-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LnuP2yoHsWsKcFo+KZkkkwOfUb0dtj4L1HhouEzw/oyg+5RH6iBlD34Wiv+zX9Em dZZftiCaw5iJu1yWCejOCw== 0000950123-98-008482.txt : 19980925 0000950123-98-008482.hdr.sgml : 19980925 ACCESSION NUMBER: 0000950123-98-008482 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980922 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980924 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: JONES APPAREL GROUP INC CENTRAL INDEX KEY: 0000874016 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 060935166 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-10746 FILM NUMBER: 98714142 BUSINESS ADDRESS: STREET 1: 250 RITTENHOUSE CIRCLE STREET 2: KEYSTONE PK CITY: BRISTOL STATE: PA ZIP: 19007 BUSINESS PHONE: 2157854000 MAIL ADDRESS: STREET 1: 250 RITTENHOUSE CIRCLE CITY: BRISTOL STATE: PA ZIP: 19007 8-K 1 JONES APPAREL GROUP, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) PENNSYLVANIA 06-0935166 (STATE OR OTHER JURISDICTION 1-10746 (IRS EMPLOYER OF INCORPORATION (COMMISSION FILE NUMBER) IDENTIFICATION NUMBER)
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) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 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).
TARGET YEAR THRESHOLD AMOUNT ----------- ---------------- (IN MILLIONS) 1998................................................. $57.0 1999................................................. 58.0 2000................................................. 63.0 2001................................................. 85.0
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 2 3 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. 3 4 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. 4 5 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:
JONES CUSTOMER 1997 FIRST HALF OF 1998 - -------------- ---- ------------------ Federated Department Stores, Inc. .......................... 20% 18% May Department Store Company................................ 19% 17% Remainder of ten largest customers.......................... 28% 32%
5 6 Department stores owned by the following entities accounted for the following percentages of Sun's sales:
SUN CUSTOMER 1997 FIRST HALF OF 1998 - ------------ ---- ------------------ Federated Department Stores, Inc. .......................... 13% 12% Remainder of ten largest customers.......................... 35% 48%
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 6 7 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. 7 8 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 8 9 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. 9 10 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. 10 11 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 11 12 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 12 13 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. 13 14 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. 14 15 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- 15 16 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, 16 17 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:
APPROXIMATE LOCATION OWNED/LEASED USE SQUARE FEET -------- ------------ ------------------------------------------------ ----------- 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
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 17 18 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 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 20 SUN APPAREL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 28 DECEMBER 31 JUNE 30 1996 1997 1998 ------------ ------------ ----------- (UNAUDITED) 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
20 21
DECEMBER 28 DECEMBER 31 JUNE 30 1996 1997 1998 ------------ ------------ ----------- (UNAUDITED) 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 ======== ========= =========
See accompanying notes. 21 22 SUN APPAREL, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
YEARS ENDED SIX MONTHS ENDED ----------------------------------------- -------------------- DECEMBER 30 DECEMBER 28 DECEMBER 31 JUNE 30 JUNE 30 1995 1996 1997 1997 1998 ----------- ----------- ----------- -------- -------- (UNAUDITED) 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 ======== ======== ======== ========
See accompanying notes. 22 23 SUN APPAREL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK PREFERRED STOCK RETAINED ----------------- ------------------- PAID-IN EARNINGS SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL ------- ------ -------- ------- ------- --------- --------- 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) ======= ==== ======== ======= ======= ========= =========
See accompanying notes. 23 24 SUN APPAREL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED SIX MONTHS ENDED --------------------------------------- ------------------- DECEMBER 30 DECEMBER 28 DECEMBER 31 JUNE 30 JUNE 30 1995 1996 1997 1997 1998 ----------- ----------- ----------- -------- -------- (UNAUDITED) 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 -- --
See accompanying notes. 24 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 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 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 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 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):
DECEMBER 28 DECEMBER 31 JUNE 30 1996 1997 1998 ----------- ----------- ------- 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 ======= ======= =======
29 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):
ESTIMATED DECEMBER 28 DECEMBER 31 JUNE 30 USEFUL LIFE 1996 1997 1998 IN YEARS ----------- ----------- ------- ------------- 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 ======= ======= =======
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 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):
DECEMBER 28 DECEMBER 31 JUNE 30 1996 1997 1998 ----------- ----------- -------- 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
31 32 SUN APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 28 DECEMBER 31 JUNE 30 1996 1997 1998 ----------- ----------- -------- 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 ======= ======== ========
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 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:
PERIOD OF PREPAYMENT PENALTY AMOUNT - -------------------- -------------- 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
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):
CAPITAL LEASE SUBORDINATED PRINCIPAL LONG-TERM DEBT PAYMENTS DEBT TOTAL DEBT ------------ ------------- --------- ---------- 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 ======= ==== ======== ========
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 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):
DECEMBER 31 JUNE 30 1997 1998 ----------- ------- 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 ====== ======
The current and deferred income tax provisions (benefits) included in income tax expense are as follows:
YEARS ENDED SIX MONTHS ENDED ----------------------------------------- ------------------ DECEMBER 30 DECEMBER 28 DECEMBER 31 JUNE 30 JUNE 30 1995 1996 1997 1997 1998 ----------- ----------- ----------- ------- ------- 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 ==== ==== ====== ==== ======
34 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):
DECEMBER 31 JUNE 30 1997 1998 ----------- ------- 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 ====== ======
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 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:
TOTAL ------ 1998.............................................. $1,276 1999.............................................. 823 2000.............................................. 743 2001.............................................. 705 2002.............................................. 701 2003 and thereafter............................... 2,354 ------ $6,602 ======
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 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 38 SUN APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. VALUATION AND QUALIFYING ACCOUNTS Valuation and qualifying accounts included the following (in thousands):
BALANCE CHARGED TO BALANCE BEGINNING OF COSTS AND NET END OF YEAR EXPENSES WRITE-OFFS YEAR ------------ ---------- ---------- ------- 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
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 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 40 JONES APPAREL GROUP, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 28, 1998
JONES SUN PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA ---------- ---------- ----------- ---------- (IN THOUSANDS) 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 --------- -------- ----------
- --------------- (see footnotes on following page) 40 41 JONES APPAREL GROUP, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 28, 1998 (CONTINUED)
JONES SUN PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA ---------- ---------- ----------- ---------- (IN THOUSANDS) 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 ========= ======== ========= ==========
- --------------- (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): 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 ======
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 42 JONES APPAREL GROUP, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 28, 1998
JONES SUN PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA ---------- ---------- ----------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) 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
- --------------- (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:
SIX MONTHS ENDED JUNE 28, 1998 ------------- (IN MILLIONS) 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 =====
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 43 JONES APPAREL GROUP, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
JONES SUN PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA ---------- ---------- ----------- ---------- (IN THOUSANDS EXCEPT PER SHARE DATA) 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
- --------------- (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 44 Interest expense includes the following:
YEAR ENDED DECEMBER 31, 1997 ----------------- (IN MILLIONS) 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 =====
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: 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.
44 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 EX-2.1 2 AGREEMENT AND PLAN OF MERGER 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 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 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 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 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 4 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. 5 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 6 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:
TARGET YEAR THRESHOLD AMOUNT - ----------- ---------------- (MILLIONS) 1998....................................... $57.0 1999....................................... $58.0 2000....................................... $63.0 2001....................................... $85.0
(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. 7 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). 8 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 9 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 10 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 11 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 12 14 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 13 15 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); 14 16 (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; 15 17 (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 16 18 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. 17 19 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). 18 20 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 19 21 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. 20 22 (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. 21 23 (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- 22 24 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. 23 25 (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 24 26 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. 25 27 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"). 26 28 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 After 6 months.............................................. 20% After 12 months............................................. 40% After 18 months............................................. 60% After 24 months............................................. 80% After 30 months............................................. 100%
(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; 27 29 (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 28 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 29 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 30 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. 31 33 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 32 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 33 35 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). 34 36 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. 35 37 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 36 38 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. 37 39 (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 38 40 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 39 41 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 40 42 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 41 43 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 42 44 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 43 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 44 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 45 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 EX-4.1 3 REGISTRATION RIGHTS AGREEMENT 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. 1 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 2 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; 3 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 4 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. 5 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 6 7 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 7 8 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. 8 9 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. 9 10 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: -------------------------------------- 10 11 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 EX-10.1 4 EMPLOYMENT AGREEMENT 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. 1 2 (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 2 3 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 3 4 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. 4 5 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 5 6 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. 6 7 (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 7 8 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. 8 9 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: 9 EX-10.2 5 EMPLOYMENT AGREEMENT 1 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. 1 2 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. 2 3 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 3 4 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 4 5 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 5 6 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, 6 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 7 8 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 EX-99.1 6 PRESS RELEASE 1 EXHIBIT 99.1 FOR IMMEDIATE RELEASE JONES APPAREL GROUP, INC. 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
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. -----END PRIVACY-ENHANCED MESSAGE-----