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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): SEPTEMBER 24, 1998
JONES APPAREL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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PENNSYLVANIA 06-0935166
(STATE OR OTHER JURISDICTION 1-10746 (IRS EMPLOYER
OF INCORPORATION (COMMISSION FILE NUMBER) IDENTIFICATION NUMBER)
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250 RITTENHOUSE CIRCLE
BRISTOL, PA 19007
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 785-4000
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED FROM LAST REPORT)
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ITEM 5. OTHER EVENTS
On September 10, 1998, Jones Apparel Group, Inc., a Pennsylvania
corporation (the "Company" or "Jones"), Sun Apparel, Inc., a Texas corporation
("Sun"), the shareholders of Sun (the "Shareholders") and SAI Acquisition Corp.,
a wholly-owned subsidiary of Jones ("SAI"), entered into an Agreement and Plan
of Merger. A copy of the Merger Agreement is attached as Exhibit 2.1 hereto and
is incorporated herein by reference. The Merger Agreement contains customary
representations, warranties, covenants (including certain non-competition and
non-interference provisions for Eric Rothfeld and Mindy Grossman) and conditions
and certain indemnification provisions.
The Merger Agreement provides for Sun to be merged into SAI (which will
change its name to Sun Apparel, Inc.), thus becoming a wholly-owned subsidiary
of Jones (the "Acquisition"). At closing Jones will (i) pay approximately $125
million in cash, (ii) issue approximately 4.8 million shares of Jones common
stock to the Shareholders, valued at the closing price of Jones common stock on
the date the Merger Agreement was signed and announced, subject to final
adjustment in the proportions of cash and stock, depending upon the price at
which Jones common stock trades immediately preceding the closing, and (iii)
refinance approximately $232 million of Sun debt. In addition, the Shareholders
will be entitled to receive $2 for each $1 by which Sun's earnings before
interest and taxes exceed the amounts in the table below (the "Contingent
Payments"). Contingent Payments, if any, will be paid 59% in cash and 41% in
Jones common stock (the value of which will be determined by the prices at which
Jones common stock trades in a defined period preceding delivery in each year).
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TARGET YEAR THRESHOLD AMOUNT
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(IN MILLIONS)
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1998................................................. $57.0
1999................................................. 58.0
2000................................................. 63.0
2001................................................. 85.0
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Jones believes that the Acquisition provides the following benefits to both
Jones and Sun:
- provides complementary product lines over similar distribution channels,
through the Polo Jeans licensed brand;
- introduces Jones to the mass merchandise market distribution channel
through Sun's private and branded label business;
- combines experienced management teams;
- further solidifies Jones' position as one of the largest licensees of the
Polo Ralph Lauren Corporation;
- provides vertical manufacturing expertise in the jeanswear business; and
- leverages Jones' existing infrastructure.
A copy of the Press Release, dated September 10, 1998, issued by the
Company relating to the Merger Agreement, is attached as Exhibit 99.1 hereto and
is incorporated herein by reference.
In connection with the Acquisition, employment agreements which will take
effect at the closing have been entered into between SAI and Eric Rothfeld, the
controlling shareholder of Sun and its Chairman, Chief Executive Officer and
President, and between a subsidiary of Sun and Mindy Grossman, Executive Vice
President of Sun and President and Chief Executive Officer of the Polo Jeans
Company Division of Sun. Copies of the employment agreements are attached hereto
as Exhibit 10.1 and Exhibit 10.2, respectively, and are incorporated herein by
reference. Both employment agreements run through December 31, 2001, and contain
significant incentive compensation awards based on Sun's and the Polo Jeans
Company Division's earnings, respectively, through the employment period. Both
employment agreements also contain certain non-competition and non-interference
obligations while the individuals are employed by Sun, and for certain periods
thereafter. Upon consummation of the Acquisition, Eric Rothfeld will become a
member of the Jones board of directors.
Jones and the Shareholders also have entered into a Registration Rights
Agreement, which provides for the registration under the Securities Act of 1933
(the "Securities Act") of resales of the Jones common stock
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issued to the Shareholders at the closing, and the Jones common stock which may
be issued as part of the Contingent Payments. The Registration Rights Agreement
requires Jones to maintain for five years from the closing a shelf registration
statement covering resales of such common stock, and gives each of the two
principal Shareholders a right to one registration for an underwritten stock
offering. Shares of Jones common stock issued at the closing to Eric Rothfeld
and certain other Shareholders may not be sold until after six months from the
closing, and thereafter may be sold in amounts equal to 20% of the number of
such shares in each succeeding six-month period. After 30 months from the
closing, all such restrictions on transfer will expire. A copy of the
Registration Rights Agreement is attached hereto as Exhibit 4.1 and is
incorporated herein by reference.
Jones expects to use a combination of borrowings under its Senior Credit
Facilities (defined below), together with the net proceeds of an offering (the
"Offering") of $300 million principal amount of senior unsecured notes (the
"Notes") to be issued in an unregistered offering pursuant to exemptions under
Rule 144A and Regulation S of the Securities Act, to finance the cash portion of
the purchase price for Sun (approximately $125 million), to refinance existing
indebtedness of Sun (approximately $232 million), to pay related expenses
(approximately $10 million) and for general corporate purposes, including
working capital and stock repurchases. The Offering of the Notes has not been
registered under the Securities Act and may not be offered or sold in the United
States absent registration or an applicable exemption from registration
requirements.
In connection with the Acquisition, Jones intends to replace its existing
credit lines and enter into new term and revolving credit facilities in an
aggregate principal amount of up to $850 million (the "Senior Credit
Facilities"). The Senior Credit Facilities will consist of (i) an aggregate $600
million of 364-day credit facilities, to be allocated between a $300 million
364-day revolving credit facility (to be available for trade letters of credit)
and a $300 million 364-day term loan facility (which term loan facility will
only be utilized to the extent the Offering is not completed), and (ii) an
aggregate of $250 million of three-year credit facilities, to be allocated
between a $100 million term loan facility and a $150 million revolving credit
facility.
Jones may utilize a portion of the proceeds under the three-year revolving
credit facility to execute repurchases under its common stock repurchase
program. The repurchase program authorizes Jones to purchase shares in the open
market and the repurchased shares are held as treasury shares. Jones has
repurchased $195.1 million of its shares as of September 18, 1998, since the
program's inception in December 1995. An additional $100 million was approved by
the Jones Board of Directors on September 16, 1998, to provide for additional
repurchases. Jones may authorize additional share repurchases in the future
depending on, among other things, market conditions and Jones' financial
condition.
Set forth below is additional information for security holders about Sun,
the Acquisition and related transactions.
1. STRATEGY
In addition to its nationally recognized brand names, Jones believes it
enjoys a number of competitive strengths, including its design team, worldwide
network of manufacturers and reputation for customer service. Jones seeks to
capitalize on these competitive advantages and the benefits of the Acquisition
through the following growth strategies:
EXPAND LAUREN BY RALPH LAUREN LINE. The Acquisition will allow Jones to
capitalize on the success of the Lauren by Ralph Lauren line by introducing
jeanswear products under the brand. Jones' previous licensing arrangement with
Polo Ralph Lauren precluded Jones from doing so. Jones believes that Sun's
expertise in the jeanswear manufacturing and finishing process, coupled with
Jones' marketing strengths, will provide an opportunity to create a significant
denim business. Jones also plans to introduce large sizes under the Lauren by
Ralph Lauren label for the Fall 1999 season.
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EXPAND DISTRIBUTION CHANNELS. The acquisition of the Sun Apparel business
introduces Jones to new distribution channels, such as moderate department
stores and specialty stores, as well as to mass-market distribution chains such
as Wal-Mart. Jones has historically not distributed its products through these
channels. Jones believes that Sun's sales expertise in these markets provides an
opportunity for the newly combined entity to introduce brand names (other than
their current brand names) to these new channels.
EXPAND EXISTING PRIMARY PRODUCT LINES. Jones intends to increase the
number of department store locations that sell its four major brands and the
amount of retail space devoted to those brands within existing department store
locations. The combination of two major Ralph Lauren product resources (Lauren
by Ralph Lauren and Polo Jeans Company) complemented by Jones' existing array of
labels will further enhance Jones' status as one of the primary apparel
resources for many of its retail accounts. The Acquisition will also increase
Jones' leverage with its department store customers. As a primary apparel
resource, Jones can influence the mix and timing of orders, which allows Jones
to more effectively market complete product lines and minimize excess inventory.
EXPAND POLO JEANS COMPANY RALPH LAUREN BRAND. Jones believes that there
are many opportunities to grow the Polo Jeans brand licensed by Sun, including:
- expanding existing and installing additional in-store shops. In-store
shops are areas within department stores dedicated to Polo Jeans Products
utilizing signature Polo Jeans fixtures;
- increasing the number of department and specialty stores carrying Polo
Jeans Products;
- increasing sales to Polo Ralph Lauren retail stores, which Jones believes
will augment Polo Jeans Products sales and enhance consumer recognition
of the brand; and
- broadening product offerings within the Polo Jeans collection, such as
new jeanswear products, as well as casual bottoms, knitwear, sweaters and
outerwear.
EXPAND SUN DIVISION BUSINESS. Jones believes that there are many
opportunities to grow the Sun Division business, including:
- further penetrating Sun's existing customer base by distributing its
products in new departments and offering additional merchandise within
existing departments;
- expanding its account base by capitalizing on Sun's reputation as a
manufacturer and distributor of quality jeanswear and on the success of
the Polo Jeans business; and
- broadening Sun's offerings of jeanswear and casual bottoms.
ADD NEW PRODUCT LINES AND BRAND NAMES. Jones has announced that it will
introduce a new brand for the Fall 1999 season, Ralph by Ralph Lauren, licensed
from Polo Ralph Lauren Corporation. The label will cover a new sportswear
collection, at better price points, targeting 16- to 25-year old women, a market
which Jones does not directly target with any other brands. Additionally, Jones
seeks to introduce new product lines under its existing brands, such as the
Jones New York men's sportswear line launched for the Fall 1998 season and the
recently introduced, more moderately priced Todd Oldham jeanswear and sportswear
line under the TO(2) brand name for the junior market.
CAPITALIZE ON VERTICAL MANUFACTURING EXPERTISE. Sun has devoted
substantial resources to the development of low-cost, high-quality manufacturing
and sourcing and is vertically integrated in manufacturing jeanswear and casual
bottoms. Additionally, Sun plans to shift cutting and portions of its other
operations from the United States to Mexico to further reduce manufacturing
costs. Sun's vertical manufacturing expertise and cost efficiency in this area
will provide Jones with a more efficient source for its Jones Jeans line, and
will offer the opportunity to expand other lines (such as Lauren by Ralph
Lauren) into denim.
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2. PROPOSED REORGANIZATION
Jones is considering a corporate reorganization that it believes would have
certain tax benefits. If Jones consummates the reorganization, a new subsidiary
of Jones would become the primary obligor under the Notes, with Jones
guaranteeing the Notes. The target date for implementation is January 1, 1999.
Jones is currently the parent and primary operating company. It has three
principal subsidiaries: one which conducts its retail outlet business, another
which owns its Canadian and other international subsidiaries and a third which
holds Jones' trademarks and collects licensing income. Following consummation of
the Acquisition, Sun will also be a subsidiary of Jones.
Under the proposed reorganization, Jones would transfer all operations now
directly conducted by Jones to a newly created Pennsylvania subsidiary. Jones
would be the ultimate holding company, with a new Delaware holding company
(itself the only direct subsidiary of Jones) as an intermediate holding company
that directly holds the interest in the new operating subsidiary and the other
subsidiaries. In addition, at the time the reorganization is implemented, the
newly created Delaware holding company may form two new subsidiaries: one to
provide retail consultant and fixture services and another for factoring certain
receivables.
If Jones proceeds with the reorganization, the new operating subsidiary
would become the primary obligor under the Notes, with both Jones and the new
Delaware holding company guaranteeing the Notes on a full and unconditional
basis. At the same time, the new operating subsidiary would become the borrower
under the Senior Credit Facilities, with both Jones and the new Delaware holding
company providing guarantees.
3. RISK FACTORS
COMPETITION; CHANGES IN FASHION TRENDS
The apparel industry is highly competitive. Competition in this industry
takes many forms, including the following:
- establishing and maintaining favorable brand recognition;
- developing products sought by consumers;
- implementing appropriate pricing;
- providing strong marketing support; and
- obtaining access to retail outlets and sufficient floor space.
There is intense competition in the sectors of the apparel industry in
which Jones and Sun participate. Jones and Sun each compete with many other
manufacturers, some of which are larger and have greater resources. Any
increased competition could result in reduced sales or prices, or both, which
could have a material adverse effect on Jones. Additionally, customer tastes and
fashion trends can change rapidly. Jones may not be able to anticipate, gauge or
respond to such changes in a timely manner. If Jones misjudges the market for
its products or product groups, it may be faced with a significant amount of
unsold finished goods inventory, which could have a material adverse effect on
Jones.
CONCENTRATION OF CUSTOMERS
Jones' ten largest customers (typically department stores) accounted for
approximately 67% of sales in each of 1997 and the first half of 1998. Sun's ten
largest customers accounted for 48% of its sales in 1997 and 60% of its sales in
the first half of 1998. While no single department or specialty store accounted
for more than 10% of net sales for either Jones or Sun, certain of Jones' and
Sun's customers are under common ownership. Department stores owned by the
following entities accounted for the following percentages of Jones' sales:
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JONES CUSTOMER 1997 FIRST HALF OF 1998
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Federated Department Stores, Inc. .......................... 20% 18%
May Department Store Company................................ 19% 17%
Remainder of ten largest customers.......................... 28% 32%
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Department stores owned by the following entities accounted for the
following percentages of Sun's sales:
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SUN CUSTOMER 1997 FIRST HALF OF 1998
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Federated Department Stores, Inc. .......................... 13% 12%
Remainder of ten largest customers.......................... 35% 48%
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Jones believes that purchasing decisions are generally made independently
by individual department stores within a commonly-controlled group. There has
been a trend, however, toward more centralized purchasing decisions. As such
decisions become more centralized, the risk to Jones of such concentration
increases. The loss of any of Jones' or Sun's largest customers, or the
bankruptcy or material financial difficulty of any customer or any of the
companies above, could have a material adverse effect on Jones. Jones and Sun do
not have long-term contracts with any of their customers, and sales to customers
generally occur on an order-by-order basis. As a result, customers can terminate
their relationships with Jones or Sun at any time or under certain circumstances
cancel or delay orders.
SIGNIFICANT DEPENDENCE ON LICENSE AGREEMENTS WITH POLO RALPH LAUREN CORPORATION
The termination or non-renewal of Jones' and Sun's exclusive licenses to
manufacture and market clothing under the Lauren by Ralph Lauren and Polo Jeans
Company trademarks in the United States and elsewhere would have a material
adverse effect upon Jones. Jones' Lauren by Ralph Lauren line and Sun's Polo
Jeans business represent material portions of each company's sales and profits.
Jones and Sun sell products bearing those trademarks under exclusive licenses
from affiliates of Polo Ralph Lauren Corporation. The Acquisition increases
Jones' dependence on Polo Ralph Lauren. On a pro forma basis, net sales by Jones
and Sun of products bearing these trademarks would have been 27.1% of the
consolidated entity's total net sales for the year ended December 31, 1997 and
30.3% of the consolidated entity's total net sales for the six-month period
ending June 28, 1998. In addition, Jones has announced that it will introduce
for Fall 1999 a line of sportswear directed to younger women under the trademark
Ralph by Ralph Lauren, under an additional exclusive license from Polo Ralph
Lauren.
The Lauren by Ralph Lauren license expires on December 31, 2001, subject to
Jones' right to renew through December 31, 2006 if sales of that product line
for the year 2000 exceed a specified level. Although such sales in 1997 and 1998
exceeded the renewal minimum, Jones' sales are made season-to-season, with
customers having no obligation to buy products beyond what they have already
ordered for a particular season.
The initial term of the Polo Jeans license expires on December 31, 2000 and
may be renewed by Sun in five-year increments for up to 30 additional years, if
certain minimum sales levels in certain years are met. Although Sun's Polo Jeans
sales in 1997 exceeded the renewal minimum which would be required to extend the
term of the license through December 31, 2005, Sun's sales are made
season-to-season with customers having no obligation to buy products beyond what
they have already ordered. In addition, renewal of the Polo Jeans license after
2010 requires a one-time payment by Sun of $25 million or, at Sun's option, a
transfer of a 20% interest in its Polo Jeans business to Polo Ralph Lauren (with
no fees required for subsequent renewals). Polo Ralph Lauren also has an option,
exercisable on or before June 1, 2010, to purchase the Polo Jeans business at
the end of 2010 for 80% of the then fair value of the business as a going
concern, assuming the continuation of the Polo Jeans license through December
31, 2030, payable in cash.
In addition to the provisions described above, both licenses (and the Ralph
by Ralph Lauren license) contain provisions common to trademark licenses which
could result in termination of a license, such as failure to meet payment or
advertising obligations.
CYCLICALITY OF APPAREL INDUSTRY; SEASONALITY
Negative economic trends over which Jones has no control which depress the
level of consumer spending could have a material adverse effect on Jones.
Purchases of apparel and related goods often decline during recessionary periods
when disposable income is low. In such an environment, Jones and Sun may
increase the number of promotional sales which could adversely impact Jones'
gross profit margins. Additionally, Jones's sales and profit levels fluctuate
significantly by quarter, resulting primarily from the timing of shipments for
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each season; Jones principally ships spring merchandise in the first quarter and
fall merchandise in the third quarter. An increase in sales of jeans and casual
apparel, which Sun sells, generally occurs during the third and fourth quarter.
Accordingly, Jones' operating results will fluctuate significantly from quarter
to quarter.
ACQUISITION RISKS
In order to realize the profit potential of the Acquisition, Jones will
need to successfully integrate Sun's business into its existing operations. To
do so, Jones may need to implement enhanced operational, distribution, financial
and information systems and may require additional employees and management,
operational and financial resources. The Acquisition is Jones' first acquisition
of another company. Jones may not be able to integrate Sun's operations into its
existing operations without significant expense or interruption to its existing
business. Jones may not achieve revenue growth or operational synergies in
integrating jeanswear or other product lines presently offered by Sun. Jones may
also not be able to retain important Sun employees. The acquisition of Sun, and
any future acquisition which Jones may pursue, involves certain special risks,
including:
- initial reductions in Jones' reported operating results;
- diversion of management's attention;
- unanticipated problems or legal liabilities; and
- possible reduction in reported earnings due to amortization of acquired
intangible assets.
Some or all of the above items could have a material adverse effect on
Jones. Sun or any other acquired company may not achieve sales and profitability
in the future that justify Jones' investment therein.
FOREIGN OPERATIONS AND MANUFACTURING
In 1997, approximately 70% of Jones' products were manufactured outside the
United States, primarily in Asia, while the remainder were manufactured in the
United States and Mexico. Substantially all of Sun's jeanswear assembly and most
of its finishing occur in Mexico. Sun also plans to shift cutting and portions
of its other operations from the United States to Mexico. The following may
adversely affect foreign operations:
- political instability in countries where contractors and suppliers are
located;
- imposition of regulations and quotas relating to imports;
- imposition of duties, taxes and other charges on imports;
- significant fluctuation of the value of the dollar against foreign
currencies; and
- restrictions on the transfer of funds to or from foreign countries.
As a result of its substantial foreign operations, Jones' domestic business
(including the domestic business of Sun) is subject to the following risks:
- quotas imposed by bilateral textile agreements between the United States
and certain foreign countries;
- reduced manufacturing flexibility because of geographic distance between
Jones and its foreign manufacturers, increasing the risk that Jones may
have to mark down unsold inventory as a result of misjudging the market
for a foreign-made product; and
- violations by foreign contractors of labor and wage standards and
resulting adverse publicity.
FLUCTUATING PRICE AND AVAILABILITY OF RAW MATERIALS
Fluctuations in the price, availability and quality of the fabrics or other
raw materials used by Jones and Sun in their manufactured apparel could have a
material adverse effect on Jones' cost of sales or its ability to meet its
customers' demands. Jones and Sun mainly use cotton twill, wool, denim and
synthetic and blended fabrics. The prices for such fabrics depend largely on the
market prices for the raw materials used to produce them, particularly cotton.
The price and availability of such raw materials and, in turn, the fabrics used
in Jones' and Sun's apparel may fluctuate significantly, depending on many
factors, including crop yields and weather patterns. Sun generally enters into
denim purchase order contracts at specified prices for three to six months at a
time. Higher cotton prices would directly affect Jones' costs and earnings.
Jones may not be able to pass all or a portion of such higher prices on to its
customers.
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RELIANCE ON INDEPENDENT MANUFACTURERS
Jones relies upon independent third parties for the manufacture of most of
its products. Sun relies on independent third parties for the manufacture of
some of its products. A manufacturer's failure to ship products in a timely
manner or to meet the required quality standards could cause Jones or Sun to
miss the delivery date requirements of their customers for those items. The
failure to make timely deliveries may drive customers to cancel orders, refuse
to accept deliveries or demand reduced prices, any of which could have a
material adverse effect on Jones' business. Jones and Sun do not have long-term
written agreements with any of their third party manufacturers. As a result, any
of these manufacturers may unilaterally terminate their relationships with Jones
or Sun at any time.
DEPENDENCE UPON KEY PERSONNEL
The success of Jones depends upon the personal efforts and abilities of
Sidney Kimmel (Chairman), Jackwyn Nemerov (President), Irwin Samelman (Executive
Vice President, Marketing) and, upon consummation of the Acquisition, Eric
Rothfeld (President of Sun) and Mindy Grossman (Executive Vice President of Sun
and President of Sun's Polo Jeans Company Division). Jones does not have
employment agreements with Mr. Kimmel, Ms. Nemerov and Mr. Samelman. If any of
these individuals become unable or unwilling to continue in their present
positions, Jones' business and financial results could be materially adversely
affected.
INCREASED LEVERAGE
Following the Acquisition, Jones will be substantially more leveraged on a
consolidated basis than it has historically been, as a result of borrowings to
finance the Acquisition. On a pro forma basis, Jones would have had $440.9
million of long-term debt (including the Notes) outstanding as of June 28, 1998,
compared to $40.9 million of long-term debt on an historical basis.
Historically, Jones has operated with almost no leverage, and has not been
subject to any type of materially restrictive covenants. Certain covenants
contained in the Indenture for the Notes and the Senior Credit Facilities, as
well as the increased leverage, may reduce Jones' flexibility in responding to
adverse changes in economic, business or market conditions. The financial
covenants and other restrictions contained in the Senior Credit Facilities will
require Jones to meet certain financial tests and will restrict its ability to,
among other things, borrow additional funds, make certain investments, dispose
of assets and make material amendments to debt instruments, including the
Indenture for the Notes. The additional leverage will also reduce funds
available for operations, capital expenditures, acquisitions and future business
opportunities.
RISK OF YEAR 2000 NON-COMPLIANCE
Certain functions in various types of technology used by Jones and Sun are
designed to use only two digits to identify a year. Therefore, these programs
may fail or create erroneous results on or before January 1, 2000 if not
corrected. Jones and Sun have assessed and are updating their own systems to
insure that they are Year 2000 compliant. Jones and Sun anticipate substantial
completion of this process by early 1999. Jones and Sun may not be able,
however, to complete these plans in time. Additionally, vendors, customers and
other third parties with which Jones and Sun do business may not make their
systems Year 2000 compliant. Jones' and Sun's business and results of operations
could suffer if either of them or such third parties fail to make necessary
technological adjustments. See "Year 2000" below.
4. FORWARD-LOOKING STATEMENTS
This Current Report includes "forward-looking statements" within the
meaning of the securities laws. All statements regarding our expected financial
position, business and financing plans are forward-looking statements.
Forward-looking statements also include representations of Jones' expectations
or beliefs concerning future events that involve risks and uncertainties,
including those associated with the effect of national and regional economic
conditions, the overall level of consumer spending, the performance of Jones'
products within the prevailing retail environment, customer acceptance of both
new designs and newly-introduced product lines, financial difficulties
encountered by customers and the integration of Sun's business with Jones'
existing operations. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, such expectations may prove to be
incorrect. Important factors that could cause actual results
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to differ materially from such expectations ("cautionary statements") are
disclosed in this Current Report, in conjunction with the forward-looking
statements included in this Current Report and under "Risk Factors." All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements.
5. BUSINESS OF SUN
Sun is a designer, manufacturer and distributor of jeanswear, sportswear,
and related apparel for men, women and children under licensed brands, private
label brands and Sun-owned brands, the most prominent of which is the Polo Jeans
Company licensed brand. Sun markets and distributes its products nationally
through a broad array of distribution channels, including department stores,
specialty stores and mass merchandisers. Through its brand marketing and
development expertise, diversified product offerings, manufacturing capabilities
and comprehensive distribution network, Sun reaches a broad range of consumers.
Sun conducts its business through two divisions, the Polo Jeans Company Division
and the Sun Division.
In late 1995, Sun entered into exclusive long-term license and design
agreements with Polo Ralph Lauren Corporation for the design, manufacture and
distribution of men's and women's jeanswear, sportswear and related apparel
under the Polo Jeans trademark in the United States and its territories. Polo
Ralph Lauren is a widely recognized consumer brand and has been a leader in the
design, marketing and distribution of premium lifestyle products for over 30
years. The Polo Jeans collection targets youthful, brand conscious consumers,
capitalizing on the distinctive name recognition and lifestyle image created by
Polo Ralph Lauren. Polo Jeans Products maintain the quality standards and
prestige of Polo Ralph Lauren at price points that are competitive with other
denim-based designer collections and lower than most apparel collections bearing
the "Polo" name. Sun markets its Polo Jeans line in leading department stores,
specialty stores and Polo Ralph Lauren retail stores. Launched at retail for
Fall 1996, the Polo Jeans collection is currently distributed to more than 3,500
department and specialty store locations and generated $198.0 million in net
sales in 1997, the first full fiscal year of distribution of Polo Jeans
Products.
Since its inception in 1979, Sun has focused primarily on the design,
manufacture and distribution of jeanswear and casual bottoms for all size
ranges, at various price points under private label brands, contract
manufacturing programs, licensed brands and Sun-owned brands. Sun manufactures
Sun Division Products for leading retailers and manufacturers such as Wal-Mart,
The Limited, J.C. Penney, Federated and Sara Lee. While manufacturing quality
jeanswear and casual bottoms in diverse styles, fits and finishes, Sun's
strategy is to distinguish itself from other denim-based apparel manufacturers
by providing value-added services in design, merchandising, production and
inventory management. The Sun Division products are currently distributed
nationwide to more than 18,000 store locations. In fiscal 1997, Sun Division
products generated $161.7 million in net sales.
Primarily as a result of the launch of the Polo Jeans line in fiscal 1996,
Sun has experienced rapid growth, with net sales increasing from $205.7 million
in fiscal 1995 to $359.7 million in fiscal 1997. During the same period,
operating income increased from $16.0 million to $36.0 million, and the
operating margin increased from 7.8% to 10.0%. In the first six months of fiscal
1998, net sales and operating income increased from $160.2 million and $13.4
million to $206.8 million and $23.9 million, respectively, while operating
margin increased from 8.4% to 11.6% compared to the corresponding period of
fiscal 1997.
Sun believes that its success is due to a number of fundamental strengths,
including: proven success in brand marketing and development, full service
design and merchandising expertise, modern and vertically integrated jeanswear
manufacturing and distribution facilities, international sourcing capabilities
and customer inventory management.
Sun's senior management has an average of over 14 years of experience in
the apparel industry. Eric A. Rothfeld, Sun's President, has been leading Sun's
operations for over 15 years. Sun has built an experienced management team with
expertise in all facets of the apparel business.
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POLO JEANS COMPANY BUSINESS
Polo Jeans Products. Sun's Polo Jeans Products consist primarily of men's
and women's jeanswear, sportswear and related apparel. The Polo Jeans line is
designed to maximize in-store impact while minimizing fashion risk. A major
portion of the Polo Jeans line is comprised of core, recurring styles which Sun
believes are less susceptible to fashion obsolescence and less seasonal in
nature than fashion products.
Polo Jeans Products are categorized into three groups: automatic
replenishment, basics and fashion merchandise. The automatic replenishment
merchandise consists of Polo Jeans Company core products and their styles
reflect little variation from season to season. These products include jeans,
shorts, T-shirts and caps and are shipped daily under Sun's quick response
automatic replenishment program, whereby customer orders are generally shipped
within 24 hours to one week from receipt of the orders (the "Replenishment
Program"). Automatic replenishment merchandise represented approximately 40% of
Sun's Polo Jeans Products net sales in 1997. Polo Jeans complements automatic
replenishment merchandise with its key item basics, which include items with
similar styles to the automatic replenishment merchandise but with a broader
range of colors and fabrics. These basics also consist of selected casual
bottoms and tops that are generally seasonal in nature and are carried on the
sales floor by retailers for an entire season. Certain best-selling basics may
ultimately be added to Sun's Replenishment Program. Basics represented
approximately 35% of Polo Jeans Products net sales in 1997. To appeal to fashion
conscious consumers, Polo Jeans continually updates its product assortment by
offering fashion merchandise which reflects current trends in color, fabrication
and styling. Fashion merchandise is sold and shipped on a monthly basis and is
generally ordered by customers well in advance of the selling season. Fashion
merchandise represented approximately 25% of Polo Jeans Products net sales in
1997.
Through the Polo Jeans line, Sun intends to leverage and further develop
the name recognition and lifestyle image created by Polo Ralph Lauren, in order
to capture the increasing buying power of youthful, brand conscious consumers.
The Polo Jeans business is focused primarily on a younger market and serves to
introduce this generation to the distinctive lifestyle image of Polo Ralph
Lauren in a contemporary manner. Polo Jeans Products maintain the high quality
standards and prestige of Polo Ralph Lauren at price points that are competitive
with other denim based designer collections and lower than most apparel
collections bearing the "Polo" name.
Sun employs its own in-house Polo Jeans design staff, which travels
throughout the United States and internationally in order to monitor and
interpret fashion trends and discover new fabrics. Designs of Polo Jeans
Products are influenced by contemporary music, television, cinema and other
forms of artistic expression. The design staff collaborates with Ralph Lauren
and his design team on many of the Polo Jeans Products. In addition, as Polo
Ralph Lauren has launched the Polo Jeans line internationally, many of the Polo
Ralph Lauren international licensees have used Sun's designs of Polo Jeans
Products. Sun receives a design fee in connection with Polo Jeans international
sales.
Sales. Sun markets its Polo Jeans line in leading department stores,
specialty stores and Polo Ralph Lauren retail stores. Key customers include
Federated (including Macy's and Bloomingdale's), May (including Lord & Taylor
and Foley's), Dillard's and Dayton Hudson. In addition, Polo Ralph Lauren
currently owns and operates more than 70 Polo Ralph Lauren Factory Outlets, all
of which carry certain Polo Jeans Products, and seven Polo Jeans Company Factory
Outlets. In late 1997, Polo Ralph Lauren opened its first full-price Polo Jeans
Company retail store dedicated to Sun's Polo Jeans Products. Polo Ralph Lauren
has opened two additional such stores in 1998 and expects to open 10 full-price
Polo Jeans Company retail stores and 18 Polo Jeans Company Factory Outlets
during 1999. Sun believes that the continued roll-out of outlet and retail
stores by Polo Ralph Lauren will augment Polo Jeans Products sales and enhance
consumer recognition of the Polo Jeans brand. Although products for Polo Ralph
Lauren full-price and outlet stores are generally sold at a discount to Sun's
wholesale prices, Sun does not have any royalty, advertising or markdown
expenses with respect to such sales.
Men's Line. The Polo Jeans men's line is sold in approximately 1,400
department store locations and 1,500 specialty store locations. By the end of
1998 Sun expects to have over 600 in-store shops in department stores. Menswear
products accounted for approximately 60% of net sales of Polo Jeans Products in
1997.
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Women's Line. The Polo Jeans women's line is sold in over 900 department
store locations and over 900 specialty store locations. By the end of 1998 Sun
expects to have approximately 600 in-store shops in department stores.
Womenswear represented approximately 40% of net sales of Polo Jeans Products in
1997. Sun anticipates that womenswear will represent a greater percentage of
Polo Jeans Products sales by the end of 1998.
Sun employs a staff of in-house account managers and regional account
executives for both men's and women's sales who manage the department store,
specialty store and Polo Ralph Lauren retail store business. Each account
manager interfaces with a retail analyst to evaluate and plan growth for each
customer by door. The sales and retail planning group is integrated into the
merchandise planning process to ensure correct inventory flow. Sun believes this
team integration approach maximizes sales and manages inventory throughout the
product development, sales and distribution process.
Retail Development. In-store shops and fixtured environments are a
critical component of the Polo Jeans marketing strategy as they are designed to
effectively display and merchandise Polo Jeans Products. Sun believes that, in
addition to maximizing sales per square foot, in-store shops and fixtured
environments enhance the consumer's shopping experience, promote the Polo Jeans
lifestyle image and build loyalty among consumers. These shops also serve to
differentiate the youthful lifestyle image of Polo Jeans Products from other
Polo Ralph Lauren products through the use of distinctive fixturing and visuals.
Sun anticipates spending approximately $12.5 million in 1998 both on expanding
existing shops and adding new in-store shops. Sun believes that in-store shops
stimulate long term commitments from retailers as well as significantly improve
sales productivity. Sun currently expects to have over 1,100 in-store shops
covering more than 500,000 square feet of fixtured retail selling space in
department stores by the end of 1998. Approximately 50% of the department store
locations will have fixtured environments, increasing the amount of Polo Jeans
fixtured retail real estate in one year by approximately 140%.
Sun has developed a sophisticated retail development program that
encompasses in-house shop planning and visual merchandising, state-of-the-art
shop imaging systems, a coordinator team of regional merchandisers, and in-store
specialists. Coordinators cover approximately 70% of the Polo Jeans department
store locations and seek to ensure that the Polo Jeans Products are merchandised
in the best available locations and are prominently displayed to maximize sales
volume. The coordinators train the department store sales associates about the
Polo Jeans Products brand image and merchandising standards. The continued
expansion of retail development is a key element in Sun's growth strategy.
Marketing and Advertising. Sun has focused on creating exciting marketing
and advertising campaigns for Polo Jeans to build brand awareness and appeal to
its target market of youthful, brand conscious consumers. Sun spent over $22
million on launch advertising during 1996 and 1997 to establish the Polo Jeans
Products brand image. While Polo Ralph Lauren maintains final authority in
creating, producing and placing the advertising, Sun works closely with Polo
Ralph Lauren to develop innovative advertising and integrated marketing efforts
to heighten brand awareness. In addition to advertising in a broad range of
fashion magazines, Sun has expanded Polo Jeans advertising into lifestyle
publications, outdoor advertising and radio advertising. Further, Sun has
created the "Polo Jeans Outdoor Cinema" to showcase independent films, developed
at-counter movie promotions with retailers in conjunction with Miramax Film
Corp. and Entertainment Weekly, among others, and run a nationwide movie-short
in Sony Retail Entertainment's Loews theaters and other major theater chains.
These advertising and promotional venues are aimed to differentiate the brand
and reach the target customer. In addition, Sun benefits from the advertising
campaigns of Polo Ralph Lauren and its other licensees.
SUN DIVISION BUSINESS
Sun Division Products. Sun's Sun Division Products consist of jeanswear
and casual bottoms for men, women, and children, in all sizes ranging from
toddlers to men's big and tall and women's plus sizes. More than 40% of the Sun
Division Products business consists of basic five pocket jeans in core denim
fabrics distributed through Sun's Replenishment Program, with the balance
representing basic and fashion jeanswear and casual bottoms produced on a
cut-to-order basis only. The fashion component is derived from a broad
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range of silhouettes, fabrications and finishes intended to appeal to younger,
more style conscious consumers. Sun is able to quickly produce fashion items on
a cut-to-order basis because of its flexible manufacturing process, thus
reducing inventory risk and enabling Sun to respond to fashion trends.
Sales. Sun markets its Sun Division Products nationally to major retailers
across numerous channels of distribution. The Sun Division Products are
currently distributed nationwide to more than 18,000 store locations. Sun
manufactures its products for such leading retailers and manufacturers as
Wal-Mart, The Limited, J.C. Penney, Federated and Sara Lee, each targeting
different channels of distribution. Sun believes its reputation as a
manufacturer and distributor of quality jeanswear and casual bottoms, together
with the success of the Polo Jeans business, has fostered the expansion of Sun's
Sun Division Products account base. Sun is continuing to explore opportunities
to develop additional accounts with department stores, specialty stores, mass
merchandisers and manufacturers as well as further penetrate its existing
customer base.
Within the Sun Division, private label sales have become an increasingly
important component and currently represent over 80% of Sun's Sun Division
business. The balance of the Sun Division business consists primarily of
licensed brand sales under the Todd Oldham, Sasson and Robert Stock labels,
sales under Sun-owned Code Bleu brand and contract manufacturing, including Just
My Size jeans for Sara Lee.
In its Sun Division, Sun concentrates on maintaining a balance of customers
across different distribution channels. In 1997, department stores represented
approximately 27% of sales, speciality stores represented approximately 26%,
mass merchandisers represented approximately 41% of net sales, and manufacturers
represented approximately 6% of net sales.
Sun employs a sales staff of in-house account managers with strong
backgrounds in retail, design and merchandising, production and distribution.
These highly trained specialists are able to respond to the diverse needs of the
buying, production and logistical staffs of retailers and manufacturers,
offering the technical expertise to facilitate and expedite the rapid conversion
of fashion concepts into samples, production, and retail sales. With respect to
the Replenishment Program, the account managers work closely with retail
analysts and production coordinators to ensure there are appropriate inventory
levels to meet consumer demands. For the fashion cut-to-order business, the
account managers interface with the design and merchandising staff to create
innovative, affordable merchandise.
Todd Oldham Jeans Business. Sun is the exclusive worldwide licensee for
Todd Oldham Jeans, a collection of jeanswear and sportswear targeted toward the
sophisticated, fashion forward consumer and distributed to better department
stores and specialty stores, at price points that are higher than Polo Jeans but
significantly lower than Todd Oldham's couture collection.
In the Fall 1998 season, Sun introduced a more moderately priced Todd
Oldham jeanswear and sportswear line under the TO(2) brand name for the junior
market at Nordstrom, Wet Seal and other select department and specialty stores.
MANUFACTURING, SOURCING AND DISTRIBUTION
Sun has devoted substantial resources to the development of low-cost,
high-quality and versatile manufacturing and sourcing. Sun believes its modern
and vertically integrated manufacturing and distribution facilities in the
United States and Mexico, combined with the global sourcing capabilities
developed through its Polo Jeans business, provide Sun with the flexibility and
efficiency necessary to offer its customers a broad variety of products tailored
to their specific design, pricing and delivery requirements.
Sun believes it has distinguished itself from many of its jeanswear
competitors by virtue of its extensive control of the manufacturing process. Sun
is vertically integrated in manufacturing jeanswear and casual bottoms,
beginning with the design and merchandising process, through cutting, assembly,
finishing and distribution. Approximately 80% of Sun's jeanswear products are
cut in Sun-owned facilities, 40% are assembled in Sun-owned facilities, and 70%
are finished in Sun-owned facilities. Virtually all of the remaining jeanswear
is assembled and finished through Sun's network of Mexican contractors developed
over the last ten years. In fiscal 1997, approximately 40% of Polo Jeans
Products consisting of jeanswear and casual bottoms
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were made at Sun-owned and Mexican contract facilities. All other Polo Jeans
non-jeanswear products are sourced from a broad range of domestic and
international manufacturers.
Raw Material. Sun's primary raw material in its jeanswear business is
denim, of which approximately 95% is purchased from leading domestic mills,
including Swift Denim USA, Cone Mills Corp. and Thomaston Mills Inc. Denim
purchase commitments and prices are negotiated on a quarterly or semi-annual
basis. Sun has no long term supply contracts with any of its suppliers, but has
been conducting business with its primary denim suppliers for more than five
years. Sun performs its own extensive testing of denim, cotton twill and other
fabrics to insure consistency and durability. Most non-jeanswear products are
sourced on a finished product basis with raw materials furnished by the
suppliers.
Pre-production, Cutting, Assembly and Finishing of Jeanswear and Casual
Bottoms. Beginning with the pre-production stage of jeanswear sample
development, Sun's in-house manufacturing staff is able to quickly develop
jeanswear and casual bottoms styles that satisfy customer specifications and can
be produced efficiently to meet customer pricing guidelines. Quality assurance
is built into all phases of Sun's jeanswear manufacturing process, with the
careful monitoring of cutting, assembly and finishing by inspectors and
auditors.
Sun utilizes a sophisticated computer aided design ("CAD") marking system
to maximize fabric utilization for jeanswear and casual bottoms production. All
of the fabric is warehoused and most of the cutting is done in a Sun-owned
100,000 square foot facility in El Paso, Texas.
The six Sun-owned assembly and finishing facilities, comprising
approximately 380,000 square feet (five in Mexico and one in El Paso, Texas),
assemble approximately 200,000 jeans and casual bottoms and finish approximately
350,000 jeans and casual bottoms per week. These modern facilities, when
combined with Sun's network of Mexican contractors, provide significant capacity
for the quick turnaround of basic jeans and casual bottoms and are able to
rapidly execute small tests and large production runs of fashion designs and
finishes. Over the last ten years, Sun has moved substantially all of its
jeanswear assembly and most of its finishing from the United States to Mexico,
maintaining its quality standards and timely delivery while significantly
reducing manufacturing costs. In addition, Sun plans to shift cutting and
portions of its other operations from the United States to Mexico to further
reduce manufacturing costs.
Sourcing of Non-Jeanswear Polo Jeans Products. While virtually all
jeanswear and most casual bottoms are produced in Sun-owned or contract
facilities in Mexico, the remaining Polo Jeans Products are sourced from a
variety of domestic and foreign manufacturers using sourcing agents and direct
representatives. The Polo Jeans Company Division has developed an international
and domestic sourcing network of core vendors to ensure timely delivery,
superior quality and competitive pricing. In certain cases, Sun uses the same
agent and suppliers as Polo Ralph Lauren.
Replenishment Inventory Management. Sun's Replenishment Program is a vital
component of the Polo Jeans Company and Sun Division businesses. Approximately
40% of both the Polo Jeans Company Division business and the Sun Division
business is generated through such inventory Replenishment Program. A staff of
retail analysts and production coordinators monitor and proactively respond to
retail sales trends by SKU for each program to maximize sales and minimize
inventory risks.
Warehousing and Distribution. All Polo Jeans Products are distributed
through a 190,000 square foot leased modern warehouse facility in El Paso,
Texas. In 1997, this warehouse implemented a state-of-the-art computerized
warehouse management system to efficiently control inventory by SKU from receipt
into the warehouse through shipping and billing. In conjunction with this
system, Sun has developed a scan pack auditing procedure to ensure the correct
merchandise is being shipped.
All Sun Division Products are distributed through a Sun-owned 80,000 square
foot modern warehouse facility also in El Paso. This facility is implementing
the same computerized warehouse management system as in the Polo Jeans
warehouse.
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LICENSE AGREEMENTS
Polo Jeans Company License. In August 1995, Sun entered into design and
license agreements with Polo Ralph Lauren (together and each as amended, the
"Polo Jeans License"). Under the Polo Jeans License, Polo Ralph Lauren granted
Sun an exclusive, long-term license for the design, manufacture and sale of
men's and women's jeanswear, sportswear, and related apparel under the Polo
Jeans trademarks in the United States and its territories. The Polo Jeans
License requires Sun to pay certain royalties to Polo Ralph Lauren and to make
certain expenditures for advertising, in each case based on Sun's net sales of
Polo Jeans Products. In addition, the Polo Jeans License requires that certain
activities of Sun under the Polo Jeans License, including, among others, design,
advertising and distribution of Polo Jeans Products, are subject to review and
approval by Polo Ralph Lauren.
The initial term of the Polo Jeans License expires on December 31, 2000 and
may be renewed by Sun in five year increments for up to 30 additional years if
certain minimum sales requirements are met. Beginning in the first renewal term,
Sun is required to make certain minimum royalty payments. Renewal of the Polo
Jeans License by Sun after 2010 requires a one-time payment of $25.0 million or,
at Sun's option, a transfer of a 20.0% interest in its Polo Jeans Company
Division business to Polo Ralph Lauren, with no fees required for subsequent
renewals. Polo Ralph Lauren has an option exercisable on or before June 1, 2010,
to purchase Sun's Polo Jeans Company Division business at the end of 2010 for
80.0% of the then fair value of the business as a going concern, assuming the
continuation of the Polo Jeans License through December 31, 2030, payable in
cash. Sun's Polo Jeans Products sales during fiscal 1997 exceeded the minimum
contractual threshold for renewal through 2005, however, such threshold must
also be met at time of renewal. There can be no assurance that Sun will continue
to meet or exceed the minimum contractual threshold.
Sun's ability to produce and distribute Polo Jeans Products is dependent
upon the retention of the Polo Jeans License, which contains provisions that,
under certain circumstances, could permit Polo Ralph Lauren to terminate the
Polo Jeans License. Such provisions include, among others, (i) the failure to
meet specified minimum levels of annual sales for the licensed products after
the initial term; and (ii) a default in the payment of certain amounts payable
under the Polo Jeans License, such as royalties, annual advertising and shop
expenditures.
Pursuant to the terms of the Polo Jeans License, Sun is prohibited, during
the term of the license, from selling, advertising or promoting the sale of any
items which are comparable to and/or competitive with the Polo Jeans Products
and which bear the name of any fashion apparel designer (other than Todd Oldham
or Robert Stock), subject to certain limited exceptions. The Polo Jeans License
specifically prohibits Sun from, directly or indirectly, acting as a
manufacturer, contractor or supplier of or for merchandise comparable or
competitive with the Polo Jeans Products bearing or associated with certain
specified designer and brand names.
Pursuant to the terms of the Polo Jeans License, Polo Ralph Lauren is
prohibited from the use of or licensing others to use the "Polo" or "Ralph
Lauren" name in connection with men's or women's denim jean pants or shorts
(excluding the "Chaps" trademark), provided, however, that (i) Polo Ralph Lauren
may include such products in its "Polo" lines so long as the wholesale prices
for such products are at least 40% higher than the wholesale prices for
comparable Polo Jeans Products and (ii) Polo Ralph Lauren may include such
products in its "RRL" jeanswear line at price points that are higher than the
suggested retail prices for comparable Polo Jeans Products.
Todd Oldham License. In March 1995, Sun entered into an exclusive license
agreement with L7 Designs, Inc., the owner of the Todd Oldham trademark (as
amended, the "Todd Oldham License") for the design, merchandising, manufacturing
and sale of men's and women's jeanswear, casual bottoms and tops under the Todd
Oldham Jeans name (or other Todd Oldham name identification selected by L7
Designs, Inc.). Although the Todd Oldham License is scheduled to expire on
December 31, 1999, it is renewable at the option of Sun for a series of two-year
periods for a total of 40 years in the aggregate, if certain minimum sales
requirements are met or minimum royalty payments are made. Sun is the exclusive,
worldwide licensee of Todd Oldham Jeans Products.
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The Todd Oldham License contains provisions that, under certain
circumstances, could permit the licensor to terminate the Todd Oldham License.
Such provisions include, among other things, (i) a default in the payment of
certain amounts payable under the Todd Oldham License that continues beyond the
specified grace period; and (ii) the failure to comply with the covenants
contained in the Todd Oldham License. Sun does not believe that the loss or
termination of the Todd Oldham License, or the decline in popularity of Todd
Oldham Jeans Products, would have a material adverse effect on Sun's financial
condition.
MANAGEMENT INFORMATION SYSTEMS & TECHNOLOGY
Over the past three years, Sun has invested over $5.0 million in upgrading
its management information systems to support the rapid growth of the Polo Jeans
Company Division business. Sun has implemented and continues to add systems to
be more proactive to customer needs, to improve internal communication flow, to
increase process efficiency, and to support management decisions.
Sun's systems provide, among other things, comprehensive order processing,
production, accounting and management information for the marketing, sales,
manufacturing, and distribution functions of Sun. Sun has developed advanced
software programs to track customer orders, manufacturing schedules and sales.
Sun also utilizes an advanced computerized warehouse management system, as well
as other warehouse management technology, to efficiently manage inventory from
receipt into the warehouses through shipping and billing.
BACKLOG
A large portion of sales are booked in advance of each season, and it is
therefore normal for Sun to maintain a significant order backlog. As of March
31, 1998, Sun had booked orders amounting to approximately $204 million compared
with $140 million at March 31, 1997. Order backlog at December 31, 1997 was
approximately $129 million. Automatic replenishment orders, which are generally
shipped within one week of receipt of order and therefore excluded from the
order backlog, have also increased for both the Polo Jeans Products and Sun
Division Products. Accordingly, a comparison of backlog orders from period to
period is not necessarily meaningful and may not be indicative of eventual
actual shipments.
FACTORING OF ACCOUNTS RECEIVABLE
Sun factors approximately 25% of its trade receivables with three
commercial financial companies. These receivables are factored without recourse
as to credit risk, but with recourse for any claims by customers for adjustment
in the normal course of business relating to pricing errors, shortages, and
damaged goods. Upon collection of the receivables or 120 days after payment is
due, the factors forward the related payment to Sun. Under this arrangement, Sun
is charged a factoring commission ranging from 0.50% to 0.75% of factored sales.
The factor approves the credit for those orders submitted by Sun prior to sale.
If the factor disapproves a sale to a customer and Sun decides to proceed with
the sale, Sun bears the credit risk.
SEASONALITY
Demand for Sun's products and its level of sales fluctuate during the
course of the calendar year as a result of seasonal buying trends. An increase
in sales of jeans and casual apparel generally occurs during the Fall and
Holiday selling seasons (Jones' third and fourth quarter, respectively).
Accordingly, Sun's operating results will fluctuate from quarter to quarter.
COMPETITION
The apparel industry is highly competitive and Sun competes with numerous
manufacturers of jeanswear, sportswear and casual apparel, including both brand
name and private label producers. Sun's Polo Jeans Products compete with a
number of designer product lines, including Calvin Klein, Tommy Hilfiger, Donna
Karan and Guess?, as well as certain brand name products, including those
manufactured by Levi Strauss & Co. and VF Corporation. Sun's Sun Division
Products compete with products manufactured by numerous brand name and private
label producers, as well as retailers that have established, or may establish,
internal product development and sourcing capabilities. Certain of Sun's
competitors have greater financial, manufac-
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turing and other resources than Sun. Although factors may differ by product
line, Sun believes that it competes primarily on the basis of brand image,
quality of design and workmanship, price, advertising and its ability to respond
quickly to the needs of retail customers. Any increased competition could result
in reduced sales or prices, or both, which could have a material adverse effect
on Sun's business, results of operations and financial condition.
GOVERNMENT REGULATION
Apparel products are subject to regulation by the Federal Trade Commission
in the United States. Regulations relate principally to the labeling of Sun's
products. Sun's import operations are also subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries. These agreements which have been negotiated bilaterally either under
the framework established by the Arrangement Regarding International Trade in
Textiles, known as the Multifiber Agreement, or other applicable statutes,
impose quotas on the amounts and types of merchandise which may be imported into
the United States from these countries. These agreements also allow the
signatories to adjust the quantity of imports for categories of merchandise
that, under the terms of the agreements, are not currently subject to specific
limits. Sun's imported apparel products are also subject to United States
customs duties which are included in the cost of the merchandise.
ENVIRONMENTAL LAWS
Sun's manufacturing process, particularly the finishing process, uses
laundering agents, softeners, dyes and other chemicals. Compliance with federal,
state and local and foreign laws enacted for the protection of the environment
has to date had no material effect upon Sun's capital expenditures, earnings, or
competitive position. Although Sun does not anticipate any material adverse
effects in the future based on the nature of its operations and the thrust of
such laws, no assurance can be given that such laws, or any future laws enacted
for the protection of the environment, will not have a material adverse effect
on Sun.
EMPLOYEES
At December 31, 1997, Sun employed approximately 5,050 people, of which
approximately 3,715 are employed in Mexico. Of the 1,335 United States
employees, approximately 1,015 are hourly employees and 320 are salaried
employees. 105 of the United States employees, all of whom work in Sun's cutting
facility in El Paso, Texas, are covered by a collective bargaining agreement
with Local 360, Union of Needletrades, Industrial and Textile Employees,
AFL-CIO, which expires December 31, 1999. Under this Agreement, Sun can relocate
portions or all of its cutting operations to Mexico. Management believes its
employee relations are satisfactory.
PROPERTIES
Sun's headquarters are located at 11201 Armour Drive, El Paso, Texas. An
executive office and the design and sales office for the Sun Division Products
are located at 111 West 40th Street, New York, New York. The Polo Jeans Company
Division office and showroom is currently located at 115 Fifth Avenue, New York,
New York. The lease for the office and showroom space formerly occupied at 595
Madison Avenue,
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New York, New York, which expires in October 2006, has been assigned for the
remainder of its term. The general location, use and approximate size of Sun's
principal owned and leased properties are set forth below:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION OWNED/LEASED USE SQUARE FEET
-------- ------------ ------------------------------------------------ -----------
<S> <C> <C> <C>
El Paso, Texas owned Corporate headquarters and pre-production
facility 50,000
El Paso, Texas owned Warehousing and cutting 100,000
El Paso, Texas owned Finishing 170,000
El Paso, Texas owned Warehousing and distribution 80,000
El Paso, Texas leased Warehousing and distribution 190,000
New York, New York leased Executive office, design and sales office for
Sun Division Products 11,500
New York, New York leased Polo Jeans Company Division office and showroom 43,000
New York, New York leased Todd Oldham Jeans division office and showroom 2,900
Durango, Mexico owned Finishing 86,000
Durango, Mexico owned Assembly 38,600
Durango, Mexico owned Assembly 34,500
Durango, Mexico owned Assembly 34,500
Durango, Mexico owned Finishing 16,000
</TABLE>
LEGAL MATTERS
Sun is involved from time to time in various routine legal and
administrative proceedings and threatened legal and administrative proceedings
incidental to its business. In the opinion of Sun's management, the resolution
of such matters will not have a material adverse effect on its business,
financial condition or results of operations.
6. YEAR 2000
(A) JONES
Jones uses various types of technology in the operations of its business.
Some of this technology incorporates date identification functions; however,
many of these date identification functions were developed to use only two
digits to identify a year. These date identification functions, if not
corrected, could cause their relating technology to fail or create erroneous
results on or before January 1, 2000.
Jones is continuing to assess, with both internal and external resources,
the impact of Year 2000 issues on its information and non-information technology
systems. As part of this process, Jones retained the services of an independent
consultant that specializes in Year 2000 evaluation and remediation work. In
addition, Jones has developed a plan with respect to the Year 2000 readiness of
its internal technology systems. This plan involves (i) creating awareness
inside Jones of Year 2000 issues, (ii) analyzing Jones' Year 2000 state of
readiness, (iii) testing, correcting and updating systems and computer software
as needed, and (iv) incorporating the corrected or updated systems and software
into Jones' business. Jones is currently finalizing the assessment phase of this
plan, and has moved into the testing and correcting phase with respect to those
technology systems that have been identified by Jones as having Year 2000
issues. Jones anticipates substantially completing the implementation of this
plan by early 1999; however, Jones may revise the estimated date of completion
of this plan based upon any unforeseen delays or costs in implementing such
plan.
In a continuing effort to become more productive and competitive, Jones
replaces portions of its software and hardware when warranted by significant
business and/or technology changes. While these replacements are not
specifically intended to resolve the Year 2000 issue, the new software and
hardware is designed to function properly with respect to dates related to the
Year 2000 and beyond. Jones also has initiated discussions with its significant
suppliers, customers and financial institutions to ensure that those parties
have appropriate plans to remediate Year 2000 issues when their systems
interface with Jones's systems or may
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otherwise impact operations. Jones anticipates substantially completing the
implementation of this plan by early 1999; however, there can be no assurances
that such plan will be completed by the estimated date or that the systems and
products of other companies on which Jones relies will not have an adverse
effect on its business, operations or financial condition.
As of August 30, 1998, Jones had incurred approximately $125,000 in costs
related to the Year 2000 issue. Jones believes that additional costs related to
the Year 2000 issue will not be material to its business, operations or
financial condition. However, estimates of Year 2000 related costs are based on
numerous assumptions and there is no certainty that estimates will be achieved
and actual costs could be materially greater than anticipated. Jones anticipates
that it will fund its additional Year 2000 costs from current working capital.
(B) SUN
Sun uses various types of technology in the operations of its business.
Some of this technology incorporates date identification functions; however,
many of these date identification functions were developed to use only two
digits to identify a year. These date identification functions, if not
corrected, could cause their relating technology to fail or create erroneous
results on or before January 1, 2000.
Sun is continuing to assess, with both internal and external resources, the
impact of Year 2000 issues on its information and non-information technology
systems. A substantial portion of Sun's systems are presently Year 2000
compliant and Sun anticipates that the implementation of Sun's Year 2000 plan
will be complete by early 1999. However, Sun may revise the estimated date of
completion of this plan based upon any unforeseen delays or costs in
implementing its plan. Although Sun believes that Year 2000 compliance will not
have a material adverse effect on financial results, Sun is uncertain as to the
extent its customers and suppliers may be affected by Year 2000 issues.
As of July 31, 1998, Sun has incurred approximately $400,000 of costs
related to Year 2000 issues. Sun believes that additional costs related to Year
2000 issues will not be material to its business, operations or financial
condition. However, estimates of Year 2000 costs are based on numerous
assumptions and there is no certainty that estimates will be achieved. Actual
costs could be materially greater than anticipated.
18
<PAGE> 19
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(A) FINANCIAL STATEMENTS OF SUN
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sun Apparel, Inc.
We have audited the accompanying consolidated balance sheets of Sun
Apparel, Inc. as of December 28, 1996 and December 31, 1997, and the related
consolidated statements of income, shareholders' equity (deficit), and cash
flows for the years ended December 30, 1995, December 28, 1996, and December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sun Apparel, Inc. as of December 28, 1996 and December 31, 1997 and the
consolidated results of its operations and its cash flows for the years ended
December 30, 1995, December 28, 1996, and December 31, 1997 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
March 26, 1998, except for
Note 17, as to which the date
is September 10, 1998
19
<PAGE> 20
SUN APPAREL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 28 DECEMBER 31 JUNE 30
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 3,674 $ 3,751 $ 1,354
Due from factors.................................... 32,969 15,879 17,224
Trade receivables................................... 26,215 46,822 44,455
Inventories......................................... 54,960 57,704 75,345
Advances to contractors............................. 387 1,670 242
Other receivables................................... 2,237 1,619 2,932
Prepaid expenses.................................... 891 1,299 4,651
-------- --------- ---------
Total current assets.................................. 121,333 128,744 146,203
Property, plant, and equipment........................ 47,615 59,249 63,727
Less accumulated depreciation......................... 19,222 25,167 27,106
-------- --------- ---------
Net property, plant, and equipment.................... 28,393 34,082 36,621
Loan origination costs, net........................... 109 7,305 6,759
Deferred income taxes................................. -- 2,503 2,026
Other assets.......................................... 2,780 1,607 1,820
-------- --------- ---------
Total assets.......................................... $152,615 $ 174,241 $ 193,429
======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable -- trade........................... $ 24,062 $ 23,228 $ 27,457
Current portion of long-term debt................... 6,330 3,000 4,228
Accrued liabilities................................. 8,681 13,552 19,309
Due to related parties.............................. 100 1,607 1,607
Taxes payable....................................... 1,310 4,645 5,033
-------- --------- ---------
Total current liabilities............................. 40,483 46,032 57,634
Debt:
Long-term debt, net of current portion.............. 27,299 156,611 153,709
Bank Credit Facility................................ 34,250 27,000 28,900
Subordinated debt, net of current portion........... 2,507 30,000 30,000
Deferred income taxes................................. -- 1,028 1,075
Shareholders' equity (deficit):
Common stock, no par value; 1,000,000 shares
authorized; 101,000 shares issued; 101,000 shares
issued and outstanding at December 28, 1996 and
3,780 shares issued and outstanding at December
31, 1997 and June 30, 1998 (unaudited)........... 417 417 417
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
DECEMBER 28 DECEMBER 31 JUNE 30
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Preferred stock:
Series A Preferred Stock, $1 par value; 215,000
shares authorized, issued and outstanding...... -- 44,475 47,270
Series B Preferred Stock, $1 par value; 201,065
shares authorized, issued and outstanding...... -- 41,593 44,207
Series C Preferred Stock, $1 par value; 8,935
shares authorized, issued and outstanding...... -- 1,848 1,964
Paid-in capital..................................... -- 15,582 15,582
Retained earnings (deficit)......................... 47,659 (190,345) (187,329)
-------- --------- ---------
Total shareholders' equity (deficit).................. 48,076 (86,430) (77,889)
-------- --------- ---------
Total liabilities and shareholders' equity
(deficit)........................................... $152,615 $ 174,241 $ 193,429
======== ========= =========
</TABLE>
See accompanying notes.
21
<PAGE> 22
SUN APPAREL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
----------------------------------------- --------------------
DECEMBER 30 DECEMBER 28 DECEMBER 31 JUNE 30 JUNE 30
1995 1996 1997 1997 1998
----------- ----------- ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales....................... $205,657 $281,668 $359,672 $160,182 $206,865
Cost of goods sold.............. 155,830 194,192 236,203 108,401 129,636
-------- -------- -------- -------- --------
Gross profit.................... 49,827 87,476 123,469 51,781 77,229
Operating expenses:
Selling, general, and
administrative expenses.... 33,295 64,329 84,044 37,007 50,753
Depreciation and
amortization............... 529 4,062 3,424 1,396 2,588
-------- -------- -------- -------- --------
Operating income................ 16,003 19,085 36,001 13,378 23,888
Other (income) and expenses:
Interest income............... (17) (31) (227) (41) (27)
Interest and bank charges..... 3,228 4,213 10,375 2,630 12,051
Other income, net............. (1,701) (435) (1,753) (456) (417)
-------- -------- -------- -------- --------
Income before taxes and
extraordinary item............ 14,493 15,338 27,606 11,245 12,281
Income tax expense.............. 542 863 3,674 756 5,326
-------- -------- -------- -------- --------
Income before extraordinary
item.......................... 13,951 14,475 23,932 10,489 6,955
Loss on early extinguishment of
debt,
net of tax benefit of $291
in 1997....................... -- -- 566 -- --
-------- -------- -------- -------- --------
Net income...................... $ 13,951 $ 14,475 $ 23,366 $ 10,489 $ 6,955
======== ======== ======== ======== ========
Unaudited pro forma data
(Note 11):
Income before taxes and
extraordinary item......... $ 14,493 $ 15,338 $ 27,606 $ 11,245
Pro forma adjustments to
reflect federal, state, and
foreign income taxes....... 6,087 6,442 11,595 4,723
-------- -------- -------- --------
Pro forma income before
extraordinary item......... 8,406 8,896 16,011 6,522
Loss on early extinguishment
of debt, net of tax benefit
of $291 in 1997............ -- -- 566 --
-------- -------- -------- --------
Pro forma net income............ $ 8,406 $ 8,896 $ 15,445 $ 6,522
======== ======== ======== ========
</TABLE>
See accompanying notes.
22
<PAGE> 23
SUN APPAREL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK RETAINED
----------------- ------------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------- ------ -------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.... 101,000 $417 -- $ -- $ -- $ 30,685 $ 31,102
Issuance of Satellite Companies
common stock.................. -- -- -- -- -- 8 8
Distributions to shareholders... -- -- -- -- -- (8,055) (8,055)
Net income...................... -- -- -- -- -- 13,951 13,951
------- ---- -------- ------- ------- --------- ---------
Balance at December 30, 1995.... 101,000 417 -- -- -- 36,589 37,006
Issuance of Satellite Companies
common stock.................. -- -- -- -- -- 4 4
Distributions to shareholders... -- -- -- -- -- (3,409) (3,409)
Net income...................... -- -- -- -- -- 14,475 14,475
------- ---- -------- ------- ------- --------- ---------
Balance at December 28, 1996.... 101,000 417 -- -- -- 47,659 48,076
Cash distributions to
shareholders.................. -- -- -- -- -- (45,737) (45,737)
Noncash distributions to
shareholders.................. -- -- -- -- -- (557) (557)
Preferred stock exchanged for
Sun stock..................... (30,072) -- 198,891 39,778 -- (39,778) --
Repurchase of interests in
common stock of Sun and
Satellite Companies........... (67,337) -- -- -- -- (147,411) (147,411)
Preferred and common stock
exchanged for Sun and
Satellite Companies stock..... 189 -- 11,109 2,222 -- (2,222) --
Preferred stock issued for
cash.......................... -- -- 215,000 43,000 -- -- 43,000
Recapitalization fees........... -- -- -- -- (7,167) (7,167)
Transfer of undistributed S
corporation earnings to
paid-in capital............... -- -- -- -- 15,582 (15,582) --
Preferred stock dividends....... -- -- -- 2,916 -- (2,916) --
Net income...................... -- -- -- -- -- 23,366 23,366
------- ---- -------- ------- ------- --------- ---------
Balance at December 31, 1997.... 3,780 417 425,000 87,916 15,582 (190,345) (86,430)
Preferred stock dividends....... -- -- -- 5,525 -- (5,525) --
Distributions to shareholders... -- -- -- -- -- (241) (241)
Contributions from
shareholders.................. -- -- -- -- -- 1,827 1,827
Net income (unaudited).......... -- -- -- -- -- 6,955 6,955
------- ---- -------- ------- ------- --------- ---------
Balance at June 30, 1998
(unaudited)................... 3,780 $417 425,000 $93,441 $15,582 $(187,329) $ (77,889)
======= ==== ======== ======= ======= ========= =========
</TABLE>
See accompanying notes.
23
<PAGE> 24
SUN APPAREL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
--------------------------------------- -------------------
DECEMBER 30 DECEMBER 28 DECEMBER 31 JUNE 30 JUNE 30
1995 1996 1997 1997 1998
----------- ----------- ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................................... $ 13,951 $ 14,475 $ 23,366 $ 10,489 $ 6,955
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation................................... 2,800 6,578 5,703 2,701 3,496
Amortization................................... 123 275 881 241 646
Loss on debt extinguishment.................... -- -- 857 -- --
Federal income taxes -- deferred............... -- -- (1,475) -- 524
Changes in operating assets and liabilities:
Due from factors............................ 5,625 (13,759) 17,090 14,726 (1,345)
Trade receivables........................... (1,599) (14,776) (20,607) (18,310) 2,367
Inventories................................. 5,254 (28,943) (2,744) (3,925) (17,641)
Advances to contractors..................... 542 611 (1,283) (555) 1,428
Other receivables........................... (594) (1,643) 618 (621) (1,313)
Prepaid expenses............................ (1,052) 569 (408) (664) (3,352)
Other assets................................ (669) 285 (724) 11 (313)
Accounts payable -- trade................... 531 12,756 (834) 3,909 4,229
Accrued liabilities......................... 1,818 3,858 4,871 2,713 5,757
Taxes payable............................... 170 371 3,335 68 388
--------- -------- --------- -------- --------
Net cash provided by (used in) operating
activities..................................... 26,900 (19,343) 28,646 10,783 1,826
INVESTING ACTIVITIES
Purchases of property, plant, and equipment...... (5,655) (15,374) (10,525) (6,468) (6,035)
Proceeds from sales of property, plant, and
equipment...................................... -- 2,130 -- -- --
--------- -------- --------- -------- --------
Net cash used in investing activities............ (5,655) (13,244) (10,525) (6,468) (6,035)
FINANCING ACTIVITIES
Proceeds from long-term debt and Bank Credit
Facility....................................... 487,859 120,467 193,000 5,202 1,900
Payments on long-term debt and Bank Credit
Facility....................................... (502,607) (84,200) (75,135) (400) (1,674)
Issuance of subordinated debt.................... -- -- 30,000 -- --
Payments of subordinated debt.................... (100) -- (1,000) -- --
Issuance of preferred stock...................... -- -- 43,000 -- --
Recapitalization fees............................ -- -- (7,167) -- --
Loan origination fees............................ -- -- (7,594) -- --
Issuance of Satellite Companies common stock..... 8 4 -- -- --
Repurchase of interests in common stock of Sun
and Satellite Companies........................ -- -- (147,411) -- --
Contributions from shareholders.................. -- -- -- -- 1,827
Distributions paid............................... (8,055) (3,409) (45,737) (11,913) (241)
--------- -------- --------- -------- --------
Net cash (used in) provided by financing
activities..................................... (22,895) 32,862 (18,044) (7,111) 1,812
--------- -------- --------- -------- --------
Net (decrease) increase in cash and cash
equivalents.................................... (1,650) 275 77 (2,796) (2,397)
Cash and cash equivalents at beginning of
period......................................... 5,049 3,399 3,674 3,674 3,751
--------- -------- --------- -------- --------
Cash and cash equivalents at end of period....... $ 3,399 $ 3,674 $ 3,751 $ 878 $ 1,354
========= ======== ========= ======== ========
Supplemental disclosures:
Interest and bank charges paid................. $ 3,295 $ 4,831 $ 8,066 $ 2,580 $ 9,252
Income taxes paid.............................. 790 779 1,326 728 4,938
Assets acquired under capital leases........... -- -- 867 -- --
Preferred stock exchanged for Satellite
Companies stock............................. -- -- 42,000 -- --
</TABLE>
See accompanying notes.
24
<PAGE> 25
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996, AND DECEMBER 31, 1997 AND
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(INFORMATION AS TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation/Combination
The consolidated/combined financial statements include the operations of
the affiliated entities described below which were under common control prior to
the Reorganization (as defined) effected in September 1997 (see Note 2).
Sun Apparel, Inc. (Sun), a Texas corporation, is engaged in the manufacture
and sale of jeanswear and other apparel under its own labels, licensed labels,
and private labels.
Greater Texas Finishing Corporation (GTX), a Texas corporation, is engaged
in the business of processing and finishing jeanswear and other apparel for Sun.
Maquilas Pami S.A. de C.V. (Pami), a corporation organized and operating in
Mexico, sews, processes, and finishes jeanswear for Sun at agreed-upon prices
(see Note 12). Although the operations of Pami are located in Mexico, management
decisions are centralized with the management of Sun.
CNC West, Inc. (CNC), a Texas corporation, is a producer of chemicals used
in the apparel washing process. CNC is consolidated with CNC de Mexico, S.A. de
C.V., a Mexican corporation which was incorporated under the laws of Mexico in
1997 to support operations in Mexico. Substantially all products are sold to
Sun, GTX, and Pami.
Import Technology of Texas, Inc. (Import Technology), a Texas corporation,
is a holding company which has a 99% ownership interest in Pami. CNC holds the
remaining 1% interest in Pami.
Sun City Realty Group, Inc. (Sun City), a Texas corporation, is a real
estate holding company for Sun properties.
R.L. Management, Inc. (R.L.), a Delaware corporation, provides general and
administrative support related to the Polo line (see Note 14).
Lone Star Selling Group, Inc. (Lone Star), a New York corporation, provides
general and administrative support related to all apparel lines other than Polo.
GTX, Pami, CNC, Import Technology, Sun City, R.L., and Lone Star are
collectively referred to as the "Satellite Companies." As a result of the
Reorganization, the Satellite Companies became wholly-owned subsidiaries of Sun.
The financial statements of Sun have been consolidated with those of the
Satellite Companies for 1997. For 1995 and 1996, the financial statements of Sun
are combined with those of the Satellite Companies, and the equity of the
Satellite Companies is included in retained earnings. All intercompany balances,
sales, and transactions have been eliminated in the consolidated/combined
financial statements. The consolidated/combined entity is collectively referred
to as the Company.
Fiscal Years
During 1997, the Company changed its fiscal year from a 52 or 53 week
period ending on the Sunday closest to December 31 to a twelve calendar month
period ending on December 31. All references to 1995, 1996, and 1997 herein are
to the fiscal years ended December 30, 1995, December 28, 1996, and December 31,
1997, respectively, which are 52 week periods.
25
<PAGE> 26
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments readily convertible to
known cash amounts and with a maturity of three months or less at the date of
purchase to be cash equivalents.
Trade Receivables
The allowance for doubtful accounts, if any, is established through a
provision charged to expense. Receivables are charged against the allowance when
management believes that collection is unlikely. Collections of previously
written-off receivables are credited to the allowance. The Company performs
periodic credit evaluations of its customers' financial condition and ability to
satisfy their obligations. The allowance, if any, is based upon management's
evaluation of the collectibility of outstanding receivables, including such
factors as credits, claims, prior experience, and economic conditions. The
Company's credit losses for the periods presented are insignificant and have not
exceeded management's estimates. The Company generally does not require
collateral or letters of credit when extending credit. However, from time to
time, the Company requires customer deposits or letters of credit as a condition
of extending credit. The allowance for doubtful accounts totaled approximately
$102,000, $205,000, and $199,000 at December 28, 1996, December 31, 1997, and
June 30, 1998, respectively.
Trade receivables are stated net of estimated chargebacks related to such
items as damaged goods, returns, markdowns, and any applicable trade discounts.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Cost of inventory represents the aggregate cost of direct materials, direct
labor, and manufacturing overhead. The manufacturing overhead included in the
inventories is based on the ratio of manufacturing expenses to direct labor for
each period. Purchased finished goods are recorded at invoice cost, including
duty, freight, and insurance.
Advances to Contractors
Periodically, the Company advances funds to sewing contractors located in
Mexico against specific cuts in order to provide those contractors with
sufficient cash to fund a portion of the costs of their sewing operations.
Advances are deducted from contractors' invoices when they are presented for
payment.
Property, Plant, and Equipment
Property, plant, and equipment is stated at cost. Major renewals and
betterments are charged to property accounts while replacements, maintenance,
and repairs which do not improve or extend the lives of the respective assets
are expensed currently. Depreciation is calculated on the straight-line method
over the estimated useful economic lives of the assets. Leasehold improvements
are amortized on a straight-line method over the lease term.
26
<PAGE> 27
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in office furniture and other equipment (see Note 5) are
Company-owned displays and fixtures located in certain customer-owned retail
facilities. These displays and fixtures are amortized over their useful lives,
generally five years.
Trademark
Sun purchased a trademark for $1,500,000 plus the unamortized portion of a
license fee for approximately $348,000, which aggregates to a total basis of
approximately $1,848,000. This amount is being amortized over fifteen years. At
December 28, 1996, December 31, 1997, and June 30, 1998 accumulated amortization
amounted to approximately $522,000, $645,000, and $707,000, respectively.
Revenue Recognition
Sales are recorded at the time the product is shipped. Sales in the
consolidated statements of income are recorded net of a provision for trade,
volume, and other discounts, as well as for returns and allowances.
Sales to Major Customers and Concentration of Credit Risk
During 1995, 1996, and 1997, respectively, approximately 13%, 13%, and 9%
of consolidated net sales were made to one large discount retailer. During 1995,
1996, and 1997, respectively, approximately 4%, 13%, and 14% of consolidated net
sales were made to a group of affiliated retailers. Amounts due from these
customers at December 30, 1995, December 28, 1996, and December 31, 1997 totaled
approximately $6,691,000, $13,915,000, and $10,732,000, respectively,
substantially all of which was collected after year-end.
Sun purchases the majority of its piece goods inventory from five principal
suppliers. While these suppliers provide a significant share of the piece goods
used by Sun, piece goods used are substantially generic products and can be
provided by a number of other suppliers on comparable terms. Sun believes its
relationship with its existing suppliers is satisfactory.
Advertising Costs
Advertising expenses of Sun include costs related to print media, including
magazines, newspapers and industry publications, and television advertising.
Total advertising expense amounted to approximately $4,936,000, $12,143,000, and
$16,176,000 for the years ended 1995, 1996, and 1997, respectively, and
$6,562,000 and $5,666,000 for the six months ended June 30, 1997 and 1998.
Advertising costs are expensed as incurred.
Loan Origination Costs
In connection with the refinancing transaction (see Note 7), the Company
incurred approximately $7,600,000 in loan origination costs. Accumulated
amortization of these loan origination costs was approximately $292,000 and
$876,000 at December 31, 1997 and June 30, 1998, respectively. Loan origination
costs, which are being amortized using a method that approximates the effective
interest method over the term of the related debt, are included in other assets
in the balance sheet.
Loan origination costs totaling approximately $857,000 were expensed and
reported as an extraordinary item in the statement of income when the related
debt was retired concurrent with the Recapitalization (see Note 2).
Income Taxes
Effective September 26, 1997, the Company terminated its Subchapter S tax
status (see Note 9). The Company became subject to the provisions of Financial
Accounting Standards Board (FASB) Statement
27
<PAGE> 28
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 109, "Accounting for Income Taxes," on September 26, 1997. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting bases and tax bases of assets and liabilities, and
are measured using the enacted tax rates and laws which will be in effect when
the differences are expected to reverse. Prior to the termination of its
Subchapter S tax status, federal income tax expense was not recognized in the
financial statements of the Company. The federal tax liability was the
shareholders' rather than the Company's.
Interim Financial Data
The consolidated financial statements and related information as of June
30, 1998, and for the six months ended June 30, 1997 and 1998, have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, such consolidated financial statements
reflect all adjustments (consisting of normal recurring entries) which are, in
the opinion of management, necessary for a fair presentation of the financial
position, results of operations, cash flows, and changes in shareholders' equity
of the Company for such periods. Interim period results are not necessarily
indicative of the results to be achieved for the entire year.
Reclassifications
Certain prior year amounts in the financial statements have been
reclassified to conform to current year presentation.
Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (FAS 130). FAS 130 establishes new rules for the reporting and display
of comprehensive income and its components. These disclosures are required for
the first quarter of 1998. FAS 130 requires changes such as unrealized gains or
losses on available-for-sale securities and foreign currency translation
adjustments, which currently are reported in shareholders' equity, to be
included in other comprehensive income and the disclosure of total comprehensive
income. Currently, the Company has no transactions that generate items of other
comprehensive income, and the adoption of FAS 130 is not expected to have a
significant impact on the financial statement disclosures.
Business Segments
In June 1997, the FASB issued Statement No. 131, "Financial Reporting for
Segments of a Business Enterprise" (FAS 131). FAS 131 specifies the computation,
presentation, and disclosure requirements for business segment information, and
requires that segments be identified based on internal financial reporting at
the level reported to the chief operating decision maker. FAS 131 supersedes FAS
14, "Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. FAS 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt FAS 131 for its December 31, 1998 financial statements, and
expects to disclose financial information for two operating segments, the Polo
Jeans division and the Sun division.
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 establishes new rules for
the accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. FAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The adoption of FAS 133 is not expected to have a
significant impact on the financial statement disclosures.
28
<PAGE> 29
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. REORGANIZATION AND RECAPITALIZATION
On September 26, 1997, the shareholders of Sun reorganized certain entities
under their common control (the Reorganization) as a result of which the
Satellite Companies became wholly-owned subsidiaries of Sun. The Reorganization
involved exchanging all of the outstanding stock of the Satellite Companies for
stock of Sun (consisting of 189 shares of common stock, 2,174 shares of Series B
Preferred Stock totaling approximately $435,000, and 8,935 shares of Series C
Preferred Stock totaling $1,787,000) and cash. These transactions have been
accounted for as a combination of entities under common control, and
accordingly, the Satellite Companies are reflected at their historical
carry-over basis in the consolidated financial statements.
Also on September 26, 1997, the Company completed a recapitalization
transaction (the Recapitalization) under which Sun redeemed 67,336.67 shares of
its common stock held by an individual and his related family interests (the
Selling Shareholders) and exchanged 30,072.33 shares of its common stock held by
the former minority shareholder and his family interests (the Continuing
Shareholders) for 198,891 shares of Series B Preferred Stock totaling
$39,778,000. Additionally, Sun issued 215,000 shares of Series A Preferred Stock
to Vestar/Sun Holding Company, LLC (Vestar) for $43,000,000 in cash and Vestar
purchased 1,512 shares of Sun common stock directly from the Continuing
Shareholders such that, after the Recapitalization, Vestar owned 40% and the
Continuing Shareholders owned 60% of the common equity interests of the Company.
The above transactions have been accounted for as a recapitalization, and as
such, there was no change in the carrying values of the Company's net assets.
As a result of the Reorganization and Recapitalization, the Selling
Shareholders and the Continuing Shareholders received total cash of $147,411,000
and $30,000,000, respectively. These distributions and related fees and expenses
were financed by using the proceeds from equity issuances, bank debt, and
subordinated debt (see Notes 7 and 8).
3. DUE FROM FACTORS
Sun has agreements with three commercial finance companies which provide
for the factoring of certain trade receivables of its selling divisions. These
receivables are factored without recourse as to credit risk, but with recourse
for any claims by the customers for chargebacks in the normal course of business
relating to damaged goods, returns, markdowns, and any applicable trade
discounts. Such receivables sold without recourse are reflected in the
accompanying financial statements as due from factors. Sun is charged a
factoring commission ranging from .50% to .60% of factored sales. The factoring
commissions are included in factoring charges in the accompanying financial
statements. Upon collection of the receivables, the factors forward the related
payment to Sun's primary lender for credit to Sun's account.
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28 DECEMBER 31 JUNE 30
1996 1997 1998
----------- ----------- -------
<S> <C> <C> <C>
Finished goods................................... $31,501 $33,646 $42,684
Work-in-process.................................. 10,274 12,746 20,702
Piece goods...................................... 7,297 5,303 4,916
Trim and supplies................................ 5,888 6,009 7,043
------- ------- -------
$54,960 $57,704 $75,345
======= ======= =======
</TABLE>
29
<PAGE> 30
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following balances (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
DECEMBER 28 DECEMBER 31 JUNE 30 USEFUL LIFE
1996 1997 1998 IN YEARS
----------- ----------- ------- -------------
<S> <C> <C> <C> <C>
Land................................. $ 1,418 $ 1,560 $ 1,560 -
Building and improvements............ 12,599 13,203 12,439 30 - 31.5
Production and processing
equipment.......................... 18,995 19,907 18,915 5 - 7
Computer equipment................... 4,236 6,586 7,601 5
Office furniture and other
equipment.......................... 7,977 15,040 19,714 5 - 7
Leasehold improvements............... 2,138 2,564 3,061 Life of Lease
Autos and truck...................... 252 389 437 5 - 10
------- ------- -------
47,615 59,249 63,727
Less accumulated depreciation........ 19,222 25,167 27,106
------- ------- -------
$28,393 $34,082 $36,621
======= ======= =======
</TABLE>
Depreciation expense for 1995, 1996, and 1997 was approximately $2,800,000,
$6,578,000, and $5,703,000, respectively. Fully depreciated assets have been
written off the books, although some may still be in use. Computer equipment at
December 31, 1997 and June 30, 1998 includes $867,000 of assets held under
capital leases, and amortization of these leases is included in depreciation
expense.
6. GROUP HEALTH INSURANCE
The Company maintains self-insurance group health plans for U.S. employees.
The plans provide medical benefits coverage for qualified and participating
employees. For protection against significant claims, the Company has obtained
coverage for claims in excess of $20,000 per employee. The amount charged to
health insurance expense is based upon benefits paid and expected liabilities
and includes the insurance premiums. Management believes that the accrued
liability as of December 31, 1997 is adequate to cover future benefit payments
for claims that occurred prior to year-end.
7. BANK CREDIT COMMITMENT AND FACILITY
On September 26, 1997, Sun entered into a new Loan Agreement (the Facility)
that provides for up to $235,000,000 in committed credit by a group of
participating banks. A Swingline Loan facility of $10,000,000 is provided within
the Facility to accommodate zero balance banking. The Facility provides for
aggregate term debt, consisting of two term loans, of $155,000,000. The first
Term Loan (Term Loan A) provides for $45,000,000 payable in escalating quarterly
payments beginning March 31, 1998 at $500,000 and increasing to $1,250,000,
$1,750,000, $2,500,000, and $3,650,000 for the years 1999, 2000, 2001 -- 2002,
and 2003, respectively, with the final payment of $3,700,000 being due on
September 30, 2003. The second Term Loan (Term Loan B) provides $110,000,000
payable in sixteen quarterly payments of $250,000 from March 31, 1999 to
December 31, 2002, four quarterly payments of $4,000,000 from March 31, 2003 to
December 31, 2003, and three quarterly payments of $30,000,000 from March 31,
2004 to September 30, 2004. Interest is payable quarterly on the outstanding
term loans at interest rate options selected by Sun. The interest rate options
for all outstanding amounts (term loans and revolving credit loans) are based
upon the Prime Rate, the Federal Funds Effective Rate, or LIBOR (plus applicable
margin based on the leverage ratio as of the determination date) as defined by
the Facility. At December 31, 1997, Sun's interest rate was 8.74%, 9.24%, and
8.74% for Term Loan A, Term Loan B, and the revolving credit loans,
respectively. Borrowings under the
30
<PAGE> 31
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Facility are secured by factor receivable balances, trade receivables,
inventories, machinery and equipment, real property, and intangibles.
In addition to the term loans, the Facility provides for revolving credit
loans (Revolving Loans) to Sun from September 26, 1997 to September 30, 2003, in
aggregate amount outstanding at any one time up to $80,000,000. The aggregate
amount of all Revolving Loans (plus Swingline Loans) at any time outstanding
shall not exceed the Borrowing Base (as hereinafter defined) then in effect. The
Borrowing Base is defined as the sum of (i) eighty-five percent (85%) of (a) all
eligible nonpurchased accounts; plus (b) the lesser of (1) $3,000,000 or (2) all
eligible collectible chargebacks less collectible chargeback reserve; plus (c)
all eligible factored credit balances; and (ii) the lesser of (a) $1,000,000 or
(b) fifty percent (50%) of accrued settlements; and (iii) the lesser of (a) the
inventory cap or (b) the sum of (1) fifty-five percent (55%) of all eligible
inventory and (2) thirty-five percent (35%) of eligible inventory related to
"unwashed" finished goods; and (iv) an amount equal to (a) fifty percent (50%)
of the face amount of all issued and outstanding trade letters of credit less
(b) a reserve for estimated costs and expenses required to be paid in order to
take possession of any inventory which is then in transit. At December 31, 1997,
Sun had approximately $70,427,000 ($88,305,000 at June 30, 1998) available under
the Borrowing Base, of which $27,000,000 ($28,900,000 at June 30, 1998) was
utilized under the Revolving Credit Facility.
The Facility also provides for irrevocable letters of credit to be issued
against credit loans on behalf of Sun up to $30,000,000, subject to certain
borrowing limitations.
The Facility contains restrictive covenants relating to, among other
things, additional borrowings, additional liens, additional guarantees, the
declaration or payment of dividends, transactions with subsidiaries, mergers or
acquisitions, investments, asset sales, and capital expenditures. The Facility
includes certain financial covenants including, but not limited to, minimum
interest coverage, minimum fixed charge coverage, and a minimum leverage ratio.
As required by the Facility, the Company has entered into certain interest
rate protection agreements covering $77,500,000 (50%) of its borrowings under
the Facility. As of December 31, 1997, these agreements were in a net
unfavorable position with a fair market value of approximately $222,000.
Under its prior credit agreement as of December 28, 1996, Sun's interest
rate was 7.56% and 8.06% for a $25,000,000 term loan and a $34,250,000 revolving
credit loan, respectively. All amounts outstanding under the prior credit
agreement were repaid using proceeds from the new Facility.
8. DEBT
Long-Term Debt
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28 DECEMBER 31 JUNE 30
1996 1997 1998
----------- ----------- --------
<S> <C> <C> <C>
Term Loan A -- term note portion of the
September 26, 1997 Loan Agreement (see Note
7) -- payable in graduating quarterly
principal installments........................ $ -- $ 45,000 $ 44,000
Term Loan B -- term note portion of the
September 26, 1997 Loan Agreement (see Note
7) -- payable in graduating quarterly
principal installments........................ -- 110,000 110,000
</TABLE>
31
<PAGE> 32
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 28 DECEMBER 31 JUNE 30
1996 1997 1998
----------- ----------- --------
<S> <C> <C> <C>
Mortgages payable, secured by real property,
payable in monthly installments of $34,403
beginning in 1994 through 2006 plus interest
at .5% below prime (8% at December 31,
1997)......................................... 2,723 2,490 2,381
Note payable -- term note portion of the March
27, 1997 Loan Agreement (see Note
7) -- payable in quarterly installments of
$1,250,000 beginning in 1997 through 2002 plus
interest at the interest rate option selected
by Sun........................................ 25,000 -- --
Note payable -- trademark -- payable in four
annual principal installments of $250,000
beginning in 1995 through 1998 plus interest
at Bank of America's prime (7.5% at December
28, 1996)..................................... 500 --
Mortgage payable, secured by real property,
payable in monthly installments of $27,550
including interest at 11% per annum with a
final installment due on November 1, 2001..... 1,267 1,066 957
Note payable to bank, secured by equipment,
payable in monthly installments of $95,007
through year 2000 plus interest at 2.54% over
the federal funds rate (8.06% at December 28,
1996)......................................... 3,432 -- --
Capital lease for computer and related equipment
and software, with interest rates varying from
3.39% to 4.9%, payable in monthly installments
of $19,666 over five years, beginning April
1997.......................................... -- 713 415
Other........................................... 707 342 184
------- -------- --------
33,629 159,611 157,937
Less current portion............................ 6,330 3,000 4,228
------- -------- --------
$27,299 $156,611 $153,709
======= ======== ========
</TABLE>
Subordinated Debt
As a part of the Recapitalization (Note 2) on September 26, 1997, Sun and
all subsidiaries (through intercompany advances from Sun) repaid a majority of
third-party debt and all subordinated debt outstanding, except a
noninterest-bearing note payable to an affiliated entity for approximately
$1,607,000 which is subordinated through September 30, 1998.
Subordinated debt at December 28, 1996 included another note to a
shareholder for $700,000, with interest payable at 12% per annum, and a
shareholder note of $300,000, bearing interest at the rate of 10% per annum. As
of December 28, 1996, all interest had been paid, and $100,000 of the
subordinated debt was current.
Also as a part of the Recapitalization, Sun entered into two notes payable
to Vestar (the Vestar Notes) in the aggregate amount of $30,000,000, bearing
interest at 17.9%. A portion of interest (as defined in the agreement) is
payable annually in cash prior to September 25, 2003, but only to the extent
that payment of interest does not violate any senior obligations (any unpaid
interest accumulates as additional principal). After September 25, 2003,
interest is payable annually in arrears. The Vestar Notes have been subordinated
to all
32
<PAGE> 33
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
creditors until their due dates at September 25, 2007 and are subject to
prepayment penalties prior to maturity as follows:
<TABLE>
<CAPTION>
PERIOD OF PREPAYMENT PENALTY AMOUNT
- -------------------- --------------
<S> <C>
Prior to September 26, 1998................................. $15,000,000
September 26, 1998 -- September 25, 1999.................... 25,000,000
September 26, 1999 -- September 25, 2000.................... 35,000,000
September 26, 2000 -- September 25, 2001.................... 45,000,000
</TABLE>
These penalty amounts are considered to include accrued but unpaid
interest, and would be reduced by any cash interest paid.
The Vestar Notes are subject to mandatory redemption (including applicable
prepayment penalties) upon the occurrence of certain events as defined in the
note agreement, including changes in equity interests, a public offering of
equity securities, and the payment of dividend on any securities in any form
other than a dividend of similar equity securities.
Accrued interest on the Vestar Notes totaled $1,343,000 and $4,028,000 at
December 31, 1997 and June 30, 1998, respectively.
Capital Leases
In April 1997, Sun entered into two capital leases for computer equipment.
The minimum monthly lease payment, including interest, for both leases is
approximately $20,000 through March 2001.
Principal Maturities
Scheduled principal payments on all debt and capital leases as of December
31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL LEASE
SUBORDINATED PRINCIPAL LONG-TERM
DEBT PAYMENTS DEBT TOTAL DEBT
------------ ------------- --------- ----------
<S> <C> <C> <C> <C>
1998................................ $ 1,607 $214 $ 2,787 $ 4,608
1999................................ -- 216 6,492 6,708
2000................................ -- 223 8,540 8,763
2001................................ -- 60 11,594 11,654
2002................................ -- -- 11,306 11,306
2003 and thereafter................. 30,000 -- 145,179 175,179
------- ---- -------- --------
$31,607 $713 $185,898 $218,218
======= ==== ======== ========
</TABLE>
Fair Value
Substantially all debt is floating rate or has been issued in the near
term, and the carrying value approximates market value.
9. INCOME TAXES
On September 26, 1997, the Company terminated its Subchapter S tax status
and converted to a C corporation for federal income tax purposes.
Simultaneously, the Company became subject to the provisions of the FASB
Statement No. 109, "Accounting for Income Taxes" (FAS 109). FAS 109 requires
that the deferred tax effects of a change in tax status be included in income
from continuing operations at the date of
33
<PAGE> 34
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the change in tax status. The effect of the change from S corporation to C
corporation status as of September 26, 1997 was to increase net income by
approximately $1,958,000.
The Company provides for all foreign income taxes. No federal income taxes
have been provided for the earnings of its Mexican subsidiary, Pami. These
earnings are limited by its Maquiladora arrangement, and the Company considers
these earnings to be permanently reinvested.
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of the assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Components of the Company's net deferred tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
----------- -------
<S> <C> <C>
Deferred tax liabilities:
Depreciable property...................................... $ 768 $ 632
Display costs............................................. 48 49
Polo royalty waiver....................................... 212 394
------ ------
Total deferred tax liabilities.............................. 1,028 1,075
Deferred tax assets:
Depreciable property...................................... 577 594
Transaction fees, loan costs.............................. 937 887
Inventory................................................. 398 410
Allowance for doubtful accounts........................... 70 72
Patent costs.............................................. 34 36
Fixture installation costs................................ 460 --
Other..................................................... 27 27
------ ------
Total deferred tax assets................................... 2,503 2,026
------ ------
Net deferred tax asset...................................... $1,475 $ 951
====== ======
</TABLE>
The current and deferred income tax provisions (benefits) included in
income tax expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
----------------------------------------- ------------------
DECEMBER 30 DECEMBER 28 DECEMBER 31 JUNE 30 JUNE 30
1995 1996 1997 1997 1998
----------- ----------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Current:
Federal................... $ -- $ -- $3,247 $ -- $4,256
State..................... 542 706 1,297 756 219
Foreign................... -- 157 605 -- 327
Deferred federal............ -- -- (1,475) -- 524
---- ---- ------ ---- ------
$542 $863 $3,674 $756 $5,326
==== ==== ====== ==== ======
</TABLE>
34
<PAGE> 35
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax attributable to continuing operations
computed at U.S. federal statutory rates to income tax expense is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
----------- -------
<S> <C> <C>
Tax at statutory rate (34% for December 31, 1997 and 35% for
June 30, 1998)............................................ $9,095 $4,298
Effect of S corporation status through September 25, 1997... (5,053) --
Effect of change in tax status as of September 26, 1997..... (1,958) --
Permanent differences....................................... 62 52
State tax expense, net of federal benefit................... 857 142
Excess of foreign over U.S. tax rate........................ 380 327
Tax effect of loss on debt extinguishment -- separately
stated.................................................... 291 --
Fixture installation costs.................................. -- 550
Effect of increase in statutory rates on existing temporary
differences............................................... -- (43)
------ ------
$3,674 $5,326
====== ======
</TABLE>
10. PREFERRED STOCK
Series A Cumulative Participating Preferred Stock (Series A) is senior to
the Company's common stock and other preferred stock with respect to dividends,
distributions of assets, or liquidation. Series B Cumulative Participating
Preferred Stock (Series B) and Series C Cumulative Participating Preferred Stock
(Series C) are of equal parity, are junior to Series A, and are senior to the
Company's common stock with respect to dividends, distributions of assets, or
liquidation. Dividends accrue at 13% on Series A, B, and C, are cumulative, and
are payable in cash when dividends are declared. At December 31, 1997 and June
30, 1998, accumulated unpaid dividends on all preferred stock totaled
approximately $2,916,000 ($6.86 per share) and $8,441,000 ($19.86 per share),
respectively.
The Series A shares are redeemable at the option of the Company at any time
at a price of $200 per share (Redemption Price) plus any accumulated and unpaid
dividends.
If the Company or any of its subsidiaries enters into an agreement which
constitutes a change of control as defined in the Statement of Designation of
Series A, the Company must offer to redeem the outstanding shares of Series A at
the Redemption Price plus any accumulated and unpaid dividends.
If the Company undergoes an initial public offering (IPO), the Company must
offer to redeem the outstanding shares of Series A, B, and C at the Redemption
Price plus any accumulated and unpaid dividends. Shares of Series A, B, or C not
redeemed will be converted to shares of common stock. The number of shares of
common stock issued will be determined by dividing the Redemption Price by the
IPO price.
The Redemption Price is subject to adjustment for any stock splits or
combinations.
Series A participates at a rate of 20%, payable in cash, of any dividends
declared on the common stock. Series B and C participate at a rate of 30%,
payable in cash, of any dividends declared on the common stock.
11. PRO FORMA DATA (UNAUDITED)
Pro forma net income for the years ended December 30, 1995, December 28,
1996, and December 31, 1997, and for the six months ended June 30, 1997, have
been determined assuming that the Company had been taxed as a C corporation for
federal and certain state income tax purposes for such periods.
35
<PAGE> 36
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. LEASES AND LEASE ARRANGEMENTS
On June 24, 1994, Lone Star entered into a ten year operating lease for
sales offices in New York City. The agreement provides for annual rentals of
approximately $266,000.
On November 17, 1995, R.L. entered into a ten year operating lease for
sales offices in New York with a graduating minimum annual rental of
approximately $383,000 for the first five years and approximately $435,000 for
the second five years. Additionally, R.L. has month-to-month arrangements
totaling approximately $34,000 per month.
On December 5, 1995, Sun entered into a three year operating lease for a
warehouse in El Paso. The agreement, as amended, provides for minimum annual
payments of $404,000.
On June 30, 1996, Lone Star entered into a five year operating lease for
sales offices in New York City for approximately $90,000 per month.
The minimum rental under all operating leases as of December 31, 1997 with
initial or remaining terms of more than one year are as follows:
<TABLE>
<CAPTION>
TOTAL
------
<S> <C>
1998.............................................. $1,276
1999.............................................. 823
2000.............................................. 743
2001.............................................. 705
2002.............................................. 701
2003 and thereafter............................... 2,354
------
$6,602
======
</TABLE>
The total rent expense for Sun for the years ended December 28, 1996 and
December 31, 1997 was $2,033,000 and $2,773,000, respectively.
13. COMMITMENTS AND CONTINGENCIES
Approximately 9% and 5% of Sun's sales were made under trademark licensing
agreements, other than Polo/Ralph Lauren Companies (see Note 14), for the years
1996 and 1997, respectively. One such royalty agreement is currently in a
renewal term of forty-eight months ending December 31, 1999, and provides for
the payment of graduating royalties from 5.0% to 3.8% if certain net sales
levels are achieved. The other agreements call for minimum royalties and
advertising costs ranging from .75% to 1.5% of net sales. The total royalty and
advertising payments per these agreements in 1996, 1997, and for the six months
ended June 30, 1997 and 1998 amounted to approximately $1,444,000, $1,174,000,
$520,000, and $461,000, respectively, and are included in selling, general, and
administrative expenses. During the current renewal term of the principal
trademark licensing agreement, the minimum annual royalties are $800,000,
$600,000, and $400,000 for 1997 through 1999, respectively.
In 1990, GTX entered into an agreement with the owners of the Ricci acid
wash patent, under which GTX is licensed to use the process and to produce
products under a royalty arrangement, and pursuant to which GTX has undertaken a
licensing and patent protection program. GTX is required to pay royalties to the
patent owners on its own production and to make payments to them of a defined
portion of amounts generated through the licensing and patent protection
program. A number of companies have entered into licensing and settlement
agreements with GTX, and GTX has been involved in several lawsuits regarding
patent validity and recovery of damages from infringement. In October 1997, a
settlement was reached on all outstanding lawsuits related to patent
infringement, and GTX received a settlement of $1,386,000 which is included in
36
<PAGE> 37
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
other income for 1997. GTX's and its licensees' use of the patented acid wash
process has declined significantly and was minimal in 1997.
The Company is party to several lawsuits in the normal course of business.
Management believes that the outcome of these claims is not determinable at
December 31, 1997, and that ultimate resolution will not have a material adverse
effect on the Company's financial position or results of operations.
14. LICENSE AGREEMENT WITH POLO/RALPH LAUREN COMPANIES
In September 1995, Sun entered into a license agreement and a design
services agreement covering men's apparel products with the Polo/Ralph Lauren
Companies (Polo), which were expanded in October 1995 to include women's apparel
products. Under the agreements, Polo has granted Sun an exclusive license to use
certain Polo trademarks. The initial term of the license agreement is from
August 1, 1995 to December 31, 2000 and may be renewed by Sun in five year
increments for up to 30 additional years if certain sales requirements are met.
Under the agreements, Sun is required to pay Polo royalties equal to 7% of
net sales of the licensed products. Approximately 35% and 55% of Sun's sales
were made under this agreement for the years 1996 and 1997, respectively. The
total royalty payment per this agreement amounted to $7,035,000 and $11,504,000
for the years 1996 and 1997, respectively. Commencing in 2001, certain minimum
annual royalty payments are required if Sun exercises its renewal options.
For the six months ended June 30, 1997 and 1998, approximately 53% and 60%
of Sun's sales were made under the Polo agreement. Polo royalty expenses
aggregated approximately $3,857,000 and $6,635,000, respectively, for these
periods.
Sun is obligated to spend on advertising an annual amount equal to 3% of
net sales of licensed products, but not less than $20,000,000 for the launch of
the lines through December 31, 1997. Sun incurred launch advertising expense for
the two years ended December 28, 1996 and December 31, 1997 of approximately
$9,639,000 and $12,861,000, respectively, meeting the two year minimum launch
advertising requirements.
Renewal by Sun after 2010 requires a one-time payment of $25,000,000 or, at
Sun's option, a transfer of a 20% interest in its Polo jeanswear business to
Polo. Polo has the one-time right, in blockage of such renewal, to purchase
Sun's Polo jeanswear business at the end of 2010 for 80% of its then fair market
value, as defined, payable in cash.
15. YEAR 2000 ISSUE (UNAUDITED)
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by early 1999 and to cost between $750,000 and $1,000,000. This estimate
includes internal costs as well as consulting help. It also includes the cost of
software purchases where applicable. The Company does not expect this project to
have a significant effect on operations. This project started in early 1998. The
Company will continue to implement systems with strategic value simultaneously
with Year 2000 development.
37
<PAGE> 38
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. VALUATION AND QUALIFYING ACCOUNTS
Valuation and qualifying accounts included the following (in thousands):
<TABLE>
<CAPTION>
BALANCE CHARGED TO BALANCE
BEGINNING OF COSTS AND NET END OF
YEAR EXPENSES WRITE-OFFS YEAR
------------ ---------- ---------- -------
<S> <C> <C> <C> <C>
1997
Allowance for doubtful accounts........ $102 $269 $166 $205
1996
Allowance for doubtful accounts........ 78 89 65 102
1995
Allowance for doubtful accounts........ - 78 - 78
</TABLE>
17. SUBSEQUENT EVENT
On September 10, 1998, the Company entered into an agreement to merge with
a wholly-owned subsidiary of Jones Apparel Group, Inc. (Jones). Under the terms
of the merger, the shareholders of the Company will exchange all the outstanding
shares of the Company's common stock for approximately $125 million in cash and
approximately 4.8 million shares of Jones common stock (subject to final
adjustment on closing).
Under the terms of the merger agreement, the preferred stock will be
treated as if converted to common stock and will be exchanged for cash and Jones
common stock as described above. Additionally, all existing bank debt of the
Company will be assumed and refinanced by Jones. The merger transaction, if
consummated, will trigger mandatory redemption of the Vestar Notes, including
applicable prepayment penalties.
38
<PAGE> 39
(B) PRO FORMA FINANCIAL INFORMATION
Jones has included the following unaudited pro forma consolidated financial
statements to illustrate the estimated effects of the Acquisition and related
transactions, including the Offering, as if they had occurred as of January 1,
1997, for purposes of the pro forma consolidated statements of operations, and
as of June 28, 1998, for purposes of the pro forma consolidated balance sheet.
Management believes that the assumptions used provide a reasonable basis for
presenting the estimated effect directly attributable to the Acquisition and
related transactions, including the Offering and the entering into the Senior
Credit Facilities (but excluding any potential future payments by Jones based on
Sun's operating performance). The pro forma consolidated financial statements do
not purport to represent what the results of operations or financial position of
Jones would actually have been if the Acquisition and related transactions had
in fact occurred on such dates, nor do they purport to project the results of
operations or financial position of Jones for any future period or date. You
should read these statements together with the Sun historical consolidated
financial statements and the discussion of the Acquisition set forth above and
the Jones historical consolidated financial statements previously filed.
The Acquisition will be accounted for using the purchase method of
accounting. Under this method, tangible and identifiable intangible assets
acquired and liabilities assumed are recorded at their estimated fair values.
The excess of the purchase price (which is subject to certain closing
adjustments as defined in the Merger Agreement), including estimated fees and
expenses related to the Acquisition, over the net assets acquired ("goodwill")
is classified with intangibles on the accompanying unaudited pro forma
consolidated balance sheet. In addition to the purchase price, there will be
contingent payments payable in the future as defined in the Merger Agreement,
which amounts cannot be determined presently and are not included herein. The
estimated fair values and useful lives of assets acquired and liabilities
assumed are based on a preliminary valuation and are subject to final valuation
adjustments.
39
<PAGE> 40
JONES APPAREL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 28, 1998
<TABLE>
<CAPTION>
JONES SUN PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents.............................. $ 45,567 $ 1,354 $ 33,150(c) $ 80,071
Due from factors....................................... -- 17,224 17,224
Accounts receivable.................................... 93,367 44,455 137,822
Inventories............................................ 259,498 75,345 1,850(b) 336,693
Receivable from and advances to contractors............ 12,978 242 13,220
Prepaid and refundable income taxes.................... 4,705 -- 4,705
Deferred taxes......................................... 28,333 -- 9,315(b) 37,648
Prepaid expenses and other current assets.............. 10,434 7,583 18,017
--------- -------- --------- ----------
TOTAL CURRENT ASSETS.......................... 454,882 146,203 44,315 645,400
PROPERTY, PLANT AND EQUIPMENT.......................... 111,387 36,621 (3,000)(b) 145,008
CASH RESTRICTED FOR CAPITAL ADDITIONS.................. 3,754 -- 3,754
INTANGIBLES............................................ 29,539 -- 331,657(b) 361,196
LOAN ORIGINATION COSTS................................. -- 6,759 (6,759)(b) --
OTHER ASSETS........................................... 20,023 3,846 4,750(c) 28,619
--------- -------- --------- ----------
$ 619,585 $193,429 $ 370,963 $1,183,977
========= ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term borrowings.................................. $ 881 $ -- $ 127,775(b) $ --
(128,656)(c)
Current portion of long-term debt...................... 1,529 4,228 (4,228)(c) 1,529
Current portion of capital lease obligations........... 3,753 -- 3,753
Accounts payable....................................... 78,800 27,457 106,257
Taxes payable.......................................... -- 5,033 7,500(b) 12,533
Due to related parties................................. -- 1,607 (1,607)(c) --
Accrued expenses and other current liabilities......... 18,246 19,309 33,500(b) 56,055
(15,000)(c)
--------- -------- --------- ----------
TOTAL CURRENT LIABILITIES..................... 103,209 57,634 19,284 180,127
--------- -------- --------- ----------
NONCURRENT LIABILITIES:
Obligations under capital leases....................... 28,195 -- 28,195
Bank credit facility................................... -- 28,900 (28,900)(c) --
Subordinated debt...................................... -- 30,000 (30,000)(c) --
Term loan.............................................. -- -- 100,000(c) 100,000
Notes.................................................. -- -- 300,000(c) 300,000
Long-term debt......................................... 12,719 153,709 (153,709)(c) 12,719
Other.................................................. 6,107 1,075 7,182
--------- -------- --------- ----------
TOTAL NONCURRENT LIABILITIES.................. 47,021 213,684 187,391 448,096
--------- -------- --------- ----------
TOTAL LIABILITIES............................. 150,230 271,318 206,675 628,223
--------- -------- --------- ----------
EXCESS OF NET ASSETS ACQUIRED OVER COST................ 614 -- 614
--------- -------- ----------
</TABLE>
- ---------------
(see footnotes on following page)
40
<PAGE> 41
JONES APPAREL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 28, 1998 (CONTINUED)
<TABLE>
<CAPTION>
JONES SUN PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock........................................ -- 93,441 (93,441)(b) --
Common stock........................................... 1,099 417 (369)(b) 1,147
Additional paid in capital............................. 135,688 15,582 70,769(b) 222,039
Retained earnings (deficit)............................ 502,565 (187,329) 187,329(b) 502,565
Accumulated other comprehensive income................. (1,800) -- -- (1,800)
--------- -------- --------- ----------
637,552 (77,889) 164,288 723,951
Less treasury stock.................................... (168,811) -- -- (168,811)
--------- -------- --------- ----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)........ 468,741 (77,889) 164,288 555,140
--------- -------- --------- ----------
$ 619,585 $193,429 $ 370,963 $1,183,977
========= ======== ========= ==========
</TABLE>
- ---------------
(a) A purchase accounting valuation of Sun's assets and liabilities has not been
completed. Upon completion of such valuation, Jones will allocate the
purchase price to Sun's assets and liabilities, both tangible and
intangible, with the excess of the cost over the fair value of the net
assets acquired allocated to goodwill. Management expects that, based on
such allocation, additional purchase accounting adjustments will be made to
Sun's assets and liabilities.
(b) To record the purchase of Sun for approximately $214.2 million, comprised of
the following: cash -- $125.0 million; the issuance of 4.8 million shares of
Jones common stock valued at $86.4 million; and transaction costs -- $2.8
million. For accounting purposes, the common stock was valued at $18.00 per
share (the closing price on September 10, 1998, the date the Merger
Agreement was signed and announced). The deferred tax asset adjustment of
$9.3 million reflects deferred taxes associated with the acquired
identifiable assets other than goodwill. The purchase price was allocated to
the fair value of the net assets acquired as summarized below (in millions,
with all amounts preliminary and subject to revision upon closing of the
Acquisition):
<TABLE>
<S> <C>
Inventory................................................... $ 1.9
Deferred taxes.............................................. 9.3
Loan origination costs...................................... (6.8)
Property, plant and equipment............................... (3.0)
Intangibles, including goodwill............................. 331.7
Taxes payable............................................... (7.5)
Loan prepayment penalty..................................... (15.0)
Accrued expenses and other current liabilities.............. (18.5)
Elimination of Sun's historical stockholders' deficit....... (77.9)
------
Total purchase price.............................. $214.2
======
</TABLE>
These adjustments do not include future payments under Sun's Polo Jeans
license which would not materially impact the purchase price.
(c) Reflects the funding of the cash portion of the purchase price, transaction
costs, Sun loan prepayment penalties and the refinancing of all Sun's
long-term debt and Jones' short-term borrowings using $300.0 million of
Notes and $100.0 million of the Senior Credit Facilities.
41
<PAGE> 42
JONES APPAREL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 28, 1998
<TABLE>
<CAPTION>
JONES SUN PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales.......................................... $685,512 $206,865 $ $892,377
Licensing income................................... 6,816 -- 6,816
-------- -------- --------
Total revenues................................... 692,328 206,865 899,193
Cost of goods sold................................. 453,647 129,636 (50)(a) 583,233
-------- -------- ------- --------
Gross profit..................................... 238,681 77,229 50 315,960
Selling, general and administrative expenses....... 133,599 52,924 186,523
Amortization of intangibles........................ -- -- 5,528(b) 5,528
-------- -------- ------- --------
Operating income................................. 105,082 24,305 (5,478) 123,909
Interest expense and finance costs................. 2,446 12,051 820(d) 15,450
133(c)
Interest income.................................... (856) (27) (883)
-------- -------- ------- --------
Income before provision for income taxes......... 103,492 12,281 (6,431) 109,342
Provision for income taxes......................... 39,844 5,326 (348)(e) 44,822
-------- -------- ------- --------
Net income......................................... $ 63,648 $ 6,955 $(6,083) $ 64,520
======== ======== ======= ========
Earnings Per Share
Basic............................................ $ 0.63 $ 0.61
Diluted.......................................... $ 0.61 $ 0.59
Weighted Average Common Shares Outstanding
Basic............................................ 100,788 4,800(f) 105,588
Diluted.......................................... 104,707 4,800(f) 109,507
</TABLE>
- ---------------
(a) Represents adjustments to depreciation and amortization relating to purchase
price writedowns of property to estimated market values.
(b) Reflects amortization of acquired intangible assets, including goodwill,
over a 30-year period.
(c) Represents the incremental amortization of loan origination costs and
related fees under the Notes and the Senior Credit Facilities over the
amounts historically recorded by Sun.
(d) Reflects interest expense and other expenses related to the Notes and the
Senior Credit Facilities. Interest expense associated with the Notes and the
Senior Credit Facilities was calculated based on an average interest rate of
6.25% per year.
Interest expense includes the following:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 28, 1998
-------------
(IN MILLIONS)
<S> <C>
Notes....................................................... $ 9.4
Senior Credit Facilities.................................... 3.1
Capital Leases and Other.................................... 2.3
-----
14.8
Amortization of loan origination costs...................... 0.7
-----
$15.5
=====
</TABLE>
An increase or decrease of 25 basis points ( 1/4%) per year represents a
change in annual interest expense of approximately $1 million.
(e) Records the income tax effects for the applicable pro forma adjustments.
(f) Represents the incremental shares of common stock of Jones that are issued
as part of the purchase price of the Acquisition.
42
<PAGE> 43
JONES APPAREL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
JONES SUN PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales................................. $1,372,458 $359,672 $ $1,732,130
Licensing income.......................... 15,013 -- 15,013
---------- -------- ----------
Total revenues.......................... 1,387,471 359,672 1,747,143
Cost of goods sold........................ 940,149 236,203 (100)(a) 1,176,252
---------- -------- ------- ----------
Gross profit............................ 447,322 123,469 100 570,891
Selling, general and administrative
expenses................................ 250,685 85,715 336,400
Amortization of intangibles............... -- -- 11,055(b) 11,055
---------- -------- ------- ----------
Operating income........................ 196,637 37,754 (10,955) 223,436
Interest expense and finance costs........ 3,584 10,375 15,470(e) 30,105
676(d)
Interest income........................... (1,556) (227) (1,783)
---------- -------- ------- ----------
Income before provision for income
taxes................................ 194,609 27,606 (27,101) 195,114
Provision for income taxes................ 72,884 3,674 7,921(c) 78,462
(6,017)(f)
---------- -------- ------- ----------
Income before extraordinary item........ 121,725 23,932 (29,005) 116,652
Loss on early extinguishment of debt...... -- 566 (566)(d) --
---------- -------- ------- ----------
Net income................................ $ 121,725 $ 23,366 $28,439 $ 116,652
========== ======== ======= ==========
Earnings Per Share
Basic................................... $1.17 $1.07
Diluted................................. $1.13 $1.04
Weighted Average Common Shares Outstanding
Basic................................... 103,797 4,800(g) 108,597
Diluted................................. 107,810 4,800(g) 112,610
</TABLE>
- ---------------
(a) Represents adjustments to depreciation and amortization relating to purchase
price writedowns of property to estimated market values.
(b) Reflects amortization of acquired intangible assets, including goodwill,
over a 30-year period.
(c) For the period from January 1, 1997 to September 26, 1997, Sun elected to be
treated as an S Corporation. The tax provision has been adjusted assuming
that Sun had been taxed as a C Corporation for federal and certain state
income tax purposes for all of 1997.
(d) Represents the incremental amortization of loan origination costs and
related fees under the Notes and the Senior Credit Facilities over the
amounts historically recorded by Sun and eliminates the loss on early
extinguishment of debt.
(e) Reflects interest expense and other expenses related to the Notes and the
Senior Credit Facilities. Interest expense associated with the Notes and the
Senior Credit Facilities was calculated based on an average interest rate of
6.25% per year.
43
<PAGE> 44
Interest expense includes the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN MILLIONS)
<S> <C>
Notes....................................................... $18.8
Senior Credit Facilities.................................... 6.2
Capital leases and Other.................................... 3.7
-----
28.7
Amortization of loan origination costs...................... 1.4
-----
$30.1
=====
</TABLE>
An increase or decrease of 25 basis points ( 1/4%) per year represents a
change in annual interest expense of approximately $1 million.
(f) Records the income tax effects for the applicable pro forma adjustments.
(g) Represents the incremental shares of common stock of Jones that are issued
as part of the purchase price of the Acquisition.
(C) EXHIBITS
The following exhibits are filed with this Current Report:
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger dated September 10, 1998, by
and among the Company, SAI Acquisition Corp., Sun Apparel,
Inc. and the shareholders of Sun Apparel, Inc.
4.1 Registration Rights Agreement dated September 10, 1998, by
and among the Company and the shareholders of Sun Apparel,
Inc.
10.1 Employment Agreement dated September 10, 1998, by and
between SAI Acquisition Corp. and Eric A. Rothfeld.
10.2 Employment Agreement dated September 10, 1998, by and
between R.L. Management, Inc. and Mindy Grossman.
99.1 Press Release dated September 10, 1998, announcing the
Merger Agreement.
</TABLE>
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
JONES APPAREL GROUP, INC.
--------------------------------------
Registrant
By: /s/ WESLEY R. CARD
------------------------------------
Wesley R. Card
Chief Financial Officer
September 24, 1998
45
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
BY AND
AMONG
JONES APPAREL GROUP, INC.
("JONES")
SAI ACQUISITION CORP.
("NEWCO")
AND
SUN APPAREL, INC.
(THE "COMPANY")
THE SHAREHOLDERS OF THE COMPANY
("SHAREHOLDERS")
DATED
SEPTEMBER 10, 1998
<PAGE> 2
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (together with all Exhibits and Schedules,
this "Agreement") dated as of September 10, 1998, by and among JONES APPAREL
GROUP, INC., a Pennsylvania corporation ("Jones"), SAI ACQUISITION CORP., a
wholly-owned subsidiary of Jones organized under the laws of the State of
Delaware ("Newco"), SUN APPAREL, INC., a Texas corporation (the "Company"), and
the holders of all of the Company's issued and outstanding capital stock whose
names are set forth on the signature pages hereto ("Shareholders"). (The Company
and Newco are sometimes referred to herein as the "Constituent Corporations".)
RECITALS
WHEREAS, the Company is a corporation duly organized and validly existing
under the laws of the State of Texas, having an authorized capitalization
consisting of 1,000,000 shares of Common Stock, no par value (the "Company
Common Stock"), of which as of the date hereof, 3,780 shares are issued and
outstanding and 500,000 shares of preferred stock, $1.00 par value per share, of
which as of the date hereof, 215,000 shares are designated Series A Preferred
Stock and are issued and outstanding (the "Series A Preferred Stock"), 201,065
shares are designated Series B Preferred Stock and are issued and outstanding
(the "Series B Preferred Stock"), and 8,935 shares are designated Series C
Preferred Stock and are issued and outstanding (the "Series C Preferred Stock"
and collectively, with the Series A Preferred Stock and the Series B Preferred
Stock, the "Company Preferred Stock");
WHEREAS, Newco is a corporation duly organized and validly existing under
the laws of the State of Delaware, having an authorized capital stock consisting
of 200 shares of Common Stock, no par value (the "Newco Shares"), of which as of
the date hereof, 200 shares are issued and outstanding; and
WHEREAS, Jones, the Boards of Directors of each of the Constituent
Corporations and Shareholders, respectively, deem it advisable for the welfare
and best interests of the Constituent Corporations and for the best interests of
the respective shareholders of said corporations that the Company be merged with
and into Newco (the "Merger") on the terms and subject to the conditions set
forth in this Agreement and in accordance with the provisions of the Delaware
General Corporation Law (the "DGCL") and the Texas Business Corporation Act (the
"TBCA").
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements, and upon the terms and subject to the conditions
hereinafter set forth, the parties do hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1. Definitions. For all purposes of this Agreement, except as otherwise
expressly provided or unless the context otherwise requires:
(i) The terms "Affiliate" and "Associate" have the meanings prescribed
by Rule 12b-2 of the regulations promulgated pursuant to the Securities
Exchange Act of 1934, as amended.
(ii) "Code" means the Internal Revenue Code of 1986, as amended.
(iii) "Company Shares" means the issued and outstanding shares of the
Company Common Stock and Company Preferred Stock.
(iv) "Disclosure Schedule" means the schedule to be delivered by
Shareholders to Jones containing the information required to be included
therein pursuant to this Agreement. Unless otherwise specified, each
reference in this Agreement to any numbered schedule is a reference to that
numbered section of the Disclosure Schedule.
1
<PAGE> 3
(v) "Company Subsidiary" means any corporation, limited liability
company, partnership or other entity, (a) of which the Company directly or
indirectly owns or controls at the time equity interests which have in
ordinary circumstances (not dependent upon the happening of a contingency)
voting power to elect a majority of the governing body of said entity, or
(b) of which an equity interest of the character described in the foregoing
clause (a) shall at the time be owned or controlled directly or indirectly
by the Company and one or more Company Subsidiaries as defined in the
foregoing clause (a) or by one or more such Company Subsidiaries.
(vi) "Jones Common Stock" means the common stock, $.01 par value, of
Jones.
(vii) "Knowledge" when applied to Shareholders assumes due inquiry by
them of those persons disclosed as officers under the captions "Directors
and Executive Officers" and "Senior Officers" in the Registration
Statement.
(viii) "Registration Statement" means the registration statement on
Form S-1 filed by the Company with the Securities and Exchange Commission
on May 26, 1998 -- File No. 333-53597.
(ix) "Sun Accounting Principles" means generally accepted accounting
principles ("GAAP") as applied by the Company consistent with past
practices through June 30, 1998, including a refinement in the method used
by the Company in 1997 for the capitalization of manufacturing overhead
costs into inventory and a refinement in the method used currently by the
Company for the capitalization of Polo retail development costs to make it
consistent with the method used in 1997.
(x) "Sun Division" means the existing businesses of the Company and
the Company Subsidiaries described in the Registration Statement under the
heading "Business" conducted by Jones following the Closing, either as a
separate corporation or as an operating division of Jones, as well as any
business or businesses conducted by Jones, or by any subsidiary or
affiliated corporations of Jones, which represent a succession to and a
continuation of such businesses, as the same may be expanded from time to
time with the prior written consent of Jones.
(xi) "Tax Benefits" means the amount of (i) any tax benefit arising
from an item of loss or deduction for any tax purpose and (ii) the full
amount of any tax credit.
(xii) "Tax Credits Receivable" means the sum of the amount of any Tax
Benefits which arise as a result of (i) the payment of the redemption
premium on the promissory note payable to Vestar/Sun Holding Company L.L.C.
("Vestar") listed on Section 6.4 of the Disclosure Schedule; (ii) the grant
to Mindy Grossman ("Grossman") of a 1% interest in the Common Stock of the
Company immediately prior to the Closing and the payment of any additional
consideration to Grossman at the Closing; (iii) the write-off of deferred
financing fees arising out of the payment of the indebtedness listed on
Section 6.4 of the Disclosure Schedule; (iv) the loss on the interest rate
protection contracts which are terminated as of the Closing; (v) the
write-off of expenses in connection with the proposed IPO of the Company;
(vi) the write-off of prepayment penalties relating to the prepayment of
the promissory note issued by the Company to John Alden Life Insurance
Company (subsequently assigned to SunAmerica Life Insurance Company); and
(vii) expenses incurred by the Company and the Shareholders arising out of
this Agreement and the consummation of the transactions contemplated
hereby.
(xiii) "Total Debt" means all indebtedness of the Company and the
Company Subsidiaries for money borrowed, plus capitalized lease obligations
and accrued interest, minus cash and cash equivalents and Tax Credits
Receivable, in each case as of the Closing Date and excluding trade
accounts payable, letters of credit, preferred stock and accrued
liabilities, but including all premiums, penalties, make whole payments,
fees and any other costs and expenses of every nature necessary to
effectuate payment in full of any such indebtedness.
(xiv) "Working Capital Deficiency" means the amount by which the
Company's Working Capital as of the Closing Date is less than $96 million.
"Working Capital Surplus" means the amount by which the Company's Working
Capital as of the Closing Date is more than $96 million. "Working Capital"
means current assets (excluding cash, cash equivalents, Tax Credits
Receivable and deferred financing
2
<PAGE> 4
costs) less current liabilities (other than accrued interest and other
current liabilities included in Total Debt) and less liabilities and
expenses incurred (but not paid) in connection with this Agreement and the
transactions contemplated hereby not otherwise accrued, calculated in
accordance with Sun Accounting Principles.
ARTICLE II
THE MERGER
2.1. THE MERGER. Subject to the terms and conditions of this Agreement,
at the Effective Time (as defined in Section 2.4 hereof), the Company shall be
merged with and into Newco (the "Merger") in accordance with the applicable
provisions of the laws of the States of Delaware and Texas and the separate
corporate existence of the Company shall cease and Newco shall continue as the
surviving corporation under the laws of the State of Delaware (the "Surviving
Corporation"). The name of the Surviving Corporation shall be changed to "Sun
Apparel, Inc."
2.2. EFFECT OF MERGER. At the Effective Time, the identity, existence,
corporate organization, purposes, powers, objects, franchises, privileges,
rights and immunities of Newco shall continue in effect and be unimpaired by the
Merger and the corporate existence of the Company shall cease and Newco will
succeed, without other transfer or further act or deed, to all the rights,
interests and properties, powers, assets and qualifications of the Company and
shall be subject to all the debts, limitations, liabilities and obligations of
the Company in the same manner as if Newco itself had incurred them. All rights
of creditors and all liens upon the property of each of the Constituent
Corporations shall be preserved unimpaired by the Merger.
2.3. FILING. Upon fulfillment or waiver of the conditions specified in
this Agreement, and provided that this Agreement has not been terminated in
accordance with the provisions hereof, on the Closing Date (as defined in
Section 2.11), Jones and the Company will cause (a) a certificate of merger, in
substantially the form of Exhibit B-1 hereto (the "Delaware Certificate of
Merger"), to be executed, attested and filed with the office of the Secretary of
State of the State of Delaware as provided in Section 252 of the DGCL; and (b)
articles of merger, in substantially the form of Exhibit B-2 hereto (the "Texas
Articles of Merger"), to be executed, attested and filed with the office of the
Secretary of State of the State of Texas as provided in Section 5.04 of the
TBCA.
2.4. EFFECTIVE TIME OF THE MERGER. The Merger shall become effective at
such time as both the Delaware Certificate of Merger and the Texas Articles of
Merger have been duly filed or at such subsequent time as Jones and the Company
may agree as specified in the Delaware Certificate of Merger (the date and time
the Merger becomes effective being the "Effective Time").
2.5. CERTIFICATE OF INCORPORATION OF THE SURVIVING CORPORATION. At the
Effective Time, the Certificate of Incorporation of Newco, as in effect
immediately prior to the Effective Time (as amended pursuant to the Delaware
Certificate of Merger), shall be and continue to be the Certificate of
Incorporation of the Surviving Corporation until the same shall be further
amended as provided therein and as provided by applicable law, except that
Article I of the Certificate of Incorporation of the Surviving Corporation shall
be amended to read in its entirety as follows: "The name of the Corporation is
Sun Apparel, Inc." There is hereby reserved to the Surviving Corporation the
right, from and after the Effective Time, to amend, alter or modify its
Certificate of Incorporation, as authorized, and in the manner permitted, by
Newco's Certificate of Incorporation, its By-Laws and applicable law.
2.6. BY-LAWS OF THE SURVIVING CORPORATION. At the Effective Time, the
By-Laws of Newco, as in effect immediately prior to the Effective Time, shall be
the By-Laws of the Surviving Corporation until the same shall be amended or
repealed as provided in the Certificate of Incorporation of Newco, its By-Laws
and applicable law; provided, however, that the Newco shall not amend Section
4.3 of its By-laws for so long as Eric A. Rothfeld ("Rothfeld") is employed
under the Rothfeld Employment Agreement.
3
<PAGE> 5
2.7. DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The following
persons shall be appointed to serve as the directors and officers of the
Surviving Corporation, effective upon the Effective Time:
Directors:
Four designees of Jones, including the Chairman of the Board; Eric A.
Rothfeld and Mindy Grossman.
Chairman of the Board: Sidney Kimmel.
Officers:
President and Chief Executive Officer: Eric A. Rothfeld.
In addition, immediately after the Closing all of the present officers of
the Company shall continue to serve as officers of the Sun Division until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be. In the event that any person
referred to above is unable or unwilling to serve as a director or officer and
his successor has not yet been appointed and qualified, then the vacancy caused
thereby shall be filled as provided in the By-Laws of the Surviving Corporation
and applicable law. Such persons shall serve as officers and directors until the
earlier of their resignation or removal or otherwise ceasing to serve or until
their respective successors are duly elected and qualified, as the case may be.
Notwithstanding anything in this Section 2.7, Rothfeld and Grossman shall be
elected as directors of the Surviving Corporation for so long as they are
employed under the Rothfeld Employment Agreement and the employment agreement
being executed and delivered on the date hereof between Grossman and R.L.
Management, Inc., a Delaware corporation ("R.L. Management") (the "Grossman
Employment Agreement"), respectively.
2.8. TAX CONSEQUENCES. It is intended that the Merger shall constitute a
reorganization within the meaning of Section 368(a)(1)(A) and (a)(2)(D) of the
Code, and that this Agreement shall constitute a "plan of reorganization" for
the purposes of Section 368 of the Code.
2.9. CONVERSION.
(a) The manner and basis of converting the shares of each of the
Constituent Corporations, and the consideration which the holders of such shares
shall receive, are as follows:
(i) Each Newco Share issued and outstanding immediately prior to the
Effective Time, shall continue to remain outstanding and shall be
unaffected by the Merger.
(ii) The aggregate value of cash and shares of Jones Common Stock
which shall be issuable to the holders of the Company Shares at the Closing
pursuant to the Merger (the "Jones Shares") shall be equal to $475 million
(A) less the sum of (I) the Total Debt of the Company (on the Closing Date)
and (II) the Working Capital Deficiency of the Company (on the Closing
Date), if any, and (B) plus the sum of (I) the Working Capital Surplus of
the Company (on the Closing Date), if any, and (II) $27,777.77 for each day
after October 1, 1998 up to and including the date that the Closing
(defined below) occurs ("Aggregate Merger Consideration"), of which 59%
(subject to adjustment as provided in Sections 2.16 and 2.17 below) shall
be paid in cash ("Cash Merger Consideration") and 41% (subject to
adjustment as provided in Sections 2.16 and 2.17 below) shall be paid by
issuance of Jones Common Stock (the "Stock Merger Consideration") valued at
$26.00 (the "Jones Initial Share Value"). Notwithstanding the foregoing,
the proportions of cash and Jones Common Stock comprising the Aggregate
Merger Consideration shall be adjusted to the extent necessary in
accordance with Sections 2.16 and 2.17 hereof. In the event of any stock
dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares of the Jones Common Stock occurring after
the date hereof and prior to the Closing, the Jones Initial Share Value
shall be correspondingly adjusted to reflect such stock dividend,
subdivision, reclassification, recapitalization, split, combination or
exchange of shares.
(iii) Each share of the Company Preferred Stock issued and outstanding
immediately prior to the Effective Time shall be converted into the right
to receive cash in an aggregate amount equal to the
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<PAGE> 6
quotient of (x) the aggregate liquidation preference of all shares of
Company Preferred Stock plus any accumulated and unpaid dividends thereon
through the Closing Date (the "Aggregate Preferred Stock Value") divided by
(y) the total number of shares of Company Preferred Stock outstanding
immediately prior to the Effective Time (the "Preferred Stock Per Share
Amount"); provided, however, that if as a result of the operation of
Sections 2.16 and 2.17 the Total Cash Consideration is less than the
Aggregate Preferred Stock Value, any such shortfall shall be converted into
the right to receive Jones Common Stock (valued at the Stock Consideration
Value (as defined in Section 2.16 below)).
(iv) Each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time shall be converted into the right
to receive cash and Jones Common Stock (valued at the Jones Initial Share
Value) in an aggregate amount equal to the quotient of (x) the Aggregate
Merger Consideration minus the Aggregate Preferred Stock Value divided by
(y) the total number of shares of Company Common Stock outstanding
immediately prior to the Effective Time.
(v) The Aggregate Merger Consideration less the Aggregate Preferred
Stock Value shall be payable to the Shareholders in respect of their
Company Common Stock in such proportions of cash and Jones Common Stock as
the Shareholders shall direct in a written communication to Jones delivered
not less than two (2) business days prior to the Closing; provided,
however, that at least 40% of the Aggregate Merger Consideration allocated
to Rothfeld and the Rothfeld Family Trust shall be delivered in Jones
Common Stock, and at least 20% of the Aggregate Merger Consideration
allocated to Grossman shall be delivered in Jones Common Stock.
(vi) No fractional shares of Jones Common Stock shall be issued upon
surrender for exchange of certificates for Company Shares. Notwithstanding
any other provision of this Agreement, each holder of Company Shares who
would otherwise have been entitled to receive a fraction of a share of
Jones Common Stock shall receive in lieu thereof cash (without interest) in
an amount equal to the product of such fractional part and the Jones
Initial Share Value of a share of Jones Common Stock.
(b) (i) On the Closing Date, Shareholders shall deliver to Jones the
certificates representing their Company Common Stock or Company Preferred Stock,
as the case may be, for cancellation by the Surviving Corporation, and Jones
shall issue to Shareholders certificates representing the Jones Shares and cash
to which such persons are entitled pursuant to Section 2.9(a).
(ii) Until surrendered in accordance with the provisions of this
Section 2.9(b), the certificate or certificates which immediately prior to
the Effective Time represented issued and outstanding Company Common Stock
or Company Preferred Stock shall represent for all purposes the right to
receive Jones Shares and cash as provided above.
2.10. CONSIDERATION. On September 30, 1998, Shareholders shall deliver to
Jones and Newco an estimated September 30, 1998 balance sheet of the Company,
and Shareholders together with Jones shall discuss in good faith any adjustments
which Jones reasonably believes should be made to such projected balance sheet,
which as finally agreed to between Jones and Shareholders, is referred to as the
"Projected Balance Sheet". Using the Total Debt and Working Capital Deficiency
or Working Capital Surplus, if any, as reflected in the Projected Balance Sheet,
the parties shall agree upon the amount of the Aggregate Merger Consideration
which would be payable based upon the Projected Balance Sheet ("Tentative
Aggregate Merger Consideration"), and Jones shall pay such amount at the Closing
("Closing Merger Consideration"), subject to post closing adjustment as provided
in Section 2.13. Vestar covenants and agrees that it shall retain and, if
applicable, hold record and beneficial ownership of (and not distribute to any
of its officers, directors, employees or partners) a portion of the Jones Common
Stock delivered to it as part of the Closing Merger Consideration (valued at the
Jones Initial Share Value), cash or a combination thereof having a value of or
equal to at least $7.5 million until the "Post-Closing Adjustment" (as defined
in Section 2.13(a)) shall have been determined and agreed to by the parties in
accordance with Section 2.13 below and any amount to be paid to Jones has been
paid.
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<PAGE> 7
2.11. CLOSING.
(a) The closing (the "Closing") of the transactions contemplated by this
Agreement will take place at the offices of Phillips Nizer Benjamin Krim &
Ballon LLP, 666 Fifth Avenue, New York, New York 10103 after the satisfaction or
waiver of the conditions set forth in Articles VIII and IX hereof, but in any
event on or after September 28, 1998, at 4:30 p.m. New York City time (the
"Closing Date").
(b) At the Closing, the Company and Shareholders shall deliver to Jones and
Newco the following:
(i) the payoff letters pursuant to Section 9.4;
(ii) the certificates for the Company Common Stock and the Company
Preferred Stock, as the case may be, pursuant to Section 9.5; and
(iii) documents reasonably satisfactory to Jones terminating
agreements with Affiliates and evidencing the resignations required under
Section 9.6.
(c) At the Closing, Jones and Newco shall deliver to the Company and
Shareholders the certificates representing the Jones Shares and a wire transfer
or intra-bank transfer with respect to the Cash Merger Consideration. Solely for
purposes of facilitating the delivery of the Closing Merger Consideration on the
Closing Date, the parties agree to cooperate with each other after the date
hereof in establishing accounts at a single mutually acceptable banking
institution.
2.12. FURTHER ASSURANCES. After the Closing, Shareholders shall from time
to time, at the request of Jones or the Surviving Corporation and without
further cost or expense to Jones or the Surviving Corporation, execute and
deliver such other instruments of conveyance and transfer and take such other
actions as Jones or the Surviving Corporation may reasonably request, in order
to effectuate the Merger and the transactions contemplated hereby.
2.13. POST-CLOSING ADJUSTMENT.
(a) The Shareholders shall cause Company to prepare, and engage Ernst &
Young LLP ("E&Y") to audit, consolidated financial statements of the Company and
the Company subsidiaries as of and for the period beginning January 1, 1998
through the Closing Date (the "Closing Financial Statements"), including a
balance sheet as of Closing Date (the "Closing Balance Sheet") and to conduct a
physical inventory, in accordance with Sun Accounting Principles. The cost of
the preparation of the Closing Financial Statements (including inventory) and
audit shall be paid by Shareholders; however, Jones and its representatives
shall be permitted to observe and kept informed regarding every aspect of the
preparation of the Closing Financial Statements and audit and to communicate
with the Company and E&Y personnel with respect to the preparation of the
Closing Financial Statements and the conduct of the audit. The Tentative
Aggregate Merger Consideration shall be increased or decreased to the extent
that Total Debt or the Working Capital Deficiency (if any), as calculated by E&Y
based upon the Closing Balance Sheet, is less or greater, as the case may be,
than the Total Debt and Working Capital Deficiency (if any) used to calculate
the amount of the Tentative Aggregate Merger Consideration and shall be
decreased or increased to the extent that the Working Capital Surplus (if any),
as calculated by the Company based upon the Closing Balance Sheet, is less or
greater, as the case may be, than the Working Capital Surplus (if any) used to
calculate the amount of the Tentative Aggregate Merger Consideration ("Post
Closing Adjustment").
(b) No later than 60 days after the Closing, the Shareholders shall cause
E&Y to deliver to Jones and Shareholders (i) the Closing Financial Statements
(including the Closing Balance Sheet), with E&Y's opinion thereon, and (ii) an
Agreed Upon Procedures Report showing the calculation of the Post Closing
Adjustments to be made in accordance with Section 2.13(a) above (collectively,
"Closing Documents"). Unless either Jones or Shareholders, within 10 days after
receipt of the copy of the Closing Documents, notifies the other party of any
disagreement with the Post Closing Adjustments, the Closing Documents shall be
final and shall be accepted by and be binding upon both Jones and Shareholders.
If either party so notifies the other party of any such disagreement within such
10 day period and such disagreement cannot be amicably resolved within an
additional period of 30 days, the disagreement as to the Post Closing
Adjustments shall be submitted for final determination to a big four accounting
firm selected by mutual agreement of Shareholders
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<PAGE> 8
and Jones, or, in the absence of agreement on such firm, to a big four
accounting firm jointly designated by E&Y and BDO Seidman LLP ("BDO") ("Appeal
Accountants"), whose review of the Post-Closing Adjustments shall be limited to
those items in dispute. During such 30-day period, each party may make a written
settlement proposal to the other or, failing such written proposal, shall be
deemed to have made a written settlement proposal accepting the decision of E&Y.
Any Appeal Accountants selected pursuant to this Section 2.13 must have the
ability to resolve any dispute within 60 days after notice of such dispute is
given. The party whose final written proposal was further from the final
decision shall bear all reasonable costs and expenses of both parties in
resolving such dispute. The Appeal Accountants shall render their final
determination with respect to the resolution of such disputes, which shall be
final and binding on the parties, and shall deliver copies thereof to Jones and
Shareholders.
(c) To the extent the Tentative Aggregate Merger Consideration as adjusted
by this Section 2.13 exceeds the Closing Merger Consideration, the amount of
such excess shall be paid to Shareholders, and to the extent the Tentative
Aggregate Merger Consideration as adjusted by this Section 2.13 is less than the
Closing Merger Consideration, the amount of such excess shall be paid by
Shareholders to Jones, in each case in proportion to the percentage of the
Tentative Aggregate Merger Consideration paid to each Shareholder, and within
five days after such amount is finally determined. Each payment hereunder with
respect to each Shareholder shall be in the forms set forth in Sections
2.9(a)(iii) and 2.9(a)(iv).
(d) The cash portion of each such payment shall bear interest at the prime
rate of the Chase Manhattan Bank from the Closing Date to the date of payment.
The stock portion of any such payment shall be valued at the Jones Initial Share
Value.
2.14. ADDITIONAL PAYMENT TO SHAREHOLDERS. In addition to the Aggregate
Merger Consideration provided for under Section 2.9 hereof, Shareholders shall
be entitled to receive such additional consideration in respect of the Merger as
shall be payable in accordance with this Section 2.14. In each of the calendar
years listed below (each a "Target Year") that EBIT (as defined below) of the
Sun Division exceeds the Threshold Amount listed below (the "Threshold Amount"),
Jones will pay to Shareholders ("Additional Payments"), in such proportions as
the Shareholders shall have directed in a written communication to Jones not
less than two (2) business days prior to the Closing, $2.00 for each $1.00 of
such excess:
<TABLE>
<CAPTION>
TARGET YEAR THRESHOLD AMOUNT
- ----------- ----------------
(MILLIONS)
<S> <C>
1998....................................... $57.0
1999....................................... $58.0
2000....................................... $63.0
2001....................................... $85.0
</TABLE>
(a) Manner of Payment. The Additional Payments shall be payable 59%
in cash and 41% in Jones Common Stock. The number of shares of Jones Common
Stock deliverable to Shareholders with respect to any Target Year shall be
determined by dividing that portion of the Additional Payment due in Jones
Common Stock by the average daily last sale price of Jones Common Stock on
the New York Stock Exchange ("NYSE") composite transactions tape during the
last 20 days on which Jones Common Stock is traded of the month of March
following the Target Year (the "Calculation Period") (the "Jones Contingent
Stock"). Notwithstanding the foregoing, the proportions of cash and Jones
Contingent Stock comprising the Additional Payments shall be adjusted to
the extent necessary in accordance with Section 2.16 hereof. In the event
of any stock dividend, subdivision, reclassification, recapitalization,
split, combination or exchange of shares of Jones Common Stock occurring
during or after the Calculation Period but prior to the issuance of shares
of Jones Contingent Stock with respect to any Target Year, the number of
shares to be issued as Jones Contingent Stock shall be correspondingly
adjusted to reflect such stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares. To the extent
that any portion of the Additional Payments is deemed to be interest, such
interest shall be deemed to be paid in cash.
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<PAGE> 9
(b) Calculation of EBIT. For the purposes of this Section 2.14, the
"EBIT" of the Sun Division shall mean the net income, before extraordinary
items (as defined in accordance with GAAP) of income, gain, loss and
expense and before all income taxes and other taxes now or hereafter in
effect that are assessed on income (including Texas franchise taxes to the
extent that such taxes are assessed on income) and interest expense and
finance charges (including bank financing costs, the interest portion of
capital leases, bank commitment fees, amortization of loan origination
costs, factoring interest charges and other financing costs and expenses)
of the Sun Division, computed in accordance with Sun Accounting Principles,
except that the following provisions shall govern the computation of the
EBIT of the Sun Division for purposes of this Section 2.14:
(i) Those nonrecurring items of income, gain, loss or expense of
the Sun Division listed on Section 2.14(b) of the Disclosure Schedule
shall be excluded from such computation. The parties hereto agree that,
with respect to the amortization of the costs of moving certain of the
Sun Division's operations to Mexico, the parties shall negotiate in good
faith to determine a reasonable period of time over which to amortize
such costs, taking into account the benefits to be derived from the move
to Mexico and the period of time over which such benefits will accrue,
and adhering to the following general principles: (i) all capital items
will be amortized over their normal useful lives in accordance with Sun
Accounting Principles and (ii) all expense items, including severance
charges, will be amortized over three years.
(ii) Any purchase accounting adjustments arising out of the
transactions contemplated hereby, shall be excluded from the
computation.
(iii) To the extent that the Sun Division incurs losses, charges or
expenses for which the Shareholders (other than the Rothfeld Family
Trust and Grossman) make indemnification payments to Jones pursuant to
Section 11.2, the amount of such indemnification payments (to the extent
actually paid and not included in the computation) shall be added back
to EBIT for the period in which such payments were charged.
(c) Treatment of Certain Expenses and Charges.
(i) As used herein:
(A) "Replacement Services" shall mean those business services
which are utilized by the Sun Division following the Closing which
are of the same kind of service used prior to the Closing by the
Company, and which Jones requires be provided to the Sun Division
either by Jones' internal staff (e.g. credit and collection), or by a
third party vendor different from that which provided the services to
the Company prior to the Closing (e.g. insurance); the charges to the
Sun Division by Jones or a third party vendor for such Replacement
Services are referred to herein as "Replacement Services Expenses";
(B) "New Services" shall mean those business services which are
utilized by the Sun Division following the Closing which are of a
kind not used by the Company prior to the Closing, but which are
required by Jones (e.g. review of quarterly financial statements by
independent auditors); the charges to the Sun Division of such New
Services are referred to herein as "New Services Expenses";
(C) "Required Charges/Write-Offs" shall mean those charges to
the Sun Division for severance of employees, asset write-offs and the
like which are incurred by the Sun Division as a result of the
providing of Replacement Services; and
(D) "Sun Division Sales Growth" shall mean the percentage
increase in Sun Division net revenue in the calculation year from the
immediately preceding calendar year (with respect to 1999, the growth
shall be measured by comparison to combined net revenue in 1998 of
the Company and the Sun Division).
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<PAGE> 10
(ii) Jones shall allocate Replacement Services Expenses and New
Services Expenses in the same manner that Jones allocates such expenses
to its other divisions. In no event shall the Sun Division be charged
with a general allocation of Jones' corporate overhead expenses.
(iii) Jones will provide ER reasonable advance notice in writing of
its intent to require Replacement Services and the estimated Replacement
Services Expenses and related Required Charges/Write-Offs to be incurred
by the Sun Division.
(iv) If ER agrees to the providing of specific Replacement Services
("Agreed Replacement Services"), Replacement Services Expenses ("Agreed
Replacement Services Expenses") and related Required Charges/Write-Offs
shall be charged to the Sun Division for such Agreed Replacement
Services. It is understood and agreed by the parties hereto that EBIT
will reflect the savings (if any) which result or accrue from Agreed
Replacement Services.
(v) If ER does not agree to the providing of specific Replacement
Services, Jones may require that the Sun Division accept (and ER shall
accept) such specific Replacement Services as to which ER has objected
("Objected Replacement Services"). Replacement Services Expenses for
such Objected Replacement Services ("Objected Replacement Services
Charges") shall be charged to the Sun Division. It is understood and
agreed that EBIT will not reflect the savings (if any) which result from
Objected Replacement Services.
(vi) EBIT of the Sun Division otherwise calculated pursuant to
Section 2.14(b) shall be adjusted as follows:
(A) If the sum of Objected Replacement Services Charges plus
related Required Charges/Write-Offs exceeds the "Adjusted Prior
Year's Expenses" for Objected Replacement Services, EBIT shall be
increased by such excess;
(B) If the Adjusted Prior Year's Expenses for Objected
Replacement Services exceeds the sum of Objected Replacement Services
Charges plus related Required Charges/Write-Offs, EBIT shall be
decreased by such excess, and
(C) If the sum of Agreed Replacement Services Expenses plus
related Required Charges/ Write-Offs plus total New Services
Expenses, exceeds the Adjusted Prior Year's Expenses for Agreed
Replacement Services, EBIT shall be increased by such excess, but
only up to the amount of total New Services Expenses.
(D) As used herein, the Adjusted Prior Year's Expenses for
Replacement Services shall mean, with respect to a specific
Replacement Service:
Costs of such service in the prior year x (1+ (.75 x Sun
Division Sales Growth)).
(vii) It is also the intention of Jones to add to the Sun Division
two executives reasonably acceptable to Rothfeld who shall report
directly to Rothfeld. Notwithstanding the foregoing, each of the members
of the Sun Division's Board of Directors shall have complete access at
all times to such executives. Fifty percent (50%) of up to $1,000,000 of
the aggregate compensation payable to such executives per Target Year
will be considered a direct expense of the Sun Division.
(d) Post-Closing Conduct of Business by Jones. Following the Closing
Jones shall:
(i) through December 31, 1999, provide the Sun Division with
adequate capital to support its capital expenditure plan as approved by
Jones prior to the date hereof and set forth in Schedule 2.14(d) hereto;
provided that budgeted capital expenses which are not spent during the
Target Year may be carried over to the following Target Year's budget
for use as previously approved without further approval by Jones
(thereby increasing such subsequent Target Year's capital expense
budget);
(ii) with respect to each of Target Year 2000 and Target Year 2001,
provide the Sun Division with adequate capital to support its capital
expenditure plan in the amount approved by Jones prior
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<PAGE> 11
to the date hereof and set forth in Schedule 2.14(d) hereto (the
specific items within such capital expenditure plan being subject to
approval by Jones upon delivery by the Sun Division of data similar in
level of detail to that provided for the Target Year 1998 and Target
Year 1999 as set forth in Section 2.14(d) of the Disclosure Schedule);
provided that if EBIT of the Sun Division for the immediately preceding
fiscal year (the "Prior Year") did not equal or exceed the Threshold
Amount for such Prior Year, then the amount of capital that Jones is
obligated to provide the Sun Division for the Target Year shall
correspondingly be reduced by the percentage that EBIT was below the
Threshold Amount for such Prior Year; provided that budgeted capital
expenses which are not spent during the Target Year may be carried over
to the following Target Year's budget for use as previously approved
without further approval by Jones (thereby increasing such subsequent
Target Year's capital expense budget);
(iii) not cause the Sun Division to terminate or reduce any
existing business or line of business of the Sun Division so long as
such business or line of business has positive EBIT during the period
consisting of the four fiscal quarters ending at least 45 days prior to
such termination or reduction, or cause the Sun Division to enter into
any new business or line of business, in each case, so long as Rothfeld
is employed by the Sun Division, without Rothfeld's prior approval.
Notwithstanding the foregoing, the Sun Division shall be permitted to
continue the Todd Oldham division through December 31, 2001 so long as
losses for the Todd Oldham division do not exceed such division's losses
for 1998;
(iv) so long as Rothfeld is employed by the Sun Division, consult
with Rothfeld prior to expanding its business or entering into a
jeanswear business that is comparable to or competitive with the Polo
Jeans Company business conducted by the Sun Division, it being
understood that the ultimate decision for the actions set forth in this
clause (iv) is to be made by Jones, and it being further understood that
Jones will not conduct any business under the Polo Jeans Company name
other than through the Sun Division without Rothfeld's prior written
approval; and
(v) provide the Sun Division with adequate letters of credit and
working capital as are reasonably necessary to operate the Sun Division
consistent with the manner in which the business has been conducted
prior to the date hereof.
Following the Closing, the Sun Division may manufacture jeanswear or
other products for Jones at mutually agreed prices. If Jones and the Sun
Division cannot agree on a mutually acceptable price, the Sun Division will
manufacture such jeanswear and other products at the lowest price for its
most recent orders accepted for new styles not previously manufactured of
like products, taking into account all relevant factors, terms and
conditions including, without limitation, fabric quality and pricing, trim
quality and pricing, garment construction, washing and finishing quality
and pricing, unit volume and consistency, ancillary services necessary to
manufacturing and distribution, factory capacity or availability, delivery
and timing requirements and prior commitments.
(e) Further Assurances. In the event that Rothfeld is not employed by
the Sun Division, Jones shall, through December 31, 2001, cause the Sun
Division to be operated reasonably consistent with past practice so long as
(A) the Sun Division's EBIT continues to be equal to or greater than the
Threshold Amounts and (B) no event has occurred that would give rise to
Jones' right to terminate or limit Rothfeld's authority pursuant to Section
7.10 below. Notwithstanding the foregoing, through December 31, 2001, Jones
shall not (A) change the manner in which it allocates expenses or charges
for services provided to the Sun Division or (B) contribute to the Sun
Division a business that, during the twelve-month period prior to the date
of such contribution, had a negative EBIT.
(f) Information to Vestar, Rothfeld and the Rothfeld Family Trust. In
the event that Rothfeld is not employed by Jones or the Sun Division, Jones
shall, through December 31, 2001, provide each of Vestar and Rothfeld (or
if Rothfeld is then deceased, the Rothfeld Family Trust) with monthly
financial reports and grant Vestar and Rothfeld (or the Rothfeld Family
Trust, as the case may be) the opportunity to visit with and reasonably ask
questions of a senior financial officer of Jones at Jones' offices, and
such officer shall be instructed by the Company to provide answers within a
reasonable period
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<PAGE> 12
of time, regarding such financial reports and the Company's general
performance; provided, however, that such visits shall (i) be no more
frequent than once each fiscal quarter, (ii) take place during Jones'
normal business hours upon reasonable prior notice thereof and (iii) not
interfere with Jones' business and affairs.
(g) Board Approval. Each Additional Payment shall be payable within
the time provided in Section 2.15(a) below. On or prior to payment, any
Additional Payment shall be approved by either (i) the Board of Directors
of Jones or (ii) a committee comprised solely of two or more non-employee
directors of Jones.
(h) Survival After Closing. The obligations of Jones under Section
2.14 shall survive the Closing and any termination of Rothfeld's employment
under the Rothfeld Employment Agreement.
(i) Opportunity to Earn Additional Payments. The Shareholders'
opportunity to earn the Additional Payments under Section 2.14 is one of
the inducements for the Shareholders to enter into the Merger Agreement,
and Shareholders believe that Rothfeld's continued employment by Jones or
Newco will enable them to earn greater Additional Payments than if he were
not so employed. In the event that Newco terminates Rothfeld's employment
without "Cause" or Rothfeld terminates his employment by Newco for "Good
Reason" (as each such term is defined in the Rothfeld Employment
Agreement), Shareholders shall not be precluded from seeking damages
measured by the loss of the opportunity to earn the Additional Payments.
The Shareholders shall bear the burden of proving whether and to what
extent the lost opportunity of achieving Additional Payments resulted from
the Company's termination of Rothfeld's employment without Cause or
Rothfeld's termination of his employment for Good Reason.
2.15. TIMING OF ADDITIONAL PAYMENTS. (a) On the third business day after
the end of the Calculation Period, Jones will deliver to Shareholders a
statement setting forth in reasonable detail its calculation of the EBIT of the
Sun Division during the Target Year and the amount of any Additional Payments to
be paid to Shareholders pursuant to Section 2.14, which statement shall be
accompanied by payment to Shareholders, by delivery of the Jones Contingent
Stock and by wire transfer of immediately available funds to one or more
accounts designated by Shareholders, representing the Additional Payments as
shown thereon. If within 30 days after delivery of such statement Shareholders
have not given notice to Jones disputing such statement, Jones shall thereafter
have no further liability to Shareholders for the Additional Payment with
respect to such Target Year under Sections 2.14.
(b) In the event Shareholders give Jones such notice of dispute within such
30-day period, Shareholders and Jones will use their good faith, best efforts to
settle the dispute within 30 days after the giving of such notice. In connection
with such dispute, Jones shall provide Shareholders such access to the financial
books and records of the Sun Division with respect to the Target Year as is
reasonably necessary to determine the amount of EBIT for the Sun Division for
the Target Year. Any dispute unresolved after such 30-day period shall be
submitted to a big four accounting firm selected by mutual agreement of
Shareholders and Jones, or, in the absence of agreement on such firm, to a big
four accounting firm jointly designated by E&Y and BDO. During such 30-day
period, each party may make a written settlement proposal to the other or,
failing such written proposal, shall be deemed to have made a written settlement
proposal accepting the calculation proposed by Jones. Any public accounting firm
selected pursuant to this Section 2.15 must have the ability to resolve any such
dispute within 60 days after notice of such dispute is given. Such accounting
firm shall render its final decision with respect to the resolution of such
dispute, which shall be final and binding on the parties hereto, and shall
deliver copies thereof to Jones and Shareholders. Jones shall issue any further
Jones Contingent Stock and/or make further payments to Shareholders required in
order to comply with such decision within five days after such decision is
rendered. The party whose last written settlement proposal to the other party is
further from the final decision shall bear all reasonable costs and expenses of
both parties in resolving such dispute.
2.16. CASH LIMITATION. Notwithstanding anything in this Agreement to the
contrary, the aggregate amount of cash consideration (the "Total Cash
Consideration") to be paid to the Shareholders pursuant to this Agreement
(including the Cash Merger Consideration payable pursuant to Section 2.9(a), the
cash portion of any Additional Payments payable pursuant to Section 2.14(a)
(excluding the amount of any
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<PAGE> 13
interest deemed attributable thereto) and any cash paid in lieu of fractional
shares of Jones Common Stock) shall not exceed 59% of the total of the Aggregate
Merger Consideration plus any Additional Payments (excluding the amount of any
interest deemed attributable thereto)(the "Cash Limitation"). Solely for
purposes of determining the Cash Limitation in calculating the Aggregate Merger
Consideration plus any Additional Payments (excluding the amount of any interest
deemed attributable thereto), the value of each share of Jones Common Stock and
Jones Contingent Stock issued pursuant to this Agreement shall equal the average
of the high and low trading prices of shares of Jones Common Stock on the NYSE
composite transactions tape on (i) the Closing Date, in respect of each payment
of Jones Common Stock on the Closing Date (the "Stock Consideration Value") and
(ii) the issuance date, in respect of the payment of Jones Contingent Stock (the
"Contingent Stock Consideration Value"). If the Total Cash Consideration payable
to the Shareholders pursuant to this Agreement would exceed the Cash Limitation,
but for this Section 2.16, Jones shall be required to issue additional shares of
Jones Common Stock or Jones Contingent Stock, as the case may be, to the
Shareholders in lieu of cash in an amount necessary to ensure that the Total
Cash Consideration does not exceed the Cash Limitation. If additional shares of
Jones Common Stock or Jones Contingent Stock are issued pursuant to the
preceding sentence, the amount of cash payable to the Shareholders shall be
reduced by an amount equal to the number of such additional shares issued
multiplied by the Stock Consideration Value or the applicable Contingent Stock
Consideration Value, as the case may be.
2.17. ADJUSTMENT FOR PREPAYMENT OF VESTAR NOTES. Notwithstanding anything
in this Agreement to the contrary, after making the adjustment (if any) required
under Section 2.16, the Cash Merger Consideration shall be reduced by an amount
equal to 41% of the Vestar Prepayment Amount as defined below (the "Prepayment
Adjustment Amount") and simultaneously, the Stock Merger Consideration shall be
increased by a number of shares of Jones Common Stock (the "Vestar Adjustment
Shares") equal to (x) the Prepayment Adjustment Amount divided by (y) the Stock
Consideration Value. For purposes hereof:
(a) "Vestar Notes" shall mean, collectively, (i) the promissory note
dated September 26, 1997 issued by the Company in the initial aggregate
principal amount of $9,355,250 and payable to Vestar; and (ii) the
promissory note dated September 26, 1997 issued by the Company in the
initial aggregate principal amount of $20,644,750 and payable to Vestar.
(b) "Vestar Prepayment Amount" shall mean all amounts (including
interest, premiums, penalties, make whole payments, fees and any other
costs of every nature whatsoever) necessary to effectuate the payment in
full of the indebtedness evidenced by the Vestar Notes on the Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS
Each Shareholder (other than Grossman) represents, covenants and warrants,
jointly and severally, to Jones and Newco as follows:
3.1. CORPORATE ORGANIZATION; ETC. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas and has full corporate power and authority to carry on its business as it
is now being conducted and to own the properties and assets it now owns; is duly
qualified or licensed to do business as a foreign corporation in good standing
in the jurisdictions listed in Section 3.1 of the Disclosure Schedule which are
all the jurisdictions in which such qualification is required except
jurisdictions in which the Company's failure to qualify to do business will have
no material adverse effect on the business, operations, properties, assets or
financial condition of the Company. The copies of the articles of incorporation
and by-laws and all amendments thereto of the Company heretofore delivered to
Jones are complete and correct copies of such instruments as presently in
effect.
3.2. CAPITALIZATION OF THE COMPANY. As of the date of this Agreement, the
authorized capital stock of the Company consists of the Company Common Stock, of
which 3,780 shares are issued and outstanding, and the Company Preferred Stock,
of which 425,000 shares are issued and outstanding. All issued and outstanding
shares of capital stock of the Company are validly issued, fully paid and
nonassessable. Except as set forth in
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Section 3.2 of the Disclosure Schedule, there are no outstanding (a) securities
convertible into or exchangeable for the Company's capital stock; (b) options,
warrants or other rights to purchase or subscribe to capital stock of the
Company or securities convertible into or exchangeable for capital stock of the
Company; or (c) contracts, commitments, agreements, understandings or
arrangements of any kind relating to the issuance of any capital stock of the
Company, any such convertible or exchangeable securities or any such options,
warrants or rights.
3.3. SUBSIDIARIES. Section 3.3 of the Disclosure Schedule sets forth the
name, jurisdiction of organization and capitalization of each Company Subsidiary
and the jurisdictions in which each Company Subsidiary is qualified to do
business. Except as disclosed in Section 3.3 of the Disclosure Schedule, the
Company does not own, directly or indirectly, any capital stock or other equity
securities of any corporation, limited liability company, partnership or any
other entity or have any direct or indirect equity or ownership interest in any
business. Except as and to the extent set forth in Section 3.3 of the Disclosure
Schedule, all the outstanding equity securities of each Company Subsidiary
(except for directors' qualifying shares) are owned directly or indirectly by
the Company free and clear of all liens, options or encumbrances of any kind and
all claims or charges of any kind, and is validly issued, fully paid and
nonassessable, and there are no outstanding options, rights or agreements of any
kind relating to the issuance, sale or transfer of any capital stock or other
equity securities of any such Company Subsidiary to any person except the
Company. Each Company Subsidiary (i) is an entity duly organized, validly
existing and in good standing under the laws of its state of organization; and
(ii) has full power and authority to carry on its business as it is now being
conducted and to own the properties and assets it now owns. Each Company
Subsidiary is duly qualified to do business and is in good standing as a foreign
entity in each jurisdiction listed opposite the name of such Company Subsidiary
in Section 3.3 of the Disclosure Schedule which are the only jurisdictions in
which the properties owned or leased or the nature of the business conducted by
it makes such qualification necessary. The copies of the certificate of
incorporation and by-laws or other organizational certificate and all amendments
thereto of each Company Subsidiary heretofore delivered to Jones are complete
and correct copies of such instruments as presently in effect.
3.4. AUTHORIZATION; NO VIOLATION.
(a) The Company has full corporate power and authority necessary to enter
into this Agreement and to carry out the transactions contemplated hereby. The
Board of Directors of the Company and Shareholders have taken all action
required by law, the Company's articles of incorporation, its by-laws or
otherwise to be taken by them to authorize the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by the Company and is a legal,
valid and binding obligation of the Company enforceable against it in accordance
with its terms except that (i) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights and (ii) the remedy of specific performance
and injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefore may be brought.
(b) Except as set forth in Section 3.4(b) of the Disclosure Schedule (and
other than (i) leases entered into in the ordinary course of business which
individually either require annual payments of less than $100,000 or have terms
of less than 3 years or (ii) other commitments requiring payments not exceeding
$250,000 in the aggregate), neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will violate any
provision of the articles or certificate of incorporation or by-laws or other
organizational documents of the Company or any Company Subsidiary, or to the
knowledge of Shareholders, be in conflict with, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under or result in the termination of, or accelerate the performance required
by, or cause the acceleration of the maturity of any debt or obligation pursuant
to, or result in the creation or imposition of any security interest, lien or
other encumbrance upon any property or assets of the Company, any Company
Subsidiary or any Shareholder under, any agreement or commitment to which the
Company, any Company Subsidiary or any Shareholder is a party or by which the
Company, any Company Subsidiary or any Shareholder is bound, or to which the
property of the Company, any Company Subsidiary or any Shareholder
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is subject, or violate any statute or law or any judgment, decree, order,
regulation or rule of any court or governmental authority applicable to the
Company or any Company Subsidiary.
3.5. FINANCIAL STATEMENTS. The Company has heretofore delivered to Jones
and Newco: (i) a consolidated balance sheet of the Company and the Company
Subsidiaries as at December 31, in each of the years 1996 and 1997; and
consolidated statements of income, changes in shareholders' equity (deficit) and
cash flows for each of the years then ended, all audited and certified by E&Y,
whose reports thereon are included therein; and (ii) an unaudited consolidated
balance sheet of the Company and the Company Subsidiaries as at June 30, 1998
(the "Balance Sheet"), and unaudited consolidated statements of income,
shareholders' equity (deficit) and cash flows for the three month period then
ended. Such consolidated balance sheets and the notes thereto fairly present the
consolidated assets, liabilities and financial condition of the Company and the
Company Subsidiaries as at the respective dates thereof, and such consolidated
statements of income, changes in shareholders' equity (deficit) and cash flows
and the notes thereto fairly present the results of operations for the periods
therein referred to; all in accordance with generally accepted accounting
principles consistently applied throughout the periods involved except, in the
case of unaudited statements, for normally recurring year-end adjustments, which
adjustments will not be material either individually or in the aggregate. The
operating data set forth in Section 3.5 of the Disclosure Schedule with respect
to the Company's divisions is complete and accurate in all material respects.
3.6. NO UNDISCLOSED LIABILITIES; ETC. Except as set forth in Section 3.6
of the Disclosure Schedule, as of June 30, 1998, neither the Company nor any
Company Subsidiary had liabilities or obligations of any nature (absolute,
accrued, contingent or otherwise) not otherwise disclosed herein which are not
reflected or reserved against in the Balance Sheet, which, in accordance with
generally accepted accounting principles, should have been shown or reflected in
the Balance Sheet.
3.7. ACCOUNTS RECEIVABLE. All accounts receivable of the Company and each
Company Subsidiary (including factored accounts), whether reflected in the
Balance Sheet or otherwise, arose in the ordinary course of business in a manner
consistent with past practices for goods or services delivered or rendered, and
to the knowledge of Shareholders, are not subject to counterclaims or set offs,
and have been, or to the knowledge of Shareholders, will be, collected, less the
applicable reserves set forth in the Balance Sheet.
3.8 INVENTORY. Except as set forth in Section 3.8 of the Disclosure
Schedule (i) all of the inventories of the Company and each Company Subsidiary
whether reflected on the Balance Sheet or otherwise consist of a quality and
quantity usable and salable in the ordinary and usual course of business, except
for items of obsolete materials and materials of below-standard quality and
shrinkage, all of which have been written off or written down to fair market
value: (ii) all inventories not written off have been properly priced at the
lower of cost or market in accordance with generally accepted accounting
principles consistently applied; (iii) the quantities of each type of inventory
(whether raw materials, work-in-process, or finished goods) are not excessive or
slow moving, but are reasonable and warranted in the present circumstances of
the Company and each Company Subsidiary; and (iv) to the knowledge of
Shareholders, all work in process and finished goods inventory are free of any
material defect or other material deficiency in design, material and workmanship
and is usable and suitable for its intended purpose, except for non
first-quality work in progress and finished goods inventory arising in the
ordinary course of business.
3.9. ABSENCE OF CERTAIN CHANGES. Except as and to the extent set forth in
Section 3.9 of the Disclosure Schedule since the date of the Balance Sheet,
neither the Company nor any Company Subsidiary has:
(a) Suffered any material adverse change in its working capital,
financial condition, assets, liabilities, business or operations;
(b) Incurred any liabilities or commitments or obligations including
commitments to make capital expenditures, except for items which were:
(i) incurred in the ordinary course of business, none of which in
the singular or aggregate exceeds $100,000 (counting all periodic
installments or payments under any lease or other agreement providing
for periodic installments or payments, as a single obligation or
liability);
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(ii) consistent with the Company's budget as set forth in Section
3.9 of the Disclosure Schedule; or
(iii) consistent with the capital expenditure plan set forth in
Section 2.14(d) of the Disclosure Schedule;
or increased, or experienced any change in any assumptions underlying or
methods of calculating, any bad debt, contingency or other reserves;
(c) (i) Entered into, extended, materially modified, terminated or
renewed any contract, lease, license, permit or commitment, except in the
ordinary course of business, or
(ii) Made purchases of raw materials or supplies, or sold or
purchased any assets except for:
(A) contracts or commitments for the purchase of, and purchases of,
raw material or supplies, made in the ordinary course of business and
consistent with past practice,
(B) normal contracts or commitments for the sale of, and normal
sales of, inventory in the ordinary course of business and consistent
with past practice,
(C) capital expenditures consistent with the capital expenditure
plan set forth in Section 2.14(d) of the Disclosure Schedule, and
(D) other contracts, commitments, purchases or sales (other than of
inventory) in the ordinary course of business and consistent with past
practice the value of which does not exceed $100,000;
(d) Paid, discharged or satisfied any claim, liabilities or
obligations other than the payment, discharge or satisfaction in the
ordinary course of business and consistent with past practice of
liabilities and obligations reflected or reserved against in the Balance
Sheet or incurred in the ordinary course of business since the date of the
Balance Sheet;
(e) Failed to pay or satisfy its uncontested accounts payable, debts,
obligations and other liabilities for a period of 30 days after due;
(f) Permitted or allowed any of its property or assets (real, personal
or mixed, tangible or intangible) to be subjected to any mortgage, pledge,
lien, security interest, encumbrance, restriction or charge of any kind,
except for Permitted Liens (as defined in Section 3.10);
(g) Written down or up the value of any inventory (including
write-downs by reason of shrinkage or mark-down) or written off as
uncollectible any notes or accounts receivable, except for immaterial
write-downs and write-offs in the ordinary course of business and
consistent with past practice;
(h) Canceled any debts in excess of $10,000 individually or in the
aggregate or waived any claims or rights of substantial value;
(i) Disposed of or permitted to lapse any rights to the use of any of
the Intellectual Property (as defined in Section 3.12), or disposed of or
disclosed (except as necessary in the conduct of its business) to any
person other than representatives of Jones any trade secret, formula,
process or know-how not theretofore a matter of public knowledge;
(j) Granted or otherwise committed to make any increase in the
compensation of those individuals identified as executive officers or
senior officers under the caption "Management" in the Registration
Statement (including any such increase pursuant to any bonus, pension,
profit sharing or other plan or commitment) or make any bonus, severance,
or termination or similar payments to, or establish, adopt or amend any
employee retirement or benefit plan or program; or entered into any
collective bargaining agreement, service or termination agreement,
excluding increases which may have been granted on an occasional basis and
not as part of a plan or program for hourly paid employees;
(k) Declared any dividends (other than regularly scheduled dividends
in respect of the Company Preferred Stock) or made any other form of
capital distribution affecting its equity, or paid or incurred directors'
fees;
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(l) Made any change in any method of accounting or accounting
practice;
(m) Paid, loaned or advanced any amount to, or sold, transferred or
leased any properties or assets (real, personal or mixed, tangible or
intangible) to, or entered into any agreement or arrangement with, any of
its officers or directors or any affiliate or associate of any of its
officers or directors except for compensation to directors and officers at
rates not exceeding the rates of compensation paid during the fiscal year
of the Company ended December 31, 1997;
(n) To the knowledge of Shareholders, failed to comply in all material
respects with all laws applicable to the conduct of business; or
(o) Agreed, whether in writing or otherwise, to take any action
prohibited by this Section.
3.10. TITLE TO PROPERTIES: ENCUMBRANCES.
(a) Except as shown in Section 3.10(a) of the Disclosure Schedule each of
the Company and the Company Subsidiaries has good title to all properties and
assets which it purports to own (real, personal and mixed, tangible and
intangible), including, without limitation, all the properties and assets
reflected in the Balance Sheet (except for inventory and obsolete equipment sold
since the date of the Balance Sheet in the ordinary course of business and
consistent with past practice), and all the properties and assets purchased by
the Company and Company Subsidiaries since the date of the Balance Sheet, which
subsequently acquired properties and assets (other than inventory) are reflected
in Section 3.10(b) of the Disclosure Schedule (other than immaterial properties
and assets acquired in the ordinary course of business or as contemplated by the
capital expenditure plan as set forth on Section 2.14(d) of the Disclosure
Schedule), except in each case for (i) liens for taxes which are not yet due and
payable or which are being contested in good faith, (ii) statutory, common law,
builder, mechanic, warehouseman, materialmen, contractor, workmen, repairmen,
carrier or other liens which do not interfere with the use by the Company and
the Company Subsidiaries of the assets relating to the business of the Company
and the Company Subsidiaries or (iii) other restrictions on the use of property
which do not materially interfere with the conduct of the ordinary course of
business of the Company and the Company Subsidiaries or materially impair the
use or value of property (collectively, "Permitted Liens"). Except as set forth
in Section 3.10(c) of the Disclosure Schedule, all such properties and assets
are free and clear of all title defects or objections, liens, claims, charges,
pledges, options, security interests or other encumbrances of any kind or nature
whatsoever including, without limitation, leases, chattel mortgages, deed of
trusts, conditional sales contracts, collateral security arrangements and other
title or interest retention arrangements (collectively, "Liens"), and are not,
in the case of real property, except as set forth in Section 3.10(d) of the
Disclosure Schedule subject to any rights of way, encroachments, building use
restrictions, exceptions, variances, reservations or limitations of any nature
whatsoever or other right of third parties, whether voluntarily incurred or
arising by operation of law, including, without limitation, any agreement to
give any of the foregoing in the future and any contingent sale or other title
retention agreement except in each case (i) with respect to all such properties
and assets, liens as securing specified liabilities or obligations shown on the
Balance Sheet and (ii) for Permitted Liens. The rights, properties and other
assets presently owned, leased or licensed by the Company and the Company
Subsidiaries and described elsewhere in this Agreement include all rights,
properties and other assets necessary to permit each of the Company and the
Company Subsidiaries to conduct its business in all material respects in the
same manner as its business has been conducted prior to the Closing Date. All of
the properties and assets of the Company and the Company Subsidiaries are
maintained and operated in conformity with all applicable laws, ordinances, and
regulations relating thereto currently in effect, except where such
nonconformity would not have a material adverse effect on the business
operations of Company.
(b) All of the assets of Sun Torreon, S.A. de C.V. have been duly and
properly transferred to CNC West de Mexico, S.A. de C.V., and CNC West de
Mexico, S.A. de C.V. has good title thereto free and clear of all Liens (other
than Permitted Liens).
(c) Maquilas Pami, S.A. de C.V. has good title to and is the named
registered holder of the deeds to all of the real property in Mexico previously
disclosed by the Company to Jones as being owned by the Company
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or a Company Subsidiary, and owns such real property free and clear of all Liens
(other than Permitted Liens).
3.11. PLANTS, STRUCTURES AND EQUIPMENT. To the knowledge of Shareholders,
(i) the plants, structures and equipment of the Company and each Company
Subsidiary are structurally sound with no defects and are in good operating
condition and repair and are adequate for the uses to which they are being put;
and (ii) none of such plants, structures or equipment are in need of maintenance
or repairs except for ordinary, routine maintenance and repairs which are not
material in nature or cost. Except as set forth in Section 3.11 of the
Disclosure Schedule, neither the Company nor any Company Subsidiary has received
notification that it is in violation of any applicable building, zoning,
anti-pollution, health or other law, ordinance or regulation in respect of its
plants or structures or their operations and to the knowledge of Shareholders,
no such violation exists.
3.12. PATENTS, TRADEMARKS, TRADE NAMES, ETC. The Company and each Company
Subsidiary owns, or is licensed or otherwise has the right to use, all patents,
trademarks, trade names, copyrights, technology, know-how and processes used in
or necessary for the conduct of the business as heretofore conducted by it (the
"Intellectual Property"). Section 3.12(a) of the Disclosure Schedule lists (a)
all patents and all registrations and applications for registration of
trademarks, trade names and copyrights used or proposed to be used by the
Company or any Company Subsidiary, including, with respect to each such
trademark, a list of each jurisdiction in which such trademark is registered or
in which applications for registration have been filed, any opposition filed and
pending, the status of such registrations, oppositions and expirations dates,
and a listing of all written licenses and other agreements relating thereto and
(b) a listing of all written agreements relating to technology, know-how or
processes which the Company or any Company Subsidiary is licensed or authorized
to use by others. Except as set forth in Section 3.12(b) of the Disclosure
Schedule, the Company and each Company Subsidiary has the sole and exclusive
right to use the Intellectual Property, and the consummation of the transactions
contemplated hereby will not alter or impair any such rights; to the knowledge
of Shareholders, no claims have been asserted by any person to the use of any
such Intellectual Property or challenging or questioning the validity or
effectiveness of any such license or agreement relating to the use of the
Intellectual Property, and Shareholders do not know of any valid basis for any
such claim; and to the knowledge of Shareholders, the use of the Intellectual
Property by the Company or any Company Subsidiary does not infringe on the
rights of any person.
3.13. LEASES. Section 3.13(a) of the Disclosure Schedule lists all leases
(other than leases entered into in the ordinary course of business which
individually either require annual payments of less than $100,000 or have terms
of less than 3 years) pursuant to which the Company or any Company Subsidiary
leases real or personal property, copies of which have previously been delivered
to Jones. Except as set forth in Schedule 3.13(b) of the Disclosure Schedule, to
the knowledge of Shareholders, all such leases are in full force and effect;
there are no existing defaults by the Company or any Company Subsidiary and to
the knowledge of Shareholders no event has occurred which (whether with or
without notice, lapse of time or the happening or occurrence of any other event)
would constitute a default thereunder.
3.14. TAXES. Each of the Company and the Company Subsidiaries has duly
filed all tax reports and returns required to be filed by it and have duly paid
all taxes and other charges due by it (whether or not shown on any tax return)
or claimed to be due from it by federal, state, local or foreign taxing
authorities (including, without limitation, those due in respect of the
properties, income, franchises, licenses, sales or payrolls of any of them); the
reserves for taxes reflected in the Balance Sheet are adequate; and there are no
tax liens upon any property or assets of the Company or any Company Subsidiary
except liens for current taxes not yet due or which are being contested in good
faith with the appropriate taxing authorities as disclosed in Section 3.14 of
the Disclosure Schedule. Except to the extent set forth in Section 3.14 of the
Disclosure Schedule, there are no outstanding agreements or waivers extending
the statutory period of limitation applicable to any tax return for any period.
Since January 1, 1991, no claim has been received in writing by the Company, and
after due inquiry of the Company's executive officers, the Shareholders are not
aware that there has been, during the past twelve months, any oral notice, from
an authority in a jurisdiction where any of the Company or Company Subsidiaries
does not file tax returns that the Company or any of the Company Subsidiaries is
or may be subject to taxation by that jurisdiction.
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3.15. MATERIAL CONTRACTS.
(a) The Company has provided or made available to Jones (i) true and
complete copies of all material contracts and agreements ("Material Contracts")
relating to the business of the Company and the Company Subsidiaries, each of
which is included on Section 3.15 of the Disclosure Schedule, or (ii) with
respect to such Material Contracts that have not been reduced to writing, a
written description thereof, each of which is listed on Section 3.15 of the
Disclosure Schedule. Neither the Company nor any Company Subsidiary is, or has
received any notice or has any knowledge that any other party is, in default in
any respect under any such Material Contract; and to the knowledge of
Shareholders, there has not occurred any event that, with the lapse of time or
the giving of notice or both, would constitute a default under the Material
Contracts.
(b) In addition, except as set forth on Section 3.15 of the Disclosure
Schedule:
(i) Neither the Company nor any Company Subsidiary has any outstanding
contracts with officers, employees, agents, consultants, advisors,
salesmen, sales representatives, distributors or dealers that are not
cancelable by it on notice of not longer than 30 days without liability,
penalty or premium or any agreement or arrangement providing for the
payment of any bonus or commission based on sales or earnings;
(ii) Neither the Company nor any Company Subsidiary has any employment
agreements, or any other agreements, understandings or commitments that
contain any severance liabilities or obligations;
(iii) Neither the Company nor any Company Subsidiary has any
collective bargaining or union contracts or agreements;
(iv) Neither the Company nor any Company Subsidiary is restricted by
agreement from carrying on its business anywhere it is presently conducting
business;
(v) To the knowledge of Shareholders, neither the Company nor any
Company Subsidiary is under any liability or obligation with respect to the
return of inventory or merchandise in the possession of wholesalers,
distributors, retailers or its customers other than in the ordinary course
of business consistent with past practice and as reflected in the Projected
Balance Sheet (adjusted, as needed, in the Closing Balance Sheet) in
accordance with GAAP;
(vi) To the knowledge of Shareholders, neither the Company nor any
Company Subsidiary has guaranteed the obligations of others, other than
guarantees of the Company of obligations of the Company Subsidiaries and
guarantees of the Company Subsidiaries of obligations of each other or of
the Company; and
(vii) To the knowledge of Shareholders, neither the Company nor any
Company Subsidiary has any power of attorney outstanding or any obligations
or liabilities (whether absolute, accrued, contingent or otherwise), as
guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise
in respect of the obligation of any person, corporation, partnership, joint
venture, association, organization or other entity, other than guarantees
of the Company of obligations of the Company Subsidiaries and guarantees of
the Company Subsidiaries of obligations of each other or of the Company.
3.16. CUSTOMERS AND SUPPLIERS. Sections 3.16 (a) and (b) of the
Disclosure Schedule, respectively, sets forth: (a) a complete and accurate list
of the names of the twenty largest customers of the Company, including the
Company Subsidiaries (on a consolidated basis), for each of the Polo and Sun
divisions and five largest customers for each of the Todd Oldham and Robert
Stock lines in terms of sales during fiscal 1996 and 1997 and the six-month
periods ended June 30, 1997 and 1998, showing the approximate total sales by the
Company to each such customer during the period; and (b) a complete and accurate
list of the twenty largest suppliers of the Company and the Company Subsidiaries
(on a consolidated basis) in terms of purchases by the Company during fiscal
1996 and 1997 and the six-month periods ended June 30, 1997 and 1998 showing the
approximate total purchases by the Company, including the Company Subsidiaries,
from each such supplier during the period. Except to the extent set forth in
Section 3.16(c) of the Disclosure Schedule, there has not been to the knowledge
of Shareholders any material adverse change in the business relationship of the
Company or any Company Subsidiary with any customer or supplier named in
Sections 3.16(a) and 3.16(b).
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Except for customers and suppliers named in Schedules 3.16(a) and 3.16(b) of the
Disclosure Schedule, neither the Company nor any Company Subsidiary had any
customer who accounted for more than 5% of the Company's sales (on a
consolidated basis) during fiscal 1997 or the six-month period ended June 30,
1998 or any supplier from whom it purchased more than 5% of the goods or
services which it purchased during fiscal 1997 or the six-month period ended
June 30, 1998.
3.17. ORDERS, COMMITMENTS AND RETURNS.
(a) Accepted and Unfulfilled Orders. Section 3.17(a) of the Disclosure
Schedule sets forth the aggregate amounts of all accepted and unfulfilled orders
for the sale of merchandise entered into by the Company or any Company
Subsidiary as of July 31, 1998 and July 31, 1997.
(b) Open Purchase Orders. Section 3.17(b) of the Disclosure Schedule sets
forth the aggregate amount to be paid by the Company or any Company Subsidiary
pursuant to all contracts or commitments for the purchase of supplies involving
(in each case) payments in excess of $250,000 by it as of July 31, 1998, all of
which orders, contracts and commitments have been made in the ordinary course of
business.
(c) Returns. Section 3.17(c) of the Disclosure Schedule sets forth, as of
July 31, 1998, each known claim against the Company or any Company Subsidiary to
return merchandise in excess of $5,000 by reason of alleged overshipments,
defective merchandise or otherwise, or of merchandise in the hands of customers
under an understanding that such merchandise would be returnable or would give
rise to a discount on future purchases or other allowance of any type.
(d) Chargebacks and Allowances. Section 3.17(d) of the Disclosure Schedule
sets forth the aggregate chargebacks and allowances (whether claimed or allowed)
for fiscal 1997 and through August 31, 1998.
3.18. AGREEMENTS IN FULL FORCE AND EFFECT. Except as set forth in Section
3.18 of the Disclosure Schedule, to the knowledge of Shareholders, neither the
Company nor any Company Subsidiary is in breach or in violation or default, nor
has any other party thereto repudiated, any provisions of the contracts,
agreements, plans, leases, policies, and licenses referred to in Section 3.15 of
the Disclosure Schedule. All contracts, agreements, plans, leases, policies and
licenses referred to in Section 3.15 of the Disclosure Schedule are valid and in
full force and effect. True and complete copies thereof, with all amendments and
supplements thereto, have been heretofore delivered by the Company to Jones.
3.19. INSURANCE. Section 3.19(a) of the Disclosure Schedule contains an
accurate and complete list of all policies and binders of fire, liability,
workmen's compensation, products liability and all other forms of insurance
maintained by the Company and each Company Subsidiary (except for insurance
maintained for employees, which is set forth in Section 3.21(a) of the
Disclosure Schedule), and other forms of insurance owned or held by the Company
and each Company Subsidiary. All such policies are in full force and effect, all
premiums due and payable with respect thereto covering all periods up to and
including the Closing Date have been or will be paid, and no notice of
cancellation or termination has been received with respect to any such policy.
To the knowledge of Shareholders, such policies are sufficient for compliance
with all requirements of law and of all agreements to which the Company and each
Company Subsidiary is a party; are valid, outstanding and enforceable; provide
adequate insurance coverage for the assets and operations of the Company and
each Company Subsidiary; and will remain in full force and effect until the
Closing. Section 3.19(b) of the Disclosure Schedule identifies all risks which
the Company and each Company Subsidiary has designated as being self insured. To
the knowledge of Shareholders, neither the Company nor any Company Subsidiary
has been refused any insurance with respect to its assets or operations, nor has
its coverage been limited, by any insurance carrier to which it has applied for
any such insurance or with which it has carried insurance during the last three
years.
3.20. LABOR, CUSTOMS, HEALTH AND SAFETY LAW MATTERS.
(a) Employment Law Matters. Except to the extent set forth in Section 3.20
of the Disclosure Schedule, (a) to the knowledge of Shareholders, the Company,
all Company Subsidiaries and their respective subcontractors are in compliance
in all material respects with (i) all applicable laws respecting employment
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and employment practices, terms and conditions of employment and wages
(including overtime wages) and hours and (ii) all child and other labor laws and
regulations of the United States and other countries in which the Company's
products are manufactured or assembled; (b) to the knowledge of Shareholders,
the Company and the Company Subsidiaries are not engaged in any unfair labor
practice; (c) there is no unfair labor practice complaint against the Company or
any Company Subsidiary pending before the National Labor Relations Board; (d)
there is no labor strike, slowdown or work stoppage actually pending or, to the
knowledge of Shareholders, threatened against the Company or any Company
Subsidiary; (e) to the knowledge of Shareholders, no representation question
exists respecting the employees of the Company or any Company Subsidiary; (f) no
grievance which would have a material adverse effect on the Company or any
Company Subsidiary or the conduct of its business nor any arbitration proceeding
arising out of or under collective bargaining agreements is pending and, to the
knowledge of Shareholders, no such grievance or arbitration proceeding is
threatened; (g) there is no collective bargaining agreement binding on the
Company or any Company Subsidiary; and (h) neither the Company nor any Company
Subsidiary has experienced any work stoppage or other labor strike or, to the
knowledge of Shareholders, attempts to organize employees of the Company or any
Company Subsidiary by organized labor in the past five years.
(b) Customs, Health and Safety Law Matters. To the knowledge of
Shareholders, all of the Company's and the Company Subsidiaries' products are
manufactured, offered for sale, sold, labeled, packaged and distributed, and
advertised, marketed, promoted, publicized and otherwise exploited in accordance
with all applicable customs requirements and country of origin regulations and
all applicable laws and regulations relating to health and safety, such as
flammability-related laws and regulations, and those laws and regulations
relating to the disclosure of information to the consumer, such as
truth-in-advertising and fiber content labeling laws and regulations.
(c) Compliance Monitoring. Attached as Section 3.20 of the Disclosure
Schedule is a copy of the guidelines pursuant to which the Company and Company
Subsidiaries monitor the performance of their respective subcontractors to
assure compliance with the laws and regulations described in the foregoing
paragraphs.
3.21. EMPLOYEE BENEFIT PLANS.
(a) Definitions. The following terms, when used in this Section 3.21,
shall have the following meanings. Any of these terms may, unless the context
otherwise requires, be used in the singular or the plural depending on the
reference.
(i) Benefit Arrangement. "Benefit Arrangement" shall mean any
employment, consulting, severance or other similar contract, arrangement or
policy, practice and procedure, and each plan, arrangement (written or
oral), program, agreement or commitment providing for insurance coverage
(including without limitation any self-insured arrangements), workers'
compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, retirement benefits, life, health, disability or
accident benefits (including without limitation any "voluntary employees'
beneficiary association" as defined in Section 501(c)(9) of the Code
providing for the same or other benefits) or for deferred compensation,
profit-sharing bonuses, stock options, stock appreciation rights, stock
purchases or other forms of incentive compensation or post-retirement
insurance, compensation or benefits which (A) is not a Welfare Plan,
Pension Plan, or Multiemployer Plan, (B) is entered into, maintained,
contributed to or required to be contributed to, as the case may be, by the
Company or any ERISA Affiliate or under which the Company or any ERISA
Affiliate may incur any liability, and (C) covers any employee or former
employee of the Company or any ERISA Affiliate (with respect to their
relationship with such entities).
(ii) Employee Plans. "Employee Plans" shall mean all Benefit
Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans.
(iii) ERISA. "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
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(iv) Multiemployer Plan. "Multiemployer Plan" shall mean any
"Multiemployer Plan," as defined in Section 4001(a)(3) of ERISA, (A) which
the Company or any ERISA Affiliate maintains, administers, contributes to
or is required to contribute to, or, after September 25, 1980, maintained,
administered, contributed to or was required to contribute to, or under
which the Company or any ERISA Affiliate may incur any liability and (B)
which covers any employee or former employee of the Company or any ERISA
Affiliate (with respect to their relationship with such entities).
(v) PBGC. "PBGC" shall mean the Pension Benefit Guaranty Corporation.
(vi) ERISA Affiliate. "ERISA Affiliate" shall mean any entity which
is (or at any relevant time was) a member of a "controlled group of
corporations" with or under "common control" with the Company as defined in
Section 414(b) or (c) of the Code.
(vii) Pension Plan. "Pension Plan" shall mean any "employee pension
benefit plan" as defined in Section 3(2) of ERISA (other than a
Multiemployer Plan) (A) which the Company or any ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or, within the
five years to the Closing Date, maintained, administered, contributed to or
was required to contribute to, or under which the Company or any ERISA
Affiliate may incur any liability and (B) which covers any employee or
former employee of the Company or any ERISA Affiliate (with respect to
their relationship with such entities).
(viii) Welfare Plan. "Welfare Plan" shall mean any "employee welfare
benefit plan" as defined in Section 3(1) of ERISA, (A) which the Company or
any ERISA Affiliate maintains, administers, contributes to or is required
to contribute to, or under which the Company or any ERISA Affiliate may
incur any liability and (B) which covers any employee or former employee of
the Company or any ERISA Affiliate (with respect to their relationship with
such entities).
(b) Disclosure: Delivery of Copies of Relevant Documents and Other
Information. Section 3.21(a) of the Disclosure Schedule contains a complete
list of the Company's Employee Plans. True and complete copies of each of the
following documents have been previously delivered by Shareholders to Jones and
Newco: (i) each Welfare Plan, Pension Plan and Multiemployer Plan (and, if
applicable, related trust agreements) and all amendments thereto, the most
recent summary plan description thereof (if required by ERISA) and all annuity
contracts or other funding instruments, (ii) each Benefit Arrangement, including
written interpretations thereof and written descriptions thereof which have been
distributed to the Company's employees (including descriptions of the number and
level of employees covered thereby) and a complete description of any Benefit
Arrangement which is not in writing, (iii) the most recent determination or
opinion letter issued by the Internal Revenue Service with respect to each
Pension Plan and each Welfare Plan (other than a "multiemployer plan," as
defined in Section 3(37) of ERISA), (iv) for the three most recent plan years,
Annual Reports on Form 5500 Series required to be filed with any governmental
agency for each Pension Plan and (v) a description setting forth the amount of
any liability of the Company as of the Closing Date for payments more than
thirty (30) calendar days past due with respect to each Welfare Plan.
(c) Representations. Except as set forth in Section 3.21(b) of the
Disclosure Schedule, Shareholders represent and warrant as follows:
(I) PENSION PLANS.
(A) Neither the Company nor any ERISA Affiliate maintains or
contributes to or has maintained or contributed to a Pension Plan which is
subject to the minimum funding requirements of Section 412 of the Code or
Part 3 of Title I of ERISA. Neither the Company nor any ERISA Affiliate has
any liability for any unpaid contributions due with respect to any Pension
Plan.
(B) Each Pension Plan and each related trust agreement, annuity
contract or other funding instrument which covers or has covered employees
or former employees of the Company (with respect to their relationship with
such entities) has been determined by the Internal Revenue Service to be
qualified and tax-exempt under the provisions of Sections 401(a) (or
403(a), as appropriate) and 501(a) of the Code and Shareholders are not
aware of any circumstances that could reasonably be expected to result in
revocation of such determination.
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(C) No Pension Plan, related trust agreement, annuity contract or
other funding instrument which covers or has covered employees or former
employees of the Company (with respect to their relationship with such
entities), has been maintained, both as to form and in operation in such a
manner that could reasonably be expected to cause Jones or its tax
qualified plans to incur any liability under any and all statutes, orders,
rules and regulations which are applicable to such plans, including,
without limitation, ERISA and the Code.
(D) Neither the Company nor any ERISA Affiliate maintains or
contributes to or has maintained or contributed to a Pension Plan subject
to Title IV of ERISA.
(E) Any terminated Pension Plan received a favorable determination
letter from the Internal Revenue Service with respect to its termination.
(ii) MULTIEMPLOYER PLANS. Neither the Company nor any ERISA Affiliate
contributes to, or within the past six years has been obligated to contribute
to, a Multiemployer Plan.
(iii) WELFARE PLANS.
(A) None of the Company's Welfare Plans has any present or future
obligation to make any payment to, or with respect to any present or former
employee of the Company, or such employee's dependents or spouse, pursuant
to, any retiree medical benefit plan, or other retiree Welfare Plan.
(B) No Welfare Plan which is a "group health plan," as defined in
Section 607(1) of ERISA, has been operated in such a manner that could
reasonably be expected to cause the Company to incur any liability under
the provisions of Part 6 of Title I, Subtitle B of ERISA and Section 4980B
of the Code at all time.
(iv) LITIGATION. There is no action, order, writ, injunction, judgment or
decree outstanding or claim, suit, litigation, proceeding, arbitral action,
governmental audit or investigation relating to or seeking benefits (other than
a routine claim for benefits pursuant to the terms of the plan) under any
Pension Plan that is pending or, to Shareholders' knowledge, threatened or
anticipated against the Company, any ERISA Affiliate or any Pension Plan.
(v) NO AMENDMENTS. Neither the Company nor any ERISA Affiliate has any
announced plan or legally binding commitment to create any additional Employee
Plans which are intended to cover employees or former employees of the Company
(with respect to their relationship with such entities) or to amend or modify
any existing Employee Plan.
(vi) INSURANCE CONTRACTS. Neither the Company nor any Pension Plan (other
than a "multiemployer plan," as defined in Section 3(37) of ERISA) holds as an
asset of any Pension Plan any interest in any annuity contract, guaranteed
investment contract or any other investment or insurance contact issued by an
insurance company that is the subject of bankruptcy, conservatorship or
rehabilitation proceedings.
(vii) NO ACCELERATION OR CREATION OF RIGHTS. Except as set forth in
Section 3.21(vii) of the Disclosure Schedule, neither the execution and delivery
of this Agreement or other related agreements by the Company nor the
consummation of the transactions contemplated hereby or the related transactions
will result in (i) the acceleration or creation of any rights of any person to
benefits under any Employee Plan (including, without limitation, the
acceleration of the vesting or exercisability of any stock options, the
acceleration of the vesting of any restricted stock (or the acceleration or
creation of any rights under any severance, parachute or change in control
agreement) or (ii) require the Company to make a larger contribution to, or pay
greater benefits or provide other rights under, any Employee Plan than it
otherwise would, whether or not some other subsequent action or event would be
required to cause such payment or provision to be triggered or (iii) create or
give use to any additional vested rights or service credits under any Employee
Plan whether or not some other subsequent action or event would be required to
cause such creation or acceleration to be triggered.
3.22. LITIGATION. Except as set forth in Section 3.22 of the Disclosure
Schedule, there is no action, order, writ, injunction, judgment or decree, or
any claim, suit, litigation, labor dispute, arbitrational action, inquiry,
proceeding or investigation by or before any court or governmental or other
regulatory or administra-
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tive agency or commission pending, or to the knowledge of Shareholders,
threatened against or involving the Company or any Company Subsidiary, or which
questions or challenges the validity of this Agreement or any action taken or to
be taken by Shareholders pursuant to this Agreement or in connection with the
transactions contemplated hereby. Except as set forth in Section 3.22 of the
Disclosure Schedule to the knowledge of Shareholders, neither the Company nor
any Company Subsidiary is in default under or in violation of, nor has the
Company or any Company Subsidiary received any notice for any claim or default
under or violation of, any contract or commitment to which it is a party or by
which it is bound. Neither the Company nor any Company Subsidiary is subject to
any judgment, order or decree entered in any lawsuit or proceeding which would
have a material adverse effect on its business practices or on its ability to
conduct its business in the manner as it is conducted as of the Closing Date or
in any manner.
3.23. NO CONDEMNATION OR EXPROPRIATION. Neither the whole nor any portion
of the leaseholds or any other real property of the Company or any Company
Subsidiary is subject to any governmental decree or order to be sold or is being
condemned, expropriated or otherwise taken by any public authority with or
without payment of compensation therefor, nor, to the knowledge of Shareholders,
has any such condemnation, expropriation or taking been proposed.
3.24. PERMITS, CONSENTS AND APPROVALS OF GOVERNMENTAL AUTHORITIES. Each
of the Company and the Company Subsidiaries has all permits, licenses,
franchises, approvals, registrations, authorizations, consents or orders of, or
filings (collectively the "Permits") with any governmental authority, whether
foreign, federal, state or local, that are required and necessary to conduct its
business in substantially the manner in which it is currently being conducted,
except where the failure to have any such Permits would not individually or in
the aggregate (a) have a material adverse effect on the ability of the Company
or any Company Subsidiary to conduct its business in the normal course or (ii)
subject the Company to any material cost or expense. To the knowledge of
Shareholders, all such Permits are valid and in full force and effect. Other
than filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and the filing of the Texas Articles of Merger and the
Delaware Certificate of Merger, no consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority is required in connection with the execution, delivery and performance
of this Agreement or the consummation of the transactions contemplated hereby by
the Company and Shareholders.
3.25. CONSENTS. Section 3.25 of the Disclosure Schedule sets forth and
identifies, including the name of the party and the address, all consents,
assignments, releases, waivers and approvals required of any person necessary to
consummate the transactions contemplated hereby by the Company and Shareholders.
3.26. COMPLIANCE WITH LAW. Except as set forth in Section 3.26 of the
Disclosure Schedule, the business of the Company and the Company Subsidiaries
is, and since January 1, 1995 has been, conducted in accordance with and in
compliance with, or in conformity with, all applicable laws, statutes, rules,
orders, ordinances, judgments, decrees, or regulations and other requirements of
all national governmental authorities, and of all states, municipalities and
other political subdivisions, courts, departments, authorities, and agencies
thereof, having jurisdiction over the Company and the Company Subsidiaries,
except where any violations would not individually or in the aggregate (i) have
a material adverse effect on the ability of the Company or any Company
Subsidiary to conduct its business in the ordinary course or (ii) to the
knowledge of Shareholders, subject the Company or any Company Subsidiary to any
cost or expense. Except as set forth in Section 3.26 of the Disclosure Schedule,
within the past three years neither the Company nor any Company Subsidiary has
received notice to the effect that it is not in compliance with such laws,
statutes, rules, ordinances, judgments, decrees, regulations or other
requirements.
3.27. COMPLIANCE WITH ENVIRONMENTAL LAWS.
(a) Definitions. The following terms, when used in this Section 3.27,
shall have the following meanings. Any of these terms may, unless the context
otherwise requires, be used in the singular or the plural depending on the
reference.
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(i) "Release" shall mean and include any spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
dumping or disposing on, in or into the environment of any Hazardous
Substance.
(ii) "Hazardous Substance" shall mean any quantity of asbestos in any
form, formaldehyde, PCB's, radon gas, crude oil or any fraction thereof,
solvents, cutting oils, degreasers, machine tool oils, all forms of natural
gas, petroleum products, by-products or wastes, any radioactive substance,
any solid waste, any toxic, infectious, reactive, corrosive, ignitable or
flammable chemical or chemical compound and any other hazardous substance,
material or waste (as defined in or for purposes of any Environmental Law)
whether solid, semi-solid, liquid or gas, and any other substance which is
now subject to regulation or control under any Environmental Law.
(iii) "Environmental Laws" shall mean all applicable federal, state,
local or foreign laws, statutes, ordinances, regulations, rules, judgments,
orders and licenses which (i) regulate or relate to the protection or
remediation of the environment, the use, treatment, storage,
transportation, handling or disposal of Hazardous Substances, the
preservation or protection of waterways, groundwater, drinking water, air,
wildlife, plants or other natural resources, or the health and safety of
persons or property (but not including protection of the health and safety
of employees) or (ii) impose liability with respect to any of the
foregoing, including, without limitation, the Federal Water Pollution
Control Act (33 U.S.C. sec. 1251 et seq.), Resource Conservation & Recovery
Act (42 U.S.C. sec. 6901 et seq.) ("RCRA"), Safe Drinking Water Act (21
U.S.C. sec. 349, 42 U.S.C. sec.sec. 201, 300), Toxic Substances Control Act
(15 U.S.C. sec. 2601 et seq.), Clean Air Act (42 U.S.C. sec. 7401 et seq.),
Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C. sec. 9601 et seq.) ("CERCLA"), or any other similar federal, state
or local law or foreign law of similar effect, each as amended.
(iv) "Facilities" shall mean plants, offices, manufacturing
facilities, stores, warehouses, improvement administration buildings and
real property.
(b) Facilities. Except as set forth on Section 3.27 of the Disclosure
Schedule, the current and former Facilities of the Company and the Company
Subsidiaries are, and at all times have been, owned, leased and operated by the
Company and the Company Subsidiaries in compliance with all Environmental Laws.
(c) Permits. Except as set forth on Section 3.27 of the Disclosure
Schedule, the Company and the Company Subsidiaries currently have all Permits
required under any Environmental Law with respect to their activities and their
Facilities, and the Company and the Company Subsidiaries are in compliance with
all such Permits.
(d) Permits Required. Except as set forth on Section 3.27 of the
Disclosure Schedule, the consummation of any of the transactions contemplated by
this Agreement will not require an application for issuance, renewal, transfer
or extension of, or any other administrative action regarding, any Permit
required or any requirement under any Environmental Law.
(e) Information Request and Notice of Violation. Except as set forth in
Section 3.27 of the Disclosure Schedule or those matters which were fully
resolved prior to January 1, 1993, neither the Company nor any Company
Subsidiary has received any written notice with respect to any current or former
Facility alleging that the Company or any Company Subsidiary is in violation of
or in non-compliance with the conditions, requirements, standards or limits of
any Permit required under any Environmental Law or the provisions of any
Environmental Law, nor has the Company or any Company Subsidiary received a
written information request with respect to such alleged or potential
violations.
(f) Pending Actions. Except as set forth on Section 3.27 of the Disclosure
Schedule, there is not now pending or, to the knowledge of Shareholders,
threatened, any action against the Company or any Company Subsidiary with
respect to any of its past or current activities at any time under any
Environmental Law or otherwise with respect to any Release or mishandling of any
Hazardous Substance.
(g) Judgments. Except as set forth on Section 3.27 of the Disclosure
Schedule, there are no consent decrees, judgments, judicial or administrative
orders, or similar decrees, judgments or orders under foreign
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law, or agreements with, or liens by, any governmental authority,
quasi-governmental entity or any other person or entity relating to any
Environmental Law which currently regulates, obligates, binds or in any way
affects the Company or any Company Subsidiary with respect to past or current
activities, the business or any current or former Facility.
(h) Hazardous Substances. Except as set forth on Section 3.27 of the
Disclosure Schedule, there is not and has not been any Hazardous Substance used,
generated, treated, stored, transported, disposed of, handled or otherwise
currently or formerly existing on, under, about or from the Facilities, except
for quantities of any such Hazardous Substances stored or otherwise held on,
under or about the Facilities in full compliance with all Environmental Laws.
(i) Handling of Hazardous Substances. Except as set forth on Section 3.27
of the Disclosure Schedule, the Company has at all times, with respect to its
business, used, generated, treated, stored, transported, disposed of or
otherwise handled its Hazardous Substances in compliance with all Environmental
Laws.
(j) CERCLA or RCRA. Except as set forth on Section 3.27 of the Disclosure
Schedule, no current or past use, generation, treatment, transportation,
storage, disposal or handling practice of the Company or any Company Subsidiary
with respect to any Hazardous Substance has resulted in any liability at the
Facilities or at any other site under the CERCLA or RCRA or any applicable
state, local or foreign law of similar effect.
(k) Storage Tank or Pipeline. Except as set forth in Section 3.27 of the
Disclosure Schedule, and except for connections with public utilities and
discharges to, and intakes from, sewer lines, there are no underground or above
ground storage tanks or pipelines at any of the current Facilities of the
Company or any Company Subsidiary, and there have been no Releases of Hazardous
Substances from any such current underground or above ground storage tanks or
pipelines, or from previously removed or closed underground or above ground
storage tanks or pipelines, including, without limitation, any Release from or
in connection with the filling or emptying of any such tank.
(l) Environmental Audits or Assessments. True, complete and correct copies
of the written reports, and all parts thereof, including any drafts of such
reports if such drafts are in possession or control of or, if not in the
possession or control of, after reasonable inquiry of consultants retained by
the Company or any Company Subsidiary, are known to and may reasonably be
obtained by the Company or any Company Subsidiary, of all environmental audits
or assessments which have been conducted at the Facilities since January 1,
1993, either by seller or any attorney, environmental consultant or engineer
engaged for such purpose or by any governmental agency, have been previously
delivered to Jones and a list of all such reports, audits and assessments and
any other similar report, audit or assessment of which Shareholders have
knowledge is included in Section 3.27 of the Disclosure Schedule.
(m) Indemnification Agreements. Except as set forth in Section 3.27 of the
Disclosure Schedule, neither the Company nor any Company Subsidiary is a party,
whether as a direct signatory or as successor, assign or third party
beneficiary, or otherwise bound, to any Material Contract (excluding insurance
policies disclosed on the Disclosure Schedule or leases or other agreements
entered into in the ordinary course of business (such as agreements with vendors
or vendees)) under which the Company or any Company Subsidiary is obligated by
or entitled to the benefits of, directly or indirectly, any representation,
warranty, indemnification, covenant, restriction or other undertaking concerning
environmental conditions.
(n) Releases or Waivers. Since January 1, 1993, neither the Company nor
any Company Subsidiary has released in writing any other person or entity from
any claim under any Environmental Law or waived in writing any rights concerning
liability in connection with any Hazardous Substance.
(o) Notices, Warnings and Records. Except as set forth on Section 3.27 of
the Disclosure Schedule, each of the Company and the Company Subsidiaries has
given all notices and warnings, made all reports, and has kept and maintained
all records required by and in compliance with all Environmental Laws.
(p) Exclusivity of Representations and Warranties. The representations and
warranties set forth in this Section 3.27 are the sole and exclusive
representations and warranties being made by the Company and Shareholders in
this Agreement with respect to environmental matters.
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3.28. NO OTHER AGREEMENTS. Except as set forth in Section 3.28 of the
Disclosure Schedule, neither the Company nor any Shareholder has any commitment
or legal obligation, absolute or contingent, to any other person or firm to sell
or effect a sale of all or substantially all of the assets of the Company or any
Company Subsidiary, to sell or effect a sale of any equity interests of the
Company or any Company Subsidiary, to effect any merger, consolidation or the
reorganization of the Company or any Company Subsidiary, or to enter into any
agreement or cause the entering into of an agreement with respect thereto.
3.29. BROKERS AND FINDERS. Neither the Company, Shareholders, nor, to the
knowledge of Shareholders, any officers, directors or employees of the Company
has employed any broker or finder or incurred any liability for any brokerage
fees, commissions or finders' fees in connection with the transactions
contemplated by this Agreement other than Bear, Stearns & Co. Inc., whose fee is
to be paid by the Company prior to the Closing or accrued as a liability on the
Closing Balance Sheet.
3.30. PERSONNEL. Section 3.30 of the Disclosure Schedule sets forth a
true and complete list of:
(a) the names and current salaries of all directors and elected and
appointed officers of the Company and the Company Subsidiaries;
(b) the salaries for all salaried employees of the Company and the
Company Subsidiaries by classification, and the date of the last increase
in compensation through July 31, 1998.
3.31. INSIDER INTERESTS. Except as set forth in Section 3.31 of the
Disclosure Schedule, no Shareholder and, to the knowledge of Shareholders, no
officer or director of the Company is presently a party to any transaction with
the Company or any Company Subsidiary including, without limitation, any
contract, agreement or arrangement (i) providing for the furnishing of services,
(ii) providing for rental of real or personal property, or (iii) otherwise
requiring payments to any such person or any trust, corporation or entity in
which such person has any interest including in any property, real or personal,
tangible or intangible, including, without limitation, inventions, patents,
trademarks or trade names, used in or pertaining to the business of the Company.
3.32. BANK ACCOUNTS. Sections 3.32 of the Disclosure Schedule sets forth
the names of all banks, trust companies, savings and loan associations and other
financial institutions at which the Company or any Company Subsidiary maintains
safe deposit boxes or accounts of any nature.
3.33. REGISTRATION STATEMENT. The Registration Statement was, as to form,
in all material respects in compliance with the requirements of Form S-1 when
filed. The Registration Statement, when filed, contained no untrue statement of
a material fact nor omitted to state a material fact required to be included
therein or necessary in light of the circumstances under which it was made in
order to make the statements made therein not misleading.
ARTICLE IV
ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS
Each Shareholder represents, warrants and agrees with Jones and Newco,
individually and not jointly, as follows:
4.1. DUE EXECUTION. This Agreement has been duly executed and delivered
by such Shareholder, and is a legal, valid and binding obligation of
Shareholder, enforceable against each Shareholder, in accordance with its terms
except as (i) such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
4.2. NO DISTRIBUTION. The Jones Shares being acquired by Shareholder
hereunder are being acquired for his/its own account, for investment and not
with a view to or for resale in connection with any "distribution" thereof as
such term is used in connection with the registration provisions of the
Securities Act of 1933, as amended (the "Securities Act").
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4.3. LEGEND. The following legend shall be affixed to the certificates
for Jones Shares issued pursuant to this Agreement:
The securities represented by this Certificate have not been registered
under the Securities Act of 1933, as amended, nor the laws of any state.
Accordingly, these securities may not be offered, sold, transferred,
pledged or hypothecated in the absence of registration, or the
availability, in the opinion of counsel for the issuer, of an exemption
from registration under the Securities Act of 1933, as amended, or the laws
of any state. Therefore, the stock transfer agent will effect transfer of
this Certificate only in accordance with the above instructions.
4.4. REVIEW OF APPLICABLE LAWS. Shareholder acknowledges that Jones has
informed it that the shares of Jones Common Stock to be received pursuant hereto
have not been registered under the Securities Act and may not be sold until they
have been registered or an exemption from such registration is available.
4.5. KNOWLEDGE AND EXPERIENCE. Shareholder has the knowledge and
experience in the financial and business matters necessary for making an
informed decision on the merits and risk of the investment in the Jones Shares
pursuant hereto.
4.6. AVAILABILITY OF INFORMATION. Shareholder has had an opportunity to
meet personally or by telephone conference with officers or representatives of
Jones and has been provided with a full opportunity to ask questions of and
receive answers from such person concerning the business and affairs of Jones,
its past and current operations and financial condition, and the transactions
provided for in this Agreement.
4.7. RESTRICTIONS ON TRANSFERS. Rothfeld, the Rothfeld Family Trust and
Grossman (collectively, the "Restricted Shareholders") shall not sell, assign or
transfer ("Transfer") their "Restricted Jones Stock" (defined in paragraph (e)
below), except in accordance with the following:
(a) Notwithstanding any provision herein to the contrary, Rothfeld and
the Rothfeld Family Trust may at any time Transfer Restricted Jones Stock
to their affiliates or to any member of Rothfeld's family or to any trust
or other entity for the benefit of any member of Rothfeld's family for
estate planning purposes.
(b) The Restricted Shareholders shall not Transfer any Restricted
Jones Stock during the period of six months following the date of issuance
of such Restricted Jones Stock.
(c) At the expiration of the period of six months following the
Closing, the restrictions with respect to the Transfer of the Restricted
Jones Stock shall lapse in the incremental percentages indicated in the
following table:
Period Following the
Closing Incremental Percentage
of Restricted Jones Stock
as to which Restrictions Lapse
<TABLE>
<S> <C>
After 6 months.............................................. 20%
After 12 months............................................. 40%
After 18 months............................................. 60%
After 24 months............................................. 80%
After 30 months............................................. 100%
</TABLE>
(d) The restrictions on transfer set forth in paragraphs (b) and (c)
of this Section 4.7 shall terminate with respect to a Restricted
Shareholder in the event that:
(i) such Restricted Shareholder dies;
(ii) such Restricted Shareholder becomes disabled to the extent
that he or she is incapable of performing the essential functions of the
duties required by the Rothfeld Employment Agreement or the Grossman
Employment Agreement, as the case may be, for one hundred twenty (120)
or more consecutive days, even with reasonable accommodation;
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(iii) an arbitration tribunal or court of competent jurisdiction
renders a final and non-appealable decision finding that Rothfeld's or
Grossman's employment, as the case may be, was terminated without
"Cause" (as such term is defined in the Rothfeld Employment Agreement or
the Grossman Employment Agreement, as the case may be) or that Rothfeld
or Grossman, as the case may be, terminated his or her employment for
"Good Reason" (as such term is defined in the Rothfeld Employment
Agreement or the Grossman Employment Agreement, as the case may be); or
(iv) Jones agrees in writing that Rothfeld's or Grossman's
employment, as the case may be, has been terminated without Cause or
that Rothfeld or Grossman terminated his or her employment, as the case
may be, for Good Reason.
(e) "Restricted Jones Stock" shall mean the Jones Shares acquired by
the Restricted Shareholders at the Closing, as adjusted for stock splits,
stock dividends, reclassifications and the like; provided, however, that
with respect to the Jones Shares acquired by Rothfeld and the Rothfeld
Family Trust, the Restricted Jones Stock shall constitute no more than 40%
of the Aggregate Merger Consideration allocated to Rothfeld and the
Rothfeld Family Trust and delivered in Jones Common Stock (valuing such
shares at the Jones Initial Share Value).
4.8. OWNERSHIP OF STOCK.
(a) Each Shareholder is the lawful owner of the number of Company Shares
listed opposite the name of such Shareholder in Section 4.8 of the Disclosure
Schedule free and clear of all liens, restrictions, encumbrances and claims of
any kind other than as described in Section 4.8 of the Disclosure Schedule.
(b) Upon consummation of the Merger, Jones will acquire good title to all
of the Company Shares, free and clear of any liens, restrictions, encumbrances
and claims of any kind whatsoever.
4.9. RESTRICTIVE COVENANTS OF ROTHFELD. In consideration of Rothfeld's
receipt of his portion of the Aggregate Merger Consideration at the Closing, and
as a material inducement for Jones and Newco (the Sun Division) to enter into
and consummate the transactions contemplated by this Agreement including,
without limitation, Jones' agreement to elect Rothfeld as a director of Jones as
of the Closing and to include Rothfeld on management's slate of nominees for the
Jones Board of Directors as provided under Section 7.10, Rothfeld hereby agrees
as follows:
(a) During the Non-Compete Period (as such term is defined in the
Rothfeld Employment Agreement), Rothfeld shall not, whether as an officer,
director, owner, employee, partner, investor, agent, shareholder,
consultant who receives remuneration of any kind, or advisor who receives
remuneration of any kind, directly or indirectly, engage in any of the
Businesses then actually conducted by the Sun Division or its affiliates.
As used herein, the term "Businesses" shall mean (I) the manufacture or
finishing in the United States or Mexico of jeans, jeanswear and casual
tops and bottoms, or (II) the sale, at wholesale, in the United States or
Canada of jeans, jeanswear, casual tops and bottoms and sportswear, or
(III) the sale or blending for sale of detergents, chemicals and enzymes of
all kinds for use by the garment finishing industry in the United States or
Mexico, or (IV) any other business then actually carried on by the Sun
Division or its affiliates.
(b) During the Non-Interference Period (as such term is defined in the
Rothfeld Employment Agreement), Rothfeld shall not, directly or indirectly,
(A) solicit the employment of, interfere or negotiate with or endeavor to
entice away from the Sun Division or its affiliates or hire any persons who
are then employees or have been employees during the prior six months of
the Sun Division or its affiliates, or (B) recommend or support a decision
by any person, firm, corporation, association or other entity to solicit
(except by means of advertisement in newspapers of general circulation) the
employment of, interfere or negotiate with or endeavor to entice away from
the Sun Division or its affiliates or hire any persons who are then
employees of the Sun Division or its affiliates.
(c) Rothfeld acknowledges and agrees that the Sun Division and its
affiliates, including Jones and its divisions and subsidiaries
(collectively, the "Entities"), conduct business on a national and
international
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<PAGE> 30
scale and, as a director of Jones, Rothfeld will be privy to material
proprietary and confidential information of and pertaining to all of the
Entities, and will participate in the formulation of long-term strategic
planning for the Entities. Therefore, Rothfeld agrees that the restrictions
contained in this Section 4.9 are reasonable and necessary to protect the
legitimate interests of Jones, the Sun Division and their affiliates,
including the goodwill and knowledge of the Company being acquired by Newco
hereunder.
(d) Rothfeld acknowledges and agrees that if he should breach a
covenant contained herein, Jones' and the Sun Division's remedy at law will
be inadequate. Therefore, in addition to any remedy otherwise available to
Jones and the Sun Division, Rothfeld agrees that Jones and the Sun Division
may be entitled to an injunction restraining him from any such violation.
Moreover, if it shall be determined by any arbitration panel or court of
competent jurisdiction that any covenant herein is not enforceable due to
its geographic area or duration, then it is the intention of the parties
that such covenant shall be enforceable to the greatest extent possible,
and will be deemed amended so as to reduce the geographic area or duration,
as the case may be, to the extent necessary to secure enforceability.
(e) Rothfeld agrees that the benefits of the provisions of this
restrictive covenant shall be assignable to, and enforceable by, any
person, firm, corporation or other entity which purchases or acquires all
or substantially all of the assets of Jones or the Sun Division and which
assumes the liabilities, obligations and duties of Jones or the Sun
Division, as the case may be, as contained in this Agreement and the
Rothfeld Employment Agreement, either contractually or as a matter of law,
unless all or a part of such liabilities, obligations and duties are
retained by Jones, provided that Jones has the financial wherewithal to
assume and make payments under such agreements.
(f) Anything herein to the contrary notwithstanding, nothing contained
herein shall prohibit Rothfeld from holding, as a passive owner, less than
5% of the outstanding shares of, or any other equity interest in, an entity
engaged in a business which is the same as the Businesses or any segment
thereof.
4.10. RESTRICTIVE COVENANTS OF GROSSMAN. In consideration of Grossman's
receipt of her portion of the Aggregate Merger Consideration at the Closing, and
as a material inducement for Jones and Newco (the Sun Division) to enter into
and consummate the transactions contemplated by this Agreement, Grossman hereby
agrees as follows:
(a) During the Non-Compete Period (as such term is defined in the
Grossman Employment Agreement), Grossman shall not, whether as an officer,
director, owner, employee, partner, investor, agent, shareholder,
consultant who receives remuneration of any kind, or advisor who receives
remuneration of any kind, directly or indirectly, engage in any of the
Businesses then actually conducted by the Sun Division or its affiliates.
(b) During the Non-Interference Period (as such term is defined in the
Grossman Employment Agreement), Grossman shall not, directly or indirectly,
(A) solicit the employment of, interfere or negotiate with or endeavor to
entice away from the Sun Division or its affiliates or hire any persons who
are then employees or have been employees during the prior six months of
the Sun Division or its affiliates, or (B) recommend or support a decision
by any person, firm, corporation, association or other entity to solicit
(except by means of advertisement in newspapers of general circulation) the
employment of, interfere or negotiate with or endeavor to entice away from
the Sun Division or its affiliates or hire any persons who are then
employees of the Sun Division or its affiliates.
(c) Grossman acknowledges and agrees that the Entities conduct
business on a national and international scale and, as a Director and
executive officer of a major subsidiary of Jones, Grossman will be privy to
material proprietary and confidential information of and pertaining to all
of the Entities. Therefore, Grossman agrees that the restrictions contained
in this Section 4.10 are reasonable and necessary to protect the legitimate
interests of Jones, the Sun Division and their affiliates, including the
goodwill and knowledge of the Company being acquired by Newco hereunder.
(d) Grossman acknowledges and agrees that if she should breach a
covenant contained herein, Jones' and the Sun Division's remedy at law will
be inadequate. Therefore, in addition to any remedy
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<PAGE> 31
otherwise available to Jones and the Sun Division, Grossman agrees that
Jones and the Sun Division may be entitled to an injunction restraining her
from any such violation. Moreover, if it shall be determined by any
arbitration panel or court of competent jurisdiction that any covenant
herein is not enforceable due to its geographic area or duration, then it
is the intention of the parties that such covenant shall be enforceable to
the greatest extent possible, and will be deemed amended so as to reduce
the geographic area or duration, as the case may be, to the extent
necessary to secure enforceability.
(e) Grossman agrees that the benefits of the provisions of this
restrictive covenant shall be assignable to, and enforceable by, any
person, firm, corporation or other entity which purchases or acquires all
or substantially all of the assets of Jones or the Sun Division and which
assumes the liabilities, obligations and duties of Jones or the Sun
Division, as the case may be, as contained in this Agreement and the
Grossman Employment Agreement, either contractually or as a matter of law,
unless all or a part of such liabilities, obligations and duties are
retained by Jones, provided that Jones has the financial wherewithal to
assume and make payments under such agreements.
(f) Anything herein to the contrary notwithstanding, nothing contained
herein shall prohibit Grossman from holding, as a passive owner, less than
5% of the outstanding shares of, or any other equity interest in, an entity
engaged in a business which is the same as the Businesses or any segment
thereof.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF JONES AND NEWCO
Jones and Newco jointly represent, warrant, and covenant to Shareholders as
follows:
5.1. CORPORATE ORGANIZATION; ETC. Each of Jones and Newco is a
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation and has full corporate power and authority to
carry on its business as it is now being conducted and to own the properties and
assets it now owns; is duly qualified or licensed to do business as a foreign
corporation in good standing in the jurisdictions in which such qualification is
required except jurisdictions in which failure to qualify to do business will
have no material adverse effect on the business, operations, properties, assets
or financial condition of Jones. The copies of the certificate of incorporation
and by-laws and all amendments thereto of Jones heretofore delivered to the
Company and are complete and correct copies of such instruments as presently in
effect.
5.2. FINANCIAL STATEMENTS.
(a) Jones has heretofore delivered to the Company and Shareholders (i) a
copy of Jones' Annual Report on Form 10-K for the fiscal year ended December 31,
1997 (the "Form 10-K"), which contains audited financial statements of Jones
consisting of balance sheets as of December 31, 1997 and 1996 and statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997, and (ii) a copy of the Jones' Quarterly
Report on Form 10-Q for the six-month period ended June 28, 1998 (the "Form
10-Q"), which contains an unaudited balance sheet of Jones as of June 28, 1998
(the "Jones Balance Sheet") and statements of operations and cash flows for the
six-month period ended June 28, 1998.
(b) The Jones Balance Sheet and all other financial statements described
above or contained in the Form 10-K and Form 10-Q, including the notes and
schedules thereto, have been prepared in accordance with generally accepted
accounting principles, applied on a consistent basis and present fairly the
consolidated financial position and results of the operations and cash flows of
Jones at such date and for such periods, subject, in the case of the unaudited
interim financial statements, to normal year-end adjustments.
5.3. CAPITALIZATION. As of the date of this Agreement, (i) the authorized
capital stock of Jones is set forth in the Form 10-K, of which 101,075,448
shares are issued and outstanding and 10,057,942 shares are subject to options,
warrants or other rights to purchase or subscribe for capital stock of Jones,
and (ii) the authorized capital stock of Newco is 200 shares of Common Stock, of
which 200 shares are issued and outstanding. All issued and outstanding shares
of capital stock of Jones are validly issued, fully paid and nonassessable and
the shares of Jones Common Stock to be issued in connection with the Merger
will, when issued, be validly issued, fully paid and non-assessable. Except as
set forth in the Form 10-K, there are no
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<PAGE> 32
outstanding (a) securities convertible into or exchangeable for capital stock of
either Jones or Newco; (b) options, warrants or other rights to purchase or
subscribe for capital stock of either Jones or Newco other than employee stock
options granted by Jones; or (c) contracts, commitments, agreements,
understandings or arrangements of any kind relating to the issuance of any
capital stock of either Jones or Newco, any such convertible or exchangeable
securities or any such options, warrants or rights.
5.4. JONES COMMON STOCK. The Jones Shares to be delivered to Shareholders
at the Closing and the shares of Jones Contingent Stock (i) have been duly
authorized and will be, when issued to Shareholders in accordance with the terms
hereof, validly issued, fully paid and nonassessable and (ii) on the Closing
Date shall be approved for trading on the NYSE subject to official notice of
issuance.
5.5. AUTHORIZATION; ETC. Each of Jones and Newco has full corporate power
and authority to enter into this Agreement and to carry out the transactions
contemplated hereby. The Board of Directors of each of Jones and Newco and
Jones, as the sole shareholder of Newco, have taken all action required by law,
its certificate of incorporation and by-laws or otherwise to be taken by them to
authorize the execution and delivery of this Agreement and the transactions
contemplated hereby, and this Agreement has been duly executed and delivered and
is a valid and binding agreement of Jones and Newco enforceable in accordance
with its terms except as (i) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights and (ii) the remedy of specific performance
and injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
5.6. NO VIOLATION. Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will violate any
provisions of the respective certificate of incorporation, by-laws or other
organizational documents of Jones or Newco or, to the knowledge of Jones and
Newco, be in conflict with, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by, or cause the
acceleration of the maturity of any debt or obligation pursuant to, or result in
the creation or imposition of any security interest, lien or other encumbrance
upon any property or assets of Jones or Newco, under any agreement or commitment
to which Jones or Newco is a party or by which Jones or Newco is bound, or
violate any applicable statute or law or any judgment, decree, order, regulation
or rule of any court or governmental authority.
5.7. SEC REPORTS. The Form 10-K and Form 10-Q, and all other reports and
proxy statements required to be filed by Jones under the Securities Exchange Act
of 1934, as amended (the "Exchange Act") since January 1, 1995, have been duly
and timely filed by Jones, were in compliance with the requirements of their
respective forms and were complete and correct in all material respects, as of
the dates at which the information was furnished, and contained no untrue
statement of a material fact nor omitted to state a material fact required to be
included therein or necessary in light of the circumstances under which it was
made in order to make the statements made therein not misleading.
5.8. LITIGATION. Except as set forth in Section 5.8 of the Disclosure
Schedule, there is no action, order, writ, injunction, judgment or decree, or
any claim, suit, litigation, labor dispute, arbitrational action, inquiry,
proceeding or investigation by or before any court or governmental or other
regulatory or administrative agency or commission pending or, to the knowledge
of Jones or Newco, threatened against or involving Jones or Newco, or which
questions or challenges the validity of this Agreement or any action taken or to
be taken by Jones or Newco pursuant to this Agreement or in connection with the
transactions contemplated hereby. To the knowledge of Jones and Newco, neither
Jones nor Newco nor any of their subsidiaries is in default under or in
violation of, nor has Jones nor Newco nor any of their subsidiaries received any
notice for any claim or default under or violation of, any contract or
commitment to which it is a party or by which it is bound. Neither Jones nor
Newco nor any of their subsidiaries is subject to any judgment, order or decree
entered in any lawsuit or proceeding which would have a material adverse effect
on its business practices or on its ability to conduct its business in the
manner as it is conducted as of the Closing Date.
5.9. CONSENTS. No approvals are required of any person necessary to the
consummation of the transactions contemplated hereby by Jones and Newco except
for Jones' license with Polo Ralph Lauren.
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5.10. SECTION 368(a)(2)(D) REPRESENTATIONS.
(a) Prior to the Merger, Jones will be in control of Newco within the
meaning of Section 368(c) of the Code, and Newco has no plan or intention to
issue additional shares of its stock that would result in Jones losing control
of Newco within the meaning of Section 368(c) of the Code.
(b) Jones presently has no plan or intention to take any of the following
actions after consummation of the Merger: (i) to liquidate Newco, (ii) to merge
Newco with and into another corporation, (iii) to sell or otherwise dispose of
the stock of Newco or (iv) to cause Newco to sell or otherwise dispose of any of
the assets of the Company acquired in the Merger, except for dispositions made
in the ordinary course of business or transfers described in Section
368(a)(2)(C) of the Code.
(c) Following the Merger, Newco will continue the historic business of the
Company or use a significant portion of the Company's business assets in a
business in accordance with the requirements of Treasury Regulation Section
1.368-1(d).
(d) Neither Jones nor any person related to Jones within the meaning of
Treasury Regulation Section 1.368-1(e)(3) has any plan or intention to purchase,
redeem or otherwise acquire any of the Jones Common Stock (including Jones
Contingent Stock) that will be issued in the Merger except for acquisitions made
in the ordinary course pursuant to Jones' existing share repurchase program.
Following the Merger, any acquisitions of Jones Common Stock or Jones Contingent
Stock will not be directed specifically to Shareholders who receive Jones Common
Stock pursuant to the Merger.
5.11. FINANCING. Jones will have, at or prior to the consummation of the
Merger and at or prior to each Additional Payment, as the case may be,
sufficient funds available to pay (i) the Cash Merger Consideration and the
Total Debt of the Company and (ii) each Additional Payment pursuant to this
Agreement, respectively.
ARTICLE VI
COVENANTS OF SHAREHOLDERS AND JONES
Shareholders, Jones and Newco hereby covenant and agree, as follows:
6.1. ACCESS TO THE COMPANY. Until the Closing, Shareholders shall cause
the Company to afford to Jones, its counsel, accountants and other
representatives, reasonable access during normal business hours to the plants,
offices, warehouses, properties, books and records of the Company and the
Company Subsidiaries in order that Jones may have full opportunity to make such
investigations as it shall desire to make of the affairs of the Company; and
Shareholders will cause the Company to cause its officers and accountants to
furnish such additional financial and operating data and other information as
Jones shall from time to time reasonably request; provided, however, that any
such investigation shall be conducted in such a manner as not to interfere with
the operation of the business of the Company.
6.2. ACCESS TO JONES. Until the Closing, Jones shall afford to
Shareholders, their counsel, accountants and other representatives, reasonable
access during normal business hours to the plants, offices, warehouses,
properties, books and records of Jones and their subsidiaries in order that
Shareholders may have full opportunity to make such investigations as they shall
desire to make of the affairs of Jones; and Jones will cause its officers and
accountants to furnish such additional financial and operating data and other
information as Shareholders shall from time to time reasonably request;
provided, however, that any such investigation shall be conducted in such a
manner as not to interfere with the operation of the business of Jones.
6.3. AMENDMENT OF DISCLOSURE SCHEDULE. Until the Closing, Jones shall
promptly inform Shareholders in writing of any variances discovered by Jones or
its representatives in the representations and warranties, or any Disclosure
Schedule, of Shareholders contained in this Agreement. In the event (i) Jones
fraudulently fails to inform Shareholders in writing of any such variances or
(ii) Shareholders are notified of or discover an inaccuracy in any
representation or warranty contained herein or in the Disclosure Schedule or any
non-performance of or non-compliance with any covenant or agreement contained
herein required to be performed
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<PAGE> 34
or complied with by Shareholders at or before the Closing, Shareholders may, in
the case of clause (ii) above, amend the Disclosure Schedule to reflect such
inaccuracy and, in either case, if Jones nevertheless consummates the Merger,
notwithstanding the foregoing, Jones shall be deemed to have waived (x) such
inaccuracy, non-performance or non-compliance as a condition to its obligation
to close hereunder and (y) any indemnity pursuant to this Agreement in respect
of such inaccuracy, non-performance or non-compliance, it being understood and
agreed that any amendment to the Disclosure Schedule shall not prejudice the
right of Jones to terminate this Agreement pursuant to Section 12.1(b).
6.4. REPAYMENT OF INDEBTEDNESS. At the Closing, Jones will take all
action necessary to repay, discharge and obtain releases in respect of those
items of the Total Debt which are listed in Section 6.4 of the Disclosure
Schedule.
ARTICLE VII
ADDITIONAL COVENANTS OF THE PARTIES
7.1. EMPLOYMENT AGREEMENTS. Concurrently with the execution of this
Agreement, Newco or R.L. Management, as the case may be, will enter into the
Rothfeld Employment Agreement with Rothfeld and the Grossman Employment
Agreement with Grossman, in the forms annexed hereto as Exhibit C-1 and C-2,
each of which will become effective at the Closing.
7.2. REGISTRATION RIGHTS AGREEMENTS. Concurrently with the execution of
this Agreement, Jones will enter into an agreement (the "Registration Rights
Agreement") with each Shareholder, in the form annexed hereto as Exhibit D,
which will become effective at the Closing. Pursuant to the Registration Rights
Agreement, Shareholders shall have the right to require Jones to register the
Jones Shares and the shares of Jones Contingent Stock on the terms set forth
therein.
7.3. POLO LICENSE. On or before the execution of this Agreement, the
parties shall have obtained any necessary or appropriate consents of Polo Ralph
Lauren to the transactions contemplated hereby.
7.4. LEGAL OPINIONS. Concurrently with the execution of this Agreement,
counsel to Jones and Newco shall deliver a legal opinion or legal opinions
addressed to the Company and Shareholders satisfactory in form and substance to
the Company and Shareholders.
7.5. LEGAL OPINIONS. Concurrently with the execution of this Agreement:
(a) counsel to the Company and Shareholders shall deliver a legal
opinion or legal opinions addressed to Jones and Newco satisfactory in form
and substance to Jones and Newco;
(b) Mexican counsel to the Company shall deliver legal opinions
addressed to Jones and Newco as to the corporate status and related matters
regarding the Company Subsidiaries that are Mexican entities.
7.6. CONFIDENTIALITY. The parties agree that the confidentiality
agreement dated June 4, 1998 shall survive the execution of this Agreement and
shall continue in effect in accordance with its terms or, if sooner, until the
Effective Time.
7.7. ANTITRUST LAWS. Within two business days from the date of this
Agreement, Shareholders and Jones shall make any and all filings which are
required under the HSR Act. Shareholders will cause the Company to furnish to
Jones such necessary information and reasonable assistance as Jones may request
in connection with its preparation of necessary filings or submissions to any
governmental agency, including, without limitation, any filings necessary under
the provisions of the HSR Act.
7.8. CONSENTS. Each party hereto shall use its reasonable efforts to
obtain, prior to the Closing, all consents (including each consent set forth in
Section 3.25 of the Disclosure Schedule, other than those which are being
delivered as of the date hereof), assignments, releases, waivers, approvals,
permits, registrations and conveyances necessary and appropriate to effect the
consummation of the transactions contemplated hereby by such party and will use
its reasonable best efforts to cause all conditions precedent to its obligations
to
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consummate the transactions contemplated by this Agreement to be expeditiously
satisfied, including requesting early termination of the waiting period under
the HSR Act.
7.9. TAX TREATMENT. Each of Shareholders, the Company, Jones and Newco
shall use their reasonable best efforts to cause the Merger to qualify as a
reorganization under the provisions of Section 368 of the Code, shall not take
any action that would cause the Merger to fail to qualify as such, shall provide
to Skadden, Arps, Slate, Meagher & Flom LLP the representations contained in the
certificates to which Sections 8.7 and 9.8 hereof refer and shall not take any
action that would cause them to fail to be able to provide such representations.
7.10. MANAGEMENT OF THE COMPANY AFTER THE MERGER.
(a) Jones agrees that from the Closing Date until December 31, 2001, it
shall operate the Sun Division as an identifiable division for operational and
financial accounting purposes and that so long as Rothfeld is employed by the
Sun Division or Jones, Rothfeld shall be President and Chief Executive Officer
of the Sun Division.
(b) Concurrently with the Closing, Rothfeld shall be elected a director of
Jones and, for so long as Rothfeld is employed by the Sun Division or Jones
under the Rothfeld Employment Agreement, Rothfeld shall be included on
management's slate of nominees for the Jones Board of Directors to the extent
permitted by law and regulatory agencies.
(c) Subject to the Rothfeld Employment Agreement, Rothfeld shall (i)
provide such reports regarding the Sun Division as Jones currently receives from
its other operating divisions (including a budget substantially similar in form
and level of detail as the budget set forth in Section 7.10 of the Disclosure
Schedule, along with the supporting information relating thereto), provided,
that so long as Jones provides or controls the services used to prepare such
reports, the Sun Division shall not be responsible for any failure to provide
such reports and (ii) have the authority to oversee the day-to-day operations of
the business of the Sun Division and shall direct the formulation and execution
of both short-term and long-term plans for the Sun Division, subject to approval
by the Board of Directors of the Sun Division; provided, however, that he shall
be required to obtain the approval of Jones before making any Major Decision (as
defined in the Rothfeld Employment Agreement). Notwithstanding anything to the
contrary contained herein, Jones shall have the right, upon written notice to
Rothfeld, to terminate or limit the authority granted to him pursuant to this
Section 7.10 at any time after there has been a greater than 10% decrease in the
EBIT of the Sun Division for any two consecutive calendar quarters on a latest
twelve-month basis as compared to the EBIT for the comparable periods of the
immediately preceding fiscal year of the Sun Division, except where such
decreases are caused by a Force Majeure Event.
(d) A "Force Majeure Event" shall mean any of the following events which
has a material adverse effect on the Sun Division's business: (i) strikes or
work stoppages by the Sun Division's, or any of its ten largest customers',
suppliers' or distributors', employees, (ii) disruptions to the Sun Division's
business caused by a natural disaster or other "Act of God" or disruption in any
method of transportation by which the Sun Division or any of its ten largest
customers, suppliers or distributors who transport materials or products to or
from the Sun Division, (iii) war, declared or undeclared, or civil insurrection
in the United States or in Mexico or any other country in which the Sun Division
produces or sells at least 20% of its products or (iv) adverse changes in the
relationship between the United States and Mexico (including material adverse
modifications to the North American Free Trade Agreement) or any other country
in which the Sun Division produces or sells at least 20% of its products.
7.11. COLLECTIVE BARGAINING AGREEMENTS. The parties agree that effective
as of the Closing Date, Newco shall assume and continue in full force and effect
the Company's collective bargaining agreement with Local 360, Four Rivers
District Joint Board, Union of Needletrades, Industrial and Textile Employees,
AFL-CIO dated April 7, 1998, which by its terms extended and modified the
Company's collective bargaining agreement with Local 360, International Ladies'
Garment Workers' Union dated January 28, 1995 -- December 31, 1997. Such
assumption by Newco shall not be deemed to limit in any way Shareholders'
obligations arising out of their representations and warranties set forth in
Section 3.20(a).
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7.12 ISSUANCE OF COMPANY COMMON STOCK. Prior to the Closing, Grossman
shall have been issued (and shall own as of the Closing) a number of shares of
the Company Common Stock equal to 1% of the shares of the Company's Common Stock
then outstanding, after giving effect to such issuance.
7.13. DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE
(a) For a period of six (6) years after the Effective Time, Newco shall
indemnify all present and former directors, officers, employees and agents of
the Company for acts or omissions occurring prior to the Effective Time to the
fullest extent now provided in Newco's certificate of incorporation and by-laws
consistent with applicable law, to the extent such acts or omissions are
uninsured, and shall, in connection with defending against any action for which
indemnification is available hereunder, reimburse and advance expenses to such
officers, directors, employees and agents, from time to time upon receipt of
supporting documentation, for any reasonable costs and expenses reasonably
incurred by such officers, directors, employees and agents in connection with
such defense.
(b) The indemnification referred to in the foregoing paragraph shall in no
way limit or abrogate the obligation of the Shareholders (other than the
Rothfeld Family Trust and Grossman) to indemnify Jones and Newco pursuant to
Article XI hereof.
7.14. BANK ACCOUNTS. From the date hereof until the Closing, Shareholders
shall use their reasonable best efforts to deliver to Jones true, correct and
complete lists of (i) the locations of all banks, trust companies, savings and
loan associations and other financial institutions at which the Company or any
Company Subsidiary maintains safe deposit boxes or accounts of any nature and
(ii) all persons authorized to draw thereon, make withdrawals therefrom or have
access thereto.
ARTICLE VIII
CONDITIONS TO SHAREHOLDERS' AND THE COMPANY'S OBLIGATIONS
Each and every obligation of Shareholders and the Company to consummate the
transactions contemplated by this Agreement shall be subject to satisfaction, on
or before Closing, of each of the following conditions, unless waived in writing
by Shareholders:
8.1. REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of Jones and Newco contained herein shall be in all material respects
true and accurate as of the date hereof, except for changes expressly permitted
or contemplated by the terms of this Agreement.
8.2. PERFORMANCE. Jones and Newco shall have performed and complied in
all material respects with all agreements, obligations and conditions required
by this Agreement to be performed or complied respectively with by Jones or
Newco on or prior to the Closing.
8.3. NO INJUNCTION OR RESTRAINT. No statute, rule, regulation, executive
order, decree, temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or other
governmental entity preventing the consummation of the Merger shall be in
effect; provided, however, that each of the parties shall have used its
reasonable best efforts to prevent the entry of any such temporary restraining
order, injunction or other order and to appeal as promptly as possible any
injunction or other order that may be entered.
8.4. PAYMENT OF THE MERGER CONSIDERATION. At the Closing, Jones shall
have delivered to Shareholders the Tentative Aggregate Merger Consideration.
8.5. HSR ACT. The waiting period (and any extension thereof) applicable
to the Merger under the HSR Act shall have been terminated or shall have
expired.
8.6. LISTING OF SHARES. The NYSE shall have approved for listing the
Jones Shares, subject to official notice of issuance.
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8.7. TAX OPINION. The Company shall have received an opinion of Skadden,
Arps, Slate, Meagher & Flom LLP substantially in the form set forth in Exhibit E
hereto, dated the Closing Date, substantially to the effect that, on the basis
of facts, representations and assumptions set forth in such opinion the merger
will qualify as a reorganization described in Section 368(a) of the Code. In
rendering such opinion, Skadden, Arps, Slate, Meagher & Flom LLP may receive and
rely upon representations contained in certificates of officers of the Company
and Jones substantially in the form set forth in Exhibit E-1 hereto.
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF JONES AND NEWCO
Each and every obligation of Jones or Newco to consummate the transactions
contemplated by this Agreement shall be subject to the satisfaction, on or
before the Closing, of each of the following conditions, unless waived in
writing by Jones or Newco, as the case may be:
9.1. REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties contained in Article III and Article IV hereof and the Disclosure
Schedule shall be in all material respects true, complete and accurate as of the
date hereof, except for changes expressly permitted or contemplated by the terms
of this Agreement; provided, however, that such changes shall not include any
Shareholder amendment made to the Disclosure Schedules as provided for in
Section 6.3 herein.
9.2. PERFORMANCE. Shareholders shall have performed and complied in all
material respects with all agreements, obligations, conditions and covenants
required by this Agreement to be performed or complied with by them on or prior
to the Closing.
9.3. NO INJUNCTION OR RESTRAINT. No statute, rule, regulation, executive
order, decree, temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or other
governmental entity preventing the consummation of the Merger shall be in
effect; provided, however, that each of the parties shall have used its
reasonable best efforts to prevent the entry of any such temporary restraining
order, injunction or other order and to appeal as promptly as possible any
injunction or other order that may be entered.
9.4. PAYOFF LETTERS. Jones shall have received from each holder of any
part of the Total Debt to be paid at Closing a letter reasonably satisfactory to
Jones stating the amount necessary as of the Closing Date to pay and discharge
in full the Total Debt held by each such holder.
9.5. DELIVERY OF STOCK CERTIFICATES. At or prior to the Closing,
Shareholders shall have delivered to Jones the certificates representing their
Company Common Stock or Company Preferred Stock, as the case may be, for
cancellation by the Surviving Corporation.
9.6. TERMINATION OF AFFILIATE AGREEMENTS AND CERTAIN RESIGNATIONS. Jones
shall have received documents reasonably satisfactory to Jones terminating the
following agreements with Affiliates of the Company or evidencing certain
resignations:
(a) Employment Agreements between the Company and Rothfeld and R.L.
Management and Grossman;
(b) Stockholders Agreement, dated as of September 26, 1997;
(c) Vestar Management Agreement, dated as of September 26, 1997;
(d) Resignations of Company directors and Company Subsidiary officers
and directors.
9.7. HSR ACT. The waiting period (and any extension thereof) applicable
to the Merger under the HSR Act shall have been terminated or shall have
expired.
9.8. TAX OPINION. Jones and Newco shall have received an opinion from
Skadden, Arps, Slate, Meagher & Flom LLP substantially in the form set forth in
Exhibit E hereto, dated the Closing Date, substantially to the effect that, on
the basis of facts, representations and assumptions set forth in such opinion
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the Merger will qualify as a reorganization described in Section 368(a) of the
Code. In rendering such opinion, Skadden, Arps, Slate, Meagher & Flom LLP may
receive and rely upon representations contained in certificates of officers of
the Company and Jones substantially in the form set forth in Exhibit E-1 hereto.
ARTICLE X
CONDUCT OF THE COMPANY'S BUSINESS PENDING CLOSING AND RISK OF LOSS
From the date hereof to the Closing Date, and except as otherwise expressly
consented to or approved by Jones or Newco in writing:
10.1. REGULAR COURSE OF BUSINESS. Shareholders shall use their reasonable
best efforts to cause the Company and each Company Subsidiary (i) to carry on
its business in the ordinary course consistent with past practice and to use
reasonable efforts to preserve intact its business organization and assets and
maintain its rights, franchises and existing relations with customers,
suppliers, employees and business associates and (ii) not to engage in any
transaction or activity, or enter into any agreement or make any commitment or
take any action, inconsistent with, or which would adversely affect its ability
to perform any of its material obligations under, this Agreement.
10.2. ORGANIZATION. Shareholders shall cause the Company to use its
reasonable best efforts to preserve its corporate existence and business
organization intact, to keep available to Jones its officers and key employees,
and to preserve for Jones its relationships with key licensors, suppliers,
distributors, customers and others having business relations with it.
10.3. CERTAIN CHANGES. Shareholders shall cause the Company not to take
any of the following actions without the written consent of Jones which consent
shall not be unreasonably withheld:
(a) Borrow or agree to borrow any funds or incur, or assume or become
subject to, whether directly or by way of guarantee or otherwise, any
obligation or liability (absolute or contingent), except current
obligations and liabilities incurred in the ordinary course of business;
(b) Permit or allow any of its property or assets (real, personal or
mixed, tangible or intangible) to be subjected to any mortgage, pledge,
lien or encumbrance, except for Permitted Liens;
(c) Dispose of or permit to lapse any rights, contract, licenses,
permits or any other rights to the use of any Intellectual Property, or
dispose of or disclose to any person, other than an employee in the
ordinary course of business and consistent with past practices, any trade
secret, formula, process or know-how not theretofore a matter of public
knowledge;
(d) Take any action with respect to the grant of any increase in the
compensation of officers or directors, grant any bonus, severance or
termination pay (including such benefits pursuant to any pension, profit
sharing or other plan or commitment) or any increase in the compensation or
fringe benefits payable or to become payable to any officer or employee
committee to, or implement or otherwise modify or amend any Benefit
Arrangement, collective bargaining agreement, employment policy or practice
except as permitted by this Agreement;
(e) Other than as set forth on the capital expenditure plan previously
approved by Jones and set forth on Section 2.14(d) of the Disclosure
Schedule, make in the aggregate capital expenditures and commitments in
excess of $25,000 for additions to property, plant or equipment without the
prior written approval of Jones;
(f) Hire any employee, consultant or independent contractor for
compensation, on an annualized basis, exceeding $250,000.00 per annum
(provided, however, that Jones shall not, solely on the basis of the amount
of compensation, disapprove of an employee, consultant or independent
contractor who is proposed to be hired as a replacement for a terminated or
departed employee, consultant or independent contractor at a comparable
compensation level); or enter into or become bound by any employment or
consulting contract or legally binding understanding or arrangement
regarding such employment.
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(g) Make, declare or pay any dividend or other distribution (other
than regularly scheduled dividends in respect to the Company Preferred
Stock) with respect to the Company Common Stock or Company Preferred Stock.
(h) Dispose of or discontinue any portion of its business which is
material to the Company and the Company Subsidiaries taken as a whole or
acquire all or any portion of the business of any other entity; provided,
however, that the Company shall have the right to acquire 100% of the
equity interest in Sun Manufacturing, Inc.
10.4. CONTRACTS. No contract, lease, license, permit or commitment will
be entered into, extended, materially modified, terminated or renewed except in
the ordinary course of business and no purchase of raw material or supplies and
no sale of assets will be made, by or on behalf of the Company, except (i)
normal contracts or commitments for the purchase of, and normal purchases of,
raw materials or supplies, made in the ordinary course of business and
consistent with past practice, (ii) normal contracts or commitments for the sale
of, and normal sales of, inventory in the ordinary course of business and
consistent with past practice, and (iii) other contracts, commitments, purchases
or sales in the ordinary course of business and consistent with past practice
not in excess of $100,000.
10.5. INSURANCE OF PROPERTY. The Company shall adequately insure all
property, real, personal and mixed, owned or leased by the Company, against all
ordinary and insurable risks; and all such property shall be used, operated,
maintained and repaired in a manner consistent with past practices. The Company
shall not allow or permit to be done any act by which insurance policies may be
impaired, terminated or canceled.
10.6 NO DEFAULT. The Company shall do no act or omit to do any act, or
permit any act or omission to act, which will cause a breach of any Material
Contract of the Company or which would cause the breach in any material respect
of any representation, warranty, or covenant made hereunder.
10.7. TAX RETURNS. The Company shall prepare and file all federal, state,
local and foreign tax returns and amendments thereto required to be filed by it
and shall pay all applicable federal, state and local taxes when due.
10.8. RISK OF LOSS. If any portion of the Company's property is destroyed
or damaged by fire or any other cause on or prior to the Closing Date, other
than use, wear or loss in the ordinary course of business, the Company shall
give written notice to Jones as soon as practicable (but in no event later than
five (5) calendar days) after discovery of such damage or destruction, the
amount of insurance, if any, covering such property and the amount, if any,
which the Company is otherwise entitled to receive as a consequence.
ARTICLE XI
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
11.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements
contained in the Disclosure Schedules delivered by or on behalf of the parties
pursuant to this Agreement shall be deemed to be representations and warranties
by the parties hereunder. The representations, warranties, covenants and
agreements of Shareholders, Jones and Newco contained herein shall survive the
consummation of the transactions contemplated hereby and the Closing Date. All
such representations and warranties and all claims and causes of action with
respect thereto shall terminate on April 30, 2000; provided, however, that (i)
the representations and warranties made pursuant to Sections 3.4(a), 4.1, 4.8,
5.4 and 5.5 shall survive without time limitation, (ii) the representations and
warranties made pursuant to Section 3.27 shall survive for a period of 4 years,
(iii) the representations and warranties made pursuant to Section 3.14 shall
survive until the expiration of the applicable statute of limitations and the
representations and warranties made pursuant to Section 5.10 shall survive until
the expiration of the applicable statute of limitations. The termination of the
representations and warranties provided herein shall not affect the rights of a
party in respect of any Claim (defined in Section 11.2(d) below) made by such
party in a writing received by the other party prior to the expiration of the
applicable survival period provided herein. Notwithstanding the foregoing all
Claims for
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Damages (defined in Section 11.2(a) below) based on fraudulent actions shall
survive without time limitation.
11.2. INDEMNIFICATION.
(a) By Shareholders. Shareholders, other than the Rothfeld Family Trust
and Grossman, jointly and severally, shall indemnify, save and hold harmless
Jones, the Surviving Corporation, their respective affiliates and subsidiaries,
and their respective representatives, from and against any and all costs, losses
(including without limitation diminution in value), taxes, liabilities,
obligations, damages (excluding in each case, consequential damages and lost
profits), lawsuits, deficiencies, claims, demands, and expenses (whether or not
arising out of third-party claims), including without limitation interest,
penalties, costs of mitigation, and other losses resulting from attorney's fees
and all amounts paid in investigation, defense or settlement of any of the
foregoing less the amount of any related net tax benefits and net insurance
benefits actually received by Jones or the Surviving Corporation (herein
"Damages"), incurred in connection with, arising out of, resulting from or
incident to (i) any breach of any representation or warranty or the inaccuracy
of any representation, made by the Company or Shareholders in or pursuant to
this Agreement; (ii) any breach of any covenant or agreement made by the Company
or Shareholders in or pursuant to this Agreement; (iii) the denial by the
Internal Revenue Service of any Tax Benefits, or portion thereof, that were
taken into account in computing the amount of Tax Credits Receivable, which
denial is confirmed pursuant to a Final Determination (as defined below); and
(iv) those items set forth in Section 3.22 of the Disclosure Schedule, but only
to the extent that the Damages relating to such items exceed the accrual and
reserves for such items reflected on the Closing Balance Sheet, notwithstanding
that such items are set forth in and made part of the Disclosure Schedule;
provided, however, that the indemnity under this item (iv) shall exclude the
costs and expenses of defending or prosecuting any such item. For purposes of
the foregoing sentence, a "Final Determination" means (i) the entry of a
decision of a court of competent jurisdiction from which an appeal may no longer
be taken or (ii) the execution of a closing agreement or its equivalent between
the taxpayer and the Internal Revenue Service. The indemnification made pursuant
to item (iii) in the immediately preceding sentence shall survive until the
expiration of the applicable statutes of limitations.
(b) By Jones and the Surviving Corporation. Jones shall indemnify and save
and hold harmless Shareholders from and against any and all Damages incurred in
connection with, arising out of, resulting from or incident to (i) any breach of
any representation or warranty or the inaccuracy of any representation, made by
Jones or Newco in or pursuant to this Agreement; and (ii) any breach of any
covenant or agreement made by Jones or Newco in or pursuant to this Agreement.
(c) Cooperation. The indemnified party shall cooperate in all reasonable
respects with the indemnifying party and such attorneys in the response to,
investigation, trial, defense or other resolution of any actual or threatened
lawsuit action, or directive relating to any Claim or potential Claim and any
appeal arising therefrom; provided, however, that the indemnified party may, at
its own cost, participate in the response to, investigation, trial, defense or
other such resolution of such Claim or potential Claim and any appeal arising
therefrom. The parties shall cooperate with each other in any notifications to
insurers.
(d) Defense of Claims. If a claim for Damages (a "Claim") is to be made by
a party entitled to indemnification hereunder against the indemnifying party,
the party claiming such indemnification shall, subject to Section 11.2 give
written notice (a "Claim Notice") to the indemnifying party as soon as
practicable after the party entitled to indemnification becomes aware of any
fact, condition or event which may give rise to Damages for which
indemnification may be sought under this Section 11.2. If any party is entitled
to the benefit of indemnity hereunder, written notice thereof shall be given to
the indemnifying party as promptly as practicable (and in any event within
thirty (30) calendar days after the service or the citation or summons) or other
notice. The failure of any indemnified party to give timely notice hereunder
shall not affect rights to indemnification hereunder, except to the extent that
the indemnifying party demonstrates actual damage caused by such failure. After
such notice, the indemnifying party shall be entitled, if it so elects, (i) to
take control of the response to, defense, investigation or other resolution of
such Claim, (ii) to employ and engage attorneys of its own choice to handle and
defend the same, at the indemnifying party's cost, risk, and expense, and (iii)
to compromise or settle such Claim; provided, however, that the
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indemnifying party shall not settle any claim without the consent of the
indemnified party if the remedy sought against the indemnified party is other
than solely for money damages; provided, further, that so long as the limitation
set forth in the first sentence of subsection (e) of this Section 11.2 is
applicable to Damages incurred by an indemnified party, the indemnifying party
will (i) consult with the indemnified party before settling any Claim and (ii)
consider in good faith the indemnified party's views with respect to any
potential settlement. If the indemnifying party fails to assume the defense of
such Claim within fifteen (15) calendar days after receipt of the Claim Notice,
the indemnified party against which such Claim has been asserted will (upon
delivering notice to such effect to the indemnifying party) have the right to
undertake, at the indemnifying party's cost and expense, the defense,
compromise, settlement or other resolution of such Claim on behalf of and for
the account and risk of the indemnifying party; provided, however, that such
Claim shall not be compromised, settled or otherwise resolved without the
written consent of the indemnifying party, which consent shall not be
unreasonably withheld. In the event the indemnified party assumes the defense of
the Claim, the indemnified party will keep the indemnifying party reasonably
informed of the progress of any such defense, compromise, settlement or other
resolution. The indemnifying party shall be liable for any settlement of any
Claim effected pursuant to and in accordance with this Section 11.2 for any
final judgment (subject to any right of appeal), and the indemnifying party
agrees to indemnify and hold harmless an indemnified party from and against any
Damages by reason of such settlement, judgment or other resolutions.
(e) Limitations on Liability for Breach of Representations and Warranties.
(i) "Basket". Neither Jones, Newco, the Company or Shareholders shall
be liable to the other under this Section 11.2 for any Damages with respect
to any representation or warranty, the inaccuracy of any representation
made pursuant to this Agreement or the assertion of any claims subject to
indemnification pursuant to this Agreement until the aggregate amount
otherwise due the party being indemnified equals or exceeds an accumulated
total of $2,250,000 and, with respect to claims for taxes pursuant to
Section 11.2(a), only to the extent such claim exceeds the accrual for
taxes reflected on the Closing Financial Statements. Once such claims equal
or exceed the $2,250,000 threshold, the indemnified party will be entitled
to the full amount of all indemnified claims in excess of such $2,250,000;
provided, however, that such $2,250,000 threshold shall not apply with
respect to (A) fraudulent misrepresentations at the time of Closing but not
reflected in this Agreement or the Disclosure Schedule or (B) the
indemnification made pursuant to item (iii) of Section 11.2(a).
(ii) Special Allocation as to Liability for Breach of Section
3.27. After Shareholders have paid a total of $5.0 million to Jones in
respect of Damages with respect to a breach of Section 3.27, thereafter all
remaining Damages with respect to a breach of Section 3.27 shall be paid
75% by Shareholders and 25% by Jones.
(iii) Maximum Liability. The maximum liability of Shareholders for
all indemnifiable events asserted by Jones pursuant to this Article XI
(other than matters asserted under Section 11.2(a)(iii)) shall not exceed
$50 million in the aggregate; provided, however, with respect to fraudulent
misrepresentations in this Agreement or the Disclosure Schedule the maximum
liability of Shareholders shall be the Aggregate Merger Consideration; and
provided further, however, that the maximum liability for matters asserted
under item (iii) of Section 11.2(a) shall be the sum of the value of all
Tax Benefits denied plus all penalties, interest, fees and costs and
expenses (including reasonable fees and expenses of counsel) of every
nature arising out of or related to such matters.
11.3. ARBITRATION.
(a) Any dispute, controversy or claim arising out of or relating to this
Agreement, including, without limitation, the indemnities provided in Article
XI, or the breach, termination or validity of this Agreement, shall be finally
settled by arbitration in accordance with the Expedited Procedures of the
then-prevailing Commercial Arbitration Rules of the American Arbitration
Association, as modified herein (the "Rules"). The place of arbitration shall be
New York, New York. There shall be three arbitrators, of whom Jones shall
appoint one and Shareholders shall collectively appoint one. The two arbitrators
so appointed shall select the chairman of the tribunal within fifteen days of
the appointment of the second arbitrator. If any arbitrator is not
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appointed within the time limits provided herein or in the Rules, such
arbitrator shall be appointed by the American Arbitration Association. By
agreeing to arbitration, the parties do not intend to deprive any court of its
jurisdiction to issue a pre-arbitral injunction, pre-arbitral attachment or
other order in aid of arbitration proceedings. Judgment upon the award of the
arbitrators may be entered in any court of competent jurisdiction. The parties
agree that, except as otherwise provided herein, arbitration in accordance with
this Section 11.3 is the exclusive dispute resolution mechanism for any matter
arising out of or in connection with this Agreement or for the breach,
termination or validity hereof.
(b) For the purposes of an action to enforce an arbitration award under
Section 11.3(a), Jones, Newco, the Company and each Shareholder agrees to
consent to the jurisdiction of the Supreme Court of the State of New York and
the service of process therein.
11.4. EXCLUSIVE REMEDY. Jones, Newco, Shareholders, and the Company
hereby agree that their sole and exclusive remedies with respect to this
Agreement or any matters related to the Company are (with the exception of a
remedy in the case of fraud) the remedies set forth in this Article XI. Except
with respect to the remedies referred to in the preceding sentence, Jones,
Newco, Shareholders and the Company hereby waive, to the fullest extent
permitted under applicable law, and forever release each other, for any claims
related to this Agreement and/or the Company.
ARTICLE XII
TERMINATION AND ABANDONMENT
12.1. METHODS OF TERMINATION. The transactions contemplated herein may be
terminated and/or abandoned at any time but not later than the Closing:
(a) By mutual written consent of Jones, Newco, the Company and
Shareholders; or
(b) By Jones or Newco:
(i) on November 2, 1998, if (x) all of the conditions to closing
provided for in Articles VIII and IX of this Agreement shall have been
met or waived in writing prior to such date and (y) Jones and Newco
shall be ready, willing and able to close and the Company or
Shareholders shall refuse to close, or
(ii) on or after December 31, 1998, if any of the conditions to
closing provided for in Article IX of this Agreement shall not have been
met or waived in writing by Jones or Newco prior to such date;
provided, however, that no such termination shall result in Jones or
Newco waiving any rights they may have pursuant to the proviso to
Section 12.3(c) hereof; or
(c) By the Company or Shareholders:
(i) on November 2, 1998, if (x) all of the conditions to closing
provided for in Articles VIII and IX of this Agreement shall have been
met or waived in writing prior to such date and (y) the Company and
Shareholders shall be ready, willing and able to close and Jones or
Newco shall refuse to close, or
(ii) on or after December 31, 1998, if any of the conditions to
closing provided for in Article VIII of this Agreement shall not have
been met or waived in writing by the Company or Shareholders prior to
such date;
provided, however, that no such termination shall result in the Company
or Shareholders waiving any rights they may have pursuant to the proviso
to Section 12.3(c) hereof.
12.2. TERMINATION UNDER CERTAIN CIRCUMSTANCES. Shareholders and Jones
agree to use their reasonable best efforts to cure the breach of any
representation or warranty and the nonperformance of any covenant or agreement
made by them in this Agreement, and termination pursuant to clauses (b) and (c)
of
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Section 12.1 shall not be available to any party if the Closing shall have been
delayed by any action or failure of such party or by any breach of any provision
of this Agreement by such party.
12.3. PROCEDURE UPON TERMINATION. In the event of termination and
abandonment by Jones, Newco, the Company or Shareholders, or all, pursuant to
Section 12.1 hereof, written notice thereof shall forthwith be given to the
other party and the transactions contemplated by this Agreement shall be
terminated and/or abandoned, without further action by Jones, Newco, the Company
or Shareholders. If the transactions contemplated by this Agreement are
terminated and/or abandoned as provided herein:
(a) Each party will redeliver all documents, work papers and other
material of any other party relating to the transactions contemplated
hereby, whether so obtained before or after the execution hereof, to the
party furnishing the same;
(b) All confidential information received by any party hereto with
respect to the business of any other party or its subsidiaries shall be
treated in the manner confidential information is treated in the
confidentiality agreement referred to in Section 7.6; and
(c) In consideration for the time and expense that each party has
expended in the due diligence and negotiation of this transaction, no party
hereto shall have any liability or further obligation to any other party to
this Agreement except as stated in subparagraphs (a) and (b) of this
Section 12.3, and neither party shall make any claim, including any action
for equitable relief or specific performance, against the other party nor
be liable for the costs, expenses, or damages that may result to the other
in the event of the other's withdrawal prior to Closing of the transactions
contemplated by this Agreement, provided, however, that termination will
not relieve a breaching party from liability for any willful breach of this
Agreement giving rise to such termination.
(d) Section 13.7 shall survive any termination of this Agreement.
ARTICLE XIII
MISCELLANEOUS PROVISIONS
13.1. AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified and supplemented only by written agreement of
the respective Boards of Directors of Jones, Newco and the Company or by their
respective officers authorized by such Shareholders any time prior to the
Closing with respect to any terms contained herein.
13.2. WAIVER OF COMPLIANCE. Any failure of the Company or Shareholders on
the one hand, or Jones or Newco, on the other, to comply with any obligation,
covenant, agreement or condition herein may be expressly waived in writing by
the Chairman, President or Chief Financial Officer of Jones or Newco or the
Company, and by Shareholders, respectively, but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure.
13.3. EXPENSES, ETC. All of the fees and expenses incurred by Jones and
Newco in connection with the transactions contemplated by this Agreement shall
be borne by them and all of the fees and expenses incurred by the Company and
Shareholders in connection with the transactions contemplated by this Agreement
shall be borne by the Company, in each case, including, without limitation, all
fees of counsel, advisors, investment bankers, experts, actuaries and
accountants of such parties, which fees and expenses shall be either paid prior
to the Closing or, to the extent not paid, accrued as liabilities on the Closing
Balance Sheet.
13.4. INTEREST ON LATE PAYMENTS. "Undisputed Late Obligations" shall bear
interest beginning on the Due Date (defined below) until paid in full at annual
rate of one percent (1.0%) plus the prime rate as declared from time to time by
the Chase Manhattan Bank. For purposes hereof, "Undisputed Late Obligations"
shall mean any obligation for monies under this Agreement owing from one party
to another which remains unpaid 5 days after written notice thereof is delivered
to the other party in accordance with
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Section 13.5 below (the "Due Date"), which obligation (i) is not subject to any
bona fide dispute or (ii) has been adjudicated by an arbitration panel or court
of competent jurisdiction to be due and payable.
13.5. NOTICES. All notices or other communications required or permitted
to be given pursuant to this Agreement shall be in writing and shall be
considered as duly given on (a) the date of delivery, if delivered in person, if
sent by Federal Express or other similar overnight delivery service or
transmitted by facsimile subsequently confirmed or (b) three days after mailing,
if mailed from within the continental United Stated by registered or certified
mail, return receipt requested, to the party entitled to receive the same, at
the address provided in this Section.
Any party hereto may change its address by giving notice to the other
stating its new address, all in the manner provided herein. Such newly
designated address shall thereafter be such party's address for the purpose of
all notices or other communications required or permitted to be given pursuant
to this Agreement.
(a) If to the Company, to:
Sun Apparel, Inc.
111 West 40th Street
22nd Floor
New York, New York 10018
Attention: Eric A. Rothfeld
Fax: (212) 391-2780
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attn: Alan C. Myers, Esq.
Fax: (212) 735-2000
(b) If to Jones, to:
Jones Apparel Group, Inc.
1411 Broadway
New York, New York 10018
Attn: Herbert J. Goodfriend, Esq. and
Attn: Ira M. Dansky, Esq.
Fax: (212) 921-5370
with a copy to:
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103
Attn: Barry H. Fishkin, Esq.
Fax: (212) 262-5152
(c) If to Shareholders, as follows:
If to Rothfeld or the Rothfeld Family Trust:
Eric A. Rothfeld
791 Park Avenue
New York, New York 10021
Fax: (212) 734-3860
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<PAGE> 45
and
c/o Sun Apparel, Inc.
111 West 40th Street
22nd Floor
New York, New York 10018
Attention: Eric A. Rothfeld
Fax: (212) 391-2780
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attn: Alan C. Myers, Esq.
Fax: (212) 735-2000
If to Grossman:
Mindy Grossman
170 E. 87th Street
New York, New York 10021
Fax: (212) 935-0090
with a copy to:
Boies and Schuller
80 Business Park Drive, Suite 110
Armonk, New York 10504
Attn: Steven Neuwirth, Esq.
Fax: (914) 273-9810
If to Vestar:
Vestar/Sun Holding Company L.L.C.
245 Park Avenue
41st Floor
New York, New York 10167
Attn: Sander M. Levy
Fax: (212) 808-4922
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attn: Robert L. Friedman, Esq.
Fax: (212) 455-2502
13.6. ASSIGNMENT. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties.
13.7. PUBLICITY. Prior to the Closing Date, none of the parties hereto
shall make or issue, or cause to be made or issued, any announcement or written
statement concerning this Agreement or the transactions contemplated hereby for
dissemination to the general public without the prior consent of the other
parties (and in the case of press releases made by Jones or Newco, they shall
obtain the prior consent of each Shareholder). This provision shall not apply,
however, to any announcement or written statement required to be made by law or
the regulations of any federal or state governmental agency or the NYSE, except
that the
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<PAGE> 46
party required to make such announcement shall, to the fullest extent possible,
consult with the other parties concerning the timing and content of such
announcement and obtain such other parties' consent before such announcement is
made.
13.8. GOVERNING LAW. This Agreement and the legal relations among the
parties hereto shall be governed by and construed in accordance with the laws of
the State of New York, without regard to its conflicts of law doctrine.
13.9. COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
13.10. HEADINGS. The headings of the Sections and Articles of this
Agreement are inserted for convenience only and shall not constitute a part
hereof or affect in any way the meaning or interpretation of this Agreement.
13.11. ENTIRE AGREEMENT. This Agreement, including the Exhibits and
Schedules hereto, and all documents required to be delivered thereto and the
other documents and certificates delivered pursuant to the terms hereof, set
forth the entire agreement and understanding of the parties hereto in respect of
the subject matter contained herein, and supersede all prior negotiations,
understandings, discussions, agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto whether written or oral.
13.12. THIRD PARTIES. Except as specifically set forth or referred to
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or corporation other than the parties hereto
and their successors or assigns, any rights or remedies under or by reason of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective corporate seals to be affixed hereto, all as
of the day and year first above written.
JONES APPAREL GROUP, INC.
By:
------------------------------------
Title:
SAI ACQUISITION CORP.
By:
------------------------------------
Title:
SUN APPAREL, INC.
By:
------------------------------------
Title:
--------------------------------------
ERIC A. ROTHFELD
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<PAGE> 47
ROTHFELD FAMILY TRUST
--------------------------------------
By:
--------------------------------------, Trustee
--------------------------------------
MINDY GROSSMAN
(as Prospective Shareholder pursuant
to section 7.12)
VESTAR/SUN HOLDING COMPANY
L.L.C.
By:
------------------------------------
Title:
--------------------------------------
46
<PAGE> 1
EXHIBIT 4.1
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (the "Agreement") made as of this 10th day of
September, 1998 by and among JONES APPAREL GROUP, INC., a Pennsylvania
corporation (the "Company"), and the Shareholders (defined below).
RECITALS
WHEREAS, concurrently with the execution of this Agreement, the Company,
SAI Acquisition Corp., a Delaware corporation, Sun Apparel, Inc., a Texas
corporation ("Sun") and the shareholders of Sun (the "Shareholders") entered
into an Agreement and Plan of Merger (the "Merger Agreement");
WHEREAS, pursuant to the Merger Agreement, the Shareholders will receive on
the Closing Date (as defined in the Merger Agreement) shares of the Company's
Common Stock, par value $.01 per share (the "Common Stock"), constituting the
Stock Merger Consideration (as defined in the Merger Agreement) (the "Closing
Shares" or, collectively with the Contingent Shares (defined below), the
"Shares");
WHEREAS, pursuant to the Merger Agreement, the Shareholders will receive
additional shares of the Common Stock upon the occurrence of the events
specified in the Merger Agreement (the "Contingent Shares" or, collectively with
the Closing Shares, the "Shares");
WHEREAS, the Company and the Shareholders desire to execute and deliver
this Agreement in order to provide the Shareholders with certain registration
rights with respect to the Shares;
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. As used herein, the following terms shall have
the following respective meanings:
"Closing Date" shall have the same meaning herein as in the Merger
Agreement.
"Commission" shall mean the Securities and Exchange Commission or any
other Federal agency at the time administering the Securities Act.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any successor Federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall from time to time be in
effect.
"Holder" shall mean any holder of the Registrable Securities.
The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
"Registrable Securities" shall mean the Shares and any shares of the
Common Stock or other securities issued in respect of the Shares upon any
stock split, stock dividend, merger, consolidation, recapitalization or
similar event. Such securities shall cease to be Registrable Securities
when (i) a registration statement registering such securities shall have
become effective under the Securities Act and such securities have been
sold pursuant thereto, (ii) such securities shall have been sold under Rule
144 (or successor provision) under the Securities Act, (iii) such
securities shall have been otherwise transferred and new certificates for
them not bearing a legend restricting further transfer shall have been
delivered by the Company or (iv) such securities shall have ceased to be
outstanding.
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<PAGE> 2
"Registration Expenses" shall mean all reasonable fees and expenses
incurred by the Company in compliance with Section 3 hereof, including,
without limitation, all registration and NASD fees, filing fees, printing
expenses, reasonable fees and disbursements of counsel for the Company,
blue sky fees and expenses, and the expense of any special audits or "cold
comfort" letters incident to or required by any such registration (but
excluding the compensation of regular employees of the Company, which shall
be paid in any event by the Company).
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any successor Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall from time to time be in
effect.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities, all fees and
disbursements of counsel for any Holder and all "road show" and other
marketing expenses incurred by the Company or any underwriters which are
not otherwise paid for by the underwriters.
2. RESTRICTIVE LEGEND. Each certificate representing the Shares held by
the Shareholders and any other securities issued in respect of the foregoing
securities upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event shall (unless otherwise permitted or unless the
securities evidenced by such certificate shall have been registered under the
Securities Act) be stamped or otherwise imprinted with a legend in the following
form (in addition to any legend required under applicable state securities
laws):
The securities represented by this Certificate have not been registered
under the Securities Act of 1933, as amended, nor the laws of any state.
Accordingly, these securities may not be offered, sold, transferred,
pledged or hypothecated in the absence of registration, or the
availability, in the opinion of counsel for the issuer, of an exemption
from registration under the Securities Act of 1933, as amended, or the
laws of any state. Therefore, the stock transfer agent will effect
transfer of this Certificate only in accordance with the above
instructions.
Upon request of a holder of such a certificate, the Company shall remove
the foregoing legend from the certificate or issue to such holder a new
certificate therefor free of any transfer legend if, with such request, the
Company shall have received an opinion of counsel reasonably satisfactory to the
Company to the effect that the securities represented by such certificate have
been registered under the Securities Act or may be sold publicly without
registration under the Securities Act.
3. REGISTRATION RIGHTS.
3.1 (a) Shelf Registration. Within thirty (30) days from the Closing
Date, the Company shall file a registration statement on Form S-3 or any
successor thereto (or other form of registration statement if Form S-3 is not
available) for public sale of all of the Registrable Securities (the "Shelf
Registration Statement"), and thereafter shall use its reasonable best efforts
to have the Shelf Registration Statement declared effective by the Commission
From time to time thereafter, but not later than thirty (30) days after each
issuance of Contingent Shares, if any, the Company shall amend the Shelf
Registration Statement (or file a new Shelf Registration Statement, if required,
in which case all references herein to the Shelf Registration Statement shall
include such new Shelf Registration Statement) to include such Contingent
Shares. The Company shall use its reasonable best efforts to keep the Shelf
Registration Statement continuously effective (subject to Section 4 below) for a
period of five (5) years or until the selling Holders shall have completed the
distribution of all Registrable Securities as described in the Shelf
Registration Statement, whichever occurs first.
(B) UNDERWRITING.
(i) Each of (A) Eric A. Rothfeld and the Rothfeld Family Trust, who
for purposes of this Section 3.1 (b) shall be deemed to be a single
"Selling Shareholder" and (B) Vestar/Sun Holding Company, L.L.C. (also a
"Selling Shareholder"), on not more than one occasion during the five year
period described in the foregoing paragraph, shall have the right to
distribute all or any portion of the Registrable Securities owned by it
which are covered by the Shelf Registration Statement by means of an
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<PAGE> 3
underwritten offering. Any Selling Shareholder who desires to sell its
Registrable Securities by means of an underwritten offering shall so advise
the Company and each other Holder by written notice, and the Company shall
select an underwriter or representative of underwriters reasonably
acceptable to the Selling Shareholder; provided, however, that the
Registrable Securities requested to be underwritten, including any
Registrable Securities included in such underwritten offering pursuant to
the next sentence, shall have a gross market value (as of the time of the
request for underwriting) of not less than $25,000,000. The Company and the
Selling Shareholder shall, upon the written request of any other Holder
delivered to the Company and the Selling Shareholder within 10 business
days after receipt of such notice (which request shall specify the
Registrable Securities intended to be disposed of by such Holder and the
intended method of disposition thereof), use its reasonable best efforts to
include in the underwritten offering all Registrable Securities which such
other Holder has requested to be included.
(ii) If a Selling Shareholder proposes to sell Registrable Securities
in an underwritten offering pursuant to this Section 3.1(b), and the
underwriter of such offering shall inform the Company that the inclusion of
all or a specified number of such Registrable Securities requested to be
included (including, if applicable, the Registrable Securities of the other
Holders) would interfere with the successful marketing or pricing of such
Registrable Securities, then the Company shall first reduce the number of
the other Holder's Registrable Securities requested to be included in the
offering to the extent necessary to eliminate such effect and, if a
limitation is still required, the Company will reduce the number of the
Selling Shareholder's Registrable Securities requested to be included to
the extent necessary to eliminate such effect. In the event that the number
of shares of Registrable Securities of the Selling Shareholder included in
such underwritten offering is reduced below 75% of the Registrable
Securities requested by such Selling Shareholder to be included in such
offering, then such offering shall not be deemed to have satisfied the
requirement for the one underwritten offering to which each Selling
Shareholder is entitled under this Section 3.1(b).
(iii) The Company shall file such amendments and supplements to the
Shelf Registration Statement as it deems necessary and use its reasonable
best efforts to cause such underwritten offering to comply with all
applicable rules and regulations of the Commission. In addition, the
Company shall assist the Holders in marketing the Registrable Securities to
be sold pursuant to such underwritten offering, including by participating
in "road shows" and similar marketing efforts as reasonably requested by
the Holders or the underwriters, subject in all events to the reasonable
availability of the Company's officers and personnel. No Holder may
participate in any underwritten registration hereunder unless such Holder
(A) agrees to sell such Holder's Registrable Securities on the basis
provided in customary underwriting arrangements entered into in connection
therewith and (B) completes and executes a customary underwriting agreement
and all reasonable questionnaires, powers of attorney, and other documents
required under the terms of such underwriting arrangements.
3.2 EXPENSES OF REGISTRATION. The Company shall bear all Registration
Expenses and the selling Holders shall bear all Selling Expenses (in proportion,
as nearly as practicable, to the securities of each Holder being registered)
incurred in connection with any registration, qualification or compliance
pursuant to the provisions of Section 3.
3.3 REGISTRATION PROCEDURES. In the case of a registration statement to
be effected by the Company pursuant to this Agreement, the Company will:
(i) Furnish each Shareholder, as updated from time to time, prior to
the filing thereof with the Commission, a copy of any Shelf Registration
Statement (including any preliminary prospectus contained therein), and
each amendment thereto and each amendment or supplement, if any, to the
prospectus included therein and shall reflect in each such document, when
so filed with the Commission, such comments pertaining to each Shareholder
as such Shareholder reasonably may propose;
(ii) Prepare and file with the Commission such amendments and
supplements (including post-effective amendments and supplements) to such
registration statement and the prospectus used in connection therewith as
may be necessary to comply with the provisions of the Securities Act with
respect to the disposition of securities covered by such registration
statement;
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<PAGE> 4
(iii) Furnish such number of copies of the prospectus and other
documents incident thereto, including any amendment of or supplement
thereto, as a selling Holder from time to time may reasonably request;
(iv) Notify each selling Holder, at its last known address as set
forth in the Company's books and records, of Registrable Securities covered
by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing, and at the
request of any such selling Holder, prepare and furnish to such selling
Holder as promptly as practicable a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchaser of such shares, such
prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading or incomplete in the light of the
circumstances then existing;
(v) Cause all such Registrable Securities to be listed on each, if
any, securities exchange on which similar securities issued by the Company
are then listed and use its reasonable efforts to register or qualify such
Registrable Securities under all applicable state securities or blue sky
laws; provided, however, that the Company shall not be required for any
such purpose to (A) qualify generally to do business as a foreign company,
entity or a broker-dealer in any jurisdiction wherein it would not
otherwise be required to qualify but for the requirements of this
Agreement, (B) subject itself to taxation in any such jurisdiction or (C)
consent to general service of process in any such jurisdiction;
(vi) Provide a transfer agent and registrar for all Registrable
Securities and a CUSIP number for all such Registrable Securities, in each
case not later than the effective date of such registration;
(vii) Upon appropriate prior written notice by a selling Holder of
Registrable Securities, make reasonably available for inspection by such
selling Holder, any underwriter participating in any disposition pursuant
to such registration statement, and any attorney or accountant retained by
any such selling Holder or underwriter, reasonable financial and other
records, pertinent corporate documents and properties of the Company, and
use its reasonable efforts to cause the Company's officers and directors to
supply all information reasonably requested by any such selling Holder,
underwriter, attorney or accountant in connection with such registration
statement; provided, however, that such selling Holder, underwriter,
attorney or accountant shall agree to hold in the strictest confidence and
trust all information so provided except as required by law;
(viii) To the extent applicable, furnish to each selling Holder a
signed counterpart, addressed to the selling Holder, of an opinion of
counsel for the Company, dated the effective date of such registration
statement, and "comfort" letters signed by the Company's independent public
accountants who have examined and reported on the Company's financial
statements included in such registration statement, to the extent permitted
by the standards of the AICPA or other relevant authorities, covering
substantially the same matters with respect to such registration statement
(and the prospectus included therein) and (in the case of the accountants'
"comfort" letters) with respect to events subsequent to the date of the
financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' "comfort" letters delivered to the underwriters
in underwritten public offerings of securities;
(ix) Furnish to each selling Holder a copy of all material documents
filed with and all material correspondence from or to the Commission in
connection with any such offering;
(x) Otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission; and
(xi) In connection with any underwritten offering pursuant to such
registration statement, the Company will enter into any underwriting
agreement reasonably necessary to effect the offer and sale of Common
Stock, provided such underwriting agreement contains customary underwriting
provisions and
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<PAGE> 5
provided further that if the underwriter so requests the underwriting
agreement will contain customary indemnification and contribution
provisions.
4. RESTRICTIONS ON HOLDERS. Notwithstanding Section 3:
(a) Company Offerings. If the Company shall register its securities under
the Securities Act for sale to the public in an underwritten offering and the
underwriter of such offering shall inform the Company that the availability of
the Holders' registered Registrable Securities for public sale pursuant to the
Shelf Registration Statement would adversely interfere with the successful
marketing or pricing of the securities proposed to be registered by the Company,
then
(i) the Company shall promptly give to each Holder written notice of
the Company's intended offering (which notice shall include a list of the
jurisdictions in which the Company intends to attempt to qualify such
securities under the applicable blue sky or other state securities laws);
(ii) the Holders shall not sell, transfer or otherwise dispose of
their Registrable Securities without the prior written consent of the
Company for a period designated by the Company, which period shall not
begin more than fifteen (15) days prior to and not last more than 90 days
after the effective date of the registration statement relating to the
Company's securities, and
(iii) the Company shall include in such registration (and any related
qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Registrable Securities specified in
a written request or requests made by any Holder within ten (10) days after
receipt of the written notice from the Company described above, subject to
the following:
(A) all Holders proposing to distribute their securities through
such offering by the Company shall (together with the Company
distributing its securities for its own account through such offering)
enter into an underwriting agreement in customary form, with the
underwriter or representative of the underwriters selected by the
Company; and
(B) notwithstanding any of the foregoing, if the underwriter or the
representative of the underwriters informs the Company that inclusion of
all or part of the Registrable Securities requested to be registered in
the underwriting would adversely interfere with the successful marketing
or pricing of the securities proposed to be registered by the Company,
the underwriter or representative may limit or altogether exclude the
number of Registrable Securities to be included in the registration and
underwriting. If only a limitation is required, the Registrable
Securities permitted to be included shall be allocated among the Holders
in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities which the Holders had requested to be included in
such registration.
(b) Amendments or Supplements; Filing Delay. If, after the Shelf
Registration Statement (or any other registration statement effected pursuant to
this Agreement) becomes effective, the Company advises the Holders in writing
that the Company considers it necessary or appropriate for such registration
statement to be amended or supplemented in order for sales thereunder to be made
in compliance with the Commission's applicable rules and regulations, the
Holders shall suspend any further sale, transfer or other disposition of their
Registrable Securities until the Company advises them that such registration
statement has been amended or supplemented and declared effective. The Company
may delay filing any amendment or supplement to the registration statement, and
may cause its effectiveness to be delayed, if the Company advises the Holders in
its written notice that the Company has determined in good faith that the filing
of such amendment or supplement (or the declaration of its effectiveness) will
(i) interfere with or adversely affect the negotiation or completion of any
transaction that is being contemplated by the Company (whether or not a final
decision has been made to undertake such a transaction) at the time the right to
delay is exercised, or (ii) involve initial or continuing disclosure obligations
not in the best interest of the Company and the Company's stockholders;
provided, however, that (i) the Company shall not exercise its right to delay on
more than two (2) occasions during any calendar year, (ii) the period of any
such delay shall not exceed 120 days from the date of the Company's written
notice to the Holders, and (iii) with respect to each such delay, the Company
shall use its reasonable best efforts to minimize the period of such delay to
the fullest extent practicable.
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<PAGE> 6
5. LOCK-UP. Shareholders acknowledge and agree that notwithstanding the
registration rights granted to the Holders in Section 3, and notwithstanding
that some or all the Shares may from time to time be registered pursuant
thereto:
(i) none of the Shares may be sold, assigned or transferred except in
compliance with the restriction on sale ("lock-up") provisions and schedule
set forth in Section 4.7(a), (b) and (c) of the Merger Agreement; and
(ii) the certificates representing the Shares shall bear appropriate
restrictive legends making reference to such "lock-up" provisions.
6. INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its officers, directors
and partners, and each person controlling such Holder, with respect to which
registration, qualification or compliance has been effected pursuant to Section
3, and each underwriter, if any, and each person who controls any underwriter,
against all claims, losses, damages and liabilities (or actions, proceedings or
settlements in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any prospectus,
offering circular or other document (including any related registration
statement, notification or the like) incident to any such registration,
qualification or compliance, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Company of the
Securities Act or any rule or regulation thereunder applicable to the Company
and relating to action or inaction required of the Company in connection with
any such registration, qualification or compliance, and will reimburse each such
Holder, each of its officers, directors and partners, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses as they are reasonably
incurred in connection with investigating and defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on written information furnished to (or material
information withheld from) the Company by such Holder or underwriter
specifically for inclusion therein or any grossly negligent or fraudulent action
or inaction of such Holder or underwriter.
(b) Each Holder will indemnify the Company, each of its directors and
officers and each underwriter, if any, of the Company's securities covered by
any registration statement filed pursuant to this Agreement, each person who
controls the Company or such underwriter within the meaning of the Securities
Act, each other Holder and each of their officers, directors and partners, and
each person controlling such other Holder, against all claims, losses, damages
and liabilities (or actions, proceedings or settlements in respect thereof)
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any prospectus, offering circular or other document
(including any related registration statement, notification or the like)
incident to any such registration, qualification or compliance, or any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by the Company of the Securities Act or any rule or regulation
thereunder applicable to the Company and relating to action or inaction required
of the Company in connection with any such registration, qualification or
compliance, and will reimburse the Company and such Holders, directors,
officers, partners, persons, underwriters or control persons for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent that such untrue statement (or alleged untrue statement), omission (or
alleged omission) or violation arises out of or is based upon written
information furnished to (or material information withheld from) the Company by
such Holder specifically for inclusion therein or any grossly negligent or
fraudulent action or inaction of such Holder.
(c) Each party entitled to indemnification under this Section 6 (the
"Indemnified Party") shall give notice in writing to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation
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resulting therefrom, shall be approved by the Indemnified Party (whose approval
shall not unreasonably be withheld), and the Indemnified Party may participate
in such defense at such party's expense, and provided further that the failure
of any Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 6. Notwithstanding the
foregoing, if the defendants in any such claim or litigation include both the
Indemnifying Party and the Indemnified Party, and counsel for the Indemnified
Party shall have reasonably concluded that in such counsel's opinion, there is a
conflict of interest involved in the representation by counsel for the
Indemnifying Party of both the Indemnified Party and the Indemnifying Party, the
Indemnified Party shall have the right to select separate counsel, reasonably
satisfactory to the Indemnifying Party, at the Indemnifying Party's expense, and
to participate in the defense of such claim or litigation on behalf of such
Indemnified Party (it being understood, however, that Indemnifying Party shall
not be obligated to pay the fees and the expenses of more than one counsel (plus
local counsel if reasonably necessary) for all parties who may be indemnified by
such Indemnifying Party with respect to such claim or litigation, unless in the
reasonable judgment of any Indemnified Party a conflict of interest exists
between such Indemnified Party and any other Indemnified Party with respect to
such matter). No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. An Indemnifying Party who elects not to, or who has not appointed
counsel reasonably satisfactory to the Indemnified Party within a reasonable
time to assume the defense of an action shall be obligated to pay the fees and
expenses of counsel for the Indemnified Party; provided that the Indemnifying
Party shall not be obligated to pay the fees and the expenses of more than one
counsel (plus local counsel if reasonably necessary) for all parties who may be
indemnified by such Indemnifying Party with respect to such claim or litigation,
except in the circumstances set forth in the second preceding sentence. If the
Indemnifying Party does not assume the defense of any claim or litigation, it
shall be bound by any settlement to which the Indemnified Party agrees,
irrespective of whether the Indemnifying Party consents thereto. Each
Indemnified Party shall furnish such information regarding itself or the claim
in question as an Indemnifying Party may reasonably request in writing and as
shall be reasonably required in connection with the defense of such claim and
litigation resulting therefrom.
(d) If the indemnification provided for in this Section 6 is unavailable to
an Indemnified Party in respect of any losses, claims, damages or liabilities
referred to therein, then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities in
such proportion as is appropriate to reflect the relative fault of the Company
on the one hand and the Shareholders offering securities in the offering (the
"Selling Shareholders") on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative fault of the
Company on the one hand and the Selling Shareholders on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or by the Selling
Shareholders and the parties' relevant intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Selling Shareholders agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were based solely upon the number of
entities from whom contribution was requested or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 6(d). The amount paid or payable by an Indemnified
Party as a result of the losses, claims, damages and liabilities referred to
above in this Section 6(d) shall be deemed to include any legal or other
expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending any such action or claim, subject to the provisions
of Section 6(d) hereof. No person guilty of fraudulent misrepresentation (within
the meaning of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
(e) Other Indemnification. Indemnification similar to that specified in
the preceding subdivisions of this Section 6 (with appropriate modifications)
shall be given by the Company and each seller of Registrable
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Securities with respect to any required registration or other qualification of
securities under any Federal or state law or regulation of any governmental
authority, other than the Securities Act.
(f) Indemnification Payments. The indemnification required by this Section
6 shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred.
7. INFORMATION BY HOLDER. Each Holder of Registrable Securities shall
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in
writing and as shall be reasonably required in connection with any registration,
qualification or compliance referred to in this Agreement.
8. RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may permit the sale of the
Registrable Securities to the public without registration, the Company agrees to
use its reasonable efforts to (i) make available and keep public information as
those terms are understood and defined in Rule 144 under the Securities Act and
(ii) file with the Commission in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act.
9. TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register securities granted to the Holders by the Company under
Section 3 may be transferred or assigned only (i) in the case of Eric A.
Rothfeld and the Rothfeld Family Trust, to their affiliates or to any member of
Eric A. Rothfeld's family or to any trust or other entity for the benefit of any
member of Eric A. Rothfeld's family for estate planning purposes, (ii) in the
case of Vestar/Sun Holding Company, L.L.C., to its affiliates or limited
partners, (iii) in connection with the death or disability or liquidation or
dissolution of a Holder, or (iv) as part of a bona fide gift or if at least 75%
of the Shares originally held by a Holder are transferred, sold or otherwise
disposed of to a third party (except that, in the case of such transfer, sale or
other disposition, the rights set forth in Section 3 may be assigned on one (1)
occasion only, subject in any event to the conditions set forth in Section 5
above), provided that the Company is given written notice at the time of or
within a reasonable time after said transfer or assignment, stating the name and
address of said transferee or assignee and identifying the Registrable
Securities with respect to which such registration rights are being transferred
or assigned, and provided further that the transferee or assignee of such rights
assumes the obligations of the transferring Holder under this Agreement.
10. ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement and the Merger
Agreement constitute the entire agreement between the parties hereto with
respect to the subject matter hereof. No amendment, alteration or modification
of this Agreement shall be valid unless in each instance such amendment,
alteration or modification is expressed in a written instrument executed by the
Company and the Holders of at least 50% of the outstanding Registrable
Securities (the "Majority Holders"); provided, however, that any amendment that
would adversely affects the Holders other than the Majority Holders shall
require the consent in writing by each other Holder. No waiver of any provision
of this Agreement shall be valid unless it is expressed in a written instrument
duly executed by the party or parties making such waiver. The failure of any
party to insist, in any one or more instances, on performance of any of the
terms and conditions of this Agreement shall not be construed as a waiver or
relinquishment of any rights granted hereunder or of the future performance of
any such term, covenant or condition but the obligation of any party with
respect thereto shall continue in full force and effect.
11. SPECIFIC PERFORMANCE. The parties hereby declare that it is
impossible to measure in money the damages which will accrue to a party hereto
by reason of a failure to perform any of the obligations under this Agreement.
Therefore, all parties hereto shall have the right to specific performance of
the obligations of the other parties under this Agreement, and if any party
hereto shall institute an action or proceeding to enforce the provisions hereof,
any person (including the Company) against whom such action or proceeding is
brought hereby waives the claim or defense therein that such party has an
adequate remedy at law, and such person shall not urge in any such action or
proceeding the claim or defense that such remedy at law exists.
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12. NOTICES. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by first-class mail, postage
prepaid, return receipt requested, or transmitted by facsimile or delivered
either by hand, by messenger or by nationally recognized overnight courier,
addressed:
(a) if to the holders of the Registrable Securities, at the addresses
set forth on Schedules I hereto or at such other address as they shall have
furnished to the Company in writing, with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attention: Alan C. Myers, Esq.
Fax: (212) 735-2000
and:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Robert L. Friedman, Esq.
Fax: (212) 455-2502
and:
Boies & Schuller
80 Business Park Drive
Armonk, New York 10504
Attention: Steven Neuwirth, Esq.
Fax: (914) 273-9810
and
(b) if to the Company, to the following address, or at such other
address as the Company shall have furnished to the holders of the
Registrable Securities and each such other holder in writing,
Jones Apparel Group, Inc.
1411 Broadway
New York, New York 10018
Attention: Ira M. Dansky, Esq.
Fax: (212) 921-5370
with a copy to:
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103-0084
Attention: Barry H. Fishkin, Esq.
Fax: (212) 262-5152
Alternatively, to such other address as a party hereto supplies to each other
party in writing.
13. SUCCESSORS AND ASSIGNS. Subject to Section 9, all the terms and
provisions of this Agreement shall be binding upon and inure to the benefit of
and be enforceable by the respective transferees, successors and assigns of the
parties hereto, whether so expressed or not.
14. GOVERNING LAW. This Agreement is to be governed by and interpreted
under the laws of the State of New York without giving effect to the principles
of conflicts of laws thereof.
15. TITLES AND SUBTITLES. The titles of the sections of this Agreement
are for the convenience of reference only and are not to be considered in
construing this Agreement.
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16. SEVERABILITY. The invalidity or unenforceability of any provisions of
this Agreement shall not be deemed to affect the validity or enforceability of
any other provision of this Agreement.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
JONES APPAREL GROUP, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
--------------------------------------
ERIC A. ROTHFELD
ROTHFELD FAMILY TRUST
--------------------------------------
--------------------------------------
MINDY GROSSMAN
VESTAR/SUN HOLDING COMPANY, L.L.C.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
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SCHEDULE I
SHAREHOLDERS
Mr. Eric A. Rothfeld
791 Park Avenue
New York, New York 10021
Fax: (212) 734-3880
Rothfeld Family Trust
791 Park Avenue
New York, New York 10021
Fax: (212) 734-3880
Ms. Mindy Grossman
170 E. 87th Street
New York, New York 10021
Fax: (212) 935-0090
Vestar/Sun Holding Company, L.L.C.
245 Park Avenue, 41st Floor
New York, New York 10167
Fax: (212) 808-4922
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
AGREEMENT made and entered into as of this 10th day of September, 1998 by
and between Eric A. Rothfeld (the "Executive") and SAI Acquisition Corp., a
Delaware corporation (the "Company").
WHEREAS, simultaneously with the execution of this Agreement, Sun Apparel,
Inc., a Texas corporation (the "Predecessor"), the stockholders of the
Predecessor, the Company and Jones Apparel Group, Inc., a Pennsylvania
corporation ("Jones"), are executing and delivering an Agreement and Plan of
Merger (the "Merger Agreement");
WHEREAS, pursuant to the Merger Agreement, the Predecessor will be merged
with and into the Company, with the Company continuing as the surviving
corporation under the name "Sun Apparel, Inc.," and the Company will become a
wholly-owned subsidiary of Jones;
WHEREAS, the Board of Directors of the Company (the "Board") desires to
employ the Executive and the Executive desires to furnish services to the
Company upon consummation of the transactions contemplated by the Merger
Agreement on the terms and conditions hereinafter set forth; and
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
set forth below, the parties hereby agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the Executive, and the
Executive hereby accepts such employment, on the terms and conditions
hereinafter set forth.
2. EMPLOYMENT PERIOD. The period of employment of the Executive by the
Company hereunder (the "Employment Period") shall commence as of the Closing
Date, as such term is defined in the Merger Agreement (the "Effective Date"),
and shall end on December 31, 2001 (such period being referred to herein as the
"Term") or the Date of Termination (as defined in Section 6 below), if earlier.
In the event that the Closing (as defined in the Merger Agreement), does not
occur on or before December 31, 1998 or if the Merger Agreement is terminated
prior thereto as provided therein, then this Agreement shall be deemed to be
null and void ab initio without liability to any party.
3. POSITION AND DUTIES.
(a) Title and Authority. During the Employment Period the Executive shall
serve as President and Chief Executive Officer of the Company and shall report
directly to the Board. During the Employment Period, (i) subject to the
supervisory powers of the Board, the Executive shall have those powers and
duties consistent with his position as President and Chief Executive Officer as
may be prescribed by the Board, and (ii) the Executive shall have the authority
to oversee the day-to-day operations of the business of the Company as provided
in, and subject to the limitations set forth in, Section 7.10 of the Merger
Agreement. Notwithstanding the foregoing, the Executive shall be required to
obtain the approval of the Board prior to making any Major Decision. For
purposes hereof, the term "Major Decision" shall mean the following:
(i) Budget. Any variation of more than 10% from any of the line items
identified on Attachment A annexed hereto of the budget approved by the
Board or any material variation from the business plan approved by the
Board, except where such variation is caused by a Force Majeure Event (as
defined in the Merger Agreement). The foregoing notwithstanding, a
variation of more than 10% in (i) "Gross Sales" shall not be deemed a
"Major Decision" unless the Company shall have made changes in the strategy
upon which the budget was based (e.g., pricing, product mix, customer
allocation), and (ii) any other line item identified on such Attachment A
shall not be deemed a "Major Decision" if such variation is a consequence
of a variation in Gross Sales over which the Executive did not have
material influence.
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(ii) Compensation. The payment of any bonus, severance payment or
expenses related to geographic relocation and living expenses related to
such relocation, or any increase in the rate of salary other than expenses,
payments or increases consistent with past practice.
(iii) Employees. The hiring of any employee, consultant or
independent contractor for compensation, on an annualized basis, exceeding
$250,000.00 per annum (provided, however, that the Board shall not, solely
on the basis of the amount of compensation, disapprove of an employee,
consultant or independent contractor who is proposed to be hired as a
replacement for a terminated or departed employee, consultant or
independent contractor at a comparable compensation level); or entering
into or becoming bound by any employment or consulting contract or legally
binding understanding or arrangement regarding such employment.
(iv) Employee Benefit Plans. The establishment, modification or
termination of any employee benefit plan or other fringe benefit.
(v) Liabilities. The incurrence or assumption of any liability for
money borrowed including, without limitation, notes, debentures, loans,
letters of credits (not including those letters of credit described in
Section 2.14(d)(v) of the Merger Agreement), financing or credit
agreements, agreements or commitments for future loans, credit or financing
or any other instrument or contract for money borrowed, and the guarantee
of any obligation of any person, firm or corporation, other than
obligations to suppliers in the ordinary course of business and consistent
with the budget of the Company.
(vi) Assets. The purchase or other acquisition, or the sale, lease,
exchange or other disposition, of assets other than in the ordinary course
of business not inconsistent with (i) the budget or business plan approved
by the Board or (ii) the 1998-2001 capital expenditure plan set forth in
Section 2.14(d) of the Disclosure Schedule to the Merger Agreement, as
adjusted in Section 2.14(d) of the Merger Agreement (it being understood
that expenditures shall not be deemed to be inconsistent with such capital
expenditure plan so long as the amount spent on any particular item is
within 10% of the amount allocated to such item in the plan and the
aggregate amount of expenditures on all items during such year is within
the aggregate amount provided for under the capital expenditure plan).
(vii) Loans. The lending or advancing of credit to any person, firm
or corporation, except the extension of credit to customers and advances to
employees, both in the ordinary course of business.
(viii) Settlement of Claims. The waiver, release, settlement or
compromise of any material claims or rights of the Company or which involve
a legal proceeding or governmental investigation, except claims of (i)
customers in the ordinary course of business consistent with policies
established by Jones for its operating divisions and subsidiaries (and
communicated in writing to the Executive prior to the date first set forth
above) or (ii) suppliers in the ordinary course of business.
(ix) Jones Policies. Any material variance from policies generally
established, from time to time, by Jones for its operating divisions and
subsidiaries and communicated in writing (the "Jones Policies"), it being
agreed that the Company shall (A) establish and implement such policies in
good faith, (B) to the extent practicable, use its reasonable best efforts
to communicate any proposed policies to the Executive reasonably in advance
of implementing them, and afford the Executive an opportunity to review and
comment upon such proposed policies and (C) not establish or implement
policies whose purpose or intended effect is to adversely affect the EBIT
of the Company.
(b) Full Working Time. During the Employment Period, the Executive shall
devote substantially all his full working time, attention and energies,
consistent with past practice, to the performance of his duties for the Company.
(c) Permitted Activities. Anything herein to the contrary notwithstanding,
subject to Section 9 hereof, nothing shall preclude the Executive from (i)
serving on the boards of directors of a reasonable number of other corporations
or the boards of a reasonable number of trade associations or charitable
organizations, (ii) engaging in charitable activities and community affairs, and
(iii) managing his personal investments and
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affairs, provided that the activities described in (i), (ii) and (iii) above do
not interfere with the proper performance of his duties and responsibilities
hereunder.
4. PLACE OF PERFORMANCE. The principal place of employment of the
Executive shall be consistent with the Executive's past practice or such other
location as may be agreed to by the Board and the Executive.
5. COMPENSATION AND RELATED MATTERS.
(a) Base Salary. As compensation for the performance by the Executive of
his duties hereunder, during the Employment Period the Company shall pay the
Executive a base salary at an annual rate of $850,000 (the "Base Salary"). The
Base Salary shall be payable in accordance with the Company's normal payroll
practices.
(b) Incentive Compensation.
(i) Commencing with respect to the last quarter in the Company's 1998
fiscal year and for each fiscal quarter thereafter during the Employment
Period, the Executive shall be eligible to receive a quarterly bonus (the
"Quarterly Bonus") of $162,500 (pro rated from the date of the Closing
until December 31, 1998, in the case of the Quarterly Bonus payable in
respect of the fourth quarter of 1998) if the Company's net sales in that
fiscal quarter exceeds its net sales in the corresponding quarter in 1997
(each, a "Quarterly Target"). Each Quarterly Bonus will be payable no later
than 5 days after the end of the applicable quarter. Notwithstanding the
foregoing, the Executive shall be entitled to a Quarterly Bonus in respect
of any quarter in which the Company fails to achieve the Quarterly Target
(a "Missed Quarter") if the Company's net sales for the fiscal year during
which the Missed Quarter occurs exceeds the Company's net sales for 1997.
Any Quarterly Bonus payable pursuant to the immediately preceding sentence
will be payable no later than ten (10) days after the end of the applicable
fiscal year. For purposes of calculating the Quarterly Bonus, the third
quarter of the Company's 1997 fiscal year shall be deemed to be the period
beginning July 1 and ending on September 26, and the fourth quarter of the
Company's 1997 fiscal year shall be deemed to be the period beginning
September 27 and ending on December 31.
(ii) Commencing with respect to the Company's 1998 fiscal year, the
Executive shall be eligible to receive annual bonuses payable upon the
Company's achievement of the applicable "EBIT" of the "Sun Division" (as
such terms are defined in the Merger Agreement) targets during the
Employment Period (each, an "Annual Bonus" and collectively, with the
Quarterly Bonus, the "Bonus" or "Bonuses" as the case may be), in
accordance with Attachment B hereto. Each Annual Bonus will be payable no
later than 30 days immediately following the completion of the audited
financial statements of Jones for the applicable year. It is understood and
agreed that the EBIT of the Sun Division for 1998 shall include the
Predecessor's 1998 results of operations through the Closing Date.
(c) Expenses. During the Employment Period, the Company shall reimburse
the Executive for all reasonable and appropriate business expenses, upon
presentation of appropriate documentation to the Company.
(d) Vacation. During the Employment Period, the Executive shall be
entitled to such vacation as he deems reasonable on a basis consistent with his
past practice, provided that vacation time taken by the Executive does not
interfere with the proper performance of his duties and responsibilities
hereunder.
(e) Services Furnished. During the Employment Period, the Company shall
furnish the Executive with appropriate office space and such other facilities
and services as shall be suitable to the Executive's position and adequate for
the performance of his duties as set forth in Section 3 hereof.
(f) Other Benefits. During the Employment Period, the Executive shall be
eligible to participate in all tax-qualified defined contribution and defined
benefit retirement plans, and supplemental plans relating thereto, and welfare
plans and programs (including group life insurance, medical and dental
insurance, and accident and disability insurance) which are generally made
available to senior executives of the Company, as
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well as any benefits that are made generally available to senior executives of
the Company and Jones during the Employment Period.
(g) Perquisites. During the Employment Period, the Company shall make
available to the Executive all perquisites that are made available to senior
executives of the Company, as well as any perquisites that are made generally
available to senior executives of the Company and Jones during the Employment
Period. Without limiting the above, the Company shall provide the Executive with
a Company car and reimbursement of related expenses on a basis consistent with
past practice.
6. TERMINATION. The Executive's employment hereunder may be terminated as
follows:
(a) Death. The Executive's employment shall terminate upon his death, and
the last day of the month of his death shall be the Date of Termination.
(b) Cause. The Company may terminate the Executive's employment hereunder
for Cause. For purposes of this Agreement, the Company shall have "Cause" to
terminate the Executive's employment hereunder:
(i) upon the Executive's conviction for the commission of a felony; or
(ii) if, in carrying out his duties hereunder, the Executive engages
in conduct that constitutes willful misconduct or gross negligence, which
conduct, if curable, is not cured within 30 days after the written Notice
of Termination described below has been delivered by the Company; or
(iii) if the Executive breaches the covenants contained in Section 9
hereof, which breach is not cured within 30 days after the written Notice
of Termination described below has been delivered by the Company.
Cause shall not exist unless and until the Company has delivered to the
Executive a written Notice of Termination that specifically identifies the
events, actions, or non-actions, as applicable, that the Company believes
constitute Cause hereunder and, in the case of termination for Cause under
clause (ii) or (iii) above, the Executive has been provided with an opportunity
to be heard (with his counsel) within 30 days after the delivery of such notice.
The Date of Termination shall be the date specified in the Notice of
Termination; provided, however, that, in the case of a termination for Cause
under clause (ii) or (iii) above, the Date of Termination shall not be earlier
than 35 days after delivery of the Notice of Termination.
(c) Good Reason. The Executive may deliver written notice of his intention
to terminate his employment for "Good Reason" hereunder within sixty (60) days
after the Company's material breach of this Agreement, which breach, if curable,
has not been cured within 30 business days after written Notice of Termination
that specifically identifies the events, action, or non-actions, as applicable,
that the Executive believes constitute Good Reason hereunder has been given by
the Executive to the Company. In the event of a termination for Good Reason, the
Date of Termination shall be the date specified in the Notice of Termination,
which shall be no more than 35 days after the Notice of Termination.
(d) Other Terminations. If the Executive's employment is terminated
hereunder for any reason other than as set forth in Sections 6(a) through 6(c)
hereof, the date on which a Notice of Termination is given or any later date
(within 30 days) set forth in such Notice of Termination shall be the Date of
Termination.
(e) Notice of Termination. Any termination of the Executive's employment
hereunder by the Company or by the Executive (other than termination pursuant to
Section 6(a) hereof) shall be communicated by written Notice of Termination to
the other party hereto in accordance with Section 13 hereof. For purposes of
this Agreement, a "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated.
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7. COMPENSATION UPON TERMINATION.
(a) Death. If the Executive's employment hereunder is terminated as a
result of death, then:
(i) the Company shall pay the Executive's estate or designated
beneficiary, by no later than 30 days immediately following the Date of
Termination, the Executive's Base Salary and prorated Quarterly Bonus
through the Date of Termination, together with all compensation and
benefits payable to the Executive through the Date of Termination under the
terms of the Company's compensation and benefits plans, programs or
arrangements;
(ii) subject to the last paragraph of this Section 7(a), the Company
shall pay the Executive's estate or designated beneficiary, in a lump sum
payment paid by no later than 30 days immediately following the Date of
Termination, the Executive's Base Salary and Bonuses with respect to the
remainder of the Term. For the purpose of this Section 7(a), the Quarterly
Bonus shall be deemed to be $162,500, and the Annual Bonus shall be deemed
to equal the average Annual Bonus earned by the Executive in respect of the
two most recently completed fiscal years (unless the Executive's death
occurs before two fiscal years have been completed, in which case it shall
be deemed to equal the Annual Bonus (or similar annual bonus) earned by the
Executive in respect of the most recently completed fiscal year);
(iii) the Company shall pay the Executive's estate or designated
beneficiary, in a lump sum payment paid by no later than the 30 days
immediately following the Date of Termination, the Annual Bonus (calculated
in accordance with (ii) above) for the year in which the Date of
Termination occurs, prorated based upon the number of days during such year
the Executive was employed by the Company;
(iv) during the Employment Period, the Company shall maintain, at its
expense, life insurance policies on the life of the Executive sufficient to
meet its obligations under this Section 7(a) (the "Section 7(a)
Insurance"); and
(v) the Company shall have no additional obligations to the Executive
under this Agreement except to the extent otherwise provided in the
applicable plans and programs of the Company.
Notwithstanding anything to the contrary set forth in this Section 7(a),
the amounts under Section 7(a)(ii) shall be payable only if and to the extent
that (A) the Section 7(a) Insurance is in effect on the date hereof and (B) the
Executive has and shall have made no material misrepresentation in his
application for the Section 7(a) Insurance or any renewal thereof.
(b) Cause or By Executive other than for Good Reason. If the Executive's
employment hereunder is terminated by the Company for Cause or by the Executive
(other than for Good Reason), then:
(i) the Company shall pay the Executive by no later than 30 days
immediately following the Date of Termination, the Executive's Base Salary
and prorated Quarterly Bonus through the Date of Termination, together with
all compensation and benefits payable to the Executive through the Date of
Termination under the terms of the Company's compensation and benefits
plans, programs or arrangements; and
(ii) the Company shall have no additional obligations to the Executive
under this Agreement except to the extent otherwise provided in the
applicable plans and programs of the Company.
(c) Termination by Company without Cause or by the Executive for Good
Reason. If the Executive's employment hereunder is terminated by the Company
(other than for Cause) or by the Executive for Good Reason, then:
(i) the Company shall pay the Executive, by no later than the date
indicated in (ii) below, the Executive's Base Salary and prorated Quarterly
Bonus through the Date of Termination, together with all compensation and
benefits payable to the Executive through the Date of Termination under the
terms of the Company's compensation and benefits plans, programs or
arrangements;
(ii) the Company shall pay to the Executive the Executive's Base
Salary and Bonuses (calculated in the manner set forth in Section 7(a)(ii)
above) for the remainder of the Term. A lump sum payment
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of such Base Salary and Bonus with respect to each six-month period of the
remainder of the Term shall be made by no later than the first day of such
six-month period;
(iii) the Company shall pay the Executive, in a lump sum payment paid
by no later than 30 days immediately following the Date of Termination, the
Annual Bonus (calculated in accordance with Section 7(a)(ii) above) for the
year in which the Date of Termination occurs, prorated based upon the
number of days during such year the Executive was employed by the Company;
(iv) during the remainder of the Term (or, if earlier, until
equivalent benefits are made available to the Executive at no cost by a
subsequent employer), the Executive shall continue to participate in all
employee welfare benefit plans and programs in which the Executive was
entitled to participate immediately prior to the Date of Termination in
accordance with the terms of such plans and programs as in effect from time
to time; provided that the Executive's continued participation is permitted
under the general terms and provisions of such plans and programs. In the
event that the Executive's participation in any such plan or program is
barred, the Company shall provide the Executive and his dependents at the
Company's cost with benefits substantially similar to those which the
Executive and his dependents would otherwise have been entitled to receive
under such plans and programs from which their continued participation is
barred; and
(v) the Company shall have no additional obligations to the Executive
under this Agreement, except to the extent otherwise provided in the
applicable plans and programs of the Company.
(d) Time of the Essence. With respect to any payments to be made or
benefits to be provided by the Company to the Executive pursuant to this Section
7, time is of the essence.
8. MITIGATION. Except as set forth in Section 7(c)(iii), the Executive
shall not be required to mitigate amounts payable pursuant to Section 7 hereof
by seeking other employment or otherwise, nor shall there be any offset against
such payments on account of (a) any remuneration attributable to any subsequent
employment or self-employment or (b) any claims which the Company may have
against the Executive.
9. NON-COMPETE. In connection with the transfer of the Executive's
interest in the Company pursuant to the Merger Agreement, the Executive hereby
agrees as follows:
(a) Non-Competition. The Executive shall not, whether as an officer,
director, owner, employee, partner, investor, agent, shareholder,
consultant who receives remuneration of any kind, or advisor who receives
remuneration of any kind, directly or indirectly, engage in any of the
Businesses then actually conducted by the Company and its affiliates during
the Non-Compete Period. The Non-Compete Period shall mean the period
beginning the date hereof and ending two (2) years after the end of the
Term; provided, however, that in the event that (i) the Company agrees that
such termination was without Cause or for Good Reason; or (ii) an
arbitration tribunal or court of competent jurisdiction renders a final and
non-appealable decision finding that the Company terminated the
Executives's employment without Cause or that the Executive terminated his
employment for Good Reason, the Non-Compete Period shall mean the period
beginning the date hereof and ending two (2) years after the Date of
Termination.
(b) Non-Interference. For the one (1) year period following the
Non-Compete Period (the "Non-Interference Period"), the Executive shall
not, directly or indirectly, (A) solicit the employment of, interfere or
negotiate with or endeavor to entice away from the Company or its
affiliates or hire any persons who are then employees or have been
employees during the prior six months of the Company or its affiliates, or
(B) recommend or support a decision by any person, firm, corporation,
association or other entity to solicit (except by means of advertisement in
newspapers of general circulation) the employment of, interfere or
negotiate with or endeavor to entice away from the Company or its
affiliates or hire any persons who are then employees of the Company or its
affiliates.
(c) Exception. Anything herein to the contrary notwithstanding,
nothing contained in this Section 9 shall prohibit the Executive from
holding, as a passive owner, less than 5% of the outstanding shares of, or
any other equity interest in, an entity engaged in a business which is the
same as the Businesses or any segment thereof.
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(d) "Businesses". As used in this Agreement, the term "Businesses" shall
mean (I) the manufacture or finishing in the United States or Mexico of jeans,
jeanswear and casual tops and bottoms, or (II) the sale, at wholesale, in the
United States or Canada of jeans, jeanswear, casual tops and bottoms and
sportswear, or (III) the sale or blending for sale of detergents, chemicals and
enzymes of all kinds for use by the garment finishing industry in the United
States or Mexico, or (IV) any other business then actually carried on by the
Company and its affiliates.
(e) Confidentiality.
(i) Except as required by law, regulation, subpoena, or court
order, the Executive shall not disclose any confidential or proprietary
information relating to the Businesses, the Company and its affiliates
to any person, firm, corporation, association or other entity, nor shall
the Executive make use of any such confidential or proprietary
information for his own purpose, except to enforce this Agreement or the
Merger Agreement, or for the benefit of any person, firm, corporation,
association or other entity.
(ii) For purposes hereof, the term "confidential or proprietary
information" shall mean all confidential or proprietary information
which is presently known to the Executive or becomes known to the
Executive while he is employed by the Company concerning the Businesses,
the Company and its affiliates but shall not include any information
which at the time of its disclosure is in the public domain, which is
required by law to be disclosed or which is generally known to persons
within the industry in which the Company and its affiliates operate;
provided such information did not enter the public domain or become
known to persons by reason of Executive's breach of these provisions.
(f) Remedies. The Executive acknowledges and agrees that the restrictions
contained in this Section 9 are a material inducement for the Company to enter
into this Agreement and the Merger Agreement, and that such restrictions are
reasonable and necessary to protect the legitimate interests of the Company and
its affiliates, including the goodwill of the Predecessor being acquired by the
Company under the Merger Agreement simultaneously herewith. Therefore, in the
event of a breach or threatened breach of this Section 9, the Company shall be
entitled to injunctive relief in a court of appropriate jurisdiction to remedy
any such breach or threatened breach, the Executive acknowledging that damages
would be inadequate and insufficient. Moreover, if it shall be determined by any
arbitration panel or court of competent jurisdiction that any covenant herein is
not enforceable due to its geographic area or duration, the Executive agrees
that such covenant shall be enforceable to the greatest extent possible, and
will be deemed amended so as to reduce the geographic area or duration, as the
case may be, to the extent necessary to secure enforceability.
(g) Continuing Operation. Any termination of the Executive's employment or
of this Agreement shall have no effect on the continuing operation of this
Section 9.
(h) Nondisparagement by the Company. For the longer of the Non-Compete
Period and a period of three years immediately following the Date of
Termination, (i) the Company and its affiliates shall not disparage the
Executive and (ii) the Executive shall not disparage the Company and its
affiliates, their officers or directors.
10. INDEMNIFICATION. The Company shall indemnify the Executive to the
full extent authorized by law and the Charter and By-laws of the Company and
Jones for all expenses, costs, liabilities and legal fees which the Executive
may incur in the discharge of all his duties hereunder. The Executive shall be
insured under the Company's and Jones' Directors' and Officers' Liability
Insurance Policy as in effect from time to time. Any termination of the
Executive's employment or of this Agreement shall have no effect on the
continuing operation of this Section 10.
11. SUCCESSORS; BINDING AGREEMENT.
(a) Company's Successors. No rights or obligations of the Company under
this Agreement may be assigned or transferred by the Company except that such
rights or obligations may be assigned or transferred pursuant to a merger or
consolidation in which the Company is not the continuing entity, or the sale or
liquidation of all or substantially all of the business or assets of the Company
or Jones, provided that the
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assignee or transferee is the successor to all or substantially all of the
business or assets of the Company and such assignee or transferee assumes the
liabilities, obligations and duties of the Company, as contained in this
Agreement, either contractually or as a matter of law. The Company will require
any such successor to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business or assets as aforesaid which executes and delivers the agreement
provided for in this Section 11 or which otherwise becomes bound by all the
terms and provisions of this Agreement or by operation of law.
(b) Executive's Successors. This Agreement shall not be assignable by the
Executive. This Agreement and all rights of the Executive hereunder shall inure
to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. Upon the Executive's death, all amounts to which he is
entitled hereunder, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive's devisee, legatee,
or other designee or, if there be no such designee, to the Executive's estate.
12. ABSENCE OF RESTRICTIONS. The Executive represents and warrants that
he is not a party to any agreement or contract pursuant to which there is any
restriction or limitation upon his entering into this Agreement or performing
the services called for by this Agreement.
13. NOTICE. For the purposes of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive:
Eric A. Rothfeld
791 Park Avenue
New York, NY 10021
Facsimile: (212) 734-3860
with a copy to:
Alan C. Myers, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
Facsimile: (212) 735-2000
If to the Company:
c/o Jones Apparel Group, Inc.
1411 Broadway
New York, New York 10018
Attention: Ira M. Dansky, Esq.
Facsimile: (212) 921-5370
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
14. INTEREST ON LATE PAYMENTS. "Undisputed Late Obligations" shall bear
interest beginning on the Due Date (defined below) until paid in full at an
annual rate of one percent (1.0%) plus the prime rate as declared from time to
time by the Chase Manhattan Bank. For purposes hereof, "Undisputed Late
Obligations" shall mean any obligation which remains unpaid 5 days after written
notice thereof is delivered to the other party in accordance with Section 13
(the "Due Date") for monies under this Agreement owing from one party to
another, which obligation (i) is not subject to any bona fide dispute or (ii)
has been adjudicated by an arbitration panel or court of competent jurisdiction
to be due and payable.
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15. MISCELLANEOUS. No provision of this Agreement may be modified unless
such modification is agreed to in writing signed by the Executive and an officer
of the Company duly authorized by the Board. Any waiver or discharge must be in
writing and signed by the Executive or an authorized officer of the Company, as
the case may be. No waiver by either party hereto at any time of any breach by
the other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of New York without
regard to its conflicts of law principles.
16. ARBITRATION. Except as otherwise provided herein, all controversies,
claims or disputes arising out of or related to this Agreement shall be settled
under the rules of the American Arbitration Association then in effect in the
State of New York, as the sole and exclusive remedy of either party, and
judgment upon such award rendered by the arbitrator(s) may be entered in any
court of competent jurisdiction.
17. ATTORNEYS' FEES. The Company shall reimburse the Executive (or the
Executive shall reimburse the Company) for all reasonable costs, including
without limitation reasonable attorneys' fees of the Executive (or the Company,
as the case may be,) in any dispute, arbitration or proceeding arising under
this Agreement (collectively, a "Proceeding") so long as the Executive (or the
Company, as the case may be,) "prevails in substantial part" with respect to his
or its claims or defenses in such Proceeding. For purposes hereof, the Executive
shall be deemed to have "prevailed in substantial part" if (i) the Executive is
the party originally demanding a Proceeding, the arbitrator(s) shall have
awarded the Executive at least 75% of the amount originally demanded by the
Executive, or (ii) the Company is the party originally demanding a Proceeding,
the arbitrator(s) shall have denied the Company the relief originally requested.
The Company shall be deemed to have "prevailed in substantial part" if (i) the
Executive is the party originally demanding a Proceeding and the arbitrator(s)
shall have awarded the Executive 25% or less of the amount originally demanded
by the Executive or (ii) the Company is the party originally demanding a
Proceeding and the arbitrator(s) shall have granted the Company the relief
originally requested.
18. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
19. CONFLICT WITH JONES POLICIES. In the event that any term or condition
set forth in this Agreement shall conflict with any of the Jones Policies, the
terms of this Agreement shall govern and be controlling.
20. ENTIRE AGREEMENT. This Agreement between the Company and the
Executive sets forth the entire agreement of the parties hereto in respect of
the subject matter contained herein and supersedes all prior agreements,
promises, covenants, arrangements, communications, representations or
warranties, whether oral or written, by the parties hereto in respect of the
subject matter contained herein; and any prior agreement of the parties hereto
in respect of the subject matter contained herein is hereby terminated and
canceled. Notwithstanding anything herein to the contrary, the Merger Agreement
and the Registration Rights Agreement executed in connection therewith shall
remain in full force and effect in accordance with their respective terms and
shall be unaffected hereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the date first above written.
SAI ACQUISITION CORP.
By:
------------------------------------
Name: Eric A. Rothfeld
Title:
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EXHIBIT 10.2
EMPLOYMENT AGREEMENT
AGREEMENT made as of September 10, 1998 by and between R. L. Management,
Inc., a Delaware corporation with executive offices at 11201 Armour Drive, El
Paso, Texas 79935 (the "Company"), and Mindy Grossman residing at 170 East 87th
Street (Apartment 6-E), New York, New York 10021 (the "Executive").
W I T N E S S E T H:
WHEREAS, Sun Apparel, Inc., ("Sun") entered into a license agreement, dated
as of August 1, 1995 with Polo Ralph Lauren, L. P. (as amended to date, the
"License Agreement"), and such license agreement was amended on October 18,
1995, and the license agreement as amended is herein referred to as the "License
Agreement"; and
WHEREAS, pursuant to the License Agreement, Sun has an exclusive license to
manufacture and sell in the United States and its territories and possessions
certain men's and women's apparel bearing the trademark "Polo Jeans Company
Ralph Lauren" and certain authorized variations, the manufacturing, selling and
other related activities of Sun under the License Agreement being herein
referred to as the "Polo Jeans Business"; and
WHEREAS, the Executive is a party to the Employment Agreement with the
Company dated as of January 1, 1996 (the "Prior Agreement"); and
WHEREAS, the Company wishes to continue to employ the Executive, and the
Executive wishes to continue the employment with the Company, on the terms and
conditions hereinafter set forth, and Sun is willing to guarantee the
obligations of the Company under this Agreement; and
WHEREAS, the Executive and the Company wish to provide for the termination
of the Prior Agreement.
NOW, THEREFORE, it is agreed as follows:
1. EMPLOYMENT. During the term of this Agreement, Company shall employ
the Executive as the President and the Chief Executive Officer of the Sun
division responsible for the operation of the Polo Jeans Business and the
Executive shall continue to serve as the Executive Vice President of Sun. The
Executive shall report directly to the Chief Executive Officer of Sun, and shall
manage the Polo Jeans Business under the control and direction of Sun's board of
directors (or its executive committee). During the term of this Agreement, and
excluding any periods of vacation and sick leave to which the Executive is
entitled, the Executive agrees to devote all of her business time and attention
to the business affairs of the Polo Jean Business and Sun, and to perform such
responsibilities in a professional manner. Notwithstanding the foregoing, during
the term of this Agreement, it shall not be a violation of this Agreement for
the Executive to (a) serve on civic or charitable boards or committees; (b)
deliver lectures, fulfill speaking engagements or teach at educational
institutions; (c) attend to personal business, so long as such activities do not
interfere with the performance of the Executive's responsibilities as an
employee of the Company in accordance with this Agreement.
2. TERM. The term of this Agreement shall be for the period commencing on
the date hereof (the "Commencement Date") and ending on December 31, 2001 (the
"Expiration Date"). The Prior Agreement shall terminate effective as of the
Commencement Date and from and after such date the Prior Agreement shall be void
and of no force and effect.
3. SALARY, FRINGE BENEFITS AND ALLOWANCES.
(a) From the Commencement Date until December 31, 1998, the Executive shall
be paid a salary at the annual rate of $421,600.00 plus an advance against her
1998 bonus at the annual rate of $328,400.00.
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Throughout the remaining term of this Agreement, the Executive shall receive a
salary at the annual rate of $750,000. During the term of this Agreement, the
Executive's salary shall be payable at such regular times and intervals as the
Company customarily pays its employees from time to time, but no less frequently
than once a month.
(b) During the term of this Agreement, the Executive shall be eligible to
participate in all savings and retirement plans, practices, policies and
programs to the extent applicable generally to other senior executive employees
of the Company and Sun.
(c) During the term of this Agreement, the Executive and/or the Executive's
family, as the case may be, shall be eligible for participation in and shall
receive all benefits under welfare, fringe and other benefit plans, practices,
policies and programs provided by the Company and Sun (including, without
limitation, medical, prescription drug, dental, disability, accidental death and
travel accident insurance plans and programs) to the extent applicable generally
to other senior executives of the Company and Sun.
(d) The Executive shall be entitled to an aggregate of four (4) weeks paid
vacation during each calendar year of the term of this Agreement, prorated for
1998 from the Commencement Date until December 31, 1998. The Executive shall
also be entitled to the benefits of the Company's and Sun's policies relating to
sick leave and holidays.
(e) The Executive shall have all expenses reasonably incurred by her on
behalf of the Company reimbursed by the Company in accordance with the Company's
standard policy and practice. For transcontinental and overseas travel on
Company business, the Executive shall be entitled to business class travel (or
first class travel when business class in not available).
4. BONUS.
(a) Not later than ninety (90) days immediately following the end of 1998,
the Executive shall receive a bonus with respect to the 1998 calendar year,
calculated in accordance with the methodology set forth in Exhibit C hereto.
(b) As soon as practical and in any event not later than ninety (90) days
immediately following the end of each of 1999, 2000 and 2001, the Company shall
deliver to Executive a statement setting forth in reasonable detail its
calculation of the net sales and EBITDA of the Polo Jeans Business for each such
year, calculated in accordance with generally accepted accounting principles
("GAAP") as applied by Sun consistent with past practices through June 30, 1998.
The Company shall pay to the Executive a bonus for each such year based on a
combined achievement of net sales and EBITDA growth, determined in accordance
with Exhibit B hereto. For the purposes of this paragraph, EBITDA shall mean the
net income, before extraordinary items (as defined in accordance with GAAP) of
income, gain, loss and expense and before all income taxes and other taxes now
or hereafter in effect that are assessed on income and interest expense and
finance charges, and before charges for depreciation and amortization.
(c) The Executive shall have the right to dispute the amount of any bonus
paid to her by giving the Company written notice within thirty (30) days after
she receives the bonus statement set forth in paragraph (b) above. If she does
so:
(i) within fifteen (15) days after the Company receives such notice,
the Company will cause Sun to furnish the Executive (and her authorized
representatives) with access to such of the books and records of the Polo
Jeans Business (and of Sun and its subsidiaries) as pertain to the
calculation of the bonus in dispute, and the Executive shall within ten
(10) days thereafter inform the Company of the amount of the bonus to which
she believes she is entitled; and
(ii) if such dispute is not resolved by the parties within thirty (30)
days after the date of the Executive's notice, such dispute shall be
submitted by either party to an independent accounting firm reasonably
acceptable to both parties, to determine the proper bonus in accordance
with this Agreement, and the costs of such firm shall be borne and paid by
the party who calculated a bonus with a greater differential in dollars
from the bonus determined by such firm.
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5. TERMINATION OF EMPLOYMENT.
(a) The Company may terminate the Executive's employment for Cause (as
defined below) before the Expiration Date. If the Executive's employment is
terminated for Cause or if she resigns during the term of this Agreement without
Good Reason (as defined below), neither the Company nor Sun shall have any
additional obligations to the Executive under this Agreement.
(b) If the Executive's employment terminates before the Expiration Date
because of her death or Disability, the Company shall pay her or her duly
appointed personal representatives, as the case may be, (i) an amount equal to
her monthly salary during each of the six (6) months following her death or
Disability, but in no event beyond the Expiration Date, and (ii) the amount that
would have been payable to her with respect to the fiscal year in which she dies
or becomes Disabled pursuant to Section 4, prorated for the portion of such year
before her death or Disability, which shall be paid not later than one hundred
twenty (120) days after the end of such year. If the Executive ceases to have a
Disability at any time while precluded from competing with the Company in
accordance with Section 8(a), the Executive shall within 30 days thereof so
advise the Company in writing. In such event, the Company shall have the option,
but not the obligation, to reemploy Executive pursuant to the terms of this
Agreement for a term equal in length to the period from the commencement of the
Disability to the Expiration Date, provided that no later than 30 days after
receipt of such notice from the Executive, the Company notifies the Executive in
writing that it is exercising such option. The Company shall have the right to
have Executive submit to a reasonable examination by a qualified physician of
its choosing (and receive a report from such physician on the state of the
Executive's health) during such 30 day period and Executive agrees to make
herself available for such examination. Except as set forth in this paragraph
(b) and Section 8 and payment to Executive of unpaid salary and reimbursable
expenses accrued to the date of Executive's termination, if any, neither the
Company nor Sun shall have any additional obligations to the Executive under
this Agreement in the event of Executive's termination of employment under this
paragraph (b).
(c) The Company may terminate the Executive's employment before the
Expiration Date without Cause, and the Executive may terminate her employment
before the Expiration Date for Good Reason upon thirty (30) days written notice
to the Company. If the Executive's employment is so terminated by the Company
without Cause, or by the Executive for Good Reason, and provided that the
Company does not exercise its election pursuant to Section 8(a)(ii) hereof, the
Company will pay her severance pay in the amount of (i) $750,000 in twelve (12)
equal monthly installments commencing on a date one month following the date of
termination, and (ii) not later than one hundred twenty (120) days after the end
of such year, the greater of (A) the amount that would have been payable to her
pursuant to Section 4 with respect to the year in which the Executive's
employment was terminated, prorated for the portion of such year before her
termination or (B) the amount that was paid to her pursuant to Section 4 with
respect to the prior year. If the Executive's employment is so terminated by the
Company without Cause or by the Executive for Good Reason, the Company shall
reimburse the Executive for up to $10,000 of executive outplacement services,
and shall provide the health care and other benefits set forth in Section 3(b),
all for a period of one year from the effective date of termination. Except as
set forth in this paragraph (c) and Section 8 and payment to Executive of unpaid
salary and reimbursable expenses accrued to the date of Executive's termination,
if any, neither the Company nor Sun shall have any additional obligations to the
Executive under this Agreement in the event of Executive's termination of
employment under this paragraph (c).
(d) As used herein:
(i) the term "Cause" shall mean the Executive's commission of an act
of fraud or dishonesty or a crime involving money or other property of the
Company; the Executive's conviction of a felony or a plea of guilty or nolo
contendere to an indictment for a felony that damages the Company in any
manner; if, in carrying out her duties hereunder, the Executive engages in
conduct that constitutes willful misconduct or gross negligence; or a
material breach by the Executive of this Agreement. Any act or failure to
act on the part of the Executive which is based upon authority given
pursuant to a resolution duly adopted by the Board or authorized in writing
by the Chief Executive Officer of the Company or of Sun or other officer to
whom the Executive reports, or based upon the advice of counsel for the
Company or Sun shall not
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constitute cause as used herein. For purposes of this provision only, a
breach shall be "material" if it is demonstrably injurious to the Company
or Sun, their affiliates or any of their respective business units,
financially or otherwise.
(ii) the term "Good Reason" shall mean any one of the following:
(1) a material breach of the Company's or Sun's obligations under
this Agreement, which breach has not been cured within five (5) business
days after the Company's receipt of written notice from the Executive of
such breach;
(2) a reduction in the Executive's then annual base salary;
(3) the relocation of the Company's principal executive offices (or
the Executive's office) to a location outside the borough of Manhattan
in New York City;
(4) the failure to pay the Executive any undisputed portion of the
Executive's compensation, including any payments due under Sections 3 or
4 of the Agreement, within thirty (30) days after the date such
compensation or payment is due;
(5) the failure to continue in effect any compensation or benefit
plan in which the Executive is participating unless either (i) an
equitable arrangement (embodied in an ongoing substitute or alternative
plan) has been made with respect to such plan; or (ii) the failure to
continue the Executive's participation therein (or in such substitute or
alternative plan) does not discriminate against the Executive, both with
respect to the amount of benefits provided and the level of the
Executive's participation, relative to other similarly situated
participants;
(6) a reduction in the Executive's title and status as President
and Chief Executive Officer of the Company or Executive Vice President
of Sun; or any change in the Executive's status as reporting directly to
the Chief Executive Officer of Sun; or the assignment to the Executive
of any duties materially inconsistent with the Executive's position
(including, without limitation, status, offices, titles and reporting
requirements), authority, duties or responsibilities as contemplated by
Section 1 of this Agreement, or any other action by the Company or Sun
which results in a material diminution in such position, authority,
duties or responsibilities, excluding for this purpose any action not
taken in bad faith and which is remedied by the Company or Sun no later
than thirty (30) days after written notice by the Executive;
(7) the termination of the License Agreement, unless the acts or
omissions of the Executive directly caused such termination.
(8) any purported termination by the Company or Sun of the
Executive's employment otherwise than as expressly permitted in this
Agreement; or
(9) any failure by the Company to comply with and satisfy Section
10 of this Agreement.
(iii) the terms "Disabled" or "Disability" shall mean the Executive's
physical or mental incapacity that renders her incapable, even with a
reasonable accommodation by the Company, of performing the essential
functions of the duties required of her by this Agreement for one hundred
twenty (120) or more consecutive days.
(e) The Executive shall have no obligation to seek other employment or
otherwise mitigate the Company's obligations to make payments under this Section
5, and the Company's obligations shall not be reduced by the amount, if any, of
other compensation or income earned or received by the Executive after the
effective date of her termination.
6. COMPANY PROPERTY. Any trade name or mark, program, discovery, process,
design, invention or improvement which the Executive makes or develops which
relates, directly or indirectly, to the business of the Company or of Sun or
their affiliates, or her employment by the Company, shall be considered as "made
for hire" and shall belong to the Company and shall be promptly disclosed to the
Company. During the Executive's employment and thereafter, the Executive shall,
without additional compensation, execute and
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deliver to or as requested by the Company any instruments of transfer and take
such other action as the Company may reasonably request to carry out the
provisions hereof, including filing, at the Company's sole expense, trademark,
patent or copyright applications for any trade name or mark, invention or
writing covered hereby and assigning such applications to the Company.
7. CONFIDENTIAL INFORMATION. The Executive shall not, either during the
term of her employment by the Company or thereafter, disclose to anyone or use
(except, in each case, in the performance of her responsibilities hereunder and
in the regular course of the Company's business), any information acquired by
the Executive in connection with or during the period of her employment by the
Company, with respect to any confidential, proprietary or secret aspect of the
affairs of the Company, Sun or any of their affiliates, including but not
limited to the requirements of and terms of dealings with existing or potential
licensors, designers, suppliers and customers and methods of doing business, all
of which the Executive acknowledges are confidential and proprietary to the
Company, Sun or any of their affiliates, as the case may be.
8. COMPETITION; RECRUITMENT.
(a) The Executive shall not, at any time during her employment by the
Company, and during the following periods and under the following circumstances,
engage or become interested (as an owner, stockholder, partner, director,
officer, employee, consultant or otherwise) in any business which then competes,
directly or indirectly, with the business conducted by Sun or any of its
subsidiaries or affiliates,
(i) in the event of a termination by the Company for Cause or
Disability or by the Executive other than for Good Reason, from the date of
termination until the first anniversary of the Expiration Date;
(ii) in the event of a termination by the Company other than for Cause
or Disability or by the Executive for Good Reason, for a one-year period
commencing upon the date of termination, at the election of the Company,
exercised (A) at the beginning of such year, in the event of termination
other than for Cause or Disability or (B) within thirty (30) days of
Executive's notice of termination pursuant to Section 5(c) in the event of
termination by the Executive for Good Reason, provided, however, that in
each case with respect to such year (if elected), the Company shall pay the
Executive, in lieu of the amounts set forth in Section 5(c): (X) an amount
equal to the annual salary set forth in Section 3(a) hereof, payable in
twelve (12) equal monthly installments commencing on a date one month
following the date of termination; (Y) not later than one hundred twenty
(120) days after the end of the calendar year in which Executive's
employment was terminated, the amount that would have been payable to her
pursuant to Section 4 with respect to such calendar year, prorated for the
portion of such calendar year before her termination; and (Z) not later
than one hundred twenty (120) days after the end of such calendar year, an
amount equal to the annual bonus that would have been payable to her
pursuant to Section 4 with respect to such calendar year;
(iii) in the event of a termination due to the expiration of the term
of this Agreement, for a one-year period commencing upon the expiration of
the term of this Agreement, at the election of the Company, exercised no
later than one hundred and twenty (120) days prior to the beginning of such
year, provided that, during each month of such year, the Company pays the
Executive one-twelfth of the annual salary set forth in Section 3(a) hereof
and one-twelfth of the annual bonus set forth in Section 4 hereof with
respect to calendar year 2001.
(b) The Executive shall not, at any time during her employment by the
Company and thereafter until the second anniversary of the expiration of the
term of this Agreement, or, in the event of a termination by the Company other
than for Cause or Disability or by the Executive for Good Reason, until the
second anniversary of the date of such termination, (i) recruit, solicit for
employment, hire or engage, or assist any person or entity in recruiting,
soliciting for employment, hiring or engaging, any employee or consultant of the
Company, Sun or any of their subsidiaries or affiliates or any person who was an
employee or consultant of the Company, Sun or any of their subsidiaries or
affiliates within one year before the termination of the Executive's employment,
or (ii) negotiate or enter into, or assist any person or entity in negotiating
or entering into, a contract (oral or written) with any (x) manufacturers of, or
(y) contractors for, apparel whose facilities are in Mexico and who have
manufactured products for or contracted for products with the Company, Sun or
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any of their subsidiaries or affiliates or whose output, at the termination of
the Executive's employment, is substantially earmarked to make the Licensed
Products or other products for the Company, Sun or any of their subsidiaries or
affiliates; provided that, subject to subsection (a) of this Section 8, nothing
herein shall prevent the Executive, after her employment by the Company
terminates, from accepting employment from an employer which, prior to such
termination, was doing business with such manufacturer or contractor
independently of any relationship with or actions by the Executive.
(c) The one-year period set forth in sub-paragraph (a)(i) or (a)(ii) (if
elected) of this section, whichever is applicable, shall be extended for an
additional one-year period, at the election of the Company, exercised no later
than one hundred and eighty (180) days prior to the beginning of such additional
year, provided that, in each case during each month of such additional year (if
elected), the Company pays the Executive one-twelfth of the annual salary set
forth in Section 3(a) hereof and, if subparagraph (a)(ii) applied to the period
prior to the extension, (i) one-twelfth of the annual bonus set forth in Section
4 hereof with respect to the full year in which the Executive's employment was
terminated and (ii) an additional amount of $416,666.67.
(d) For the longer of any period applicable under this Section 8 or a
period of three years immediately following the date of termination, (i) the
Company, Sun and their respective affiliates shall not disparage the Executive
and (ii) the Executive shall not disparage the Company, Sun or their respective
affiliates, officers or directors.
(e) The Executive acknowledges that these provisions are necessary for the
protection of the Company, Sun and their subsidiaries and affiliates and are not
unreasonable, because the Executive would be able to recruit and hire personnel
other than employees of the Company, Sun and any of their subsidiaries and
affiliates and contract with manufacturers and contractors other than those
described in subsection (b). The Executive further agrees that a breach of
Section 6, 7 or 8 of this Agreement shall result in the immediate cessation of
any payments pursuant to this section and Section 5(c) hereof, if applicable.
The duration and the scope of these restrictions on the Executive's activities
are divisible, so that if any provision of this Section is held or deemed to be
invalid, that provision shall be automatically modified to the extent necessary
to make it valid. The ownership of less than 5% of the stock of a publicly owned
company which competes with the Company, Sun or any of their subsidiaries or
affiliates, in and of itself, shall not be considered a violation of the
provisions of this Section 8.
9. NOTICES. Any notice or other communication to the Company or to the
Executive under this Agreement shall be in writing and shall be considered given
when mailed by certified mail, return receipt requested, to such party at its or
her address first above written (or at such other address as such party may
specify by written notice to the other party). A copy of any notice or other
communication given to the Company or any notice or other communication to Sun
shall be given to Sun in writing by certified mail, return receipt requested,
addressed to Sun at 11201 Armour Drive, El Paso, Texas 79935, and 111 West 40th
Street, New York, New York 10018, both to the attention of Mr. Eric Rothfeld.
10. BINDING NATURE OF AGREEMENT. The Company shall use its best efforts
to require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business or
assets of the Company expressly to assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform if no such succession had taken place. For the purposes hereof, the term
"Company" shall mean the Company as defined in the opening Section of this
Agreement and any successor or assignee of the Company, which provides employees
and services to Sun in connection with the Polo Jeans Business. In the event the
Company is successful in having any such successor agree to assume this
Agreement, such successor or assignee shall execute and deliver an agreement to
be bound by all the terms and provisions of this Agreement by operation of law.
11. INDEMNIFICATION. The Company shall indemnify the Executive and hold
the Executive harmless, to the maximum extent permitted by applicable law, from
and against all claims, actions, suits, proceedings, loss, damage, liability,
costs, charges and expenses, including reasonable attorneys' fees and costs
arising in connection with the Executive's performance of her duties hereunder
or her status as an employee, officer,
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<PAGE> 7
director or agent of the Company or Sun, in accordance with the Company's
indemnity policies for its senior executives.
12. MISCELLANEOUS.
(a) Since a breach of the provisions of this Agreement would injure the
Company or Sun irreparably, the Company or Sun may, in addition to its other
remedies, obtain an injunction or other comparable relief restraining any
violation or further violation of this Agreement, and no bond, security or other
undertaking shall be required of the Company or Sun in connection therewith.
(b) The provisions of this Agreement are separable, and if any provision of
this Agreement is invalid or unenforceable, the remaining provisions shall
continue in full force and effect.
(c) This Agreement constitutes the entire understanding and agreement
between the parties, supersedes all other existing agreements between them
(including the Prior Agreement) and cannot be amended unless such amendment is
in writing and signed by the both parties to this Agreement.
(d) This Agreement shall be governed by and construed in accordance with
the laws of the State of New York (other than its choice of laws rules), where
it has been entered and where it is to be performed. The parties hereto consent
to the exclusive jurisdiction of any federal or state court in the State of New
York to resolve any dispute arising under this Agreement or otherwise.
(e) The headings in this Agreement are solely for convenience of reference
and shall not affect its interpretation.
(f) The failure of either party to insist on strict adherence to any term
of this Agreement on any occasion shall not be considered a waiver or deprive
that party of the right thereafter to insist upon strict adherence to that term
or any other term of this Agreement. For any waiver of a provision of this
Agreement to be effective, it must be in writing and signed by the party against
whom the waiver is claimed.
(g) The obligations of the Executive and the Company hereunder shall
survive the termination of the term of this Agreement and the Executive's
employment hereunder to the extent necessary to give full effect to the
provisions of this Agreement.
13. CONDITION PRECEDENT. This Agreement, and all of its terms and
provisions, are conditioned upon the closing of the Agreement and Plan of Merger
by and among Jones Apparel Group, Inc. ("Jones"), Sun Acquisition Corp., Sun and
Sun's shareholders (the "Merger Agreement"), and shall become binding upon the
parties hereto only in such event. This Agreement, and all of its terms and
provisions, shall be of no force and effect in the absence of a closed Merger
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed as of the date first above written.
R. L. MANAGEMENT, INC.
By:
------------------------------------
Name:
Title:
Mindy Grossman
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EXHIBIT A
GUARANTY
The undersigned corporation, in consideration of the promises made by the
Executive for the benefit of the undersigned corporation, hereby guarantees the
due and punctual performance of the obligations of the Company, other than
collection, in accordance with the provisions of the within Employment
Agreement. This guaranty is a primary obligation of Sun. The Executive may
enforce this Guaranty against Sun without any prior enforcement of the
obligations of the Company under the Employment Agreement. For the purposes of
this Guaranty, the terms "Executive", "Company", "Employment Agreement" and
"Sun" shall have the same meaning as set forth in the Employment Agreement dated
September 10, 1998 between R.L. Management, Inc. and Mindy Grossman.
DATED: As of
SUN APPAREL, INC.
By:
------------------------------------
Eric A. Rothfeld
President
<PAGE> 1
EXHIBIT 99.1
FOR IMMEDIATE RELEASE
JONES APPAREL GROUP, INC.
<TABLE>
<S> <C>
Contacts: Wesley R. Card, Chief Financial Officer Gene Donati, Clark & Weinstock
Anita Britt, Director of Investor Relations for Vestar Capital Partners
and Financial Planning (212) 953-2550
(215) 785-4000
</TABLE>
JONES APPAREL GROUP ANNOUNCES ACQUISITION OF SUN APPAREL
NEW YORK, NEW YORK -- Jones Apparel Group, Inc. ("Jones") (NYSE:JNY) announced
today that it has entered into a definitive agreement to purchase 100% of the
equity of Sun Apparel, Inc. ("Sun"), a privately held company owned by Eric
Rothfeld and Vestar Capital Partners, a New York based private equity investment
firm. Sun is a leading designer, manufacturer and distributor of jeanswear,
sportswear and related apparel for men, women and children. Sun markets its
products under the Polo Jeans Company brand, licensed from Polo Ralph Lauren
(NYSE:RL), as well as other company owned, licensed and private label brands.
Jones is purchasing the equity of Sun for approximately $212 million, consisting
of approximately $125 million in cash and approximately 4.8 million shares of
Jones common stock, subject to final adjustments at closing, plus the potential
for additional future payments based on Sun's operating performance. Jones also
is assuming or refinancing approximately $232 million of Sun debt. The
transaction is expected to close in early October, 1998.
Sun Apparel has shown rapid growth and generated net sales of $406 million for
the twelve months ended June 30, 1998. Polo Jeans Company, which was launched in
Fall 1996, represented 58% of net sales for that period.
Sidney Kimmel, Chairman of Jones Apparel Group, stated, "We are extremely
excited by the opportunity that this acquisition provides our Company. We have
great respect for the businesses which Sun has developed and look forward to
capitalizing on the strengths and talents of our combined companies to maximize
future growth and profitability."
Mr. Kimmel commented further, "Sun fits all the criteria we have established for
acquisitions. Sun markets its products under Polo Jeans Company and other brand
names, has an excellent track record of growth and profitability and a seasoned
management team led by Eric Rothfeld, who will become a member of the Jones
Apparel Group Board of Directors upon consummation of the transaction, and by
Mindy Grossman, Executive Vice President of Sun and President and CEO of the
Polo Jeans Division. Jones intends to use its tremendous operating and sourcing
strengths to enhance Sun's growth. Furthermore, the acquisition will enable
Jones to accelerate the growth of its existing labels by marketing new denim
products through Sun's assistance in manufacturing Jones Jeans and other Jones
denim products."
Eric Rothfeld, Chairman and CEO of Sun, added "We welcome the opportunity for
our company to join the Jones Apparel Group. We are confident that the
marketing, operating and financial strengths of Jones will help us in continuing
the rapid growth of our existing business. We look forward to assisting Jones in
those areas where we have proven expertise and to leveraging the resources and
operating synergies of our combined companies to enhance profitability."
Jones Apparel Group, Inc. is a leading designer and marketer of better priced
women's sportswear, suits and dresses. The Company markets its products under
several nationally known brands, including Jones New York, Evan-Picone, Rena
Rowan, Saville, and the Lauren by Ralph Lauren and Ralph by Ralph Lauren brands
licensed from Polo Ralph Lauren.
Vestar Capital Partners, headquartered in New York with an office in Denver,
Colorado, manages over $1 billion in private equity capital and focuses on
management buyouts and re-capitalizations.
