Jury selection and trial begins this week in Superior Court in Riverside, CA, U.S. on claims arising out of Jacuzzi Brands, Inc.'s 1998 acquisition of Sundance Spas, a privately owned leader in the portable spa industry. Jacuzzi is claiming post sale offsets to the acquisition cost entitle it to recover up to one-third of the original purchase price paid to acquire the Sundance brand and operations. Sundance former owner, Clark Manufacturing, Inc., of Riverside County, has counterclaimed including causes of action for fraud, rescission and unjust enrichment. Riverside Superior Court Commissioner Joan F. Ettinger recently found that Sundance had presented enough evidence in support of the fraud and rescission claims, particularly as to deposition testimony by former Jacuzzi Executive Vice President Paul Hermann who negotiated the acquisition on behalf of Jacuzzi, that a reasonable jury might find in the former owner's, Clark Manufacturing, favor on those claims as well as on punitive damages also sought by Clark and which the Court is allowing to be presented to a jury.
A primary issue in the lawsuit is liability for payment of costs on more than U.S. $9 million of consumer warranty claims paid by Jacuzzi since the sale which relate to product manufactured and sold by Sundance prior to the acquisition in 1998. At the time of the acquisition both Jacuzzi and Clark agreed the best estimate of the total future liability for such warranty claims was $1.7 million and the audit firm of Ernst and Young validated that estimate as part of the pre acquisition due diligence. Since the acquisition, however, Jacuzzi claims it has paid at least $9.5 million to cover warranty related costs on products sold by Clark prior to the acquisition. Clark contends that Jacuzzi used a provision in the purchase agreement to allowing Jacuzzi to charge Clark for costs in excess of the estimate as a slush fund to buy good will with the Sundance dealer network many of whom had had prior unhappy dealings with Jacuzzi which had a reputation for not supporting independent dealers. Clark also alleges that Jacuzzi secretly withheld notifying Clark of its actual charges for two years and after that continued to hide the fact Jacuzzi was not properly obtaining and crediting Clark for millions of dollars in vendor credits and consumer 'buy up' payments for new spas, as well as improperly charging Clark for millions of dollars of good will expenditures which Clark traditionally excluded from warranty expense calculations.
According to Ron Clark, president of Clark Manufacturing, Inc., and co-founder of Sundance Spas, "We are going forward with the trial of this case seeking either rescission of the original transaction, a claim which the judge has specifically allowed us to go forward on, or alternatively the return of all past and future profits unjustly earned by Jacuzzi as a result of their misleading us about the terms of the sale and their intention to use the purchase agreement as a slush fund to buy good will from a distrustful dealer base. We estimate the total value of the profits that should be returned to be in the range of $50 - $60 million, based on what we know about the sales levels and the profitability of the company. We also will be seeking punitive damages." Shortly after the closing of Sundance Spas acquisition in June, 1998, Jacuzzi's parent company began revealing financial reversals, largely connected with the Jacuzzi's acquisition practices, that lead to a nearly 90-percent decline in share values over the next 3 years. Roy Jacuzzi and Paul Hermann, who were personally responsible for the Sundance acquisition were recently relieved of their management positions in the Jacuzzi organization and Jacuzzi has reshuffled its management team.
Clark has also filed a claim against the accounting firm of Ernst & Young which has been Jacuzzi Brands long term audit firm. Clark's claim is essentially that if Jacuzzi is somehow right that up to one third of the 1998 acquisition price for Sundance Spas must now be returned based on costs more than five times the estimate approved by Ernst & Young, that Ernst should have liability for failing to foresee how Jacuzzi intended to interpret and apply the purchase agreement. Mr. Clark currently has other business interests in Riverside, where Sundance used to employ over 400 people, including an expanding electronics controls company employing approximately 100 people and an 84 acre industrial park in Corona, CA, U.S. in Riverside County. Jacuzzi recently reported it is in discussions with the SEC about unrelated accounting issues. Jacuzzi brands 2002 net income was $46 million, its $2003 earnings are forecast as similar levels. No reserve for the outcome of this litigation is known to have been provided for by Jacuzzi in compiling its earnings forecast.
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