for unpaid Taxes against the property of the
Company or any of its subsidiaries, except with respect to Taxes not yet
due or payable.
(c) The statute of limitations with respect to the U.S. Federal,
California and all other state income tax returns of the Company and its
subsidiaries for all periods through 1992 has expired.
(d) No audit or other proceeding by any taxing authority has formally
commenced, and no written notification has been given to the Company or any
of its subsidiaries that such an audit or other proceeding is pending or
threatened with respect to any Taxes of the Company or any subsidiary of
the Company, in each case that could reasonably be expected to result in an
assessment for Taxes. No assessment of Tax has been proposed in writing
against the Company or any of its subsidiaries or any of their assets,
except for assessments contested by the Company or any of its subsidiaries
in good faith.
(e) Neither the Company nor any of the subsidiaries is a party to, bound
by or has any obligation under any Tax sharing or similar contract or
arrangement.
(f) None of the Company or any of its subsidiaries (i) has been a member
of an affiliated group (within the meaning of the Code) filing a
consolidated federal Tax Return (other than a group the common parent of
which was the Company) or (ii) has any liability for any Tax of any person
under Reg. Section 1.1502-6 of the Treasury Regulations promulgated under
the Code (or any similar provision of state, local or foreign law), as a
transferee or successor, by contract or otherwise.
(g) As used herein, "Taxes" shall mean all taxes of any kind, including,
without limitation, those on or measured by or referred to as income, gross
receipts, sales, use, ad valorem, franchise, profits, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, value
added, property or windfall profits taxes, customs, duties or similar fees,
assessments or charges of any kind whatsoever, together with any interest
and any penalties, additions to tax or additional amounts imposed by any
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governmental entity. As used herein, "Tax Return" shall mean any return,
declaration, report, claim for refund or information return or statement
relating to Taxes, including any schedule or attachment thereto, and
including any amendment thereof.
SECTION 5.13 Environmental Laws. Except to the extent that any inaccuracy,
individually or in the aggregate with any other inaccuracy under any of the
following representations, would not reasonably be expected to have a Material
Adverse Effect, (a) each of the Company and each of its subsidiaries complies
and has complied with all Environmental Laws applicable to the properties,
assets or businesses of the Company and its subsidiaries, and possesses and
complies with and has possessed and complied with all Environmental Permits
required under such laws; (b) none of the Company and its subsidiaries has
received any Environmental Claim, and none of the Company and its subsidiaries
is aware after reasonable inquiry of any threatened Environmental Claim or of
any Environmental Claim pending or threatened against any entity for which the
Company or any of its subsidiaries may be responsible; (c) none of the Company
and its subsidiaries has assumed, contractually or by operation of law, any
liabilities or obligations under any Environmental Laws; (d) there are no past
or present events, conditions, circumstances, practices, plans or legal
requirements that would reasonably be expected to result in liability to the
Company or any of its subsidiaries under Environmental Laws, prevent, or
reasonably be expected to increase the burden on the Company or any subsidiary
of, complying with Environmental Laws or of obtaining, renewing, or complying
with all Environmental Permits required under such laws; (e) there are and have
been no Hazardous Materials or other conditions at or from any property owned,
operated or otherwise used by the Company or any subsidiary now or in the past
that would reasonably be expected to give rise to liability of the Company or
any subsidiary under any Environmental Law; and (f) the Company has provided to
Acquisition all Environmental Reports in the possession or control of the
Company or any of its subsidiaries. For purposes of this Agreement, the
following terms shall have the following meanings:
"Environmental Claim" means any written or oral notice, claim, demand,
action, suit, complaint, proceeding or other communication by any person
alleging liability or potential liability arising out of, relating to,
based on or resulting from (i) the presence, discharge, emission, release
or threatened release of any Hazardous Materials at any location, whether
or not owned, leased or operated by the Company or any of its subsidiaries
or (ii) circumstances forming the basis of any violation or alleged
violation of any Environmental Law or Environmental Permit or (iii)
otherwise relating to obligations or liabilities under any Environmental
Laws.
"Environmental Laws" means all applicable statutes, rules, regulations,
ordinances, orders, decrees and common law, in each case of any
Governmental Entity, as they exist at the date hereof, relating in any
manner to contamination, pollution or protection of human health or the
environment, including without limitation the Comprehensive Environmental
Response, Compensation and Liability Act, the Solid Waste Disposal Act, the
Resource Conservation and Recovery Act, the Clean Air Act, the Clean Water
Act, the Toxic Substances Control Act, the Occupational Safety and Health
Act, the Emergency Planning and Community-Right-to-Know Act, the Safe
Drinking Water Act, all as amended, and similar state laws.
"Environmental Permits" means all permits, licenses, registrations and
other governmental authorizations required for the Company and the
operations of the Company's and its subsidiaries' facilities and otherwise
to conduct its business under Environmental Laws.
"Environmental Report" means any report, study, assessment, audit, or
other similar document that addresses any issue of noncompliance with, or
liability under, any Environmental Law that may affect the Company or any
of its subsidiaries.
"Hazardous Materials" means any gasoline or petroleum (including crude
oil or any fraction thereof) or petroleum products, polychlorinated
biphenyls, urea-formaldehyde insulation, asbestos, pollutants,
contaminants, radioactivity, and any other substances of any kind, whether
or not any such substance is defined as hazardous or toxic under any
Environmental Law, that is regulated pursuant to or could give rise to
liability under any Environmental Law.
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SECTION 5.14 Material Contract Defaults; Non-Compete. (a) Neither the
Company nor any of its subsidiaries is, or has received any notice or has any
knowledge that any other party is, in default or unable to perform in any
respect under any material contracts, agreements, commitments, arrangements,
leases, licenses, policies or other instruments to which it or any of its
subsidiaries is a party or by which it or any such subsidiary is bound
("Material Contracts"), except for those defaults which would not reasonably be
expected, either individually or in the aggregate, to have a Material Adverse
Effect, and there has not occurred any event that with the lapse of time or the
giving of notice or both would constitute such a default, except for those
defaults which would not reasonably be expected, either individually or in the
aggregate, to have a Material Adverse Effect. The Company is not a party to any
Material Contract that is required to be disclosed as an exhibit to the SEC
Documents in accordance with the rules and regulations of the SEC that has not
been so disclosed.
(b) Neither the Company nor any of its subsidiaries is a party to any
agreement that expressly limits the ability of the Company or any of its
subsidiaries to compete in or conduct any line of business or compete with any
person in any geographic area or during any period of time.
SECTION 5.15 Intellectual Property. (a) Section 5.15(a) of the Disclosure
Schedule sets forth (i) all material Intellectual Property necessary to operate
the business of the Company as currently conducted ("Company IP") which is
owned by the Company or its subsidiaries and which has been registered or filed
with any Governmental Entity which regulates the filing of applications for any
Intellectual Property, (ii) all unregistered trademarks that are necessary to
operate the business as currently conducted and (iii) all licenses, consents
and other agreements concerning Company IP ("IP Licenses") that are necessary
to operate the business as currently conducted. The Company and/or its
subsidiaries (i) owns or has the right to use all the Intellectual Property
necessary for the Company and its subsidiaries to conduct their business
substantially as is currently conducted and consistent with past practice, and
(ii) with respect to any registered trademarks owned or used by the Company or
its subsidiaries in the United States, the corresponding Company IP in all
other countries in which the Company and/or any of its subsidiaries currently
conducts business except, in the case of this clause (ii), to the extent that
the failure to own or have the right to use such Intellectual Property would
not reasonably be expected, individually or in the aggregate, to have a
Material Adverse Effect.
(b) Except to the extent that such would not individually or in the
aggregate interfere in any material respect with the conduct of the business of
the Company as currently conducted: (i) all of the issued registrations for the
Company IP are valid, enforceable and unexpired, are free of liens and other
encumbrances, have not been abandoned, to the knowledge of the Company, do not
infringe the Intellectual Property of any third party and, to the knowledge of
the Company, are not being infringed by any third party; (ii) no judgment,
decree, injunction, rule or order has been rendered or, to the knowledge of the
Company, is threatened by any Governmental Entity that seeks to limit or impair
the validity of (or the Company or any subsidiary's right to own or use) any
Company IP; (iii) no action, suit or proceeding is pending, or to the knowledge
of the Company, threatened that seeks to limit, cancel or question the validity
of (or the Company or any subsidiary's right to own or use) any Company IP;
(iv) the Company has taken and takes all reasonable steps to protect and
maintain the Company IP; (v) to the knowledge of the Company, no party to an IP
License is, or is alleged to be, in material breach or default thereunder; and
(vi) the transactions contemplated by this Agreement shall not in any material
respect impair or limit the rights of the Company or any of its subsidiaries
under any IP License, or cause any material additional payments to be due
thereunder.
For the purposes of this Section 5.15, "Intellectual Property" shall mean
all U.S., state and foreign intellectual property, including all (a)
inventions, processes, designs, techniques, technology, and related
improvements and know-how, whether or not patented or patentable; (b)
registered copyrights and works of authorship in any media, including computer
software, databases and related items, graphics, artwork, photography,
advertising and promotional materials, designs, copyrightable elements of
pictorial, graphic or sculptural works, utilitarian objects or items of
clothing, Internet site content, and all other authors' rights, including
"moral rights"; (c) trademarks, service marks, trade names, brand names,
corporate names, registered domain names, logos, trade dress and all elements
thereof, the goodwill of any business symbolized
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thereby, and all common-law rights relating thereto (collectively, the
"Trademarks"); and (d) trade secrets and other confidential information.
SECTION 5.16 Transactions with Affiliates. From November 1, 1996 through the
date of this Agreement, except as set forth in the SEC Documents, there has
been no transaction, agreement, arrangement or understanding, or any related
series thereof, between the Company or its subsidiaries or contractors, on the
one hand, and the Company's affiliates (other than wholly-owned (excluding
directors' and nominee shares) subsidiaries of the Company), on the other hand,
in which the amount or value involved exceeded $60,000. As used in the
definition of "affiliate", the term "control" means possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of a person, whether through the ownership of voting securities, by
contract or otherwise.
SECTION 5.17 Brokers. No broker, finder or investment banker (other than
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
Wasserstein Perella & Co., Inc. ("Wasserstein Perella" and, collectively with
Merrill Lynch, the "Financial Advisors")) is entitled to any brokerage,
finder's or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by and on behalf of
the Company or the Independent Committee. The Company and Parent have
heretofore furnished to Acquisition a complete and correct copy of all
agreements between the Company and/or Parent and each of the Financial Advisors
pursuant to which such firm would be entitled to any payment relating to the
transactions contemplated hereby. The aggregate fees payable under such
agreements will not exceed $4.3 million, plus reimbursement for out-of-pocket
expenses.
SECTION 5.18 Opinion of Financial Advisors. (a) The Company and the
Independent Committee of the Board of Directors of the Company specially formed
for the purpose of reviewing the transactions contemplated by this Agreement
(the "Independent Committee") have received the opinion of Merrill Lynch dated
the date of this Agreement, to the effect that the consideration to be received
in the Acquisition Merger by the Company's (and, following the Reorganization
Merger, Parent's) shareholders is fair to such shareholders from a financial
point of view, a true and complete copy of which opinion has been delivered to
Acquisition. The Company has been authorized by Merrill Lynch to permit the
inclusion of such fairness opinion and any other reports, opinions or
appraisals (within the meaning of Item 9 of Schedule 13E-3 under the Exchange
Act) of Merrill Lynch related to the transactions contemplated by this
Agreement in the Form S-4, the Proxy Statement, and the Schedule 13E-3.
(b) The Independent Committee has received the opinion of Wasserstein
Perella & Co. Inc. dated the date of this Agreement, to the effect that the
consideration to be received in the Acquisition Merger by the Company's (and,
following the Reorganization Merger, Parent's) shareholders is fair to such
shareholders from a financial point of view, a true and complete copy of which
opinion has been delivered to Acquisition. The Company has been authorized by
Wasserstein Perella to permit the inclusion of such fairness opinion and any
other reports, opinions or appraisals (within the meaning of Item 9 of Schedule
13E-3 under the Exchange Act) of Wasserstein Perella related to the
transactions contemplated by this Agreement in the Form S-4, the Proxy
Statement, and the Schedule 13E-3.
SECTION 5.19 Board Recommendation; Approval of Independent
Committee. (a) The Board of Directors of the Company, at a meeting duly called
and held on February 2, 1999, has by unanimous vote of those directors present
(who constituted 100% of the directors then in office), other than those
directors who would be considered "interested directors" under Section 310 of
the California GCL, (i) determined that this Agreement, the Voting Agreement
and the transactions contemplated hereby and thereby, taken together, are
advisable and are fair to and in the best interests of the shareholders of the
Company, and (ii) resolved to recommend that the holders of the shares of
Company Common Stock approve the principal terms of this Agreement and approve
the transactions contemplated hereby, including the Mergers.
(b) The Board of Directors of Parent, at a meeting duly called and held on
February 2, 1999, has by unanimous vote of those directors present (who
constituted 100% of the directors then in office), other than
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those directors who would be considered "interested directors" under Section
310 of the California GCL, (i) determined that this Agreement, the Voting
Agreement and the transactions contemplated hereby and thereby, including the
Acquisition Merger, taken together, are advisable and are fair to and in the
best interests of the shareholders of Parent, and (ii) resolved to recommend
that the holders of the shares of Parent Common Stock adopt this Agreement.
(c) The Independent Committee has, by unanimous vote, recommended that the
Board of Directors of the Company approve this Agreement, the Voting Agreement
and the transactions contemplated hereby and thereby on February 2, 1999.
SECTION 5.20 Vote Required; State Takeover Statutes. (a) The affirmative
vote of (i) the holders of a majority of the outstanding shares of Company
Common Stock entitled to vote thereon and (ii) the holders of a majority of the
Company Common Stock present in person or by proxy and voting at the
Shareholders Meeting, excluding for such purposes shares of the persons
indicated on the Schedule 13D filed with the SEC on December 17, 1998, as
amended, with respect to shares of Company Common Stock ((i) and (ii) together,
the "Requisite Shareholder Approval") is the only vote of the holders of any
class or series of the Company's capital stock necessary to approve the
principal terms of this Agreement and approve the Reorganization Merger and the
other transactions contemplated hereby. No vote of the stockholders of the
Company or any of its subsidiaries is required to approve the Voting Agreement.
(b) The affirmative vote of the Company, as the sole stockholder of Parent,
is the only vote of the holders of any class or series of Parent's capital
stock necessary to adopt this Agreement.
(c) No provision of the articles of incorporation, by-laws or other
governing instruments of the Company or any of its subsidiaries (including
Parent) or any applicable law would, directly or indirectly, restrict or impair
the ability of Vestar/Gray (i) to vote, or otherwise to exercise the rights of
a shareholder with respect to, shares of the Company and its subsidiaries
(including Parent) that may be beneficially owned by Vestar/Gray or (ii) to
consummate the Mergers.
SECTION 5.21 Proxy Statement. None of the information supplied by the
Company or Parent for inclusion in (i) the registration statement on Form S-4
to be filed with the SEC by Parent in connection with the issuance of the
Common Stock of Parent following the Mergers (such Form S-4, as amended or
supplemented, is herein referred to as the "Form S-4") will, at the time the
Form S-4 is filed with the SEC, and at any time it is amended or supplemented
or at the time it becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, (ii) the proxy statement to be sent to the shareholders of the
Company in connection with the Shareholders Meeting (as defined in Section 8.1)
(such proxy statement, as amended or supplemented, is herein referred to as the
"Proxy Statement") will, at the date it is first mailed to the Company's
shareholders or at the time of the Shareholders Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading or (iii)
the Statement on Schedule 13E-3 (such statement, as amended or supplemented, is
herein referred to as the "Schedule 13E-3") to be filed with the SEC by the
Company concurrently with the filing of the Proxy Statement will, at the time
it is first filed with the SEC, and at any time it is amended or supplemented
and at the time of the Shareholders Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Form S-4 will, as
of its effective date, and the prospectus contained therein will, as of its
date, comply as to form in all material respects with the requirements of the
Securities Act and the rules and regulations promulgated thereunder. The Proxy
Statement and the Schedule 13E-3 will comply as to form in all material
respects with the requirements of the Exchange Act and the rules and
regulations promulgated thereunder, except that no representation is made by
the Company or Parent with respect to statements made or incorporated by
reference therein based on information supplied in writing by Acquisition
specifically for inclusion in the Proxy Statement.
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SECTION 5.22 Rights Plan. The Board of Directors of the Company has adopted
a resolution designating Vestar Capital Partners III, L.P. and its affiliates,
Vestar/Gray and Acquisition as "Exempt Persons" under the Rights Agreement
between the Company and Harris Trust Company of California dated as of November
9, 1998 (the "Rights Agreement") (without redeeming the Company Rights), the
net effect of which is that (a) neither the execution or delivery of this
Agreement or the Voting Agreement, nor the consummation of the transactions
contemplated by such Agreements (including the transactions contemplated by the
Voting Agreement and the consummation of the Mergers) will (i) cause any
Company Rights to become exercisable or to separate from the shares of Company
Common Stock to which they are attached, (ii) cause Vestar/Gray or Acquisition
or any of their affiliates to be an Acquiring Person (as defined in the Rights
Agreement) in connection with the transactions contemplated hereby or (iii)
trigger any other provisions of the Rights Agreement, including giving rise to
a Distribution Date (as defined in the Rights Agreement) in connection with the
transactions contemplated hereby and such resolution shall remain in full force
and effect at all times from and after the date hereof.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES
OF ACQUISITION
Acquisition hereby represents and warrants to the Company that:
SECTION 6.1 Corporate Organization. Acquisition is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated and has the requisite corporate power
and authority and any necessary governmental approval to own, operate or lease
its properties and to carry on its business as it is now being conducted,
except where the failure to be so organized, existing and in good standing or
to have such power, authority and governmental approvals would not,
individually or in the aggregate, reasonably be expected to prevent the
consummation of the Mergers.
SECTION 6.2 Authority Relative to This Agreement. Acquisition has all
necessary corporate power and authority to enter into this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by Acquisition and the consummation by Acquisition of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of Acquisition other than filing and recordation of appropriate
merger documents as required by the DGCL. This Agreement has been duly executed
and delivered by Acquisition and, assuming due authorization, execution and
delivery by the Company and Parent, constitutes a legal, valid and binding
obligation of Acquisition enforceable against it in accordance with its terms.
Vestar/Gray will, in its capacity as sole stockholder of Acquisition, promptly
following the execution of this Agreement adopt this Agreement in accordance
with the DGCL.
SECTION 6.3 No Conflict; Required Filings and Consents. (a) The execution,
delivery and performance of this Agreement by Acquisition does not and will
not: (i) conflict with or violate the certificate of incorporation or by-laws
of Acquisition; (ii) assuming that all consents, approvals and authorizations
contemplated by clauses (i), (ii) and (iii) of subsection (b) below have been
obtained and all filings described in such clauses have been made, conflict
with or violate any law, rule, regulation, order, judgment or decree applicable
to Acquisition or by which it or its properties are bound or affected; or (iii)
result in any breach or violation of or constitute a default (or an event which
with notice or lapse of time or both would become a default) or result in the
loss of a material benefit under, or give rise to any pre-emptive or any right
of termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the property or assets of
Acquisition pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Acquisition is a party or by which Acquisition or any of its
properties are bound or affected, except, in the case of clause (iii), for any
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such conflicts, violations, breaches, defaults or other occurrences which would
not, individually or in the aggregate, reasonably be expected to prevent the
consummation of the Mergers.
(b) The execution, delivery and performance of this Agreement by Acquisition
does not and will not require any consent, approval, authorization or permit
of, action by, filing with or notification to, any Governmental Entity, except
(i) for the applicable requirements, if any, of the Exchange Act and the rules
and regulations promulgated thereunder, the Securities Act and the rules and
regulations promulgated thereunder, the HSR Act, state securities, takeover and
Blue Sky laws and (ii) the filing and recordation of appropriate merger or
other documents as required by the DGCL.
SECTION 6.4 Proxy Statement; Schedule 13E-3. None of the information
supplied in writing by Acquisition specifically for inclusion in (i) the Form
S-4 will, at the time the Form S-4 is filed with the SEC, and at any time it is
amended or supplemented or at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Proxy Statement will, at the date
it is first mailed to the Company's shareholders or at the time of the
Shareholders Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading or (iii) the Schedule 13E-3 will, at the time it is
first filed with the SEC, and at any time it is amended or supplemented and at
the time of the Shareholders Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. Notwithstanding the
foregoing, Acquisition makes no representation or warranty with respect to any
information supplied by the Company or any of its representatives which is
contained in or incorporated by reference in any of the foregoing documents.
SECTION 6.5 Brokers. No broker, finder or investment banker (other than as
set forth in Schedule 6.5) is entitled to any brokerage, finder's or other fee
or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by and on behalf of Acquisition.
SECTION 6.6 Commitment Letters. Acquisition has delivered to each of the
Company and Parent executed letters (a) committing Vestar to cause to be
contributed to Acquisition in connection with the Acquisition Merger cash
equity in an amount equal to $146,526,664, (b) committing The Chase Manhattan
Bank to provide senior debt financing to Parent in the amount of $180,000,000,
consisting of a $155,000,000 term loan and a $25,000,000 revolving credit
facility, in connection with the Acquisition Merger, and (c) stating that Chase
Securities Inc. is highly confident that it can provide subordinated debt
financing to Parent in connection with the Acquisition Merger in an amount
equal to $160,000,000 (collectively, the "Commitment Letters"). As of the date
of this Agreement, the Commitment Letters provided to the Company and Parent
are in full force and have not been amended in any material respect.
SECTION 6.7 Newly Formed Entity. Acquisition was formed on January 29, 1999
solely for the purpose of engaging in the transactions contemplated by this
Agreement and, in all material respects, has not engaged in any other business
activities or conducted any operations other than in connection with the
transactions contemplated hereby.
SECTION 6.8 Capitalization. The authorized capital stock of Acquisition
consists of 1,000 shares of common stock, par value $.01 per share, of which,
as of the date hereof, 1,000 shares are issued and outstanding and owned of
record by Vestar/Gray. Immediately prior to the Effective Time of the
Acquisition Merger, the authorized capital stock of Acquisition shall be
increased to 7,100,000 and the number of issued and outstanding shares of
common stock immediately prior to the Effective Time of the Acquisition Merger
shall be increased to 6,546,252.
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ARTICLE 7.
CONDUCT OF BUSINESS PENDING THE MERGERS
SECTION 7.1 Conduct of Business of the Company Pending the Mergers. The
Company covenants and agrees that, during the period from the date hereof to
the Effective Time of the Acquisition Merger, unless Acquisition gives its
prior written consent, the businesses of the Company and its subsidiaries shall
be conducted only in, and the Company and its subsidiaries shall not take any
action except in, the ordinary course of business and in compliance with
applicable laws; and the Company and its subsidiaries shall each use its
reasonable best efforts to preserve substantially intact the business
organization of the Company and its subsidiaries, to keep available the
services of the present officers, employees and consultants of the Company and
its subsidiaries and to preserve the present relationships of the Company and
its subsidiaries with customers, suppliers and other persons with which the
Company or any of its subsidiaries has significant business relations. Except
as expressly contemplated by this Agreement or as set forth in the Disclosure
Schedule, by way of amplification and not limitation, neither the Company nor
any of its subsidiaries shall, between the date of this Agreement and the
Effective Time of the Acquisition Merger, directly or indirectly do or commit
to do any of the following without the prior written consent of Acquisition:
(a) amend or otherwise change the articles of incorporation or by-laws
or equivalent organizational documents of the Company or any of its
subsidiaries;
(b) issue, deliver, sell, lease, sell and leaseback, pledge, dispose of
or encumber, or authorize or commit to the issuance, delivery, sale, lease,
sale/leaseback, pledge, disposition or encumbrance of, (i) any shares of
capital stock of any class, or any options, warrants, convertible
securities or other rights of any kind to acquire any shares of capital
stock, or any other ownership interest (including but not limited to stock
appreciation rights or phantom stock), of the Company or any of its
subsidiaries (except for the issuance and delivery of shares of Company
Common Stock issuable in accordance with the terms of Stock Options
outstanding as of January 1, 1999) or (ii) any material assets of the
Company or any of its subsidiaries, other than assets sold, leased,
pledged, disposed of or encumbered in the ordinary course of business
consistent with past practice;
(c) declare, set aside, make or pay any dividend or other distribution,
payable in cash, stock, property or otherwise, with respect to any of its
capital stock, except for the Company's regular quarterly dividend in an
amount not in excess of $.025 per share per quarter;
(d) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of the capital stock of the
Company or any of its subsidiaries;
(e) (i) repurchase, repay or incur any indebtedness for borrowed money
or issue any debt securities or assume, guarantee or endorse, or otherwise
as an accommodation become responsible for, the obligations of any person,
or make any loans, advances or capital contributions to, or investments in,
any other person; (ii) enter into any material contract or agreement or any
Leases; or (iii) enter into or amend any material contract, lease,
agreement, commitment or arrangement with respect to any of the matters set
forth in this Section 7.1(e), other than in the ordinary course of business
consistent with past practice;
(f) except to the extent required under existing employee and director
benefit plans, agreements or arrangements as in effect on the date of this
Agreement, (i) increase the compensation or fringe benefits of any of its
directors, officers or employees, except for increases in salary or wages
of employees of the Company or its subsidiaries, who are not directors or
officers of the Company, in the ordinary course of business and consistent
with the Company's past practice, (ii) grant any severance or termination
pay not currently required to be paid under existing severance plans to, or
enter into any employment, consulting or severance agreement or arrangement
with, any present or former director, officer or other employee of the
Company or any of its subsidiaries or (iii) establish, adopt, enter into or
amend or terminate any collective bargaining, bonus, profit sharing,
thrift, compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance or other plan,
agreement, trust,
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fund, policy or arrangement for the benefit of any present or former
directors, officers or employees or the Company or any of its subsidiaries;
(g) except as may be required as a result of a change in law or in
generally accepted accounting principles, change any of the accounting
practices or principles used by it;
(h) make any material tax election, make or change any material method
of accounting with respect to any Tax, file any amended Tax Return with
respect to any material Tax or settle or compromise any material federal,
state, local or foreign tax liability;
(i) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of the Company or any of its subsidiaries (other than the
Mergers);
(j) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the stock or assets of, or by any other
manner, any business or any corporation, partnership, joint venture,
association or other business organization or division thereof;
(k) pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), except for the payment, discharge or satisfaction of
liabilities or obligations in the ordinary course of business consistent
with past practice, or waive, release, grant, or transfer any rights of
value;
(l) settle or compromise any litigation (whether or not commenced prior
to the date of this Agreement), other than settlements not in excess of
amounts specifically reserved for in respect of the subject litigation in
the most recent consolidated financial statements of the Company included
in the SEC Documents (provided such settlement documents do not involve any
material non-monetary obligations on the part of the Company);
(m) close, shut down or otherwise eliminate any of its facilities;
(n) change the composition, fill any vacancies or increase the size of
the Company's Board of Directors;
(o) amend, modify or waive any provision of the Rights Agreement, or
take any action to redeem the Rights or render the Rights inapplicable to
any transaction other than the Mergers and the transactions contemplated by
the Voting Agreement other than in accordance with Section 8.14(b);
(p) amend or modify in any material respect or terminate any existing IP
License, execute any new IP License, sell, license or otherwise dispose of,
in whole or in part, any Company IP, and/or subject any Company IP to any
lien or other encumbrance; or
(q) take or agree to take in writing or otherwise, any of the actions
described in Sections 7.1(a) through 7.1(p).
SECTION 7.2 WARN. Neither the Company nor any of its subsidiaries shall
effectuate a "plant closing" or "mass layoff", as those terms are defined in
the Worker Adjustment and Retraining Notification Act of 1988 ("WARN"),
affecting in whole or in part any site of employment, facility, operating unit
or employee of the Company or any subsidiary, without notifying Acquisition or
its affiliates in advance and without complying with the notice requirements
and other provisions of WARN.
ARTICLE 8.
ADDITIONAL AGREEMENTS
SECTION 8.1 Shareholders Meeting. (a) The Company, acting through its Board
of Directors, will, as reasonably promptly as practicable following the date of
this Agreement and in consultation with Acquisition, (i) duly call, give notice
of, convene and hold a meeting of its shareholders for the purpose of
considering and
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approving the principal terms of this Agreement and the Reorganization Merger
and the other transactions contemplated hereby (the "Shareholders Meeting") and
(ii) (A) except to the extent modified in accordance with this Section 8.01,
include in the Proxy Statement the unanimous recommendation of the Board of
Directors that the shareholders of the Company vote in favor of the approval of
the principal terms of this Agreement and the Reorganization Merger and the
transactions contemplated hereby and the written opinions of the Financial
Advisors that the consideration to be received by the shareholders of the
Company and the Parent pursuant to the Mergers is fair to such shareholders
from a financial point of view and (B) use its reasonable best efforts to
obtain the necessary approval of the principal terms of this Agreement and
Reorganization Merger and the other transactions contemplated hereby by its
shareholders. The Board of Directors of the Company shall not withdraw, amend
or modify in a manner adverse to Acquisition its recommendation referred to in
clause (ii) (A) of the preceding sentence (or announce publicly its intention
to do so). Notwithstanding the foregoing, prior to the receipt of the Requisite
Shareholder Approval, the Board of Directors shall be permitted to withdraw,
amend or modify its recommendation (or publicly announce its intention to do
so) of this Agreement and the Reorganization Merger and the other transactions
contemplated by this Agreement in a manner adverse to Acquisition if: (1) the
Company has complied with Section 8.4, (2) a Superior Proposal (as defined in
Section 8.4) shall have been proposed by any person other than Acquisition and
such proposal is pending at the time of such action; (3) the Board of Directors
shall have concluded in good faith, after consultation with its outside legal
counsel, that the Board of Directors is required to withdraw, amend or modify
its recommendation in order to comply with its fiduciary duties to the
shareholders of the Company under applicable law; and (4) the Company shall
have notified Acquisition of such Superior Proposal at least 48 hours in
advance of such action; and
(b) Parent, acting through its Board of Directors, will, as promptly as
practicable following the date of this Agreement and in consultation with
Acquisition, duly call, give notice of, convene and hold a meeting of its
stockholders for the purpose of adopting this Merger Agreement. The Company,
acting in its capacity as sole stockholder of Parent (i) agrees to vote at such
meeting all the shares of Parent Common Stock held by the Company in favor of
the adoption of this Agreement and (ii) hereby irrevocably waives any rights of
appraisal with respect to the Acquisition Merger or right to dissent from the
Acquisition Merger that the Company may have.
SECTION 8.2 Proxy Statement; Form S-4; Schedule 13E-3. As soon as reasonably
practicable following the date of this Agreement, Parent and the Company shall
prepare the Proxy Statement and the Schedule 13E-3, and Parent shall prepare
and file with the SEC the Form S-4, in which the Proxy Statement will be
included, and the Schedule 13E-3. The Company and Parent shall use their
reasonable best efforts to have the Form S-4 declared effective under the
Securities Act as promptly as practicable after such filing. The Company and
Parent will use their reasonable best efforts to cause the Proxy Statement to
be mailed to the Company's shareholders as promptly as practicable after the
Form S-4 is declared effective under the Securities Act. The Company and Parent
shall also take any action reasonably required to be taken under any applicable
state securities laws in connection with the registration and qualification in
connection with the Mergers of common stock of Parent following the Mergers.
The information provided by Parent and the Company for use in the Form S-4, the
Proxy Statement and the Schedule 13E-3, and to be supplied by Acquisition in
writing specifically for use in the Form S-4, the Proxy Statement and the
Schedule 13E-3, shall, at the time the Form S-4 becomes effective and on the
date of the Shareholders Meeting referred to above, be true and correct in all
material respects and shall not omit to state any material fact required to be
stated therein or necessary in order to make such information not misleading,
and the Parent, the Company and Acquisition each agree to correct any
information provided by it for use in the Form S-4, the Proxy Statement and the
Schedule 13E-3, which shall have become false or misleading. Acquisition,
Parent and the Company will cooperate with each other in the preparation of the
Proxy Statement; without limiting the generality of the foregoing, Parent and
the Company will promptly notify Acquisition of the receipt of any comments
from the SEC, of any request by the SEC for any amendment to the Proxy
Statement or for additional information and of the effectiveness of the Form S-
4. The Company will permit Acquisition to review and comment upon all filings
with the SEC, including the Proxy Statement and the Schedule 13E-3 and any
amendment thereto, and all mailings to the
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Company's shareholders in connection with the Mergers, including the Proxy
Statement, shall be subject to the prior review, comment and approval of
Acquisition, which may not be unreasonably withheld. Acquisition will furnish
to Parent and the Company the information relating to it required by the
Exchange Act and the rules and regulations promulgated thereunder to be set
forth in the Proxy Statement and the Schedule 13E-3. Each of Parent and the
Company agrees to use its reasonable best efforts, after consultation with the
other parties hereto, to respond promptly to any comments made by the SEC with
respect to the Proxy Statement and any preliminary version thereof filed by it
and the Schedule 13E-3 and to cause the Proxy Statement to be mailed to the
Company's shareholders at the earliest practicable time.
SECTION 8.3 Access to Information; Confidentiality. From the date hereof to
the Effective Time of the Acquisition Merger, the Company shall, and shall
cause its subsidiaries, officers, directors, employees, auditors, counsel,
financial advisors and other agents to, afford Acquisition and its
representatives and the potential financing sources for the transactions
contemplated by this Agreement reasonable access during normal business hours
to its officers, employees, agents, properties, offices, centers and other
facilities and to all books, contracts and records, and shall furnish
Acquisition and such financing sources with all financial, operating and other
data and information as Acquisition, through its representatives or such
financing sources may from time to time reasonably request. Except as required
by law, each of the Company and Acquisition will hold and cause their
respective officers, directors, agents and employees to hold any nonpublic
information in confidence to the extent required by, and in accordance with,
the provisions of the letter dated November 13, 1998 between Vestar and the
Company (the "Confidentiality Agreement").
SECTION 8.4 No Solicitation. Neither the Company nor any of its subsidiaries
(including Parent) shall (whether directly or indirectly through advisors,
agents or other intermediaries), nor shall the Company or any of its
subsidiaries (including Parent) authorize or permit any of its or their
officers, directors, agents, representatives, advisors or subsidiaries to, (a)
solicit, initiate, encourage (including by way of furnishing information) or
take any action knowingly to facilitate the submission of any inquiries,
proposals or offers (whether or not in writing) from any person (other than
Acquisition, Vestar or Vestar/Gray) relating to, other than the transactions
contemplated by this Agreement and the Voting Agreement, (i) any acquisition or
purchase of 10% or more of the consolidated assets of the Company (or,
following the Reorganization Merger, Parent) and its subsidiaries or of 10% or
more of any class of equity securities of the Company (or, following the
Reorganization Merger, Parent) or any of its subsidiaries, (ii) any tender
offer (including a self tender offer) or exchange offer that if consummated
would result in any person beneficially owning 10% or more of any class of
equity securities of the Company (or, following the Reorganization Merger,
Parent) or any of its subsidiaries, (iii) any merger, consolidation, business
combination, sale of substantially all assets, recapitalization, liquidation,
dissolution or similar transaction involving the Company or any of its
subsidiaries whose assets, individually or in the aggregate, constitute 10% or
more of the consolidated assets of the Company (or, following the
Reorganization Merger, Parent), or (iv) any other transaction the consummation
of which would or would reasonably be expected to impede, interfere with,
prevent or materially delay the Mergers or which would or would reasonably be
expected to materially dilute the benefits to Acquisition of the transactions
contemplated by this Agreement (collectively, "Transaction Proposals"), or
agree to or endorse any Transaction Proposal, or (b) enter into or participate
in any discussions or negotiations regarding any of the foregoing, or furnish
to any other person any information with respect to its business, properties or
assets in connection with the foregoing, or otherwise cooperate in any way
with, or knowingly assist or participate in, facilitate or encourage, any
effort or attempt by any other person (other than Acquisition, Vestar or
Vestar/Gray) to do or seek any of the foregoing; provided, however, that the
foregoing shall not prohibit the Company, prior to the receipt of the Requisite
Shareholder Approval, (A) from complying with Rule 14e-2 and Rule 14d-9 under
the Exchange Act with regard to a bona fide tender offer or exchange offer or
(B) from participating in negotiations or discussions with or furnishing
information to any person in connection with a Transaction Proposal not
solicited after the date hereof which is submitted in writing by such person to
the Board of Directors of the Company after the date of this Agreement;
provided, however, that prior to participating in any such discussions or
negotiations or furnishing any information, the Company receives from such
person an executed confidentiality agreement on terms not less favorable to the
Company than the
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Confidentiality Agreement, a copy of which shall be provided for informational
purposes only to Acquisition; and provided, further, that the Board of
Directors of the Company shall have concluded in good faith, after consultation
with its outside financial advisors, that such Transaction Proposal is
reasonably likely to constitute a Superior Proposal (as defined below) and,
after consultation with its outside legal counsel, that participating in such
negotiations or discussions or furnishing such information is required in order
to comply with its fiduciary duties to the shareholders of the Company under
applicable law; and provided, further, that the Board of Directors of the
Company shall not take any of the foregoing actions unless it provides
Acquisition with prompt (but in no event later than 24 hours after the
occurrence or commencement of such action) notice thereof. If the Board of
Directors of the Company receives a Transaction Proposal, then the Company
shall, to the extent not prohibited in good faith by the terms of such
Transaction Proposal, promptly inform Acquisition of the terms and conditions
of such proposal and the identity of the person making it. The Company will
immediately cease and cause its advisors, agents and other intermediaries to
cease any and all existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing, and shall
use its reasonable best efforts to cause any such parties in possession of
confidential information about the Company that was furnished by or on behalf
of the Company to return or destroy all such information in the possession of
any such party or in the possession of any agent or advisor of any such party.
The Company agrees not to release any third party from, or waive any provisions
of, any confidentiality or standstill agreement to which the Company is a
party. "Superior Proposal" means any of the transactions described in clause
(i), (ii) or (iii) of the definition of Transaction Proposal (with all of the
percentages included in the definition of such term raised to 51% for purposes
of this definition) with respect to which the Board of Directors of the Company
shall have concluded in good faith, after consultation with its outside legal
counsel and financial advisors, is reasonably capable of being completed,
taking into account all legal, financial, regulatory and other aspects of the
Transaction Proposal and the person making the proposal, and would, if
consummated, result in a transaction more favorable to the Company's (or,
following the Reorganization Merger, Parent's) shareholders from a financial
point of view than the transactions contemplated by this Agreement, including
the Mergers.
SECTION 8.5 Employee Benefits Matters. For a period of at least 12 months
following the Effective Time of the Acquisition Merger, Parent shall, or shall
cause the Company to, provide employee benefits under plans, programs and
arrangements which, in the aggregate, will provide benefits to the employees of
Parent, the Company and its subsidiaries which are no less favorable, in the
aggregate, than those provided pursuant to the Company Plans (other than those
related to Company Common Stock) in effect and disclosed to Acquisition on the
date hereof; provided, however, that nothing herein shall prevent the amendment
or termination of any such Company Plan (provided that following any such
amendment or termination, the Company continues to satisfy the requirements of
the first clause of this Section 8.5) or any employee, require that Parent, the
Company (or any of its subsidiaries) provide or permit investment in the
securities of Parent or interfere with Parent's or the Company's right or
obligation to make such changes to any Company Plans as are necessary to
conform with applicable law.
SECTION 8.6 Directors' and Officers' Indemnification and Insurance. (a) The
articles of incorporation and by-laws of the Company following the Mergers
shall contain provisions identical with respect to elimination of personal
liability and indemnification to those set forth in Article V of the articles
of incorporation of the Company and Article V of the by-laws of the Company,
respectively, which provisions shall not be amended, repealed or otherwise
modified for a period of six years from the Effective Time of the Acquisition
Merger in any manner that would adversely affect the rights thereunder of
individuals who at the Effective Time of the Reorganization Merger or the
Effective Time of the Acquisition Merger were directors, officers, agents or
employees of the Company or Parent.
(b) The Company shall maintain in effect for six years from the Effective
Time of the Acquisition Merger policies of directors' and officers' liability
insurance containing terms and conditions which are not less advantageous than
those policies maintained by the Company at the date hereof, with respect to
matters occurring prior to the Effective Time of the Acquisition Merger, to the
extent available, and having the
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maximum available coverage under the current policies of directors' and
officers' liability insurance; provided that (i) the Company following the
Acquisition Merger shall not be required to spend an amount in any year in
excess of 150% of the annual aggregate premiums currently paid by the Company
for such insurance; and provided, further, that if the annual premiums of such
insurance coverage exceed such amount, the Company shall be obligated to obtain
a policy with the best coverage available, in the reasonable judgment of the
Board of Directors of Parent following the Acquisition Merger, for a cost not
exceeding such amount, and (ii) such policies may in the sole discretion of the
Company be one or more "tail" policies for all or any portion of the full six
year period. The annual premium paid for such insurance in respect of the year
ended December 31, 1998 was $108,000.
SECTION 8.7 Notification of Certain Matters. The Company shall give prompt
notice to Acquisition, and Acquisition shall give prompt notice to the Company,
of (i) the occurrence or non-occurrence of any event the occurrence or non-
occurrence of which would be likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate; (ii) any failure of
Parent, the Company or Acquisition, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied
by it hereunder; (iii) any notice or other communication from any third party
alleging that the consent of such third party is or may be required in
connection with the transactions contemplated by this Agreement; and (iv) any
material adverse change in the properties, operations, assets, liabilities,
condition (financial or otherwise) or results of operations of the Company and
its subsidiaries, taken as a whole, or the occurrence of an event known to the
Company which would be reasonably likely to result in any such change;
provided, however, that the delivery of any notice pursuant to this Section 8.7
shall not limit or otherwise affect the remedies available hereunder to the
party receiving such notice.
SECTION 8.8 Further Action; Reasonable Best Efforts. (a) Upon the terms and
subject to the conditions hereof, each of the parties hereto shall use its
reasonable best efforts to take, or cause to be taken, all action, and to do or
cause to be done, and to assist and cooperate with the parties in doing, all
things necessary, proper or advisable to consummate and make effective, in the
most expeditious manner practicable, the transactions contemplated by this
Agreement and the Voting Agreement, including but not limited to (i)
cooperation in the preparation and filing of the Form S-4, the Proxy Statement,
the Schedule 13E-3, any required filings under the HSR Act and any amendments
to any thereof, (ii) determining whether any filings are required to be made or
consents, approvals, waivers, licenses, permits or authorizations are required
to be obtained (or, which if not obtained, would result in an event of default,
termination or acceleration of any agreement or any put right under any
agreement) under any applicable law or regulation or from any Governmental
Entities or third parties, including parties to leases, loan agreements or
other debt instruments, in connection with the transactions contemplated by
this Agreement, including the Mergers, and the Voting Agreement, and (iii)
promptly making any such filings, furnishing information required in connection
therewith and timely seeking to obtain any such consents, approvals, permits or
authorizations.
(b) Each of the parties agrees to cooperate with each other in taking, or
causing to be taken, all actions necessary to delist the shares of Company
Common Stock from the NYSE, provided that such delisting shall not be effective
until after the Effective Time of the Acquisition Merger. The parties also
acknowledge that it is Acquisition's intent that the shares of Parent Common
Stock following the Acquisition Merger will not be quoted on the NYSE or any
other national securities exchange or quoted in any inter-dealer quotation
system.
(c) The Company agrees to provide, and will cause its subsidiaries and its
and their respective officers, employees and advisers to provide, all
cooperation reasonably necessary in connection with the arrangement of any
financing to be consummated contemporaneously with or at or after the Closings
in respect of the transactions contemplated by this Agreement, including
participation in meetings, due diligence sessions, road shows, the preparation
of offering memoranda, private placement memoranda, prospectuses and similar
documents, the execution and delivery of any commitment letters, underwriting
or placement agreements, pledge and security documents, other definitive
financing documents, or other requested certificates or documents, including a
certificate of the chief financial officer of the Company or Parent with
respect to
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solvency matters, comfort letters of accountants and legal opinions as may be
reasonably requested by Acquisition and taking such other actions as are
reasonably required to be taken by the Company in the Commitment Letters. The
parties acknowledge that the payment of any fees by the Company in connection
with any Commitment Letters, other than pursuant to Section 10.3, shall be
subject to the occurrence of the Closings. In addition, in conjunction with the
obtaining of any such financing, the Company agrees, at the reasonable request
of Acquisition, to call for prepayment or redemption, or to prepay, redeem
and/or renegotiate, as the case may be, any then existing indebtedness of the
Company; provided that no such prepayment or redemption shall themselves
actually be made until contemporaneously with or after the Effective Time of
the Reorganization Merger.
(d) The Company shall cooperate with any reasonable requests of Acquisition
or the SEC related to the recording of the Mergers as a recapitalization for
financial reporting purposes, including, without limitation, to assist
Acquisition and its affiliates with any presentation to the SEC with regard to
such recording and to include appropriate disclosure with regard to such
recording in all filings with the SEC and all mailings to shareholders made in
connection with the Mergers. In furtherance of the foregoing, the Company
and/or Parent shall provide to Acquisition for the prior review of
Acquisition's advisors any description of the transactions contemplated by this
Agreement which is meant to be disseminated.
(e) (i) Acquisition hereby agrees to use its reasonable best efforts,
subject to normal conditions, to assist Parent and the Company in arranging the
financing described in the Commitment Letters in respect of the transactions
contemplated by this Agreement (as described in Section 9.3(f) hereof),
including using its reasonable best efforts (A) to assist Parent and the
Company in the negotiation of definitive agreements with respect thereto and
(B) to satisfy all conditions applicable to Acquisition in such definitive
agreements. Acquisition and its affiliates shall not take any action which is
intended to impair, hinder or delay the receipt of the proceeds of the
financing described in the Commitment Letters on the terms set forth therein;
provided that the foregoing shall not preclude Acquisition from providing the
parties providing such financing with all relevant information relating to the
Company and its business in connection with their due diligence investigation.
Acquisition will keep the Company informed of the status of its efforts to
assist Parent and the Company in arranging such financing, including making
reports with respect to significant developments. In the event any portion of
such financing becomes unavailable in the manner or from the sources originally
contemplated, Acquisition will use its reasonable best efforts to assist Parent
and the Company in arranging replacement financing. Each of Acquisition and the
Company shall notify the other within 24 hours of its learning that any such
financing will not be available on terms satisfactory to Acquisition or the
Company.
(ii) Subject to Parent having received the proceeds of the financing
described in the Commitment Letters referred to in Section 6.6(b) and (c) on
terms reasonably satisfactory to Acquisition, Acquisition at the Closings will
be capitalized with a cash equity contribution in an amount of up to
$146,526,664. It is understood that certain members of management of the
Company may be afforded the opportunity to purchase Parent Common Stock
representing not more than 5% of the outstanding capital stock of Parent.
Acquisition will be under no obligation pursuant to the preceding sentence
unless and until Parent receives the proceeds of the financing described in the
Commitment Letters referred to in Section 6.6(b) and (c) on terms reasonably
satisfactory to Acquisition. In addition, Acquisition will be under no
obligation under any circumstances to be capitalized with cash equity of more
than $146,526,664.
(f) In case at any time after the Effective Time of the Reorganization
Merger any further action is necessary or desirable to carry out the purposes
of this Agreement, the parties to this Agreement shall use their reasonable
best efforts to cause their proper officers and directors to take all such
necessary action.
(g) The Company and Parent shall make, subject to the condition that the
transactions contemplated herein actually occur, any undertakings required in
order to comply with the antitrust requirements or laws of any governmental
entity, including the HSR Act, in connection with the transactions contemplated
by this Agreement; provided that no such undertaking shall be agreed to or made
unless reasonably acceptable to Acquisition.
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(h) The Company shall use its commercially reasonable best efforts to obtain
all consents, approvals, agreements, extensions or other waivers of rights
necessary to ensure that all Leases and other Material Contracts remain in full
force and effect for the benefit of the Company on substantially the same terms
and conditions as in effect on the date hereof (without any material increase
in amounts payable by the Company thereunder) immediately following the
Effective Time of the Reorganization Merger, and Acquisition shall cooperate
with the Company in obtaining such consents, approvals, agreements, extensions
or other waivers of rights.
SECTION 8.9 Public Announcements. Neither Parent, the Company nor
Acquisition will issue any press release or public statement with respect to
the transactions contemplated by this Agreement and the Voting Agreement,
including the Mergers, without the other party's prior consent, except as may
be required by applicable law, court process or by obligations pursuant to any
listing agreement with the NYSE. In addition to the foregoing, Acquisition and
the Company will consult with each other before issuing, and provide each other
the opportunity to review and comment upon, any such press release or other
public statements with respect to such transactions. The parties (including the
Independent Committee) agree that the initial press release or releases to be
issued with respect to the transactions contemplated by this Agreement shall be
mutually agreed upon prior to the issuance thereof.
SECTION 8.10 Disposition of Litigation. The Company will not voluntarily
cooperate with any third party which has sought or may hereafter seek to
restrain or prohibit or otherwise oppose the Mergers and will cooperate with
Acquisition to resist any such effort to restrain or prohibit or otherwise
oppose the Mergers. The Company and Acquisition shall participate jointly in
the defense of any shareholder litigation against the Company or Acquisition,
as applicable, and their respective directors relating to the transactions
contemplated by this Agreement.
SECTION 8.11 Affiliates. Prior to the Closing Dates, the Company shall
deliver to Acquisition a letter identifying all persons who are, at the time
this Agreement is submitted for approval to the shareholders of the Company,
"affiliates" of the Company for purposes of Rule 145 under the Securities Act.
The Company shall use its reasonable best efforts to cause each such person to
deliver to Acquisition on or prior to the Closing Dates a written agreement
substantially in the form attached as Exhibit A hereto.
SECTION 8.12 Resignation of Directors. Prior to the Effective Time of the
Acquisition Merger, the Company shall deliver to Acquisition evidence
satisfactory to Acquisition of the resignation of the directors of the Company
and Parent set forth in Section 8.12 of the Disclosure Schedule, effective at
the Effective Time of the Acquisition Merger.
SECTION 8.13 Stop Transfer Order. The Company acknowledges and agrees to be
bound by and to comply with the provisions of the Voting Agreement as if a
party thereto with respect to transfers of record ownership of shares of
Company Common Stock, and agrees to notify the Company's transfer agent that
there is a stop transfer order with respect to all of the Subject Shares (as
defined in the Voting Agreement) and that the Voting Agreement places limits on
the voting of the Subject Shares and to do all other things as are necessary to
effect the provisions of the Voting Agreement.
SECTION 8.14 Certain Covenants of Parent and the Company. (a) Parent
covenants and agrees that on or before the Effective Time of the Reorganization
Merger:
(i) Qualification as Foreign Corporation. It will qualify to do business
as a foreign corporation in the State of California, and in connection
therewith will irrevocably appoint an agent for service of process as
required under the provisions of Section 2105 of the California GCL.
(ii) Franchise Tax Filings. It will file any and all documents with the
California Franchise Tax Board necessary to the assumption by Parent of all
the franchise tax liabilities of the Company.
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(iii) Migration of Parent. It will take all actions necessary to
liquidate its existence as a Barbados corporation as promptly as
practicable following the date of this Agreement and continue its existence
as a Delaware corporation.
(b) Effective not later than the Effective Time of the Reorganization
Merger, the Board of Directors of the Company shall adopt and approve an
amendment to the Rights Agreement causing the Company Rights to expire as of
the Effective Time of the Reorganization Merger.
ARTICLE 9.
CONDITIONS TO THE MERGERS
SECTION 9.1 Conditions to Obligation of Each Party to Effect the
Mergers. The respective obligations of each party to effect the Mergers shall
be subject to the satisfaction at or prior to the Effective Time of the
Reorganization Merger of the following conditions:
(a) Requisite Shareholder Approval. The principal terms of this
Agreement and the Reorganization Merger shall have been approved by the
Requisite Shareholder Approval.
(b) HSR Act. The waiting period (and any extension thereof) applicable
to the Mergers under the HSR Act shall have been terminated or shall have
expired.
(c) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other Governmental Entity of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of either or both of the Mergers or the transactions
contemplated by the Voting Agreement shall be in effect; provided, however,
that the parties hereto shall use their reasonable best efforts to have any
such injunction, order, restraint or prohibition vacated.
(d) Form S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order, and any material Blue Sky and other state
securities laws applicable to the registration and qualification of Parent
Common Stock following the Mergers shall have been complied with.
(e) Statutes. No statute, rule or regulation shall have been enacted by
any Governmental Entity that would make the consummation of either Merger
illegal.
(f) Migration of Parent. The migration of the jurisdiction of
incorporation of Parent from Barbados to Delaware pursuant to Section 356
of the Company Laws of Barbados shall have been consummated.
SECTION 9.2 Additional Condition to the Acquisition Merger. The obligations
of Acquisition and Parent to effect the Acquisition Merger are subject to the
Reorganization Merger having become effective in accordance with the California
GCL.
SECTION 9.3 Conditions to Obligation of Acquisition to Consummate the
Acquisition Merger. The obligations of Acquisition to effect the Acquisition
Merger are further subject to the satisfaction at or prior to the Effective
Time of the Acquisition Merger of the following conditions:
(a) Representations and Warranties. The representations and warranties
of the Company and Parent set forth in this Agreement to the extent
qualified as to materiality shall be true and correct and any such
representations and warranties to the extent not so qualified shall be true
and correct in all material respects, in each case as of the date of this
Agreement and as of the Closing Dates as though made on and as of the
Closing Dates (other than representations and warranties which address
matters only as of a certain date, which shall be true and correct, or true
and correct in all material respects, as the case may
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be, as of such date). Acquisition shall have received a certificate signed
on behalf of Parent and the Company by the chief executive officer and the
chief financial officer of Parent and the Company to the effect set forth
in this paragraph and paragraph (b) below.
(b) Performance of Obligations of the Company. Parent and the Company
shall have performed the obligations required to be performed by them under
this Agreement at or prior to the Closing Dates (except for such failures
to perform as have not had or would not reasonably be expected, either
individually or in the aggregate, to have a Material Adverse Effect or
materially adversely affect the ability of the Company and Parent to
consummate the transactions herein contemplated or perform its obligations
hereunder).
(c) Consents, etc. Acquisition shall have received evidence, in form and
substance reasonably satisfactory to it, that all licenses, permits,
consents, approvals, authorizations, qualifications and orders of
Governmental Entities and other third parties listed on Section 9.3 of the
Disclosure Schedule have been obtained without, in the case of third
parties, the payment or imposition of any material costs or obligations or
the exercise of preemptive rights.
(d) No Material Litigation. There shall not be pending or threatened by
any Governmental Entity any suit, action or proceeding (i) challenging or
seeking to restrain or prohibit the consummation of either of the Mergers
or any of the other transactions contemplated by this Agreement or the
Voting Agreement or seeking to obtain from Acquisition or any of its
affiliates any damages that are material to any such party, (ii) seeking to
prohibit or limit the ownership or operation by the Company or any of its
subsidiaries of any material portion of the business or assets of the
Company or any of its subsidiaries or (iii) seeking to impose limitations
on the ability of Acquisition (or any designee of Acquisition pursuant to
the Voting Agreement) or any shareholder of Acquisition or the Company to
acquire or hold, or exercise full rights of ownership of, any shares of
Company Common Stock, including, without limitation, the right to vote the
Company Common Stock on all matters properly presented to the shareholders
of the Company.
(e) Affiliate Letters. Acquisition shall have received the agreements
referred to in Section 8.11.
(f) Financing. Parent shall have received the proceeds of financing on
the terms and conditions specifically identified in the Commitment Letters
described in Section 6.6(b) and (c) or upon terms and conditions which are,
in the reasonable judgment of Acquisition, substantially equivalent
thereto, and to the extent that any terms and conditions are not
specifically identified in the Commitment Letters, on terms and conditions
reasonably satisfactory to Acquisition.
(g) Certain Transactions. The Management Shareholders and Vestar/Gray
shall have consummated the transactions contemplated by Section 4 of the
Voting Agreement and entered into the agreement contemplated by Section 4
of the Voting Agreement.
(h) No Material Adverse Effect. Since the date of this Agreement, no
event shall have occurred that has had, or that would be reasonably likely
to have, a Material Adverse Effect.
SECTION 9.4 Conditions to Obligation of Parent to Consummate the Acquisition
Merger. The obligations of Parent to effect the Acquisition Merger are further
subject to the satisfaction at or prior to the Effective Time of the
Acquisition Merger of the following conditions:
(a) Representations and Warranties. The representations and warranties
of Acquisition set forth in this Agreement to the extent qualified as to
materiality shall be true and correct and any such representations and
warranties to the extent not so qualified shall be true and correct in all
material respects, in each case as of the date of this Agreement and as of
the Closing Dates as though made on and as of the Closing Dates (other than
representations and warranties which address matters only as of a certain
date, which shall be true and correct, or true and correct in all material
respects, as the case may be, as of such date). Parent shall have received
a certificate signed on behalf of Acquisition by an authorized officer of
Acquisition to the effect set forth in this paragraph and in paragraph (b)
below.
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(b) Performance of Obligations of Acquisition. Acquisition shall have
performed the obligations required to be performed by it under this
Agreement at or prior to the Closing Dates (except for such failures to
perform as have not had or would not reasonably be expected, either
individually or in the aggregate, to materially adversely affect the
ability of Acquisition to consummate the transactions herein contemplated
or perform its obligations hereunder).
ARTICLE 10.
TERMINATION, AMENDMENT AND WAIVER
SECTION 10.1 Termination. This Agreement may be terminated and the
Acquisition Merger contemplated hereby may be abandoned at any time prior to
the Effective Time of the Reorganization Merger and, except as set forth below,
notwithstanding approval hereof by the shareholders of the Company, Acquisition
and Parent, provided that such termination shall have been approved by the
Board of Directors of such party or a duly authorized committee thereof:
(a) By mutual written consent of Acquisition and the Company;
(b) By Acquisition or the Company if any court of competent
jurisdiction, arbitrator or other Governmental Entity located or having
jurisdiction within the United States or any country or economic region in
which either the Company or Acquisition, directly or indirectly, has
material assets or operations, shall have issued a final order, decree or
ruling or taken any other final action restraining, enjoining or otherwise
prohibiting the consummation of either of the Mergers or any of the
transactions contemplated by this Agreement or the Voting Agreement, or
otherwise altering the terms of any of the foregoing in any significant
respect, and such order, decree, ruling or other action is or shall have
become final and nonappealable;
(c) By Acquisition or the Company if the Mergers shall not have been
consummated on or before July 15, 1999, provided that the right to
terminate this Agreement under this Section 10.1(c) shall not be available
to the party whose action or failure to act has been the cause of or
resulted in the failure of the Mergers to occur on or before such date and
such action or failure to act constitutes a breach of this Agreement;
(d) By Acquisition or the Company if the Requisite Shareholder Approval
shall not have been obtained at a duly held meeting of shareholders or at
any adjournment thereof;
(e) By Acquisition, if the Company or its Board of Directors shall have
(i) withdrawn, modified or amended in any respect adverse to Acquisition
its approval or recommendation of this Agreement or any of the transactions
contemplated herein, (ii) failed as promptly as reasonably practicable
after the Form S-4 is declared effective to mail the Proxy Statement to its
shareholders or failed to include in such statement such recommendation,
(iii) approved, recommended or entered into an agreement with respect to,
or consummated, any Transaction Proposal from a person other than
Acquisition or any of its affiliates, (iv) resolved to do any of the
foregoing or (v) in response to the commencement of any tender offer or
exchange offer for 10% or more of the outstanding shares of Company Common
Stock, not recommended rejection of such tender offer or exchange offer;
(f) By the Company, prior to the receipt of the Requisite Shareholder
Approval, if, (i) pursuant to and in compliance with Section 8.1 hereof,
the Board of Directors of the Company withdraws, modifies or amends in a
manner adverse to Acquisition its recommendation referred to in Section
5.21 (or publicly announces its intention to do so) or (ii) the Company or
its Board of Directors approves a Superior Proposal; provided, however,
that (A) the Company shall have complied with Section 8.4, (B) the Board of
Directors of the Company shall have concluded in good faith, after
consultation with its outside legal counsel and financial advisors, that
such proposal is a Superior Proposal and (C) the Board of Directors shall
have concluded in good faith, after consultation with its outside legal
counsel, that approving and
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entering into an agreement in connection with, and consummating, such
Superior Proposal is required in order to comply with its fiduciary duties
to the shareholders of the Company under applicable law; provided, that
this Agreement may not be terminated pursuant to this Section 10.1(f)
unless (A) concurrently with such termination, the Company pays to
Acquisition the Termination Fee and (B) the Company shall have provided
Acquisition with at least 48 hours advance notice of such termination; or
(g) (i) by the Company, if Acquisition breaches any of its
representations, warranties, covenants or agreements contained in this
Agreement which is reasonably likely to materially adversely affect
Acquisition's ability to consummate the Acquisition Merger and, with
respect to any such breach that is reasonably capable of being remedied,
the breach is not remedied within 20 days after the Company has furnished
Acquisition with written notice of such breach or (ii) by Acquisition, if
the Company breaches any of its representations, warranties, covenants or
agreements contained in this Agreement which is reasonably likely to have a
Material Adverse Effect or which is reasonably likely to materially
adversely affect the Company's ability to consummate either or both of the
Mergers and, with respect to any such breach that is reasonably capable of
being remedied, the breach is not remedied within 20 days after Acquisition
has furnished the Company with written notice of such breach.
SECTION 10.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 10.1, this Agreement shall forthwith become void
and there shall be no liability on the part of any party hereto except as set
forth in Section 10.3 and Section 11.1; provided, however, that nothing herein
shall relieve any party from liability for any wilful breach hereof.
SECTION 10.3 Termination Fees and Expenses. (a) The Company shall (provided
that Acquisition is not then in material breach of its obligations under this
Agreement) upon the termination of this Agreement in accordance with Section
10.1(c) (in the event that the Closings shall not have occurred, in whole or in
part, by reason of the failure of the conditions set forth in Section 9.1(f),
9.2 (to the extent that all relevant conditions have been satisfied or waived
and the Company fails to cause the Reorganization Merger to be consummated) or
Section 9.3(a), (b), (c) (other than consents from Robert E. Gray, Marie Gray
and Kelly Gray or any entity controlled by any of them), (e) (other than
letters from Robert E. Gray, Marie Gray and Kelly Gray), (f) (unless such
financing is not received due to (i) the occurrence of a material disruption of
or material adverse change in financial, banking or capital market conditions,
(ii) a competing offering, placement or arrangement of debt securities or bank
financing by or on behalf of the Borrower, the Company or any subsidiary
thereof that was undertaken by, on behalf of (with Vestar's consent), or at the
direction of Vestar or its affiliates, or (iii) a material disruption or
material adverse change in the market for new issues of high yield securities
or the financial or capital markets in general) or (h)), 10.1(e), 10.1(f) or
10.1(g)(ii), promptly, but in no event later than two business days following
written notice thereof, together with reasonable supporting documentation,
reimburse Acquisition, in an aggregate amount of up to $1.5 million, for all
reasonable out-of-pocket expenses and fees (including fees payable to all
banks, investment banking firms and other financial institutions, and their
respective agents and counsel, and all fees of counsel, accountants, financial
printers, advisors, experts and consultants to Acquisition and its affiliates),
whether incurred prior to, concurrently with or after the execution of this
Agreement, in connection with the Mergers and the consummation of all
transactions contemplated by this Agreement, the Voting Agreement and the
financing thereof (collectively, the "Expenses"). Such payment, together with
any Termination Fee which may be paid, shall serve as full liquidated damages
in respect of such breach, and Acquisition hereby waives all claims against the
Company and Parent and their respective subsidiaries in respect of the breach
or breaches occasioning the payment pursuant to this Section 10.3(a). It is
understood that in the event that Acquisition is paid a Termination Fee
pursuant to Section 10.3(c) or (d), to the extent not previously paid, no
amounts shall be payable as Expenses.
(b) Acquisition shall (provided that neither Parent nor the Company is then
in material breach of its obligations under this Agreement) following the
termination of this Agreement in accordance with Section 10.1(c) (in the event
that the Closings shall not have occurred by reason of the failure of the
conditions set forth in Sections 9.4(a) or 9.4(b)) or 10.1(g)(i), promptly, but
in no event later than two business days
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following written notice thereof, together with reasonable supporting
documentation, reimburse Parent and Company, in an aggregate amount of up to
$1.5 million for all reasonable out-of-pocket expenses and fees (including
payable to all banks, investment banking firms and other financial
institutions, and their respective agents and counsel, and all fees of counsel,
accountants, financial printers, advisors, experts and consultants to Parent,
the Company and their respective affiliates), whether incurred prior to,
concurrently with or after the execution of this Agreement, in connection with
the Mergers and the consummation of all transactions contemplated by this
Agreement, the financing hereof and consents related hereto. Such payment shall
serve as full liquidated damages in respect of such breach and Parent and the
Company hereby waive, on behalf of themselves and their subsidiaries, all
claims against Acquisition and its affiliates in respect of the breach or
breaches occasioning the payment pursuant to this Section 10.3(b) less any
amount previously paid to Acquisition in respect of Expenses.
(c) In the event that this Agreement is terminated by Acquisition pursuant
to Section 10.1(e) or by the Company pursuant to Section 10.1(f), the Company
shall pay to Acquisition by wire transfer of immediately available funds to an
account designated by Acquisition on the next business day following such
termination (or, in the case of a termination pursuant to Section 10.1(f),
prior to the effectiveness of such termination) an amount equal to $14 million
(the "Termination Fee") less any amount previously paid to Acquisition in
respect of Expenses.
(d) If all of the following events have occurred:
(i) a Transaction Proposal is commenced, publicly disclosed, publicly
proposed or otherwise formally communicated to the Company, Parent or the
Independent Committee at any time on or after the date of this Agreement
but prior to any termination of this Agreement and either (A) Acquisition
or the Company terminates this Agreement pursuant to Section 10.1(c)
(unless such termination shall have occurred, in whole or in part, due to
the failure of the condition set forth in Section 9.3(f) due to (i) the
occurrence of a material disruption of or material adverse change in
financial, banking or capital market conditions, (ii) a competing offering,
placement or arrangement of debt securities or bank financing by or on
behalf of the Borrower, the Company or any subsidiary thereof that was
undertaken by, on behalf of (with Vestar's consent), or at the direction of
Vestar or its affiliates, or (iii) a material disruption or material
adverse change in the market for new issues of high yield securities or the
financial or capital markets in general) or (B) Acquisition or the Company
terminates this Agreement pursuant to Section 10.1(d) or (C) Acquisition
terminates this Agreement pursuant to Section 10.1(g)(ii); and
(ii) thereafter, within 12 months of the date of such termination, the
Company or Parent enters into a definitive agreement with respect to, or
consummates, the Transaction Proposal referred to in clause (i) above or a
Superior Proposal (whether or not such Superior Proposal was commenced,
publicly disclosed, publicly proposed or otherwise communicated to the
Company or Parent prior to such termination);
then, the Company shall pay to Acquisition, concurrently with the earlier of
the execution of such definitive agreement or the consummation of such
Transaction Proposal, an amount equal to the Termination Fee (less any amount
previously paid to Acquisition in respect of Expenses), it being agreed that
one third of such Termination Fee shall be payable upon the execution of such
definitive agreement and the remaining two thirds of such Termination Fee (or,
if no definitive agreement shall have been signed, all of such Termination Fee
less any amount previously paid to Acquisition in respect of Expenses) shall be
payable upon the consummation of such Transaction Proposal or Superior
Proposal.
(e) Except as otherwise specifically provided herein, each party shall bear
its own expenses in connection with this Agreement and the transactions
contemplated hereby; provided that all expenses of Acquisition shall be paid by
the Company at or following the Effective Time of the Merger.
SECTION 10.4 Amendment. This Agreement may be amended by the parties hereto
by action taken by or on behalf of their respective Boards of Directors at any
time prior to the Effective Time of the
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Reorganization Merger; provided, however, that, after approval of the Mergers
and adoption of this Agreement by the shareholders of the Company, Acquisition
and Parent, as applicable, no amendment may be made which by law requires the
further approval of such shareholders without such further approval.
SECTION 10.5 Waiver. At any time prior to the Effective Time of the
Reorganization Merger, any party hereto may by action taken by or on behalf of
its respective Board of Directors (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (c) subject to applicable law, waive
compliance with any of the agreements or conditions contained herein. Any such
extension or waiver shall be valid if set forth in an instrument in writing
signed by the party or parties to be bound thereby.
ARTICLE 11.
GENERAL PROVISIONS
SECTION 11.1 Non-Survival of Representations, Warranties and Agreements. The
representations, warranties and agreements in this Agreement and in any
instrument delivered pursuant hereto shall terminate at the Effective Time of
the Acquisition Merger or upon the termination of this Agreement pursuant to
Section 10.1, as the case may be, except that the agreements set forth in
Section 8.6 shall survive the Effective Time of the Acquisition Merger and
those set forth in Sections 8.3, 10.3 and this Section 11.1 shall survive
termination of this Agreement.
SECTION 11.2 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by telecopy
with confirmation or by registered or certified mail (postage prepaid, return
receipt requested) to the respective parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
if to Acquisition:
c/o Vestar Capital Partners III, L.P.
1225 17th Street, Suite 1660
Denver, Colorado 80202
Attention: James P. Kelley
Facsimile: (303) 292-6639
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attention: Robert L. Friedman, Esq.
Facsimile: (212) 455-2502
Hewitt & McGuire, LLP
19900 MacArthur Boulevard, Suite 1050
Irvine, California 92612
Attention: Paul A. Rowe, Esq.
Facsimile: (949) 798-0511
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if to the Company or Parent:
St. John Knits, Inc.
17422 Derian Avenue
Irvine, California 92614
Attention: Robert E. Gray
Facsimile: (949) 223-3272
with a copy to:
O'Melveny & Myers LLP
610 Newport Center Drive
Newport Beach, California 92660-6429
Attention: Karen K. Dreyfus
Facsimile: (949) 823-6994
and
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Los Angeles, California 90071
Attention: Brian J. McCarthy, Esq.
Facsimile: (213) 687-5600
SECTION 11.3 Certain Definitions and Interpretations. For purposes of this
Agreement, the term:
(a) "affiliate" of a person means a person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, the first mentioned person;
(b) "beneficial owner" with respect to any shares of Company Common
Stock means a person who shall be deemed to be the beneficial owner of such
shares (i) which such person or any of its affiliates or associates (as
such term is defined in Rule 12b-2 of the Exchange Act) beneficially owns,
directly or indirectly, (ii) which such person or any of its affiliates or
associates has, directly or indirectly, (A) the right to acquire (whether
such right is exercisable immediately or subject only to the passage of
time), pursuant to any agreement, arrangement or understanding or upon the
exercise of consideration rights, exchange rights, warrants or options, or
otherwise, or (B) the right to vote pursuant to any agreement, arrangement
or understanding or (iii) which are beneficially owned, directly or
indirectly, by any other persons with whom such person or any of its
affiliates or person with whom such person or any of its affiliates or
associates has any agreement, arrangement or understanding for the purpose
of acquiring, holding, voting or disposing of any shares of Company Common
Stock;
(c) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the
management policies of a person, whether through the ownership of stock, as
trustee or executor, by contract or credit arrangement or otherwise;
(d) "generally accepted accounting principles" shall mean the generally
accepted accounting principles set forth in the opinions and pronouncements
of the Accounting Principles Board of the American Institute of Certified
Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity
as may be approved by a significant segment of the accounting profession in
the United States;
(e) "person" means an individual, corporation, partnership, limited
liability company, association, trust, unincorporated organization, other
entity or group (as defined in Section 13(d)(3) of the Exchange Act); and
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<PAGE>
(f) "subsidiary" or "subsidiaries" of the Company, or any other person
means any corporation, partnership, joint venture or other legal entity of
which the Company, or such other person, as the case may be (either alone
or through or together with any other subsidiary), owns, directly or
indirectly, 50% or more of the stock or other equity interests the holder
of which is generally entitled to vote for the election of the board of
directors or other governing body of such corporation or other legal entity
(and, for the avoidance of doubt, it is understood that such term shall
include and shall refer to Parent, Amen Wardy Home Stores, LLC and St.
John/Varian Development Corporation).
When a reference is made in this Agreement to Articles, Sections or
Exhibits, such reference shall be to a Section or Exhibit of this Agreement,
respectively, unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. Whenever the
words "include", "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation". Unless the
context otherwise requires, the use of the singular shall include the plural,
the use of the masculine shall include the feminine, and vice versa. As used in
this Agreement, the antecedent of any personal pronoun shall be deemed to be
only the next preceding proper noun or nouns, as appropriate for such pronoun.
As used in this Agreement, any reference to any law, rule or regulation shall
be deemed to include a reference to any amendments, revisions or successor
provisions to such law, rule or regulation.
SECTION 11.4 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated hereby are fulfilled to the fullest extent
possible.
SECTION 11.5 Entire Agreement; Assignment. This Agreement constitutes the
entire agreement among the parties with respect to the subject matter hereof
and supersedes all prior agreements and undertakings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof
other than the Confidentiality Agreement. This Agreement shall not be assigned
by operation of law or otherwise, except that Acquisition may assign all or any
of its rights and obligations hereunder to any direct or indirect wholly owned
subsidiary or subsidiaries of Acquisition or Vestar/Gray, provided that no such
assignment shall relieve the assigning party of its obligations hereunder if
such assignee does not perform such obligations.
SECTION 11.6 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and, with respect to the
provisions of Section 8.6 and 10.3, shall inure to the benefit of the persons
or entities benefitting from the provisions thereof who are intended to be
third-party beneficiaries thereof. Except as provided in the preceding
sentence, nothing in this Agreement, express or implied, is intended to or
shall confer upon any other person any rights, benefits or remedies of any
nature whatsoever under or by reason of this Agreement.
SECTION 11.7 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, except for
Articles 1 and 2, which shall be governed by the laws of the State of
California.
SECTION 11.8 Headings. The descriptive headings contained in this Agreement
are included for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement.
SECTION 11.9 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
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SECTION 11.10 Enforcement; Jurisdiction. The parties agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in any Federal court
located in the States of California or Delaware or any California or Delaware
state court, this being in addition to any other remedy to which they are
entitled at law or in equity. Any suit, action or proceeding seeking to enforce
any provision of, or based on any matter arising out of or in connection with,
this Agreement or the transactions contemplated by this Agreement may be
brought against any of the parties in any Federal court located in the States
of California or Delaware or any California or Delaware state court, and each
of the parties hereto hereby consents to the jurisdiction of such courts (and
of the appropriate appellate courts therefrom) in any such suit, action or
proceeding may be served on any objection to venue laid therein. Process in any
such suit, action or proceeding may be served on any party anywhere in the
world, whether within or without the States of California or Delaware. Without
limiting the generality of the foregoing, each party hereto agrees that service
of process upon such party at the address referred to in Section 11.2, together
with written notice of such service to such party, shall be deemed effective
service of process upon such party.
IN WITNESS WHEREOF, the Company, Acquisition, Merger Sub and Parent have
caused this Agreement to be executed as of the date first written above by
their respective officers thereunto duly authorized.
ST. JOHN KNITS, INC.
/s/ Bob Gray
By: ______________________
Title:
PEARL ACQUISITION CORP.
/s/ James P. Kelley
By: _______________________
Title:
SJKACQUISITION, INC.
/s/ Bob Gray
By: ______________________
Title:
ST. JOHN KNITS INTERNATIONAL,
INCORPORATED
/s/ Roger Ruppert
By: ______________________
Title:
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<PAGE>
EXHIBIT A
Form of Affiliate Letter
Gentlemen:
The undersigned, a holder of shares of common stock, no par value ("Company
Common Stock"), of St. John Knits International, Incorporated, a Delaware
corporation (the "Company"), is entitled to receive in connection with the
merger (the "Merger") of the Company with Pearl Acquisition Corp., a Delaware
corporation, securities (the "Securities") of the Company. The undersigned
acknowledges that the undersigned may be deemed an "affiliate" of the Company
within the meaning of Rule 145 ("Rule 145") promulgated under the Securities
Act of 1933 (the "Act"), although nothing contained herein should be construed
as an admission of such fact.
If in fact the undersigned were an affiliate under the Act, the
undersigned's ability to sell, assign or transfer the Securities retained by
the undersigned pursuant to the Merger may be restricted unless such
transaction is registered under the Act or an exemption from such registration
is available. The undersigned understands that such exemptions are limited and
the undersigned has obtained advice of counsel as to the nature and conditions
of such exemptions, including information with respect to the applicability to
the sale of such securities of Rules 144 and 145(d) promulgated under the Act.
The undersigned hereby represents to and covenants with the Company that the
undersigned will not sell, assign or transfer any of the Securities retained by
the undersigned pursuant to the Merger except (i) pursuant to an effective
registration statement under the Act, (ii) in conformity with the volume and
other limitations of Rule 145 or (iii) in a transaction which, in the opinion
of independent counsel reasonably satisfactory to the Company or as described
in a "no-action" or interpretive letter from the Staff of the Securities and
Exchange Commission (the "SEC"), is not required to be registered under the
Act.
In the event of a sale or other disposition by the undersigned of Securities
pursuant to Rule 145, the undersigned will supply the Company with evidence of
compliance with such Rule, in the form of a letter in the form of Annex I
hereto. The undersigned understands that the Company may instruct its transfer
agent to withhold the transfer of any Securities disposed of by the
undersigned, but that upon receipt of such evidence of compliance the transfer
agent shall effectuate the transfer of the Securities sold as indicated in the
letter.
The undersigned acknowledges and agrees that appropriate legends will be
placed on certificates representing Securities retained by the undersigned in
the Merger or held by a transferee thereof, which legends will be removed by
delivery of substitute certificates upon receipt of an opinion in form and
substance reasonably satisfactory to the Company from independent counsel
reasonably satisfactory to the Company to the effect that such legends are no
longer required for purposes of the Act.
The undersigned acknowledges that (i) the undersigned has carefully read
this letter and understands the requirements hereof and the limitations imposed
upon the distribution, sale, transfer or other disposition of Securities and
(ii) the receipt by Acquisition of this letter is and inducement and a
condition to Acquisition's obligations to consummate the Merger.
Very truly yours,
Dated:
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<PAGE>
ANNEX I
TO EXHIBIT A
[Name] [Date]
On the undersigned sold the securities ("Securities") of St. John
Knits International, Incorporated (the "Company") described below in the space
provided for that purpose (the "Securities"). The Securities were retained by
the undersigned in connection with the merger of Pearl Acquisition Corp. with
and into the Company.
Based upon the most recent report or statement filed by the Company with the
Securities and Exchange Commission, the Securities sold by the undersigned were
within the prescribed limitations set forth in paragraph (e) of Rule 144
promulgated under the Securities Act of 1933, as amended (the "Act").
The undersigned hereby represents that the Securities were sold in "brokers'
transactions" within the meaning of Section 4(4) of the Act or in transactions
directly with a "market maker" as that term is defined in Section 3(a) (38) of
the Securities Exchange Act of 1934, as amended. The undersigned further
represents that the undersigned has not solicited or arranged for the
solicitation of orders to buy the Securities, and that the undersigned has not
made any payment in connection with the offer or sale of the Securities to any
person other than to the broker who executed the order in respect of such sale.
Very truly yours,
[Space to be provided for description of securities]
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APPENDIX B
February 2, 1999
The Board of Directors and
The Independent Committee of the Board of Directors
St. John Knits, Inc.
17422 Derian Avenue
Irvine, CA 92714
The Board of Directors and
The Independent Committee of the Board of Directors
St. John Knits International, Incorporated
17422 Derian Avenue
Irvine, CA 92714
Ladies and Gentlemen:
St. John Knits, Inc. (the "Company"), St. John Knits International,
Incorporated ("Parent"), SJK Acquisition, Inc., a wholly owned subsidiary of
Parent ("Merger Sub"), and Pearl Acquisition Corp ("Acquisition"), a wholly
owned subsidiary of Vestar/Pearl Investors LLC ("Vestar/Pearl") (which in turn
is a wholly owned subsidiary of Vestar Capital Partners III, L.P. ("Vestar")),
propose to enter into an agreement and plan of merger (the "Merger Agreement")
pursuant to which Merger Sub will merge with and into the Company (the
"Reorganization Merger"), with the Company as the surviving corporation, and
each share of common stock, no par value, of the Company (the "Company Common
Stock") outstanding immediately prior to the Reorganization Merger (other than
Company Dissenting Shares (as defined in the Merger Agreement) and Company
Common Stock owned, directly or indirectly, by the Company or any subsidiary of
the Company) will be converted into one share of common stock, par value $.01
per share, of Parent (the "Parent Common Stock").
Immediately following the Reorganization Merger, Acquisition will be merged
with and into Parent (the "Acquisition Merger" and, together with the
Reorganization Merger, the "Mergers"), with Parent as the surviving corporation
(the "Surviving Parent Corporation"), and each share of Parent Common Stock
outstanding immediately prior to the Acquisition Merger (other than Parent
Common Stock owned, directly or indirectly, by Parent or any subsidiary of
Parent or by Acquisition, any subsidiary of Acquisition, Vestar/Pearl or Vestar
(which will be cancelled)) will be converted into the right to receive $30.00
in cash or, at the election of the holder thereof, the right to receive one
share of common stock, par value $.01 per share, of the Surviving Parent
Corporation (the "Surviving Parent Common Stock"), with such elections being
pro rated as necessary so that approximately 457,000 shares of Surviving Parent
Common Stock will be exchanged for Parent Common Stock pursuant to the
Acquisition Merger.
In connection with the Mergers, Vestar, Vestar/Pearl and the Shareholders
(identified in Schedule A to the Voting Agreement (as hereinafter defined))
propose to enter into a voting agreement (the "Voting Agreement") pursuant to
which the Shareholders will, following the Reorganization Merger but prior to
the Acquisition Merger, contribute all of their Parent Common Stock to
Vestar/Pearl in exchange for cash and equity in Vestar/Pearl.
You have asked us whether, in our opinion, the consideration to be received
by the holders of shares of Company Common Stock, other than the Shareholders,
pursuant to the Mergers is fair from a financial point of view to such holders.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial information
relating to the Company that we deemed to be relevant;
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(2) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets, liabilities and prospects
of the Company furnished to us by the Company and Vestar;
(3) Conducted discussions with members of senior management of the Company
and representatives of Vestar concerning the matters described in
clauses 1 and 2 above;
(4) Reviewed the market prices and valuation multiples for the shares of
Company Common Stock and compared them with those of certain publicly
traded companies that we deemed to be relevant;
(5) Reviewed the results of operations of the Company and compared them
with those of certain publicly traded companies that we deemed to be
relevant;
(6) Compared the proposed financial terms of the Mergers with the financial
terms of certain other transactions that we deemed to be relevant;
(7) Participated in certain discussions and negotiations among
representatives of the Company and Vestar and their financial and legal
advisors;
(8) Reviewed drafts dated February 2, 1999 of the Merger Agreement and the
Voting Agreement; and
(9) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or been furnished with any such evaluation or
appraisal. In addition, we have not assumed any obligation to conduct any
physical inspection of the properties or facilities of the Company. With
respect to the financial forecast information furnished to or discussed with us
by the Company and Vestar, we have assumed that they have been reasonably
prepared and reflect the best currently available estimates and judgment of the
management of the Company and representatives of Vestar as to the expected
future financial performance of the Company. We have also assumed that none of
the holders of Parent Common Stock will elect to receive Surviving Parent
Common Stock in the Acquisition Merger, and, accordingly, that all such holders
will receive their pro rata amount of Surviving Parent Common Stock and cash.
In addition, we have assumed that, in the course of obtaining the necessary
regulatory or other consents or approvals (contractual or otherwise) for the
Mergers, no restrictions, including any divestiture requirements or amendments
or modifications, will be imposed that will have a material adverse effect on
the contemplated benefits of the Mergers. We have assumed that the Merger
Agreement and the Voting Agreement will be substantially similar to the last
drafts reviewed by us. Our opinion is necessarily based upon market, economic
and other conditions as they exist and can be evaluated on, and on the
information made available to us as of, the date hereof.
In connection with the preparation of this opinion, we solicited third-party
indications of interest for the acquisition of the Company. We have not been
asked to consider, and our opinion does not in any manner address, the value of
the Surviving Parent Common Stock or the prices at which the Surviving Parent
Common Stock will actually trade following the Mergers.
We are acting as financial advisor to the Independent Committee of the Board
of Directors of the Company in connection with the Mergers and will receive a
fee from the Company for our services, a significant portion of which is
contingent upon the consummation of the Mergers. In addition, the Company has
agreed to indemnify us for certain liabilities arising out of our engagement.
Richard A. Gadbois, III, Senior Vice President of Corporate Executive
Services at Merrill Lynch, currently serves as a Director of the Company and
Parent. In addition, we have, in the past, provided financial advisory and
financing services to Vestar and have been retained to provide additional
financial services to Vestar in the future and have received, or will receive,
fees for such services. In the ordinary course of our business, we may
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actively trade shares of Company Common Stock as well as debt securities of
Vestar and its affiliates, for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and the Independent Committee thereof and the Board of Directors of
Parent and the Independent Committee thereof. Our opinion does not address the
merits of the underlying decision by the Company or Parent to engage in the
Mergers and does not constitute a recommendation to any shareholder as to how
such shareholder should vote on the Mergers.
On the basis of and subject to the foregoing, we are of the opinion that, as
of the date hereof, the consideration to be received by the holders of the
Company Common Stock, other than the Shareholders, pursuant to the Mergers is
fair from a financial point of view to such holders.
Very truly yours,
/s/ Merrill Lynch, Pierce, Fenner & Smith Incorporated
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
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APPENDIX C
February 2, 1999
Independent Committee of the Board of Directors
St. John Knits, Inc.
17422 Derian Avenue
Irvine, California 92614
Independent Committee of the Board of Directors
St. John Knits International, Incorporated
17422 Derian Avenue
Irvine, California 92614
Ladies and Gentlemen:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to the holders of the common stock, no par value
("Company Common Stock"), of St. John Knits, Inc. (the "Company"), other than
the shareholders (the "Shareholders") identified in Schedule A to the Voting
Agreement (as hereinafter defined), of the consideration to be received by such
holders pursuant to the terms of the proposed agreement and plan of merger (the
"Merger Agreement"), among the Company, St. John Knits International,
Incorporated ("Parent"), SJK Acquisition, Inc. ("Merger Sub"), a wholly owned
subsidiary of Parent, and Pearl Acquisition Corp. ("Acquisition"), a wholly
owned subsidiary of Vestar/Pearl Investors LLC ("Vestar/Pearl") (which in turn
is a wholly owned subsidiary of Vestar Capital Partners III, L.P. ("Vestar")).
The Merger Agreement provides for, among other things, the merger of Merger Sub
with and into the Company (the "Reorganization Merger") pursuant to which each
share of Company Common Stock outstanding immediately prior to the
Reorganization Merger, other than (i) Company Dissenting Shares (as defined in
the Merger Agreement) and (ii) Company Common Stock owned, directly or
indirectly, by the Company or any subsidiary of the Company, will be converted
into one share of common stock, par value $0.01 per share ("Parent Common
Stock"), of Parent. The Merger Agreement further provides, immediately
following the Reorganization Merger, for the merger of Acquisition with and
into Parent (the "Acquisition Merger" and, together with the Reorganization
Merger, the "Mergers") with Parent as the surviving corporation (the "Surviving
Parent Corporation") pursuant to which each share of Parent Common Stock
outstanding immediately prior to the Acquisition Merger, other than Parent
Common Stock owned, directly or indirectly, by Parent or any subsidiary of
Parent or by Acquisition, any subsidiary of Acquisition, Vestar/Pearl or
Vestar, will be converted into the right to receive $30.00 in cash, or at the
election of the holder thereof, the right to receive one share of common stock,
par value $.01 per share, of the Surviving Parent Corporation (the "Surviving
Parent Common Stock"), with such elections being pro rated as necessary so that
approximately 457,000 shares of Surviving Parent Common Stock will be exchanged
for Parent Common Stock pursuant to the Acquisition Merger. The terms and
conditions of the Mergers are set forth in more detail in the Merger Agreement.
In connection with the Mergers, Vestar, Vestar/Pearl and the Shareholders
propose to enter into a voting agreement (the "Voting Agreement") pursuant to
which the Shareholders will, following the Reorganization Merger but prior to
the Acquisition Merger, contribute all of their Company Common Stock to
Vestar/Pearl in exchange for cash and equity in Vestar/Pearl.
In connection with rendering our opinion, we have reviewed drafts of the
Merger Agreement and the Voting Agreement, and for purposes hereof, we have
assumed that the final forms of these documents will not differ in any material
respect from the drafts provided to us. We have also reviewed and analyzed
certain publicly available business and financial information relating to the
Company for recent years and interim periods to date, as well as certain
internal financial and operating information, including financial forecasts,
analyses and projections prepared by or on behalf of the Company and Vestar and
provided to us for purposes
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In re: St. John Knits, Inc.
February 2, 1999
Page 2
of our analysis, and we have met with the management of the Company and
representatives of Vestar to review and discuss such information and, among
other matters, the Company's business, operations, assets, financial condition
and future prospects.
We have reviewed and considered certain financial and stock market data
relating to the Company, and we have compared that data with similar data for
certain other companies, the securities of which are publicly traded, that we
believe may be relevant or comparable in certain respects to the Company or one
or more of its businesses or assets, and we have reviewed and considered the
financial terms of certain recent acquisitions and business combination
transactions in the apparel industry specifically, and in other industries
generally, that we believe to be reasonably comparable to the Mergers or
otherwise relevant to our inquiry. We have also performed such other financial
studies, analyses and investigations and reviewed such other information as we
considered appropriate for purposes of this opinion.
In our review and analysis and in formulating our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to or discussed with us or publicly available, and we have
not assumed any responsibility for independent verification of any of such
information. We have also assumed and relied upon the reasonableness and
accuracy of the financial projections, forecasts and analyses provided to us,
and we have assumed that such projections, forecasts and analyses were
reasonably prepared in good faith and on bases reflecting the best currently
available judgments and estimates of the management of the Company and of
Vestar. We express no opinion with respect to such projections, forecasts and
analyses or the assumptions upon which they are based. In addition, we have not
reviewed any of the books and records of the Company, or assumed any
responsibility for conducting a physical inspection of the properties or
facilities of the Company, or for making or obtaining an independent valuation
or appraisal of the assets or liabilities of the Company, and no such
independent valuation or appraisal was provided to us. We also have assumed
that none of the holders of Parent Common Stock will elect to receive Surviving
Parent Common Stock in the Acquisition Merger and, accordingly, that all such
holders will receive their pro rata amount of Surviving Parent Common Stock and
cash and, further, that the transactions described in the Merger Agreement will
be consummated without waiver or modification of any of the material terms or
conditions contained therein by any party thereto. We have not been asked to
consider and our opinion does not in any manner address the value of the
Surviving Parent Common Stock or the prices at which the Surviving Parent
Common Stock will actually trade following the Mergers. Our opinion is
necessarily based on economic and market conditions and other circumstances as
they exist and can be evaluated by us as of the date hereof.
In the ordinary course of our business, we may actively trade the debt and
equity securities of the Company for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
We are acting as financial advisor to the Independent Committee of the Board
of Directors of the Company in connection with the Mergers and will receive a
fee for our services, as well as a fee for rendering this opinion. We have
performed various investment banking services for Vestar and its affiliates
from time to time in the past and have received customary fees for rendering
such services.
Our opinion addresses only the fairness, from a financial point of view, to
the holders of Company Common Stock, other than the Shareholders, of the
consideration to be received by such holders pursuant to the Mergers, and we do
not express any views on any other terms of the Mergers. Specifically, our
opinion does not address the Company's underlying business decision to effect
the Mergers. In addition, our opinion does not address the solvency of the
Company or any other entity following consummation of the Mergers or at
any time.
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In re: St. John Knits, Inc.
February 2, 1999
Page 3
It is understood that this letter is for the benefit and use of the
Independent Committee of the Board of Directors of the Company and the
Independent Committee of the Board of Directors of Parent in its consideration
of the Mergers, and except for inclusion in its entirety in any proxy statement
required to be circulated to shareholders of the Company relating to the
Mergers may not be quoted, referred to or reproduced at any time or in any
manner without our prior written consent. This opinion does not constitute a
recommendation to any holder of Company Common Stock with respect to how such
holder should vote with respect to the Mergers, and should not be relied upon
by any holder as such.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that as of the date hereof,
the consideration to be received by the holders of Company Common Stock, other
than the Shareholders, pursuant to the Mergers is fair to such holders from a
financial point of view.
Very truly yours,
/s/ Wasserstein Perella & Co., Inc.
WASSERSTEIN PERELLA & CO., INC.
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APPENDIX D
CHAPTER 13. DISSENTERS' RIGHTS
(S)1300. Reorganization or short-form merger; dissenting shares; corporate
purchase at fair market value; definitions
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as
defined in subdivision (b). The fair market value shall be determined as of the
day before the first announcement of the terms of the proposed reorganization
or short-form merger, excluding any appreciation or depreciation in consequence
of the proposed action, but adjusted for any stock split, reverse stock split,
or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that sub-
paragraph (A) rather than subparagraph (B) of this paragraph applies in any
case where the approval required by Section 1201 is sought by written
consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
(S)1301. Notice to holders of dissenting shares in reorganizations; demand for
purchase; time; contents
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval,
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accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a
statement of the price determined by the corporation to represent the fair
market value of the dissenting shares, and a brief description of the procedure
to be followed if the shareholder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as defined in
subdivision (b) of Section 1300, unless they lose their status as dissenting
shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
(S)1302. Submission of share certificates for endorsement; uncertificated
securities
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
(S)1303. Payment of agreed price with interest; agreement fixing fair market
value; filing; time of payment
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
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(S)1304. Action to determine whether shares are dissenting shares or fair
market value; limitation; joinder; consolidation; determination of
issues; appointment of appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
(S)1305. Report of appraisers; confirmation; determination by court; judgment;
payment; appeal; costs
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which
any dissenting shareholder who is a party, or who has intervened, is entitled
to require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of
Section 1301).
(S)1306. Prevention of immediate payment; status as creditors; interest
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with
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interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt to
be payable when permissible under the provisions of Chapter 5.
(S)1307. Dividends on dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
(S)1308. Rights of dissenting shareholders pending valuation; withdrawal of
demand for payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
(S)1309. Termination of dissenting share and shareholder status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of dissenting shares.
(S)1310. Suspension of right to compensation or valuation proceedings;
litigation of shareholder's approval
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
(S)1311. Exempt shares
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
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(S)1312. Right of dissenting shareholder to attack, set aside or rescind merger
or reorganization; restraining order or injunction; conditions
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attach the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions, or if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form set aside or rescinded shall
not restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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APPENDIX E
VOTING AGREEMENT
This AGREEMENT dated as of February 2, 1999, among Vestar Capital Partners
III, L.P., a Delaware limited partnership ("Vestar"), Vestar/Gray Investors
LLC, a Delaware limited liability company ("Vestar/Gray"), and the parties
listed on Schedule A hereto (each, a "Shareholder" and, collectively, the
"Shareholders").
WHEREAS, St. John Knits, Inc. (the "Company"), St. John Knits International,
Incorporated, a Delaware and Barbados corporation ("Parent"), SJKAcquisition,
Inc., a California corporation ("Merger Sub"), and Pearl Acquisition Corp., a
Delaware corporation ("Acquisition") propose to enter into an Agreement and
Plan of Merger dated as of the date hereof (the "Merger Agreement"; capitalized
terms used but not defined herein shall have the meanings set forth in the
Merger Agreement) providing for (i) a merger (the "Reorganization Merger") of
Merger Sub with and into the Company and (ii) as promptly as practicable
following the consummation of the Reorganization Merger, a merger (the
"Acquisition Merger" and, together with the Reorganization Merger, the
"Mergers") of Acquisition with and into Parent, both upon the terms and subject
to the conditions set forth in the Merger Agreement.
WHEREAS, each Shareholder owns the number of shares of Common Stock, no par
value, of the Company ("Company Common Stock") set forth opposite such
Shareholder's name on Schedule A hereto (such shares of Company Common Stock,
together with any other shares of Company Common Stock or shares of the Common
Stock, par value $.01 per share, of Parent (the "Parent Common Stock") of which
such Shareholder acquires beneficial ownership after the date hereof and during
the term of this Agreement (including, but not limited to, shares of Parent
Common Stock into which shares of Company Common Stock are converted pursuant
the Reorganization Merger) whether upon the exercise of options, warrants or
rights, the conversion or exchange of convertible or exchangeable securities,
or by means of purchase, dividend, distribution or otherwise, being
collectively referred to herein as the "Subject Shares"); and
WHEREAS, as a condition to its willingness to cause Acquisition to enter
into the Merger Agreement, Vestar/Gray has requested that the Shareholders
enter into this Agreement.
NOW, THEREFORE, to induce Vestar/Gray to cause Acquisition to enter into,
and in consideration of its entering into, the Merger Agreement, and in
consideration of the premises and the representations, warranties and
agreements contained herein, the parties agree as follows:
1. Representations and Warranties of the Shareholders.
(a) Representations and Warranties of the Shareholders. Each Shareholder
hereby represents and warrants to Vestar and Vestar/Gray as to itself as of
the date hereof as follows:
(i) Organization. The Shareholders that are entities are duly
organized, validly existing and in good standing under the laws of the
state of their incorporation, formation or organization.
(ii) Authority; No Conflicts. Each Shareholder has the legal
capacity (in the case of Shareholders that are natural persons), and
all requisite power and authority to enter into this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. This Agreement has been duly authorized, executed
and delivered by each Shareholder and constitutes a valid and binding
obligation of each Shareholder enforceable in accordance with its
terms. Except for filings required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the
applicable requirements of the Securities Act and the Exchange
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Act, and the applicable requirements of state securities, blue sky or
takeover or other corporate laws, (A) except as set forth on Schedule
A, no filing with, and no permit, authorization, consent or approval
of, any Governmental Entity or any other person is necessary for the
execution of this Agreement by the Shareholders and the consummation by
the Shareholders of the transactions contemplated hereby and (B) except
as set forth on Schedule A, none of the execution and delivery of this
Agreement by the Shareholders, the consummation of the transactions
contemplated hereby and compliance with the terms hereof by the
Shareholders will conflict with, or result in any violation of, or
default (with or without notice or lapse of time or both) under any
provision of, the certificate of incorporation, by-laws or analogous
documents of each Shareholder (other than Shareholders that are natural
persons) or any other agreement to which such Shareholder is a party,
including any voting agreement, stockholders agreement, voting trust,
trust agreement, pledge agreement, loan or credit agreement, note,
bond, mortgage, indenture, lease or other agreement, instrument,
permit, concession, franchise or license or violate any judgment,
order, notice, decree, statute, law, ordinance, rule or regulation
applicable to the Shareholders or to each of the Shareholders' property
or assets.
(iii) The Subject Shares. Except as set forth on Schedule A, each
Shareholder is the record and beneficial owner of, and has good and
marketable title to, the number of Subject Shares set forth opposite
such Shareholder's name on Schedule A hereto, free and clear of any
encumbrances, agreements, adverse claims, liens or other arrangements
with respect to the ownership of or the right to vote or dispose of the
Subject Shares. None of the Shareholders beneficially or of record owns
any shares of capital stock of the Company or securities convertible or
exchangeable for shares of capital stock of the Company, other than as
set forth opposite such Shareholder's name on Schedule A hereto. Each
Shareholder has the sole right and power to vote and dispose of the
Subject Shares. None of such Subject Shares is subject to any voting
trust or other agreement, arrangement or restriction with respect to
the voting or transfer of any of the Subject Shares, except as
contemplated by this Agreement or as set forth on Schedule A.
2. Representations and Warranties of Vestar and Vestar/Gray. Vestar and
Vestar/Gray hereby represent and warrant to the Shareholders that Vestar and
Vestar/Gray are duly organized, validly existing and in good standing under the
laws of the state of their formation. Vestar and Vestar/Gray have all requisite
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly authorized,
executed and delivered by Vestar and Vestar/Gray and constitutes a valid and
binding obligation of Vestar and Vestar/Gray enforceable in accordance with its
terms. Except for filings required under the HSR Act, the applicable
requirements of the Securities Act and the Exchange Act, and the applicable
requirements of state securities, blue sky or takeover laws, (i) no filing
with, and no permit, authorization, consent or approval of, any Governmental
Entity or any other person is necessary for the execution of this Agreement by
Vestar and Vestar/Gray and the consummation by Vestar and Vestar/Gray of the
transactions contemplated hereby and (ii) none of the execution and delivery of
this Agreement by Vestar and Vestar/Gray, the consummation of the transactions
contemplated hereby nor the compliance with the terms hereof by Vestar and
Vestar/Gray will conflict with, or result in any violation of, or default (with
or without notice or lapse of time or both) under any provision of, the
certificate of incorporation, by-laws, limited liability company agreement,
certificate of formation or analogous documents of Vestar or Vestar/Gray or any
other agreement to which either of them is a party, including any voting
agreement, stockholders agreement, voting trust, trust agreement, pledge
agreement, loan or credit agreement, note, bond, mortgage, indenture, lease or
other agreement, instrument, permit, concession, franchise or license, or
violate any judgment, order, notice, decree, statute, law, ordinance, rule or
regulation applicable to Vestar or Vestar/Gray or to Vestar's or Vestar/Gray's
property or assets.
3. Covenants of the Shareholders. Until the termination of this Agreement in
accordance with Section 8 hereof, each Shareholder agrees as follows:
(a) Voting of Subject Shares. At any meeting of stockholders of the
Company or Parent or at any adjournment thereof or in any other
circumstances upon which any Shareholder's vote, consent or other
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approval is sought, each such Shareholder shall vote all of the Subject
Shares then beneficially owned by such Shareholder (i) in favor of the
Mergers and the adoption and the approval of the principal terms of the
Merger Agreement and each of the other transactions contemplated by the
Merger Agreement, (ii) against any action or agreement that would result in
a breach in any material respect of any covenant, representation or
warranty or any other obligation or agreement of the Company or Parent
under the Merger Agreement and (iii) against any action or agreement that
would impede, interfere with, delay or postpone or that would reasonably be
expected to discourage the Mergers, including, but not limited to: (A) any
extraordinary corporate transactions (other than the Mergers), such as a
merger, consolidation or other business combination involving the Company
or Parent and their subsidiaries, a sale or transfer of a material amount
of assets of the Company or Parent and their subsidiaries or a
reorganization, recapitalization or liquidation of the Company or Parent
and their subsidiaries; (B) any amendment of the Company's or Parent's
articles or certificate of incorporation or by-laws or other proposal or
transaction involving the Company or Parent or any of their subsidiaries,
which amendment or other proposal or transaction would in any manner
impede, prevent or nullify the Mergers, the Merger Agreement or any of the
other transactions contemplated by the Merger Agreement or change in any
manner the voting rights of any class of the Company's or Parent's capital
stock; (C) any change in the management or board of directors of the
Company or Parent; (D) any material change in the present capitalization or
dividend policy of the Company or Parent; or (E) any other material change
in the Company's or Parent's corporate structure or business; provided,
however, that in the event the Board of Directors of the Company shall have
withdrawn, amended or modified its recommendation in accordance with
Section 8.1 of the Merger Agreement, the Shareholders shall be permitted to
vote the Subject Shares owned by them in favor of any action described in
clause (iii)(A) above which is a Superior Proposal. Each Shareholder shall
not hereafter, unless and until this Agreement terminates pursuant to
Section 8 hereof, purport to grant (other than through the irrevocable
proxy granted in Section 3(b)) any proxy or power of attorney with respect
to any of the Subject Shares, deposit any of the Subject Shares into a
voting trust or enter into any agreement (other than this Agreement),
arrangement or understanding with any person, directly or indirectly, to
vote, grant any proxy or give instructions with respect to the voting of
any of the Subject Shares. Each Shareholder further agrees not to commit or
agree to take any action inconsistent with the foregoing.
(b) Proxies. Each Shareholder hereby grants to Vestar/Gray a proxy to
vote all of the Subject Shares then beneficially owned by such Shareholder
as indicated in Section 3(a) above. Each Shareholder agrees that this proxy
shall be irrevocable and coupled with an interest, agrees to take such
further action or execute such other instruments as may be necessary to
effectuate the intent of this proxy and hereby revokes any proxy previously
granted by such Shareholder with respect to any of the Subject Shares.
(c) Transfer Restrictions. Each Shareholder agrees not to (i) sell,
transfer, pledge, encumber, assign or otherwise dispose of (including by
gift) (collectively, "Transfer"), or enter into any contract, option or
other arrangement or understanding (including any profit sharing
arrangement) with respect to the Transfer of, any of the Subject Shares to
any person other than pursuant to the terms of the Merger Agreement,
(ii) enter into any voting arrangement or understanding, whether by proxy,
voting agreement or otherwise, with respect to any of the Subject Shares or
(iii) take any action that would make any of its representations or
warranties contained herein untrue or incorrect or have the effect of
preventing or impeding such Shareholder from performing any of its
obligations under this Agreement.
(d) Appraisal Rights. Each Shareholder hereby irrevocably waives any
rights of appraisal with respect to the Mergers or rights to dissent from
the Mergers that such Shareholder may have.
(e) No Solicitation. Each of the Shareholders agrees that it shall not,
directly or indirectly, nor shall it authorize, instruct or, if asked or
notified, permit (to the extent feasible) any of its trustees, advisors,
agents, representatives or other intermediaries to, (i) solicit, initiate,
encourage or take any action to facilitate any submission of inquiries,
proposals or offers from any person relating to (A) any acquisition or
purchase of any or all of the Subject Shares or (B) any Transaction
Proposal or agree to or endorse any Transaction Proposal, other than the
transactions contemplated by the Merger Agreement, or (ii) enter into
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or participate in any discussions or negotiations regarding any of the
foregoing or furnish to any other person any information with respect to
the Company's or Parent's business, properties or assets or any of the
foregoing, or otherwise cooperate in any way with, or assist or participate
in, facilitate or encourage, any effort or attempt by any other person to
do or seek any of the foregoing (other than in their capacities as officers
and directors of the Company in the event that the Board of Directors of
the Company has concluded in accordance with Section 8.4 of the Merger
Agreement that similar actions on the part of the Company are required in
order for the Board of Directors to comply with its fiduciary duties under
applicable law). Notwithstanding anything in this Agreement to the
contrary, from and after the date hereof, each Shareholder shall promptly
advise Vestar/Gray orally and in writing of the receipt by any of them (or
any of the other entities or persons referred to above) of any Transaction
Proposal (it being understood that to the extent received in their
respective capacities as officer or director of the Company, their
obligation to so advise Vestar/Gray shall be governed by the Merger
Agreement) or any inquiry which is likely to lead to any Transaction
Proposal, the material terms and conditions of such Transaction Proposal or
inquiry, and the identity of the person making any such Transaction
Proposal or inquiry. Each Shareholder will keep Vestar/Gray fully informed
of the status and details of any such Transaction Proposal or inquiry (it
being understood that to the extent such transaction proposal was received
in their respective capacities as officer or director of the Company, their
obligation to so advise Vestar/Gray shall be governed by the Merger
Agreement).
(f) Affiliate Letter. Each Shareholder shall deliver to Vestar/Gray on
or prior to the Closing Date a written agreement substantially in the form
attached as Exhibit C to the Merger Agreement.
(g) Consents. Each Shareholder agrees that to the extent that it is, or
that it controls, any party to any Lease or other agreement between the
Company or one of its subsidiaries and a third party set forth on Section
9.3 of the Disclosure Schedule, it will deliver, or cause to be delivered
any necessary approval or consent required in connection with the
consummation of the transactions contemplated by the Merger Agreement
without requiring the payment of or imposing any costs or obligations on
the Company or exercising any preemptive rights.
4. Contribution; LLC Agreement. (a) Each Shareholder hereby agrees that,
prior to the Effective Time of the Reorganization Merger, it shall contribute
all of the Subject Shares then beneficially owned by such Shareholder to
Vestar/Gray, in exchange for (i) payment by Vestar/Gray of cash in immediately
available funds in the amount set forth opposite such Shareholder's name on
Schedule B hereto and (ii) the membership interest in Vestar/Gray set forth
opposite such Shareholder's name on Schedule B hereto.
(b) In connection with the undertakings contained in Section 4(a)
hereof, Vestar and each Shareholder hereby agree that concurrently with the
consummation of the transactions contemplated by Section 4(a) hereof, they
will enter into the Limited Liability Company Agreement of Vestar/Gray in
substantially the form attached hereto as Exhibit A.
5. Further Assurances. Each of the Shareholders, Vestar and Vestar/Gray
agrees that it will, from time to time, execute and deliver, or cause to be
executed and delivered, such additional or further consents, documents and
other instruments as any of the Shareholders, Vestar or Vestar/Gray may
reasonably request for the purpose of effectively carrying out the transactions
contemplated by this Agreement.
6. Stop Transfer Order. Each Shareholder hereby authorizes counsel for the
Company to notify the Company's transfer agent that there is a stop transfer
order with respect to all of the Subject Shares and that this Agreement places
limits on the voting of the Subject Shares.
7. Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder may be assigned by any of the parties hereto without the
prior written consent of the other parties hereto, except that Vestar and
Vestar/Gray may assign, in their sole discretion, any or all of their rights,
interests and obligations hereunder to any direct or indirect wholly owned
subsidiary of Vestar or Vestar/Gray, respectively. Subject to
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the preceding sentence, this Agreement will be binding upon, inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns.
8. Termination. This Agreement shall terminate, and no party hereto shall
have any rights or obligations hereunder, upon the first to occur of (a) the
Effective Time of the Acquisition Merger and (b) the termination of the Merger
Agreement in accordance with its terms.
9. General Provisions.
(a) Amendments. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
(b) Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall
be deemed to have been duly given upon receipt) by delivery in person, by
telecopy or by registered or certified mail (postage prepaid, return
receipt requested) to the respective parties at the following addresses (or
at such other address for a party as shall be specified by like notice):
if to Vestar or Vestar/Gray:
c/o Vestar Capital Partners III, L.P.
1225 17th Street, Suite 1660
Denver, Colorado 80202
Attention: James P. Kelley
Facsimile: (303) 292-6639
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attention: Robert L. Friedman, Esq.
Facsimile: (212) 455-2502
if to any of the Shareholders:
c/o Robert E. Gray
St. John Knits, Inc.
17422 Derian Avenue
Irvine, California 92614
Facsimile: (949) 223-3272
with a copy to:
Hewitt & McGuire, LLP
19900 MacArthur Boulevard, Suite 1050
Irvine, California 92612
Attention: Paul A. Rowe, Esq.
Facsimile: (949) 798-0511
(c) Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The headings contained in this Agreement are
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for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Wherever the words "include", "includes"
or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation".
(d) Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more of the counterparts have been
signed by each of the parties and delivered to the other party, it being
understood that each party need not sign the same counterpart.
(e) Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California regardless of the laws
that might otherwise govern under applicable principles of conflicts of
law.
10. Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that, in addition to any other remedy to which it may be
entitled, at law or in equity, the parties shall be entitled to the remedy of
specific performance of the covenants and agreements contained herein and
injunctive and other equitable relief.
11. No Termination or Closure of Trusts. Unless, in connection therewith,
the subject Shares held by any trust which are presently subject to the terms
of this Agreement are transferred upon termination to one or more Shareholders
and remain subject in all respects to the terms of this Agreement, the
Shareholders who are trustees shall not take any action to terminate, close or
liquidate any such trust and shall take all steps necessary to maintain the
existence thereof at least until the first to occur of (i) the Effective Time
of the Acquisition Merger and (ii) the termination of the Merger Agreement in
accordance with its terms.
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12. Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto and, with respect to the provisions
of Section 4 also shall inure to the benefit of Parent and the Company. Except
as provided in the preceding sentence, nothing in this Agreement, express or
implied, is intended to or shall confer upon any other person any rights,
benefits or remedies or any nature whatsoever under or by reason of this
Agreement.
IN WITNESS WHEREOF, each of Vestar, Vestar/Gray and the Shareholders have
caused this Agreement to be signed by its signatory thereunto duly authorized,
as of the date first written above.
VESTAR CAPITAL PARTNERS III, L.P.
<TABLE>
<C> <S>
By: Vestar Associates III, L.P.,
its General Partner
</TABLE>
<TABLE>
<C> <S>
By: Vestar Associates Corporation III,
its General Partner
</TABLE>
<TABLE>
<S> <C>
/s/ James P. Kelley
By: _______________________
Name:
</TABLE>
VESTAR/GRAY INVESTORS LLC
<TABLE>
<C> <S>
By: Vestar Capital Partners III, L.P.
Its: Managing Member
</TABLE>
<TABLE>
<C> <S>
By: Vestar Associates III, L.P.
Its: General Partner
</TABLE>
<TABLE>
<C> <S>
By: Vestar Associates Corporation III
Its: General Partner
</TABLE>
<TABLE>
<S> <C>
/s/ James P. Kelley
By: _______________________
Name:
Title:
</TABLE>
<TABLE>
<C> <S>
/s/ Robert E. Gray
______________________
Robert E. Gray
</TABLE>
<TABLE>
<C> <S>
/s/ Marie Gray
__________________
Marie Gray
</TABLE>
<TABLE>
<C> <S>
/s/ Kelly A. Gray
_____________________
Kelly A. Gray
</TABLE>
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GRAY FAMILY TRUST
<TABLE>
<C> <S>
/s/ Robert E. Gray
By: ______________________
Name: Robert E. Gray
</TABLE>
<TABLE>
<C> <S>
/s/ Marie Gray
By: __________________
Name: Marie Gray
</TABLE>
KELLY ANN GRAY TRUST
<TABLE>
<C> <S>
/s/ Robert E. Gray
By: ______________________
Name: Robert E. Gray
</TABLE>
<TABLE>
<C> <S>
/s/ Marie Gray
By: __________________
Name: Marie Gray
</TABLE>
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APPENDIX F
FORM OF AGREEMENT OF MERGER
This Agreement of Merger is made as of , 1999 by and among
SJKAcquisition, Inc., a California corporation (hereinafter called
"Disappearing Corporation"), St. John Knits, Inc., a California corporation
(hereinafter called "Surviving Corporation"), and St. John Knits International,
Incorporated, a Delaware corporation ("Parent Corporation" and, together with
Disappearing Corporation and Surviving Corporation, the "Constituent
Corporations").
Disappearing Corporation is organized in California. Its authorized capital
stock consists of 1,000 shares of common stock, par value $0.01 per share
("Disappearing Corporation Common Stock"), of which 1,000 shares have been
issued.
Surviving Corporation, which is to be the surviving corporation in the
merger set forth herein, is organized in California. Its authorized capital
stock consists of 40,000,000 shares of Common Stock, no par value ("Common
Stock"), and 2,000,000 shares of Preferred Stock, $0.01 par value ("Preferred
Stock"), of which shares of Common Stock and no shares of Preferred
Stock have been issued.
Parent Corporation, the sole shareholder of Disappearing Corporation, is
organized in Delaware. Shares of Parent Corporation common stock, par value
$0.01 per share ("Parent Common Stock"), will be issued to shareholders of the
Surviving Corporation at the Effective Time (as defined below). Its authorized
capital stock consists of 20,000,000 shares of Parent Common Stock and
2,000,000 shares of Preferred Stock, par value $0.01 per share ("Parent
Preferred Stock"), of which 10,000 shares of Parent Common Stock and no shares
of Parent Preferred Stock have been issued.
The respective boards of directors of the Constituent Corporations and the
respective shareholders of the Constituent Corporations have approved the
merger set forth herein.
NOW, THEREFORE, Disappearing Corporation, Surviving Corporation and Parent
Corporation do hereby adopt and make themselves respectively parties to the
plan of reorganization encompassed by this Agreement of Merger and do hereby
agree that Disappearing Corporation shall merge with and into Surviving
Corporation upon the following terms and conditions:
1. Merger. Disappearing Corporation shall be merged with and into Surviving
Corporation and Surviving Corporation shall survive the merger.
2. Effective Time. Pursuant to Section 110(c) of the California General
Corporation Law, this instrument and the merger contemplated herein shall
become effective at the close of business on , 1999, provided it has
been filed on or before said date; if not filed on or before said date it shall
become effective when a copy of this Agreement of Merger with officers'
certificates attached is filed in accordance with Section 1103 of the
California General Corporation Law. The date and time upon which the merger
becomes effective in accordance with the foregoing sentence is sometimes
referred to herein as the "Effective Time."
3. Articles of Incorporation and Bylaws. The articles of incorporation of
Surviving Corporation, as in effect immediately prior to the Effective Time,
shall continue to be the articles of incorporation of the Surviving Corporation
without change or amendment until further amended in accordance with the
provisions thereof and applicable law. The bylaws of Surviving Corporation, as
in effect immediately prior to the Effective Time, shall continue to be the
bylaws of Surviving Corporation without change or amendment until further
amended in accordance with the provisions thereof and applicable law.
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4. Directors and Officers. The directors of Surviving Corporation
immediately prior to the Effective Time shall remain the directors of Surviving
Corporation at and after the Effective Time until such director's respective
successor is duly elected or appointed and qualified. Each person serving as an
officer of the Surviving Corporation immediately prior to the Effective Time
shall be and continue as an officer of the Surviving Corporation at and after
the Effective Time, holding the same office or offices, until such person's
successor is chosen or qualified.
5. Succession. At the Effective Time, Surviving Corporation shall succeed to
Disappearing Corporation in the manner of and as more fully set forth in
Section 1107 of the California General Corporation Law.
6. Further Assurances. From time to time as and when required by Surviving
Corporation or by its successors and assigns, there shall be executed and
delivered on behalf of Disappearing Corporation such deeds and other
instruments, and there shall be taken or caused to be taken such further and
other actions as shall be appropriate or necessary in order to vest or perfect
in or to confirm of record or otherwise in Surviving Corporation the title to
and possession of all the property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of Disappearing Corporation, and
otherwise to carry out the purposes of this Agreement of Merger, and the
officers and directors of Surviving Corporation are fully authorized in the
name and on behalf of Disappearing Corporation or otherwise to take any and all
such actions and to execute and deliver any and all such deeds and other
instruments.
7. Cancellation of Common Stock. Each share of Common Stock that is owned by
Surviving Corporation, Disappearing Corporation or Parent Corporation shall be
automatically and immediately canceled and retired and shall cease to exist,
and no cash, Parent Common Stock or other consideration shall be delivered or
deliverable in exchange therefor.
8. Common Stock of Disappearing Corporation. At the Effective Time, by
virtue of the merger and without any action on the part of the holder thereof,
each share of Disappearing Corporation Common Stock outstanding immediately
prior thereto shall be converted into and become one (1) validly issued, fully
paid and nonassessable share of the Common Stock, no par value, of Surviving
Corporation, and such outstanding share of Disappearing Corporation shall be
canceled and cease to exist.
9. Capital Stock of Surviving Corporation. At the Effective Time, each share
of Common Stock of Surviving Corporation outstanding immediately prior thereto
shall be converted into and become one (1) validly issued, fully paid and
nonassessable share of Parent Common Stock.
10. Stock Certificates. At and as of the Effective Time, all of the
outstanding certificates which prior to that time represented shares of the
capital stock of Surviving Corporation shall be deemed for all purposes to
evidence ownership of and to represent shares of Parent Corporation into which
the shares of Surviving Corporation represented by such certificates have been
converted as herein provided. Parent Corporation, as holder of the certificate
that immediately prior to the Effective Time evidenced outstanding shares of
Disappearing Corporation Common Stock, may at such holder's option, surrender
the same to the Surviving Corporation in exchange for a certificate
representing shares of the Surviving Corporation Common Stock into which such
holder's outstanding shares of Disappearing Corporation Common Stock shall have
been converted and, until surrendered, the Disappearing Corporation Common
Stock certificate shall represent and evidence the shares of the Surviving
Corporation Common Stock into which the outstanding shares of the Disappearing
Corporation Common Stock theretofore represented and evidenced thereby.
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11. Counterparts. In order to facilitate the filing and recording of this
Agreement of Merger, it may be executed in any number of counterparts, each of
which shall be deemed to be an original.
"SURVIVING CORPORATION"
ST. JOHN KNITS, INC.,
a California corporation
By:
-----------------------------
Name: Bob Gray
Title: Chairman of the Board and
Chief Executive Officer
By:
-----------------------------
Name: Marie Gray
Title: Secretary
"DISAPPEARING CORPORATION"
SJKACQUISITION, INC.,
a California corporation
By:
-----------------------------
Name: Bob Gray
Title: President
By:
-----------------------------
Name: Roger G. Ruppert
Title: Secretary
"PARENT CORPORATION"
ST. JOHN KNITS INTERNATIONAL,
INCORPORATED,
a Delaware corporation
By:
-----------------------------
Name: Bob Gray
Title: Chairman of the Board and
Chief Executive Officer
By:
-----------------------------
Name: Marie Gray
Title: Secretary
F-3
<PAGE>
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
OF
SJKACQUISITION, INC.,
a California corporation
Bob Gray and Roger G. Ruppert do hereby certify:
1. That they are, respectively, the president and secretary of
SJKAcquisition, Inc., a California corporation.
2. That the total number of outstanding shares of each class of said
corporation entitled to vote on the merger described in the agreement of
merger to which this certificate is attached is 1,000 shares of common stock.
3. That the principal terms of the agreement of merger in the form attached
were approved by that corporation by a vote of a number of shares of each
class which exceeded the vote required, common stock being the sole class
entitled to vote and a majority vote of the outstanding shares being required
of such class.
4. The required vote of the stockholders of St. John Knits International,
Incorporated has been obtained.
DATE: , 1999
By:
--------------------------------
Name: Bob Gray
Title: President
By:
--------------------------------
Name: Roger G. Ruppert
Title: Secretary
Each of the undersigned declares under penalty of perjury that the matters
set forth in the foregoing certificate are true of his or her own knowledge.
Executed at Irvine, California on , 1999.
--------------------------------
--------------------------------
F-4
<PAGE>
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
OF
ST. JOHN KNITS, INC.,
a California corporation
Bob Gray and Marie Gray do hereby certify:
1. That they are, respectively, the president and secretary of St. John
Knits, Inc., a California corporation.
2. That the total number of outstanding shares of each class of said
corporation entitled to vote on the merger described in the agreement of merger
to which this certificate is attached is shares of common stock.
3. That the principal terms of the agreement of merger in the form attached
were approved by that corporation by a vote of a number of shares of each class
which exceeded the vote required, common stock being the sole class entitled to
vote and a majority vote of the outstanding shares being required of such
class.
DATE: , 1999
By:
------------------------------
Name: Bob Gray
Title: Chairman of the Board and
Chief Executive Officer
By:
------------------------------
Name: Marie Gray
Title: Vice-Chairman of the Board,
Chief Designer and Secretary
Each of the undersigned declares under penalty of perjury that the matters
set forth in the foregoing certificate are true of his or her own knowledge.
Executed at Irvine, California on , 1999.
------------------------------
------------------------------
F-5
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Certificate of Incorporation of the Registrant provides that
except to the extent prohibited by the Delaware General Corporate Law (the
"DGCL"), a director of the Registrant may not personally be liable to the
Registrant or its stockholders for monetary damages for breach of fiduciary
duty by a director. Section 4.01 of the Registrant's Bylaws contains a similar
provision, which states that the Registrant shall indemnify to the fullest
extent permitted by law any person made, or threatened to be made, a party to
any action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was a director or
officer of the Registrant or serves or served any other enterprise at the
request of the Registrant.
Section 145 of the DGCL permits a corporation to indemnify its directors and
officers against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred by them in
connection with any action, suit or proceeding brought by third parties, if
such directors or officers acted in good faith and in a manner they reasonable
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reason to believe
their conduct was unlawful. In a derivative action, i.e., one by or in the
right of the corporation, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit, and only with respect to a
matter as to which they will have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification will be made if such person will
have been adjudged liable to the corporation, unless and only to the extent
that the court in which the action or suit was brought will determine upon
application that the defendant officers or directors are fairly and reasonably
entitled to indemnify for such expenses despite such adjudication of liability.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of February 2, 1999, among
St. John Knits, Inc., SJKAcquisition, Inc., St. John Knits
International, Incorporated and Acquisition Corp. (included as
Appendix A to the Proxy Statement-Prospectus
which forms a part of this Registration Statement)
3.1+ Form of Post-Merger Restated Certificate of Incorporation of St.
John Knits International
3.2+ Post-Merger Bylaws of St. John Knits International
5.1 Opinion of O'Melveny & Myers LLP regarding the validity of the
securities being registered
8.1 Opinion of O'Melveny & Myers LLP regarding certain tax matters
10.1 Voting Agreement, dated as of February 2, 1999, among Vestar
Capital Partners III, L.P., Vestar/Gray LLC and the parties listed
on Schedule A thereto (included as Appendix E to the Proxy
Statement-Prospectus which forms a part of this Registration
Statement)
10.2 Form of Limited Liability Company Agreement
10.3+ Form of Management Agreement among St. John, St. John Knits
International and Vestar Capital Partners (previously filed as
Exhibit 10.4 to Amendment No. 1 to this Registration Statement on
Form S-4)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.4+ Letter Agreement, dated as of April 27, 1999, between Vestar
Capital Partners and Robert E. Gray, attaching (i) a summary of
terms for the Grays' stock options, (ii) a form of St. John Knits
International, Incorporated 1999 Stock Option Plan and (iii) a
form of stock option agreement (previously filed as Exhibit 10.5
to Amendment No. 1 to this Registration Statement on Form S-4)
10.5+ Letter dated February 2, 1999, from The Chase Manhattan Bank and
Chase Securities Inc. to Vestar Capital Partners III, L.P.
(incorporated herein by reference to Exhibit (a)(1) to the
Schedule 13E-3 of St. John Knits, Inc., filed with the Securities
and Exchange Commission on March 1, 1999)
10.6+ Letter dated February 2, 1999, from Chase Securities Inc. to
Vestar Capital Partners III, L.P. (incorporated herein by
reference to Exhibit (a)(2) to the Schedule 13E-3 of St. John
Knits, Inc., filed with the Securities and Exchange Commission on
March 1, 1999)
10.7+ Superior Court of the State of California County of Orange,
Central Justice Center Minute Order, dated April 30, 1999
(previously filed as Exhibit 10.8 to Amendment No. 2 to this
Registration Statement on Form S-4)
23.1 Consent of O'Melveny & Myers LLP (contained in Exhibit 5.1 hereto)
23.2 Consent of O'Melveny & Myers LLP (contained in Exhibit 8.1 hereto)
23.3 Consent of Arthur Andersen LLP
24.1+ Power of Attorney of the officers and directors of Registrant
signing this Registration Statement (contained on page II-4)
99.1 Form of Proxy
99.2 Form of Non-Cash Election
99.3+ Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated
99.4+ Consent of Wasserstein Perella & Co., Inc.
99.5 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
(included as Appendix B to the Proxy Statement-Prospectus which
forms a part of this Registration Statement)
99.6 Opinion of Wasserstein Perella & Co., Inc. (included as Appendix C
to the Proxy Statement-Prospectus which forms a part of this
Registration Statement)
99.7+ Consent of Daniel S. O'Connell to serve as a director of St. John
Knits International after the mergers
99.8+ Consent of Sander M. Levy to serve as a director of St. John Knits
International after the mergers
99.9+ Consent of James P. Kelley to serve as a director of St. John
Knits International after the mergers
99.10 Form of Letter to Brokers and their Clients enclosing Form of
Non-Cash Election
</TABLE>
- --------
+ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have either been incorporated by reference or have been
omitted as not applicable or not required under the rules of Regulation S-X.
(c) REPORTS, OPINIONS AND APPRAISALS OF OUTSIDE PARTIES
The opinions of Merrill Lynch, Pierce, Fenner & Smith Incorporated & Co.,
Inc. and Wasserstein Perella & Co. Inc. are included as Appendices B and C to
the Proxy Statement-Prospectus.
II-2
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) that, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering;
(4) that, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(5) (a) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(b) that every prospectus: (A) that is filed pursuant to paragraph
(5)(a) immediately preceding, or (B) that purports to meet the requirements
of Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(6) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such
II-3
<PAGE>
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(a) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
Form S-4, within one business day of receipt of such request, and to send
the incorporated documents by first-class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the registration statement through the date of
responding to the request.
(b) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 3 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Irvine, State of California, on the 25th day of May, 1999.
ST. JOHN KNITS INTERNATIONAL,
INCORPORATED
/s/ Bob Gray
By _________________________________
Bob Gray
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to the Registration Statement has been signed by the following
persons in the capacities indicated below on the 25th day of May, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Bob Gray Chairman of the Board and Chief
_____________________________________________ Executive Officer (Principal Executive
Bob Gray Officer)
* Vice Chairman of the Board, Chief
_____________________________________________ Designer and Secretary
Marie Gray
* Director and President
_____________________________________________
Kelly A. Gray
* Chief Financial Officer and Senior Vice
_____________________________________________ President, Finance (Principal Financial
Roger G. Ruppert Officer and Principal Accounting
Officer)
* Director
_____________________________________________
David A. Krinsky
* Director
_____________________________________________
Richard A. Gadbois, III
* Director
_____________________________________________
Robert C. Davis
* Director
_____________________________________________
Mark R. Goldston
* Director
_____________________________________________
Daniel T. Reiner
</TABLE>
/s/ Bob Gray
By: ____________________________________
Bob Gray
Attorney-in-fact
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
2.1 Agreement and Plan of Merger, dated as of February 2, 1999, among St.
John Knits, Inc., SJKAcquisition, Inc., St. John Knits International,
Incorporated and Acquisition Corp. (included as Appendix A to the
Proxy Statement-Prospectus which forms a part of this Registration
Statement)
3.1+ Form of Post-Merger Restated Certificate of Incorporation
3.2+ Post-Merger Bylaws
5.1 Opinion of O'Melveny & Myers LLP regarding the validity of the
securities being registered
8.1 Opinion of O'Melveny & Myers LLP regarding certain tax matters
10.1 Voting Agreement, dated as of February 2, 1999, among Vestar Capital
Partners III, L.P., Vestar/Gray LLC and the parties listed on Schedule
A thereto (included as Appendix E to the Proxy Statement-Prospectus
which forms a part of this Registration Statement)
10.2 Form of Limited Liability Company Agreement
10.3+ Form of Management Agreement among St. John, St. John Knits
International and Vestar Capital Partners (previously filed as Exhibit
10.4 to Amendment No. 1 to this Registration Statement on Form S-4)
10.4+ Letter Agreement, dated as of April 27, 1999, between Vestar Capital
Partners and Robert E. Gray, attaching (i) a summary of terms for the
Grays' stock options, (ii) a form of St. John Knits International,
Incorporated 1999 Stock Option Plan and (iii) a form of stock option
agreement (previously filed as Exhibit 10.5 to Amendment No. 1 to this
Registration Statement on Form S-4)
10.5+ Letter dated February 2, 1999, from The Chase Manhattan Bank and Chase
Securities Inc. to Vestar Capital Partners III, L.P. (incorporated
herein by reference to Exhibit (a)(1) to the Schedule 13E-3 of St.
John Knits, Inc., filed with the Securities and Exchange Commission on
March 1, 1999)
10.6+ Letter dated February 2, 1999, from Chase Securities Inc. to Vestar
Capital Partners III, L.P. (incorporated herein by reference to
Exhibit (a)(2) to the Schedule 13E-3 of St. John Knits, Inc., filed
with the Securities and Exchange Commission on March 1, 1999)
10.7+ Superior Court of the State of California County of Orange, Central
Justice Center Minute Order, dated April 30, 1999 (previously filed as
Exhibit 10.8 to Amendment No. 2 to this Registration Statement on Form
S-4)
23.1 Consent of O'Melveny & Myers LLP (contained in Exhibit 5.1 hereto)
23.2 Consent of O'Melveny & Myers LLP (contained in Exhibit 8.1 hereto)
23.3 Consent of Arthur Andersen LLP
24.1+ Power of Attorney of the officers and directors of Registrant signing
this Registration Statement (contained on page II-4)
99.1 Form of Proxy
99.2 Form of Non-Cash Election
99.3+ Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated
99.4+ Consent of Wasserstein Perella & Co., Inc.
99.5 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
(included as Appendix B to the Proxy Statement-Prospectus which forms
a part of this Registration Statement)
99.6 Opinion of Wasserstein Perella & Co., Inc. (included as Appendix C to
the Proxy Statement-Prospectus which forms a part of this Registration
Statement)
99.7+ Consent of Daniel S. O'Connell to serve as a director of St. John
Knits International after the mergers
99.8+ Consent of Sander M. Levy to serve as a director of St. John Knits
International after the mergers
99.9+ Consent of James P. Kelley to serve as a director of St. John Knits
International after the mergers
99.10 Form of Letter to Brokers and their Clients enclosing Form of Non-Cash
Election
</TABLE>
- --------
+ Previously filed.
<PAGE>
EXHIBIT 5.1
OUR FILE NUMBER
744,574-56
WRITER'S DIRECT DIAL
949-760-9600
May 17, 1999
St. John Knits International, Incorporated
17422 Derian Avenue
Irvine, California 92614
Re: St. John Knits International, Incorporated Form S-4
Registration Statement
---------------------------------------------------
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-4
filed by you with the Securities and Exchange Commission in connection with the
registration under the Securities Act of 1933, as amended, of 6,546,252 shares
of Common Stock, $0.01 par value (the "Shares"), of St. John Knits
International, Incorporated, a Delaware corporation (the "Corporation"). We are
familiar with the proceedings taken and proposed to be taken by you in
connection with the authorization and proposed issuance and sale of the Shares.
It is our opinion that, subject to said proceedings being duly taken and
completed by you as now contemplated prior to the issuance of the Shares, the
Shares will, upon issuance and sale thereof in the manner referred to in the
Registration Statement, be legally and validly issued, fully paid and
nonassessable shares of Common Stock of the Corporation.
The law covered by this opinion is limited to the present corporate law of
the State of Delaware. We express no opinion as to the laws of any other
jurisdiction and no opinion regarding the statutes, administrative decisions,
rules, regulations or requirements of any county, municipality, subdivision or
local authority of any jurisdiction.
<PAGE>
St. John Knits International, Incorporated, May 17, 1999 - Page 2
We consent to your filing this opinion as an exhibit to the Registration
Statement and to the reference to us in the Registration Statement under the
heading "Legal Matters."
Respectfully submitted,
/s/ O'MELVENY & MYERS LLP
NB1:421137.1
<PAGE>
EXHIBIT 8.1
[O'MELVENY & MYERS LLP LETTERHEAD]
May 25, 1999 OUR FILE NUMBER
744,574-056
St. John Knits International, Incorporated
St. John Knits, Inc.
17422 Derian Avenue
Irvine, California 92614
Re: Proposed Reorganization
-----------------------
Ladies and Gentlemen:
You have requested our opinion regarding the material United States
federal income tax consequences of the proposed reorganization (the
"Reorganization") by and among St. John Knits, Inc. ("St. John Knits"), St. John
Knits International, Incorporated ("St. John Knits International"),
SJKAcquisition, Inc. and Pearl Acquisition Corp., pursuant to which the
shareholders of St. John Knits will receive cash and stock of St. John Knits
International in exchange for such shareholders' common stock of St. John Knits.
In connection with this opinion, we have examined such documents and
matters of law and fact as we have considered appropriate, including the
Agreement and Plan of Merger, dated as of February 2, 1999, between St. John
Knits, St. John Knits International, SJKAcquisition, Inc. and Pearl Acquisition
Corp. (the "Agreement"); the Registration Statement on Form S-4 filed by
St. John Knits International with the Securities and Exchange Commission (the
"Registration Statement"); and a letter from St. John Knits International and
St. John to the undersigned (the "Representation Letter"), in the form attached
hereto.
In connection with this opinion, with your consent, we have relied on the
representations made in the Representation Letter, and with your consent, we
expressly assume that each of the representations made in the Representation
Letter continues to be true and correct as of the date of this opinion. In
addition, with your consent, we have assumed or obtained representations (and
are relying thereon, without any independent investigation or review thereof)
that: (a) original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the effective date of the Reorganization) due execution and
delivery of all documents where due execution and delivery
<PAGE>
St. John Knits International, Incorporated May 25, 1999 - Page 2
are prerequisites to effectiveness thereof; and (b) the Reorganization will be
effective under the laws of the State of Delaware. Capitalization terms not
defined herein shall have the meaning ascribed to such terms in the Registration
Statement.
Opinion
-------
Subject to the assumptions set forth above, the representations made in the
Representation Letter, and the assumptions and qualifications set forth in the
discussion in the Registration Statement under the heading "Special Factors--
Material Federal Income Tax Consequences" (the "Material Federal Income Tax
Consequences Section"), we hereby confirm that discussion of federal income tax
consequences in the Material Federal Income Tax Consequences Section of the
Registration Statement is the opinion of O'Melveny & Myers LLP. As set forth in
that discussion, no opinion is being provided by us as to whether the series of
transactions described in the Registration Statement will qualify under Section
351 of the Internal Revenue Code.
This opinion is limited to the tax matters specifically covered herein, and
we have not been asked to address, nor have we addressed, any other tax
consequences of the Reorganization. The opinion herein is based on current
authorities and upon facts and assumptions as of the date of this opinion. This
opinion is subject to change in the event of a change in the applicable law or
change in the interpretation of such law by the courts, the Treasury Department
or by the Internal Revenue Service, or a change in any of the facts and
assumptions upon which it is based, which changes could be retroactive with
respect to transactions prior to the date of such changes. Any such changes
could significantly modify the statements and opinions expressed herein. This
opinion represents counsel's best legal judgment, and has no binding effect or
official status, so that no assurance can be given that the positions set forth
above will be sustained by a court, if contested. In addition, if any of the
facts or assumptions upon which this opinion is based were to change, this
opinion would no longer have any force or effect.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Special Factors--
Material Federal Income Tax Consequences," "SUMMARY--Material Federal Income Tax
Consequences," and "Legal Opinions," in the Registration Statement. This opinion
concerning the material federal income tax consequences of the Reorganization is
delivered to pursuant Item 601(b)(8) of Regulation S-K of the Securities and
Exchange Commission, and is intended solely for the benefit of St. John
<PAGE>
St. John Knits International, Incorporated May 25, 1999 - Page 3
Knits International, St. John Knits, and their shareholders. This opinion may
not be relied upon by any other person or entity without our prior written
consent.
Respectfully submitted,
/s/ O'MELVENY & MYERS LLP
<PAGE>
EXHIBIT 10.2
================================================================================
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
OF
VESTAR/GRAY INVESTORS LLC
BY AND AMONG
VESTAR/SJK INVESTORS LLC
ROBERT E. GRAY
MARIE GRAY
KELLY A. GRAY
KELLY ANN GRAY TRUST
GRAY FAMILY TRUST
AND
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
Dated as of _______ __, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I
Definitions...........................................................1
SECTION 1.1 Definitions.............................................1
ARTICLE II
General Provisions....................................................9
SECTION 2.1 Formation...............................................9
SECTION 2.2 Name....................................................9
SECTION 2.3 Term....................................................9
SECTION 2.4 Purpose; Powers.........................................9
SECTION 2.5 Place of Business......................................10
SECTION 2.6 Business Transactions of a Member with the LLC.........10
SECTION 2.7 Fiscal Year............................................10
SECTION 2.8 No State-Law Partnership...............................10
ARTICLE III
Members and Interests................................................11
SECTION 3.1 Members................................................11
SECTION 3.2 Certificates...........................................11
SECTION 3.3 Liability of Members...................................11
SECTION 3.4 Access to and Confidentiality..........................11
ARTICLE IV
Management and Operation of the LLC..................................11
SECTION 4.1 Management.............................................11
SECTION 4.2 Certain Duties and Obligations of the Members..........12
SECTION 4.3 Indemnification of the Managing Member.................12
SECTION 4.4 Expenses...............................................13
SECTION 4.5 Indemnification Rights Non-Exclusive...................13
SECTION 4.6 Insurance..............................................13
SECTION 4.7 Assets of the LLC......................................13
SECTION 4.8 Loans to the LLC.......................................13
SECTION 4.9 Voting of Shares.......................................14
ARTICLE V
Capital Contributions; Distributions.................................16
SECTION 5.1 Capital Contributions..................................16
SECTION 5.2 Distributions..........................................16
SECTION 5.3 Limitations on Distributions...........................16
-i-
<PAGE>
Page
----
ARTICLE VI
Books and Reports; Tax Matters; Capital Accounts; Allocations........17
SECTION 6.1 General Accounting Matters.............................17
SECTION 6.2 Certain Tax Matters....................................17
SECTION 6.3 Capital Accounts.......................................18
SECTION 6.4 Allocations............................................18
ARTICLE VII
Dissolution..........................................................18
SECTION 7.1 Dissolution............................................18
SECTION 7.2 Votes of Members.......................................19
SECTION 7.3 Winding-up; Final Distributions........................19
SECTION 7.4 Further Assurances.....................................20
ARTICLE VIII
Transfer of Member's Units...........................................21
SECTION 8.1 Transfers to be Made Only as Permitted or Required by
this Agreement........................................21
SECTION 8.2 Permitted Transfers....................................21
SECTION 8.3 Tag-Along Rights.......................................21
SECTION 8.4 Drag-Along Rights......................................23
SECTION 8.5 No Transfers...........................................23
SECTION 8.6 Other Transfer Provisions..............................24
ARTICLE IX
The LLC's Registration Rights Relating to Shares of Parent Common
Stock and Related Rule 144 Sales....................................24
SECTION 9.1 Stockholders' Agreement; Transfers of Shares...........24
SECTION 9.2 Exercise of Incidental Registration Rights.............25
SECTION 9.3 Exercise of Demand Registration Rights.................26
SECTION 9.4. Tag-Along Rights.......................................28
SECTION 9.5. Drag-Along Rights......................................30
SECTION 9.6. Public Offerings, etc..................................30
SECTION 9.7. Rights of First Refusal................................31
SECTION 9.8 Initiation of a Rule 144 Sale..........................31
SECTION 9.9 Individual Private Sale................................32
SECTION 9.10 Reduction of Allocated Shares..........................32
SECTION 9.11 Liquidation of the LLC.................................33
-ii-
<PAGE>
Page
----
SECTION 9.12 Transfers to be Made Only as Permitted or Required
by this Agreement.....................................33
SECTION 9.13 Liquidity Right........................................33
SECTION 9.14 Certain Limitations on the Parent's Obligations to
Purchase Shares.......................................34
ARTICLE X
Miscellaneous.........................................................36
SECTION 10.1 Equitable Relief.......................................36
SECTION 10.2 Governing Law..........................................36
SECTION 10.3 Successors and Assigns.................................36
SECTION 10.4 Notices................................................36
SECTION 10.5 Counterparts...........................................36
SECTION 10.6 Entire Agreement.......................................36
SECTION 10.7 Amendments.............................................37
SECTION 10.8 Section Titles.........................................37
SECTION 10.9 Representations and Warranties.........................37
SECTION 10.10 SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL.......38
SECTION 10.11 Reimbursement of Expenses..............................38
SECTION 10.12 Gray Representative....................................38
SECTION 10.13 Covenant Not to Compete; Confidential Information......39
SECTION 10.14 Additional Securities Subject to Agreement.............42
Schedule 1 Member Information/Allocated Shares
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<PAGE>
VESTAR/GRAY INVESTORS LLC
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT of
VESTAR/GRAY INVESTORS LLC, a Delaware limited liability company (the "LLC"),
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dated as of _________ __, 1999, by and among Vestar/SJK Investors LLC, a
Delaware limited liability company (the "Vestar Member"), the parties listed on
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Schedule 1 hereto (each a "Gray Member" and, collectively, the "Gray Members"),
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such other Persons as shall hereinafter become Members as hereinafter provided,
St. John Knits International, Incorporated, a Delaware corporation ("Parent")
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and St. John Knits, Inc., a California corporation (the "Company").
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W I T N E S S E T H
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WHEREAS, the LLC was formed pursuant to (i) a Certificate of Formation
dated as of January 29, 1999 (the "Certificate") and filed for recordation in
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the office of the Secretary of State of the State of Delaware on January 29,
1999 and (ii) a Limited Liability Company Agreement dated as of January 29, 1999
by the Vestar Member (the "Original Agreement"); and
------------------
WHEREAS, the parties hereto desire to enter into this Amended and
Restated Limited Liability Company Agreement of the LLC to permit the admission
as Members (as defined below) of the parties listed on Schedule 1 hereto and
further to make the modifications hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein made and intending to be legally bound hereby, the parties hereto agree
to amend and restate the Original Agreement in its entirety to read as follows:
ARTICLE I
Definitions
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SECTION 1.1 Definitions. Unless the context otherwise requires, the
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following terms shall have the following meanings for purposes of this
Agreement:
"Acquisition" means Pearl Acquisition Corp., a Delaware corporation
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and a wholly-owned direct subsidiary of the LLC.
"Acquisition Merger" shall have the meaning ascribed to such term in
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the Merger Agreement.
"Additional Demand Registrations" shall have the meaning ascribed to
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such term in Section 9.3(a)(iii).
"Affiliate" shall mean, (a) with respect to any Person, (i) any Person
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that directly or indirectly controls, is controlled by or is under common
control with, such Person, or
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2
(ii) any director, officer, partner, member or employee of such Person or
any Person specified in clause (i) above, or (iii) any Immediate Family
Member of any Person specified in clause (i) or (ii) above; and (b) shall
also include, with respect to any Person who is an individual, a trust the
beneficiaries of which, or a corporation or partnership the stockholders or
limited or general partners of which, include only such individual and such
individual's Immediate Family Members. Notwithstanding the foregoing, the
LLC will not be deemed to be an Affiliate of any Person.
"Agreement" means this Amended and Restated Limited Liability Company
---------
Agreement, as it may be amended, supplemented, modified or restated from
time to time.
"Allocated Shares" shall mean, in respect of each Member, the number
----------------
of Shares initially allocated to each Member, as set forth on Schedule 1 to
this Agreement, minus the number of such Shares that have been the subject
of a Transfer (which does not include pledges) and plus the number of
additional shares received by the LLC in respect of such Shares.
"Business Day" means a day which is not a Saturday, Sunday or other
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day on which banks in New York, New York or Los Angeles, California are
closed.
"Capital Account" has the meaning set forth in Section 6.3.
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"Capital Contribution" means the total amount of cash and the agreed
--------------------
fair market value (net of liabilities) of all other assets contributed to
the LLC by a Member.
"Carrying Value" means, with respect to any asset of the LLC, the
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asset's adjusted basis for federal income tax purposes, except that the
Carrying Values of all assets of the LLC shall be adjusted to equal their
respective fair market values, in accordance with the rules set forth in
Regulations section 1.704-1(b)(2)(iv)(f), except as otherwise provided
herein, as of: (a) the date of the acquisition of any additional Interest
by any new or existing Member in exchange for more than a de minimis
Capital Contribution; (b) the date of the distribution of more than a de
minimis amount of assets of the LLC to a Member; (c) the date an Interest
is relinquished to the LLC; provided, however, that adjustments pursuant to
clauses (a), (b) and (c) above shall be made only if the Managing Member
reasonably determines that such adjustments are necessary or appropriate to
reflect the relative economic interests of the Members. The Carrying Value
of any asset of the LLC distributed to any Member shall be adjusted
immediately prior to such distribution to equal its fair market value and
depreciation shall be calculated by reference to Carrying Value, instead of
tax basis, once Carrying Value differs from tax basis. The Carrying Value
of any asset contributed (or deemed contributed under Regulations section
1.704-1(b)(2)(iv)) by a Member to the LLC will be the fair market value of
the asset at the date of its contribution thereto.
"Certificate" has the meaning set forth in the recitals to this
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Agreement.
<PAGE>
3
"Code" means the Internal Revenue Code of 1986, as amended from time
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to time, or any successor statute. Any reference herein to a particular
provision of the Code shall mean, where appropriate, the corresponding
provision in any successor statute.
"Common Stock Request" has the meaning set forth in Section 9.3(a)(i).
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"Company Common Stock" means the common stock, no par value per share,
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of Company.
"Company Names" means, collectively, the names "Marie Gray", "St John"
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or "St John by Marie Gray."
"Competing Business" has the meaning set forth in Section 10.13(a)(i).
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"Confidential Information" means information that is not generally
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known to the public and that is used, developed or obtained by the
restricted Group in connection with its business.
"Demand Request" shall have the meaning ascribed to such term in
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Section 9.3(a)(i).
"Demanding Member" shall have the meaning ascribed to such term in
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Section 9.3(a)(i).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"Fair Market Value" shall mean, as of any date (the "Valuation Date"),
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with respect to each Share, prior to a Public Offering, the fair market
value thereof, disregarding any discount for minority interest or
marketability of shares, as determined by an independent appraiser,
accountant or investment banking firm (the "Initial Appraiser") selected by
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the Board of Directors of the Parent (and compensated by the Parent) (the
"Initial Determination"); provided, that if the selling Gray Employee(s)
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disagree(s), in good faith, with the Initial Determination, such selling
Gray Employee(s) shall promptly notify the Parent of such disagreement, in
which event an independent appraiser, accountant or investment banking firm
(the "Second Appraiser") selected by the selling Gray Employee(s) shall
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make a determination of the fair market value thereof, disregarding any
discount for minority interest or marketability of shares (the "Second
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Determination"), and if the Second Determination is (i) not at least 110%
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of the Initial Determination, "Fair Market Value" shall be the average of
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the First Determination and the Second Determination and the selling Gray
Employee(s) shall pay the cost of the Second Determination or (ii) 110% of
the Initial Determination or greater, an independent appraiser, accountant
or investment banking firm (the "Third Appraiser"; the Second and Third
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Appraisers shall not be permitted to see or otherwise have access to, or be
informed of, the results of the Initial Determination and the Second
Determination, as applicable, or any component of either appraiser's
analysis that led to its conclusions and each of the Parent and the Gray
Employees agrees to comply with the foregoing provision) jointly
<PAGE>
4
agreed upon and selected by the Initial Appraiser and the Second Appraiser
shall make a determination of the fair market value thereof, disregarding
any discount for minority interest or marketability of shares (the "Third
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Determination"), and if the Third Determination (i) falls within the range
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of values that is between the Lower Appraised Amount (as defined below) and
the Higher Appraised Amount (as defined below), "Fair Market Value" shall
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be the Third Determination and the Parent and the selling Gray Employee(s)
shall split the cost of the Second Appraiser and the Third Appraiser, or
(ii) is below the Lower Appraised Amount, "Fair Market Value" shall be the
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Lower Appraised Amount and the selling Gray Employee(s) shall pay the cost
of the Second Appraiser and the Third Appraiser; or (iii) is above the
Higher Appraised Amount, "Fair Market Value" shall be the Higher Appraised
-----------------
Amount and the Parent shall pay the cost of the Second Appraiser and the
Third Appraiser. Subsequent to a Public Offering, the term "Fair Market
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Value" shall mean the price per share equal to the average of the last
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sales price of Parent Common Stock on each of the last thirty trading days
prior to the Valuation Date (the "Repurchase Calculation Period") on each
-----------------------------
exchange on which the Parent Common Stock may at the time be listed or, if
there shall have been no sales on any of such exchanges during the
Repurchase Calculation Period, the average of the closing bid and asked
prices on each such exchange on each day during the Repurchase Calculation
Period or, if there are no such bid and asked prices during the Repurchase
Calculation Period on the next preceding five dates on which such bid and
asked prices occurred or, if the Parent Common Stock shall not be so
listed, the average of the closing sales prices as reported by Nasdaq
during the Repurchase Calculation Period in the over-the-counter market. As
used herein, "Lower Appraised Amount" means the lower of the Initial
Determination and the Second Determination and "Higher Appraised Amount"
means the higher of the Initial Determination and the Second Determination.
"Family Group" shall have the meaning ascribed to such term in Section
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8.2.
"Financing Default" shall mean an event which constitutes (or which
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with notice or lapse of time or both would constitute) an event of default
(which event of default has not been cured or waived) under any of the
following as originally entered into or as they may be amended from time to
time: (i) any agreement under which an amount of indebtedness of the
Parent or the Company in excess of $5,000,000 is outstanding as of the time
of the aforementioned event, and any extensions, renewals, refinancings or
refundings thereof in whole or in part; (ii) any provision of the Parent's
or the Company's or any of their subsidiaries' certificates of
incorporation as in effect on the Closing Date; (iii) any amendment of,
supplement to or other modification of any of the instruments referred to
in clauses (i) or (ii) above; and (iv) any of the securities issued
pursuant to or whose terms are governed by the terms of any of the
agreements set forth in clauses (i) and (ii) above, and any extensions,
renewals, refinancings or refundings thereof in whole or in part.
"Fiscal Year" means the calendar year ending on October 31 of each
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year.
"GAAP" means generally accepted accounting principles in the United
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States of America in effect from time to time.
<PAGE>
5
"Gray Employees" has the meaning set forth in Section 9.13(a).
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"Gray Members" shall have the meaning ascribed to such term in the
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preamble hereto.
"Immediate Family Member" shall mean, with respect to any Person, a
-----------------------
spouse, parent, child or sibling of such Person.
"Incidental Registration" has the meaning set forth in Section 9.2(a).
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"Indemnitee" shall have the meaning ascribed to such term in Section
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4.3.
"Initial Members" means the Vestar Member and the Gray Members.
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"Interest" means a limited liability company interest in the LLC as
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provided in this Agreement and under the LLC Act and includes any and all
rights and benefits to which the holder of such Interest may be provided
under this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement. Interests shall be
expressed as a number of Units.
"Joining Member" has the meaning set forth in Section 9.3(a)(iv).
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"Liquidator" has the meaning set forth in Section 7.3.
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"Liquidity Closing" shall have the meaning as ascribed to such term in
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Section 9.13(c).
"Liquidity Event" has the meaning set forth in Section 9.13(a).
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"Liquidity Notice" has the meaning set forth in Section 9.13(c).
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"LLC" shall have the meaning ascribed to such term in the preamble to
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this Agreement.
"LLC Act" means the Delaware Limited Liability Company Act, 6 Del. C.
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(S)(S) 18-101, et seq., as it may be amended from time to time, and any
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successor to such statute.
"LLC Assets" means all right, title and interest of the LLC in and to
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all or any portion of the assets and other rights of the LLC and any
property (real or personal) or estate acquired in exchange therefor or in
connection therewith.
"Managing Member" means the Vestar Member and its successor or assign
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in its capacity as managing member of the LLC.
<PAGE>
6
"Member" means a Person (a) (i) who is an Initial Member or (ii) who
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is a transferee of an Interest in accordance with the provisions of Article
VIII and (b) who has not resigned or withdrawn as a Member or been
dissolved. Reference to a "Member" shall be to any one of the Members.
"Merger Agreement" means the Agreement and Plan of Merger dated as of
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February 2, 1999, among Parent, the Company, SJKAcquisition, Inc. and Pearl
Acquisition Corp., as the same may be amended, supplemented or otherwise
modified from time to time.
"Net Income (Loss)" for any Fiscal Period means the taxable income or
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loss of the LLC for such period as determined in accordance with the
accounting method used by the LLC for federal income tax purposes with the
following adjustments: (i) any income of the LLC that is exempt from
federal income taxation and not otherwise taken into account in computing
Net Income (Loss) shall be added to such taxable income or loss; (ii) if
the Carrying Value of any asset differs from its adjusted tax basis for
federal income tax purposes, any depreciation, amortization or gain
resulting from a disposition of such asset shall be calculated with
reference to such Carrying Value; (iii) upon an adjustment to the Carrying
Value of any asset, pursuant to the definition of Carrying Value, the
amount of the adjustment shall be included as gain or loss in computing
such taxable income or loss; and (iv) except for items in (i) above, any
expenditures of the LLC not deductible in computing taxable income or loss,
not properly capitalizable and not otherwise taken into account in
computing Net Income (Loss) pursuant to this definition shall be treated as
deductible items.
"90 Day Period" has the meaning set forth in Section 9.3(a)(iii).
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"Noncompete Period" has the meaning set forth in Section 10.13(a)(i).
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"Non-Demanding Members" shall have the meaning ascribed to such term
---------------------
in Section 9.3(a)(ii).
"Offer" shall have the meaning as ascribed to such term in Section
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9.7.
"Offeree" has the meaning set forth in Section 9.7.
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"Offeror" shall have the meaning as ascribed to such term in Section
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9.7.
"Organizational Expenses" means all costs and expenses of the LLC and
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the Managing Member arising out of or relating to this Agreement, the
Merger, the Merger Agreement or the transactions contemplated hereby and
thereby, including all fees and expenses of counsel to the LLC and the
Managing Member.
"Original Agreement" has the meaning ascribed to such term in the
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recitals hereto.
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7
"Parent" has the meaning ascribed to such term in the preamble hereto.
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"Parent Common Stock" means the common stock, $.01 par value per
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share, of Parent.
"Percentage Interest" means, with respect to any Member, such Member's
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Interest expressed as a percentage of all Interests of all Members,
determined by dividing the number of Allocated Shares allocated to such
Member by the total number of Allocated Shares then outstanding and
allocated to all Members. The Percentage Interests of the Members
initially will be determined by reference to Schedule 1.
"Permitted Transferee" has the meaning ascribed to such term in
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Section 8.2.
"Person" means any individual, company, joint venture, corporation,
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partnership, limited liability company, trust, unincorporated organization
or government or any department or agency thereof.
"Post Offering Purchase" has the meaning set forth in Section
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9.3(a)(iii).
"Proceeds" shall have the meaning ascribed to such term in Section
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5.2(a).
"Public Offering" shall mean the sale of Parent Common Stock to the
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public pursuant to an effective registration statement filed under the
Securities Act, which results in an active trading market in such
securities (it being understood that such an active trading market shall be
deemed to exist if, without limitation, such securities are listed on a
national securities exchange or on the NASDAQ National Market).
"Restricted Group" shall have the meaning as ascribed to such term in
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Section 10.13(a)(i).
"Rule 144 Request" has the meaning set forth in Section 9.8.
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"Sale Notice" has the meaning set forth in Section 9.7.
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"SEC" means the Securities and Exchange Commission or any other
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federal agency at the time administering the Securities Act or the Exchange
Act.
"Securities Act" means the Securities Act of 1933, as amended.
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"Share Permitted Transferee" has the meaning set forth in Section 9.9.
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"Shares" shall mean the Shares of Parent Common Stock owned by the LLC
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following the effective time of the Acquisition Merger and shall include
the shares or other securities of Parent that are distributed in respect of
such Common Stock and the
<PAGE>
8
shares or other securities of any other issuer for which such shares of
Common Stock shall be exchanged or into which such shares of Common Stock
shall be converted.
"Stockholders' Agreement" means that certain Stockholders' Agreement
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dated as of the date hereof among the LLC, Parent, the Company, the Members
and [other management stockholders].
"Tagging Stockholder" has the meaning set forth in Section 9.4(a).
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"Tagging Unitholder" shall have the meaning ascribed to such term in
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Section 8.3(a).
"Tax Matters Member" shall have the meaning ascribed to such term in
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Section 6.2.
"Third Party" shall mean any Person other than the Members, Parent,
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the Company and their respective Affiliates.
"transfer" shall have the meaning ascribed to such term in Section
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8.1.
"Transfer" shall have the meaning ascribed to such term in Section
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9.1.
"Transferring Stockholder" has the meaning set forth in Section
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9.4(a).
"Transferring Unitholder" shall have the meaning ascribed to such term
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in Section 8.3(a).
"Unit" means a fractional share of the Interests of all Members. The
----
number of Units outstanding and the holders thereof are set forth on
Schedule 1, as such Schedule may be amended from time to time pursuant to
Section 3.1.
"Vestar Member" has the meaning ascribed to such term in the preamble
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hereto.
ARTICLE II
General Provisions
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SECTION 2.1 Formation. The LLC was formed under the provisions of
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the LLC Act. The Vestar Member is hereby appointed the Managing Member of
the LLC. The Members hereby agree to continue the LLC as a limited
liability company pursuant to the Act, upon the terms and subject to the
conditions set forth in this Agreement. The Managing Member is hereby
designated as an authorized person, within the meaning of the LLC Act, to
execute, deliver and file any amendments and/or restatements of the
Certificate and any other certificates necessary for the LLC to qualify to
do business in a jurisdiction in which the LLC may wish to conduct
<PAGE>
9
business. The execution by the Managing Member alone of any of the
foregoing certificates (and any amendments and/or restatements thereof)
shall be sufficient.
SECTION 2.2 Name. The LLC shall conduct its activities under the
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name of Vestar/Gray Investors LLC or such other name as the Managing Member
shall determine in accordance with this Section 2.2. The Managing Member
shall have the power at any time to change the name of the LLC; provided,
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that the name shall always contain the words "Limited Liability Company" or
the letters "LLC". Prompt notice of any such change shall be given to each
Member.
SECTION 2.3 Term. The term of the LLC commenced on the date of the
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filing of the Certificate and shall continue until the earlier of (a)
December 31, 2009 and (b) such time as the Vestar Member does not own at
least 10% of the total number of Allocated Shares allocated to such Vestar
Member immediately following the Effective Time of the Acquisition Merger,
unless sooner dissolved, wound up and terminated in accordance with Article
VII; notwithstanding any termination of the LLC, the agreements of the
parties set forth in Section 10.13 shall survive the termination of this
Agreement in accordance with their terms.
SECTION 2.4 Purpose; Powers. (a) The purposes of the LLC shall be
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to (i) acquire Shares of Company Common Stock from the Gray Members, (ii)
hold Shares that may be issued in exchange for Shares of Company Common
Stock in the Reorganization Merger referred to in the Merger Agreement,
(iii) purchase and acquire 100% of the capital stock of Acquisition, (iv)
hold Shares that may be issued in exchange for Shares of the capital stock
of Acquisition in the Acquisition Merger referred to in the Merger
Agreement, and (v) do all things necessary or incidental to the foregoing,
including exercising the rights of a holder of shares of Company Common
Stock and its rights under the Stockholders' Agreement.
(b) In furtherance of its purposes, the LLC shall have all powers
necessary, suitable or convenient for the accomplishment of its purposes,
alone or with others, including the following, subject to the terms of this
Agreement:
(i) to receive, hold and otherwise exercise all rights,
powers, privileges and other incidents of ownership or possession with
respect to the Shares held by the LLC, including, but not limited to (A)
exercising all voting and other corporate governance rights available to
holders of Shares, (B) receiving and investing any cash dividends declared
and paid by Parent in respect of the Shares owned from time to time by the
LLC or any other cash or cash equivalents owned by the LLC from time to
time and (C) selling, pledging, transferring or otherwise disposing of the
Shares held by the LLC;
(ii) to open, maintain and close bank accounts and draw checks
and other orders for the payment of moneys;
(iii) to engage accountants, custodians, attorneys, investment
bankers and other advisors as may be necessary or advisable for the due and
proper administration of the LLC Assets, and to compensate them as may be
reasonably necessary or advisable;
<PAGE>
10
(iv) to enter into, make and perform all contracts, agreements
and other undertakings as may be necessary or advisable or incident to
carrying out its purposes; and
(v) to distribute at any time and from time to time to Members
cash or investments or other property of the LLC, or any combination
thereof.
SECTION 2.5 Place of Business. The LLC shall maintain a registered
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office at CT Corporation System, 1209 Orange Street, Wilmington, New Castle
County, Delaware 19801, or such other office within the State of Delaware as the
Managing Member determines. The LLC shall maintain an office and principal
place of business at 1225 17th Street, Suite 1660, Denver, Colorado 80202 or at
such other place as the Managing Member may from time to time determine to be
its principal place of business. The name and address of the LLC's registered
agent as of the date of this Agreement is CT Corporation System, 1209 Orange
Street, Wilmington, New Castle County, Delaware 19801.
SECTION 2.6 Business Transactions of a Member with the LLC. In
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accordance with section 18-107 of the Act, and except as otherwise provided in
this Agreement, a Member may (but shall be under no obligation to) lend money
to, borrow money from, act as surety, guarantor or endorser for, guarantee or
assume one or more specific obligations of, provide collateral for, and transact
other business with, the LLC and, subject to applicable law, shall have the same
rights and obligations with respect to any such matter as a person who is not a
Member.
SECTION 2.7 Fiscal Year. The fiscal year of the LLC (the "Fiscal
-----------
Year") for financial statement and Federal income tax purposes shall, except as
otherwise required in accordance with the Code, end on October 31 of each year.
SECTION 2.8 No State-Law Partnership. The Members intend that the
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LLC not be a partnership (including, without limitation, a limited partnership)
or joint venture and that no Member be an agent, partner or joint venturer of
any other Member for any purposes other than Federal and state tax purposes, and
this agreement shall not be construed to suggest otherwise.
ARTICLE III
Members and Interests
---------------------
SECTION 3.1 Members. Each Member's Interest in the LLC shall be
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represented by Units. Schedule 1 hereto contains the name and address and
number of Units owned by each Member as of the date of this Agreement. Schedule
1 shall be revised by the Managing Member from time to time to reflect the
admission or withdrawal of a Member or the issuance, transfer, assignment,
redemption, relinquishment to the LLC or other cancellation of Units in the LLC
in accordance with the terms of this Agreement and other modifications to or
changes in the information set forth therein.
<PAGE>
11
SECTION 3.2 Certificates. Interests in the LLC may be evidenced by a
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certificate of limited liability company interest issued by the LLC. Such
Certificates shall bear the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED
OR ASSIGNED TO ANY PERSON EXCEPT IN ACCORDANCE WITH ARTICLE VIII OF
THE AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF
VESTAR/GRAY INVESTORS LLC DATED AS OF [ ], 1999."
SECTION 3.3 Liability of Members. Except as otherwise expressly
--------------------
required by law, all debts, obligations and liabilities of the LLC, whether
arising in contract, tort or otherwise, shall be solely the debts, obligations
and liabilities of the LLC, and no Member shall be obligated personally for any
such debt, obligation or liability of the LLC solely by reason of being a
Member.
SECTION 3.4 Access to and Confidentiality. (a) Each Member shall
-----------------------------
have the right to obtain from the LLC from time to time upon reasonable demand
for any purpose reasonably related to the Member's interest as a Member of the
LLC the documents and other information described in section 18-305(a) of the
Act.
(b) Any demand by a Member pursuant to this Section 3.4 shall be in
writing and shall state the purpose of such demand.
ARTICLE IV
Management and Operation of the LLC
-----------------------------------
SECTION 4.1 Management. (a) Except as set forth in Section 4.1(b),
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the management, control and operation of the LLC shall be vested exclusively in
the Managing Member, and no other Member shall have any right to participate in
or exercise control or management power over the business and affairs of the
LLC. Except as set forth in Section 4.1(b), the Managing Member shall have full
power and authority and absolute discretion to do all things deemed necessary or
desirable by it to conduct the business of the LLC on behalf and in the name of
the LLC.
(b) Notwithstanding anything in this Agreement to the contrary, the
Managing Member shall not take any of the following actions on behalf of the LLC
without the prior written consent of the Gray Members:
(i) the conduct of any business by the LLC other than in accordance
with the purposes of the LLC enumerated in Section 2.4;
(ii) any Transfer of the Gray Members' Allocated Shares except
pursuant to this Agreement;
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12
(iii) any voting of the Gray Members' Allocated Shares except
pursuant to this Agreement; and
(iv) the amendment of this Agreement other than pursuant to Section
10.7.
SECTION 4.2 Certain Duties and Obligations of the Members. No Member
---------------------------------------------
shall take any action so as to cause the LLC to be classified for federal income
tax purposes as an association taxable as a corporation and not as a
partnership.
SECTION 4.3 Indemnification of the Managing Member. The LLC shall
--------------------------------------
indemnify and hold harmless the Managing Member, its Affiliates and its
respective officers, directors, employees, partners and agents and the heirs,
executors, successors and assigns of each of the foregoing (individually, an
"Indemnitee") from and against any and all losses, claims, demands, costs,
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damages, liabilities, joint and several, expenses of any nature (including
reasonable attorneys' fees and disbursements), judgments, fines, settlements and
other amounts arising from any and all claims, demands, actions, suits or
proceedings, whether civil, criminal, administrative or investigative, in which
the Indemnitee was involved or may be involved, or threatened to be involved, as
a party or otherwise, arising out of or in connection with the business of the
LLC, the Managing Member's status as Managing Member or any action taken by the
Managing Member under this Agreement or otherwise on behalf of the LLC,
regardless of whether the Indemnitee continues to be the Managing Member, an
Affiliate, or an officer, director, employee or agent of the Managing Member at
the time any such liability or expense is paid or incurred, to the fullest
extent permitted by the LLC Act and all other applicable laws; provided, that an
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Indemnitee shall be entitled to indemnification hereunder only to the extent
that such Indemnitee's conduct did not constitute gross negligence or willful
misconduct. The termination of any proceeding by settlement, judgment, order,
conviction, or upon a plea of nolo contendere or its equivalent shall not, of
---- ----------
itself, create a presumption that such Indemnitee's conduct constituted gross
negligence or willful misconduct. The right of any Indemnitee to the
indemnification provided herein shall be cumulative of, and in addition to, any
and all rights to which such Indemnitee may otherwise be entitled by contract or
as a matter of law or equity and shall extend to such Indemnitee's successors,
assigns and legal representatives. Any indemnification under this Section 4.3
(unless ordered by a court) shall be made by the LLC except only in the specific
case upon a determination, upon clear and convincing evidence that
indemnification of the Managing Member, officer, director, employee, partner or
agent is not proper in the circumstances because he has not met the applicable
standard of conduct as set forth in this Section 4.3.
SECTION 4.4 Expenses. Expenses incurred by an Indemnitee in
--------
defending any claim, demand, action, suit or proceeding subject to Section 4.3
shall, from time to time, be advanced by the LLC prior to the final disposition
of such claim, demand, action, suit or proceeding upon receipt by the LLC of an
undertaking reasonably acceptable in form and substance to the Managing Member
by or on behalf of the Indemnitee to repay such amount if it shall be determined
that such Person is not entitled to be indemnified as authorized in Section 4.3.
Such expenses (including attorneys' fees) incurred by other employees and agents
may be so paid upon such terms and conditions, if any, as the Managing Member
deems appropriate.
<PAGE>
13
SECTION 4.5 Indemnification Rights Non-Exclusive. The
------------------------------------
Indemnification provided by Section 4.3 shall be in addition to any other rights
to which those indemnified may be entitled under any agreement as a matter of
law or equity or otherwise, both as to action in the Indemnitee's capacity as
the Managing Member, as an Affiliate or as an officer, director, employee or
agent of the Managing Member and as to any action in another capacity, and shall
continue as to an Indemnitee who has ceased to serve in such capacity and shall
inure to the benefit of the heirs, successors, assigns and administrators of the
Indemnitee.
SECTION 4.6 Insurance. The LLC may purchase and maintain insurance,
---------
at the LLC's expenses, on behalf of the Managing Member and such other Persons
as the Managing Member shall determine, against any liability that may be
asserted against, or any expense that may be incurred by, such Person in
connection with the activities of the LLC and/or the Managing Member's acts or
omissions as the Managing Member of the LLC regardless of whether the LLC would
have the power to indemnify such Person against such liability under the
provisions of this Agreement.
SECTION 4.7 Assets of the LLC. Any indemnification under Section 4.3
-----------------
shall be satisfied solely out of the assets of the LLC. No Member shall be
subject to personal liability or required to fund or cause to be funded any
obligation by reason of these indemnification provisions.
SECTION 4.8 Loans to the LLC. In the event the Managing Member
----------------
determines at any time or from time to time that the LLC requires or will
shortly require additional funds to pay any costs and expenses of the LLC, the
Managing Member may advance funds to the LLC in the form of a loan, which loan
shall bear interest at the Vestar Member's cost of funds. Notwithstanding
anything in this Agreement to the contrary, all such loans shall be repaid in
full (including any interest accrued thereon) prior to the LLC making any cash
distributions to the Members pursuant this Agreement, including pursuant to
Section 5.2 or 7.3.
SECTION 4.9 Voting of Shares
----------------
(a) Proportional Voting. Subject to Section 4.9(b), the Managing Member
-------------------
shall vote the Shares and/or exercise any consents relating to the Shares as
directed in writing by the Members in proportion to their Percentage Interests.
(b) Election of Directors.
---------------------
(A) The Managing Member hereby agrees that so long as this Agreement
shall remain in effect, it will vote all of the Shares so as to elect and,
during such period, to continue in office a Board of Directors of the Parent and
the Company, each consisting solely of the following:
(i) 3 designees of the Vestar Member (so long as the Vestar Member
and its Affiliates are allocated an aggregate number of Allocated
Shares not less than one-half (1/2) of the number of Allocated
Shares allocated to the Vestar Member on the date of execution
and delivery of this Agreement)
<PAGE>
14
or, if the foregoing condition is not satisfied, 2 designees of
the Vestar Member (so long as the Vestar Member and its
Affiliates are allocated an aggregate number of Allocated Shares
not less than one-third (1/3) of the total number of Allocated
Shares allocated to the Vestar Member on the date of its
execution and delivery of this Agreement) or, if the foregoing
condition is not satisfied, 1 designee of the Vestar Member (so
long as the Vestar Member and its Affiliates are allocated an
aggregate number of Allocated Shares not less than one-tenth
(1/10) of the total number of Allocated Shares allocated to the
Vestar Member immediately following the Effective Time of the
Acquisition Merger), provided, however, that so long as the Gray
-------- -------
Members have the right to appoint at least 1 designee and the
Vestar Member (and its Affiliates) has more Allocated Shares
allocated to it than the aggregate number of Allocated Shares
allocated to the Gray Members (and their Permitted Transferees)
the Vestar Member shall have the right to appoint at least as
many designees as the Gray Members; and
(ii) 2 designees of the Gray Members (so long as the Gray Members
and their respective Affiliates are allocated an aggregate number
of Allocated Shares not less than one-half (1/2) of the number of
Allocated Shares allocated to the Gray Members on the date of
their execution and delivery of this Agreement) or, if the
foregoing condition is not satisfied, 1 designee of the Gray
Members (so long as the Gray Members and their respective
Affiliates are allocated an aggregate number of Allocated Shares
not less than one-fifth (1/5) of the number of Allocated Shares
allocated to the Gray Members immediately following the Effective
Time of the Acquisition Merger).
(B) If at any time during the period specified in paragraph (A)
above, the Vestar Member or the Gray Members shall notify the other Stockholders
of its or their desire to remove, with or without Cause, any director of the
Parent or of the Company previously designated by it or them, each Member shall
vote all of the Allocated Shares attributable to it so as to remove such
director.
(C) If at any time during the period specified in paragraph (A) above,
any director previously designated by the Vestar Member or the Gray Members
ceases to serve on the Board of Directors of the Parent or the Company (whether
by reason of death, resignation, removal or otherwise), the Member who
designated such director shall be entitled to designate a successor director to
fill the vacancy created thereby.
(D) The parties hereto hereby acknowledge that any individual
designated as a director of the Parent or of the Company may be removed for
Cause pursuant to the Parent's (or the Company's) by-laws and applicable law
with or without the consent of the Member which designated such individual. No
such removal of an individual designated pursuant to this Section 2.1 shall
affect any of the Stockholders' rights to designate a different individual
pursuant to this Section 2.1.
<PAGE>
15
(E) No fees shall be paid by the Parent or any of its subsidiaries to
any member of the Board of Directors in his capacity as such; provided that the
--------
foregoing shall not limit reimbursement of expenses in accordance with the
expense reimbursement policy of the Parent and its subsidiaries; and provided
--------
further, that it is understood that the Parent shall pay an advisory fee to
- -------
Vestar Capital Partners, an affiliate of the Vestar Member, in the amount of
$500,000 per year pursuant to an advisory agreement to be entered into between
Vestar Capital Partners and Parent.
(c) Other Voting Matters. Each Member agrees that, so long as this
--------------------
Agreement shall remain in effect and (i) the Vestar Member and its Affiliates
beneficially own not less than 50% of the Percentage Interest held by them on
the date hereof, and (ii) the LLC holds Shares representing not less than 25% of
the voting power of Parent, each Member will direct the LLC to vote all of the
Allocated Shares allocated to such Member to ratify, approve and adopt any and
all actions adopted or approved by the Board of Directors of the Parent.
(d) Upon instruction received from any Member, the Managing Member, unless
the Managing Member reasonably believes that any such action would be unlawful,
or would have a material adverse effect upon the LLC, shall exercise, in
accordance with such Member's instructions, any rights of a stockholder with
respect to the Allocated Shares allocated to such Member, other than voting
(which is dealt with in Section 4.9(a), (b) and (c)) or transfer (which is dealt
with in Articles VIII and IX).
ARTICLE V
Capital Contributions;
----------------------
Distributions
-------------
SECTION 5.1 Capital Contributions. No Member shall be required to
---------------------
make a Capital Contribution to the LLC except as set forth in Schedule 2. No
Member shall have any obligation to restore any negative balance in the Member's
Capital Account upon liquidation of the LLC. No Member shall be entitled to
withdraw all or any part of its Capital Contributions except as expressly
provided in this Agreement. No interest shall be payable by the LLC on the
Capital Contributions of any Member except as otherwise provided herein.
SECTION 5.2 Distributions.
-------------
(a) Distributions With Respect to Allocated Shares With respect to
----------------------------------------------
any Transfer of Shares by the LLC pursuant to Article IX hereof, the LLC shall
distribute the proceeds it receives from such Transfer and any reimbursements it
receives in connection with such Transfer less any and all unreimbursed costs,
fees and expenses incurred and paid for by the LLC in connection with such
Transfer (the "Proceeds") to the Member(s) whose Allocated Shares were included
--------
in such Transfer, pro rata on the basis of the number of Allocated Shares
--- ----
actually included in such Transfer, and with respect to cash and any other
property received by the LLC as a distribution in respect of the Allocated
Shares (including any property received as consideration in respect of the
Shares in a merger or other business combination), the LLC shall distribute such
<PAGE>
16
cash or other property pro rata to the Members to which such Allocated Shares
--- ----
were allocated as of the date upon which the LLC received such distribution. All
distributions to be made pursuant to this Section 5.2(a) shall be made by the
LLC within three Business Days of its receipt of the Proceeds.
(b) Other Property. Distributions of property other than those
--------------
described in Section 5.2(a) shall be made if, as and when determined by the
Managing Member in its sole and absolute discretion. Each distribution of such
property shall be distributed to the Members in proportion to their respective
Percentage Interests at the time the cash or other property being distributed is
received by the LLC.
(c) The parties hereto acknowledge and agree that notwithstanding that
the provisions of this Article V and Article VII hereof make reference only to
Members, the distributions and allocations provided for in this Article V and
Article VII hereof shall also apply to Permitted Transferees.
SECTION 5.3 Limitations on Distributions. The LLC shall not make a
----------------------------
distribution to a Member if such distribution would violate the LLC Act.
ARTICLE VI
Books and Reports; Tax Matters; Capital Accounts; Allocations
-------------------------------------------------------------
SECTION 6.1 General Accounting Matters. (a) Each Member shall be
--------------------------
supplied with the LLC information necessary to enable such Member to prepare in
a timely manner its Federal, state and local income tax returns and such other
financial or other statements and reports that the Managing Member deems
appropriate.
(b) The Managing Member shall keep or cause to be kept books and
records pertaining to the LLC's business showing all of its assets and
liabilities, receipts and disbursements, realized profits and losses, Members'
Capital Accounts and all transactions entered into by the LLC. Such books and
records of the LLC shall be kept at the office of the LLC and the Members and
their representatives shall at all reasonable times have free access thereto for
the purpose of inspecting or copying the same. The LLC's books of account shall
be kept on an accrual basis or as otherwise provided by the Managing Member and
otherwise in accordance with GAAP, except that for income tax purposes such
books shall be kept in accordance with applicable tax accounting principles.
(c) All determinations, valuations and other matters of judgment
required to be made for accounting and tax purposes under this Agreement shall
be made by or under the direction of the Managing Member and shall be conclusive
and binding on all Members, former Members, their successors or legal
representatives and any other Person except for manifest errors or fraud, and to
the fullest extent permitted by law no such Person shall have the right to an
accounting or an appraisal of the assets of the LLC or any successor thereto
except for manifest errors or fraud.
<PAGE>
17
(d) The LLC shall promptly supply each Member with copies of all
information distributed to it by the Parent pursuant to Section 5.14 of the
Stockholders' Agreement.
SECTION 6.2 Certain Tax Matters. The taxable year of the LLC shall
-------------------
be the same as its Fiscal Year. The Tax Matters Member shall cause to be
prepared all federal, state and local tax returns of the LLC for each year for
which such returns are required to be filed and shall cause such returns to be
timely filed. The Tax Matters Member shall determine the appropriate treatment
of each item of income, gain, loss, deduction and credit of the LLC and the
accounting methods and conventions under the tax laws of the United States, the
several states and other relevant jurisdictions as to the treatment of any such
item or any other method or procedure related to the preparation of such tax
returns. The Tax Matters Member shall make the election to amortize
Organizational Expenses pursuant to section 709 of the Code and the regulation
promulgated thereunder. In addition, the Tax Matters Member, in its sole and
absolute discretion, may cause the LLC to make or refrain from making any and
all other elections permitted by the tax laws of the United States, the several
states and other relevant jurisdictions (including, but not limited to, the
election provided for in section 754 of the Code). The "tax matters partner"
for purposes of section 6231(a)(7) of the Code (the "Tax Matters Member") shall
------------------
be the Managing Member. The Tax Matters Member shall have all of the rights,
duties, powers and obligations provided for in sections 6221 through 6234 of the
Code with respect to the LLC.
SECTION 6.3 Capital Accounts. There shall be established for each
----------------
Member on the books of the LLC as of the date hereof, or such later date on
which such Member is admitted to the LLC, a capital account (each being a
"Capital Account"). Each Capital Contribution shall be credited to the Capital
- ----------------
Account of such Member on the date such contribution of capital is paid to the
LLC. In addition, each Member's Capital Account shall be (a) credited with such
Member's allocable share of any Net Income of the LLC, (b) debited with (i)
distributions to such Member of cash or the fair market value of other property
and (ii) such Member's allocable share of Net Loss of the LLC and expenditures
of the LLC described or treated under section 704(b) of the Code as described in
section 705(a)(2)(B) of the Code, and (c) otherwise maintained in accordance
with the provisions of the Code. Any other item which is required to be
reflected in a Member's Capital Account under section 704(b) of the Code or
otherwise under this Agreement shall be so reflected. Capital Accounts shall be
appropriately adjusted to reflect transfers of part (but not all) of a Member's
Interest. Interest shall not be payable on Capital Account balances.
Notwithstanding anything to the contrary contained in this Agreement, the LLC
shall maintain the Capital Accounts of the Members in accordance with the
principles and requirements set forth in section 704(b) of the Code and
Regulations section 1.704-1(b)(2)(iv).
SECTION 6.4 Allocations. (a) Net Income and Losses shall be
-----------
allocated among the Members in accordance with their Percentage Interests
provided, however, that Net Income and Losses with respect to any Transfer of
- -------- -------
Allocated Shares shall be allocated to the Member(s) whose Allocated Shares were
included in such Transfer, pro rata on the basis of the number of such Allocated
--- ----
Shares included in such Transfer.
<PAGE>
18
(b) For income tax purposes only, each item of income, gain, loss
and deduction of the LLC shall be allocated among the Members in the same manner
as the corresponding items of Net Income (Loss) and specially allocated items
are allocated for Capital Account purposes; provided that in the case of any
--------
asset of the LLC the Carrying Value of which differs from its adjusted tax basis
for U.S. federal income tax purposes, income, gain, loss and deduction with
respect to such asset shall be allocated solely for income tax purposes in
accordance with the principles of sections 704(b) and (c) of the Code (in any
manner determined by the Managing Member) so as to take account of the
difference between Carrying Value and adjusted basis of such asset.
ARTICLE VII
Dissolution
-----------
SECTION 7.1 Dissolution. (a) No Member shall have the right to
-----------
terminate this agreement or dissolve the LLC or withdraw or otherwise retire or
resign as a Member except pursuant to the prior written consent of (i) the
Managing Manager and (ii) Members representing more than 85% of the Percentage
Interests. Any purported withdrawal, retirement or resignation without such
prior written consent shall be void and of no effect. Except as expressly
provided for herein, a Member may not withdraw capital from the LLC.
(b) The LLC shall be dissolved and, except as specifically provided
herein, this Agreement shall terminate, upon the first to occur of any of
the following:
(i) December 31, 2009;
(ii) the bankruptcy, dissolution, resignation, or expulsion of
the Managing Member;
(iii) the sale, in one transaction or in a series of directly
related transactions, of all of the assets of the LLC;
(iv) the unanimous agreement of the Managing Member and the Gray
Members to dissolve the LLC; or
(v) on or after the earlier of (A) the consummation of a Public
Offering and (B) the fifth anniversary of the date hereof, upon the
request of the Vestar Member or the Gray Members.
Except as expressly set forth above, there are no other events pursuant to
which the LLC shall be dissolved and its affairs wound up. Furthermore, no
Member, except pursuant to the written consent of the Managing Member,
shall wind up or attempt to wind up the LLC. The LLC shall not be
dissolved upon the bankruptcy, any other bankruptcy event, if any,
described in the LLC Act, dissolution, death, insanity, retirement,
resignation or expulsion of any Member which is not the Managing Member.
Each Member agrees not
<PAGE>
19
to apply for judicial dissolution pursuant to Section 18-802 of the
Delaware Limited Liability Parent Act prior to June 30, 2004.
SECTION 7.2 Votes of Members. If an act or other event described in
----------------
Section 7.1(b) (ii) hereof occurs and the Members owning a majority of the
profits interests and a majority of the capital interests owned by all the
Members (excluding the Managing Member) within 90 days of the date of such act
or event, elect in writing to continue the business of the LLC such event or
other act shall not constitute a dissolution of the LLC.
SECTION 7.3 Winding-up; Final Distributions. (a) When the LLC is
-------------------------------
dissolved, the business and property of the LLC shall be wound up and liquidated
by the Managing Member or, by such liquidating trustee as may be appointed by
the Managing Member (the Managing Member or such liquidating trustee, as the
case may be, being hereinafter referred to as the "Liquidator"). In the event
----------
of a dissolution under the circumstances described in any of Section 7.1(b)(i),
(iv) or (v), after satisfying the obligations of clauses (i), (ii), (iii) and
(iv) below, the Shares shall be distributed pro rata to the Members in
accordance with their respective Percentage Interests. In all other
circumstances, the Liquidator shall use its best efforts to reduce to cash and
cash equivalent items such assets of the LLC as the Liquidator shall deem it
advisable to sell, subject to obtaining fair value for such assets and any tax
or other legal considerations. The Liquidator shall be responsible for winding
up and terminating the affairs of the LLC and shall determine all matters in
connection therewith (including, without limitation, the arrangements to be made
with creditors, to what extent and under what terms the assets of the LLC are to
be sold, and the amount or necessity of cash reserves to cover contingent
liabilities) as the Liquidator deems advisable and proper; and all decisions of
the Liquidator shall be made in accordance with the fiduciary duty owed by the
Liquidator to the LLC and each of the Members, and any disposition of the
properties of the LLC shall be by auction with prior notice to all Persons who
were Members at the time of the dissolution. The Liquidator shall thereafter
liquidate the assets of the LLC as promptly as is consistent with obtaining the
fair market value thereof, and the proceeds therefrom, to the extent sufficient
therefor, shall be applied and distributed in the following manner and order:
(i) to the payment of the expenses of the winding-up,
liquidation and dissolution of the LLC;
(ii) to pay all creditors of the LLC, other than Members, either
by the payment thereof or the making of reasonable provision therefor;
(iii) to establish reserves, in amounts established by the
Members or such Liquidator, to meet other liabilities of the LLC; and
(iv) to pay, in accordance with the provisions of this agreement
applicable to such loans or in accordance with the terms agreed among
them and otherwise on a pro rata basis, all creditors of the LLC that
--- ----
are Members, either by the payment thereof or the making of reasonable
provisions therefor.
<PAGE>
20
The remaining assets of the LLC shall be applied and distributed in
accordance with Section 5.2.
(b) Notwithstanding anything to the contrary in Section 7.3(a) hereof,
the Liquidator shall not sell any Allocated Shares of a Member without the
express written consent of such Member. Without such consent, any Allocated
Shares of such Member shall be distributed to such Member.
(c) After all of the assets of the LLC have been distributed, the LLC
shall terminate; if at any time thereafter any funds in any cash reserve fund
referred to in Section 7.3(a) hereof are released because the need for such cash
reserve fund has ended, such funds shall be distributed to the Members in the
same manner as if such distribution had been made pursuant to clauses (i)
through (iv) of Section 7.3(a) hereof.
SECTION 7.4 Further Assurances. Following the dissolution of the LLC
------------------
other than under the circumstances described in Section 7.1(b)(iii), the Shares
shall be distributed to the Members in accordance with their respective
Percentage Interests, and the Member's rights thereto shall be governed by the
Stockholders' Agreement, and each Member agrees that so long as the
Stockholders' Agreement remains in effect it will take all actions, and execute
all amendments or modifications to the Stockholders' Agreement and all other
certificates, agreements or other documents reasonably necessary to effect the
intentions of this Agreement and to ensure that each Member shall remain bound
by the terms of the Stockholders' Agreement with respect to the Allocated Shares
allocated to such Member to the same extent as it is bound by this Agreement.
ARTICLE VIII
Transfer of Member's Units
--------------------------
SECTION 8.1 Transfers to be Made Only as Permitted or Required by
-----------------------------------------------------
this Agreement. Subject to Section 8.2, the Gray Members may not, directly or
- --------------
indirectly, sell, assign, transfer, pledge or otherwise encumber or dispose of
(for purposes of this Article VIII, a "transfer") any Interests, except as
--------
specifically permitted or required by this Article VIII; any other purported
transfer shall be void and of no effect. The Vestar Member may transfer any
Interests freely, subject to Section 8.3 and, in the case of transfers to its
Affiliates, subject to written agreement by the transferee (in form and
substance reasonably satisfactory to the Managing Member) to be bound by this
Agreement as if the transferee were the transferring Member.
SECTION 8.2 Permitted Transfers. The Gray Members may transfer any
-------------------
of their Interests to (i) their respective beneficiaries, spouses, parents or
descendants or any executor, estate, trustee of the Gray Family Trust or the
Kelly Gray Trust (as applicable), guardian, committee, trustee or other
fiduciary acting as such on behalf or for the benefit of any such spouse, parent
or descendant (the Gray Members' "Family Group") or (ii) any trust, corporation,
------------
partnership or limited liability company, all of the beneficial interests in
which shall be held,
<PAGE>
21
directly or indirectly, by the Gray Members and/or one or more of the Family
Group of the Gray Members; provided, however, that during the period that any
-------- -------
such trust, corporation, partnership or limited liability company holds any
right, title or interest in any Interest, no person other than the Gray Members
or the Family Group of the Gray Members may be or become beneficiaries,
stockholders or general partners or members thereof. No transfer pursuant to
this Section 8.2 shall be valid unless the transferee agrees in writing (in form
and substance reasonably satisfactory to the Managing Member) to be bound by
this Agreement as if the transferee were the transferring Member. A transferee
under Section 8.1 or 8.2 is referred to as a "Permitted Transferee."
--------------------
SECTION 8.3 Tag-Along Rights. (a) So long as this Agreement shall
----------------
remain in effect, unless a Public Offering shall have occurred, with respect to
any proposed transfer by the Vestar Member or any of its Affiliates (in such
capacity, a "Transferring Unitholder") of Units (excluding any transfers by the
-----------------------
Vestar Member to its Affiliates), the Transferring Unitholder shall have the
obligation, and each other Member and its Permitted Transferees shall have the
right (such Member and its Permitted Transferees that exercise such right being
a "Tagging Unitholder") to require the proposed transferee to purchase from each
------------------
holder of Units a number of Units up to the product (rounded up to the nearest
whole number) of (i) the quotient determined by dividing (A) the aggregate
number of Units beneficially owned by such Tagging Unitholder and sought by the
Tagging Unitholder to be included in the contemplated transfer by (B) the
aggregate number of Units beneficially owned by the Transferring Unitholder and
the aggregate number of Units beneficially owned by all Tagging Unitholders and
sought by all Tagging Unitholders to be included in the contemplated transfer
and (ii) the total number of Units proposed to be acquired by the transferee in
the contemplated transfer, and at the same price per Unit and upon the same
terms and conditions (including, without limitation, time of payment and form of
consideration) as to be paid and given to the Transferring Unitholder, provided
--------
that in order to be entitled to exercise its right to sell Units to the proposed
transferee pursuant to this Section 8.3, a Tagging Unitholder must agree to make
to the transferee the same representations, warranties, covenants, indemnities
and agreements as the Transferring Unitholder agrees to make in connection with
the proposed transfer of the Units by the Transferring Unitholder (except that
in the case of representations and warranties pertaining specifically to the
Transferring Unitholder, a Tagging Unitholder shall make the comparable
representations and warranties pertaining specifically to itself, and except
that in the case of covenants or agreements capable of performance only by
certain holders of Units, such covenants or agreements shall be made only by
such certain holders of Units); and provided further that all representations,
----------------
warranties, covenants, agreements and indemnities made by the Transferring
Unitholder and the Tagging Unitholders pertaining specifically to themselves
shall be made by each of them severally and not jointly; and provided further
-------- -------
that each of the Transferring Unitholder and each Tagging Unitholder shall be
severally (but not jointly) liable for breaches of representations, warranties,
covenants and agreements of or (in the case of representations and warranties)
pertaining to the LLC or Parent and its subsidiaries, as the case may be, and
for indemnification obligations arising out of or relating to any such breach or
otherwise pertaining to the LLC, on a pro rata basis, such liability of each
such Unitholder not to exceed such Unitholder's pro rata portion of the gross
proceeds of the sale.
(b) The Transferring Unitholder shall give notice to all relevant
holders of Units and their Permitted Transferees of each proposed transfer
giving rise to the rights of the Tagging
<PAGE>
22
Unitholders set forth in the first sentence of Section 8.3(a) at least 30 days
prior to the proposed consummation of such transfer, setting forth the name of
the Transferring Unitholder, the number of Units proposed to be so transferred,
the name and address of the proposed transferee, the proposed amount and form of
consideration and other terms and conditions offered by the proposed transferee,
and a representation that the proposed transferee has been informed of the tag-
along rights provided for in this Section 8.3 and has agreed to purchase Units
in accordance with the terms hereof. The tag-along rights provided by this
Section 8.3 must be exercised by each Tagging Unitholder within 15 days
following receipt of the notice required by the preceding sentence, by delivery
of a written notice to the Transferring Unitholder as the case may be,
indicating such Tagging Unitholder's desire to exercise its rights and
specifying the number of Units it desires to sell. If the proposed transferee
fails to purchase Units from any Tagging Unitholder that has properly exercised
its tag-along rights, then the Transferring Unitholder shall not be permitted to
make the proposed transfer, and any such attempted transfer shall be void and of
no effect.
(c) If any of the Tagging Unitholders exercise their rights under
Section 8.3(a), the closing of the purchase of Units with respect to which such
rights have been exercised shall take place concurrently with the closing of the
sale of the Transferring Unitholder's Units. No transfer shall occur pursuant
to this Section 8.3 unless the transferee shall agree in writing to become a
party to, and be bound by this Agreement to the same extent as its transferor.
SECTION 8.4 Drag-Along Rights. So long as this Agreement shall
-----------------
remain in effect, if the Vestar Member or any of its Affiliates receives an
offer from a Third Party to purchase (whether pursuant to a sale of units, a
merger or otherwise) all, but not less than all, outstanding Units subject to
this Agreement and such offer is accepted by the Vestar Member, then each holder
of Units hereby agrees that it will, if requested by the Vestar Member, transfer
all Units owned by it to such Third Party on the terms of the offer so accepted
by the Vestar Member, including making the same representations, warranties,
covenants, indemnities and agreements that the Vestar Member agrees to make
(except that, in the case of representations and warranties pertaining
specifically to the Vestar Member, each other holder of Units shall make the
comparable representations and warranties pertaining specifically to itself, and
except that, in the case of covenants or agreements capable of performance only
by certain holders of Units, such covenants or agreements shall be made only by
such certain holders of Units, and provided that all representations,
warranties, covenants, agreements and indemnities made by the holders of Units
pertaining specifically to themselves shall be made by each of them severally
and not jointly and provided further that each holder of Units shall be
severally (but not jointly) liable for breaches of representations, warranties,
covenants and agreements of or (in the case of representations and warranties)
pertaining to the LLC, or the Parent and its subsidiaries, as the case may be,
and for indemnification obligations arising out of or relating to any such
breach or otherwise pertaining to the LLC, on a pro rata basis, such liability
of each such holder of Units not to exceed such holder of Units' pro rata
portion of the gross proceeds of the sale).
SECTION 8.5 No Transfers. Other than as set forth in this agreement,
------------
no Member, without the prior written consent of the Managing Member (which
consent may be withheld in the sole discretion of the Managing Member), shall
(i) transfer all or any part of its direct or indirect Interest in the LLC or
(ii) resign as a Member. Without limiting the limitations set forth in this
Section 8.5, no transfer of any Interest in the LLC may be made unless the
<PAGE>
23
transferring Member delivers to the LLC an opinion of counsel stating, or other
evidence satisfactory to the LLC, that (i) registration of the transferred
Interest in the LLC is not required under the Securities Act, and such transfer
shall not violate applicable state securities or blue sky registration
requirements in any respect, and (ii) such transfer shall not cause the LLC to
be treated as an association taxable as a corporation rather than as a
partnership subject to the provisions of Subchapter K of the Code. Any such
opinion of counsel shall be rendered by counsel, and shall be in form and
substance, reasonably acceptable to the Managing Member and all costs and
expenses thereof shall be borne by the transferring Member. In no event shall
any Interest in the LLC be transferred to a minor (except pursuant to a bequest
by a Member, provided that any right exercised pursuant to this Agreement shall
--------
be exercised on behalf of such minor by an appropriately appointed custodian
under the Uniform Transfers to Minors Act) or an incompetent or in violation of
any state or Federal law. No consent to a transfer pursuant to this Section 8.5
shall be construed as a consent to any other transfer of the same or any other
Interest or Member.
SECTION 8.6 Other Transfer Provisions. If any Interest is
-------------------------
transferred during any accounting period pursuant to this Agreement, each item
of income, gain, loss, expense, deduction and credit and all other items
attributable to such Interest for such period shall be divided and allocated
between the transferor and the transferee by taking into account their varying
Interests during such period in accordance with section 706(d) of the Code,
using any conventions permitted by law and selected by the Managing Member. All
distributions on or before the date of such transfer shall be made to the
transferor, and all distributions thereafter shall be made to the transferee.
ARTICLE IX
The LLC's Registration Rights Relating to
Shares of Parent Common Stock and Related Rule 144 Sales
---------------------------------------------------------
SECTION 9.1 Stockholders' Agreement; Transfers of Shares.
--------------------------------------------
(a) The provisions of this Article IX are intended to govern the
LLC's exercise of its registration rights under the Stockholders' Agreement and
the sale or other disposition by the LLC (any such sale, assignment, transfer,
pledge or other encumbrance or disposition of Shares or any interest therein,
whether pursuant to a registration or otherwise a "Transfer") of the Shares.
--------
(b) The LLC shall exercise its rights under the Stockholders'
Agreement, and shall effect Transfers of Shares, only as provided in this
Article IX. Notwithstanding any other provision of this Agreement to the
contrary, (i) the rights and obligations of the Members and the LLC pursuant to
this Article IX with respect to the Stockholders' Agreement are subject to the
provisions of the Stockholders' Agreement and (ii) the rights and obligations of
the Members and the LLC with respect to the Stockholders' Agreement and all
Transfers of Shares shall be subject to all applicable laws including, without
limitation, the Securities Act, the Exchange Act and applicable state securities
or blue sky laws.
<PAGE>
24
(c) Subject to Section 9.5, the rights of any Member to request the
registration or the Transfer of any Shares shall be limited to the Allocated
Shares allocated to such Member, and upon the Transfer by the LLC of all the
Allocated Shares allocated to such Member, and the distribution to such Member
of any Proceeds relating to the Transfer of such shares, all rights of such
Member under this Article IX shall cease.
(d) Notwithstanding any provision in this Agreement to the contrary,
if the LLC receives advice from the Parent, or if the Managing Member determines
in its reasonable judgment, at the time that the LLC receives a request to
effect a registration or a Transfer (other than a Transfer to the Parent
pursuant to Section 9.13(a) or 9.13(b)), that, as a result of any such
registration or Transfer, (i) there would be an adverse effect on a then
contemplated public offering of Parent's securities, (ii) the registration and
offering would interfere with any material financing, acquisition, corporate
reorganization or other material corporate transaction or development involving
the Parent that is pending or imminent, (iii) the disclosures that would be
required to be made by Parent in connection with such registration or Transfer
would be materially harmful to Parent because of transactions then being
considered by, or other events then concerning, Parent, or (iv) registration at
the time would require the inclusion of pro forma or other information, which
requirement Parent is reasonably unable to comply with, and the LLC promptly
gives notice of that determination to each Member that has requested such
registration or Transfer, which may be a general notice, then the LLC may defer
requesting such registration or effecting such Transfer. If the LLC shall so
postpone requesting a registration statement, the Demanding Member, in the case
of any registration referred to in Section 9.3 hereof, shall have the right to
withdraw its or his Demand Request by giving written notice to the LLC within 30
days after the receipt of the notice of the postponement and, in the event of
the withdrawal, the Demand Request that was withdrawn shall not be deemed to
have been made.
(e) Notwithstanding the fact that Sections 9.2, 9.3 and 9.4 pertain
only to Members, to the extent that any Member has transferred any Interests to
a Permitted Transferee, (i) such Permitted Transferee shall be deemed for the
purpose of this Article IX to have been apportioned a pro rata share of the
--- ----
Allocated Shares allocated to such Member (based upon the amount of the Interest
transferred), (ii) all such Permitted Transferees shall receive any notice to be
provided under this Article IX to the Member and (iii) any notice given or
action to be taken by a Member other than an action under Section 9.4 or 9.5,
which action shall not require the majority referred to in this clause (iii))
may be given or taken by such Member and the Permitted Transferees of such
Member that have been apportioned a majority of the Allocated Shares of the
Member and the Permitted Transferees of such Member. Whenever this Article IX
shall make a pro rata allocation based upon the number of Allocated Shares
--- ----
allocated to a Member, such allocation shall be made upon the basis of the
Allocated Shares allocated to such Member and the Permitted Transferees of such
Member.
(f) When this Article IX states that the LLC shall cause the Parent
to take any action, it shall be interpreted to mean that the LLC shall take such
actions as the Managing Member reasonably believes is appropriate to cause the
Parent to take such action.
SECTION 9.2 Exercise of Incidental Registration Rights.
------------------------------------------
<PAGE>
25
(a) Right to Incidental Registration. Whenever the LLC receives notice
--------------------------------
that the Parent proposes to register any of its common stock (or securities
convertible into or exchangeable or exercisable for common stock) under the
Securities Act for its own account or the account of any stockholder of the
Parent (other than offerings pursuant to employee plans, a dividend reinvestment
plan or a business combination transaction, recapitalization or exchange offer)
(an "Incidental Registration"), the LLC shall give prompt written notice to each
-----------------------
Member of the intention of the Parent to effect such a registration and, subject
to Section 9.2(c), shall use all reasonable efforts to cause the Parent to
include in such registration all the Shares with respect to which the LLC has
received written request specifying the number of Allocated Shares of a Member
for inclusion therein within 20 days after receipt of the LLC's notice by each
Member (12 days if the Parent gives telephonic notice to the LLC pursuant to
Section 4.2(a) of the Stockholders' Agreement).
(b) Designation of Pricing. Any Member exercising its Incidental
----------------------
Registration rights may designate a minimum offering price and maximum
underwriting or selling discounts at which the Allocated Shares allocated to
such Member may be sold.
(c) Priority. If an Incidental Registration pursuant to this Section
--------
9.2 involves an underwritten offering, the LLC shall not be required to cause
the Parent to register any Allocated Shares of any Member unless such Member
accepts the terms of the underwriting agreement, to the extent applicable to
such Member, and then only in such quantity as shall not, in the opinion of the
managing underwriter, exceed the maximum number of shares (or other securities)
that can be marketed without materially and adversely affecting the offering, if
any, by Parent or the stockholders of Parent, as the case may be. If the
managing underwriter advises the LLC in good faith that in its opinion the
number of securities requested to be included in such registration exceeds the
number that can be sold in such offering without having an adverse effect on
such offering, including the price at which such securities can be sold, then
the LLC shall cause Parent to include in such registration the maximum number of
Shares that such underwriter advises can be so sold, allocated as follows:
(i) if such registration was initiated by Parent, (x) first, to
the securities Parent proposes to sell, (y) second, among the Shares
requested to be included in such registration by the Members, pro rata, on
--- ----
the basis of the number of Allocated Shares allocated to each Member, and
(z) third, among other securities, if any, requested and otherwise eligible
to be included in such registration; and
(ii) if such registration was initiated by the LLC at the
request of any Demanding Member pursuant to Section 9.3, (x) first, among
the Allocated Shares requested to be included in such registration by the
Members, pro rata, on the basis of the number of Allocated Shares allocated
--- ----
to each Member (y) second, to any securities the Parent proposes to sell,
and (z) third, among other securities, if any, requested and otherwise
eligible to be included in such registration.
SECTION 9.3 Exercise of Demand Registration Rights .
--------------------------------------
(a) Right to Demand.
---------------
<PAGE>
26
(i) At any time when the LLC is permitted by the Stockholders'
Agreement, any of (A) the Vestar Member or (B) no earlier than twelve
months following the consummation of a Public Offering, any Gray Member or
its Permitted Transferees (in each case a "Demanding Member") may request
----------------
the LLC to exercise a "Common Stock Request" under the Stockholders'
Agreement (a "Demand Request"), provided that in the case of a Gray Member,
-------------- --------
either (x) such Demanding Member shall have proposed to register together
with all other Shares proposed to be registered at such time by any other
Demanding Member at least 10% of the outstanding Shares, or (y) such
Demanding Member shall have proposed to register, together with all of the
Shares proposed to be registered at such time by any other Demanding
Member, shares having an aggregate Fair Market Value of at least $50
million.
(ii) Within 10 days after receipt of any Demand Request, the
Managing Member shall give written notice of the Demand Request to the
other Members (collectively, the "Non-Demanding Members") and shall,
---------------------
subject to the provisions of the last paragraph of this Section 9.3(a), use
all reasonable efforts to exercise the Demand Registration Right with
respect to the Allocated Shares specified in the Demand Request and,
subject to Section 9.3(b), to cause the Parent to include in the
registration all the additional Shares with respect to which the LLC has
received written requests for inclusion therein within 60 days after the
receipt of the Demand Request by the Non-Demanding Members.
(iii) The LLC shall cause the Parent to effect not more than
four Demand Registrations on behalf of the Vestar Member and two Demand
Registrations in the aggregate on behalf of the Gray Members or their
Permitted Transferees pursuant to paragraph (i) of this Section 9.3(a),
provided that if for any reason the number of Demand Registrations
--------
available to the LLC under the Stockholders' Agreement is not reduced as a
result of any Demand Request, such Demand Request shall not reduce the
number of Demand Requests that such Demanding Member may request under this
Section 9.3(a), provided, further, that in the event that any of the Gray
-------- -------
Employees is terminated without "Cause" by the Company or the Parent or
resigns for "Good Reason" from the Company and the Parent, as such terms
are defined in their current respective employment contracts with the
Company, then such Gray Employee, together with all other such terminated
or resigning Gray Employees, shall have the right, beginning six months
following the consummation of a Public Offering, to four additional Demand
Registrations (the "Additional Demand Registrations"), which may be used no
-------------------------------
more often than once in any 12-month period following such termination or
resignation, and in which 25% of the Allocated Shares allocated to all such
terminated or resigning Gray Employees (or allocated to a trust of which
such Gray Employee is a beneficiary) on the date of their respective
terminations or resignations, in the aggregate, shall have first priority
alone (without sharing such priority with the Vestar Member); provided,
--------
further, that the Additional Demand Registrations shall not be subject to
-------
the restrictions contained in Section 9.3(a)(i) hereof, provided, further,
-------- -------
that if a registration statement filed pursuant to an Additional Demand
Registration is not effective within 90 days (the "90 Day Period") of the
-------------
receipt by the Parent of such Additional Demand Registration request, if
the terminated or resigning Gray Employee so elects, the Parent (or, at the
option of such
<PAGE>
27
Gray Employee, the Company, to the extent that the Parent is precluded due
to regulatory or state law reasons) will purchase (a "Post Offering
-------------
Purchase") the Shares being registered which would have had first priority
--------
alone at a purchase price equal to the product of (x) the total number of
Shares being registered that would have had first priority alone and (y) a
price per share equal to the Fair Market Value as of the date of the
Additional Demand Registration Request, provided, further, that during
-------- -------
any twelve month period, the Parent and the Company, in the aggregate,
shall not be obligated to purchase from all such terminated or resigning
Gray Employees, in the aggregate, a number of shares greater than 25% of
the aggregate number of shares allocated to all such terminated or
resigning Gray Employees (or allocated to a trust of which such Gray
Employee is a beneficiary) on the date of their respective terminations or
resignations less all shares sold by the Gray Employees pursuant to
Sections 9.9 and 9.13(a) and (b) during such 12-month period, provided,
--------
further, that if a registration statement to be filed pursuant to an
-------
Additional Demand Registration is filed within 45 days of the Additional
Demand Registration request, the 90 Day Period shall be extended by 45
days.
(iv) The LLC confirms and agrees that a Demanding Member (the
"Joining Member") that joins in a Demand Registration initiated by another
---------------
Demanding Member shall not by reason thereof be deemed to have used any of
the Demand Registrations provided herein for such Joining Member.
(b) Priority. If a Demand Request pursuant to this Section 9.3
--------
involves an underwritten offering, the LLC shall not be required to cause Parent
to register any Allocated Shares allocated to any Non-Demanding Member unless
such Non-Demanding Member accepts the terms of the underwriting agreement, to
the extent applicable to it, and then, only in such quantity as shall not, in
the written opinion of the managing underwriter, exceed the maximum shares of
common stock or other securities that can be marketed without materially
adversely affecting the offering, if any, by the Demanding Member. If the
managing underwriter advises the LLC in good faith that in its opinion the
number of securities requested to be included in such registration exceeds the
number which can be sold in such offering without having an adverse effect on
such offering, including the price at which such securities can be sold, then
the LLC shall cause the Parent to include in such registration the maximum
number of Shares that such underwriter advises can be so sold, allocated (x)
first, among the Allocated Shares requested to be included in such registration
by the Members, pro rata, on the basis of the number of Allocated Shares
--- ----
allocated to each such Member, (y) second, to any securities that Parent
proposes to sell, and (z) third, among other securities, if any, requested and
otherwise eligible to be included in such registration.
(c) Selection of Underwriters. In connection with any Demand
-------------------------
Registration involving an underwritten offering, the Parent shall select a
managing underwriter or underwriters, which underwriter or underwriters shall be
nationally recognized and shall be reasonably acceptable to the Demanding
Member.
SECTION 9.4. Tag-Along Rights. (a) So long as this Agreement or the
-----------------
Stockholders Agreement shall remain in effect and the Vestar Member (and its
Affiliates) has more Allocated Shares allocated to it than the aggregate number
of Allocated Shares allocated to
<PAGE>
28
the Gray Members and their Permitted Transferees, unless a Public Offering shall
have occurred, with respect to any proposed Transfer by the LLC of the Vestar
Member's or any of its Affiliates' (in such capacity, a "Transferring
------------
Stockholder") Allocated Shares (excluding any Transfers by the Vestar Member to
- -----------
its Affiliates), the Transferring Stockholder shall have the obligation, and
each other Member and its Permitted Transferees shall have the right (such
Member and its Permitted Transferees that exercise such right shall be referred
to as a "Tagging Stockholder"), to require the LLC to sell and the proposed
-------------------
transferee to purchase from the LLC a number of its Allocated Shares up to the
product (rounded up to the nearest whole number) of (i) the quotient determined
by dividing (A) the aggregate number of Allocated Shares allocated to such
Tagging Stockholder and sought by the Tagging Stockholder to be included in the
contemplated Transfer by (B) the sum of the aggregate number of Allocated Shares
allocated to such Transferring Stockholder and the aggregate number of Allocated
Shares allocated to such Tagging Stockholders and sought by all Tagging
Stockholders to be included in the contemplated Transfer and (ii) the total
number of Allocated Shares proposed to be acquired by the transferee in the
contemplated Transfer, and at the same price per Allocated Share and upon the
same terms and conditions (including without limitation time of payment and form
of consideration) as to be paid and given to the Transferring Stockholder,
provided that in order to be entitled to exercise its right to sell Allocated
- --------
Shares to the proposed transferee pursuant to this Section 9.4, a Tagging
Stockholder must agree to make to the transferee the same representations,
warranties, covenants, indemnities and agreements as the Transferring
Stockholder agrees to make in connection with the proposed transfer of the
Allocated Shares of the Transferring Stockholder (except that in the case of
representations and warranties pertaining specifically to the Transferring
Stockholder, a Tagging Stockholder shall make the comparable representations and
warranties pertaining specifically to itself, and except that in the case of
covenants or agreements capable of performance only by certain Members, such
covenants or agreements shall be made only by such certain Members); and
provided further that all representations, warranties, covenants, agreements and
- ----------------
indemnities made by the Transferring Stockholder and the Tagging Stockholders
pertaining specifically to themselves shall be made by each of them severally
and not jointly; and provided further that each of the Transferring Stockholder
----------------
and each Tagging Stockholder shall be severally (but not jointly) liable for
breaches of representations, warranties, covenants and agreements of or (in the
case of representations and warranties) pertaining to the LLC or Parent and its
subsidiaries, as the case may be, and for indemnification obligations arising
out of or relating to any such breach or otherwise pertaining to the LLC, Parent
and its subsidiaries, on a pro rata basis, such liability of each such
Stockholder not to exceed such Stockholder's pro rata portion of the gross
proceeds of the sale.
(b) The Transferring Stockholder shall give notice to each other
Member and their Permitted Transferees of each proposed Transfer giving rise to
the rights of the Tagging Stockholders set forth in the first sentence of
Section 9.4(a) at least 30 days prior to the proposed consummation of such
Transfer, setting forth the name of the Transferring Stockholder, the number of
Allocated Shares proposed to be so Transferred, the name and address of the
proposed transferee, the proposed amount and form of consideration and other
terms and conditions offered by the proposed transferee, and a representation
that the proposed transferee has been informed of the tag-along rights provided
for in this Section 9.4 and has agreed to purchase Allocated Shares in
accordance with the terms hereof. The tag-along rights provided by this Section
9.4 must be exercised by each Tagging Stockholder within 15 days following
receipt of the notice required by the preceding sentence, by delivery of a
written notice to the Transferring
<PAGE>
29
Stockholder indicating such Tagging Stockholder's desire to exercise its rights
and specifying the number of Allocated Shares it desires to sell. If the
proposed transferee fails to purchase Allocated Shares from any Tagging
Stockholder that has properly exercised its tag-along rights, then the
Transferring Stockholder shall not be permitted to make the proposed Transfer,
and any such attempted Transfer shall be void and of no effect.
(c) If any of the Tagging Stockholders exercise their rights under
Section 9.4(a), the closing of the purchase of the Allocated Shares with respect
to which such rights have been exercised shall take place concurrently with the
closing of the sale of the Transferring Stockholder's Allocated Shares. No
Transfer shall occur pursuant to this Section unless the transferee shall agree
to become a party to, and be bound to the same extent as its transferor by the
terms of the Stockholders' Agreement.
SECTION 9.5. Drag-Along Rights. So long as this Agreement or the
------------------
Stockholders Agreement shall remain in effect and the Vestar Member (and its
Affiliates) has more Allocated Shares allocated to it than the aggregate number
of Allocated Shares allocated to the Gray Members or their Permitted
Transferees, if the Vestar Member or any of its Affiliates receives an offer
from a Third Party to purchase (whether pursuant to a sale of stock, a merger or
otherwise) all, but not less than all, of the Allocated Shares allocated to the
Vestar Member and its Affiliates (other than shares, if any, not being purchased
in order to preserve the availability of recapitalization accounting treatment)
and such offer is accepted by the Vestar Member or such Affiliate, then each
Member other than the Vestar Member hereby agrees that it will, if requested by
the Vestar Member, allow the LLC to Transfer all the Allocated Shares allocated
to such Member to such Third Party on the terms of the offer so accepted by the
Vestar Member, including making the same representations, warranties, covenants,
indemnities and agreements that the Vestar Member agrees to make (except that,
in the case of representations and warranties pertaining specifically to the
Vestar Member, each other Member shall make the comparable representations and
warranties pertaining specifically to itself, and except that, in the case of
covenants or agreements capable of performance only by certain Members, such
covenants or agreements shall be made only by such certain Members, and provided
that all representations, warranties, covenants, agreements and indemnities made
by the Members pertaining specifically to themselves shall be made by each of
them severally and not jointly and provided further that each Member shall be
severally (but not jointly) liable for breaches of representations, warranties,
covenants and agreements of or (in the case of representations and warranties)
pertaining to the LLC, or Parent or its subsidiaries, as the case may be, and
for indemnification obligations arising out of or relating to any such breach or
otherwise pertaining to the LLC, the Parent or its subsidiaries, on a pro rata
basis, such liability of each such Member not to exceed such Member's pro rata
portion of the gross proceeds of the sale.
SECTION 9.6. Public Offerings, etc. The provisions of Sections 9.4,
----------------------
9.5 and 9.7 shall not be applicable to Transfers in a Public Offering or
Transfers pursuant to Section 9.8.
SECTION 9.7. Rights of First Refusal. If, at any time on or after
-----------------------
the date hereof, any Gray Member or any of their respective Permitted
Transferees (an "Offeree") receives a bona fide offer to purchase any or all of
-------
its Allocated Shares (the "Offer") (and, pursuant to such Offer, such
-----
Stockholder could, without violating the terms of this Agreement, cause the LLC
to Transfer the Shares that are the subject of such Offer) from a Third Party
(the "Offeror") which
<PAGE>
30
such Offeree wishes to accept, such Offeree shall cause the Offer to be reduced
to writing and shall notify the Parent in writing of its wish to accept the
Offer (the "Sale Notice"). The Sale Notice shall contain an irrevocable offer to
-----------
sell such Allocated Shares to the Parent (in the manner set forth below) at a
purchase price equal to the price contained in, and otherwise on the same terms
and conditions of, the Stock Offer, and shall be accompanied by a true copy of
the Offer (which shall identify the Offeror). At any time within 30 Business
Days after the date of the receipt by the Parent of the Sale Notice, the Parent
shall have the right and option to commit to purchase, or to arrange for one or
more third parties designated by the Parent to purchase, all of the Allocated
Shares covered by the Offer either (i) for the same consideration and on the
same terms and conditions as the Offer or (ii) if the Offer includes any
consideration other than cash, then, at the sole option of the Parent, at the
equivalent all cash price, determined in good faith by a nationally recognized
independent investment banking firm, and otherwise on the same terms and
conditions as the Offer. If the option referred to in the preceding sentence is
exercised, on or prior to the 30th Business Day after the date of receipt by the
Parent of the Sale Notice the Parent (or its designees) shall pay the relevant
cash consideration by delivering a certified bank check or checks in (or, if the
Offeree so elects at least three Business Days prior to the closing date in a
writing specifying the Offeree's bank account and other wire transfer
instructions, by wire transferring) the appropriate amount and shall deliver the
relevant non-cash consideration to the Offeree against delivery to the Parent by
the LLC of certificates representing the Allocated Shares being purchased,
appropriately endorsed by the Offeree. If, at the end of the aforementioned 30
Business Day period, the Parent (or its designees) has not exercised its option
in the manner set forth above, the Offeree may during the succeeding 30 Business
Day period sell not less than all of the Allocated Shares covered by the Offer
to the Offeror at a price and on terms no less favorable to the Offeree than
those contained in the Offer. Such Offeror shall agree in a writing in form and
substance reasonably satisfactory to the Parent to become a party hereto and be
bound to the same extent as the Offeree by the provisions hereof other than this
Section 9.7. Promptly after such sale, the Offeree shall notify the Parent of
the consummation thereof and shall furnish such evidence of the completion and
time of completion of such sale and of the terms thereof as may reasonably be
requested by the Parent. If, at the end of 30 Business Days following the
expiration of the 30 Business Day period for the Parent (or its designees) to
commit to purchase the aforementioned Allocated Shares, the Offeree has not
completed the sale of such Allocated Shares as aforesaid, all the restrictions
on transfer contained herein shall again be in effect with respect to such
Allocated Shares.
SECTION 9.8 Initiation of a Rule 144 Sale. After a Public Offering,
-----------------------------
any Member may request that all or any portion of the Allocated Shares of such
Member be the subject of a Transfer by the LLC in accordance with Rule 144 under
the Securities Act (a "Rule 144 Request"). A Rule 144 Request shall specify the
number of Allocated Shares that is subject to such request, provided that a
--------
Member shall not request the inclusion of a number of Shares during any three-
month period that is greater than the maximum number of Shares that the LLC
could sell pursuant to Rule 144 multiplied by a fraction, the numerator of which
is the number of Allocated Shares allocated to such Member (or in the case of
any of the Gray Members or their Permitted Transferees, all of the Gray Members
and their Permitted Transferees) and the denominator of which is the total
number of Shares then held by the LLC. Promptly upon receipt of a Rule 144
Request, the LLC shall give each other Member notice of the Rule 144 Request and
shall use its best efforts to effect the Transfer of the Allocated Shares in
respect of which the LLC receives written requests for inclusion within 30 days
after such Member shall have
<PAGE>
31
received the LLC's notice pursuant to this Section 9.8. Any Transfer proposed to
be made pursuant to this Section 9.8 (i) shall be subject in all respects to
compliance by the LLC with the provisions of Rule 144, (ii) shall be subject to
interruption and termination as a result of any registration of securities by
Parent, regardless of whether initiated pursuant to the Stockholders' Agreement
and (iii) in the event such Transfer is proposed to be made by a Gray Member
employed by the Parent or so long as the Gray Members have the right to
designate directors, shall be subject to interruption and termination for any of
the reasons set forth in Section 9.1(d).
SECTION 9.9 Individual Private Sale. (A) In the case of the Gray
-----------------------
Members or their Permitted Transferees, after the earlier to occur of (i) a
Public Offering and (ii) the fifth anniversary of the date hereof, the Gray
Members may, and (B) in the case of the Vestar Member, at any time the Vestar
Member may, request that, to the extent that it may lawfully do so, the LLC
shall effect a Transfer of all or any portion of the Allocated Shares allocated
to such Member pursuant to any available exemption from the registration
requirement under the Securities Act, subject to written agreement by the
transferee (in form and substance reasonably satisfactory to the Managing
Member) to be bound by this Agreement as if the transferee were the transferring
Member. A transferee under this Section 9.9 is referred to as a "Share
-----
Permitted Transferee". No transfer of any such Shares may be made unless such
- --------------------
Member delivers to the LLC an opinion of counsel stating, or other evidence
satisfactory to the LLC, that registration of such Shares is not required under
the Securities Act, and such transfer shall not violate applicable state
securities or blue sky laws. Any such opinion of counsel shall be rendered by
counsel, and shall be in form and substance, reasonably acceptable to the
Managing Member and all costs and expenses thereof shall be borne by such
Member. Notwithstanding the foregoing to the contrary, the LLC shall not take
the action referred to in the first sentence of this Section 9.9 if the Managing
Member reasonably believes that any such action would be unlawful, or could have
an adverse effect on Parent. The LLC agrees to use its reasonable best efforts
to take all actions reasonably requested by any Gray Member or its Permitted
Transferee to facilitate a Transfer pursuant to this Section 9.9.
SECTION 9.10 Reduction of Allocated Shares. Upon the consummation by
-----------------------------
the LLC of any Transfer of Shares, (i) the number of Allocated Shares of each
Member shall be reduced by the number of such Member's Allocated Shares that
were actually included in such Transfer, provided that such reduction shall be
--------
made only on the basis of whole Shares and the LLC shall allocate any fractional
Shares among such Members by lot or pursuant to any other method that the LLC
deems, in its sole judgment, to be just and equitable and (ii) the Percentage
Interests of the Members shall be adjusted to reflect the number of remaining
Allocated Shares that are allocated to each such Member.
SECTION 9.11 Liquidation of the LLC. Upon the liquidation of the
----------------------
LLC, (a) the Demand Registration rights provided for in Section 9.3(a) shall be
distributed to the Members and each Share Permitted Transferee to the extent
that such Demand Registration Rights have not been exercised and (b) the
incidental registration rights provided for in Section 9.2(a) hereof shall be
assigned to each Member and each Share Permitted Transferee thereof.
SECTION 9.12 Transfers to be Made Only as Permitted or Required by
-----------------------------------------------------
this Agreement. Until the earlier to occur of (i) a Public Offering and (ii)
- --------------
the fifth anniversary of the
<PAGE>
32
date hereof, except as permitted by this Article IX, the Gray Members may not,
directly or indirectly, request the Transfer of the Allocated Shares allocated
to each of them, except as specifically permitted or required by this Article
IX; any other purported transfer shall be void and of no effect. The Vestar
Member may request the Transfer of its Allocated Shares at any time subject only
to the restrictions in this Article IX.
SECTION 9.13 Liquidity Right.
---------------
(a) Prior to a Public Offering, as long as this Agreement or the
Stockholders' Agreement shall remain in effect, if Robert E. Gray ceases to
serve as Chairman or Chief Executive Officer of the Company or Parent or the
employment with the Company of any of Marie Gray or Kelly A. Gray (together with
Robert E. Gray, the "Gray Employees") ceases for any reason (including, but not
--------------
limited to, a cessation under the circumstances set forth in Section 9.13(b)
hereof) (a "Liquidity Event"), then such Gray Employee, such Gray Employee's
---------------
executor or estate, or the trustees of the Gray Family Trust or the Kelly Gray
Trust shall have the right, subject to the provisions of Section 9.14 hereof, at
any time, upon at least four business days' written notice, following the date
of the cessation of the employment of such Gray Employee, to sell to the Parent
(or, at the option of such Gray Employee, the Company, to the extent that the
Parent is precluded due to regulatory or state law reasons), and the Parent (or,
at the option of such Gray Employee, the Company, to the extent that the Parent
is precluded due to regulatory or state law reasons) shall be required to
purchase (subject to the provisions of Section 9.14 hereof), all or part of the
Allocated Shares allocated to such Gray Employee (or allocated to a trust of
which such Gray Employee is a beneficiary) at a purchase price equal to the
product of (x) the total number of Shares being sold and (y) a price per share
equal to the Fair Market Value as of the date of the Liquidity Notice (as
defined below); provided, however, that during any twelve month period, the
-------- -------
Parent and the Company shall not, in the aggregate, be required to purchase
pursuant to this Section 9.13(a) from all Gray Employees, in the aggregate, a
number of Shares having an aggregate Fair Market Value that exceeds $5 million
less the amount of net proceeds received in respect of all shares sold by the
Gray Employees during such twelve-month period pursuant to Section 9.9 and
9.13(b).
(b) Prior to a Public Offering, as long as this Agreement or the
Stockholders' Agreement shall remain in effect, in the event that any of the
Gray Employees is terminated by the Parent or the Company without "Cause" or
resigns from the Parent and the Company for "Good Reason", as such terms are
defined in their current respective employment contracts with the Company, then
such Gray Employee, such Gray Employee's executor or estate, or the trustees of
the Gray Family Trust or the Kelly Gray Trust shall have the right, subject to
Section 9.14 hereof and on the terms described in Section 9.13(c), to sell to
the Parent (or, at the option of such Gray Employee, the Company, to the extent
that the Parent is precluded due to regulatory or state law reasons) and the
Parent (or, at the option of such Gray Employee, the Company, to the extent that
the Parent is precluded due to regulatory or state law reasons) shall be
required to purchase all or part of the Allocated Shares allocated to such Gray
Employee (or allocated to a trust of which such Gray Employee is a beneficiary)
at a purchase price equal to the product of (x) the total number of Shares being
sold and (y) a price per share equal to the Fair Market Value as of the date of
the Liquidity Notice; provided, however, that the Parent and the Company shall
-------- -------
<PAGE>
33
not, in the aggregate, be required to purchase pursuant to this Section 9.13(b)
during any 12-month period from all Gray Employees, in the aggregate, a number
of Shares greater than 25% of the aggregate number of Allocated Shares allocated
to all such terminated or resigning Gray Employees (and allocated to any trusts
of which any such Gray Employees are a beneficiary) on the date of their
respective terminations or resignations less all Shares sold by the Gray
Employees during such twelve-month period pursuant to Sections 9.9 and 9.13(a);
provided, further, that if such Gray Employee so notifies the Parent pursuant to
- -------- -------
the first Liquidity Notice (or any subsequent Liquidity Notice) given by such
Gray Employee pursuant to this Section 9.13(b), the Fair Market Value in respect
of all Allocated Shares allocated to such Gray Employee (or allocated to a trust
of which such Gray Employee is a beneficiary) for all subsequent sales to the
Parent (or, at the option of such Gray Employee, the Company, to the extent that
the Parent is precluded due to regulatory or state law reasons) by such Gray
Employee pursuant to this Section 9.13(b) shall be deemed to be the Fair Market
Value as of the date of such Liquidity Notice.
(c) Each Gray Employee desiring to sell Shares which may be sold
pursuant to this Section 9.13 or 9.3(a)(iii) shall send at least four business
days' written notice (the "Liquidity Notice") to the Parent and the Vestar
----------------
Member stating its intention to sell Shares and the number of Shares to be
sold. Subject to Section 9.14, the closing of the purchase (the "Liquidity
---------
Closing") shall take place at the principal office of the Parent on the earlier
- -------
to occur of (i) the 30th day after the giving of such notice by the selling Gray
Employee, (ii) the determination of the Fair Market Value of the selling Gray
Employee's shares pursuant to this Agreement and (iii) agreement between the
selling Gray Employee and the Parent as to the Fair Market Value of the Shares
to be sold. If, after the issuance of a Liquidity Notice but before the
Liquidity Closing associated with such a notice, a Public Offering occurs,
neither the Parent nor the Company shall have any obligation whatsoever to
purchase Shares pursuant to this Section 9.13.
SECTION 9.14 Certain Limitations on the Parent's Obligations to
--------------------------------------------------
Purchase Shares. Notwithstanding anything to the contrary elsewhere herein,
- ---------------
neither the Parent nor the Company shall be obligated to purchase any Shares of
Parent Common Stock at any time pursuant to Sections 9.3(a)(iii) or 9.13 hereof
(a) to the extent that the purchase of such Shares (together with any other
purchases of Shares pursuant to Sections 9.13 and 9.3(a)(iii)) would result (i)
in a violation of any law, statute, rule, regulation, policy, order, writ,
injunction, decree or judgment promulgated or entered by any federal, state,
local or foreign court or governmental authority applicable to the Parent or the
Company or any of its subsidiaries or any of its or their property or (ii) after
giving effect thereto (including any dividends or other distributions or loans
from a subsidiary of the Parent to the Parent in connection therewith), would
result in a Financing Default, or (b) if immediately prior to such purchase
there exists a Financing Default which prohibits such purchase (including any
dividends or other distributions or loans from a subsidiary of the Parent to the
Parent in connection therewith). The Parent shall within 5 days of learning of
any such fact so notify (the "Delay Notice") the relevant Gray Employee that
------------
neither it nor the Company is obligated to purchase Shares at such time. If, in
the case of a purchase pursuant to Sections 9.3(a)(iii), 9.13(a) or 9.13(b), the
Parent gives such a notice: (A) each Share the purchase of which by Parent would
result in a Financing Default (the "Default Shares") shall be exchanged for a
--------------
share of redeemable preferred stock, $.01 par value, of the Parent ("Gray
----
<PAGE>
34
Preferred Stock"), having the following terms: (1) such shares of Gray
- ---------------
Preferred Stock shall have an aggregate liquidation preference equal to the Fair
Market Value of the Default Shares as of the date of the original Liquidity
Notice in respect of such Default Shares; (2) cash dividends with respect to the
Gray Preferred Stock shall accrue at a rate of 10% per annum on the liquidation
preference, provided that to the extent that the aggregate liquidation
--------
preference in respect of all shares of Gray Preferred Stock outstanding would
exceed $2,500,000, dividends shall accrue on all shares of Gray Preferred Stock
having an aggregate liquidation preference in excess of such amount at a rate of
12% per annum, and in each case such dividends will be payable by the Parent
annually, on each anniversary of the date of this Agreement, in an aggregate
amount not to exceed $250,000 with respect to all shares of Gray Preferred Stock
outstanding, provided that no Financing Default has occurred or would result
from the payment of such dividend; (3) shares of Gray Preferred Stock may be
exchanged at the option of the holder on a one-for-one basis for Shares of
Common Stock, but only if immediately upon such exchange such Shares of Common
Stock are to be transferred to a Third Party in a transfer made in accordance
with the provisions of this Agreement (it being understood that the Parent
shall retain the obligation to pay to the holder of Gray Preferred Stock any
accrued and unpaid dividends thereon at the time of such exchange); (4) the Gray
Preferred Stock shall not be transferable, except that a Gray Employee may
transfer Gray Preferred Stock to his or her Immediate Family Member or any other
member of his or her Family Group; and (5) the Gray Preferred Stock may not
mature or be mandatorily redeemable until [ ], 2010; (B) until
all shares of Gray Preferred Stock are purchased by the Parent (or, at the
option of such Gray Employee, the Company, to the extent that the Parent is
precluded due to regulatory or state law reasons) in accordance with this
Section 9.14, the Vestar Member will not receive any distributions or dividends
in respect of its Allocated Shares; and (C) unless all shares of Gray Preferred
Stock (or Shares of Common Stock issued in exchange therefor) have been sold in
one or more separate transactions or the Gray Members shall have otherwise sold
all shares of Gray Preferred Stock (or Shares of Common Stock issued in exchange
therefor) eligible for sale during the twelve-month period in respect of which
the Liquidity Notice was given, such shares of Gray Preferred Stock shall be
purchased (a "Delayed Purchase") by the Parent (or, at the option of such Gray
----------------
Employee, the Company, to the extent that the Parent is precluded due to
regulatory or state law reasons) on the tenth Business Day after such date or
dates that it is no longer permitted to defer purchasing such shares pursuant to
the first sentence of this Section 9.14, and the Parent shall give the Gray
Employees at least five business days' prior notice of any such purchase. The
Parent shall issue shares of Gray Preferred Stock to a Gray Employee in the
circumstances described above upon receipt by the Parent from such Gray Employee
of certificates representing the shares to be exchanged (such shares to be
deemed to be issued as of the date of the relevant Liquidity Notice). Upon the
issuance of the Gray Preferred Stock, all shares received in exchange therefor
shall be canceled. Any Delayed Purchase shall be made at the Fair Market Value
as of the date of the original Liquidity Notice in respect of such purchase.
The Company and Parent agree to use all commercially reasonable efforts to cure
any such Financing Default which is curable. It is understood that for purposes
of the foregoing, any shares in respect of which a Liquidity Notice shall be
given shall be treated on a "first-in, first-out" basis, with the first shares
in respect of which a Liquidity Notice has been given having the right to be
redeemed first and any related Gray Preferred Stock accruing dividends at a rate
of 10% per annum, until all applicable limits shall be reached.
<PAGE>
35
ARTICLE X
Miscellaneous
-------------
SECTION 10.1 Equitable Relief. The Members hereby confirm that
----------------
damages at law would be an inadequate remedy for a breach or threatened breach
of this Agreement and agree that, in the event of a breach or threatened breach
of any provision hereof, the respective rights and obligations hereunder shall
be enforceable by specific performance, injunction or other equitable remedy,
but, nothing herein contained is intended to, nor shall it, limit or affect any
right or rights at law or by statute or otherwise of a Member aggrieved as
against the other for a breach or threatened breach of any provision hereof, it
being the intention by this Section 10.1 to make clear the agreement of the
Members that the respective rights and obligations of the Members hereunder
shall be enforceable in equity as well as at law or otherwise and that the
mention herein of any particular remedy shall not preclude a Member from any
other remedy it or he might have, either in law or in equity.
SECTION 10.2 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware applicable to
contracts executed and to be performed in such State.
SECTION 10.3 Successors and Assigns. This Agreement shall be binding
----------------------
upon and shall inure to the benefit of the parties hereto, their respective
successors and assigns.
SECTION 10.4 Notices. Subject to Section 10.12, whenever notice is
-------
required or permitted by this Agreement to be given, such notice may be in
writing (including facsimile) and if in writing shall be given to any Member at
its address or facsimile number shown in the LLC's books and records (including
Schedule 1 hereto).
SECTION 10.5 Counterparts. This Agreement may be executed in any
------------
number of counterparts, all of which together shall constitute a single
instrument.
SECTION 10.6 Entire Agreement. This Agreement and the Stockholders'
----------------
Agreement embody the entire agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, agreements, representations, warranties, covenants or undertakings
with respect to the subject matter hereof, other than those expressly set forth
or referred to herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter hereof.
SECTION 10.7 Amendments. Any amendment to this Agreement shall be
----------
effective only if such amendment is evidenced by a written instrument duly
executed and delivered by (a) the holders of a majority of the Units held by the
Gray Members, (b) the Managing Member and (c) the Vestar Member, and with
respect to the matters set forth in Section 10.13, Parent, the Company and the
relevant Gray Member.
SECTION 10.8 Section Titles. Section titles are for descriptive
--------------
purposes only and shall not control or alter the meaning of this Agreement as
set forth in the text hereof.
<PAGE>
36
SECTION 10.9 Representations and Warranties. Each Member represents,
------------------------------
warrants and covenants to each other Member that:
(a) such Member, if not a natural Person, is duly formed and validly
existing under the laws of the jurisdiction of its organization with full
power and authority to conduct its business to the extent contemplated in
this Agreement;
(b) such Member, if a natural Person, has the capacity to enter into
and perform its obligations under this Agreement;
(c) this Agreement has been duly authorized (in the case of Members
that are not natural Persons), executed and delivered by such Member and
constitutes the valid and legally binding agreement of such Member
enforceable in accordance with its terms against such Member except as
enforceability hereof may be limited by bankruptcy, insolvency, moratorium
and other similar laws relating to creditors' rights generally and by
general equitable principles;
(d) the execution and delivery of this Agreement by such Member and
the performance of its duties and obligations hereunder do not result in a
breach of any of the terms, conditions or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, credit agreement,
note or other evidence of indebtedness, or any lease or other agreement, or
any license, permit, franchise or certificate, to which such Member is a
party or by which it is bound or to which its properties are subject, or
require any authorization or approval under or pursuant to any of the
foregoing, or violate any statute, regulation, law, order, writ,
injunction, judgment or decree to which such Member is subject;
(e) no consent, approval or authorization of, or filing,
registration or qualification with, any court or governmental authority on
the part of such Member is required for the execution and delivery of this
Agreement by such Member and the performance of its obligations and duties
hereunder.
SECTION 10.10 SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. Each
------------------------------------------------
of the parties hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement, to the non-exclusive general
jurisdiction of the Courts of the State of New York in New York County, the
Courts of the United States of America for the Southern District of New
York and the Central District of California, the Courts in the State of
California in the County of Orange and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in
such courts, and waives any objection that it may now or hereafter have to
the venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not to
plead or claim the same to the extent permitted by applicable law;
<PAGE>
37
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to the party,
as the case may be, at its address set forth in Schedule 1 or at such other
address of which the other party shall have been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction for recognition and enforcement of
any judgment or if jurisdiction in the courts referenced in paragraph (i)
hereof is not available despite the intentions of the parties hereto; and
(e) waives trial by jury in any litigation in any court with respect
to, in connection with, or arising out of this Agreement or any other
instrument or document delivered pursuant hereto, or any other claim or
dispute howsoever arising, to which the parties are party. This waiver is
informed and freely made.
SECTION 10.11 Reimbursement of Expenses. Promptly after the date of
-------------------------
this Agreement, the LLC, to the extent it does not pay such costs and expenses
directly, will reimburse the Managing Member for Organizational Expenses
incurred by the Managing Member.
SECTION 10.12 Gray Representative. Each Gray Member hereby
-------------------
designates and appoints (and each Permitted Transferee of each such Gray Member
shall be deemed to have so designated and appointed) Robert E. Gray, with full
power of substitution (the "Gray Representative") the representative of each
such Person to perform all such acts as are required, authorized or contemplated
by this Agreement to be performed by any such Person and hereby acknowledges
that the Gray Representative shall be the only Person authorized to take any
action so required, authorized or contemplated by this Agreement by each such
Person, except that the foregoing shall not apply to the rights of any Gray
Employee pursuant to Sections 9.3(a)(iii), 9.13(a) and 9.13(b). Each such Person
further acknowledges that the foregoing appointment and designation shall be
deemed to be coupled with an interest and shall survive the death or incapacity
of such Person. Each such Person hereby authorizes (and each Permitted
Transferee shall be deemed to have authorized) the other parties hereto to
disregard any notice or other action taken by such Person pursuant to this
Agreement on any action so taken or any notice given by the Gray Representative
and are and will be entitled and authorized to give notices only to the Gray
Representative for any notice contemplated by this Agreement to be given to any
such Person. A successor to the Gray Representative may be chosen by a majority
of the Gray Employees, provided that written notice thereof is given by the
--------
successor Gray Representative to the LLC. Whenever any action or consent (but
not any forbearance) is required to be taken or given by the Gray Members, the
action or consent of the Gray Representative shall be considered the act or
consent of all the Gray Members, and the Vestar Member and the Managing Member
shall be protected in relying on such act or consent.
SECTION 10.13 Covenant Not to Compete; Confidential Information.
-------------------------------------------------
<PAGE>
38
(a) The following covenant shall apply to each of Robert E. Gray, Marie
Gray and Kelly Gray (the "Gray Employees"), individually, and each of them
hereby agrees, with respect to himself or herself, to the following:
(i) In consideration of the Parent and the Vestar Member entering
into this Agreement with the Gray Members, each of the Gray
Employees hereby agrees, effective as of the Effective Time of
the Acquisition Merger (as defined in the Merger Agreement), for
so long as he or she is employed by the Company, Parent or one of
their respective subsidiaries (the "Restricted Group") and for a
----------------
period of five years (the "Noncompete Period") after he or she
-----------------
has ceased to be employed by the Restricted Group, that (i) he or
she shall not, directly or indirectly, engage in the design,
manufacturing, production, marketing, sale or distribution of any
women's clothing or accessories anywhere in the world in which
the Restricted Group is doing business (the "Competing
---------
Business"), other than through his or her employment with the
Restricted Group; provided, however, that in the event Kelly Gray
-------- -------
is terminated without "Cause" by the Parent or the Company or
resigns for "Good Reason" from the Parent and the Company, as
such terms are defined in her current employment contract, the
term of such Noncompete Period with respect to her shall be three
years; provided further that she shall not be precluded from
-------- -------
being employed by Saks Fifth Avenue, Neiman Marcus or a similar
broad-based specialty store or from working at an advertising
agency, provided that she is not otherwise in violation of this
Section 10.13 and is not engaging in activities in such
employment that are directly competitive with or otherwise would
reasonably be expected to be injurious or adverse to the business
of the Company. For purposes of this Agreement, the phrase
"directly or indirectly engage in" shall include any direct or
indirect ownership or profit participation interest in such
enterprise, whether as an owner, stockholder, partner, director,
joint venturer or otherwise, and shall include any direct or
indirect participation in such enterprise as an executive,
designer, consultant, licensor of technology or otherwise;
provided that the Gray Employees shall be permitted to be passive
equity investors in an amount not to exceed 5% (in the aggregate
among all of the Gray Employees) of the voting power or 5% (in
the aggregate among all of the Gray Employees) of the equity in
any company engaged in a Competing Business provided he or she is
not otherwise in violation of this covenant. Notwithstanding the
foregoing, Robert E. Gray shall be permitted to remain a "passive
equity investor" in "Patrick Robinson", so long as he remains
inactive in the management of that business and his investment in
"Patrick Robinson" does not increase beyond its level as of the
date hereof.
(ii) Each of the Gray Employees agrees that he or she will not,
without the prior written consent of the Parent, directly or
indirectly, use or grant a third party their consent to use or a
license to use or any other right to use,
<PAGE>
39
the names "Marie Gray", "St. John" or "St. John by Marie Gray"
(collectively, the "Company Names") or any combination,
-------------
derivative, variation or element thereof, in any Competing
Business or in any other manner which use would be reasonably
likely to infringe, dilute or endanger the validity or value of,
any trademarks or trade names of the Restricted Group. The Parent
agrees not to unreasonably withhold its consent with respect to
any uses of the Company Names by Bob Gray, Marie Gray or Kelly
Gray for non-commercial projects.
(iii) Each of the Gray Employees agrees not to disclose or use at any
time any Confidential Information (as defined below) of which he
or she is or becomes aware, whether or not such information is
developed by any one of them, except to the extent that such
disclosure or use is directly related to and required by his or
her performance of duties, if any, assigned to him or her by the
Restricted Group. As used in this Agreement, the term
"Confidential Information" means information that is not
generally known to the public and that is used, developed or
obtained by the Restricted Group in connection with its business,
including but not limited to (i) products or services, (ii) fees,
costs and pricing structures, (iii) designs, (iv) computer
software, including operating systems, applications and program
listings, (v) flow charts, manuals and documentation, (vi) data
bases, (vii) accounting and business methods, (viii) inventions,
devices, new developments, methods and processes, whether
patentable or unpatentable and whether or not reduced to
practice, (ix) customers and clients and customer or client
lists, (x) other copyrightable or trademarked works, (xi) all
technology and trade secrets, (xii) strategic business plans, and
(xiii) all similar and related information in whatever form.
Confidential Information will not include any information that is
generally available to the public prior to the date any of the
Gray Employees proposes to disclose or use such information.
Each of the Gray Employees acknowledges and agrees that all
copyrights, works, inventions, innovations, improvements,
developments, patents, trademarks and all similar or related
information which relates to the actual or anticipated business
of the Restricted Group (including its predecessors) and
conceived, developed or made by any of the Gray Employees while
employed by the Restricted Group belong to the Restricted Group.
Each of the Gray Employees agrees to perform all actions
reasonably requested by the Restricted Group (whether during or
after the Noncompete Period) to establish and confirm such
ownership at the Restricted Group's expense (including without
limitation assignments, consents, powers of attorney and other
instruments).
(iv) Notwithstanding clauses (i), (ii) and (iii) above, if at any time
a court holds that the restrictions stated in any of such clauses
(i), (ii), (iii) or clause (b) below are unreasonable or
otherwise unenforceable under circumstances then existing, the
parties hereto agree that the maximum period, scope or
<PAGE>
40
geographic area determined to be reasonable under such
circumstances by such court will be substituted for the stated
period, scope or area. Because the Gray Employees' services are
unique and because the Gray Employees have had access to
Confidential Information, the parties hereto agree that money
damages will be an inadequate remedy for any breach of this
Agreement. In the event of a breach or threatened breach of this
Agreement, each of the Gray Employees agrees that the Restricted
Group or their successors or assigns may, in addition to other
rights and remedies existing in their favor, apply to any court
of competent jurisdiction for specific performance and/or
injunctive relief in order to enforce, or prevent any violations
of, the provisions hereof (without the posting of a bond or other
security).
(b) Marie Gray hereby assigns to the Restricted Group, in connection with
the Restricted Group's current and future business and the advertising thereof,
in all forms of media: (A) the exclusive right to use the Company Names in
connection with any Competing Business; (B) all of Marie Gray's rights of
privacy, publicity and similar rights necessary or desirable for the Restricted
Group to conduct and advertise its current and future business; provided that
the Restricted Group may not use the Company Names in any manner that would
tarnish or disparage Marie Gray's name or reputation; and (C) all rights to sue
at law or in equity for any infringement or other impairment of the foregoing,
including the right to receive all proceeds and damages therefrom; Marie Gray
agrees to take all actions and execute all documents reasonably requested by the
Restricted Group to accomplish the foregoing.
(c) This Section 10.13 shall survive the termination of this Agreement.
SECTION 10.14 Additional Securities Subject to Agreement. Each Member
------------------------------------------
agrees that any other Shares (or shares of capital stock of the Parent having
voting rights) which it shall hereafter acquire by means of a stock split, stock
dividend, distribution or other similar event (other than pursuant to a Public
Offering) shall be subject to the provisions of this Agreement to the same
extent as if held as Shares on the date hereof, and in the event of any such
stock split, combination, reclassification, reorganization or other similar
event, where appropriate, the numbers and percentages in this Agreement shall be
adjusted accordingly to replicate the intention of the parties on the date
hereof.
<PAGE>
41
IN WITNESS WHEREOF, the parties have executed this Amended and
Restated Limited Liability Company Agreement as of the day and year first above
written.
VESTAR/SJK INVESTORS LLC
By:
-------------------------------------------
Name:
Title:
----------------------------------------------
ROBERT E. GRAY
----------------------------------------------
MARIE GRAY
----------------------------------------------
KELLY A. GRAY
GRAY FAMILY TRUST
By:
-------------------------------------------
Name: Robert E. Gray
By:
-------------------------------------------
Name: Marie Gray
KELLY ANN GRAY TRUST
By:
-------------------------------------------
Name: Robert E. Gray
By:
-------------------------------------------
Name: Marie Gray
ST. JOHN KNITS INTERNATIONAL,
INCORPORATED
By:
-------------------------------------------
Name:
Title:
<PAGE>
42
ST. JOHN KNITS, INC.
By:
-------------------------------------------
Name:
Title:
<PAGE>
SCHEDULE 1
Gray Members Number of Allocated
- ------------ Units Shares
--------- ---------
Vestar Capital Partners III, L.P. 8.409 5,121,222
1225 17th Street
Suite 1600
Denver, Colorado 80202
Robert E. Gray -- --
St. John Knits, Inc.
17422 Derian Avenue
Irvine, CA 92614
Marie Gray -- --
St. John Knits, Inc.
17422 Derian Avenue
Irvine, CA 92614
Kelly A. Gray 587 357,571
St. John Knits, Inc.
17422 Derian Avenue
Irvine, CA 92614
Gray Family Trust 914 556,772
c/o Robert E. Gray
St. John Knits, Inc.
17422 Derian Avenue
Irving, CA 92614
Kelly Ann Gray Trust 90 54,640
c/o Robert E. Gray
St. John Knits, Inc.
17422 Derian Avenue
Irving, CA 92614
Totals
<PAGE>
Schedule 2
Immediately prior to the Effective Time of the Reorganization Merger, Vestar
will make a capital contribution to the LLC of $153,636,664
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Proxy Statement-Prospectus of our report dated December 18,
1998, (except with respect to note 12 as to which the date is January 8, 1999)
included in St. John Knits, Inc.'s Form 10-K, as amended for the year ended
November 1, 1998 and to all references to our Firm included in this Proxy
Statement-Prospectus.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN
Orange County, California
May 25, 1999
<PAGE>
ST. JOHN KNITS, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. 0
<TABLE>
<CAPTION>
[ ]
<S> <C> <C> <C> <C>
Please Mark Below If You Plan
MERGER PROPOSAL For Against Abstain to Attend the Meeting
Approval of (i) the principal terms of the reorganization O 0 0 0
merger found in the Agreement and Plan of Merger, dated as
of February 2, 1999, by and among St. John Knits, Inc., St. John
Knits International, Incorporated, SJKAcquisition, Inc. and Pearl
Acquisition Corp., pursuant to which St. John Knits, Inc. will
become a wholly owned subsidiary of St. John Knits International,
Incorporated, a Delaware corporation, which is currently a wholly
owned subsidiary of St. John Knits, Inc., and (ii) the form of
agreement of merger to be filed with the California Secretary of
State to effect the reorganization merger.
</TABLE>
Dated: _________________________________________________________________ , 1999
_______________________________________________________________________________
Signature of Shareholder
_______________________________________________________________________________
Printed Name of Shareholder
_______________________________________________________________________________
Title (if applicable)
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS. IF ACTING AS ATTORNEY, EXECUTOR,
TRUSTEE, OR IN REPRESENTATIVE CAPACITY, SIGN NAME AND INDICATE TITLE. IF
SHARES ARE IN THE NAMES OF MORE THAN ONE PERSON, EACH SHOULD SIGN.
- --------------------------------------------------------------------------------
<PAGE>
PROXY PROXY
St. John Knits, Inc.
This Proxy Is Solicited On Behalf Of The Board of Directors
For The Special Meeting of Shareholders -- June 28, 1999
The undersigned hereby appoints Robert E. Gray and Roger G. Ruppert, and each
of them, with full power to appoint his substitutes, attorneys, successors and
assigns, as proxies to represent the undersigned and vote all shares of stock
which the undersigned is entitled to vote at the Special Meeting of Shareholders
of St. John Knits, Inc. to be held on June 28, 1999, at 1:00 p.m. local time, at
the offices of St. John Knits, Inc. located at 17522 Armstrong Avenue, Irvine,
California, and at any adjournments or postponements thereof, upon the matters
set forth herein and, in their discretion, upon all matters which may come
before the Special Meeting.
The Board of Directors has recommended that you vote "FOR" the Merger
Proposal. Unless otherwise specified by the undersigned, this proxy will be
voted FOR the Merger Proposal and will be voted by the proxyholders in
accordance with their best judgment as to any other matters properly transacted
at the Special Meeting and at any postponements or adjournments thereof. To vote
in accordance with the Board of Directors' recommendations just sign on the
reverse side, no boxes need to be checked.
(Continued and to be signed on reverse side.)
- --------------------------------------------------------------------------------
<PAGE>
Form of Non-Cash Election
To accompany certificates representing shares of common stock ("SJK Common
Stock"), no par value per share, of
ST. JOHN KNITS, INC.
when submitted pursuant to an election ("Non-Cash Election") to retain shares
of common stock, par value $0.01 per share ("Non-Cash Election Shares"), of
ST. JOHN KNITS INTERNATIONAL, INCORPORATED, a Delaware corporation ("SJKI"),
in connection with the proposed merger (the "Merger") of Pearl Acquisition
Corp. ("Acquisition") with and into SJKI.
The Exchange Agent for the Merger is:
HARRIS TRUST AND SAVINGS BANK
<TABLE>
<S> <C> <C> <C>
By Mail: Facsimile Transmission: By Hand or Overnight Courier:
Harris Trust and Savings Bank (for Eligible Institutions only) Harris Trust and Savings Bank
c/o Harris Trust Company (212) 701-7636 c/o Harris Trust Company
of New York of New York
Wall Street Station For Confirmation By Telephone: Receive Window
P.O. Box 1023 (212) 701-7624 Wall Street Plaza
New York, NY 10268-1023 88 Pine Street, 19th Floor
New York, NY 10005
The Information Agent for the Merger is:
D.F. KING & CO., INC.
77 Water Street, 20th Floor
New York, New York 10005
(800) 859-8511 (toll free)
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
BOX I: ELECTION AND DESCRIPTION OF SHARES OF SJK COMMON STOCK ENCLOSED (Attach
additional sheets if necessary)
- ----------------------------------------------------------------------------------------------------------------------------
Number of Number of
Name and Address of Registered Holder(s) Shares Shares For
(Please fill in, if blank, exactly as name(s) appears Certificate Represented by Which a Non-Cash
on certificate(s))* Number Each Certificate Election is Made
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
Total Number
of Shares
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Only certificates registered in a single form may be deposited with this Form
of Non-Cash Election. If certificates are registered in different forms (e.g.,
John R. Doe and J.R. Doe), it will be necessary to fill in, sign and submit as
many separate Forms of Non-Cash Election as there are different registrations
of certificates. Unless otherwise indicated, it will be assumed that all
shares listed in Box I are to be treated as having made a Non-Cash Election.
DELIVERY OF THIS FORM OF NON-CASH ELECTION TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE FOR THE EXCHANGE AGENT DOES NOT CONSTITUTE A VALID DELIVERY.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. COMPLETE THE SUBSTITUTE
FORM W-9 INCLUDED WITH THIS FORM OF NON-CASH ELECTION AND SIGN IN BOX IV OF
THIS FORM OF NON-CASH ELECTION.
[_] Check here if you cannot locate certificates. Upon receipt of this Form of
Non-Cash Election, the Exchange Agent will contact you directly with
replacement instructions. You cannot submit an effective Form of Non-Cash
Election without attaching your stock certificate(s) to this Form of Non-
Cash Election. Therefore, if you wish to make an effective Non-Cash
Election, it is critical that you act immediately to obtain replacement
stock certificates.
<PAGE>
HOLDERS OF SJK COMMON STOCK WHO DO NOT WISH TO MAKE A NON-CASH ELECTION (ANY
SUCH HOLDER, A "NON-ELECTING HOLDER") SHOULD NOT SUBMIT THIS FORM OF NON-CASH
ELECTION. EACH SHARE OF SJK COMMON STOCK OWNED BY ANY SUCH NON-ELECTING HOLDER
WILL AUTOMATICALLY, SUBJECT TO PRORATION AS DESCRIBED IN THE PROXY STATEMENT
(AS DEFINED BELOW), BE CONVERTED INTO THE RIGHT TO RECEIVE AN AMOUNT EQUAL TO
$30.00 IN CASH FROM SJKI FOLLOWING THE MERGER.
TO BE EFFECTIVE, THIS FORM OF NON-CASH ELECTION, TOGETHER WITH YOUR STOCK
CERTIFICATE(S) (OR GUARANTEE OF DELIVERY OF SUCH STOCK CERTIFICATE(S)) MUST BE
RECEIVED BY THE EXCHANGE AGENT BEFORE THE ELECTION DEADLINE SPECIFIED IN THE
INSTRUCTIONS.
In connection with the Merger, the undersigned hereby submits the
certificate(s) for shares of SJK Common Stock listed in BOX I and elects,
subject to proration and other conditions as set forth below, to have all or a
portion of the shares of SJK Common Stock represented by such certificate(s)
converted into the right to retain Non-Cash Election Shares following the
Merger.
By delivering certificates for shares of SJK Common Stock, the registered
holder of such certificates releases St. John Knits, Inc., a California
corporation ("SJK"), SJKI, Acquisition and their respective affiliates,
directors, officers, employees, partners, agents, advisors and
representatives, and their respective successors and assigns, from any and all
claims arising from or in connection with the purchase or ownership of such
SJK Common Stock or the exchange of such SJK Common Stock pursuant to the
Merger Agreement.
It is understood that this Form of Non-Cash Election and the following
election are subject to (i) the terms, conditions and limitations set forth in
the Proxy Statement--Prospectus dated May 26, 1999, relating to the Merger
(including all annexes thereto, and as it may be amended or supplemented from
time to time, the "Proxy Statement"), receipt of which is acknowledged by the
undersigned, (ii) the terms of the Agreement and Plan of Merger, dated as of
February 2, 1999 (as the same may be amended or supplemented from time to
time, the "Merger Agreement"), a conformed copy of which appears as Appendix A
to the Proxy Statement, and (iii) the accompanying Instructions. Capitalized
terms not otherwise defined in this Form of Non-Cash Election shall have the
meanings given to such terms in the Merger Agreement.
The undersigned understands that a Non-Cash Election is subject to certain
terms, conditions and limitations that have been set forth in the Merger
Agreement including, but not limited to, the fact that only 456,047 Non-Cash
Election Shares will be issued in the Merger and the remaining outstanding
shares of SJK Common Stock will be converted into the right to receive cash in
the Merger. THE UNDERSIGNED ACKNOWLEDGES THAT THE MERGER AGREEMENT PROVIDES
FOR PRORATION, WITH THE RESULT THAT THE UNDERSIGNED MAY RECEIVE A MIX OF CASH
AND NON-CASH ELECTION SHARES THAT DIFFERS FROM THE NON-CASH ELECTION MADE
HEREBY.
If the undersigned is acting in a representative or fiduciary capacity for a
particular beneficial owner, the undersigned hereby certifies that this Form
of Non-Cash Election covers all of the shares of SJK Common Stock owned by the
undersigned in a representative or fiduciary capacity for such particular
beneficial owner.
The undersigned authorizes and instructs you, as Exchange Agent, to deliver
such certificate(s) of SJK Common Stock to SJK and to receive on behalf of the
undersigned, in exchange for the shares of SJK Common Stock represented
thereby, any certificate for Non-Cash Election Shares or check for cash
issuable in the Merger pursuant to the Merger Agreement. If certificates of
SJK Common Stock are not delivered herewith, there is furnished below a
guarantee of delivery of such certificates representing shares of SJK Common
Stock from a member of a national securities exchange, a member of the
National Association of Securities Dealers, Inc. or a commercial bank or trust
company having an office in the United States.
The undersigned hereby represents and warrants that the undersigned is as of
the date hereof, and will be as of the Closing Dates, the registered holder of
the shares of SJK Common Stock represented by the certificate(s)
2
<PAGE>
for SJK Common Stock surrendered herewith, with good title to such shares of
SJK Common Stock and full power and authority (i) to sell, assign and transfer
such shares, free and clear of all liens, claims and encumbrances, and not
subject to any adverse claims and (ii) to make the Non-Cash Election indicated
herein. All authority conferred or agreed to be conferred in this Form of Non-
Cash Election shall be binding upon the successors, assigns, heirs, executors,
administrators and legal representatives of the undersigned and shall not be
affected by, and shall survive, the death or incapacity of the undersigned.
Unless otherwise indicated under Special Payment Instructions below, please
issue any certificate(s) for Non-Cash Election Shares and/or any check(s)
issuable in exchange for the shares of SJK Common Stock represented by the
certificate(s) submitted hereby in the name of the registered holder(s) of
such SJK Common Stock. Similarly, unless otherwise indicated under Special
Delivery Instructions, please mail any certificate for shares of SJKI Common
Stock and/or any check for cash issuable in exchange for the shares of SJK
Common Stock represented by the certificate(s) submitted hereby to the
registered holder(s) of the SJK Common Stock at the address or addresses shown
above.
BOX II BOX III
SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions) (See Instructions)
To be completed ONLY if the To be completed ONLY if the
certificate(s) for Non-Cash Elec- certificate(s) for Non-Cash
tion Shares are to be registered Election Shares are to be
in the name of, or the check(s) registered in the name of, or the
are to be made payable to, some- check(s) are to be made payable
one other than the registered to, the registered holder(s) of
holder(s) of shares of SJK Common shares of SJK Common Stock, but
Stock. are to be sent to someone other
than the registered holder(s) or
to an address other than the
address of the registered
holder(s) set forth above.
Name _____________________________ Name ______________________________
(Please Print)
Address __________________________ Address ___________________________
__________________________________
(Include Zip Code) __________________________________
(Include Zip Code)
__________________________________
(Tax Identification or Social
Security No.)
3
<PAGE>
BOX IV: PLEASE SIGN HERE
(SEE INSTRUCTIONS)
The undersigned represents and warrants that the undersigned has full
power and authority to transfer the shares of SJK Common Stock
surrendered hereby and that the transferee will acquire good and
unencumbered title thereto, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim when the
shares are accepted for exchange by the Exchange Agent. The undersigned
will, upon request, execute and deliver any additional documents deemed
by the Exchange Agent to be necessary and desirable to complete the
transfer of the shares of SJK Common Stock surrendered hereby.
______________________________ Name: _________________________________
Signature of Owner (Please Print)
Telephone Number (including area
Dated: _______________________ code):
Tax Identification or Social Security
Number: _______________________________
______________________________ Name: _________________________________
Signature of Owner (Please Print)
Telephone Number (including area
Dated: _______________________ code): ________________________________
Tax Identification or Social Security
Number:________________________________
______________________________ Name: _________________________________
Signature of Owner (Please Print)
Telephone Number (including area
Dated: ______________________ code): ________________________________
Tax Identification or Social Security
Number: _______________________________
(Must be signed by registered holder(s) exactly as name(s) appear(s) on stock
certificate(s) or a security position listing or by person(s) authorized to
become registered holder(s) by certificates and documents transmitted herewith.
If signature is by a trustee, executor, administrator, guardian, attorney-in-
fact, officer of a corporation or any other person acting in a fiduciary or
representative capacity, please set forth the following information and see
Instructions.)
Name(s): ______________________________________________________________________
Capacity (full title): ________________________________________________________
Address: ______________________________________________________________________
______________________________________________________________________
Telephone Number (including area code): _______________________________________
- --------------------------------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(See Instructions)
The undersigned hereby guarantees the signature(s) which appear(s) on this
Form of Non-Cash Election.
Name of Firm: __________________________________________________________________
Address: _______________________________________________________________________
_______________________________________________________________________
Authorized Signature ___________________________________________________________
Name: __________________________________________________________________________
Telephone Number (including area code): ________________________________________
4
<PAGE>
BOX V: GUARANTEE OF DELIVERY
(TO BE USED ONLY IF CERTIFICATES ARE NOT SURRENDERED HEREWITH)
(SEE INSTRUCTIONS)
The undersigned is: (1) a member of a national securities exchange; (2) a
member of the National Association of Securities Dealers, Inc.; or (3) a
commercial bank or trust company having an office in the United States; and
guarantees to deliver to the Exchange Agent the certificates for shares of
SJK Common Stock to which this Form of Non-Cash Election relates, duly
endorsed in blank or otherwise in form acceptable for transfer on the books
of SJK, no later than 5:00 p.m. New York City time on the third New York
Stock Exchange trading day after the date of execution of this guarantee of
delivery.
- --------------------------------------------------------------------------------
_____________________________________ _______________________________________
Firm (Please Print) Address
_____________________________________ _______________________________________
Authorized Signature
_____________________________________ _______________________________________
Date
_______________________________________
Telephone Number (including area code)
_______________________________________
Contact Name
5
<PAGE>
INSTRUCTIONS FOR FORM OF NON-CASH ELECTION
A. SPECIAL CONDITIONS.
1. Time in Which to Elect. To be effective, a Non-Cash Election pursuant to
the terms and conditions set forth herein on this Form of Non-Cash Election or
a facsimile hereof, accompanied by the above-described certificate(s)
representing shares of SJK Common Stock or a proper guarantee of delivery
thereof, must be received by the Exchange Agent, at the address set forth
above, no later than 5:00 p.m., New York City time, on June 25, 1999 (the
"Election Date"). Holders of SJK Common Stock whose stock certificates are not
immediately available may also make an effective Non-Cash Election by
completing this Form of Non-Cash Election or a facsimile hereof and having the
Guarantee of Delivery box (BOX V) properly completed and duly executed
(subject to the condition that the certificate(s) for which delivery is
thereby guaranteed are in fact delivered to the Exchange Agent, duly endorsed
in blank or otherwise in form acceptable for transfer on the books of SJK, no
later than 5:00 p.m., New York City time, on the third New York Stock Exchange
trading day after the date of execution of such guarantee of delivery). Each
share of SJK Common Stock with respect to which the Exchange Agent shall have
not received an effective Non-Cash Election prior to the Election Date, or
with respect to which the proration procedures set forth in the Proxy
Statement pertain, outstanding at the Effective Time of the Acquisition Merger
will be converted into the right to receive an amount equal to $30.00 in cash
from SJKI following the Merger. See Instruction C.
2. Revocation of Non-Cash Election. Any Non-Cash Election may be revoked by
the person who submitted this Form of Non-Cash Election to the Exchange Agent
and the certificate(s) for shares withdrawn by written notice duly executed
and received by the Exchange Agent prior to 5:00 p.m., New York City time, on
the Election Date. Such notice must specify the person in whose name the
shares of SJK Common Stock to be withdrawn had been deposited, the number of
shares to be withdrawn, the name of the registered holder thereof, and the
serial numbers shown on the certificate(s) representing the shares to be
withdrawn. If a Non-Cash Election is revoked, and the certificate(s) for
shares withdrawn, the SJK Common Stock certificate(s) submitted therewith will
be promptly returned by the Exchange Agent to the person who submitted such
certificate(s).
3. Termination of Right to Elect. If for any reason the Merger is not
consummated or is abandoned, all Forms of Non-Cash Election will be void and
of no effect. Certificate(s) for SJK Common Stock previously received by the
Exchange Agent will be returned promptly by the Exchange Agent to the person
who submitted such stock certificate(s).
B. ELECTION AND PRORATION PROCEDURES.
A description of the election and proration procedures is set forth in the
Proxy Statement under "THE MERGERS --Merger Consideration;" "--
Conversion/Retention of Shares; Procedures for Exchange of Certificates." A
full statement of the election and proration procedures is contained in the
Merger Agreement and all Non-Cash Elections are subject to compliance with
such procedures. IN CONNECTION WITH MAKING ANY NON-CASH ELECTION, A HOLDER OF
SJK COMMON STOCK SHOULD READ CAREFULLY, AMONG OTHER MATTERS, THE AFORESAID
DESCRIPTION AND STATEMENT AND THE INFORMATION CONTAINED IN THE PROXY STATEMENT
UNDER "SPECIAL FACTORS--MATERIAL FEDERAL INCOME TAX CONSEQUENCES."
AS A RESULT OF THE PRORATION PROCEDURES, HOLDERS OF SJK COMMON STOCK MAY
RECEIVE NON-CASH ELECTION SHARES AND/OR CASH IN AMOUNTS WHICH VARY FROM THE
AMOUNTS SUCH HOLDERS ELECT TO RECEIVE. SUCH HOLDERS WILL NOT BE ABLE TO CHANGE
THE NUMBER OF NON-CASH ELECTION SHARES OR THE AMOUNT OF CASH ALLOCATED TO THEM
PURSUANT TO SUCH PROCEDURES.
6
<PAGE>
C. RECEIPT OF NON-CASH ELECTION SHARES OR CHECKS.
As soon as practicable after the Effective Time of the Acquisition Merger
and after the Election Date, the Exchange Agent will mail certificate(s) for
Non-Cash Election Shares and/or cash payments by check to the holders of SJK
Common Stock with respect to each share of SJK Common Stock which is included
in any effective Non-Cash Election. Holders of SJK Common Stock who declined
to make a Non-Cash Election, or failed to make an effective Non-Cash Election,
with respect to any or all of their shares will receive, for each such share,
the right to receive an amount equal to $30.00 in cash, subject to proration,
as soon as practicable after the certificate(s) representing such share or
shares have been submitted.
No fractional Non-Cash Election Shares will be issued in connection with the
Merger. In lieu thereof, each fractional share shall be exchanged for an
amount in cash (without interest) equal to the product of such fraction
multiplied by the average of the last reported sales price, regular way, per
share of SJK common stock on the New York Stock Exchange Composite
Transactions for the ten business days prior to and including the last
business day prior to the day on which the effective time of the Acquisition
Merger occurs, as set forth in Section 4.6(e)(ii) of the Merger Agreement.
D. GENERAL.
1. Execution and Delivery. This Form of Non-Cash Election or a facsimile
hereof must be properly filled in, dated and signed in BOX IV, and must be
delivered (together with stock certificate(s) representing the shares of SJK
Common Stock as to which the Non-Cash Election is made or with a duly signed
guarantee of delivery of such certificate(s)) to the Exchange Agent at the
address set forth above for the Exchange Agent.
THE METHOD OF DELIVERY OF CERTIFICATE(S) AND ALL OTHER REQUIRED DOCUMENTS IS
AT THE OPTION AND RISK OF THE STOCKHOLDER, BUT IF SENT BY MAIL, IT IS
RECOMMENDED THAT THEY BE SENT BY REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED.
2. Inadequate Space. If there is insufficient space on this Form of Non-Cash
Election to list all your stock certificates being submitted to the Exchange
Agent, please attach a separate list.
3. Guarantee of Signatures. Signatures on all Forms of Non-Cash Election
must be guaranteed by a financial institution that is a member of a Securities
Transfer Association approved medallion program such as STAMP, SEMP or MSP (an
"Eligible Institution"), except in cases where securities are surrendered (i)
by a registered holder of the securities who has not completed either the box
entitled "Special Payment Instructions" or the box entitled "Special Delivery
Instructions" on the Form of Non-Cash Election or (ii) for the account of an
Eligible Institution. See Instruction D.4.
4. Book-Entry Transfer of Shares. The Exchange Agent has established an
account with respect to the shares of SJK Common Stock at The Depository Trust
Company (the "Book-Entry Transfer Facility"). Any financial institution that
is a participant in the Book-Entry Transfer Facility system may make book-
entry delivery of shares of SJK Common Stock by causing the Book-Entry
Transfer Facility to transfer such shares of SJK Common Stock into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance
with the Book-Entry Transfer Facility's procedure for such transfer. However,
although delivery of such shares of SJK Common Stock may be effected through
book-entry transfer at the Book-Entry Transfer Facility, a properly completed
and duly executed Form of Non-Cash Election with any required signature
guarantees and any other required documents must, in any case, be transmitted
to and received by the Exchange Agent at one of its addresses set forth on the
first page of the Form of Non-Cash Election no later than 5:00 p.m. New York
City time on the Election Date. In addition, for such Form of Non-Cash
Election to be effective, confirmation of book-entry transfer of such shares
of SJK Common Stock into the Exchange Agent's account at the Book-Entry
Transfer Facility must be received by the Exchange Agent no later than 5:00
p.m. New York City time on the Election Date.
7
<PAGE>
5. Signatures. The signature (or signatures, in the case of certificates
owned by two or more joint holders) on this Form of Non-Cash Election should
correspond exactly with the name(s) as written on the face of the
certificate(s) submitted, unless shares of SJK Common Stock described on this
Form of Non-Cash Election have been assigned by the registered holder(s), in
which event this Form of Non-Cash Election should be signed in exactly the
same form as the name(s) of the last transferee(s) indicated on the transfers
attached to or endorsed on the certificate(s).
If this Form of Non-Cash Election is signed by a person or persons other
than the registered owner(s) of the certificate(s) listed, the certificate(s)
must be endorsed or accompanied by appropriate stock powers, in either case
signed exactly as the name(s) of the registered owner(s) appear on the
certificate(s).
If this Form of Non-Cash Election or any stock certificate(s) or stock
power(s) are signed by a trustee, executor, administrator, guardian, attorney-
in-fact, officer of a corporation or any other person acting in a fiduciary or
representative capacity, the person signing must give such person's full title
in such capacity, and appropriate evidence of authority to act in such
capacity must be forwarded with this Form of Non-Cash Election.
6. Partial Exchanges. If fewer than all the shares represented by any
certificate delivered to the Exchange Agent are to be submitted for exchange,
fill in the number of shares which are to be submitted in the box entitled
"Number of Shares For Which a Non-Cash Election Is Made" (BOX I). In such
case, a new certificate for the remainder of the shares represented by the old
certificate will be sent to the registered owner(s) as soon as practicable
following the Election Date. All shares represented by certificates submitted
hereunder will be deemed to have been submitted unless otherwise indicated.
7. Lost, Stolen or Destroyed Certificates. If your stock certificate(s) has
been either lost or destroyed, please check the box on the front of the Form
of Non-Cash Election and the appropriate forms for replacement will be sent to
you. You will then be instructed as to the steps you must take in order to
receive a stock certificate(s) representing Non-Cash Election Shares and/or
any checks in accordance with the Merger Agreement.
8. Stock Transfer Taxes. If payment for securities is to be made to any
person other than the registered holder, or if any surrendered certificate(s)
are registered in the name of any person other than the person(s) signing the
Form of Non-Cash Election, the amount of any stock transfer taxes (whether
imposed on the registered holder or such person) payable as a result of the
transfer to such person will be deducted from the payment for such securities
if satisfactory evidence of the payment of such taxes, or exemption therefrom,
is not submitted.
9. New Certificates and/or Checks in Same Name. If any stock certificate(s)
representing Non-Cash Election Shares or any check(s) in respect of Non-Cash
Election Shares are to be registered in, or made payable to the order of,
exactly the same name(s) that appears on the certificate(s) representing
shares of SJK Common Stock submitted with the Form of Non-Cash Election, no
endorsement of certificate(s) or separate stock power(s) are required.
10. New Certificates and Checks in Different Name. If any stock
certificate(s) representing Non-Cash Election Shares or any check(s) in
respect of Non-Cash Election Shares are to be registered in, or made payable
to the order of, other than exactly the same name(s) that appear on the
certificate(s) representing shares of SJK Common Stock submitted with the Form
of Non-Cash Election, such exchange shall not be made by the Exchange Agent
unless the certificate(s) submitted are endorsed, BOX II is completed, and the
signature is guaranteed in BOX IV by a member of a national securities
exchange, a member of the National Association of Securities Dealers, Inc. or
a commercial bank (not a savings bank or a savings & loan association) or
trust company in the United States which is a member in good standing of the
Exchange Agent's Medallion Program.
11. Special Delivery Instructions. If the checks are to be payable to the
order of, or the certificates for Non-Cash Election Shares are to be
registered in, the name of the registered holder(s) of shares of SJK Common
Stock, but are to be sent to someone other than the registered holder(s) or to
an address other than the address of the registered holder(s), it will be
necessary to indicate such person or address in BOX III.
12. Miscellaneous. A single check and/or a single stock certificate
representing Non-Cash Election Shares will be issued in exchange for shares of
SJK Common Stock submitted herewith.
8
<PAGE>
13. Backup Federal Income Tax Withholding and Substitute Form W-9. Under the
"backup withholding" provisions of Federal income tax law, the Exchange Agent
may be required to withhold 31% of the amount of any payment made to holders
of SJK Common Stock pursuant to the Merger. To prevent backup withholding,
each holder should complete and sign the Substitute Form W-9 included in the
Form of Non-Cash Election and either: (a) provide the correct taxpayer
identification number ("TIN") and certify, under penalties of perjury, that
the TIN provided is correct (or that such holder is awaiting a TIN), and that
(i) the holder has not been notified by the Internal Revenue Service ("IRS")
that the holder is subject to backup withholding as a result of failure to
report all interest or dividends, or (ii) the IRS has notified the holder that
the holder is no longer subject to backup withholding; or (b) provide an
adequate basis for exemption. If the box in Part 2 of the Substitute Form W-9
is checked, the Exchange Agent shall retain 31% of payments made to a holder
during the sixty (60) day period following the date of the Substitute Form W-
9. If the holder furnishes the Exchange Agent with his or her TIN within sixty
(60) days of the date of the Substitute Form W-9, the Exchange Agent shall
remit such amounts retained during the sixty (60) day period to the holder and
no further amounts shall be retained or withheld from payments made to the
holder thereafter. If, however, the holder has not provided the Exchange Agent
with his or her TIN within such sixty (60) day period, the Exchange Agent
shall remit such previously retained amounts to the IRS as backup withholding
and shall withhold 31% of all payments to the holder thereafter until the
holder furnishes a TIN to the Exchange Agent. In general, if a holder is an
individual, the TIN is the Social Security number of such individual. If the
certificates for SJK Common Stock are registered in more than one name or are
not in the name of the actual owner, consult the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9
("Guidelines") for additional guidance on which number to report. If the
Exchange Agent is not provided with the correct TIN or an adequate basis for
exemption, the holder may be subject to a $50 penalty imposed by the IRS and
backup withholding at a rate of 31%. Certain holders (including, among others,
all corporations and certain foreign individuals) are not subject to these
backup withholding and reporting requirements. In order to satisfy the
Exchange Agent that a foreign individual qualifies as an exempt recipient,
such holder must submit a statement (generally, IRS Form W-8), signed under
penalties of perjury, attesting to that individual's exempt status. A form for
such statements can be obtained from the Exchange Agent.
For further information concerning backup withholding and instructions for
completing the Substitute Form W-9 (including how to obtain a TIN if you do
not have one and how to complete the Substitute Form W-9 if SJK Common Stock
is held in more than one name), consult the enclosed Guidelines.
Failure to complete the Substitute Form W-9 will not, by itself, cause SJK
Common Stock to be deemed invalidly tendered, but may require the Exchange
Agent to withhold 31% of the amount of any payments made pursuant to the
Merger. Backup withholding is not an additional Federal income tax. Rather,
the Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
14. Additional Copies. Additional copies of the Form of Non-Cash Election
may be obtained from Harris Trust Company of New York at the address listed
above.
All questions with respect to this Form of Non-Cash Election, the Non-Cash
Elections (including, without limitation, questions relating to the timeliness
or effectiveness of revocation of any Non-Cash Election and computations as to
proration), and the validity, form and eligibility of any surrender of
certificates will be determined by SJK and Acquisition and such determination
shall be final and binding. SJK and Acquisition reserve the right to waive any
irregularities or defects in the surrender of any certificates. A surrender
will not be deemed to have been made until all irregularities have been cured
or waived.
9
<PAGE>
SUBSTITUTE FORM W-9 REQUEST FOR TAXPAYER IDENTIFICATION NUMBER AND
CERTIFICATION
(PLEASE REFER TO ACCOMPANYING GUIDELINES)
- --------------------------------------------------------------------------------
PART 1--PLEASE ENTER YOUR SOCIAL
SECURITY NUMBER OR EMPLOYER
IDENTIFICATION NUMBER
- --------------------------------------------------------------------------------
PART 2--CERTIFICATION
Please check the box at the right if you have
applied for, and are awaiting receipt of, your
Taxpayer Identification Number.[_]
Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct
Taxpayer Identification Number (or I am waiting
for a number to be issued to me) and
(2) I am not subject to backup withholding either
because I have not been notified by the
Internal Revenue Service ("IRS") that I am
subject to backup withholding as a result of
failure to report all interest or dividends, or -------------------------
the IRS has notified me that I am no longer
subject to backup withholding.
Certificate Instructions--You may cross out item
(2) in Part 2 above if you have been notified by
the IRS that you are subject to backup withholding
because of underreporting interest or dividends on
your tax return. However, if after being notified
by the IRS that you were subject to backup
withholding you received another notification from
the IRS stating that you are no longer subject to
backup withholding, do not cross out item (2).
SIGNATURE: _______________________________________ Date: ___________________
- --------------------------------------------------------------------------------
IF YOU CHECKED THE BOX IN PART 2 OF THE SUBSTITUTE FORM W-9, YOU MUST SIGN
AND DATE THE FOLLOWING CERTIFICATION:
CERTIFICATION OF PAYEE AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify, under penalties of perjury, that a Taxpayer Identification Number
has not been issued to me, and that I mailed or delivered an application to
receive a Taxpayer Identification Number to the appropriate IRS Center or
Social Security Administration Office (or I intend to mail or deliver an
application in the near future). I understand that if I do not provide a
Taxpayer Identification Number to the payer, 31% of all payments made to me
pursuant to this Merger shall be retained until I provide a Taxpayer
Identification Number to the payer and that, if I do not provide my Taxpayer
Identification Number within 60 days, such retained amounts shall be remitted
to the IRS as backup withholding and 31% of all reportable payments made to
me thereafter will be withheld and remitted to the IRS until I provide a
Taxpayer Identification Number.
SIGNATURE: _______________________________________ Date: ___________________
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU.
PART 3--CERTIFICATION FOR FOREIGN RECORD HOLDERS
Under penalties of
perjury, I certify
that I am not a United
States citizen or
resident (or I am
signing for a foreign
corporation,
partnership, estate or
trust).
SIGNATURE: ____________
DATE: _________________
10
<PAGE>
EXHIBIT 99.10
RE: ST. JOHN KNITS, INC.
FORM OF NON-CASH ELECTION
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
We are enclosing herewith the materials listed below relating to the Form of
Non-Cash Election as described in and subject to conditions set forth in the
Proxy Statement-Prospectus dated May 26, 1999 (including all documents
attached as appendices thereto, and as it may be amended or supplemented from
time to time, the "Proxy Statement"), which describes the Agreement and Plan
of Merger, dated as of February 2, 1999, among St. John Knits, Inc. ("St.
John"), St. John Knits International, Incorporated ("SJKI"), SJKAcquisition,
Inc. and Pearl Acquisition Corp. (the "Merger Agreement") providing for, among
other things, the merger of Pearl Acquisition Corp. with and into SJKI (the
"Merger"). THE PROXY STATEMENT HAS BEEN MAILED UNDER SEPARATE COVER TO YOUR
PROXY DEPARTMENT FOR DISTRIBUTION TO YOUR CLIENTS. Capitalized terms used
herein and not defined herein have the meaning specified in the Merger
Agreement.
Subject to the potential for proration described in the Proxy Statement,
pursuant to the Form of Non-Cash Election, record holders of shares of St.
John common stock, no par value per share ("SJK Common Stock"), are entitled
to make an election (a "Non-Cash Election") on or prior to 5:00 p.m., New York
City time, on June 25, 1999 to receive shares of common stock of SJKI ("Non-
Cash Election Shares") by properly executing and submitting the enclosed Form
of Non-Cash Election.
Enclosed are copies of the following documents:
1.Form of Non-Cash Election for your use and for the information of your
clients.
2. A printed form of letter which may be sent to your clients for whose
accounts you or your nominee hold SJK Common Stock as the registered
holder with space provided for obtaining such clients' instructions with
regard to any Non-Cash Election.
YOUR PROMPT ACTION IS REQUIRED, WE URGE YOU TO CONTACT YOUR CLIENTS AS SOON
AS POSSIBLE. THE PERIOD IN WHICH A NON-CASH ELECTION CAN BE MADE WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON JUNE 25, 1999.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE NON-CASH ELECTION OR
THE PROXY STATEMENT SHOULD BE DIRECTED TO D.F. KING & CO., INC. AT THE
FOLLOWING TOLL-FREE TELEPHONE NUMBER: (800) 859-8511.
Very truly yours,
ST. JOHN KNITS, INC.
<PAGE>
RE: ST. JOHN KNITS, INC.
FORM OF NON-CASH ELECTION
To Our Clients:
In connection with the Proxy Statement-Prospectus dated May 26, 1999,
(including all documents attached as appendices thereto, and as it may be
amended or supplemented from time to time, the "Proxy Statement") describing
the Agreement and Plan of Merger, dated as of February 2, 1999, among St. John
Knits, Inc. ("St. John"), St. John Knits International, Incorporated ("SJKI"),
SJKAcquisition, Inc. and Pearl Acquisition Corp. (the "Merger Agreement"),
providing for the merger of Pearl Acquisition Corp. with and into SJKI (the
"Merger"), enclosed for your consideration and information is a Form of Non-
Cash Election. THE PROXY STATEMENT, WHICH CONTAINS A COPY OF THE MERGER
AGREEMENT, HAS BEEN SENT TO YOU UNDER SEPARATE COVER. Capitalized terms used
herein and not defined herein have the meaning specified in the Merger
Agreement.
As described in and subject to conditions set forth in the Proxy Statement,
and subject to the proration described therein, record holders of shares of
St. John common stock, no par value per share ("SJK Common Stock") are
entitled to make an election (a "Non-Cash Election") on or prior to 5:00 p.m.
New York City time, on June 25, 1999, to receive shares of common stock of
SJKI ("Non-Cash Election Shares") by executing and submitting the enclosed
Form of Non-Cash Election. As described in and subject to conditions set forth
in the Proxy Statement and the Form of Non-Cash Election, record holders of
shares of SJK Common Stock may revoke any Non-Cash Election prior to 5:00
p.m., New York City time, on June 25, 1999 by sending executed written notice
to St. John's exchange agent.
We are registered holders of SJK Common Stock held for your account. Any
Non-Cash Election can be made only by us as the registered holder of such
shares and only pursuant to your instructions as the beneficial owners of such
shares. Accordingly, we request instructions if you wish us to exercise the
Non-Cash Election for any shares of SJK Common Stock, which you are entitled
to do pursuant to the terms and subject to the conditions set forth in the
Proxy Statement and the Form of Non-Cash Election. We urge you, however, to
read these documents carefully before instructing us to exercise the Form of
Non-Cash Election.
A description of the election and proration procedures is set forth in the
Proxy Statement under "The Mergers - Merger Consideration." A full statement
of the election and proration procedures is contained in the Merger Agreement
and all Non-Cash Elections are subject to compliance with such procedures. In
connection with making any Non-Cash Election, a holder of SJK Common Stock
should read carefully, among other matters, the aforesaid description and
statement and the information contained in the Proxy Statement under "Special
Factors - Material Federal Income Tax Consequences," "Risk Factors - The
Fairness Opinions and the Board Recommendation May Not Apply to Shareholders
Electing to Receive St. John Knits International Common Stock," and "Risk
Factors - You May Not Receive the Type of Consideration Specified in Your
Election."
AS A RESULT OF THE PRORATION PROCEDURES, HOLDERS OF SJK COMMON STOCK MAY
RECEIVE NON-CASH ELECTION SHARES OR CASH IN AMOUNTS WHICH VARY FROM THE
AMOUNTS SUCH HOLDERS ELECT TO RECEIVE. SUCH HOLDERS WILL NOT BE ABLE TO CHANGE
THE NUMBER OF NON-CASH ELECTION SHARES OR THE AMOUNT OF CASH ALLOCATED TO THEM
PURSUANT TO SUCH PROCEDURES.
Holders of SJK Common Stock who do NOT wish to make a Non-Cash Election (any
such holder being referred to as a "Non-Electing Holder") need not submit a
Form of Non-Cash Election. Each share of SJK Common Stock owned by such Non-
Electing Holder will automatically, subject to proration as described in the
Proxy Statement, be converted into the right to receive an amount equal to
$30.00 in cash from SJKI following the Merger.
If you wish to have us, on your behalf, exercise the Form of Non-Cash
Election, please so instruct us by completing, executing and returning to us
the attached letter of instructions (the "Letter of Instructions") attached to
this letter. THE ENCLOSED FORM OF NON-CASH ELECTION IS FURNISHED TO YOU FOR
YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO EXCHANGE SJK COMMON STOCK
HELD BY US FOR OUR ACCOUNT. The Letter of Instructions should be forwarded as
promptly as possible to permit us to exercise the Non-Cash Election in
accordance with the procedures outlined in the Proxy Statement. If we do not
receive a complete Letter of Instructions in accordance with such procedures,
we will not exercise a Non-Cash Election on your behalf.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE NON-CASH ELECTION OR
THE PROXY STATEMENT, OR COMPLETION OF THE LETTER OF INSTRUCTIONS, SHOULD BE
DIRECTED TO D.F. KING & CO., INC. AT THE FOLLOWING TOLL-FREE TELEPHONE NUMBER:
(800) 859-8511.
Very truly yours,
ST. JOHN KNITS, INC.
-1-
<PAGE>
LETTER OF INSTRUCTIONS
To My Bank or Broker:
This letter instructs you to exercise the Non-Cash Election to receive Non-
Cash Election Shares in exchange for shares of common stock, no par value, of
St. John Knits, Inc. ("SJK Common Stock") specified below which you hold for
the account of the undersigned. Capitalized terms used herein and not defined
herein have the meaning specified in the Merger Agreement.
It is understood that the Non-Cash Election is subject to (i) the terms,
conditions and limitations set forth in the Proxy Statement-Prospectus, dated
May 26, 1999, relating to the Merger (including all documents incorporated
therein, and as may be amended or supplemented from time to time, the "Proxy
Statement"), receipt of which is acknowledged by the undersigned, (ii) the
terms of the Agreement and Plan of Merger, dated as of February 2, 1999, as
the same may be amended from time to time, a conformed copy of which appears
as Appendix A to the Proxy Statement (the "Merger Agreement"), and (iii) the
accompanying Form of Non-Cash Election.
If you are electing to exchange all or a portion of your shares, you must
properly fill in the information requested in this box, even if you are
electing to retain only a portion of your shares.
<TABLE>
<CAPTION>
Total Number of Shares of SJK Common
Name and Address of Beneficial Stock Held Number of Shares To Be
Owner(s) of SJK Common Stock (Attach additional list if necessary) Exchanged for Non-Cash Election Shares
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
TOTAL SHARES
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Unless otherwise indicated in this box, it will be assumed that all
shares submitted are to be treated as having made an election to receive
new shares. Remaining shares represented by such certificates will be
converted into cash, subject to proration.
** In the event of proration, a holder may be required to receive some
cash. If a holder knows the number or numbers of such holder's
certificate(s), a holder may choose to indicate in the space following
this sentence the number(s) of the certificate(s) deemed to represent
any shares of SJK Common Stock converted into cash. Certificate
No(s): _______________________________________________________________.
Holders are not required to so identify certificate numbers in this
space. In the event of proration, shares will be converted to cash from
stock certificates in the order in which they have been listed. There
can be no assurance that any identification of share certificate(s) will
be recognized by any governmental agency or third party. In addition, no
such certificate identification will operate to alter the application of
the proration procedures in the Merger.
DATED: _____________________, 1999 -----------------------------
---------------------------------- -----------------------------
Account Number SJK Common Stock Signature(s)
Phone Number: ( ) -
-2-
