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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 1, 1999
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 since last report)
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<PAGE>
Item 5. Other Events.
On January 1, 1999, Jones Apparel Group, Inc. (the
"Company") consummated a corporate reorganization (the "Asset
Drop-Down Transaction"), which the Company believes will
provide certain tax benefits. Under the Asset Drop-Down
Transaction, the Company transferred all operations which it
had previously directly conducted to a new wholly owned
subsidiary, Jones Apparel Group USA, Inc. ("Jones USA"), a
Pennsylvania corporation. In addition, the Company formed
another new wholly owned subsidiary, Jones Apparel Group
Holdings, Inc. ("Jones Holdings"), a Delaware corporation.
Jones Holdings serves as an intermediate holding company,
immediately above Jones USA and immediately below the
Company, and holds the interests, either directly or
indirectly, in all the Company's other subsidiaries.
As a result of the Asset Drop-Down Transaction:
o The Company is the parent holding company and
holds 100% of the equity in Jones Holdings;
o Jones Holdings is an intermediate holding
company and the only direct subsidiary of the
Company;
o Jones Holdings holds 100% of the equity in
Jones USA; and
o The Company's other subsidiaries have become
either direct or indirect subsidiaries of
Jones Holdings.
Concurrently with the consummation of the Asset
Drop-Down Transaction, Jones USA assumed the role of obligor
of the Company's Senior Notes due 2001, with the Company
remaining and Jones Holdings becoming co-obligors of the
Senior Notes. In addition, Jones USA assumed the role of
obligor under the Company's Senior Credit Facilities, with
the Company remaining and Jones Holdings becoming co-obligors
under the Senior Credit Facilities. It is expected that Jones
USA will make all payments in connection with the Senior
Notes and the Senior Credit Facilities.
The exhibits described below are being provided in
connection with the Company's Registration Statement on Form
S-4 for its Senior Notes due 2001.
Exhibit 99.1 contains consolidated financial
statements of the Company for each of the three fiscal years
in the period ended December 31, 1997 (the "Company Annual
Financial Statements"). THE COMPANY ANNUAL FINANCIAL
STATEMENTS, WHICH INCLUDE THE OPINION OF BDO SEIDMAN, LLP,
THE COMPANY'S INDEPENDENT ACCOUNTANTS, ARE IDENTICAL TO THE
CORRESPONDING FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER
31, 1997, EXCEPT THAT A NEW NOTE NUMBER 17, CONTAINING
SUMMARIZED FINANCIAL INFORMATION FOR JONES USA, HAS BEEN
ADDED. The Company Annual Financial Statements are hereby
incorporated by reference.
Exhibit 99.2 contains unaudited condensed
consolidated financial statements of the Company for the nine
months ended September 27, 1998 (the "Company Nine-Month
Financial Statements"). THE COMPANY NINE-MONTH FINANCIAL
<PAGE>
STATEMENTS ARE IDENTICAL TO THE CORRESPONDING FINANCIAL
STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998,
EXCEPT THAT A NEW NOTE NUMBER 7, CONTAINING SUMMARIZED
FINANCIAL INFORMATION FOR JONES USA, HAS BEEN ADDED. The
Company Nine-Month Financial Statements are hereby
incorporated by reference.
<PAGE>
Item 7. Financial Statements and Exhibits.
(c) Exhibits
Exhibit 99.1 Consolidated financial statements of the
Company for each of the three fiscal years in
the period ended December 31, 1997
Exhibit 99.2 Condensed consolidated financial statements of
the Company for the nine months ended
September 27, 1998
<PAGE>
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
January , 1999
<PAGE>
EXHIBIT LIST
Exhibit 99.1 Consolidated financial statements of the
Company for each of the three fiscal years in
the period ended December 31, 1997
Exhibit 99.2 Condensed consolidated financial statements of
the Company for the nine months ended
September 27, 1998
EXHIBIT 99.1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-10746
JONES APPAREL GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-0935166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 Rittenhouse Circle,
Bristol, Pennsylvania 19007
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 785-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
- ----------------------------- -----------------------------
Common Stock, $0.01 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 23, 1998 was approximately $2,365,861,580.
As of March 23, 1998, there were 50,322,550 shares of the registrant's
Common Stock outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The documents incorporated by reference into this Form 10-K and the Parts
hereof into which such documents are incorporated are listed below:
Document Part
------------------------------------ ----
Those portions of the registrant's III
proxy statement for the registrant's
1998 Annual Meeting (the "Proxy
Statement") that are specifically
identified herein as incorporated by
reference into this Form 10-K.
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<PAGE>
PART I
ITEM 1. BUSINESS
General
Jones Apparel Group, Inc. (the "Company") is a leading designer and
marketer of better priced women's sportswear, suits and dresses. The Company
has pursued a multi-brand strategy by marketing its products under several
nationally known brands, including Jones New York, Evan-Picone and
Rena Rowan, and the licensed brand Lauren by Ralph Lauren. Each label is
differentiated by its own distinctive styling and pricing strategy. The
Company primarily contracts for the manufacture of its products through a
worldwide network of quality manufacturers. The Company has capitalized on
its nationally known brand names by entering into 32 licenses for the Jones
New York brand name and 16 licenses for the Evan-Picone brand name with
select manufacturers of women's and men's apparel and accessories.
Products
The Company's brands cover the entire women's better apparel market. Within
those brands, various product classifications include career and casual
sportswear, dresses and suits, and a combination of all components termed
lifestyle collection. Career and casual sportswear are marketed as groups of
skirts, pants, jackets, blouses, sweaters and related accessories which,
while sold as separates, are coordinated as to styles, color schemes and
fabrics, and are designed to be worn together. For its sportswear and dress
collections, the Company will develop several groups in a selling season.
New sportswear and dress collections are introduced in four or five of the
principal selling seasons - Spring, Summer, Fall I, Fall II and Holiday/Resort,
while suit collections have traditionally been developed for the Fall and Spring
seasons. The introduction of different groups in each season is spaced to
ensure that retail customers frequently are introduced to new merchandise.
The Company's major product categories are summarized in the
following table:
Career Casual Lifestyle Suits, Dresses
Sportswear Sportswear Collection and Other
-------------- ------------- ------------- ----------------
Industry Better Better Better Better
Categories
Brand Labels Jones New York, Jones New York Lauren by Jones New York,
Jones Wear, Sport, Ralph Lauren, Evan-Picone,
Rena Rowan, Jones Wear, Jones New Saville
Evan-Picone, Jones Jeans, York Country
Jones & Co,
Jones Studio
Product Skirts, blouses Skirts, blouses, Skirts, Suits,
Offerings pants, jackets, pants, jackets, blouses, dresses
sweaters sweaters pants, jackets,
sweates, suits,
coats
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The Company's success is enhanced by its ability to maintain a name brand or
designer image while its products are generally sold in the women's better
market at the following retail price points:
Skirts Blouses Casual Tops Suits &
Jackets and Pants and Sweaters and Bottoms Coats Dresses
- --------- --------- ------------ ----------- --------- ---------
$150-$280 $70-$140 $70-$200 $25-$90 $200-$450 $125-$250
The following chart sets forth a breakdown of the Company's apparel sales by
dollar amount (in thousands and as a percentage of the Company's total sales)
during the past three fiscal years.
1997 1996 1995
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Career Sportswear $613,000 45% $529,000 52% $439,000 57%
Casual Sportswear $323,000 24% $292,000 29% $209,000 27%
Lifestyle Collection $293,000 21% $59,000 6% $2,000 0%
Suits, Dresses and Other $143,000 10% $141,000 13% $126,000 16%
Career Sportswear. The Company's flagship brand, Jones New York, offers
consumers an extensive range of better sportswear geared primarily for the
career woman's working needs. Jones New York products are sold in misses,
petites and women's sizes and are marketed under the Jones New York, Jones New
York Petite and Jones New York Woman labels.
Career sportswear under the Rena Rowan label is positioned at the opening
price point in better apparel and includes misses, petites and women's sizes.
The Company's Evan-Picone line of career sportswear is positioned at a price
point between the Jones New York and Rena Rowan brands and includes misses
and women's sizes.
A career sportswear line using the Jones Wear label is sold to selected retail
accounts that do not carry the Company's other lines of career sportswear.
Casual Sportswear. Jones New York Sport offers a collection of casual
sportswear which complements the Jones New York career line. These products
are designed to be worn for weekend and informal workday dressing. Jones New
York Sport is offered in misses, petite and women's sizes. The Company also
offers a business casual collection under the Jones & Co label designed to meet
the needs of the informal workplace and business "dress down" days.
Jones Studio, introduced for the Spring 1996 season, provides business casual
sportswear separates. In 1996, the Company introduced Jones Jeans, a denim and
cotton-based collection for the women's market. Petites and misses sizes
were added for Spring 1998.
Lifestyle Collection. Jones New York Country, introduced for the Fall 1995
season, is a collection of classic country-styled casualwear. Prior to 1997,
this label was exclusive to the Company's own retail outlets. The
distribution of Jones New York Country products has now been extended to several
specialty stores.
In October 1995, the Company acquired an exclusive license to manufacture
and market women's shirts, blouses, skirts, jackets, suits, sweaters, pants,
vests, coats, outerwear and hats under the Lauren by Ralph
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Lauren trademark in the United States, pursuant to license and design service
agreements with the licensor, which expire on December 31, 2001. Upon
expiration of the initial term, the Company has the right to renew the
license for an additional three-year period, provided that it meets certain
minimum sales level requirements. The agreements provide for the payment by the
Company of a percentage of net sales against guaranteed minimum royalty and
design service payments as set forth in the agreements. In July 1996, the
Company began shipping a collection of better career and casual sportswear under
this label for the Fall 1996 season. The Company introduced a collection of
Petite sportswear which began shipping in the Fall 1997 season. Coats and
suits were also introduced in the Fall 1997 season.
Suits. The Company produces suits under the brand names Jones New York and
Saville. Jones New York is a better priced brand. Saville is targeted to
sell at the opening price points of the better price category. Jones New
York currently offers products in misses and petite sizes and Saville offers
petite, misses and women's sizes. During 1997, the Company phased out its
licensed Christian Dior suit business.
Dresses. The Company ships collections of career dresses under the Jones New
York and Evan-Picone brand names, targeted to sell at better prices.
Other. The Company also produces sportswear for the private label market.
While there is significant additional demand in this market, the Company has
not actively pursued more private label business in order to concentrate on
the expansion of its name brand business.
The Company has introduced a collection of men's casual sportswear under the
Jones New York label for the Fall 1998 selling season.
Design
Each product line of the Company has its own design team which is
responsible for the creation, development and coordination of the product
group offerings within each line. The Company believes its design staff of
215 people is widely recognized for its distinctive styling of garments and
its ability to update fashion classics with contemporary trends. The Company's
designers travel throughout the world for fabrics and colors, and attempt to
stay continuously abreast of the latest fashion trends. In addition, the
Company actively monitors the retail sales of its products to determine changes
in consumer trends.
For most sportswear lines, the Company will develop several groups in a
season. A group typically consists of an assortment of skirts, pants,
jackets, blouses, sweaters and various accessories. The Company believes
that it is able to minimize design risks because the Company often will not have
started cutting fabrics until the first few weeks of a major selling season.
Since different styles within a group often use the same fabric, the Company
can redistribute styles and, in some cases, colors, to fit current market
demand.
In accordance with standard industry practices for licensed products, Polo
Ralph Lauren Corporation has the right to approve the Company's designs for
the Lauren by Ralph Lauren product line.
Manufacturing
Apparel sold by the Company is produced in accordance with its design,
specification and production schedules. The Company contracts for the
cutting and sewing of the majority of its garments with approximately 133
contractors located in the United States and 280 in overseas locations. The
Company also operates one manufacturing facility of its own. During 1997,
approximately 30% of the Company's products were manufactured in the United
States and Mexico, and 70% in other parts of the world, primarily Asia.
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<PAGE>
The Company believes that outsourcing allows it to maximize production
flexibility while avoiding significant capital expenditures, work-in-process
inventory build-ups and costs of managing a larger production work force.
The Company's fashion designers, production staff and quality control personnel
closely supervise garments manufactured by contractors to ensure that they meet
the Company's high standards. See "Quality Control" below.
The Company's products are manufactured according to plans prepared each year
which reflect prior years' experience, current fashion trends, economic
conditions and management estimates of a line's performance. The Company
orders piece goods concurrently with concept board development. The purchase
of piece goods is controlled and coordinated on a divisional basis. The Company
limits its exposure to specific colors and fabrics by committing to purchase
a portion of total projected demand with options to purchase additional
volume if demand meets the plan. The Company believes that its policy of
limiting its commitments for purchases early in the season minimizes its
exposure to excess inventory and obsolescence.
The Company believes its extensive experience in logistics and production
management underlies its success in coordinating with contractors who
manufacture different garments included within the same product group. The
Company has had long-term mutually satisfactory business relationships with
many of its contractors, but does not have long-term written agreements with any
of them.
The Company has an active program in place to monitor compliance by its
contract manufacturers with applicable laws relating to the payment of wages
and working conditions. In 1996, the Company became a participant in the
United States Department of Labor's Apparel Manufacturers Compliance Program for
that purpose. Under that program, and through the Company's independent
agreements with each of its domestic and foreign manufacturers, the Company
regularly audits such compliance and requires corrective action when
appropriate.
Quality Control
The Company's comprehensive quality control program is designed to ensure that
purchased raw materials and finished goods meet the Company's exacting
standards. Substantially all of the fabric purchases for domestically
manufactured garments are inspected upon receipt in either the Company's
Pennsylvania and North Carolina warehouse facilities (where they are stored
prior to shipment for cutting) or at the contractor's warehouse. Fabrics for
foreign manufactured garments are inspected by the Company's contractors upon
receipt in their warehouses. The Company's quality control program includes
inspection of prototypes of each garment prior to cutting by the contractors
to ensure compliance with the Company's specifications.
Domestic contractors are supervised by the Company's quality control staff
based primarily in Pennsylvania, while foreign manufacturers' operations are
monitored by both Company personnel and buying agents located in other
countries. All finished goods are shipped to the Company's warehouses for
final inspection and distribution.
Supplies
The Company generally supplies the raw material to its domestic
manufacturers and occasionally to foreign manufacturers. Otherwise, the raw
materials are purchased directly by the manufacturer in accordance with the
Company's specifications. Raw materials, which are in most instances made
and/or colored especially for the Company, consist principally of piece goods
and yarn and are purchased by the Company from a number of domestic and
foreign textile mills and converters. The Company's foreign finished goods
purchases are generally purchased on a letter of credit basis, while its
domestic purchases are generally purchased on an open order basis.
The Company does not have long-term formal arrangements
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<PAGE>
with any of its suppliers. However, the Company has experienced little
difficulty in satisfying its raw material requirements and considers its
sources of supply adequate.
Marketing
The Company distributes its products through approximately 1,225 customers,
including department stores, specialty retailer accounts and direct mail
catalog companies throughout the United States and Canada representing
approximately 6,800 locations. Department stores account for approximately
two-thirds of the Company's sales. The Company's ten largest customers
accounted for approximately 67% of sales in 1997. No single customer
accounted for more than 10% of net sales; however, certain of the Company's
customers are under common ownership. When considered together as a group
under common ownership, sales to seven department store customers currently
owned by Federated Department Stores, Inc. ("Federated") accounted for
approximately 20% of 1997 sales and sales to eight department store customers
currently owned by The May Department Stores Company ("May") accounted for
approximately 19% of 1997 sales. While the Company believes that purchasing
decisions are generally made independently by each department store customer
(including the stores in the Federated and May groups), in some cases the trend
may be toward more centralized purchasing decisions. The Company attempts to
minimize its credit risk from its concentration of customers by closely
monitoring accounts receivable balances and shipping levels and the ongoing
financial performance and credit status of its customers. Among the
Company's leading customers are May group members Lord & Taylor, Hecht's and
Foley's; Federated group members Macy's Department Stores, Lazarus and
Bloomingdale's; and independent stores Dillard's, Dayton Hudson and Nordstrom.
The Company has a direct sales force of 174 sales people (excluding
employees in the Company's factory outlet stores) which includes individuals
located in the Company's New York and Toronto showrooms as well as in
regional sales offices and showrooms that the Company leases in Atlanta, Dallas,
Los Angeles and Seattle. The Company also has a small number of independent
sales representatives. In addition, senior management is actively involved
in selling to major accounts. Products are marketed to department stores and
specialty retailing customers during "market weeks," which are generally four to
six months in advance of the five corresponding industry selling seasons.
While the Company typically will allocate a six week period to market a
line, most major orders are written within the first three weeks of any
market period. Since piece goods for a line usually are not cut until the
first few weeks of a marketing period, the Company is able to tailor production
schedules and styles to current market demands and minimize excess inventory.
As one of the primary apparel resources for many of its customers, the Company
is able to influence the mix, quantity and timing of orders placed by its
retail accounts enabling the Company to market complete lines of sportswear
and minimize excess inventory. The Company's close relationships with its
retail accounts allow it to efficiently monitor production schedules and
inventories.
The Company believes retail demand for its products is enhanced by the
Company's ability to provide its retail accounts and consumers with
knowledgeable sales support. In this regard, the Company has an established
program to place retail sales specialists in many major department stores.
These individuals have been trained by the Company to support the sale of its
products by educating other store personnel and consumers about the Company's
products and by coordinating the Company's marketing activities with those of
the stores. In addition, the retail sales specialists provide the Company with
firsthand information concerning consumer reactions to the Company's
products. In addition, the Company has a program of designated sales
personnel in which a store agrees to designate certain sales personnel who will
devote a substantial portion of their time to selling Jones products in return
for certain benefits.
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<PAGE>
The Company employs a cooperative advertising program with its major retail
accounts, whereby it shares the cost of its retail accounts' advertising and
promotional expenses, up to a preset maximum percentage of the retail
accounts' purchases. An important part of the marketing program includes
prominent displays of the Company's products in retail accounts' sales
catalogs.
Factory Outlet Stores
At December 31, 1997, the Company operated a total of 214 factory outlet
stores and 5 full price stores. The Company operates six coffee bars in close
proximity to six of its factory outlet stores as a convenience to its
customers. Manufacturer's outlet malls are generally located either in high
traffic tourist areas or on major highways to vacation destinations and major
cities. The 214 factory outlet stores operated by the Company are located in
120 outlet malls throughout the United States. These locations are generally
situated in select geographic markets which are not in direct competition with
the Company's primary customers. The Company's outlet stores focus on breadth of
product line and customer service as well as value pricing. In addition to
its brand name merchandise, these stores also sell merchandise produced by
licensees of the Company. The Company's outlet store expansion strategy is
to continue to open multiple stores in select outlet malls for specific
product lines which target different customer segments.
The Company opened 45 and closed 26 stores in 1997 and opened 47 and closed 22
stores in 1996. The following table sets forth certain information regarding
the number and type of stores open and aggregate store sales for each of the
years in the three year period ended December 31, 1997.
Retail stores open at end of period:
Store Type Description 1997 1996 1995
- ---------------------- ---------------------------- ---- ---- ----
Jones New York Jones New York sportswear 85 82 78
Jones New York Full price retail showcase 2 2 2
for products
Executive Suite Jones New York and Executive 21 28 33
Suite men's and women's
suits and furnishings
Jones New York Sport Jones New York Sport and 31 22 2
Jones & Co casual sportswear
Evan-Picone Evan-Picone sportswear 15 17 23
Jones New York Country Jones New York Country 35 22 9
casual sportswear
Jones New York Country Full price retail showcase 3 2 -
for products
Factory Finale Close out merchandise 19 15 15
Other concepts Various 8 10 13
---- ---- ----
Total retail stores open at end of period 219 200 175
Aggregate net store sales (in thousands) $153,830 $129,767 $102,307
Square footage of gross store space at end of period 607,632 557,100 478,975
Nearly all stores are leased under long-term leases (typically five years).
The average store size is approximately 2,775 square feet, ranging from a
minimum of 1,386 square feet to a maximum of 6,600 square feet.
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Licensing of Company Brands
As of December 31, 1997, the Company had 32 license agreements under which
independent licensees sell products under the Company's Jones New York (and
related) trademarks in accordance with designs furnished or approved by the
Company in various territories in the United States and Canada. Current
licenses include men's tailored clothing and overcoats, women's intimate
apparel, women's rainwear, outerwear, leather outerwear and woolen coats,
footwear and handbags, belts, scarves, women's swimwear, umbrellas, eyewear,
fragrances, costume jewelry, hair accessories, and cosmetic travel accessories.
Each of the licenses provides for the payment to the Company of a percentage of
the licensee's net sales of the licensed products against guaranteed minimum
royalty payments which generally increase over the term of the agreement.
During 1997, the Company received $9,436,000 of Jones New York (and related
names) licensing income.
As of December 31, 1997, the Company had 16 license agreements under which
independent licensees sell products under the Company's Evan-Picone
trademarks in accordance with designs furnished or approved by the Company
in various territories in the United States and Canada. These licenses include
women's woolen coats, footwear, men's tailored clothing, mens' knit and woven
shirts and sweaters, men's neckwear, and men's and women's hosiery. Each of
the licenses provides for the payment to the Company of a percentage of the
licensee's net sales of the licensed products against guaranteed minimum
royalty payments which generally increase over the term of the agreement.
During 1997, the Company received $5,945,000 of Evan-Picone licensing income.
Trademarks
The Company utilizes a variety of trademarks which it owns, including Jones
New York, Jones New York Sport, Jones & Co, Jones*Wear, Jones Wear, JNY, Jones
New York Country, Jones Jeans, Saville, Rena Rowan, Ellen Kaye, Evan-Picone,
Picone Sport, Elements by Evan-Picone, Picone Studio, Evan-Picone Sport,
Executive Suite and Strictly Business. The Company has registered or applied
for registration for these and other trademarks for use on a variety of items of
apparel and apparel-related products in the United States and Canada. In
addition, the Company has registered certain of its trademarks in certain other
countries. The Company's material registered trademarks Jones New York,
Jones New York Sport, Rena Rowan and Evan-Picone, have their Federal
trademark registrations expire in 2006, 2004, 2002, and 2003, respectively, with
its other registered trademarks expiring at various dates through 2014, all of
which are subject to renewal. The Company carefully monitors trademark
expiration dates to ensure uninterrupted registration of its trademarks. The
Company also licenses the Lauren by Ralph Lauren label (see "Products" above).
The Company regards its trademarks and other proprietary rights as valuable
assets and believes that they have significant value in the marketing of its
products. The Company vigorously protects its trademarks against infringement.
Imports and Import Restrictions
The Company's transactions with its foreign manufacturers and suppliers are
subject to the risks of doing business abroad.
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries, including Hong Kong, Taiwan and Korea. These agreements impose
quotas on the amount and type of goods which can be imported into the United
States from these countries. Such agreements also allow the United States to
impose at any time restraints on the importation of categories of merchandise
that, under the terms of the agreements, are not subject to specified limits.
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The Company monitors duty, tariff and quota-related developments and
continually seeks to minimize its potential exposure to quota-related risks
through, among other measures, geographical diversification of its
manufacturing sources, the maintenance of overseas offices, allocation of
overseas production to merchandise categories where more quota is available
and shifts of production among countries and manufacturers.
The Company's imported products are also subject to United States customs
duties and, in the ordinary course of business, the Company is from time to time
subject to claims by the United States Customs Service for duties and other
charges.
The United States and the other countries in which the Company's products are
manufactured may, from time to time, impose new quotas, duties, tariffs or
other restrictions, or adversely adjust presently prevailing quotas, duty or
tariff levels, which could adversely affect the Company's operations and its
ability to continue to import products at current or increased levels. The
Company cannot predict the likelihood or frequency of any such events occurring.
Because the Company's foreign manufacturers are located at greater geographic
distances from the Company than its domestic manufacturers, the Company is
generally required to allow greater lead time for foreign orders, which
reduces the Company's manufacturing flexibility. Foreign imports are also
affected by the high cost of transportation into the United States.
In addition to the factors outlined above, the Company's future import
operations may be adversely affected by political instability resulting in
the disruption of trade from exporting countries, any significant fluctuation
in the value of the dollar against foreign currencies and restrictions on the
transfer of funds. However, the recent instability of Asian financial markets
is not expected to have a material impact on the Company's financial results.
Backlog
On December 31, 1997, the Company had unfilled customer orders of
approximately $557 million, compared to approximately $419 million of such
orders at December 31, 1996. These amounts include both confirmed orders and
unconfirmed orders which the Company believes, based on industry practice and
past experience, will be confirmed. The amount of unfilled orders at a
particular time is affected by a number of factors, including the timing of
the receipt and processing of customer orders and scheduling of the
manufacture and shipping of the product, which in some instances is dependent on
the desires of the customer. Accordingly, a comparison of unfilled orders from
period to period is not necessarily meaningful and may not be indicative of
eventual actual shipments.
Competition
There is intense competition in the sectors of the apparel industry in which
the Company participates. The Company competes with many other manufacturers,
some of which are larger and have greater resources than the Company.
The Company competes primarily on the basis of fashion, price and quality.
The Company believes its competitive advantages include its ability to
effectively anticipate and respond to changing consumer demands, its premier
brand names and range of products and its ability to operate within the
industry's production and delivery constraints. Furthermore, the Company's
established brand names and relationships with retailers have resulted in a
highly loyal following of customers.
The Company considers the risk of formidable new competitors to be minimal due
to barriers to entry such as significant startup costs and the long-term nature
of supplier and customer relations. It has been the
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<PAGE>
Company's belief that during the past few years, major department stores and
specialty retailers have been increasingly unwilling to source garments from
suppliers who are not well capitalized or do not have established reputations
for delivering quality merchandise in a timely manner. However, there can be
no assurance that significant new competitors will not develop in the future.
Employees
At December 31, 1997, the Company had approximately 3,135 full-time employees.
This total includes 25 in executive or senior managerial positions,
approximately 1,870 in quality control, production, design and distribution
positions, approximately 380 in sales, clerical and office positions and
approximately 860 in the Company factory outlet and full-price retail stores.
The Company also employs approximately 790 part-time employees, of which
approximately 720 work in the Company factory outlet and full-price retail
stores.
Approximately 350 of the Company's employees are members of the Teamsters
Union, which has a four year labor agreement with the Company expiring in March
2002. The Company considers its relations with its employees to be
satisfactory.
ITEM 2. PROPERTIES
The general location, use and approximate size of the Company's principal
properties, all of which are leased, are set forth below:
Approximate Area
Location Use in Square Feet
- --------------------- ----------------------------- ----------------
Bristol, Pennsylvania Headquarters, warehouse 419,200
and distribution
Bristol, Pennsylvania Materials warehouse 102,400
Bristol, Pennsylvania Distribution warehouse 208,000
Bristol, Pennsylvania Computer and accounting 16,425
services
Bristol, Pennsylvania Administrative services 22,500
Ciudad Juarez, Mexico Production 66,850
Downsview, Canada Canadian headquarters, 114,300
warehouse and distribution
El Paso, Texas Administrative services 33,250
Lawrenceburg, Tennessee Distribution warehouses 1,205,100
New York, New York Executive and sales offices 156,700
Rural Hall, North Carolina Materials warehouse 232,200
The Company leases space for 214 outlet stores, five full-price retail stores
and six coffee bars (aggregating approximately 613,500 square feet) at
locations across the United States. The Company also leases regional sales
offices and showrooms in Atlanta, Dallas, Los Angeles and Seattle. The Company
believes that its existing facilities are well maintained, in good operating
condition and that its existing and planned facilities will be adequate for
its operations for the foreseeable future.
The Company occupies a warehouse and office facility which is leased from an
affiliated real estate partnership which is 50% owned by the Company's Chairman.
The lease runs until March 31, 1998. Minimum annual rent payments are
$1,000,000. The lease was capitalized at the fair market value of the
facility which approximated the present value of the minimum lease payments.
Upon the expiration of the lease, the Company has agreed to purchase the
property from the partnership for $10,500,000, which
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<PAGE>
approximates fair market value, and enter into a sale and leaseback arrangement
with an unrelated third party. See "Item 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Price range of common stock:
1997
High $41 3/8 $49 1/8 $57 3/16 $57 5/16
Low $32 1/8 $36 1/8 $46 5/8 $40 7/16
1996
High $24 1/4 $27 3/4 $37 3/8 $37 3/8
Low $17 13/16 $23 1/4 $22 9/16 $29 5/8
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol "JNY". The above figures set forth, for the periods indicated, the
high and low sale prices per share of the Company's Common Stock as reported
on the New York Stock Exchange Composite Tape. The last reported sale price
per share of the Company's Common Stock on March 17, 1998 was $55 11/16 and on
that date there were 154 holders of record of the Company's Common Stock.
To date, the Company has not paid any cash dividends on shares of its Common
Stock. The Company anticipates that all of its future earnings will be retained
for its financial requirements and does not anticipate paying cash dividends on
its Common Stock in the foreseeable future. All stock prices have been
adjusted to reflect the 2-for-1 stock split effective October 2, 1996.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following financial information is qualified by reference to, and should
be read in conjunction with, the Company's Consolidated Financial Statements
and Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained elsewhere in this report.
The selected consolidated financial information presented below is derived from
the Company's audited Consolidated Financial Statements for each of the five
years in the period ended December 31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995 1994 1993
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Net sales $1,372,458 $1,021,042 $776,365 $633,257 $541,152
Licensing income <F1> 15,013 13,036 10,314 8,487 4,907
---------- ---------- -------- -------- --------
Total revenues 1,387,471 1,034,078 786,679 641,744 546,059
Cost of goods sold 940,149 717,250 546,413 438,575 363,742
---------- ---------- -------- -------- --------
Gross profit <F2> 447,322 316,828 240,266 203,169 182,317
Selling, general and
administrative expense 250,685 186,572 139,135 115,307 103,392
---------- ---------- -------- -------- --------
Operating income 196,637 130,256 101,131 87,862 78,925
Interest expense 3,584 3,040 1,908 1,212 716
Interest income (1,556) (547) (445) (695) (810)
---------- ---------- -------- -------- --------
Income before provision
for income taxes 194,609 127,763 99,668 87,345 79,019
Provision for 72,884 46,889 36,183 32,425 30,660
income taxes ---------- ---------- -------- -------- --------
Net income $121,725 $80,874 $63,485 $54,920 $48,359 <F3>
========== ========== ======== ======== ========
Per Share Data <F4><F5>
Net income per share
Basic $2.35 $1.55 $1.22 $1.06 $0.95 <F3>
Diluted $2.26 $1.51 $1.20 $1.04 $0.92 <F3>
Dividends paid per share - - - - -
Weighted average number
of common shares
outstanding
Basic 51,899 52,333 52,130 51,656 50,789
Diluted 53,905 53,651 53,024 52,889 52,286
<CAPTION>
December 31, 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Working capital $330,569 $293,970 $260,853 $204,221 $159,175
Total assets 580 767 488,109 400,959 318,286 266,594
Short-term debt,
including current
portion of capital
lease obligations 4,199 3,067 2,327 1,859 1,722
Long-term debt,
including capital
lease obligations 27,290 12,141 10,151 8,029 9,545
Stockholders' equity 435,632 376,729 314,975 248,678 189,120
</TABLE>
<F1> Represents license fees received by the Company (net of related expenses).
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<PAGE>
<F2> Historically, the Company included licensing income as a separate line
item in operating income. In accordance with current industry practice,
the Company has included this amount in total revenues and gross profit.
All periods presented reflect this reclassification of licensing income.
<F3> Represents income before cumulative effect of change in accounting
principle for the year ended December 31, 1993. In 1993, the Company
recorded a cumulative effect of a change in accounting principle for
income taxes as a result of the adoption of SFAS No. 109 which increased
net income by $1,376,000. Basic and diluted income per share for the year
ended December 31, 1993, including this change in accounting principle, was
$0.98 and $0.95, respectively.
<F4> On July 30, 1996, the Company's Board of Directors approved a two-for-one
stock split of the Company's Common Stock in the form of a 100% stock
dividend for shareholders of record as of September 12, 1996.
Concurrently, the number of authorized shares of Common Stock was increased
to 100,000,000. On October 2, 1996, a total of 26,744,580 shares of Common
Stock were issued in connection with the split. The stated par value of
each share remained at $0.01. All share and per share amounts have been
restated to retroactively reflect the stock split.
<F5> During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which
provides for the calculation of "basic" and "diluted" earnings per
share. This Statement, effective for financial statements issued for
periods ending after December 15, 1997, requires restatement of all
prior-period EPS data presented. All periods have been restated to
comply with the provisions of SFAS No. 128.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
STATEMENTS OF INCOME EXPRESSED AS A PERCENTAGE OF TOTAL REVENUES
Year Ended December 31, 1997 1996 1995
------ ------ ------
Net sales 98.9% 98.7% 98.7%
Licensing income 1.1% 1.3% 1.3%
------ ------ ------
Total revenues 100.0% 100.0% 100.0%
Cost of goods sold 67.8% 69.4% 69.5%
------ ------ ------
Gross profit 32.2% 30.6% 30.5%
Selling, general and
administrative expenses 18.1% 18.0% 17.7%
------ ------ ------
Operating income 14.2% 12.6% 12.9%
Interest expense 0.3% 0.3% 0.2%
Interest income (0.1%) (0.1%) (0.1%)
------ ------ ------
Income before provision
for income taxes 14.0% 12.4% 12.7%
Provision for income taxes 5.3% 4.5% 4.6%
------ ------ ------
Net income 8.8% 7.8% 8.1%
====== ====== ======
Totals may not agree due to rounding.
-14-
<PAGE>
GENERAL
The following discussion provides information and analysis of the Company's
results of operations from 1995 through 1997 and its liquidity and capital
resources. The following discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements included
elsewhere herein.
The Company has achieved compound annual growth rates of 32.8% for total
revenues and 39.4% for operating income from 1995 to 1997. Total revenues and
operating income in 1997 increased 34.2% and 51.0%, respectively, over 1996.
The Company believes that it has achieved this growth by enhancing the brand
equity of each of its labels and successfully adding new labels, such as Lauren
by Ralph Lauren, through its focus on exceptional design, quality and value.
The Company has leveraged the strength of its brands to increase both the
number of locations and amount of selling space in which its products are
offered, as well as to introduce new product extensions. The Company has
also benefitted from a trend among its major retail accounts to concentrate
their women's apparel buying among a narrowing group of apparel vendors.
RESULTS OF OPERATIONS
1997 Compared to 1996
Net Sales
Net sales in 1997 increased 34.4%, or $0.4 billion, to $1.4 billion compared
to $1.0 billion in 1996, due primarily to an increase in the number of units
shipped, and also, to a lesser extent, higher average selling prices per
unit. Career sportswear sales increased 15.9%, or $83.9 million, to $612.8
million in 1997 compared to $528.9 million in 1996. Casual sportswear sales
in 1997 increased 10.8%, or $31.5 million, to $323.4 million compared to
$291.9 million in 1996. Lifestyle collection sales in 1997 increased $234.1
million, to $292.9 million compared to $58.8 million in 1996, largely the
result of the rapid growth in sales of the Lauren by Ralph Lauren label.
Net sales for the Company's suit, dress and other category increased 1.4%, or
$2.0 million, to $143.4 million in 1997, compared to $141.4 million in 1996.
Licensing Income
Licensing income increased $2.0 million to $15.0 million in 1997, compared to
$13.0 million in 1996. Income from licenses under the Jones New York label
increased $1.8 million while income from licenses under the Evan-Picone label
rose $0.2 million. The increases were primarily due to higher sales volume by
licensees.
Gross Profit
The gross profit margin was 32.2% in 1997, compared to 30.6% in 1996. The
increase was attributable to the impact of stronger margins across major product
categories and the proportionately larger increase in sales of the Lauren by
Ralph Lauren label, which was introduced in Fall 1996 and carries higher margins
than the corporate average.
SG&A Expenses
Selling, general and administrative expenses ("SG&A" expenses) of $250.7
million in 1997 represented an increase of $64.1 million over $186.6 million
in 1996. As a percentage of total revenues, SG&A expenses increased to 18.1% in
1997 from 18.0% in 1996. Expenses associated with Lauren by Ralph Lauren
product advertising, royalties, store displays and associated operating costs,
as well as the Company's overall sales growth, added significant expenses during
1997. Retail store operating expenses increased $6.9 million, reflecting the
added cost of 19 new stores in operation at the end of 1997.
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<PAGE>
Operating Income
The resulting 1997 operating income increased $66.3 million to $196.6 million,
compared to $130.3 million during 1996. The operating margin increased to 14.2%
in 1997 from 12.6% in 1996 as a result of the higher gross profit margins
during 1997.
Net Interest Expense
Net interest expense was $2.0 million in 1997 compared to $2.5 million in
1996. The primary reason for the change was an increase in interest income
of $1.0 million, which offset higher interest on capital leases for
additional warehouse facilities constructed during 1997.
Provision for Income Taxes
The effective income tax rate for 1997 was 37.5% compared to 36.7% in 1996.
The increase was primarily due to higher state income tax provisions for 1997.
Net Income
Net income increased 50.5% to $121.7 million in 1997, an increase of $40.8
million over the net income of $80.9 million earned in 1996. Net income as a
percentage of total revenues was 8.8% in 1997 compared to 7.8% in 1996.
1996 Compared to 1995
Net Sales
Net sales in 1996 increased 31.5%, or $244.6 million, to $1,021.0 million,
compared to $776.4 million in 1995, due primarily to an increase in the number
of units shipped. Career sportswear sales increased 20.5%, or $89.8 million,
to $528.9 million in 1996 compared to $439.1 million in 1995. Casual
sportswear sales in 1996 increased 39.7%, or $83.0 million, to $291.9 million
compared to $208.9 million in 1995. Lifestyle collection sales in 1996
increased $56.7 million to $58.8 million, compared to $2.1 million in 1995,
primarily due to the 1996 introduction of the Lauren by Ralph Lauren label.
Net sales for the Company's suit, dress and other category increased 12.0%,
or $15.1 million, to $141.4 million in 1996 compared to $126.3 million in 1995.
Licensing Income
Licensing income increased $2.7 million to $13.0 million in 1996 as compared
to $10.3 million in 1995. Income from licenses under the Jones New York label
increased $2.1 million, while income from licenses under the Evan-Picone
label rose $0.6 million.
Gross Profit
The gross profit margin was 30.6% in 1996 compared to 30.5% in 1995. The
increase was primarily attributable to the impact of higher gross profit margins
from the Company's major product lines, as well as the introduction of the
new Lauren by Ralph Lauren label, which carries higher margins than the
corporate average.
SG&A Expenses
SG&A expenses of $186.6 million in 1996 represented an increase of $47.5
million over $139.1 million in 1995. As a percentage of total revenues, SG&A
expenses increased to 18.0% in 1996 from 17.7% in 1995. Expenses associated
with the Lauren by Ralph Lauren product advertising and royalties and associated
operating costs, as well as the Company's overall sales growth, added
significant expenses during 1996. Retail store operating expenses increased
$10.2 million, reflecting the added cost of 25 new stores in operation at the
end of 1996.
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<PAGE>
Operating Income
The resulting 1996 operating income of $130.3 million increased $29.2 million,
as compared to $101.1 million during 1995. The operating margin decreased to
12.6% in 1996 from 12.9% in 1995, largely as a result of the higher
percentage of SG&A expenses to sales during 1996.
Net Interest Expense
Net interest expense was $2.5 million in 1996 compared to $1.5 million in
1995. The primary reasons for the change were higher average overall
borrowings and interest on capital leases for additional warehouse facilities
during 1996.
Provision for Income Taxes
The effective income tax rate for 1996 was 36.7% as compared to 36.3% in 1995.
The increase was primarily due to higher state income tax provisions for 1996.
Net Income
Net income increased 27.4% to $80.9 million in 1996, an increase of $17.4
million over the net income of $63.5 million earned in 1995. Net income as a
percentage of total revenues was 7.8% in 1996, compared to 8.1% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund working capital
needs, capital expenditures and, beginning in 1995, to repurchase the Company's
Common Stock on the open market. The Company has historically relied primarily
on internally generated funds, trade credit and bank borrowings to finance
its operations and expansion. As of December 31, 1997, total cash and cash
equivalents were $40.1 million, a $10.0 million increase over the $30.1 million
reported as of December 31, 1996.
Net cash provided by operations was $110.6 million, $70.7 million and $8.9
million in 1997, 1996 and 1995, respectively. The $39.9 million improvement for
1997 was primarily due to a higher net income and a decrease in trade
receivables compared to an increase in the previous two years. While fourth
quarter 1997 sales increased 33.7% over 1996, accounts receivable at the end of
1997 decreased $18.9 million from 1996. This was due to the provision for
allowances that will be granted to customers and fourth quarter shipments
occurring earlier than in prior years, allowing cash collections on a greater
portion of the resulting receivables before the end of the year. Inventories
increased $41.0 million in 1997, $37.8 million in 1996 and $53.1 million in
1995, all of which reflected the inventory levels required to meet anticipated
wholesale shipments for the first quarter of the following year and the net
addition of 19 retail stores in 1997, 25 in 1996, and 42 in 1995.
Net cash used in investing activities increased to $43.3 million, an increase
of $8.0 million over 1996. Cash used in investing activities has been
primarily for the opening of additional warehouse facilities (including, in
1997, cash restricted for use in completing warehouse facilities under
construction at the end of the year), new retail stores and existing store
renovations, computer system hardware and software upgrades and a
$1.5 million payment made in 1996 to satisfy all future royalty obligations to
the former owner of the Evan-Picone trademark. In addition, to support
anticipated growth in the number of units shipped, the Company has committed
to the construction of additional warehouse facilities in 1998. These
facilities, including related equipment, are estimated to cost $28.0 million
and the Company plans to finance all or a portion of the construction through
capital lease financing and long-term debt.
Net cash provided by (used in) financing activities was $(57.2) million in
1997, $(22.2) million in 1996 and $2.4 million in 1995. The principal
reasons for the changes were: (i) $10.0 and $5.0 million in proceeds from
capital leases in 1997 and 1996, respectively, for construction of additional
warehouse facilities; (ii) issuance of $10.0 million in long-term debt in
1997 for construction of an additional warehouse facility; and (iii)
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<PAGE>
transactions involving the Company's Common Stock. In 1997 and 1996, the
Company repurchased $85.8 million and $33.6 million, respectively, of its
Common Stock on the open market under two announced programs under which the
Company is authorized to acquire an aggregate of up to $200.0 million of such
shares. As of December 31, 1997, $100.0 million had been expended pursuant to
the first stock repurchase program (the maximum authorized) and an additional
$24.0 million had been expended under the second program. Proceeds from the
issuance of common stock to employees exercising stock options amounted to
$12.5 million, $9.1 million and $4.7 million in 1997, 1996 and 1995,
respectively.
As of December 31, 1997, the Company had credit arrangements with six United
States financial institutions which totaled $425.0 million (see Note 5 of
Notes to Consolidated Financial Statements). These lines, which may be used
for unsecured borrowings and letters of credit (issued primarily to finance
foreign inventory purchases), contain an aggregate sub-limit of $170.0
million for unsecured borrowings with rates depending on the borrowing
vehicle utilized. At December 31, 1997, $153.7 million was utilized for letters
of credit and there were no short-term borrowings outstanding. The Company also
has a line of credit with a Canadian institution for C$4.0 million to be used
for unsecured borrowings under which no amounts were outstanding at December
31, 1997.
The Company believes that funds generated by operations and the bank credit
arrangements will provide the financial resources sufficient to meet its
foreseeable working capital, letter of credit, capital expenditure and stock
repurchase requirements.
THE YEAR 2000
The Company is currently evaluating the impact of the Year 2000 on its
management and information systems. At this time, management believes that
the impact of the Year 2000 will have no material effect on its operations or
financial results.
INFLATION
The Company believes that the relatively moderate rates of inflation which
have been experienced in the United States and Canada, where it competes, have
not had a significant effect on its net sales or profitability.
SEASONALITY OF BUSINESS
Historically, the Company's sales and profit levels fluctuate by quarter.
As a result, the Company experiences seasonal increases and decreases in its
working capital requirements. These patterns result primarily from the
timing of shipments for each season; however, the timing of seasonal shipments
can vary from quarter to quarter. Fall merchandise is shipped principally in
the third quarter while Spring merchandise is shipped primarily in the first
quarter. Summer and Holiday/Resort goods, the smaller of the seasons, are
shipped primarily in the second and fourth quarters, respectively. For an
analysis of quarterly historical operating trends, see Note 14 of Notes to
Consolidated Financial Statements.
NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued two new disclosure
standards.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," established standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments
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<PAGE>
by owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which supersedes SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise," establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of and enterprise about which separate
financial information is available that is evaluated regularly by Management in
deciding how to allocate resources and in assessing performance.
Both SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. The adoption of these standards is not
expected to have a material effect on the Company's financial position or
results of operations. The Company is currently reviewing SFAS No. 131 and
has of yet been unable to fully evaluate the impact, if any, it may have on
future financial statement disclosures.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended which represent the Company's
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 the Company's products within the prevailing retail environment,
customer acceptance of both new designs and newly-introduced product lines, and
financial difficulties encountered by customers. All statements other than
statements of historical facts included in this Annual Report, including,
without limitation, the statements under "Management's Discussion and Analysis
of Financial Condition," are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
have been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
disclosed in this Report. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STATEMENT OF MANAGEMENT RESPONSIBILITY
The management of Jones Apparel Group, Inc. is responsible for the
preparation, integrity and objectivity of the consolidated financial
statements and other financial information presented in this report. The
accompanying consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and properly reflect the
effects of certain estimates and judgements made by management.
The Company's management maintains an effective system of internal control
that is designed to provide reasonable assurance that assets are safeguarded
and transactions are properly recorded and executed in accordance with
management's authorization. The system is continuously monitored by direct
management
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<PAGE>
review, the independent accountants and by internal auditors who conduct an
extensive program of audits throughout the Company.
The Company's consolidated financial statements have been audited by BDO
Seidman, LLP, independent accountants. Their audits were conducted in
accordance with generally accepted auditing standards, and included a review
of financial controls and tests of accounting records and procedures as they
considered necessary in the circumstances.
The Audit Committee of the Board of Directors, which consists of outside
directors, meets regularly with management, the internal auditors and the
independent accountants to review accounting, reporting, auditing and
internal control matters. The committee has direct and private access to both
internal and external auditors.
/s/ Sidney Kimmel /s/ Wesley R. Card
Sidney Kimmel Wesley R. Card
Chairman Chief Financial Officer
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Jones Apparel Group, Inc.
We have audited the accompanying consolidated balance sheets of Jones Apparel
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended 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 audits to
obtain reasonable assurance about whether the 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 financial position of Jones
Apparel Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
February 6, 1998
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<PAGE>
Jones Apparel Group, Inc.
Consolidated Balance Sheets
(All amounts in thousands except per share data)
December 31, 1997 1996
------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $40,134 $30,085
Accounts receivable, net of allowance
of $2,767 and $2,263 for doubtful accounts 91,747 112,678
Inventories 255,055 214,437
Receivable from and advances to contractors 7,833 11,490
Prepaid and refundable income taxes 5,993 -
Deferred taxes 26,269 9,708
Prepaid expenses and other current assets 13,740 11,432
-------- --------
TOTAL CURRENT ASSETS 440,771 389,830
PROPERTY, PLANT AND EQUIPMENT, at cost,
less accumulated depreciation and amortization 81,934 61,696
CASH RESTRICTED FOR CAPITAL ADDITIONS 11,193 -
INTANGIBLES, at cost, less
accumulated amortization 30,604 26,288
OTHER ASSETS 16,265 10,295
-------- --------
$580,767 $488,109
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and
capital lease obligations $4,199 $3,067
Accounts payable 90,429 72,569
Income taxes payable - 8,959
Accrued expenses and other current liabilities 15,574 11,265
-------- --------
TOTAL CURRENT LIABILITIES 110,202 95,860
-------- --------
NONCURRENT LIABILITIES:
Obligations under capital leases 18,457 12,134
Long-term debt 8,833 7
Other 6,107 -
-------- --------
TOTAL NONCURRENT LIABILITIES 33,397 12,141
-------- --------
TOTAL LIABILITIES 143,599 108,001
-------- --------
COMMITMENTS AND CONTINGENCIES - -
EXCESS OF NET ASSETS ACQUIRED OVER COST 1,536 3,379
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - shares
authorized 1,000; none issued - -
Common stock, $.01 par value - shares
authorized 100,000;issued 54,478 and 53,595 545 536
Additional paid-in capital 122,582 99,140
Retained earnings 438,917 317,192
Cumulative foreign currency
translation adjustment (1,524) (1,154)
-------- --------
560,520 415,714
Less treasury stock,
3,384 and 1,600 shares, at cost (124,888) (38,985)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 435,632 376,729
-------- --------
$580,767 $488,109
======== ========
See accompanying notes to consolidated financial statements
-21-
<PAGE>
Jones Apparel Group, Inc.
Consolidated Statements of Income
(All amounts in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
NET SALES $1,372,458 $1,021,042 $776,365
LICENSING INCOME 15,013 13,036 10,314
---------- ---------- --------
Total revenues 1,387,471 1,034,078 786,679
COST OF GOODS SOLD 940,149 717,250 546,413
---------- ---------- --------
Gross profit 447,322 316,828 240,266
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 250,685 186,572 139,135
---------- ---------- --------
Operating income 196,637 130,256 101,131
INTEREST EXPENSE 3,584 3,040 1,908
INTEREST INCOME (1,556) (547) (445)
---------- ---------- --------
Income before provision for
income taxes 194,609 127,763 99,668
PROVISION FOR INCOME TAXES 72,884 46,889 36,183
---------- ---------- --------
NET INCOME $121,725 $80,874 $63,485
========== ========== ========
EARNINGS PER SHARE
Basic $2.35 $1.55 $1.22
Diluted $2.26 $1.51 $1.20
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 51,899 52,333 52,130
Diluted 53,905 53,651 53,024
</TABLE>
See accompanying notes to consolidated financial statements
-22-
<PAGE>
Jones Apparel Group, Inc.
Consolidated Statements of Stockholders' Equity
(All amounts in thousands)
<TABLE>
<CAPTION>
Cumulative
foreign Total
Additional currency Stock-
Common paid-in Retained translation Treasury holders'
stock capital earnings adjustments stock equity
---- -------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $259 $76,711 $172,916 $(1,208) $ - $248,678
YEAR ENDED DECEMBER 31, 1995:
Amortization of deferred
compensation in connection
with executive stock options - 232 - - - 232
Net income - - 63,485 - - 63,485
Exercise of stock options 4 4,730 (83) - 168 4,819
Tax benefit derived from
exercise of stock options - 2,499 - - - 2,499
Stock tendered as payment for
options exercised - - - - (168) (168)
Treasury stock acquired - - - - (4,638) (4,638)
Foreign currency translation
adjustments - - - 68 - 68
--- -------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 1995 263 84,172 236,318 (1,140) (4,638) 314,975
YEAR ENDED DECEMBER 31, 1996:
Amortization of deferred
compensation in connection
with executive stock options - 290 - - - 290
Net income - - 80,874 - - 80,874
Exercise of stock options 6 9,825 - - - 9,831
Tax benefit derived from
exercise of stock options - 5,157 - - - 5,157
Stock tendered as payment
for options exercised - - - - (763) (763)
Treasury stock acquired - - - - (33,584) (33,584)
Effect of 2-for-1 stock split 267 (267) - - - -
Registration of 1996
Stock Option Plan - (37) - - - (37)
Foreign currency translation
adjustments - - - (14) - (14)
--- -------- -------- ------- -------- --------
BALANCE, DECEMBER 31, 1996 536 99,140 317,192 (1,154) (38,985) 376,729
YEAR ENDED DECEMBER 31, 1997:
Amortization of deferred
compensation in connection
with executive stock options
and related items - 2,778 - - - 2,778
Net income - - 121,725 - - 121,725
Exercise of stock options 9 12,597 - - - 12,606
Tax benefit derived from
exercise of stock options - 8,067 - - - 8,067
Stock tendered as payment
for options exercised - - - - (100) (100)
Treasury stock acquired - - - - (85,803) (85,803)
Foreign currency translation
adjustments - - - (370) - (370)
---- -------- -------- ------- --------- --------
BALANCE, DECEMBER 31, 1997 $545 $122,582 $438,917 $(1,524) $(124,888) $435,632
==== ======== ======== ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements
-23-
<PAGE>
Jones Apparel Group, Inc.
Consolidated Statements of Cash Flows
(All amounts in thousands)
Year Ended December 31, 1997 1996 1995
-------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $121,725 $80,874 $63,485
-------- ------- -------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 14,594 8,948 6,724
Provision for losses on
trade receivables 1,870 800 (464)
Deferred taxes (17,907) 7,233 7,622
Other 264 416 40
Decrease (increase) in:
Trade receivables 18,917 (21,349) (17,873)
Inventories (40,961) (37,814) (53,077)
Prepaid expenses and
other current assets 1,264 10,624 (10,746)
Other assets (6,273) (3,703) (5,027)
Increase (decrease) in:
Accounts payable 17,909 13,498 13,371
Taxes payable (5,253) 6,673 4,116
Accrued expenses and other
current liabilities 4,428 4,492 768
-------- ------- -------
Total adjustments (11,148) (10,182) (54,546)
-------- ------- -------
Net cash provided by
operating activities 110,577 70,692 8,939
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (32,149) (34,066) (16,013)
Proceeds from disposition of assets - 261 635
Increase in cash restricted
for capital additions (11,193) - -
Acquisition of trademarks and licenses - (1,492) (28)
-------- ------- -------
Net cash used in investing activities (43,342) (35,297) (15,406)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term
debt and capital leases (3,939) (2,623) (2,606)
Purchases of treasury stock (85,803) (33,584) (4,638)
Proceeds from issuance of
long-term debt 10,000 - -
Proceeds from capital leases 10,000 5,000 5,000
Proceeds from exercise of stock options 12,507 9,068 4,651
Other - (37) -
Net cash provided by (used in) -------- ------- -------
financing activities (57,235) (22,176) 2,407
-------- ------- -------
EFFECT OF EXCHANGE RATES ON CASH 49 2 (202)
-------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 10,049 13,221 (4,262)
CASH AND CASH EQUIVALENTS, BEGINNING 30,085 16,864 21,126
-------- ------- -------
CASH AND CASH EQUIVALENTS, ENDING $40,134 $30,085 $16,864
======== ======= =======
See accompanying notes to consolidated financial statements
-24-
<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Jones Apparel
Group, Inc. and its wholly-owned subsidiaries (collectively, the "Company").
All significant intercompany balances and transactions have been eliminated.
The Company designs, contracts for the manufacture of, and markets a broad
range of women's career and casual sportswear, suits and dresses. The
Company sells its products to better specialty and department stores and also
operates its own network of factory outlet stores. In addition, the Company
licenses the use of several of its brand names to select manufacturers of
women's and men's apparel and accessories.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of temporary cash, cash equivalents and
accounts receivable. The Company places its cash and cash equivalents in
investment-grade, short-term debt instruments with quality financial
institutions and the U.S. Government and, by policy, limits the amount of
credit exposure in any one financial vehicle. The Company performs ongoing
credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The allowance for non-collection
of accounts receivable is based upon the expected collectibility of all
accounts receivable.
Financial Instruments
The fair value of cash and cash equivalents and receivables approximate their
carrying value due to their short-term maturities. The fair value of
long-term debt instruments, including the current portion, approximates the
carrying value and is estimated based on the current rates offered to the
Company for debt of similar maturities.
Inventories
Inventories are stated at the lower of cost or market. Wholesale inventories
are determined using the first-in, first-out method while retail inventories
are determined using the retail method.
Property, Plant, Equipment and Depreciation
Depreciation and amortization are computed by the straight-line method over
the estimated useful lives of the assets ranging from three to twenty years.
Leased Property Under Capital Leases
Property under capital leases is amortized over the lives of the respective
leases or the estimated useful lives of the assets.
Intangibles
Intangibles, which include trademarks and license agreements, are amortized on
a straight-line basis over the estimated useful lives of the assets.
-25-
<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Excess of Net Assets Acquired Over Cost
The excess of net assets acquired over cost of acquired businesses is
amortized using the straight-line method over a five year period.
Foreign Currency Translation
The financial statements of foreign subsidiaries are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards
No. 52, "Foreign Currency Translations." Balance sheet accounts are
translated at the current exchange rate and income statement items are
translated at the average exchange rate for the period. Gains and losses
resulting from translation are accumulated in a separate component of
stockholders' equity. Segment data is not provided as foreign operations are
not material.
Treasury Stock
Treasury stock is recorded at net acquisition cost. Gains and losses on
disposition are recorded as increases or decreases to additional paid-in
capital with losses in excess of previously recorded gains charged directly
to retained earnings.
Revenue Recognition
Sales are recognized upon shipment of products or, in the case of retail
sales, at the time of register receipt. Allowances for estimated returns are
provided when sales are recorded.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Current tax assets and liabilities are recognized for the estimated
Federal, foreign, state and local income taxes payable or refundable on the
tax returns for the current year. Deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary timing
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred income tax provisions are based
on the changes to the respective assets and liabilities from period to period.
Stock Options
The Company uses the intrinsic value method of accounting for employee stock
options as permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of the grant over the amount the employee
must pay to acquire the stock. The compensation cost is recognized over the
vesting period of the options.
Earnings per Share
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which provides
for the calculation of "basic" and "diluted" earnings per share. This
Statement, effective for financial statements issued for periods ending after
December 15, 1997, requires restatement of all prior-period EPS data
presented. Basic earnings per share includes no dilution and is computed by
dividing income available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
reflect, in periods in which they have a dilutive effect, the effect of
common shares issuable upon exercise of stock options. All periods
presented have been restated to comply with the provisions of SFAS No. 128.
Cash Equivalents
The Company considers all highly liquid short-term investments to be cash
equivalents.
-26-
<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Long-Lived Assets
The Company reviews certain long-lived assets and identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. In that regard, the Company assesses
the recoverability of such assets based upon estimated non-discounted cash flow
forecasts.
Presentation of Prior Year Data
Certain reclassifications have been made to conform prior year data with the
current presentation.
New Accounting Standards
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," established standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise,"
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of and
enterprise about which separate financial information is available that is
evaluated regularly by Management in deciding how to allocate resources and in
assessing performance.
Both SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. The adoption of these standards is not
expected to have a material effect on the Company's financial position or
results of operations. The Company is currently reviewing SFAS No. 131 and
has of yet been unable to fully evaluate the impact, if any, it may have on
future financial statement disclosures.
NOTE 2. INVENTORIES
Inventories are summarized as follows:
December 31, 1997 1996
(In thousands) -------- --------
Raw materials $27,045 $38,571
Work in process 41,294 37,682
Finished goods 186,716 138,184
-------- --------
$255,055 $214,437
======== ========
-27-
<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are as follows:
December 31, 1997 1996
(In thousands) ------- -------
Land and buildings $37,893 $36,763
Leasehold improvements 29,230 24,712
Machinery and equipment 31,979 25,340
Furniture and fixtures 9,666 6,932
Construction in progress 17,355 1,076
------- -------
126,123 94,823
Less: accumulated depreciation and amortization 44,189 33,127
------- -------
$81,934 $61,696
======= =======
Included in property, plant and equipment are the following capitalized
leases:
December 31, 1997 1996
(In thousands) ------- -------
Buildings $32,137 $31,006
Machinery and equipment 3,759 3,538
Construction in progress 9,937 -
------- -------
45,833 34,544
Less: accumulated amortization 12,626 10,243
------- -------
$33,207 $24,301
======= =======
At December 31, 1997, the Company had commitments to construct additional
warehouse facilities. These facilities, which will be completed during 1998,
will cost an estimated $28,000,000 in the aggregate. As of December 31,
1997, a total of $9,937,000 had been expended on these projects and the Company
had $11,193,000 in cash on hand restricted for use in their completion.
-28-
<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 4. INTANGIBLE ASSETS
Intangible assets consist of the following:
Useful
lives
December 31, 1997 1996 (years)
(In thousands) ------- ------- ----------
Trademarks $32,972 $26,865 15 to 20
License agreements 5,319 5,319 51/2 to 19
------- -------
38,291 32,184
Less: accumulated amortization 7,687 5,896
------- -------
$30,604 $26,288
======= =======
NOTE 5. SHORT-TERM BORROWINGS
At December 31, 1997, the Company had credit arrangements with six United
States financial institutions which totaled $425,000,000. These lines, which
may be used for unsecured borrowings and letters of credit (issued primarily
to finance foreign inventory purchases), contain an aggregate sub-limit of
$170,000,000 for unsecured borrowings with rates depending on the borrowing
vehicle utilized. At December 31, 1997, the estimated aggregate interest
rate on the lines was 7.1%. The Company was committed for unexpired bank
letters of credit at December 31, 1997 in the amount of $153,744,000 and there
were no short-term borrowings outstanding. The Company also has a line of
credit with a Canadian institution for C$4,000,000 to be used for unsecured
borrowings under which no amounts were outstanding at December 31, 1997.
NOTE 6. LONG-TERM DEBT
Long-term debt consists of the following:
December 31, 1997 1996
(In thousands) ------ ------
7.125% Industrial revenue bonds, due 2007 $9,833 $ -
Other debt 10 48
------ ------
9,843 48
Less: current portion 1,010 41
------ ------
$8,833 $ 7
====== ======
During 1997, the Company issued $10.0 million of long-term debt to finance
construction of a new warehouse facility. The aggregate maturities for
long-term debt for the five years after December 31, 1997 are approximately
$1,000,000 per year.
-29-
<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 7. OBLIGATIONS UNDER CAPITAL LEASES
Obligations under capital leases consist of the following:
December 31, 1997 1996
(In thousands) ------- -------
Warehouses, office facilities and equipment $21,646 $15,160
Less: current portion 3,189 3,026
------- -------
Obligations under capital leases - noncurrent $18,457 $12,134
======= =======
The Company occupies a warehouse and office facility which is leased from an
affiliated real estate partnership which is 50% owned by the Company's
Chairman. The lease runs until March 15, 1998. Minimum annual rent payments
are $1,000,000. The lease was capitalized at the fair market value of the
facility which approximated the present value of the minimum lease payments.
Upon the expiration of the lease, the Company has agreed to purchase the
property from the partnership for $10,500,000, which approximates fair market
value, and enter into a sale and leaseback arrangement with an unrelated third
party.
The Company occupies warehouse and office facilities leased from the City of
Lawrenceburg, Tennessee. Four ten-year net leases run until February 2004,
July 2005, May 2006 and April 2007, respectively, and require minimum annual
rent payments of $500,000, $500,000, $500,000, and $1,000,000, respectively,
plus accrued interest. In connection with these leases, the Company guaranteed
$25,000,000 of Industrial Development Bonds issued in order to construct the
facilities, $20,417,000 of which remained unpaid as of December 31, 1997.
The financing agreement with the issuing authority (i) requires the Company to
maintain stipulated levels of insurance and tangible net worth, (ii) requires
the Company to maintain minimum ratios of cash flow to debt service and
liabilities to tangible net worth and (iii) contains certain other restrictions.
The Company also leases various equipment under three to five year leases at
an aggregate annual rental of $767,000. The equipment has been capitalized
at its fair market value of $2,650,000, which approximates the present value
of the minimum lease payments.
The following is a schedule by year of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments as of December 31, 1997:
Year Ending December 31,
(In thousands)
1998 $4,638
1999 4,254
2000 3,523
2001 3,345
2002 3,166
Later years 8,994
-------
Total minimum lease payments 27,920
Less: amount representing interest 6,274
-------
Present value of net minimum lease payments $21,646
=======
-30-
<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 8. SIGNIFICANT CUSTOMERS
A significant portion of the Company's sales are to retailers throughout the
United States and Canada. Sales to department stores owned by Federated
Department Stores, Inc. ("Federated") accounted for 20%, 20% and 21% for the
years ended December 31, 1997, 1996 and 1995, respectively. Sales to
department stores owned by The May Department Stores Company ("May")
accounted for 19%, 20% and 19% for the years ended December 31, 1997, 1996
and 1995, respectively. Federated and May accounted for approximately 43%
of accounts receivable at December 31, 1997.
NOTE 9. COMMITMENTS
(a) LEASES. Total rent expense charged to operations for the years ended
December 31, 1997, 1996 and 1995 was $22,159,000, 18,888,000 and $15,359,000,
respectively.
The following is a schedule by year of future minimum rental payments required
under operating leases for the next five years:
Year Ending December 31,
(In thousands)
1998 $18,059
1999 17,320
2000 15,124
2001 13,416
2002 8,506
Later years 17,617
-------
$90,042
=======
Certain of the leases provide for renewal options and the payment of real
estate taxes and other occupancy costs.
(b) CONTINGENT LIABILITIES. Various lawsuits and claims arising during the
normal course of business are pending against the Company and its
consolidated subsidiaries. In the opinion of management, the ultimate
liability, if any, resulting from these matters will have no significant effect
on the Company's consolidated financial position, results of operations or
liquidity.
(c) ROYALTIES. Under an exclusive license to manufacture certain items
under the Lauren by Ralph Lauren trademark pursuant to license and design
service agreements with Polo Ralph Lauren Corporation, the Company is
obligated to pay Polo Ralph Lauren Corporation a percentage of net sales of
Lauren by Ralph Lauren products. Under these agreements, minimum payments of
$7,000,000 are due for each of the years 2000 and 2001. The license and
design service agreements expire on December 31, 2001 and provide for certain
renewal options at that time.
-31-
<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 10. INCOME TAXES
The following summarizes the provision for income taxes:
Year ended December 31, 1997 1996 1995
(In thousands) ------- ------- -------
Current:
Federal $78,811 $34,522 $23,236
State and local 10,524 3,733 3,030
Foreign 1,456 1,401 2,295
------- ------- -------
90,791 39,656 28,561
------- ------- -------
Deferred:
Federal (15,359) 7,722 7,653
State and local (2,240) (489) (31)
Foreign (308) - -
------- ------- -------
(17,907) 7,233 7,622
------- ------- -------
Provision for income taxes $72,884 $46,889 $36,183
======= ======= =======
The foreign and domestic components of income before provision for income taxes
were as follows:
Year ended December 31, 1997 1996 1995
(In thousands) -------- -------- -------
United States $192,482 $125,650 $94,224
Canada 1,815 2,378 2,666
Other 312 (265) 2,778
-------- -------- -------
Income before provision
for income taxes $194,609 $127,763 $99,668
======== ======== =======
-32-
<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
The provision for income taxes on adjusted historical income differs from the
amounts computed by applying the applicable Federal statutory rates due to
the following:
Year ended December 31, 1997 1996 1995
(In thousands) ------- -------- -------
Provision for Federal income
taxes at the statutory rate $68,113 $44,717 $34,884
State and local income taxes,
net of federal benefit 5,385 2,108 1,949
Amortization of excess of net
assets acquired over cost (645) (645) (645)
Other items, net 31 709 (5)
------- ------- -------
Provision for income taxes $72,884 $46,889 $36,183
======= ======= =======
The Company has not provided for U.S. Federal and foreign withholding taxes on
$2,727,000 of foreign subsidiaries' undistributed earnings as of December 31,
1997. Such earnings are intended to be reinvested indefinitely.
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
December 31, 1997 1996
(In thousands) ------- -------
Deferred tax assets:
Nondeductible accruals and allowances $23,587 $ 8,009
Depreciation and amortization 561 1,118
Other (net) 2,286 1,042
------- -------
Net deferred tax asset $26,434 $10,169
======= =======
-33-
<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 11. COMMON STOCK
On July 30, 1996, the Company's Board of Directors approved a two-for-one
stock split of the Company's Common Stock in the form of a 100% stock
dividend for shareholders of record as of September 12, 1996. Concurrently,
the number of authorized shares of Common Stock was increased to 100,000,000.
On October 2, 1996, a total of 26,744,580 shares of Common Stock were issued
in connection with the split. The stated par value of each share remained at
$0.01. The issuance of authorized but unissued shares resulted in the transfer
of $267,000 from additional paid-in capital to common stock, representing the
par value of the shares issued. All share and per share amounts have been
restated to retroactively reflect the stock split.
In 1995, the Board of Directors authorized the repurchase of up to
$100,000,000 of the Company's Common Stock in open market transactions over
a two-year period ending in December, 1997. The program expired on October
27, 1997, through which date 2,823,394 shares had been acquired at a cost of
$100,000,000.
In 1997, the Board of Directors authorized an additional program to
repurchase the Company's Common Stock from time to time in open market
transactions not to exceed $100,000,000 in aggregate price. This program was
to commence upon the earlier of December 15, 1997 or the full utilization of
the previous buy-back program and has no time limit. As of December 31,
1997, 530,106 shares had been acquired at a cost of $24,025,000, leaving
$75,975,000 available for future repurchases at that date.
NOTE 12. STATEMENT OF CASH FLOWS
Cash interest payments during the years ended December 31, 1997, 1996 and
1995 were $3,941,000, $3,207,000 and $2,118,000, respectively.
Cash income tax payments during the years ended December 31, 1997, 1996 and
1995 were $96,251,000, $32,110,000 and $23,068,000, respectively.
In connection with an agreement entered into for the formal acquisition of and
payment for a currently utilized trademark, the Company recorded a $6,107,000
intangible asset and an offsetting long-term liability.
Reductions in income tax payments resulting from the exercise of employee
stock options during the years ended December 31, 1997, 1996 and 1995 were
$8,067,000, $5,157,000 and $2,499,000, respectively.
Under the provisions of the Company's 1991 Stock Option Plan, employees
exercising stock options during the year ended December 31, 1997 exchanged
2,122 shares of the Company's Common Stock (valued at $100,000) for 8,163
newly issued shares, during the year ended December 31, 1996 exchanged 28,000
shares of the Company's Common Stock (valued at $763,000) for 67,430 newly
issued shares and during the year ended December 31, 1995 exchanged 11,536
shares of the Company's Common Stock (valued at $168,000) for 24,000 newly
issued shares.
-34-
<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 13. STOCK OPTIONS
At December 31, 1997, the Company has two stock option plans, which are
described below. The Company applies APB Opinion 25, "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for the
plans. Under APB Opinion 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation cost is recognized.
Under the Company's 1991 and 1996 Stock Option Plans, options to purchase an
aggregate of not more than 5,000,000 shares and 4,000,000 shares,
respectively, of common stock may be granted from time to time to key
employees, officers, directors, advisors and independent consultants to the
Company or to any of its subsidiaries. The Plans are administered by the
Board of Directors, which has empowered a committee of directors to
administer the Plans.
Under both plans, the per share exercise price for incentive stock options
("ISOs") will not be less than 100% of the fair market value of a share of
the common stock on the date the option is granted (110% of fair market value
on the date of grant of an ISO if the optionee owns more than 10% of the
Company). Under the 1991 Plan, the per share exercise price for non-
qualified stock options ("NQSOs") will not be less than 75% of the fair
market value on the date the option is granted. The 1996 Plan has no
restrictions on NQSO pricing. Under the 1991 Plan, options may be granted
for a term to be determined by the committee of not less than one or more
than ten years from the date of grant; under the 1996 Plan, options may be
granted for a term of not less than six months or more than ten years from
the date of grant.
FASB Statement 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income and earnings
per share as if compensation cost for the Company's stock option plans had
been determined in accordance with the fair value-based method prescribed in
FASB Statement 123. The Company estimates the fair value of each stock option
at the grant date by using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997, 1996 and
1995, respectively: no dividends paid for all years; expected volatility of
34.7%, 38.9% and 40.7%; risk-free interest rates of 6.04%, 6.20% and 6.16%;
and expected lives of 3.4, 3.0 and 3.0 years.
Under the accounting provisions of FASB Statement 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated in the following table.
December 31, 1997 1996 1995
-------- ------- -------
Net income (in thousands)
As reported $121,725 $80,874 $63,485
Pro forma 116,120 79,074 63,387
Basic earnings per share
As reported $2.35 $1.55 $1.22
Pro forma $2.24 $1.51 $1.22
Diluted earnings per share
As reported $2.26 $1.51 $1.20
Pro forma $2.15 $1.47 $1.20
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<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
The following table contains information on stock options for the three
year period ended December 31, 1997:
Exercise Weighted
Option price range average
shares per share price
--------- ------------------ ------
Outstanding, January 1, 1995 3,726,366 $0.40 to $16.125 $9.65
Granted 180,000 $12.00 to $17.75 $14.28
Exercised 777,766 $0.40 to $14.25 $6.20
Forfeited 78,000 $7.00 to $16.125 $13.63
--------- ------------------ ------
Outstanding, December 31, 1995 3,050,600 $0.40 to $17.75 $10.71
Granted 2,166,000 $14.715 to $34.375 $24.53
Exercised 1,031,230 $0.40 to $14.5625 $9.53
Forfeited 76,200 $7.00 to $24.00 $14.93
--------- ------------------ ------
Outstanding, December 31, 1996 4,109,170 $0.40 to $34.375 $18.17
Granted 1,717,000 $1.00 to $51.50 $47.04
Exercised 883,118 $7.00 to $36.625 $14.28
Forfeited 18,800 $12.375 to $24.75 $21.46
--------- ------------------ ------
Outstanding, December 31, 1997 4,924,252 $0.40 to $51.50 $28.88
========= ================== ======
Exercisable at year-end
1995 980,400 $0.40 to $15.0625 $8.93
1996 733,770 $0.40 to $17.50 $9.56
1997 894,854 $0.40 to $34.375 $13.90
1991 Plan 1996 Plan
--------- ---------
Available for future grants
1995 938,334 -
1996 49,534 2,799,000
1997 3,134 1,147,200
Exercise price Exercise price Total
less than market equal to market options
---------------- --------------- -------
Weighted-average
fair value of:
Options granted in 1995 - $4.74 $4.74
Options granted in 1996 $8.46 $8.00 $8.01
Options granted in 1997 $35.72 $14.90 $15.20
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<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes information about stock options outstanding at
December 31, 1997.
<TABLE>
<CAPTION>
Range of exercise prices: $0.40 $11.25 $21.125 $32.625 $44.00 $0.40
to to to to to to
$9.50 $19.625 $24.3125 $39.25 $51.50 $51.50
------- --------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding Options
Number outstanding
at December 31, 1997 361,167 1,044,867 1,579,218 324,000 1,615,000 4,924,252
Weighted-average remaining
contractual life (years) 3.4 6.9 8.6 9.0 9.8 8.3
Weighted-average
exercise price $5.86 $13.55 $23.97 $34.53 $47.61 $28.88
Exercisable options
Number outstanding
at December 31, 1997 261,169 373,067 253,618 7,000 - 894,854
Weighted-average
exercise price $4.61 $13.16 $23.98 $34.38 - $13.90
</TABLE>
NOTE 14. UNAUDITED CONSOLIDATED FINANCIAL INFORMATION
Unaudited interim consolidated financial information for the two years ended
December 31, 1997 is summarized as follows:
First Second Third Fourth
(In thousands except per share data) Quarter Quarter Quarter Quarter
-------- -------- -------- --------
1997
Net sales $317,990 $262,988 $445,972 $345,508
Total revenues 321,455 266,289 450,508 349,219
Gross profit 106,571 87,747 147,201 105,803
Operating income 47,475 31,115 79,383 38,664
Net income 29,540 19,280 48,938 23,967
Diluted earnings per share $0.55 $0.36 $0.90 $0.45
1996
Net sales $260,350 $193,275 $309,019 $258,398
Total revenues 262,926 195,934 313,228 261,990
Gross profit 75,369 63,691 99,706 78,062
Operating income 32,652 21,534 49,788 26,282
Net income 20,339 13,338 30,878 16,319
Diluted earnings per share $0.38 $0.25 $0.58 $0.30
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<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 15. EMPLOYEE BENEFIT PLAN
The Company maintains the Jones Apparel Group, Inc. Retirement Plan (the
"Plan") under Section 401(k) of the Internal Revenue Code. Full-time
employees not covered by a collective bargaining agreement and meeting
certain other requirements are eligible to participate in the Plan. Under the
Plan, employees may elect to have up to 10% of their salary deferred and
deposited with a qualified trustee, who in turn invests the money in a
variety of investment vehicles as selected by each employee.
From January 1, 1995 through March 31, 1996, the Company matched 30% of each
participant's contributions with the Company's contribution limited to a
maximum of 1.8% of the employee's total compensation for employees earnings
less than $150,000 per year. For employees earning over $150,000 per year,
the Company matched 25% of each participant's contributions with the Company's
contribution limited to a maximum of 1% of the employee's total compensation.
On April 1, 1996, the Company matching contribution rates were increased to
50% and 3.0% of total compensation, respectively, for employees earning up to
$150,000 per year and 35% and 2.1% of total compensation, respectively, for
employees earning over $150,000 per year.
Contributions and salary deferrals are subject to limitations imposed by the
Internal Revenue Code. The Company may, at its sole discretion, contribute
additional amounts to all employees on a pro rata basis. All employee
contributions into the Plan are 100% vested, while the Company's matching
contributions vest over a five-year period. The Company contributed
approximately $1,241,000, $801,000 and $369,000 to the Plan during the years
ended December 31, 1997, 1996 and 1995, respectively.
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<PAGE>
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 16. EARNINGS PER SHARE
Basic and diluted earnings per share for each of the three years ended
December 31, 1997, 1996 and 1995 are calculated as follows (in thousands
except per share amounts):
Net Per-share
Income Shares Amount
-------- ------ ------
For the year ended December 31, 1997:
Basic earnings per share $121,725 51,899 $2.35
Effect of assumed conversion
of employee stock options - 2,006 $0.09
-------- ------ ------
Diluted earnings per share $121,725 53,905 $2.26
======== ====== ======
For the year ended December 31, 1996:
Basic earnings per share $80,874 52,333 $1.55
Effect of assumed conversion
of employee stock options - 1,318 $0.04
------- ------ ------
Diluted earnings per share $80,874 53,651 $1.51
======= ====== ======
For the year ended December 31, 1995:
Basic earnings per share $63,485 52,130 $1.22
Effect of assumed conversion
of employee stock options - 894 $0.02
------- ------ ------
Diluted earnings per share $63,485 53,024 $1.20
======= ====== ======
Options to purchase 1,590,000 shares of common stock at exercise prices
ranging from $45 5/16 to $51 1/2 per share were outstanding during a portion
of 1997 but were not included in the computation of diluted earnings per
share because the exercise prices of the options were greater than the average
market price of the common shares. These options, which expire between
July 22 and December 12, 2007, were all outstanding at the end of 1997.
<PAGE>
NOTE 17. SUPPLEMENTAL PRO FORMA CONDENSED FINANCIAL INFORMATION
On January 1, 1999, Jones Apparel Group, Inc. consummated a corporate
reorganization under which two new wholly owned subsidiaries named Jones
Apparel Group USA, Inc. ("Jones USA") and Jones Apparel Group Holdings, Inc.
("Jones Holdings") were created. On that date, the operating assets of Jones
Apparel Group, Inc. were transferred to Jones USA and Jones USA assumed the
role of obligor of the Senior Notes due 2001 (which were issued on October
2, 1998 in conjunction with the acquisition of Sun Apparel, Inc.) with Jones
Apparel Group, Inc. remaining and Jones Holdings becoming co-obligors of the
Notes. The following condensed financial information represents, on a pro
forma basis, the results of Jones USA had the reorganization occurred on
January 1, 1995 (all amounts in thousands). Separate pro forma financial
statements and other disclosures concerning Jones USA and Jones Holdings are
not presented as such information is not considered material to the holders
of the Senior Notes.
December 31, December 31, December 31,
1995 1996 1997
----------- ----------- -----------
Current assets $284,805 $331,104 $365,019
Noncurrent assets 33,045 58,962 95,349
Current liabilities 141,514 199,043 256,605
Noncurrent liabilities 10,151 12,420 28,094
Excess of net assets
acquired over cost 5,221 3,379 1,536
For the Year Ended December 31,
---------------------------------------
1995 1996 1997
-------- -------- ----------
Total revenues $690,339 $921,500 $1,261,159
Gross profit 177,533 244,302 371,522
Operating income 35,361 56,820 112,946
Net income 21,671 30,616 61,358
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<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Office
- --------------------- --- -----------------------------------
Sidney Kimmel 70 Chairman and Director
Herbert J. Goodfriend 71 Vice Chairman and Director
Jackwyn Nemerov 46 President
Irwin Samelman 67 Executive Vice President, Marketing
and Director
Wesley R. Card 50 Chief Financial Officer
Patrick M. Farrell 48 Vice President and
Corporate Controller
Geraldine Stutz 69 Director
Howard Gittis 64 Director
Each director who is not a full-time employee of the Company will receive an
annual grant of options to purchase 1,000 shares of the Company's common stock
at an exercise price of $1.00 per share. Each option will expire on the
tenth anniversary of its date of grant, and will be exercisable, in whole or in
part, commencing six months from the date of grant and thereafter during the
exercise period. Officers are appointed by the Board of Directors.
The Board of Directors has appointed an Audit Committee consisting of Ms.
Stutz and Mr. Gittis. The Audit Committee meets periodically to review and
make recommendations with respect to the Company's internal controls and
financial reports, and in connection with such reviews, has met with appropriate
Company financial personnel and the Company's independent certified public
accountants. The Board of Directors has also appointed a Stock Option
Committee consisting of Ms. Stutz and Mr. Gittis to administer the 1991 and
1996 Stock Option Plans and a Compensation Committee consisting of Ms. Stutz and
Mr. Gittis to determine cash and other incentive compensation to be paid to
the Company's executive officers.
Mr. Kimmel founded the Jones Apparel Division of W.R. Grace & Co. in 1970.
Mr. Kimmel has served as Chairman since 1975. Prior to 1975, Mr. Kimmel
occupied various executive offices including President
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<PAGE>
of Jones New York and Vice President of John Meyer of Norwich. Prior to
founding Jones, Mr. Kimmel was employed by W.R. Grace & Co. and was President of
Villager, Inc., a sportswear company.
Mr. Goodfriend joined the Company in 1990 after serving as the Company's legal
counsel for the previous three years and has served as a director since July
1991. Before joining Jones, Mr. Goodfriend served as a director of Villager,
Inc. and Venice Industries, Inc. In addition, Mr. Goodfriend is engaged in the
practice of law and is of counsel to the firm of Phillips Nizer Benjamin Krim &
Ballon LLP, which performs legal services for the Company.
Ms. Nemerov was appointed President in January 1997. She joined the Company
in 1985 and served as President of the Company's casual sportswear divisions
and the Lauren by Ralph Lauren division. Prior to joining Jones, Ms. Nemerov
was President of the Gloria Vanderbilt division of Murjani, Inc. from 1980
through 1985.
Mr. Samelman has been Executive Vice President, Marketing of the Company since
1991 and has served as a director since July 1991. In addition, from 1987 to
1991, Mr. Samelman provided marketing consulting services to the Company
through Samelman Associates, Inc., a private consulting company controlled by
him. Prior thereto, Mr. Samelman was Regional Marketing Manager of Russ Togs,
Inc. and Vice President of Villager, Inc.
Mr. Card joined the Company in 1990. Prior to joining Jones, Mr. Card held
the positions of Executive Vice President and Chief Financial Officer of
Carolyne Roehm, Inc., and Corporate Vice President, Controller and Assistant
Secretary of Warnaco, Inc.
Mr. Farrell was appointed Vice President and Corporate Controller in November
1997. He joined the Company in 1994 as Director of Internal Audit and served
as Vice President, Finance and Administration of Retail Operations of the
Company since 1995. Prior to joining the Company, Mr. Farrell was Director of
Internal Audit for Crystal Brands, Inc.
Ms. Stutz has been a director of the Company since July 1991. Since 1993, Ms.
Stutz has been a principal partner of Panache Productions, a fashion and
marketing service. During the previous five years, she was Publisher of
Panache Press at Random House, a book publisher. From 1960 until 1986, Ms.
Stutz was President of Henri Bendel. Ms. Stutz serves on the Board of
Directors of Tiffany & Co., The Theatre Development Fund and The Actors' Fund.
Mr. Gittis has been a director of the Company since April 1992. During the
past five years, Mr. Gittis' principal occupation has been Director and Vice
Chairman of MacAndrews & Forbes Holdings Inc., a diversified holding company.
In addition, Mr. Gittis is a director of Andrews Group Incorporated,
California Federal Bank, a Federal Savings Bank, Consolidated Cigar
Corporation, Consolidated Cigar Holdings Inc., First Nationwide Holdings
Inc., First Nationwide (Parent) Holdings Inc., Loral Space and Communications
Ltd., Mafco Consolidated Group Inc., Pneumo Abex Corporation, Power Control
Technologies, Inc., Revlon, Inc., Revlon Consumer Products Corporation, Revlon
Worldwide Corporation and Rutherford-Moran Oil Corporation.
Key Employees
The following persons, although not executive officers of the Company, make
significant business contributions to the Company:
Rena Rowan was the original creator of the Jones New York line and served as
the division's Chief Designer from 1970 to 1982. She is currently
Vice President, Design of the Company. From 1991 to 1993, Ms.
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<PAGE>
Rowan was an executive vice president of the Company. Prior to the inception of
Jones New York, Ms. Rowan was employed by Villager, Inc. and Rosenau, Inc.
Anita Britt, Director of Investor Relations and Financial Planning, joined the
Company in December 1993. Prior to joining the Company, Ms. Britt was
Director of Internal Audit of American Reliance Group, Inc.
Howard Buerkle has been President of Retail Operations for the Company since
1989. From 1986 through 1989, Mr. Buerkle was President of the retail
division of Inwear/Martinique.
Ellen Daniel, President of the Evan-Picone Collection division, joined Jones
in 1994. From 1982 through 1994, Ms. Daniel was employed by Liz Claiborne,
most recently as Senior Vice President - Corporate Design Director.
Ira Dansky joined the Company in 1996 as General Counsel. Prior to joining
the Company, Mr. Dansky was engaged in private law practice from 1987
through 1996, prior to which he served as Associate General Counsel of
Xerox Corporation.
Ronald Harrison, Vice President of Manufacturing, joined the Company in 1981.
Mr. Harrison had been Plant Manager for Chief Apparel, Inc. from 1965 through
1981.
Joseph Hiess was appointed President of the Jones New York Men's Sportswear
division in August 1997. Prior to his appointment, Mr. Hiess served as head
of Design and Marketing of JJ Farmer, a menswear company he founded in 1986
and subsequently sold to Salant Corporation in 1993.
Barbara Kennedy has been President of the Jones New York Dress Division since
August 1991. From 1983 through August 1991, Ms. Kennedy was employed by
Bloomingdale's in various capacities, most recently as Vice President,
Merchandise Manager.
Gary R. Klocek has been Controller of Jones Apparel Group, Inc. since
August 1987. Prior to joining Jones, Mr. Klocek held various positions with
Atlantic Richfield Company ("ARCO") from 1979 through 1987, his last position
being Manager of Cost and Inventory Control for one of ARCO's subsidiaries.
Jeffrey Levy, President of Rena Rowan, joined the Company in 1990. Prior to
joining Jones, Mr. Levy was Vice President of Sales and National Sales
Manager, of Russ Togs, Inc. from 1984 through 1990.
Benny Lin, Senior Vice President - Creative Director, joined Jones Apparel
Group in December 1995. Mr. Lin had been Fashion Director at Macy's East
prior to joining the Company.
Martin Marlowe joined Jones Apparel Group in 1992 as Vice President of Foreign
Manufacturing. Prior to joining Jones, Mr. Marlowe was President of Jodi
International, an apparel importer, from 1988 to 1992.
Helen Merril, President of the Evan-Picone Dress Divisions, joined Jones
Apparel Group in October 1993. Prior to joining the Company, Ms. Merril held
the positions of President of Scassi Dress of De Peche Corporation and
President of Nippon Boutique of Albert Nippon Inc.
Susan Metzger, Vice President of Sales for the Lauren by Ralph Lauren
division, joined the Company in May 1996. Prior to joining Jones Apparel
Group, Ms. Metzger held the positions of Vice President of Sales of Chaus,
Inc. and Sales Manager of JH Collectibles.
Heather Pech, President of the Jones New York Sport Collection division,
joined the Company in 1990. Ms. Pech had been Account Executive at
Calvin Klein, Inc. prior to joining Jones.
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<PAGE>
Deanna Randall, who joined the Company in 1981, has held various sales and
marketing positions with the Company, and is currently President of the
Jones New York career division.
Susan Rieland, President of Casual Design, joined the Company in 1994. Ms.
Rieland had been Account Executive at Rafaella prior to joining Jones.
John Sammaritano, Vice President of Distribution, joined Jones in 1975.
Mr. Sammaritano had been Vice President of Distribution for Villager, Inc.
from 1964 through 1975.
Richard Shaw, President of Jones Apparel Group Canada, Inc., joined the
Company in May 1997. Prior to joining the Company, Mr. Shaw served as
President of Liz Claiborne Canada, which he helped launch in 1987.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the Proxy Statement under the captions
"EXECUTIVE COMPENSATION" and "EMPLOYMENT AND COMPENSATION ARRANGEMENTS"
is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the Proxy Statement under the caption "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" is incorporated herein by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the Proxy Statement under the captions "CERTAIN
TRANSACTIONS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION"
are incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The schedule and report of independent certified public accountants
thereon, listed on the Index to Financial Statement Schedules
attached hereto.
2. The Exhibits, which are listed on the Exhibit Index attached hereto.
(b) No reports on Form 8-K were filed by the registrant during the last
quarter of the period covered by this report.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Amendment to the Annual Report
on Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 26, 1998
JONES APPAREL GROUP, INC.
(Registrant)
By: /s/ Sidney Kimmel
Sidney Kimmel, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------------------- ----------------------------- --------------
/s/ Sidney Kimmel Chairman and Director March 26, 1998
- ----------------- (Chief Executive Officer)
(Sidney Kimmel)
/s/ Wesley R. Card Chief Financial Officer March 26, 1998
- ------------------ (Principal Financial Officer)
(Wesley R. Card)
/s/ Patrick M. Farrell Vice President and March 26, 1998
- ---------------------- Corporate Controller
(Patrick M. Farrell) (Principal Accounting Officer)
/s/ Herbert J. Goodfriend Vice Chairman and Director March 26, 1998
- -------------------------
(Herbert J. Goodfriend)
/s/ Irwin Samelman Executive Vice President, March 26, 1998
- ------------------ Marketing and Director
(Irwin Samelman)
/s/ Geraldine Stutz Director March 26, 1998
- -------------------
(Geraldine Stutz)
/s/ Howard Gittis Director March 26, 1998
- -----------------
(Howard Gittis)
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<PAGE>
JONES APPAREL GROUP, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Report of Independent Certified Public Accountants on Schedule
Schedule II. Valuation and qualifying accounts
Schedules other than those listed above have been omitted since the information
is not applicable, not required or is included in the respective financial
statements or notes thereto.
EXHIBIT INDEX
Incorporated
by Reference Exhibit
to Exhibit Nos. Description of Exhibit
- ------------ ------- ----------------------
(5) 3.1 3.1 Articles of Incorporation, as amended
(1) 3.3 3.3 By-Laws
(3) 3.4 3.4 Amendment to By-Laws
(1) 10.2 10.2 Lease Agreement between the Registrant and
Bristol Associates, L.P., re:
250 Rittenhouse Circle
(1) 10.5 10.5 Form of 1991 Stock Option Plan+
(1) 10.7 10.7 Employment and Stock Option
Agreements between the Registrant and
Herbert J. Goodfriend+
(2) 10.17 10.17 Note Agreement with The Industrial
Development Board of the City of
Lawrenceburg, Tennessee
(2) 10.18 10.18 Industrial Development Board of the City of
Lawrenceburg Taxable
Revenue Note, Series 1995
(2) 10.19 10.19 Lease agreement between the Registrant and
the Industrial
Development Board of the City of Lawrenceburg
(4) 10.26 10.26 Series 1996 Note Agreement with The
Industrial Development Board of the City of
Lawrenceburg, Tennessee
(4) 10.27 10.27 Industrial Development Board of the City of
Lawrenceburg Taxable
Revenue Note, Series 1996
(4) 10.28 10.28 First Amendment to Lease Agreement between
the Registrant and the Industrial
Development Board of the City of Lawrenceburg
(4) 10.29 10.29 Agreement between the Registrant and
Herbert J. Goodfriend with respect to
consulting services following termination
of employment
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<PAGE>
Incorporated
by Reference Exhibit
to Exhibit Nos. Description of Exhibit
- ------------ ------- ----------------------
(5) 10.30 10.30 Series 1996 Note Agreement with The
Industrial Development Board of the City of
Lawrenceburg, Tennessee
(5) 10.31 10.31 Industrial Development Board of the City of
Lawrenceburg Taxable
Revenue Note, Series 1996
(5) 10.32 10.32 Lease Agreement between the Registrant and
the Industrial Development Board of the
City of Lawrenceburg
(5) 10.33 10.33 Form of 1996 Stock Option Plan+
(5) 10.34 10.34 Letter Agreement between the Registrant and
CoreStates Bank
(5) 10.35 10.35 Master Short Term Borrowing Agreement
between the Registrant and CoreStates Bank
(5) 10.36 10.36 Letter Agreement between the Registrant and
First Union National Bank
(5) 10.37 10.37 Letter Agreement between the Registrant and
the Bank of New York
(5) 10.38 10.38 Letter Agreement between the Registrant and
Bank of Boston
(5) 10.39 10.39 Money Market Line Commercial Promissory
Note between the Registrant and Bank of Boston
(5) 10.40 10.40 License Agreement between the Registrant
and Polo Ralph Lauren, L.P., dated October
18, 1995#
(5) 10.41 10.41 Design Services Agreement between the
Registrant and Polo Ralph Lauren, L.P.,
dated October 18, 1995#
(5) 10.42 10.42 Lease Agreement between the Registrant and
The Shelton Companies
(5) 10.43 10.43 Letter Agreement between the Registrant and
Israel Discount Bank of New York
* 10.44 Series 1997 Note Agreement with The
Industrial Development Board of the City of
Lawrenceburg, Tennessee
* 10.45 Industrial Development Board of the City of
Lawrenceburg Taxable Revenue Note, Series
1997
* 10.46 Amendment to Lease Agreement between the
Registrant and the Industrial Development
Board of the City of Lawrenceburg
* 10.47 Letter Agreement between the Registrant
and First Union National Bank
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<PAGE>
Incorporated
by Reference Exhibit
to Exhibit Nos. Description of Exhibit
- ------------ ------- ----------------------
* 10.48 Letter Agreement between the Registrant and
CoreStates Bank
* 10.49 Letter Agreement between the Registrant and
BankBoston
* 10.50 Money Market Line Commercial Promissory
Note between the Registrant and BankBoston
* 10.51 Letter Agreement between the Registrant and
The Chase Manhattan Bank
* 10.52 Term Note and Unconditional Guaranty with
First Union National Bank
* 11 Computation of Earnings per Share
* 21 List of Subsidiaries
* 23 Consent of BDO Seidman, LLP
* 27 Financial Data Schedule (6)
* 27.1 Restated Financial Data Schedule for 1996
and 1995 (6)
* 27.2 Restated Financial Data Schedule for 1997
interim periods (6)
* 27.3 Restated Financial Data Schedule for 1996
interim periods (6)
____________________
* Filed herewith.
# Portions deleted pursuant to application for confidential treatment under
Rule 24B-2 of the Securities Exchange Act of 1934.
+ Management contract or compensatory plan or arrangement.
(1) Incorporated by Reference to the Company's Registration Statement on Form
S-1 (file No. 33-39742).
(2) Incorporated by Reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.
(3) Incorporated by Reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
(4) Incorporated by Reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(5) Incorporated by Reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
(6) Exhibit 27 is submitted as an exhibit only in the electronic format of this
Annual Report on Form 10-K submitted to the Securities and Exchange
Commission.)
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<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Jones Apparel Group, Inc.
New York, New York
The audits referred to in our dated February 6, 1998 relating to the
consolidated financial statements of Jones Apparel Group, Inc. and subsidiaries,
which is contained in Item 8 of Form 10-K, included the audits of the financial
statement schedule listed in the accompanying index for each of the three years
ended December 31, 1997. The financial statement schedule is the responsibility
of management. Our responsibility is to express an opinion on the financial
statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
February 6, 1998
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<PAGE>
SCHEDULE II
JONES APPAREL GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In Thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------- ---------- ------------------------- ---------- ---------
Additions
-------------------------
Balance at Charged to Charged to Balance
beginning costs and other Deductions at end of
Description of period expenses accounts <F1> period
- ------------ ---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1995:
Allowance for doubtful accounts $2,560 $(464) $ - $(161) $2,257
For the year ended
December 31, 1996:
Allowance for doubtful accounts $2,257 $(800) $ - $(806) $2,263
For the year ended
December 31, 1997:
Allowance for doubtful accounts $2,263 $(1,870) $ - $2,374 $2,767
</TABLE>
<F1> Doubtful accounts written off (recovered) against accounts receivable.
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<PAGE>
EXHIBIT 10.44
SERIES 1997 NOTE AGREEMENT
SERIES 1997 NOTE AGREEMENT (this "Agreement"), dated as of April 1,
1997, among THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG, a
Tennessee public nonprofit corporation (the "Board"), NATIONSBANK OF TENNESSEE,
NATIONAL ASSOCIATION, a national banking association with its principal office
in Nashville, Tennessee (the "Purchaser"), and JONES APPAREL GROUP, INC., a
Pennsylvania corporation (the "Lessee").
PRELIMINARY STATEMENTS:
WHEREAS, the Board is a public nonprofit corporation and a public
instrumentality of the City of Lawrenceburg, Tennessee, and is authorized
under Sections 7-53101 to 7-53-311, inclusive, Tennessee Code Annotated, as
amended (hereinafter called the "Act"), to acquire, whether by purchase,
exchange, gift, lease, or otherwise, and to own, lease and dispose of
properties for the public purpose of promoting industry and developing trade
by inducing manufacturing, industrial, governmental, educational and commercial
enterprises to locate in or remain in the State of Tennessee; and
WHEREAS, the Lessee heretofore leased from the Board pursuant to the
Lease (as defined herein) certain distribution facilities located on land owned
by the Board and located in the City of Lawrenceburg, Tennessee, and in
connection therewith the Board issued its Taxable Revenue Note Series 1996
Jones Apparel Group Project, Inc.) (the "Series 1996 Note") to finance the
cost thereof; and
WHEREAS, Lessee has requested the Board to reimburse it for its costs
to be incurred by Lessee in connection with the Board's enhancement of such
facilities by issuing its note to the Purchaser and by using the proceeds from
the issuance of such note for the purpose of reimbursing the Lessee for the
cost of constructing and equipping a new 210,000 square foot distribution
facility to be located on the leased premises adjacent to the existing
distribution facility; and
WHEREAS, the Board proposes to issue and sell its 1997 note (the "Series
1997 Note") to the Purchaser pursuant to this Agreement and further proposes to
use the proceeds from the sale thereof to perform its obligations under such
Lease; and
WHEREAS, the Series 1996 Note and the Series 1997 Note proposed to be
issued under this Agreement will be secured by, among other security, the
amended and restated assignment of the rental payments under the Lease and the
amended and restated deed of trust from the Board with respect to the property
on which the distribution facilities are located.
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<PAGE>
NOW, THEREFORE, in consideration of the premises, the Board, the
Purchaser and the Lessee hereby agree as follows:
ARTICLE I
DEFINITIONS
In addition to the terms defined in the preamble hereto, and elsewhere
herein, the following terms have the following respective meanings as used in
this Agreement unless the context otherwise requires:
"Act" means Sections 7-53-101 to 7-53-311, inclusive, of Tennessee Code
Annotated, as amended.
"Agreement" means this Series 1997 Note Agreement as it now exists and
as it may hereafter be amended.
"All Unpaid Installments" shall have the same meaning as in the Lease.
"Assignment" means the Amended and Restated Assignment Agreement dated
as of April 1, 1997 from the Board to the Purchaser.
"Authorized Lessee Representative" means the President or any Vice
President of the Lessee, except that the Lessee may, by written notice to the
Noteholder, designate additional Authorized Lessee Representatives or delete
Authorized Lessee Representatives.
"Basic Rent" means the Basic Rent payable pursuant to Section 4.01 of
the Lease.
"Building" shall have the same meaning as in the Lease.
"Business Day" means any day other than a Saturday, Sunday, or a public
holiday or the equivalent for banks generally under the laws of State of
Tennessee.
"Closing Date" means the date agreed to by the parties as the date to
close the sale of the Series 1997 Note but in no event later than April 18,
1997.
"Deed of Trust" means the Amended and Restated Construction Deed of
Trust and Security Agreement with respect to the Project dated as of April 1,
1997 from the Board for the benefit of the Purchaser as amended, restated and
supplemented.
"Default Rate" shall have the same meaning as in the Series 1996 Note.
"Documents" means the Lessee Documents and the Series 1997 Note
Documents.
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<PAGE>
"Environmental Indemnity' means the Environmental Law Compliance and
indemnity Agreement dated -as of April 1, 1997 among the Lessee and the
Purchaser.
"Escrow and Security Agreement" means the Escrow and Security Agreement
dated as of April 1, 1997 by and among the Board, Lessee and NationsBank of
Tennessee, National Association, as Escrow Agent and Trustee.
"Event of Default" means an Event of Default as defined in Article VI
hereof.
"First Amendment to Lease" means the First Amendment to Lease dated as
of April 1, 1997 by and between the Board and Lessee.
"First Amendment to the Amended and Restated Deed of Trust And Security
Agreement" means the First Amendment to the Amended and Restated Deed of Trust
said Security Agreement dated as of April 1, 1997 entered into by the Board,
NationsBank of Tennessee, National Association and Lessee.
"Holder," whether or not capitalized, means the registered owner from
time to time of the Series 1997 Note.
"Land" means the real property described in Schedule A to the Lease.
"Lease" means the Lease dated as of May 1, 1996 between the Board, as
lessor, and the Lessee, as lessee, as amended by the First Amendment to Lease
and as such lease may hereafter be amended.
"Leased Property" means the Land, the Building and all other
improvements now or hereafter located on the Land.
"Lessee" means Jones Apparel Group, Inc., a Pennsylvania corporation.
"Lessee Documents" means this Agreement, the Lease, the Series 1997
Guaranty, the Escrow and Security Agreement and the Environmental Indemnity.
"Noteholder" or "Purchaser" means NationsBank of Tennessee, National
Association, a national banking association with its principal office in
Nashville, Tennessee, as the original purchaser and registered owner of the
Series 1997 Note, and any subsequent registered owner of the Series 1997 Note.
"Notes" mean collectively the Series 1996 Note and the Series 1997 Note.
"Prior Note Agreements" means collectively the Note Agreement, dated
November 23, 1993, the Series 1995 Note Agreement dated as of June 30, 1995,
the Note Agreement dated as of May 1, 1996, all by and among the Board, the
Lessee and the Purchaser.
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<PAGE>
"Prime Rate" shall have the same meaning as in the Series 1997 Note.
"Project" means the Land, the Building and any personal property
located therein including any and all equipment used at or in connection with
the Project, but excluding any inventory owned by Lessee.
"Series 1996 Note" means the Taxable Revenue Note, Series 1996 (Jones
Apparel Group, Inc. Project) dated May 1, 1996 in the principal amount of
$5,000,000 issued by the Board.
"Series 1997 Guaranty" means that certain Series 1997 Guaranty Agreement
dated as of April 1, 1997 from Lessee.
"Series 1997 Note" means the Taxable Revenue Note, Series 1997 (Jones
Apparel Group, Inc. Project) dated the date hereof in the principal amount of
$10,000,000 issued by the Board.
"Series 1997 Note Documents" means this Agreement, the Lease, the Series
1997 Note, the Deed of Trust, the First Amendment to the Amended and Restated
Deed of Trust and Security Agreement, the Series 1997 Guaranty, the Escrow and
Security Agreement and the Assignment.
"Tangible Net Worth" means the excess of Lessee's Total Assets
(excluding receivables from Lessee's officers and intangible assets determined
in accordance with generally accepted accounting principles) over Total
Liabilities (exclusive of capital stock and surplus), all determined in
accordance with generally accepted accounting principles consistently applied.
"Total Assets" shall mean total assets determined in according with
generally accepted accounting principles consistently applied.
"Total Liabilities" shall mean total liabilities determined in
accordance with generally accepted accounting principles consistently applied.
ARTICLE II
AMOUNT AND TERMS OF THE SERIES 1997 NOTE
SECTION 2.01. The Series 1997 Note. The Purchaser agrees to purchase
and the Board agrees to sell, at par, on the terms and conditions hereinafter
set forth, the Taxable Revenue Note, Series 1997 (Jones Apparel Group, Inc.
Project) of the Board in the principal amount of Ten Million Dollars
($10,000,000). The Series 1997 Note shall contain the terms and conditions
and shall be substantially in the form of Exhibit A hereto.
SECTION 2.02. Purchasing the Series 1997 Note. The Series 1997 Note
shall be purchased on the Closing Date. Not later than 4:00 P.M. (Nashville
time) on the Closing
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<PAGE>
Date, and upon fulfillment of the applicable conditions set forth in Article
III, the Purchaser will purchase the Series 1997 Note by application of
immediately available funds on behalf of the Board in the manner set forth
in Section 20.03 of the Lease.
SECTION 2.03. Application of Payments. Except as otherwise provided in
Article XX of the Lease, any payment or prepayment of Basic Rent under the Lease
shall be applied as a payment or prepayment first to accrued interest on the
Notes and the remainder, if any, to prepayment penalty, if any, and then to
principal installments on the Notes in the inverse order of maturity. Any
payment or prepayment on the Series 1996 Note or the Series 1997 Note shall be
applied as a payment or prepayment of Basic Rent under the Lease.
SECTION 2.04. Payments. Each payment on the Series 1997 Note shall be
made not later than 12:00 Noon (Nashville time) on the day when due at the place
designated in the Series 1997 Note in immediately available funds. Whenever any
payment to be made hereunder or under the Series 1997 Note shall be stated to be
due on a day other than a Business Day, such payment shall be extended to the
next succeeding Business Day and such extension of time shall in such case be
included in computing such interest.
SECTION 2.05. Use of Proceeds. All of the proceeds from the sale of
the Series 1997 Note will be used as provided in Section 20.03 of the Lease.
ARTICLE III
CONDITIONS OF PURCHASE
SECTION 3.01. Conditions Precedent to the Purchase of the Series 1997
Note. The obligation of the Purchaser to purchase the Series 1997 Note is
subject to the conditions precedent that the Purchaser shall have received
on or before the Closing Date the following, each in form and substance
satisfactory to the Purchaser:
(a) The Series 1997 Note duly executed by the Board.
(b) The Assignment duly executed by the Board.
(c) The First Amendment to Lease and the Escrow and Security
Agreement duly executed by the Board and the Lessee.
(d) The Deed of Trust duly executed by the Board.
(e) The First Amendment to the Amended and Restated Deed of Trust and
Security Agreement executed by the parties thereto.
(f) The Series 1997 Guaranty duly executed by the Lessee.
(g) The Environmental Indemnity duly executed by the Lessee.
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<PAGE>
(h) Evidence of the completion of all recordings and filings as may be
necessary or, in the opinion of the Purchaser, desirable to perfect the liens,
assignments and security interests created by the Documents, and evidence that
all other actions necessary or, in the opinion of the Purchaser, desirable to
perfect and protect the priority lien, assignment and security interest created
by the Documents have been taken.
(i) Certified copies of the resolutions of the Board of Directors of
the Board approving each Series 1997 Note Document and of all documents
evidencing other necessary corporate action and governmental approvals, if any,
with respect to each Series 1997 Note Document.
(j) A Certificate of the Secretary, or similar officer, of the Board
certifying the names and true signatures of the officers of the Board authorized
to sign each Series 1997 Note Document and the other documents to be delivered
by it hereunder.
(k) Certified copies of the Resolutions of the Board of Directors of
the Lessee approving each Lessee Document and of all documents evidencing other
necessary corporate action and governmental approval, if any, with respect to
each Lessee Document.
(l) A Certificate of the Secretary, or similar officer, of the Lessee
certifying the names and true signatures of the officers of the Lessee
authorized to sign each Lessee Document and the other documents to be
delivered by it hereunder.
(m) The opinion of Boston, Bates & Holt, counsel for the Lessee, dated
the date hereof, and in form acceptable to Purchaser.
(n) The opinion of White and Betz, counsel for the Board, dated the
date hereof, and in form acceptable to Purchaser.
(o) A paid title insurance policy, prepared upon an opinion of counsel
approved by the Purchaser, in form and content, and with a company, acceptable
to the Purchaser, in the amount of $15,000,000 insuring that the Deed of Trust
creates a valid first lien in and upon the Project, free and clear of all
defects and encumbrances except as set forth on Schedule B to the Lease and
containing full coverage against liens of mechanics, materialmen, laborers and
any other party who might claim statutory or common law liens.
(p) Evidence satisfactory to the Purchaser as to:
(i) Methods of access to and egress from the Project, and nearby
or adjoining public ways, meeting the reasonable requirements of
similar projects;
(ii) The availability of storm and sanitary sewer facilities
meeting the reasonable requirements of the Project;
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<PAGE>
(iii) The availability of other required utilities, such as
electricity, water, etc., reasonably required to serve the
Project; and
(iv) The securing of all requisite governmental approvals of
sanitary facilities, and other matters that are subject to the
jurisdiction of any governmental authority.
(q) Suitable policies or evidence of insurance in accordance with the
terms of the Lease and this Agreement.
(r) A survey, certified by a surveyor registered as such in Tennessee,
to which is attached a certificate satisfactory to the Purchaser, which survey
shall disclose all improvements, easements and rights-of-way, and the Building.
(s) An environmental report, prepared by an environmental engineering
firm acceptable to the Purchaser, if requested by Purchaser, with respect to
the premises, in form, substance and detail satisfactory to the Purchaser.
(t) Such other items as the Purchaser may reasonably request.
ARTICLE IV
REPRESENTATIONS, COVENANTS AND WARRANTIES
OF THE BOARD
SECTION 4.01. Representations and Warranties of the Board. The Board
represents and warrants as follows:
(a) The Board is a duly established, organized and existing public
corporation under the laws of the State of Tennessee. Each of the
directors of the Board is a duly qualified elector of and taxpayer
in the City of Lawrenceburg, Tennessee, and no director is an officer
or employee of the City of Lawrenceburg, Tennessee. The composition
of the Board of Directors of the Board is in conformity with the
requirements of Section 7-53-301 of the Act.
(b) The Board has all requisite power, authority and legal right to
execute and deliver the Series 1997 Note Documents and all other
instruments and documents to be executed and delivered by the Board
pursuant hereto, to perform and observe the provisions thereof and to
carry out the transactions contemplated thereby. All corporate action
on the part of the Board which is required for the execution, delivery,
performance and observance by the Board of the Series 1997 Note
Documents has been duly authorized and effectively taken, and such
execution, delivery, performance and observation by the Board do not
contravene applicable law or any contractual restriction binding on
or affecting the Board.
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<PAGE>
(c) No authorization or approval or other action by, and no notice
to or filing with, any governmental authority or regulatory body is
required for the due execution and delivery by the Board of, and
performance by the Board of its obligations under, any Series 1997
Note Document except for the filing of a Report on Debt Obligation
with the Division of Local Finance, Comptroller's Office, as
required by Chapter 402, Public Acts of 1989.
(d) This Agreement is, and each other Series 1997 Note Document
when delivered hereunder will be, legal, valid and binding special
obligations of the Board enforceable against the Board in accordance
with their respective terms.
(e) There is no default of the Board in the payment of the principal
of or interest on any of its indebtedness for borrowed money or under
any instrument or instruments or agreements under and subject to which
any indebtedness for borrowed money has been incurred which does or
could affect the validity and enforceability of the Series 1997 Note
Documents or the ability of the Board to perform its obligations
thereunder, and no event has occurred and is continuing under the
provisions of any such instrument or agreement which constitutes or,
with the lapse of time or the giving of notice, or both, would
constitute such a default.
(f) There is not pending or, to the knowledge of the undersigned
officers of the Board, threatened any action or proceeding before any
court, governmental agency or arbitrator (i) to restrain or enjoin the
issuance or delivery of the Series 1997 Note or the collection of any
revenues pledged under the Assignment, (ii) in any way contesting or
affecting the authority for the issuance of the Series 1997 Note or
the validity of any of the Series 1997 Note Documents, or (iii) in
any way contesting the existence or powers of the Board.
(g) In connection with the authorization, issuance and sale of the
Series 1997 Note, the Board has complied with all provisions of the
Constitution and laws of the State of Tennessee, including the Act and
Sections 8-44-104, et seq., of Tennessee Code Annotated (the "Public
Meetings Act").
(h) The Board has not assigned or pledged and will not assign or
pledge its interest in the Lease for any purpose other than to secure
the Series 1996 Note and the Series 1997 Note under the Assignment.
The Series 1996 Note and the Series 1997 Note constitute the only notes
or other obligations of the Board in any manner payable from the
revenues to be derived from the Lease, and except for the Series 1996
Note and the Series 1997 Note, no notes or other obligations have been
or will be issued on the basis of the Lease.
(i) The Board is not in default under any provision of its
Certificate of Incorporation or By-Laws, and is not in default under
any of the provisions of
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<PAGE>
the laws of the State of Tennessee which default would affect its
existence or its powers referred to in subsection (b) of this Section.
(j) No member, officer or other official of the Board has any
interest whatsoever in the Lessee or in the transactions contemplated
by the Lease.
(k) The Board will not enter into any agreement or instrument which
might in any way prevent or materially impair its ability to perform
its obligations under the Series 1997 Note Documents.
(l) The Board will not consent or agree to any modification of the
Lease or waive compliance with any of the terms thereof, unless any
such modification or waiver shall have been agreed to in writing by
the Noteholder.
(m) The Board will execute, acknowledge where appropriate, and
deliver from time to time promptly at the request of the Noteholder
all such instruments and documents as in the opinion of the Noteholder
are necessary or desirable to carry out the intent and purpose of any
of the Documents.
SECTION 4.02. Affirmative Covenants. So long as the Series 1997 Note
shall remain unpaid, the Board will, upon request of the Noteholder and provided
it shall be furnished with sufficient funds to pay all costs and expenses
(including attorney's fees) reasonably incurred by it as such costs and
expenses accrue:
(a) Take all action and do all things which it is authorized by law
to take and do in order to perform and observe all covenants and
agreements on its part to be performed and observed under the Series
1997 Note Documents.
(b) Execute, acknowledge where appropriate, and deliver from time to
time promptly at the request of the Noteholder all such instruments and
documents as in the opinion of the Noteholder are necessary or desirable
to carry out the intent and purpose of the Series 1997 Note Documents or
Lessee Documents (or any of them).
ARTICLE V
OTHER REPRESENTATIONS, COVENANTS AND WARRANTIES OF LESSEE
SECTION 5.01. Representations and Warranties. In order to induce the
Board to amend and modify the Lease and the Purchaser to purchase the Series
1997 Note, Lessee hereby represents and warrants to, and agrees with, the Board,
the Purchaser and any subsequent Noteholder as follows:
(a) Organization. The Lessee is a corporation duly organized, validly
existing and in good standing under the laws of the State of Pennsylvania and
has all requisite power and
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<PAGE>
authority to own and operate its properties and to carry on its business as now
being conducted. Lessee shall remain a corporation duly organized and existing
and in good standing under the laws of the State of Pennsylvania, and is and
shall remain duly qualified to do business in Tennessee and each state other
than Tennessee in which qualification is necessary. Neither the execution,
the delivery, nor the performance of this Agreement and all related documents
by Lessee will constitute a default under or conflict with Lessee's charter or
bylaws or any agreement, contract, document, or instrument to which Lessee now
is a party. The execution of all necessary resolutions and other prerequisites
of corporate actions have been duly performed so that the individual executing
this Agreement and related documents on behalf of Lessee is duly authorized to
bind Lessee by his signature.
(b) Requisite Power and Authorization. This Agreement constitutes, and
upon execution and delivery thereof, the other Lessee Documents will constitute,
legal, valid and binding obligations of the Lessee enforceable against the
Lessee in accordance with their respective terms, except as enforcement thereof
may be limited by bankruptcy, insolvency, moratorium, reorganization or other
similar laws affecting creditors' rights generally. The Lessee has full power
and authority, corporate and otherwise, to execute and deliver, and to perform
all of its obligations under, each of the Lessee Documents. All corporate
action which is required for such execution, delivery and performance has been
validly taken.
(c) Approvals. No approval, consent or other authorization (corporate,
governmental or otherwise) of, or filing with, any court, agency, commission or
other authority or entity is required for the due execution, delivery,
performance or observance by the Lessee of this Agreement or for the payment
of any sums thereunder.
(d) Litigation. There is no litigation or proceeding pending against
Lessee or, to the knowledge of Lessee, threatened that, if decided adversely to
Lessee, would have a material effect upon its financial condition. Lessee is
not subject to any outstanding court or administrative order.
(e) Financial Statements. The financial statements of Lessee heretofore
delivered to the Purchaser fairly and accurately reflect the financial condition
and capital structure of Lessee as of the dates thereof. Since said date, no
material adverse change in either has occurred or, to the knowledge of Lessee,
is threatened. All financial statements delivered to Purchaser have been
prepared in accordance with generally accepted accounting principles,
consistently applied, and are true, accurate and complete in every material
respect. Without limiting the foregoing, Lessee warrants that such financial
statements disclose all known contingent liabilities as well as direct
liabilities. Lessee acknowledges that Purchaser agreed to purchase the Series
1997 Note in reliance upon such financial statements, and Lessee warrants that
no material adverse change has occurred in the financial condition of any
person or entity as set forth in such financial statements. Lessee warrants
that Lessee has good and marketable title to the assets disclosed on Lessee's
balance sheet disclosed to Purchaser, subject only to liens, security interests
and other encumbrances noted thereon.
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<PAGE>
(f) Taxes. Lessee is not presently delinquent in the payment of any
taxes imposed by any governmental authority or in the filing of any tax return
and Lessee is not involved in a dispute with any taxing authority over tax
amounts due. Lessee covenants that all future taxes assessed against Lessee
shall be timely paid and that all tax returns required of Lessee shall be
timely filed.
SECTION 5.02. Lease. The Lessee shall punctually pay all Basic Rent
and other amounts due under the Lease and shall promptly perform all of its
other obligations under the Lease.
SECTION 5.03. Inspection. The Lessee and the Board shall permit the
Noteholder and any representative of the Noteholder to visit and inspect the
Leased Property at such time as either the Board or the Lessee has title to
any part thereof, to examine the books of account of the Lessee and to discuss
Lessee's affairs, finances and accounts with Lessee and independent certified
public accountants, all during business hours and as often as the Noteholder or
any such representatives may reasonably request. Any inspection or examination
pursuant to this paragraph shall be for the sole purpose of protecting the
security of the Noteholder and shall not be construed as a representation by
the Noteholder that there has been compliance with the plans and specifications
for the Project or that the Project will be or is free of faulty materials or
workmanship, or a waiver of any right the Noteholder may have against Lessee or
any other party.
SECTION 5.04. Expenses Paid by Lessee, indemnification.
(a) The Lessee will pay in full all reasonable out-of-pocket expenses
of the Board and the Purchaser incurred in connection with the preparation,
execution and delivery of this Agreement and the Lease and the consummation of
the transactions contemplated by such documents, including but not limited to
(i) the fees and disbursements of the Board's counsel, and Purchaser's counsel,
(ii) all taxes(other than income taxes) applicable to such transactions, (iii)
all present and future recording and filing fees and recording and filing taxes,
(iv) all expenses incident to the preparation of the Documents and any other
documents relating to the Lease or the Series 1997 Note, and (v) all survey
and title insurance premiums, fees and expenses.
(b) The Lessee shall pay to or reimburse in full the Board and
Noteholder for all costs and expenses incurred in the collection or enforcement
of (or in respect of any action taken to collector enforce) the Documents upon
any default thereunder, or in any investigation of any such default, including
reasonable attorneys' fees.
(c) The Lessee shall indemnify and hold harmless both the Board, the
Purchaser and any subsequent Noteholder (and all officers and directors of
both the Board, the Purchaser and any subsequent Noteholder) against all
liabilities, claims, costs and expenses imposed or asserted against either the
Board or the Purchaser for (i) any loss or damage to property or injury or
death of any person that may be occasioned by any cause whatsoever pertaining
to the renovation, maintenance, operation or use of the Leased Property, (ii)
any breach or default on the part of the Lessee in the performance of any
covenant or agreement
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<PAGE>
under the Lessee Documents or arising from any act or failure to act by the
Lessee or any of his agents, contractors, servants, employees or licensees or
arising from any accident, injury or damage whatsoever caused to any person,
firm or corporation occurring in or about the Leased Property, or (iii) any
such claim or action or proceeding brought thereon.
(d) The obligations of the Lessee under this Section 5.04 shall survive
the payment in full of all amounts payable under the Series 1997 Note to the
extent set forth above.
SECTION 5.05. Performance of Lessee or Board Obligations by Series 1997
Noteholder. Without having any obligation to do so and only if an Event of
Default has occurred and is continuing, the Noteholder may perform or pay any
obligation which the Lessee is obligated to pay or perform under any of the
Lessee Documents or which the Board is obligated to pay or perform under any
of the Series 1997 Note Documents. All of the following shall bear interest
at the Default Rate and, together with such interest, be repaid by the Lessee
to the Noteholder on demand: (1) all sums advanced or paid by the Noteholder
under this Section, and (2) all costs reasonably incurred or paid by the
Noteholder in the exercise of its rights under this Section.
SECTION 5.06. Further Assurances. Lessee will execute such other
assignments, security agreements, financing statements, and other documents
that Purchaser may deem necessary to further evidence the obligations provided
for in the Lease or to perfect, extend, or clarify Purchaser's rights in any
property securing or intended to secure the Series 1997 Note. Any Vice
President of Purchaser is hereby appointed as Lessee's attorney-in-fact with
full power of substitution for the signing of financing statements and other
similar filings with government offices for perfecting security interests
granted hereby. Purchaser acknowledges that this power of attorney is coupled
with an interest and is irrevocable.
SECTION 5.07. Financial Statements. The Lessee will provide to the
Purchaser (i) within forty-five days in the case of the Lessee, after the end
of the Lessee's fiscal quarter, financial statements of the Lessee, in form and
content satisfactory to Purchaser including a complete balance sheet and profit
and loss statement for each quarter; (ii) within one hundred twenty days after
the close of Lessee's fiscal year, complete certified audited financial
statements of Lessee, prepared in accordance with generally accepted
accounting principles, consistently applied, prepared by a certified public
accountant acceptable to Purchaser; and (iii) a quarterly compliance
certificate from an officer of the Lessee acknowledging that the Lessee is not
in default in the performance of any provisions of the Lessee Documents and
that the Lessee is in compliance with all fiscal covenants contained in the
Lessee Documents.
SECTION 5.08. Cash Flow to Debt Service Ratio. Lessee shall at all
times maintain a ratio of Cash Flow to Debt Service of not less than 10.0 to
1.0 except as provided below. For the purposes of this covenant, "cash flow"
shall mean earnings of Lessee before interest, taxes, depreciation and
amortization and "debt service" shall mean the sum of the current portion of
long term debt and capitalized leases, dividends, and treasury stock
repurchases. In the event Lessee is engaged in an active stock repurchase
program, Lessee shall
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at all times maintain a ratio of Cash Flow to Debt Service of not less than 1.5
to 1.0. An active stock repurchase program shall mean that Lessor has purchased
during the immediately preceding thirty day period not less than $1,000,000 of
its own Common Stock.
SECTION 5.09. RESERVED
SECTION 5.10. Dividends and Loans or Advances. The Lessee will not
pay or make, directly or indirectly, to any related company, (i) dividends;
(ii) royalty fees or related company management or consulting fees; and (iii)
any loans or advances for the duration of this Agreement unless immediately
before and immediately after paying or making such dividend, royalty fee or
related company management or consulting fee or any loan or advance, the Lessee
was and remains in compliance with the other covenants contained herein.
SECTION 5.11. Liabilities to Tangible Net Worth. Lessee will not
permit its ratio of Total Liabilities to its Tangible Net Worth to exceed .75
to 1 at any time during the term of the Lease.
SECTION 5.12. Insurance. The Lessee will maintain public liability
insurance insuring against bodily injury and property damage with liability
limits of $500,000 for each occurrence and $10,000,000 aggregate liability and
fire and extended coverage insurance on all assets in such form and in such
amounts as are consistent with industry practices and with insurers satisfactory
to the Purchaser. The Lessee shall provide evidence of insurance (together with
written agreement by the insurer or insurers to give Purchaser 30 days' prior
written notice of cancellation) to the Purchaser and the Lessee shall name the
Purchaser as the loss payee on any and all such insurance policies relating
to the Leased Property.
SECTION 5.13. Use of Project. Lessee will keep the Project free from
any lien, security interest, or encumbrance other than that granted to Purchaser
by the Board pursuant to the Deed of Trust and in good order and repair and will
not waste or destroy the Project or any part thereof. Lessee will not use the
Project in violation of any statute or ordinance. Lessee's business activities
are conducted in accordance with all applicable laws and regulations, and Lessee
covenants that such activities shall continue to be so conducted. Purchaser may
examine and inspect the Project at any time.
SECTION 5.14. No Conflicting Agreements. Lessee is not a party to any
contract or agreement and is not subject to any contingent liability that does
or may impair Lessee's ability to perform under the terms of this Agreement.
The execution and performance of this Agreement will not cause a default under
any other contract or agreement to which Lessee or any property of Lessee is
subject, and will not result in the imposition of any charge, penalty, lien or
other encumbrance against any of Lessee's property except in favor of Purchaser.
SECTION 5.15. Notice to Purchaser of Certain Events. Lessee covenants
to give Purchaser prompt written notice of any litigation, arbitration,
administrative proceeding or
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investigation that may hereafter be instituted or threatened against Lessee in
which the potential liability of Lessee exceeds $250,000. Lessee covenants to
give Purchaser written notice within ten days of (i) the creation or discovery
of any material additional contingent liability or the occurrence of any other
material adverse change in the financial condition of Lessee, (ii) the
occurrence of any event, or presence of any condition, which constitutes an
Event of Default or which with the giving of notice, the passage of time, or
both, would constitute a default, and (iii) the change of the name of Lessee.
SECTION 5.16. Further Assurances. Lessee covenants that it will
execute, acknowledge where appropriate, and deliver from time to time promptly
at the request of the purchaser all such instruments and documents as in the
opinion of the Purchaser are necessary or desirable to carry out the intent
and purpose of the Series 1997 Note Documents or Lessee Documents (or any of
them).
SECTION 5.17. Merger, Sale of Assets, Certificates and-Loans. Lessee
will not, without the prior written consent of the Purchaser:
(a) enter into any merger or consolidation; provided, however, that
Lessee may, without the consent of Purchaser, merge or consolidate
with any other company as long as the Lessee shall be the
continuing or surviving corporation;
(b) sell, lease, convey or otherwise dispose of any of its property or
assets, except that Lessee may (i) grant liens or encumber any of
its property (other than its interest in the Lease) (ii) dispose of
property in the ordinary course of business and (iii) otherwise
dispose of its properties as long as the aggregate fair market
value of the property so disposed of in any fiscal year of the
Lessee also does not exceed $1,000,000; and
(c) submit to the Purchaser any certificate or other document that
contains any untrue statement of a material fact or omits to
state a material fact necessary to make it not misleading.
SECTION 5.18. Borrowing. Lessee will not create, incur, assume or
become liable in any manner for any indebtedness for borrowed money, deferred
payment for the purchase of assets, lease payments, as surety or guarantor for
the debt of another, or otherwise plan to purchase, except for normal trade
debts incurred in the ordinary course of Lessee's business, and except for
existing indebtedness disclosed to Purchaser in writing and acknowledged by
Purchaser prior to the date of this Agreement.
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ARTICLE VI
EVENTS OF DEFAULT
The occurrence of any one or more of the following events shall
constitute an Event of Default hereunder:
(a) non-payment when due of any installment of interest on the Series
1996 Note or the Series 1997 Note; or
(b) non-payment when due of any installment of principal on the
Series 1996 Note or the Series 1997 Note whether at maturity, by
acceleration or mandatory prepayment; or
(c) non-payment when due of any other amount required to be paid by
the Lessee or the Board hereunder or under any other Document
(other than a default under subsections (a) or (b) above) continued
for ten (10) days after written notice thereof to the Lessee; or
(d) the occurrence of an "Event of Default" as defined in Article
14.01 of the Lease which continues beyond the applicable cure
period provided therein, if any; or
(e) indebtedness of the Lessee in excess of $50,000 shall be declared
to be due and payable, or required to be prepaid other than by
regularly scheduled or other mandatory required prepayment, prior
to the stated maturity thereof; or
(f) any representation or warranty made by Lessee herein or in the
Lease is untrue in any material respect when made;
(g) default by the Lessee in the due observance or performance of any
term, covenant, condition or agreement on its part to be performed
under any of the Documents (other than a default under
subsections (a), (b), (c), (d), (e) or (f) above) continued for
thirty (30) days after written notice specifying such default has
been given to the Lessee;
(h) default by the Lessee in the due observance or performance of any
term covenant, condition or agreement on its part to be performed
under the Prior Note Agreements, or any of them, except that no
default shall be deemed to exist under the Prior Note Agreements
by reason of a breach of the financial covenants contained in
Sections 5.07, 5.08 and 5.11 of the Prior Note Agreements unless
there is a breach of any of the financial covenants contained in
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Section 5.07 through 5.11 hereof, which the parties agree shall
supersede and replace Sections 5.07 through 5.11 of the Prior Note
Agreements. The parties further agree that the provisions of
Section 5.09 contained in the Prior Note Agreements are deleted
and are of no further force and effect. Except as modified hereby,
the terms of the Prior Note Agreements remain in full force and
effect; or
(i) default under any notes issued by the Board or Purchaser for the
benefit of Lessee or under any and all other documents,
instructions, deeds of trust, mortgages, security agreements,
guaranties, executed and/or delivered by Lessee or the Board in
connection therewith (the "Loan Documents"); it being agreed that
a default under any of such Loan Documents shall be a default
hereunder and vice versa.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Notices, Etc. All notices and other communications
provided for hereunder shall be in writing (including telegraphic, telecopy,
or telex communication) and mailed, telecopied, telexed, telegraphed or
delivered, if to the Board, at its address, c/o White & Betz, 22 Public
Square, Lawrenceburg, Tennessee 38464-0488, Attention: Alan C. Betz, Esq.;
if to the Purchaser, at its address at NationsBank of Tennessee, National
Association, 255 N. Military Avenue, Lawrenceburg, Tennessee 38464, Attention:
Mr. Timothy E. Pettus; if to any Noteholder other than the Purchaser, at the
address indicated on the note register maintained pursuant to Section 7.02
hereof; if to the Lessee, at its address at Jones Apparel Group, Inc., 250
Rittenhouse Circle, Bristol, Pennsylvania 19007, Attention: Chief Financial
Officer; or, as to each party, at such other address as shall be designated
by such party in a written notice to the other party. All such notices and
communications shall, when mailed or telegraphed; be effective three days
after deposit in the mails or delivery to the telegraph company, respectively,
addressed as aforesaid. All such notices and communications otherwise
transmitted shall be effective upon receipt by the addressee.
SECTION 7.02. Series 1997 Note Registration. The Series 1997 Note
shall be registered (as hereinafter provided) in the name of the owner on a
note register to be provided for that purpose by the Board in the office of
the Lessee, as note registrar. The note registrar and the note register shall
be subject to change upon written notice thereof from the Noteholder. No
transfer thereof shall be valid unless made at the written request of the
registered owner or his legal representative, on said note register and
evidence of transfer of the Series 1997 Note furnished to the note registrar.
Principal of, premium, if any, and interest on the Series 1997 Note will be
paid by check to the registered owner by mail at the address shown on the note
register or at such other place as may be directed by the Noteholder, which
directions shall be noted in the note register.
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The person in whose name the Series 1997 Note shall be registered shall
be deemed and regarded as the absolute owner thereof for all purposes, and
payment of or on account of the interest on or the principal of the Series
1997 Note shall be made only to or upon the order of the registered owner
thereof or his legal representative, but such registration may be changed as
hereinabove provided. All such payments shall be valid and effectual to
satisfy and discharge the liability upon the Series 1997 Note to the extent
of the sum or sums paid.
SECTION 7.03. No Waiver: Remedies. No failure on the part of the
Noteholder to exercise, and no delay in exercising, any right under any
Document shall operate as a waiver thereof; nor shall any single or partial
exercise of any right under any Document preclude any other or further
exercise thereof or the exercise of any other right. The remedies provided
in the Documents are cumulative and not exclusive of any remedies provided
by law.
SECTION 7.04. Binding Effect, Governing Law. This Agreement shall be
binding upon and inure to the benefit of the Board, the Purchaser and the Lessee
and their respective successors and assigns, except that the Board shall not
have the right to assign its rights hereunder or any interest herein without
the prior written consent of the Purchaser. This Agreement and the Series 1997
Note shall be governed by, and construed in accordance with, the laws of the
State of Tennessee except to the extent that applicable federal law may
permit any higher rate of interest.
SECTION 7.05. Acquisition of the Series 1997 Note For Account of the
Purchaser. The Purchaser represents and warrants that it will acquire the
Series 1997 Note and the other Series 1997 Note Documents to be acquired by
it for its own account and, except that the Purchaser may grant participation
interests therein to other financial institutions, not with a view to the
distribution or any disposition thereof, and that it has no present intention
of making any such distribution or disposition provided that the disposition
of the Purchaser's property shall at all times be and remain within its
control. In the event that the Purchaser or any subsequent Noteholder should
transfer the Series 1997 Note, the Purchaser or any subsequent Noteholder shall
give prompt written notice to the Board and the Lessee of the name and address
of the transferee. Until such time as the Board and the Lessee receive such
notice from the Purchaser and the name and address of the transferee have been
entered on the note register and noted on the Series 1997 Note, the Board and
the Lessee shall be entitled to assume that the Purchaser is the Noteholder and
that the Noteholder is as reflected in the most recent entry on the note
register and the most recent notation on the Series 1997 Note.
SECTION 7.06. Severability. In the event that any clause or provision
of any Series 1997 Note Document shall be held to be invalid by any court of
competent jurisdiction, the invalidity of such clause or provision shall not
affect any of the remaining provisions of such Series 1997 Note Document.
SECTION 7.07. Payment on Non-Business Days. Whenever any payment to be
made hereunder or under the Series 1997 Note shall be stated to be due on a day
which is not a Business Day, such payment may be made on the next succeeding
Business Day.
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SECTION 7.08. No Liability of Board's Officers, Etc. No recourse under
or upon any obligation, covenant or agreement contained in this Agreement or the
Assignment, or in the Series 1997 Note, or under any judgment obtained against
the Board, or by the enforcement of any assessment or by any legal or equitable
proceeding by virtue of any constitution or statute or otherwise or under any
circumstances, under or independent of this Agreement or the Assignment, shall
be had against any incorporator, member, director or officer, as such, past,
present or future, of the Board, either directly or through the Board, or
otherwise, for the payment for or to the Board or any receiver thereof, or
for or to the holder of the Series 1997 Note or otherwise, of any sum that
may be due and unpaid by the Board upon the Series 1997 Note. Any and all
personal liability of every nature, whether at common law or in equity, or by
statute or by constitution or otherwise, of any such incorporator, member,
director or officer, as such, to respond by reason of any act or omission on
his part or otherwise, for the payment for or to the Board or any receiver
thereof, or for or to the holder of the Series 1997 Note or otherwise, of any
sum that may remain due and unpaid upon the Series 1997 Note, is hereby
expressly waived and released as a condition of and consideration for the
execution of this Agreement and the issue of the Series 1997 Note.
SECTION 7.09. No Liability of the City of Lawrenceburg, Tennessee, The
City of Lawrenceburg, Tennessee shall not in any event be liable for the payment
of the principal of, premium, if any, or interest on the Series 1997 Note, or
for the performance of any pledge, mortgage, obligation or agreement of any
kind whatsoever herein or indebtedness by the Board, and neither the Series
1997 Note nor any of the agreements or obligations of the Board contained in
this Agreement or the Assignment or otherwise shall be construed to constitute
an indebtedness of the City of Lawrenceburg, Tennessee, within the meaning of
any constitutional or statutory provision whatsoever.
SECTION 7.10. Term of Agreement. This Agreement and all terms and
provisions hereof shall survive the closing of the purchase and delivery of
the Series 1997 Note and shall not be merged into the Series 1997 Note or any
other documents evidencing the Series 1997 Note or the purchase thereof. The
term of this Agreement shall be from the date hereof until the date of payment
in full of the Series 1997 Note and all other obligations of the Board or the
Lessee hereunder and under the other Documents.
SECTION 7.11. Arbitration. Any controversy or claim between or among
the parties hereto including but not limited to those arising out of or relating
to this Agreement, or any related notes or instruments, including any claim
based on or arising from an alleged tort, shall be determined by binding
arbitration in accordance with the Federal Arbitration Act (or if not
applicable, the applicable state law), the rules of practice and procedure for
the arbitration of commercial disputes of Judicial Arbitration and Mediation
Services, Inc. (J.A.M.S.) Endispute or any successors thereto as supplemented
by any special rules set forth in any of the Loan Documents including the
special rules set forth below. In the event of any inconsistency, the special
rules shall control. Judgment upon any arbitration award may be entered in any
court having jurisdiction. Lessee consents to the exclusive jurisdiction of
the courts of competent jurisdiction in Davidson County, Tennessee. Any
party to the Agreement may bring an action,
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withholding a summary of expeditional providing, to compel arbitration of any
controversy or claim to which this Agreement applies to any court having
jurisdiction over such action.
(A) Special Rules. The arbitration shall be conducted in Davidson
County, Tennessee and administered by J.A.M.S. who will appoint an arbitrator.
If J.A.M.S. is unable or legally precluded from administering the arbitration,
then the American Arbitration Association will serve. All arbitration hearings
will be commenced within 90 days of the demand for arbitration; further, the
arbitrator shall only, upon a showing of cause, be permitted to extend the
commencement of such hearing for an additional 60 days.
(B) Reservation of Rights. Nothing herein shall be deemed to (i) limit
the applicability of any otherwise applicable statutes of limitation or repose
and any waivers contained in this Agreement; or (ii) be a waiver by the
Purchaser of the protection afforded to it by 12 U.S.C. Sec. 91 or any
substantially equivalent state law; or (iii) limit the right of the purchaser
(a) to exercise self help remedies such as (but not limited to) setoff, or (b)
to foreclosure against any real or personal property collateral, or (c) to
obtain from a court provisional or ancillary remedies such as (but not limited
to) injunctive relief, writ of possession or the appointment of a receiver.
The Purchaser may exercise such self help rights, foreclosure upon such
property, or obtain such provisional or ancillary remedies before, during or
after the pendency of any arbitration proceeding brought pursuant to this
Agreement. Neither the exercise or self help remedies nor the institution or
maintenance of an action for foreclosure or provisional or ancillary remedies
shall constitute a waiver of the right of any party, including the claimant in
such action, to arbitrate the merits of the controversy or claim occasioning
resort to such remedies.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
THE INDUSTRIAL DEVELOPMENT BOARD OF
THE CITY OF LAWRENCEBURG
By: /s/ Jerry Putman
Chairman
ATTEST:
Caralyne Thompson
Secretary
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NATIONSBANK OF TENNESSEE, NATIONAL
ASSOCIATION
By: /s/ Tim Pettus
Title: Senior V. Pres.
JONES APPAREL GROUP, INC.
By: /s/ Gary R. Klocek
Title: Corp. Controller
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EXHIBIT 10.45
THE INDUSTRIAL DEVELOPMENT BOARD OF
THE CITY OF LAWRENCEBURG
TAXABLE REVENUE NOTE, SERIES 1997
(JONES APPAREL GROUP, INC. PROJECT)
$10,000,000 April 17, 1997
FOR VALUE RECEIVED, the undersigned, THE INDUSTRIAL DEVELOPMENT BOARD
OF THE CITY OF LAWRENCEBURG, a Tennessee public nonprofit corporation (the
"Maker"), promises to pay to the registered owner hereof (the "holder"), at
the main office of NationsBank of Tennessee, National Association, Lawrenceburg,
Tennessee, or at such other place as the holder may from time to time designate
in writing, the principal sum of TEN MILLION DOLLARS ($10,000,000), plus
interest at the rate of seven and thirty one hundredth percent (7.30%) on the
outstanding principal balance hereof from the date hereof.
Principal and interest hereunder shall be payable monthly on the fifth
day of each month, commencing on May 5, 1997. Unless the principal shall be
declared due earlier and except as hereinafter provided, the principal hereof
shall be payable in one hundred and twenty (120) equal monthly installments
commencing on May 5, 1997. Notwithstanding the above, the entire outstanding
principal balance, if any, together with all accrued and unpaid interest shall
be immediately due and payable in full on May 5, 2002.
Overdue installments of principal and, to the extent legally
enforceable, interest and other amounts payable under this Note shall bear
interest from their due date at the Default Rate (as hereinafter defined).
All calculations of interest hereunder shall be on the basis of actual
days elapsed in a 360-day year.
Anything herein to the contrary notwithstanding, at no time shall the
interest rate hereunder exceed the highest rate permitted from time to time by
applicable law.
As used herein, (a) "Prime Rate" means the rate of interest set by
NationsBank of Tennessee, National Association, as such bank's Prime Rate
from time to time, and (b) "Default Rate" means the lesser of the Prime Rate
plus 4%, or the maximum rate from time to time permitted under applicable law.
This Note is the Note referred to in, and is entitled to the benefits
of, the Series 1997 Note Agreement (the "Note Purchase Agreement") dated as of
April 1, 1997 among the Maker, NationsBank of Tennessee, National Association
and Jones Apparel Group, Inc., a Pennsylvania corporation (the "Lessee"),
and is secured by, among others, (i) an Amended and
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Restated Assignment Agreement, dated as of April 1, 1997, from the Maker to
NationsBank of Tennessee, National Association assigning to NationsBank of
Tennessee, National Association maker's interest in that certain' Lease from
Maker to Lessee dated as of May 1, 1996 herewith and of record in the
Register's Office for Lawrence County, Tennessee, as amended by the First
Amendatory Lease Agreement dated as of April 1, 1997 (the "Lease"), (ii)
an Amended and Restated Construction Deed of Trust and Security Agreement
from Maker for the benefit of NationsBank of Tennessee, National Association,
dated as of April 1, 1997, and of record in the Register's Office for Lawrence
County, Tennessee; (iii) an Escrow and Security Agreement dated as of April 1,
1997 by and among Maker, Lessee and NationsBank of Tennessee, N.A. as escrow
agent and trustee; and (iv) such other security as has heretofore or will be
hereafter provided as security for any loan made by NationsBank of Tennessee,
National Association, for the benefit of Lessee.
This Note shall be prepayable at the option of the Maker at any time
with the prepayment penalties set forth in the following schedule if this Note
is prepaid through refinancing of the indebtedness by any outside lender, other
than NationsBank of Tennessee, National Association, or its affiliates,
including any financial institution, credit union, trust fund or like source
of funds.
Prepayment Date Prepayment Penalty
Before May 1, 2000 2%
and thereafter 0%
Notwithstanding the foregoing paragraph, this Note shall be prepayable
by the Maker without penalty in the event the Note is prepaid through funds of
the Lessee generated solely from its operations.
All payments hereunder shall be payable in lawful money of the United
States of America representing legal tender in payment of all debts and dues,
public and private, at the time of payment.
Payment of each monthly installment as herein above provided, when
received by the holder shall be first applied to accrued interest at the rate
aforesaid on the then outstanding balance of principal and the remainder of
said installment shall be applied to reduction of principal.
Demand, notice, presentment and protest are waived.
This Note is issued in accordance with Sections 7-53-101 to 7-53-311
of Tennessee Code Annotated and constitutes a special obligation of the Maker,
the principal of, premium, if any, and interest on this Note, and all other
amounts payable by the Maker pursuant to the Note Purchase Agreement and this
Note, are payable pursuant to the Assignment referred to in the Note Purchase
Agreement; (ii) from revenues of the Maker derived and to be derived pursuant
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to the Lease. All payments made as provided above shall, to the extent of the
sum or sums so paid, satisfy and discharge the liability of the Maker under
the Note or the Note Purchase Agreement, as the case may be. Neither the faith
and credit nor any taxing power of the Maker, the State of Tennessee nor the
City of Lawrenceburg, Tennessee, is pledged to the payment of the principal or
premium, if any, or interest on this Note.
No recourse under or upon any obligation, covenant or agreement
contained in this Note, or under any judgment obtained against the Maker, or
by the enforcement of any assessment or by any legal or equitable proceeding
by virtue of any constitution or statute or otherwise or under any
circumstances, under or independent of this Note, shall be had against any
incorporator, member, director or officer, as such, past, present or future,
of the Maker, either directly or through the Maker, or otherwise, for the
payment for or to the Maker or any receiver thereof, or for or to the holder
of the Note or otherwise, of any sum that may be due and unpaid by the Maker
upon the Note. Any and all personal liability of every nature, whether at
common law or in equity, or by statute or by constitution or otherwise, of
any such incorporator, member, director or officer, as such, to respond by
reason of any act or omission on his part or otherwise, for the payment for
or to the Maker or any receiver thereof, or for or to the holder of the Note
or otherwise, of any sum that may remain due and unpaid upon the Note, is
hereby expressly waived and released as a condition of and consideration for
the issue of the Note.
Upon the occurrence of an Event of Default under the Note Purchase
Agreement, the Lease or the Deed of Trust, the balance of the principal sum
of the indebtedness evidenced hereby, with all arrearages of interest thereon,
and any other sums advanced hereunder or under any other document evidencing or
securing the indebtedness evidenced hereby, shall, at the option of the holder,
become and be due and payable immediately, without notice, anything contained
herein to the contrary notwithstanding, time being of the essence of this
contract. From and after the date of acceleration in accordance with this
paragraph, interest will accrue at the Default Rate.
In the event this Note is placed in the hands of an attorney for
collection or for enforcement or protection of the security, the Maker shall
pay reasonable attorney's fees and all court and other costs upon demand.
The failure of the holder to exercise any option to accelerate the
indebtedness hereunder in the event of any default as above provided, or any
forbearance, indulgence, or other delay by such holder in the exercise of any
such option, shall not constitute a waiver of the right to exercise such option
prior to the curing of any such default or in the event of any subsequent
default, whether similar or dissimilar to any prior default.
The Maker consents to any extension of time of payment hereof, release
of all or any part of the security for the payment hereof, or release of any
party liable for this obligation. Any such extension or release may be made
without notice to said Maker and without discharging any of its liability
hereunder.
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No provision in this Note shall require the payment or permit the
collection of interest in excess of the maximum permitted by law. If any
excess of interest in such respect is herein provided for, or shall be
adjudicated to be so provided for herein, the provisions of this paragraph
shall govern, and the Maker shall not be obligated to pay the amount of such
interest to the extent that it is in excess of the amount permitted by law.
In the event the holder shall collect monies which are deemed to constitute
interest which would otherwise increase the effective interest rate on this
Note to a rate in excess of that permitted to be charged by applicable law,
all such sums deemed to constitute interest in excess of the legal rate shall
be immediately returned to the payor thereof upon such determination.
This Note shall be construed according to the laws of the State of
Tennessee except to the extent-that applicable federal law may permit any
higher rate of interest.
Any notice to the Maker of this Note shall be effective when delivered
by personal service or when placed in the first-class United States mails,
postage prepaid, addressed to Maker, c/o Alan C. Betz, Esq., White & Betz,
22 Public Square, Lawrenceburg, Tennessee 38464-0488, or at such other
address as may be designated in writing to holder by Maker.
This Note may be transferred or assigned by the holder by giving notice
to the Lessee as note registrar at its main office, currently at 250 Rittenhouse
Circle, Bristol, Pennsylvania 19007. The principal hereof, premium, if any, and
interest hereon will be paid by check of the note registrar at the times
provided herein to the holder by mail to the address shown on the registration
books or at such other place as may be directed by the holder.
The law pursuant to which this Note is issued requires that the
following statement appear on the face hereof:
Neither the principal of or interest on this Note is taxable by the
State of Tennessee or by any county or municipality thereof.
However, such interest is subject to the Tennessee corporate excise
tax and the Tennessee privilege tax imposed on savings and loan
associations and the principal hereof may be subject to Tennessee
inheritance tax.
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IN WITNESS WHEREOF, THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF
LAWRENCEBURG, has caused this Note to be duly executed by its Chairman and its
seal to be impressed hereon and attested by its Secretary as of the date first
above written.
THE INDUSTRIAL DEVELOPMENT
BOARD OF THE CITY OF
LAWRENCEBURG
By: /s/ Jerry Putman
Chairman
(SEAL)
ATTEST:
Caralyn Thompson
Secretary
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<PAGE>
Date Of Name and Address
Registration Registered Owner
April 17, 1997 NationsBank of Tennessee,
National Association
255 N. Military Avenue
Lawrenceburg, TN 38464
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EXHIBIT 10.46
This instrument Prepared By
Alexander B. Buchanan, Esq.
Waller Lansden Dortch & Davis
511 Union Street, Suite 2100
Nashville, Tennessee 37219-1760
FIRST AMENDMENT TO LEASE
This First Amendment to Lease (the "First Amendment") made and entered
into as of April 1, 1997, by and between THE INDUSTRIAL DEVELOPMENT BOARD OF
THE CITY OF LAWRENCEBURG, a public non-profit corporation organized and
existing under the laws of the State of Tennessee (hereinafter called "Lessor")
and JONES APPAREL GROUP, INC., a Pennsylvania corporation (hereinafter called
"Lessee").
WITNESSETH
WHEREAS, Lessor and Lessee have heretofore entered into a Lease dated
as of May 1, 1996 (the "Lease") noted in Note Book 23, Page 175, registered in
Trust Book 400, Page 99-128, Register's Office of Lawrence County, Tennessee;
and
WHEREAS, Lessee has agreed to construct enhancements on the Leased
Premises (as defined in the Lease) consisting of a 210,000 square foot
distribution facility located adjacent to the existing facility and has
received the prior written consent of NationsBank of Tennessee, N.A. to the
enhancement as required by the Lease; and
WHEREAS, the parties wish to amend the Lease in order to set forth
more fully the understanding of the parties with respect to matters arising
by reason of the proposed enhancement; and
WHEREAS, to obtain funds for the enhancement, Lessor will issue and
sell its Taxable Revenue Note, Series 1997 (Jones Apparel Group, Inc. Project)
(herein sometimes referred to as the "Series 1997 Note") in the principal
amount of $10,000,000 under and pursuant to the Act (as defined in the Lease)
and the Series 1997 Note Purchase Agreement dated as of the date hereof (the
"Series 1997 Note Purchase Agreement") among Lessor, NationsBank of Tennessee,
National Association (the "Purchaser") and Lessee and proceeds from the sale
of the Series 1997 Note shall be disbursed in the manner and for the purposes
hereinafter set forth.
SECTION I
Section 1.01 of the Lease is amended in the following particulars:
a. The definition of "All Unpaid Installments" is deleted and the
following substituted in its stead:
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"All Unpaid Installments" means an amount equal to (i) the then
unpaid principal amount of the Notes, premium, if any, and all
interest accrued or to accrue on and prior to the next succeeding
date or dates on which the Lessor may prepay the Notes or on which
the Notes become due, whether by acceleration or otherwise, and
(ii) any additional rental due or to become due hereunder prior to
the time that the Notes are paid in full, including without
limitation any unpaid fees and expenses of Lessor which are then
due or will become due prior to the time that the Notes are paid
in full.
b. The definition of "Building" is deleted and the following is
substituted in its stead:
"Building" means the improvements constructed on the Land in
accordance with the Construction Contract. From and after the
issuance of the Series 1997 Note, "Building" shall also include
improvements constructed on the Land in accordance with the
Series 1997 Construction Contract.
c. The definition of "Deed of Trust" is deleted and the following
substituted in its stead:
"Deed of Trust" means the Deed of Trust dated as of May 1,
1996 from the Lessor for the benefit of the Purchaser with
respect to the Project, of record in Trust Book 400, Page
86-96 Register's Office for Lawrence County, Tennessee, as
amended, restated and supplemented.
d. The definition of "Lessee Documents" is deleted and the following
is substituted in its stead:
" Lessee Documents" means this Lease, the Note Purchase Agreement,
the Guaranty, the Environmental Indemnity, the Series 1997 Note
Purchase Agreement, the Series 1997 Guaranty, and the Series 1997
Environmental Indemnity.
e. The definition of "Note Documents" is deleted and the following is
substituted in its stead:
"Note Documents" means this Lease, the Note Purchase
Agreement, the Note, the Assignment, the Series 1997 Note Purchase
Agreement, the Series 1997 Note, the Series 1997 Assignment, the
First Amendment to the Amended and Restated Deed of Trust and
Security Agreement, and the Deed of Trust.
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f. The following new definitions shall be added to the Lease in
alphabetical order:
"Enhancement" means the 210,000 square foot distribution facility
to be located on the Leased Premises and constructed in accordance
with the terms of the Series 1997 Construction Contract.
"First Amendment to the Amended and Restated Deed of Trust and
Security Agreement" means the First Amendment to the Amended and
Restated Deed of Trust and Security Agreement dated as of April 1,
1997 by and among the Lessor, the Lessee and NationsBank of
Tennessee, National Association.
"First Amendment to Lease" means this First Amendment to Lease
dated as of June 1, 1997 by and between Lessor and Lessee.
"Notes" means, collectively, the Note and the Series 1997 Note.
"Note Purchase Agreements" means, collectively, the Note Purchase
Agreement and the Series 1997 Note Purchase Agreement.
"Series 1997 Assignment" means the Restated and Amended
Assignment Agreement dated as of April 1, 1996 from Lessor to the
Purchaser.
"Series 1997 Construction Contract" means the form of agreement
dated January 23, 1997 between Lessee and the Series 1997
Contractor.
"Series 1997 Contractor" means Evers Construction Company Inc.
"Series 1997 Environmental Indemnity" means the Environmental
Law and Compliance Certificate and Indemnity Agreement dated as
of April 1, 1997 between Lessee and Purchaser.
"Series 1997 Guaranty" means that certain Guaranty Agreement
dated as of April 1, 1997 from Lessee.
"Series 1997 Note" means the Taxable Revenue Note, Series 1997
(Jones Apparel Group, Inc. Project) in the principal amount of
$10,000,000 issued by the Lessor.
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"Series 1997 Noteholder" means NationsBank of Tennessee,
National Association, a national banking association with its
principal office in Nashville, Tennessee as the original
purchaser and registered owner of the Series 1997 Note and any
subsequent registered owner of the Series 1997 Note.
"Series 1997 Note Agreement" means the Series 1997 Note
Agreement dated as of April 1, 1997 among Lessor, Lessee and the
Series 1997 Noteholder.
SECTION II
Article III through Article XIX of the Lease are hereby amended in the
following particulars:
(a) all references to the "Note" appearing in such Articles
of the Lease shall be changed to the "Notes";
(b) all references to the "Note Purchase Agreement" shall be
changed to the "Note Purchase Agreements"; and
(c) all verbs modifying such terms shall be pluralized where
necessary to provide correct grammar.
SECTION III
The following new Article XX is added immediately following
Article XIX of the Lease:
ARTICLE XX
Construction and Equipping of Enhancement; Issuance of the
Series 1997 Note; Lessee's Acceptance;
Permitted Contests, Assignment of Lessor's Rights
Section 20.01. Construction and Equipping of the Enhancement.
Lessee agrees to complete the Enhancement in accordance with the Series
1997 Construction Contract by October 1, 1997 and to lease the Project,
including the Enhancement, from Lessor in accordance with the terms hereof.
Lessee agrees that any property acquired for use at the Project will be
acquired in the name of the Lessor and any property located on the Leased
Premises (other than Lessee's inventory) shall be deemed the property of
Lessor without any further act of the Lessee.
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Section 20.02 Agreement to Issue Series 1997 Note. In order to
provide funds for reimbursement of the Lessee for the costs of the
constructing and equipping the Enhancement as set forth in Section 20.01
hereof and certain costs incurred in connection with the issuance of the
Series 1997 Note, Lessor agrees that it will sell the Series 1997 Note as
provided in the Series 1997 Note Purchase Agreement.
Section 20.03 Use of Proceeds. The proceeds of the sale of the
Series 1997 Note shall be disbursed by the Purchaser as follows:
(a) $63,839 shall be paid to or at the direction of the Lessee
to pay it for certain costs in connection with the issuance of the
Series 1997 Note.
(b) $9,936,161 shall be paid to NationsBank of Tennessee, N.A.
as Escrow Agent and Trustee (the "Escrow Agent") and disbursed as
provided in that certain Escrow and Security Agreement dated as of
April 1, 1997 by and among Lessor, Lessee and Escrow Agent.
Section 20.04. Lessor to Pursue Remedies Against Contract
Subcontractors and Suppliers and Their Sureties. In the event of default
of the Series 1997 Contractor or any other contractor, subcontractor or
supplier under any contract made by it in connection with the Enhancement
or in the event of breach of warranty with respect to any material,
workmanship or performance guarantee, Lessor will at the request of Lessee
promptly proceed (subject to Lessee's advice to the contrary), either
separately or in conjunction with others, to exhaust the remedies of Lessor
against the contractor, subcontractor or supplier so in default and against
each surety for the performance of such contract. Lessee agrees to advise
Lessor of the steps it intends to take in connection with any such default.
If Lessee shall so notify Lessor, Lessee may, in its own name or in the name
of Lessor, prosecute or defend any action or proceeding or take any other
action involving any such contractor, subcontractor or surety which the
Lessee deems reasonably necessary, and in such event Lessor hereby agrees to
cooperate fully with Lessee and to take all action necessary to effect the
substitution of Lessee for Lessor in any such action or proceeding. Any
amounts recovered by way of damages, refunds, adjustments or otherwise in
connection with the foregoing shall be paid to Lessee.
Section 20.05. Use of Leased Property. Lessee is hereby granted and
shall have the right during the Term to occupy and use the Leased Property
as a facility for use as a clothing distribution center. Lessor agrees that
at Lessee's request and expense it will use all reasonable efforts to ensure
that such uses are and will continue to be lawful uses under all applicable
zoning laws and regulations.
Section 20.06. Lessee's Acceptance of Leased Property. With regard
to Lessor but subject to Section 20.04, Lessee agrees to accept the Leased
Property in its condition on the date that title thereto was transferred
to the Lessor and assumes all risks, if any, resulting from
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any present or future, latent or patent defects therein or from the failure
of the Project or the Enhancement to comply with all legal requirements
applicable thereto, reserving, however, any and all rights of Lessee
with respect to parties other than Lessor.
Section 20.07. Assignment of Lessor's Rights. Concurrently with the
execution of the First Amendment to Lease, Lessor will enter into the Series
1997 Assignment pursuant to which the Lessor will assign to the Purchaser
Lessor's rights under the Lease as security for, among other things, the
payment of the Notes and other amounts payable by Lessor or Lessee under
the Note Purchase Agreements. Lessee hereby consents to such assignment and
agrees to make all payments to Lessor required hereunder directly to the
Purchaser without defense or set-off by reason of any dispute between Lessee
and Lessor. Lessee further agrees that upon such assignment the Purchaser
shall be entitled to enforce the provisions of the Lease without regard to
whether the Lessor is then in default with respect to the Notes, or either
of them, or under the Note Purchase Agreements, or either of them.
Concurrently with the execution of the First Amendment to Lease, Lessor will
also amend and restate the Deed of Trust pursuant to which the Lessor will
make clear that the lien on the Project includes the Enhancement and serves
as security for the payment of both the Note and the Series 1997 Note and as
security for the obligations of Lessor and Lessee under the Note Purchase
Agreement, the Series 1997 Note Purchase Agreement and this Lease.
Section 20.08. Authorized Lessee Representative. Anything herein
contained to the contrary notwithstanding, any notice, request, direction
or similar communication of Lessee required or permitted under this Article
XX shall be executed by the Authorized Lessee Representative on behalf of the
Lessee, and the Purchaser shall not be obligated to accept or act upon any
such notice request direction or other communication unless it is made by an
Authorized Lessee Representative on behalf of the Lessee.
Section 20.09. Application of Moneys. All moneys received pursuant to
any right given or action taken under the Deed first shall be applied to
the payment of (i) the cost and expenses of the proceedings resulting in the
collection of such moneys and of the expenses, liabilities and advances incurred
or made by the Deed of Trust Trustee, including reasonable attorneys' fees, and
all other outstanding fees and expenses of the Deed of Trust Trustee, and (ii)
any sums due to the Lessor under the Lease, such moneys shall be applied in the
order set forth below:
(a) Unless the principal of all Notes shall have become or been
declared due and payable, all such moneys shall be applied:
First: To the payment of all installments of interest then due
on the Notes in order of priority first to installments past due for
the greatest period and, if the amount available shall not be
sufficient to pay in full any particular installment, then to the
ratable payment of the amounts due on such installment; and
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Second: To the payment of the unpaid principal of any of the
Notes which shall have become due and, if the amount available shall
not be sufficient to pay in full Notes due on any particular date,
together with such interest, then to the ratable payment of the
amounts due on such date.
(b) If the principal of all the Notes shall have become or been
declared due and payable, all such moneys shall be applied to the payment
of the principal, premium, if any, and interest then due and unpaid upon
the Notes, without preference or priority as between principal, premium,
interest, installments of interest or bonds, ratably according to the
amounts due respectively for principal, premium and interest to the persons
entitled thereto.
THE INDUSTRIAL DEVELOPMENT BOARD OF
THE CITY OF LAWRENCEBURG
By: /s/ Jerry Putnam
Chairman
JONES APPAREL GROUP, INC.
By: /s/ Gary R. Klocek
Title: Corp. Controller
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EXHIBIT 10.47
First Union Capital Markets Group
123 South Broad Street
Philadelphia, Pennsylvania 19109-1199
215 985-6000
Fax 215 985-8793
October 22, 1997
Mr. Gary R. Klocek
Controller
Jones Apparel Group, Inc.
250 Rittenhouse Circle
Bristol, PA 19007
Dear Gary:
I am pleased to inform you that First Union National Bank (the "Bank") has
approved, on an uncommitted basis, a $90 million facility for the use of
Jones Apparel Group, Inc. The facility is subject to the following conditions:
Sublimit(s):
The facility is divided into two sublimits. One for $50 million, to be used
for the express purpose of issuing import letters of credit. Each letter of
credit will be risk participated with a bank of our mutual choice on a 50%
basis for a total letter of credit facility, including the risk participation
of $100 million. Initially the risk participant bank will be BankBoston.
The second sublimit will be for direct borrowings, not to exceed $40 million.
Advances under both sublimits will be at the Bank's sole discretion.
Letters of Credit:
Fees: As previously negotiated.
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October 22, 1997
Mr. Gary R. Klocek
Page Two
Terms of Advances:
The interest rates, amount, maturity date and other payment terms with
respect to any cash advance will be on an offering basis on terms mutually
agreed upon.
Guarantors:
MELRU Corp., Jones Investment Company, Inc., Jones International LTD,
and Jones Holdings Corp. will continue to guarantee the facility as reflected
in the Guaranty and Suretyship Agreements dated July 26, 1993.
All borrowings under the sublimit of $40 million for direct advances will be
subject to the terms outlined in a Money Market Master Note dated July 26, 1993.
Please feel free to call me if you have any questions on the aforementioned
matter.
Best regards,
/s/ Carl E. Goelz
Carl E. Goelz
Vice President
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EXHIBIT 10.48
CoreStates Bank,
FC. 1-8-8-14
PO Box 7618
1345 Chestnut Street
Philadelphia PA 19101-7618
215 973 7397
Fax 215 973 7671
James P Richards
Vice President
Retailer and Apparel Group August 5, 1997
Gary R. Klocek
Controller
JONES APPAREL GROUP
250 Rittenhouse Circle
Bristol, PA 19007
Dear Gary:
I take great pleasure in advising you that we have approved in favor of Jones
Apparel Group, the following credit facilities:
A) A $150,000,000 discretionary fine of credit for the issuance of
documentary trade letters of credit, This amount is gross of any risk
participations. Chase Manhattan Bank has advised us they plan to
risk participate 30%, or $45,000,000, of this facility.
B) A $25,000,000 discretionary line of credit available for money
market loans and/or standby letters of credit. There is currently
outstanding a $100,000 standby LOC issued on behalf of Melru
Corporation.
C) We have also reapproved facilities for foreign exchange and other
types of transactional business.
I'm currently reviewing our documentation file to ensure that everything is
current and in good order. I will notify you should I find anything to the
contrary.
We are pleased to play an important role in Jones Apparel's growth and very
happy to have been favored with the opportunity to demonstrate our international
capabilities. I trust we have met--or exceeded--your expectations. We look
forward to further opportunities to demonstrate our confidence in the Jones
Apparel Group and its management.
Sincerely,
/s/ James P. Richards
cc: Wesley R. Card
<PAGE>
EXHIBIT 10.49
BankBoston, N. A.
100 Federal Street
Boston, Massachusetts 02110
August 19, 1997
Mr. Gary Klocek
Controller
Jones Apparel Group, Inc.
250 Rittenhouse Circle
Bristol, PA 10997
Dear Gary:
BankBoston, N.A. is pleased to confirm that we hold available for Jones Apparel
Group, Inc., a $55,000,000 364-day uncommitted letter of credit facility to
extend through July 5, 1998.
The availability of borrowings under this facility is subject to (i) our usual
reservation that we continue to be satisfied with the affairs of Jones Apparel
Group, Inc.; (ii) the execution of documentation for this facility that is
satisfactory to the Bank and (iii) any changes in government regulations or
monetary policy.
If the foregoing is satisfactory, please execute and return the enclosed copy
of this letter.
Very truly yours,
BankBoston, N.A.
By /s/ Nancy E. Fuller
Nancy E. Fuller, Director
/s/ Terese A. McLaughlin, Assistant Vice President
Accepted:
Jones Apparel Group, Inc.
By /s/ Gary R. Klocek
Date 9-10-97
<PAGE>
EXHIBIT 10.50
BankBoston, N.A.
100 Federal Street
Boston, Massachusetts 02110
July 7, 1997
Mr. Gary R. Klocek
Controller
Jones Apparel Group, Inc.
250 Rittenhouse Circle
Bristol, PA 19007
Dear Gary;
We are pleased to inform you that the necessary internal approval has been
obtained for the establishment of an informal "money market" lending arrangement
with Jones Apparel Group. Loans under this arrangement will be at fixed rates
quoted by BankBoston, N.A. with maturities of up to ninety days. Prepayment of
loans will not be permitted and if any loans are paid on a date other than the
maturity date thereof (whether by acceleration or otherwise), you shall
compensate us for any funding losses and other costs (including lost profits)
incurred as a result of such payment. Each loan must be at least $750,000 and
aggregate loans under this arrangement may not exceed $20,000,000. This
arrangement is not a commitment to lend, and from time to time the Bank may not
quote rates on some or all maturities.
We agree that upon your advice by telephone from time to time to our Money
Market Desk at (617) 434-7725 that you wish to borrow money under this facility
and our agreement to lend, we will forthwith lend you such amount at the quoted
rate of interest by crediting such an amount to your demand deposit account with
us, or, upon your instructions, by wiring such amount to such other account as
you may direct. Borrowings shall be evidenced by a Promissory Note in the
form attached hereto. Each borrowing and the corresponding information (see
attached note schedule) will be recorded the day of the telephone call. Our
corresponding advices of credit and debit will be additional evidence of
borrowings. You authorize us to keep the official record of all borrowings
under this "money market" lending arrangement in the format described above,
and you agree that this record shall be prima facie evidence of the amount of
the borrowings under this facility.
This letter and the Promissory Note evidence your promise to pay all such
borrowings with interest on their respective maturity dates.
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This "money market" lending arrangement remains in force until July 7, 1998.
If the foregoing satisfactorily sets forth the terms and conditions of this
lending arrangement, please indicate your acceptance thereof by executing and
returning the attached copy of this letter and the attached Promissory Note.
Sincerely,
/s/ Linda H. Thomas
Linda H. Thomas, Managing Director
Accepted: Jones Apparel Group, Inc.
BY: /s/ Gary R. Klocek
TITLE Controller
DATE: 7-14-97
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MONEY MARKET LINE
COMMERCIAL PROMISSORY NOTE
Boston, Massachusetts
July 7, 1997
FOR VALUE RECEIVED, the undersigned (jointly and severally if more than
one) promise(s) to pay to the order of BANKBOSTON, N.A. (together with any
successors or assigns, the "Bank"), a national banking association with its
Head Office at 100 Federal Street, Boston, Massachusetts 02110, the aggregate
principal amount of all loans made by the Bank to the undersigned pursuant to
the letter agreement between the Bank and the undersigned dated July 7, 1997,
as shown in the schedule attached hereto (the "Note Schedule"), together with
interest on each loan from the date such loan is made until the maturity thereof
at the applicable rate set forth in the Note Schedule. The principal amount of
each loan shall be payable on the maturity date of such loan as indicated in the
Note Schedule. Interest on the principal amount of each loan shall be payable
in arrears on the same day as the principal amount is due. Interest shall be
calculated on the basis of a 360-day year for the actual number of days elapsed
including holidays and days on which the Bank is not open for the conduct of
banking business.
SECTION 1. PAYMENT TERMS.
1.1 PAYMENTS; PREPAYMENTS. All payments hereunder shall be made by
the undersigned to the Bank in United States currency at the Bank's address
specified above (or at such other address as the Bank may specify), in
immediately available funds, on or before 2:00 p.m. (Boston, Massachusetts time)
on the due date thereof Payments received by the Bank prior to the occurrence of
an Event of Default (as defined in Section 2) will be applied first to fees,
expenses and other amounts due hereunder (excluding principal and interest);
second, to accrued interest; and third to outstanding principal; after the
occurrence of an Event of Default, payments will be applied to the Obligations
under this Note as the Bank determines in its sole discretion. No prepayment of
any loan shall be permitted.
1.2 PREPAYMENT CHARGE. If any payment of principal is made for any
reason on any day other than the date scheduled therefor, whether as a result
of acceleration or otherwise, the undersigned shall reimburse the Bank for the
loss, if any, including any lost profits, resulting from such prepayment, as
reasonably determined by the Bank. The undersigned shall pay such loss upon
presentation by the Bank of a statement of the amount of such loss, setting
forth the Bank's calculation thereof, which notice and calculation (including
the method of calculation) shall be deemed true and correct absent manifest
error.
1.3 DEFAULT RATE. To the extent permitted by applicable law, upon and
after the occurrence of an Event of Default (whether or not the Bank has
accelerated payment of this Note), interest on principal and overdue interest
shall, at the option of the Bank, be payable on demand at a rate per annum equal
to 2% above the greater of the rate of interest otherwise payable hereunder or
the rate announced by the Bank from time to time as its Base Rate.
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SECTION 2. DEFAULTS AND REMEDIES.
2.1 DEFAULT. The occurrence of any of the following events or conditions
shall constitute an "Event of Default" hereunder:
(a) (i) default in the payment when due of the principal of or interest
on this Note or (ii) any other default in the payment or performance of
this Note or of any other Obligation or (iii) default in the payment or
performance of any obligation of any Obligor to others for borrowed money
or in respect of any extension of credit or accommodation or under any
lease;
(b) failure of any representation or warranty herein or in any agreement,
instrument, document or financial statement delivered to the Bank in
connection herewith to be true and correct in any material respect;
(c) failure to furnish the Bank promptly on request with financial
information about, or to permit inspection by the Bank of any books,
records and properties of, any Obligor;
(d) merger, consolidation, sale of all or substantially all of the assets
or change in control of any Obligor; or
(e) any Obligor generally not paying its debts as they become due; the
death, dissolution, termination of existence or insolvency of any Obligor;
the appointment of a trustee, receiver, custodian, liquidator or other
similar official for such Obligor or any substantial part of its property
or the assignment for the benefit of creditors by any Obligor; or the
commencement of any proceedings under any bankruptcy or insolvency laws by
or against any Obligor.
As used herein, "Obligation" means any obligation hereunder or otherwise of
any Obligor to the Bank or to any of its affiliates, whether direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter arising;
and "Obligor" means the undersigned, any guarantor or any other person primarily
or secondarily liable hereunder or in respect hereof.
2.2 REMEDIES. Upon an Event of Default described in Section 2.1(e)
immediately and automatically, and upon or after the occurrence of any other
Event of Default at the option of the Bank, all Obligations of the undersigned
shall become immediately due and payable without notice or demand. All rights
and remedies of the Bank are cumulative and are exclusive of any rights or
remedies provided by law or in equity or any other agreement, and may be
exercised separately or concurrently.
SECTION 3. MISCELLANEOUS.
3.1 WAIVER; AMENDMENT. No delay or omission on the part of the Bank in
exercising any right hereunder shall operate as a waiver of such right or of
any other right under this Note. No waiver of any right or any amendment hereto
shall be effective unless in writing and signed by the Bank, nor shall a waiver
on one occasion bar or waive the exercise of any such right on any future
occasion. Without limiting the generality of the foregoing, the acceptance by
the Bank of any late payment shall not be deemed to be a waiver of the Event
of Default arising as a consequence thereof Each Obligor waives presentment,
demand, notice, protest, and an other demands and notices in connection with
the delivery, acceptance, performance, default or enforcement of this Note and
assents to any extensions or postponements of the time of payment and to any
other
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indulgences under this Note, and to any additions or releases of any other
parties or persons primarily or secondarily liable hereunder, that from time
to time may be granted by the Bank in connection herewith.
3.2 SET-OFF. Regardless of the adequacy of any collateral or other means
of obtaining repayment of the Obligations, the Bank is hereby authorized at any
time and from time to time, without notice to the undersigned (any such notice
being expressly waived by the undersigned) and to the fullest extent permitted
by law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) and other sums credited by or due from the Bank
to the undersigned or subject to withdrawal by the undersigned against the
Obligations of the undersigned, although such Obligations may be contingent or
unmatured.
3.3 TAXES. The undersigned agrees to indemnify the Bank and hold it
harmless from and against any transfer taxes, documentary taxes, assessments
or charges made by any governmental authority by reason of the execution,
delivery, and performance of this Note.
3.4 EXPENSES. The undersigned will pay on demand all expenses of the Bank
in connection with the preparation, administration, default, collection, waiver
or amendment of the Obligations or in connection with the Bank's exercise,
reservation or enforcement of any of its rights, remedies or options thereunder,
including, without limitation, fees of outside legal counsel or the allocation
costs of in-house legal counsel, accounting, consulting, brokerage or other
similar professional fees or expenses, and any fees or expenses associated with
any travel or other costs relating to any appraisals or examinations conducted
in connection with the Obligations or any collateral therefor, and the amount of
all such expenses shall, until paid, bear interest at the rate applicable to
principal hereunder (including any default rate) and be an Obligation secured
by any such collateral.
3.5 BANK RECORDS. The entries on the records of the Bank (including any
appearing on this Note) shall be prima facie evidence of the aggregate principal
amount outstanding under this Note and interest accrued thereon.
3.6 INFORMATION. The undersigned shall furnish the Bank from time to
time with such financial statements and other information relating to any
Obligor or any collateral securing, this Note as the Bank may require. All
such information shall be true and correct and fairly represent the financial
condition and the operating results of such Obligor as of the date and for the
periods for which the same are furnished. The undersigned shall permit
representatives of the Bank to inspect its properties and its books and records,
and to make copies or abstracts thereof Each Obligor authorizes the Bank to
release and disclose to its affiliates, agents and contractors any financial
statements and other information relating to said Obligor provided to or
prepared by or for the Bank in connection with any Obligation. The undersigned
will notify the Bank promptly of the existence or upon the occurrence of any
Event of Default or event which, with the giving of notice or the passage of
time or both, would become an Event of Default.
3.7 GOVERNING LAW; CONSENT TO JURISDICTION. This Note is intended to take
effect as a sealed instrument and shall be governed by, and construed in
accordance with, the laws of The Commonwealth of Massachusetts, without regard
to its conflicts of law rules. The undersigned agrees that any suit for the
enforcement of this Note may be brought in the courts of such state or any
Federal Court sitting in such state and consents to the non-exclusive
jurisdiction of each such court and to service of process in any such suit
being made upon the undersigned by mail at the address specified below. The
undersigned hereby waives any objection that it may now
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or hereafter have to the venue of any such suit or any such court or that such
suit was brought in an inconvenient court.
3.8 SEVERABILITY; AUTHORIZATION TO COMPLETE; PARAGRAPH HEADINGS. If
any provision of this Note shall be invalid, illegal or unenforceable, such
provisions shall be severable from the remainder of this Note and the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby. The Bank is hereby authorized, without further
notice, to fill in any blank spaces on this Note, and to date this Note as of
the date funds are first advanced hereunder. Paragraph headings are for the
convenience of reference only and are not a part of this Note and shall not
affect its interpretation.
3.9 JURY WAIVER. THE BANK (BY ITS ACCEPTANCE OF THIS NOTE) AND THE
UNDERSIGNED AGREE THAT NEITHER OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL
(A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER
ACTION BASED UPON, OR ARISING OUT OF, THIS NOTE, ANY RELATED INSTRUMENTS, ANY
COLLATERAL OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR
(B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY
TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH SHALL
BE SUBJECT TO NO EXCEPTIONS. NEITHER THE BANK NOR THE UNDERSIGNED HAS AGREED
WITH OR REPRESENTED TO THE OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT
BE FULLY ENFORCED IN ALL INSTANCES.
By: /s/ Gary R. Klocek
Gary R. Klocek, Controller
Jones Apparel Group, Inc.
250 Rittenhouse Circle
Bristol, PA 19007
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EXHIBIT 10.51
The Chase Manhattan Bank George Neuman
1411 Broadway, 5th Floor Vice President
New York, NY 10018 Seventh Avenue Region
Tel 212-391-4050
Fax 212-391-7118
August 14,1997
Mr. Gary Klocek
Controller
Jones Apparel Group, Inc.
250 Rittenhouse Circle
Bristol, PA 19007
Dear Gary:
We are pleased to advise you that based on your annual financial statements
for the fiscal year 1996, The Chase Manhattan Bank (the "Bank") has approved
your request for a line of credit in the amount of $25,000,000. Our officers
may, at their discretion, make short term loans to Jones Apparel Group, Inc.
on such terms as are mutually agreed upon between us from time to time. We
also advise a $45,000,000 participation in the $150,000.000 line of credit for
commercial letters of credit extended by CoreStates Bank, N.A.
Borrowings under this line are intended to be used to meet your normal
short term working capital needs and will bear interest at such a rate as shall
be mutually agreed upon by each of us from time to time.
As this line is not a commitment, credit availability is, in addition,
subject to your execution and delivery of such documentation as the Bank deems
appropriate and the receipt and continuing satisfaction with current financial
information, which information will be furnished to the Bank as it may from
time to time reasonably request. This line expires on June 30, 1998.
We are pleased to be of service and trust you will call on us to assist in
any of your banking requirements.
Very truly yours,
/s/ George Neuman
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EXHIBIT 10.52
TERM NOTE
Philadelphia, Pennsylvania
October 1, 1997
$10,000,000
FOR VALUE RECEIVED, and intending to be legally bound hereby, JONES
APPAREL GROUP, INC., a Pennsylvania corporation with offices at 250
Rittenhouse Circle, Bristol, PA 19007 (the "Borrower") unconditionally
promises to pay to the order of FIRST UNION NATIONAL BANK (the "Bank")
the principal sum of Ten Million Dollars ($10,000,000), with interest,
in accordance with the provisions hereinafter set forth.
A. Terms of Note.
1. Interest Rate. Interest will accrue on the outstanding
principal balance of this Note during each Interest
Period at a rate per annum (computed on the basis of a
360-day year and the actual number of days elapsed)
equal to the sum of the One Month LIBOR for such
Interest Period, plus 60 basis points (.6 of 1%). The
term "Interest Period" means the calendar month. The
term "One Month LIBOR" means the rate for U.S. dollar
deposits of one month maturity as reported on Telerate
page 3750 as of 11:00 a.m., London time, on the second
London business day before the relevant Interest Period
begins (or if not so reported, then as determined by
the Bank from another recognized source or interbank
quotation).
2. Payment of Principal and Interest. This Note shall be
Paid in one hundred nineteen (119) consecutive monthly
installments of principal and interest on the first day
Of each month (or, if not a business day, the next
succeeding business day) commencing on November 3,
1997, in an amount equal to the sum of (i) all accrued
and unpaid interest on the Note plus (ii) a principal
payment of $83,333.33, with a final installment of
principal and interest on the Maturity Date in an
amount equal to the sum of (i) all accrued and unpaid
interest on the Note plus (ii) a principal payment of
$83,333.73.
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3. Payment Terms. All payments made hereunder shall be
made on the due date thereof, in immediately available
funds and in lawful currency of the United States of
America. All payments made hereunder shall be made to
the Bank at its offices set forth in this Note or at
such other address as the Bank shall notify the
Borrower of in writing.
4. Late Charge. If any payment is not paid in full when
the same is due, the Borrower shall pay the Bank a fee
on such unpaid amount equal to five percent (5%) of
such amount.
5. Default Rate. At the Bank's option, interest will be
assessed on any principal which remains unpaid at the
maturity of this Note, whether by acceleration or
otherwise, at a rate which is two percent (2%) higher
than the rate otherwise charged hereunder (the "Default
Rate") provided that at no time shall the Default Rate
exceed the highest rate of interest allowed by law.
Such Default Rate of interest shall also be charged on
the amounts owed by the Borrower to the Bank pursuant
to any judgment entered in favor of Bank with respect
to this Note.
6. Prepayment. Borrower may, without penalty or premium,
on any date installments of principal are due, prepay
the principal amount of this Note in whole or in part,
any partial prepayment to be made in the sum of
$83,333.33 or an integral multiple thereof. All such
partial prepayments shall be applied against the
installments of principal due under Paragraph A.2 above
in the inverse order of maturity thereof.
7. Security for Note.
7.1. As security for the payment of all amounts owing
under this Note, the Borrower will execute and
deliver to the Bank the Deed of Trust (as
hereinafter defined) at the time of the
acquisition of the Project (as hereinafter
defined).
7.2 As security for the payment of all amounts owing
under this Note, the Borrower hereby assigns and
grants to the Bank a security interest in and to
the Project Account (as hereinafter defined)
pursuant to a separate Assignment of Interest in a
Custodian Account of even date herewith. Unless
there has occurred an Event of Default under this
Note, Borrower may withdraw from the Project
Account (i) all accrued earnings for any corporate
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purpose or use, and (ii) amounts in excess of the
accrued earnings so long as the funds withdrawn
are used for the acquisition or construction of
the Project or the purchase of equipment to be
installed on the Project; provided, however, that
until the Deed of Trust is recorded, aggregate
withdrawals from the Project Account (other than
withdrawals of accrued earnings) will not exceed
$500,000.00. At the time of any permitted
withdrawal from the Project Account (other than
withdrawals of accrued earnings), the Chief
Financial Officer of the Borrower (or his written
designee) will certify in writing to the Bank that
the funds withdrawn are for the uses herein
permitted.
B. Certain Definitions. As used herein, the following terms
shall have the following meanings (additional terms are defined
elsewhere in this Note):
1. Affiliate. The term "Affiliate" means First Union
Corporation and any of its direct and indirect
affiliates and subsidiaries.
2. Consolidated Net Income. The term "Consolidated Net
Income" means, for any period, the net income after
taxes of the Borrower and its subsidiaries for such
period, as shown by the consolidated income statement
of the Borrower and its subsidiaries, calculated in
accordance with GAAP.
3. Consolidated Tangible Net Worth. The term "Consolidated
Tangible Net Worth" means, at any time, the sum of
Stockholders' Equity plus the lesser of the cost of the
Borrower's treasury stock purchased after June 29,
1997, or Fifty Million Dollars ($50,000,000), less the
sum of:
(a) Any surplus resulting from any write-up of assets;
(b) Goodwill, including any amounts, however
designated on the consolidated balance sheet of
the Borrower and its subsidiaries, representing
the excess of the purchase price paid for assets
or stock acquired over the value assigned thereto
on the books of the Borrower and its subsidiaries;
(c) Patents, trademarks, trade names and copyrights;
(d) Any amount at which shares of capital stock of the
Borrower or any subsidiary appear as an asset on
the consolidated balance sheet of the Borrower and
its subsidiaries;
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(e) Loans and advances to stockholders, directors,
officers or employees or to any affiliate of the
Borrower or any subsidiary; and
(f) Deferred expenses
4. Funded Debt. The term "Funded Debt" means any and all
indebtedness, obligations or liabilities (whether
matured or unmatured, liquidated or unliquidated,
direct or indirect, absolute or contingent, or joint or
several) for or in respect of: W borrowed money, (ii)
amounts raised under or liabilities in respect of any
note purchase or acceptance credit facility,(iii)
reimbursement obligations under any letter of credit,
currency swap agreement, interest rate swap, cap,
collar or floor agreement or other interest rate
management device, (iv) any other transaction
(including without limitation forward sale or purchase
agreements, capitalized leases, synthetic leases and
conditional sales agreements) having the commercial
effect of a borrowing of money entered into to finance
its operations or capital requirements (but not
including trade payables and accrued expenses incurred
in the ordinary course of business which are not
represented by a promissory note or other evidence of
indebtedness), or (v) any guaranty of Funded Debt for
borrowed money.
5. GAAP. The term "GAAP" means generally accepted
accounting principles as in effect at the time of
application to the provisions hereof, consistently
applied.
6. Guarantors. The term "Guarantors" means, individually
and collectively, Melru Corp., Jones Investment Company
Inc., Jones International Ltd., and Jones Holding Corp.
7. Guaranties. The term "Guaranties" means those
agreements now or hereafter in effect, from the
Guarantors in favor of the Bank.
8. Liabilities. The term "Liabilities" means any and all
obligations and indebtedness of every kind and
description of the Borrower owing to the Bank or to any
Affiliate, whether under the Loan Documents or not and
whether such debts or obligations are primary or
secondary, direct or indirect, absolute or contingent,
sole, joint or several, secured or unsecured, due or to
become due, contractual or tortious, arising by
operation of law or otherwise, or now or hereafter
existing, including, without limitation, principal,
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interest, fees, late fees, expenses, attorneys' fees
and costs.
9. Loan Documents. The term "Loan Documents" means this
Note, the Deed of Trust, the Guaranties and any and all
credit accommodations, notes, mortgages, loan
agreements, other agreements and documents, now or
hereafter existing, creating, evidencing, guarantying,
securing or relating to any or all of the Liabilities,
together with all amendments, modifications, renewals,
or extensions thereof.
10. Deed of Trust. The term "Deed of Trust" means a Deed
of Trust and Security Agreement in form and substance
reasonably acceptable to the Borrower and the Bank to
be executed and delivered by the Borrower to the Bank
which, when recorded, will grant to the Bank a first
lien on and first priority security interest in the
Project and all equipment to be installed thereon.
11. Note. The term "Note" means this Term Note together
with all attachments hereto and all amendments and
modifications hereto in effect from time to time.
12. Obligor. The term "Obligor" means the Borrower and
each and every maker, endorser, guarantor or surety
including, without limitation, the Guarantors, of or
For the Liabilities or any part thereof.
13. Maturity Date. The term "Maturity Date" means
October 1, 2007.
14. Project. The term "Project" means approximately 47.3
acres of land in South Hill, Virginia, to be acquired
by the Borrower and all improvements, including the
warehouse and distribution center buildings, to be
constructed thereon.
15. Project Account. The term "Project Account" means the
Borrower's Money Management Custodian Account at the
Bank (No. 1556594048) into which the
loan proceeds of the Note have been deposited.
16. Stockholders' Equity. The term "Stockholders' Equity"
means, at any time, sum of the following accounts set
forth in a consolidated balance sheet of the Borrower
and its subsidiaries, prepared in accordance with GAAP:
(a) the par or stated value of all outstanding capital
stock; (b) capital surplus; and (c) retained earnings.
17. Total Capital. The term "Total Capital" means
Stockholders, Equity plus Funded Debt.
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C. Representations and Warranties. The Borrower represents and
warrants to the Bank that:
1. Use of Proceeds. The proceeds of the Note will be used
only for the acquisition or construction of the Project
or the purchase of equipment installed on the Project.
2. Financial Statements. All financial statements
heretofore delivered by the Borrower to the Bank are
true, correct, and complete in all material respects,
fairly represent the Borrower's and Guarantors'
financial condition as of the date hereof, and no
information has been omitted which would make the
information previously furnished misleading or
incorrect in any material respect. There have been no
material adverse changes in the Borrower's or
Guarantors' financial condition or business since the
date of such statements.
3. Suits and Defaults. There are no actions, suits,
proceedings, or claims pending or threatened against
the Borrower or Guarantors or any of their property,
and the Borrower and Guarantors are not in violation of
any applicable order, law, rule or regulation, which
would have material adverse effect on the Borrower's or
Guarantors' business. The Borrower and Guarantors are
not in default under any agreement to which the
Borrower or the Guarantors are a party or by which the
Borrower or the Guarantors or any of their property is
bound, or under any instrument evidencing any
indebtedness of the Borrower or Guarantors, and neither
the Borrower's nor Guarantors' execution of or
performance under the Loan Documents will create a
default or any lien or encumbrance under any such
agreement or instrument other than a lien or
encumbrance in favor of the Bank.
D. Affirmative Covenants. The Borrower covenants and agrees
that so long as there are any outstanding amounts due under this
Note, the Borrower shall:
1. Financial Reporting. Promptly deliver to the Bank (but
in no event later than thirty (30) days after they are
filed) all regular and periodic reports including, but
not limited to, Forms 10-K, 10-Q and 8-K filed by the
Borrower with the U.S. Securities and Exchange
Commission, or its successor. If the Borrower ceases to
be subject to the reporting requirements under the
Securities Exchange Act of 1934, the Borrower will
deliver to the Bank audited annual consolidated
financial statements within ninety (90) days of the end
of each year and unaudited quarterly consolidated
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financial statements within forty-five (45) days of the
end of each of the first three fiscal quarters
certified as accurate by the Borrower's Chief Financial
Officer, such financial statements to be prepared in
accordance with GAAP in form reasonably acceptable to
the Bank.
2. Project Account. Maintain and operate the Project
Account in accordance with Paragraph A.7.2 hereof.
3. Notice of Certain Events. Promptly give written notice
to the Bank of: (i) the occurrence of any event which
alone or with notice, the passage of time, or both,
would constitute an Event of Default; and (ii) the
commencement of any proceeding or litigation which, if
adversely determined, would materially and adversely
affect its financial condition or ability to conduct
its business.
4. Consolidated Tangible Net Worth. Maintain Consolidated
Tangible Net Worth, measured at the end of each fiscal
quarter, of Three Hundred Twenty-Five Million Dollars
($325,000,000) plus fifty percent (50%) of Consolidated
Net Income for each of the fiscal quarters after
December 31, 1996, with no deduction for any quarterly
losses.
5. Additional Affirmative Covenants. Shall perform any
other affirmative covenants set forth in the Loan
Documents to which the Borrower is a party.
6. Covenant Compliance Certificate. Within ninety (90)
days after the end each fiscal year, deliver to the
Bank a covenant compliance certificate in form
acceptable to the Bank indicating with specificity the
compliance or non-compliance with each of the
affirmative and negative covenants in the Loan
Documents.
E. Negative Covenants. So long as any amounts due under this
Note are outstanding, the Borrower shall not, without the
prior written consent of the Bank:
1. Funded Debt. Permit the ratio of its Funded Debt
divided by its Total Capital to exceed forty-five
percent (45%).
2. Additional Negative Covenants. Undertake any
activities prohibited by any negative covenant set
forth in the Loan Documents to which the Borrower is a
party.
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F. Event of Default. The occurrence of any one of the
following shall-constitute an Event of Default under this
Note:
1. Nonpayment. Failure to pay any principal or interest
payment when due under the Liabilities and such failure
shall continue for a period of three (3) days;
2. Breach. A breach by any obligor of any term,
obligation, provision, covenant, representation or
warranty, arising under (i) this Note, or any other
Loan Document; (ii) any present or future agreement
with or in favor of the Bank and/or any Affiliate,
including the failure to make any payment when due; or
(iii) any present or future agreement or instrument for
borrowed money or other financial accommodations with
any person or entity, which breach is not cured or
satisfied within ten (10)days;
3. Bankruptcy; Insolvency. (i) Any obligor commences any
bankruptcy, reorganization, debt arrangement, or other
case or proceeding under the United States Bankruptcy
Code or under any similar foreign, federal, state, or
local statute, or any dissolution or liquidation
proceeding, or makes a general assignment for the
benefit of creditors, or takes any action for the
purpose of effecting any of the foregoing; (ii) Any
bankruptcy, reorganization, debt arrangement, or other
case or proceeding under the United States Bankruptcy
Code or under any similar foreign, federal, state or
local statute, or any dissolution or liquidation
proceeding, is involuntarily commenced against or in
respect of any Obligor or an order for relief is
entered in any such proceeding; (iii) The appointment,
or the filing of a petition seeking the appointment, of
a custodian, receiver, trustee, or liquidator for any
Obligor or any of its property, or the taking of
possession of any part of the property of any Obligor
at the instance of any governmental authority; or (iv)
Any Obligor becomes insolvent (however defined), is
generally not paying its debts as they become due, or
has suspended transaction of its usual business;
4. Material Misstatement. Any statement, representation or
warranty made in or pursuant to this Note or any
other Loan Document or to induce the Bank to enter into
this Note shall prove to be untrue or misleading in any
material respect;
5. Transfer of Assets. Any Obligor transfers or sells all
or substantially all of its assets, without the prior
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written consent of the Bank, which consent shall not be
unreasonably withheld.
G. Remedies.
1. Acceleration of Liabilities; Rights of Bank. Upon the
occurrence of an Event of Default described in Section
F hereof (other than any Event of Default described in
Paragraph F.3), at the Bank's sole option, the Bank's
commitment, if any, to make any further advances or
loans to the Borrower under any Loan Document shall
terminate and the Loan and all other Liabilities shall
immediately become due and payable in full, all without
protest, presentment, demand or further notice of any
kind to the Borrower or any other Obligor, all of which
are expressly waived. Upon the occurrence of an Event
of Default described in Paragraph F.3 hereof,
immediately and automatically, the Bank's commitment,
if any, to make any further advances or loans to the
Borrower under any Loan Document, shall terminate, and
the Loan and all other Liabilities shall immediately
become due and payable in full, all without protest,
presentment, demand or further notice of any kind to
the Borrower or any other obligor, all of which are
expressly waived. Upon and following an Event of
Default, the Bank, at its option, may exercise any and
all rights and remedies it has under this Note, the
other Loan Documents and under applicable law,
including, without limitation, the right to charge and
collect interest on the principal portion of the
Liabilities at the Default Rate, which rate shall, at
the Bank's option, apply upon and after an Event of
Default, maturity, whether by acceleration or
otherwise, and the entry of judgment with respect to
any or all of the Liabilities. Upon and following an
Event of Default hereunder, the Bank may proceed to
protect and enforce the Bank's rights under any Loan
Document and/or under applicable law by action at law,
in equity, or other appropriate proceeding, including,
without limitation, an action for specific performance
to enforce or aid in the enforcement of any provision
contained herein or in any other Loan Document.
2. Right of Set-off. If any of the Liabilities shall be
due and payable and whether or not the Bank shall have
made any demand under this Note and regardless of the
adequacy of any collateral for the Liabilities or other
means of obtaining repayment of the Liabilities, the
Bank shall have the right, without notice to the
Borrower or to any other Obligor, and is specifically
authorized hereby to set-off against and apply to the
then unpaid balance of the Liabilities any items or
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funds of the Borrower and/or any Obligor held by the
Bank or any Affiliate, any and all deposits (whether
general or special, time or demand, matured or
unmatured) or any other property of the Borrower and/or
any Obligor, including, without limitation, securities
and/or certificates of deposit, now or hereafter
maintained by the Borrower and/or any Obligor for its
or their own account with the Bank or any Affiliate,
and any other indebtedness at any time held or owing by
the Bank or any Affiliate to or for the credit or the
account of the Borrower and/or any Obligor, even if
effecting such set-off results in a loss or reduction
of interest or the imposition of a penalty applicable
to the early withdrawal of time deposits. For such
purpose, the Bank shall have, and the Borrower hereby
grants to the Bank, a first lien on and security
interest in such deposits, property, funds and accounts
and the proceeds thereof. The Borrower further
authorizes any Affiliate, upon and following the
occurrence of an Event of Default, at the request of
the Bank, and without notice to the Borrower, to turn
over to the Bank any property of the Borrower,
including, without limitation, funds and securities
held by the Affiliate for the Borrower's account, and
to debit any deposit account maintained by the Borrower
with such Affiliate (even if such deposit account is
not then due or there results a loss or reduction of
interest or the imposition of a penalty in accordance
with law applicable to the early withdrawal of time
deposits), in the amount requested by the Bank up to
the amount of the Liabilities, and to pay or transfer
such amount or property to the Bank for application to
the Liabilities.
3. Remedies Cumulative; No Waiver. The rights, powers and
remedies hereunder and under the other Loan Documents
are cumulative and concurrent, and are not exclusive of
any other rights, powers or remedies available to the
Bank. No failure or delay on the part of the Bank in
the exercise of any right, power or remedy shall
operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or remedy preclude
any other or further exercise thereof, or the exercise
of any other right, power or remedy.
4. Continuing Enforcement of the Loan Documents. If,
after receipt of any payment of all or any part of the
Note or the Liabilities, the Bank is compelled or
agrees, for settlement purposes, to surrender such
payment to any person or entity for any reason, then
this Note and the other Loan Documents shall continue
in full force and effect or be reinstated, as the case
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may be. The provisions of this Paragraph shall survive
the termination of this Note and the other Loan
Documents and shall be and remain effective
notwithstanding the payment of the Liabilities, the
cancellation of the Note, the release of any security
interest, lien or encumbrance securing the Liabilities
or any other action which the Bank may have taken in
reliance upon its receipt of such payment.
H. Miscellaneous.
1. Waiver of Demand. The Borrower (i) waives presentment,
notice of dishonor and protest of this Note; (ii)
consents to any and all extensions of time, renewals,
waivers, or modifications that may be granted by the
Bank with respect to the payment or other provisions
of this Note; and (iii) agrees that makers, endorsers,
guarantors, including but not limited to the
Guarantors, and sureties for the indebtedness evidenced
hereby may be added or released without notice to the
Borrower and without affecting the Borrower's liability
hereunder. The liability of the Borrower hereunder
shall be absolute and unconditional.
2. Notices. Notices and communications under this Note
shall be in writing and shall be given by either (i)
hand-delivery, (ii) first class mail (postage prepaid),
or (iii) reliable overnight commercial courier (charges
prepaid) to the addresses listed in this Note. Notice
shall be deemed to have been given and received (a) if
by hand delivery, upon delivery, (b) if by mail, three
(3) calendar days after the date first deposited in the
United States mail, and (c) if by overnight courier, on
the date scheduled for delivery. A party may change
its address by giving written notice to the other party
as specified herein.
3. Costs and Expenses. The Borrower shall promptly pay
(or reimburse, as the Bank may elect) all costs and
expenses which the Bank may hereafter incur after the
occurrence of an Event of Default in connection with
the enforcement of this Note and the other Loan
Documents, the collection of all amounts due under this
Note and the other Loan Documents. The Borrower's
reimbursement obligations under this Paragraph shall
survive any termination of this Note or any other Loan
Document.
4. Payment Due on a Day Other than a Business Day. If any
payment due or action to be taken under this Note or
any other Loan Document falls due or is required to be
taken on a day that the Bank is not open for business,
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such payment or action shall be made or taken on the
next succeeding day when the Bank is open for business
and such extended time shall be included in the
computation of interest.
5. Governing Law. This Note shall be construed in
accordance with and governed by the substantive laws of
the Commonwealth of Pennsylvania without reference to
conflict of laws principles.
6. Integration; Amendment. This Note and the other Loan
Documents constitute the sole agreement of the parties
with respect to the subject matter hereof and thereof
and supersede all oral negotiations and prior writings
with respect to the subject matter hereof and thereof.
No amendment of this Note, and no waiver of any one or
more of the provisions hereof shall be effective unless
set forth in writing and signed by the parties hereto.
7. Successors and Assigns. This Note (i) shall be binding
upon the Borrower and the Bank and, where applicable,
their respective heirs, executors, administrators,
successors and permitted assigns, and (ii) shall inure
to the benefit of the Borrower and the Bank and, where
applicable, their respective heirs, executors,
administrators, successors and permitted assigns;
provided, however, that the Borrower may not assign its
rights or obligations hereunder or any interest herein
without the prior written consent of the Bank, and any
such assignment or attempted assignment by the Borrower
shall be void and of no effect with respect to the
Bank. The Bank may from time to time sell or assign,
in whole or in part, or grant participations in the
Loan and/or the Note and/or the obligations evidenced
thereby. The Borrower authorizes the Bank to provide
information concerning the Borrower to any prospective
purchaser, assignee or participant in compliance with
the banks internal confidentiality procedures.
8. Severability and Consistency. The illegality,
unenforceability or inconsistency of any provision of
this Note or any instrument or agreement required
hereunder shall not in any way affect or impair the
legality, enforceability or consistency of the
remaining provisions of this Note or any instrument or
agreement required hereunder. The Loan Documents are
intended to be consistent. However, in the event of
any inconsistencies among any of the Loan Documents,
such inconsistency shall not affect the validity or
enforceability of any Loan Document. The Borrower
agrees that in the event of any inconsistency or
ambiguity in any of the Loan Documents, the Loan
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Documents shall not be construed against any one party
but shall be interpreted consistent with the Bank's
policies and procedures
9. Consent to Jurisdiction and Service of Process. The
Borrower hereby consents and agrees that (i) any action
or proceeding against it may be commenced and
maintained in any court within the Commonwealth of
Pennsylvania or in the United States District Court for
any District of Pennsylvania by service of process on
it and (ii) the courts of the Commonwealth of
Pennsylvania and the United States District Court for
any District of Pennsylvania shall have Jurisdiction
with respect to the subject matter hereof and the
person of the Borrower and all collateral for the
Liabilities. The Borrower agrees that any action
brought by the Borrower shall be commenced and
maintained only in a court in the federal judicial
district or county in which the Bank has its principal
place of business in Pennsylvania.
10. Judicial Proceeding; Waivers.
THE BORROWER AND THE BANK ACKNOWLEDGE AND AGREE THAT
(i) ANY SUIT, ACTION OR PROCEEDING, WHETHER CLAIM OR
COUNTERCLAIM, BROUGHT OR INSTITUTED BY THE BANK OR THE
BORROWER OR ANY SUCCESSOR OR ASSIGN OF THE BANK OR THE
BORROWER, ON OR WITH RESPECT TO THIS NOTE OR ANY OTHER
LOAN DOCUMENT OR THE DEALINGS OF THE PARTIES WITH
RESPECT HERETO, OR THERETO, SHALL BE TRIED ONLY BY A
COURT AND NOT BY A JURY AND EACH PARTY WAIVES THE RIGHT
TO TRIAL BY JURY; (ii) EACH WAIVES ANY RIGHT IT MAY
HAVE TO CLAIM OR RECOVER, IN ANY SUCH SUIT, ACTION OR
PROCEEDING, ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN
ADDITION TO, ACTUAL DAMAGES; AND (iii) THIS SECTION IS
A SPECIFIC AND MATERIAL ASPECT OF THIS NOTE AND THAT
THE BANK WOULD NOT EXTEND CREDIT TO THE BORROWER IF THE
WAIVERS SET FORTH IN THIS SECTION WERE NOT A PART OF
THIS NOTE.
11. Arbitration. Upon demand of any party hereto, whether
made before or after institution of any judicial
proceeding, any dispute, claim or controversy arising
out of, connected with or relating to this Note and
other Loan Documents ("Disputes") between or among
parties to this Note shall be resolved by binding
arbitration as provided herein. Institution of a
judicial proceeding by a party does not waive the right
of that party to demand arbitration hereunder.
Disputes may include, without limitation, tort claims,
counterclaims, disputes as to whether a matter is
-13-
<PAGE>
subject to arbitration, claims brought as class
actions, claims arising from Loan Documents executed in
the future, or claims arising out of or connected with
the transaction reflected by this Note.
Arbitration shall be conducted under and governed
by the Commercial Financial Disputes Arbitration Rules
(the "Arbitration Rules") of the American Arbitration
Association (the "AAA") and Title 9 of the U.S. Code.
All arbitration hearings shall be conducted in the city
in which the office of Bank first stated above is
located. The expedited procedures set forth in Rule 51
et seq. of the Arbitration Rules shall be applicable to
claims of less than $1,000,000. All applicable
statutes of limitation shall apply to any Dispute. A
judgment upon the award may be entered in any court
having jurisdiction. The panel from which all
arbitrators are selected shall be comprised of licensed
attorneys. The single arbitrator selected for
expedited procedure shall be a retired judge from the
highest court of general jurisdiction, state or
federal, of the state where the hearing will be
conducted or if such person is not available to serve,
the single arbitrator may be a licensed attorney.
Notwithstanding the foregoing, this arbitration
provision does not apply to disputes under or related
to swap agreements.
Notwithstanding the preceding binding arbitration
provisions, the Bank and the Borrower agree to
preserve, without diminution, certain remedies that any
party hereto may employ or exercise freely,
independently or in connection with an arbitration
proceeding or after an arbitration action is brought.
The Bank and the Borrower shall have the right to
proceed in any court of proper jurisdiction or by self-
help to exercise or prosecute the following remedies,
as applicable: (i) all rights to foreclose against any
real or personal property or other security by
exercising a power of sale granted under Loan Documents
or under applicable law or by judicial foreclosure and
sale, including a proceeding to confirm the sale; (ii)
all rights of self-help including peaceful occupation
of real property and collection of rents, set-off, and
peaceful possession of personal property; (iii)
obtaining provisional or ancillary remedies including
injunctive relief, sequestration, garnishment,
attachment, appointment of receiver and filing an
involuntary bankruptcy proceeding; and (iv) when
applicable, a judgment by confession of judgment.
Preservation of these remedies does not limit the power
of an arbitrator to grant similar remedies that may be
requested by a party in a Dispute.
-14-
<PAGE>
The Borrower and the Bank agree that they shall
not have a remedy of punitive or exemplary damages
against the other in any Dispute and hereby waive any
right or claim to punitive or exemplary damages they
have now or which may arise in the future in connection
with any Dispute whether the Dispute is resolved by
arbitration or judicially.
IN WITNESS WHEREOF, the Borrower has executed and delivered
to the Bank this Note as of the day and year first above written.
ATTEST JONES APPAREL GROUP, INC.
BY: /s/ Gary R. Klocek
Name: Name: Gary R. Klocek
Title: Title: Corporate Controller
FIRST UNION NATIONAL BANK
Address: 123 South Broad Street
Philadelphia, PA 19109-1199
-15-
<PAGE>
FIRST UNION
UNCONDITIONAL GUARANTY
October 1, 1997
Jones Apparel Group, Inc.
250 Rittenhouse Circle
Bristol, Pennsylvania 19007
(individually and collectively "Borrower")
Melru Corp.; Jones Investment Company, Inc.; Jones International, Ltd.; and
Jones Holding Corp.
250 Rittenhouse Circle
Bristol, Pennsylvania 19007
(Individually and collectively "Guarantor")
First Union National Bank
123 South Broad Street
Philadelphia, Pennsylvania 19109
(Hereinafter referred to as "Bank")
To induce Bank to make, extend or renew loans, advances, credit, or other
financial accommodations to or for the benefit of Borrower, and in
consideration of loans, advances, credit, or other financial accommodations
made, extended or renewed to or for the benefit of Borrower, Guarantor hereby
absolutely, irrevocably and unconditionally guarantees to Bank and its
successors, assigns and affiliates the timely payment and performance of all
liabilities and obligations of Borrower to Bank and its affiliates, including,
but not limited to, all obligations under any notes, loan agreements, security
agreements, letters of credit, swap agreements (as defined in 11 U.S. Code
Sec. 101), instruments, accounts receivable, contracts, drafts, leases, chattel
paper, indemnities, acceptances, repurchase agreements, overdrafts, and the
Loan Documents defined below, however and whenever incurred or evidenced,
whether primary, secondary, direct, indirect, absolute, contingent, due or to
become due, now existing or hereafter contracted or acquired, and all
modifications, extensions or renewals thereof, including without limitation
all principal, interest, charges, and costs and expenses incurred thereunder
(including attorneys' fees and other costs of collection incurred, regardless
of whether suit is commenced) (collectively, the "Guaranteed Obligations").
Guarantor further covenants and agrees:
GUARANTOR'S LIABILITY. This Guaranty is a continuing and unconditional
guaranty of payment and performance and not of collection. The parties to
this Guaranty are jointly and severally obligated hereunder. This Guaranty
does not impose any obligation on Bank to extend or continue to extend credit
or otherwise deal with Borrower at any subsequent time. This Guaranty shall
continue to be effective or be reinstated, as the case may be, if at any time
any payment of the Guaranteed Obligations is rescinded, avoided or for any
other reason must be returned by Bank, and the returned payment shall remain
payable as part of the Guaranteed Obligations, all as though such payment had
not been made. Except to the extent the provisions of this Guaranty give the
Bank additional rights, this Guaranty shall not be deemed to supersede or
replace any other guaranties given to Bank by Guarantor; and the obligations
guaranteed hereby shall be in addition to any other obligations guaranteed by
Guarantor pursuant to any other agreement of guaranty given to Bank and other
guaranties of the Guaranteed Obligations.
-16-
<PAGE>
TERMINATION OF GUARANTY. Guarantor may terminate this Guaranty by written
notice, delivered personally to or received by certified or registered United
States Mail by an authorized officer of the Bank at the address for notices
provided herein. Such termination shall be effective with respect to
Guaranteed Obligations arising more than 15 days after the date such written
notice is received by said Bank officer. Guarantor may not terminate this
Guaranty as to Guaranteed Obligations (including any subsequent extensions,
modifications or compromises of the Guaranteed Obligations) then existing, or
to Guaranteed Obligations arising subsequent to receipt by Bank of said notice
if such Guaranteed Obligations are a result of Bank's obligation to make
advances pursuant to a commitment entered into prior to expiration of the 15
day notice period, or are a result of advances which are necessary for Bank to
protect its collateral or otherwise preserve its interests. Termination of this
Guaranty by any single Guarantor will not affect the existing and continuing
obligations of any other guarantor hereunder.
APPLICATION OF PAYMENTS, BANK LIEN AND SET-OFF. Monies received from any source
by Bank for application toward payment of the Guaranteed Obligations may be
applied to such Guaranteed Obligations in any manner or order deemed
appropriate by Bank. Except as prohibited by law, Guarantor grants Bank a
security interest in all of Guarantor's accounts maintained with Bank and any
of its affiliates (collectively, the "Accounts"). If a Default occurs, Bank is
authorized to exercise its right of set-off or to foreclose its lien against any
obligation of Bank to Guarantor including, without limitation, all Accounts or
any other debt of any maturity, without notice.
CONSENT TO MODIFICATIONS. Guarantor consents and agrees that Bank may from time
to time, in its sole discretion, without affecting, impairing, lessening or
releasing the obligations of the Guarantor hereunder: (a) extend or modify the
time, manner, place or terms of payment or performance and/or otherwise change
or modify the credit terms of the Guaranteed Obligations; (b) increase, renew,
or enter into a novation of the Guaranteed Obligations; (c) waive or consent to
the departure from terms of the Guaranteed Obligations; (d)permit any change in
the business or other dealings and relations of Borrower or any other guarantor
with Bank; (e) proceed against, exchange, release, realize upon, or otherwise
deal with in any manner any collateral that is or may be held by Bank in
connection with the Guaranteed Obligations or any liabilities or obligations
of Guarantor; and (f) proceed against, settle, release, or compromise with
Borrower, any insurance carrier, or any other person or entity liable as to
any part of the Guaranteed Obligations, and/or subordinate the payment of any
part of the Guaranteed Obligations to the payment of any other obligations,
which may at any time be due or owing to Bank; all in such manner and upon
such terms as Bank may deem appropriate, and without notice to or further
consent from Guarantor. No invalidity, irregularity, discharge or
unenforceability of, or action or omission by Bank relating to any part of,
the Guaranteed Obligations or any security therefor shall affect or impair this
Guaranty.
WAIVERS AND ACKNOWLEDGMENTS. Guarantor waives and releases the following
rights, demands, and defenses Guarantor may have with respect to Bank and
collection of the Guaranteed Obligations: (a) promptness and diligence in
collection of any of the Guaranteed Obligations from Borrower or any other
person liable thereon, and in foreclosure of any security interest and sale
of any property serving as collateral for the Guaranteed Obligations; (b) any
law or statute that requires that Bank make demand upon, assert claims against,
or collect from Borrower or other persons or entities, foreclose any security
interest, sell collateral, exhaust any remedies, or take any other action
against Borrower or other persons or entities prior to making demand upon,
collecting from or taking action against Guarantor with respect to the
Guaranteed Obligations, including any such rights Guarantor might otherwise
have had under Va. Code Sec. 49-25 and 49-26, et seq., N.C.G.S. Secs. 26-7, et
seq., Tenn. Code Ann. Sec. 47-12-101, O.C.G.A. 10-7-24 (and any successor
statute) and any other applicable law; (c) any law or statute that requires
that Borrower or any
-17-
<PAGE>
other person be joined in, notified of or made part of any action against
Guarantor; (d) that Bank preserve, insure or perfect any security interest
in collateral or sell or dispose of collateral in a particular manner or at
a particular time; (e) notice of extensions, modifications, renewals, or
novations of the Guaranteed Obligations, of any new transactions or other
relationships between Bank, Borrower and/or any guarantor, and of changes in
the financial condition of, ownership of, or business structure of Borrower
or any other guarantor; (f) presentment, protest, notice of dishonor, notice
of default, demand for payment, notice of intention to accelerate maturity,
notice of acceleration of maturity, notice of sale, and all other notices of
any kind whatsoever; (g) the right to assert against Bank any defense (legal or
equitable), set-off, counterclaim, or claim that Guarantor may have at any time
against Borrower or any other party liable to Bank; (h) all defenses relating
to invalidity, insufficiency, unenforceability, enforcement, release or
impairment of Bank's lien on any collateral, of the Loan Documents, or of
any other guaranties held by Bank; (i) any claim or defense that acceleration
of maturity of the Guaranteed Obligations is stayed against Guarantor because
of the stay of assertion or of acceleration of claims against any other
person or entity for any reason including the bankruptcy or insolvency of
that person or entity; and (j) the benefit of any exemption claimed by
Guarantor. Guarantor acknowledges and represents that it has relied upon
its own due diligence in making its own independent appraisal of Borrower,
Borrower's business affairs and financial condition, and any collateral;
Guarantor will continue to be responsible for making its own independent
appraisal of such matters; and Guarantor has not relied upon and will not
hereafter rely upon Bank for information regarding Borrower or any collateral.
FINANCIAL CONDITION. Guarantor warrants, represents and covenants to Bank that
on and after the date hereof: (a) the fair saleable value of Guarantor's assets
exceeds its liabilities, Guarantor is meeting its current liabilities as they
mature, and Guarantor is and shall remain solvent; (b) all financial statements
of Guarantor furnished to Bank are correct and accurately reflect the financial
condition of Guarantor as of the respective dates thereof; (c) since the date of
such financial statements, there has not occurred a material adverse change in
the financial condition of Guarantor; (d) there are not now pending any court or
administrative proceedings or undischarged judgments against Guarantor, no
federal or state tax liens have been filed or threatened against Guarantor,
and Guarantor is not in default or claimed default under any agreement; and
(e) at such reasonable times as Bank requests, Guarantor will furnish Bank with
such other financial information as Bank may reasonably request.
INTEREST. Regardless of any other provision of this Guaranty or other Loan
Documents, if for any reason the effective interest on any of the Guaranteed
Obligations should exceed the maximum lawful interest, the effective interest
shall be deemed reduced to and shall be such maximum lawful interest, and any
sums of interest which have been collected in excess of such maximum lawful
interest shall be applied as a credit against the unpaid principal balance of
the Guaranteed Obligations.
DEFAULT. If any of the following events occur, a default ("Default") under
this Guaranty shall exist: (a) Failure of timely payment or performance of the
Guaranteed Obligations or a default under any Loan Document; (b) A breach of any
agreement or representation contained or referred to in the Guaranty, or any of
the Loan Documents, or contained in any other contract or agreement of
Guarantor with Bank or its affiliates, whether now existing or hereafter
arising; (c) The death of, appointment of a guardian for, dissolution of,
termination of existence of, loss of good standing status by, appointment of
a receiver for, assignment for the benefit of creditors of, or the commencement
of any insolvency or bankruptcy proceeding by or against, Guarantor or any
general partner of or the holder(s) of the majority ownership interests of
Guarantor; and/or (d) The entry of
-18-
<PAGE>
any monetary judgment or the assessment against, the filing of any tax lien
against, or the issuance of any writ of garnishment or attachment against any
property of or debts due Guarantor.
If a Default occurs, the Guaranteed Obligations shall be due immediately and
payable without notice. Guarantor shall pay interest on the Guaranteed
Obligations from such Default at the highest rate of interest charged on any
of the Guaranteed Obligations.
ATTORNEY'S FEES AND OTHER COSTS OF COLLECTION. Guarantor shall pay all of
Bank's reasonable expenses incurred to enforce or collect any of the Guaranteed
Obligations, including, without limitation, reasonable arbitration, paralegals',
attorneys' and experts' fees and expenses, whether incurred without the
commencement of a suit, in any suit, arbitration, or administrative proceeding,
or in any appellate or bankruptcy proceeding.
SUBORDINATION OF OTHER DEBTS. Guarantor agrees: (a) to subordinate the
obligations now or hereafter owed by Borrower to Guarantor ("Subordinated
Debt") to any and all obligations of Borrower to Bank now or hereafter existing
while this Guaranty is in effect, provided however that Guarantor may receive
regularly scheduled principal and interest payments on the Subordinated Debt
so long as (i) all sums due and payable by Borrower to Bank have been paid in
full on or prior to such date, and (ii) no event or condition which constitutes
or which with notice or the lapse or time would constitute an event of default
with respect to the Guaranteed Obligations, shall be continuing on or as of the
payment date; (b) Guarantor will place a legend indicating such subordination
on every note, ledger page or other document evidencing any part of the
Subordinated Debt; and (c) except as permitted by this paragraph, Guarantor
will not request or accept payment of or any security for any part of the
Subordinated Debt, and any proceeds of the Subordinated Debt paid to Guarantor,
through error or otherwise, shall immediately be forwarded to Bank by Guarantor,
properly endorsed to the order of Bank, to apply to the Guaranteed Obligations.
MISCELLANEOUS. (a) Assignment. This Guaranty and other Loan Documents shall
inure to the benefit of and be binding upon the parties and their respective
heirs, legal representatives, successors and assigns. Bank's interests in and
rights under this Guaranty and other Loan Documents are freely assignable, in
whole or in part, by Bank. Any assignment shall not release Guarantor from the
Guaranteed Obligations. (b) Applicable Law; Conflict Between Documents. This
Guaranty and other Loan Documents shall be governed by and construed under the
laws of the state in which office of Bank first shown above is located without
regard to that state's conflict of laws principles. If the terms of this
Guaranty should conflict with the terms of any commitment letter that survives
closing, the terms of this Guaranty shall control. (c) Jurisdiction.
Guarantor irrevocably agrees to non-exclusive personal jurisdiction in the
state in which the office of Bank first shown above is located. (d)
Severability. If any provision of this Guaranty or of the other Loan
Documents shall be prohibited or invalid under applicable law, such
provision shall be ineffective but only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Guaranty or other document. (e) Notices. Any
notices to Guarantor shall be sufficiently given, if in writing and mailed or
delivered to the Guarantor's address shown above or such other address as
provided hereunder, and to Bank, if in writing and mailed or delivered to
Bank's office address shown above or such other address as Bank may specify
in writing from time to time. In the event that Guarantor changes Guarantor's
address at any time prior to the date the Guaranteed Obligations are paid in
full, Guarantor agrees to promptly give written notice of said change of address
by registered or certified mail, return receipt requested, all charges prepaid.
(f) Plural; Captions. All references in the Loan Documents to borrower,
guarantor, person, document or other nouns of reference mean both the singular
and plural form, as the case may be, and the term "person" shall mean any
individual, person or entity.
-19-
<PAGE>
The captions contained in the Loan Documents are inserted for convenience only
and shall not affect the meaning or interpretation of the Loan Documents. (g)
Binding Contract. Guarantor by execution of and Bank by acceptance of this
Guaranty agree that each party is bound to all terms and provisions of this
Guaranty. (h) Amendments, Waivers an& Remedies. No waivers, amendments or
modifications of this Guaranty and other Loan Documents shall be valid unless
in writing and signed by an officer of Bank. No waiver by Bank of any Default
shall operate as a waiver of any other Default or the same Default on a future
occasion. Neither the failure nor any delay on the part of Bank in exercising
any right, power, or privilege granted pursuant to this Guaranty and other Loan
Documents shall operate as a waiver thereof, nor shall a single or partial
exercise thereof preclude any other or further exercise or the exercise of any
other right, power or privilege. All remedies available to Bank with respect
to this Guaranty and other Loan Documents and remedies available at law or in
equity shall be cumulative and may be pursued concurrently or successively.
(i) Partnerships. If Guarantor is a partnership, the obligations, liabilities
and agreements on the part of Guarantor shall remain in full force and effect
and fully applicable notwithstanding any changes in the individuals comprising
the partnership. The term "Guarantor" includes any altered or successive
partnerships, and predecessor partnership(s) and the partners shall not be
released from any obligations or liabilities hereunder. (j) Loan Documents.
The term "Loan Documents" refers to all documents executed in connection with
the Guaranteed Obligations and may include, without limitation, commitment
letters that survive closing, loan agreements, other guaranty agreements,
security agreements, instruments, financing statements, mortgages, deeds of
trust, deeds to secure debt, letters of credit and any amendments or
supplements (excluding swap agreements as defined in 11 U.S. Code Sec. 101).
ARBITRATION. Upon demand of any party hereto, whether made before or after
institution of any judicial proceeding, any dispute, claim or controversy
arising out of, connected with or relating to this Guaranty and other Loan
Documents ("Disputes") between or among parties to this Guaranty shall be
resolved by binding arbitration as provided herein. Institution of a judicial
proceeding by a party does not waive the right of that party to demand
arbitration hereunder. Disputes may include, without limitation, tort claims,
counterclaims, disputes as to whether a matter is subject to arbitration, claims
brought as class actions, claims arising from Loan Documents executed in the
future, or claims arising out of or connected with the transaction reflected by
this Guaranty.
Arbitration shall be conducted under and governed by the Commercial Financial
Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration
Association (the "AAA") and Title 9 of the U.S. Code. All arbitration hearings
shall be conducted in the city in which the office of Bank first stated above
is located. The expedited procedures set forth in Rule 51 et seq. of the
Arbitration Rules shall be applicable to claims of less than $1,000,000.00.
All applicable statutes of limitation shall apply to any Dispute. A judgment
upon the award may be entered in any court having jurisdiction. The panel
from which all arbitrators are selected shall be comprised of licensed
attorneys. The single arbitrator selected for expedited procedure shall be a
retired judge from the highest court of general jurisdiction, state or federal,
of the state where the hearing will be conducted or if such person is not
available to serve, the single arbitrator may be a licensed attorney.
Notwithstanding the foregoing, this arbitration provision does not apply to
disputes under or related to swap agreements.
-20-
<PAGE>
PRESERVATION AND LIMITATION OF REMEDIES. Notwithstanding the preceding binding
arbitration provisions, Bank and Guarantor agree to preserve, without
diminution, certain remedies that any party hereto may employ or exercise
freely, independently or in connection with an arbitration proceeding or
after an arbitration action is brought. Bank and Guarantor shall have the
right to proceed in any court of proper jurisdiction or by self-help to
exercise or prosecute the following remedies, as applicable: (i) all rights
to foreclose against any real or personal property or other security by
exercising a power of sale granted under Loan Documents or under applicable
law or by judicial foreclosure and sale, including a proceeding to confirm
the sale; (ii) all rights of self-help including peaceful occupation of real
property and collection of rents, set-off, and peaceful possession of personal
property; (iii) obtaining provisional or ancillary remedies including
injunctive relief, sequestration, garnishment, attachment, appointment of
receiver and filing an involuntary bankruptcy proceeding; and (iv) when
applicable, a judgment by confession of judgment. Preservation of these
remedies does not limit the power of an arbitrator to grant similar remedies
that may be requested by a party in a Dispute. Guarantor and Bank agree that
they shall not have a remedy of punitive or exemplary damages against the other
in any Dispute and hereby waive any right or claim to punitive or exemplary
damages they have now or which may arise in the future in connection with any
Dispute whether the Dispute is resolved by arbitration or judicially.
IN WITNESS WHEREOF, Guarantor, on the day and year first written above, has
caused this Unconditional Guaranty to be executed under seal.
Melru Corp.
Taxpayer Identification Number: 23-2256563
By: /s/ Patrick M. Farrell
Name: Patrick M. Farrell
Title: V.P., Finance and Administration
Jones Investment, Inc.
Taxpayer Identification Number: 51-0335604
By: /s/ Wesley R. Card
Name: Wesley R. Card
Title: President
Jones International, Ltd.
Taxpayer Identification Number: Not applicable
By: /s/ Wesley R. Card
Name: Weslev R. Card
Title: Director
Jones Holding Corporation
Taxpayer Identification Number: 51-0335605
By: /s/ Wesley R. Card
Name: Weslev R. Card
Title: Director
-21-
<PAGE>
EXHIBIT 11
JONES APPAREL GROUP, INC. AND SUBSIDIARIES
Computation of Basic and Diluted Earnings per Share
(In thousands except per share amounts)
For the Year Ended December 31,
-------------------------------
1997 1996 1995<F1>
------- ------- -------
Basic Earnings per Share:
- -------------------------
Net income........................... $121,725 $80,874 $63,485
======== ======= =======
Weighted average number of shares
outstanding.......................... 51,899 52,333 52,130
======== ======= =======
Basic earnings per share............. $2.35 $1.55 $1.22
======== ======= =======
Diluted Earnings per Share:
- ---------------------------
Net income........................... $121,725 $80,874 $63,485
======== ======= =======
Weighted average number of shares
outstanding.......................... 51,899 52,333 52,130
Assumed issuances under exercise
of stock options..................... 2,006 1,318 894
-------- ------- -------
53,905 53,651 53,024
======== ======= =======
Diluted earnings per share........... $2.26 $1.51 $1.20
======== ======= =======
<F1> Adjusted for 2-for-1 stock split effective October 2, 1996.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF JONES APPAREL GROUP, INC.
State or County Percentage of Voting
Name of Incorporation Securities Owned *
- --------------- ---------------- --------------------
Melru Corporation New Jersey 100%
Jones Apparel Group Canada Inc. Canada 100%
Jones Investment Co., Inc. Delaware 100%
Jones Holding Corporation Delaware 100%
Jones International Limited Hong Kong 100%
Bongal Company Limited Hong Kong 100%
Jones Apparel Group (HK) Ltd. Hong Kong 100%
Jones Far East Ltd. Hong Kong 100%
Vestamex S.A. De C.V. Mexico 100%
Camisas de Juarez S.A. De C.V. Mexico 100%
* Directly or Indirectly
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Jones Apparel Group, Inc.
New York, New York
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the Registration Statement on Form S-8 filed May 15,
1996 of our reports dated February 6, 1998, relating to the consolidated
financial statements and schedule of Jones Apparel Group, Inc. and
subsidiaries appearing in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
March 26, 1998
<PAGE>
EXHIBIT 27
<TABLE>
<S> <C>
PERIOD-TYPE YEAR
FISCAL-YEAR-END DEC-31-1997
PERIOD-END DEC-31-1997
CASH 40,134
SECURITIES 0
RECEIVABLES 94,514
ALLOWANCES 2,767
INVENTORY 255,055
CURRENT-ASSETS 440,771
PP&E 126,123
DEPRECIATION 44,189
TOTAL-ASSETS 580,767
CURRENT-LIABILITIES 110,202
BONDS 0
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 545
OTHER-SE 435,087
TOTAL-LIABILITY-AND-EQUITY 580,767
SALES 1,372,458
TOTAL-REVENUES 1,387,471
CGS 940,149
TOTAL-COSTS 940,149
OTHER-EXPENSES 250,685
LOSS-PROVISION 1,870
INTEREST-EXPENSE 3,584
INCOME-PRETAX 194,609
INCOME-TAX 72,884
INCOME-CONTINUING 121,725
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 121,725
EPS-PRIMARY 2.35
EPS-DILUTED 2.26
</TABLE>
EXHIBIT 27.1
<TABLE>
<S> <C> <C>
PERIOD-TYPE YEAR YEAR
FISCAL-YEAR-END DEC-31-1996 DEC-31-1995
PERIOD-END DEC-31-1996 DEC-31-1995
CASH 30,085 16,864
SECURITIES 0 0
RECEIVABLES 114,941 94,404
ALLOWANCES 2,263 2,257
INVENTORY 214,437 176,626
CURRENT-ASSETS 389,830 331,465
PP&E 94,823 62,042
DEPRECIATION 33,127 25,385
TOTAL-ASSETS 488,109 400,959
CURRENT-LIABILITIES 95,860 70,612
BONDS 0 0
PREFERRED-MANDATORY 0 0
PREFERRED 0 0
COMMON 536 263
OTHER-SE 376,193 314,712
TOTAL-LIABILITY-AND-EQUITY 488,109 400,959
SALES 1,021,042 776,365
TOTAL-REVENUES 1,034,078 786,679
CGS 717,250 546,413
TOTAL-COSTS 717,250 546,413
OTHER-EXPENSES 186,572 139,135
LOSS-PROVISION 800 (464)
INTEREST-EXPENSE 3,040 1,908
INCOME-PRETAX 127,763 99,668
INCOME-TAX 46,889 36,183
INCOME-CONTINUING 80,874 63,485
DISCONTINUED 0 0
EXTRAORDINARY 0 0
CHANGES 0 0
NET-INCOME 80,874 63,485
EPS-PRIMARY 1.55 1.22
EPS-DILUTED 1.51 1.20
</TABLE>
<PAGE>
EXHIBIT 27.2
<TABLE>
<S> <C> <C> <C>
PERIOD-TYPE 3-MOS 6-MOS 9-MOS
FISCAL-YEAR-END DEC-31-1997 DEC-31-1997 DEC-31-1997
PERIOD-END MAR-30-1997 JUN-29-1997 SEP-28-1997
CASH 20,529 30,010 12,315
SECURITIES 0 0 0
RECEIVABLES 189,986 108,116 214,827
ALLOWANCES 3,757 3,533 3,757
INVENTORY 221,032 274,067 277,003
CURRENT-ASSETS 462,817 452,848 543,386
PP&E 100,324 108,140 116,032
DEPRECIATION 35,740 38,567 41,379
TOTAL-ASSETS 563,946 568,693 665,729
CURRENT-LIABILITIES 140,119 124,619 181,273
BONDS 0 0 0
PREFERRED-MANDATORY 0 0 0
PREFERRED 0 0 0
COMMON 538 541 543
OTHER-SE 408,685 421,149 462,658
TOTAL-LIABILITY-AND-EQUITY 563,946 568,693 665,729
SALES 317,990 580,978 1,026,950
TOTAL-REVENUES 321,455 587,744 1,038,252
CGS 214,884 393,426 696,733
TOTAL-COSTS 214,884 393,426 696,733
OTHER-EXPENSES 59,096 115,729 183,547
LOSS-PROVISION 1,556 1,783 2,009
INTEREST-EXPENSE 362 629 1,710
INCOME-PRETAX 47,113 77,960 156,262
INCOME-TAX 17,573 29,141 58,504
INCOME-CONTINUING 29,540 48,819 97,758
DISCONTINUED 0 0 0
EXTRAORDINARY 0 0 0
CHANGES 0 0 0
NET-INCOME 29,540 48,819 97,758
EPS-PRIMARY 0.57 0.94 1.88
EPS-DILUTED 0.55 0.90 1.81
</TABLE>
<PAGE>
EXHIBIT 27.3
<TABLE>
<S> <C> <C> <C>
PERIOD-TYPE 3-MOS 6-MOS 9-MOS
FISCAL-YEAR-END DEC-31-1996 DEC-31-1996 DEC-31-1996
PERIOD-END MAR-31-1996 JUN-30-1996 SEP-29-1996
CASH 8,316 13,288 9,650
SECURITIES 0 0 0
RECEIVABLES 169,324 96,513 174,664
ALLOWANCES 2,472 2,503 2,425
INVENTORY 198,505 238,002 222,765
CURRENT-ASSETS 420,256 396,882 443,444
PP&E 65,908 72,051 81,812
DEPRECIATION 26,987 28,932 30,764
TOTAL-ASSETS 491,790 474,712 530,945
CURRENT-LIABILITIES 144,086 111,438 143,132
BONDS 0 0 0
PREFERRED-MANDATORY 0 0 0
PREFERRED 0 0 0
COMMON 265 267 267
OTHER-SE 333,105 345,306 371,032
TOTAL-LIABILITY-AND-EQUITY 491,790 474,712 530,945
SALES 260,351 453,626 762,645
TOTAL-REVENUES 262,927 458,861 772,089
CGS 187,557 319,800 533,322
TOTAL-COSTS 187,557 319,800 533,322
OTHER-EXPENSES 42,718 84,874 134,792
LOSS-PROVISION 222 460 683
INTEREST-EXPENSE 521 984 1,991
INCOME-PRETAX 32,131 53,203 101,984
INCOME-TAX 11,792 19,526 37,428
INCOME-CONTINUING 20,339 33,677 64,556
DISCONTINUED 0 0 0
EXTRAORDINARY 0 0 0
CHANGES 0 0 0
NET-INCOME 20,339 33,677 64,556
EPS-PRIMARY 0.39 0.64 1.23
EPS-DILUTED 0.38 0.63 1.21
</TABLE>
EXHIBIT 99.2
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10746
JONES APPAREL GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-0935166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 Rittenhouse Circle
Bristol, Pennsylvania 19007
(Address of principal (Zip Code)
executive offices)
(215) 785-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at November 6, 1998
$.01 par value 104,859,946
<PAGE>
JONES APPAREL GROUP, INC.
Index
PART I. FINANCIAL INFORMATION Page No.
--------
Financial Statements:
Consolidated Balance Sheets
September 27, 1998 and December 31, 1997............ 3
Consolidated Statements of Income
Thirteen and Thirty-nine Weeks ended September 27,
1998 and September 28, 1998....................... 4
Consolidated Statement of Stockholders' Equity
Thirty-nine Weeks ended September 27, 1998.......... 5
Consolidated Statements of Cash Flows
Thirty-nine Weeks ended September 27, 1998 and
September 28, 1997................................ 6
Notes to Consolidated Financial Statements................. 7 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 10 - 15
PART II. OTHER INFORMATION...................................... 16 - 17
- 2 -
<PAGE>
<TABLE>
JONES APPAREL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 27, December 31,
1998 1997
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents............................................................. $ 14,956 $ 40,134
Accounts receivable, net of allowance of $3,337 and $2,767 for doubtful accounts...... 255,978 91,747
Inventories........................................................................... 226,971 255,055
Receivable from and advances to contractors........................................... 17,571 7,833
Prepaid and refundable income taxes................................................... - 5,993
Deferred taxes........................................................................ 25,304 26,269
Prepaid expenses and other current assets............................................. 11,142 13,740
------- -------
TOTAL CURRENT ASSETS................................................................ 551,922 440,771
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization of $47,009 and $44,189.................................. 129,646 81,934
CASH RESTRICTED FOR CAPITAL ADDITIONS................................................... - 11,193
INTANGIBLES, less accumulated amortization of $8,618 and $7,687......................... 29,006 30,604
OTHER ASSETS............................................................................ 25,495 16,265
------- -------
$736,069 $580,767
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings................................................................. $ 37,929 $ -
Current portion of long-term debt and capital lease obligations....................... 5,825 4,199
Accounts payable...................................................................... 81,881 90,429
Taxes payable......................................................................... 30,329 -
Accrued expenses and other current liabilities........................................ 25,132 15,574
------- -------
TOTAL CURRENT LIABILITIES........................................................... 181,096 110,202
------- -------
NONCURRENT LIABILITIES:
Obligations under capital leases...................................................... 35,851 18,457
Long-term debt........................................................................ 12,338 8,833
Other................................................................................. 6,107 6,107
------- -------
TOTAL NONCURRENT LIABILITIES........................................................ 54,296 33,397
------- -------
TOTAL LIABILITIES................................................................... 235,392 143,599
------- -------
EXCESS OF NET ASSETS ACQUIRED OVER COST................................................. 154 1,536
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - shares authorized 1,000; none issued................ - -
Common stock, $.01 par value - shares authorized 200,000;
issued 109,963 and 108,955........................................................... 1,100 545
Additional paid in capital............................................................ 136,956 122,582
Retained earnings..................................................................... 561,663 438,917
Accumulated other comprehensive income................................................ (2,059) (1,524)
------- -------
697,660 560,520
Less treasury stock, 10,037 and 6,767 shares, at cost................................. (197,137) (124,888)
------- -------
TOTAL STOCKHOLDERS' EQUITY.......................................................... 500,523 435,632
------- -------
$736,069 $580,767
======= =======
<FN>
All amounts in thousands except per share data
See notes to consolidated financial statements
</FN>
</TABLE>
- 3 -
<PAGE>
<TABLE>
JONES APPAREL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
-------------------------- --------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales............................................... $495,727 $445,972 $1,181,240 $1,026,950
Licensing income........................................ 4,590 4,536 11,406 11,302
------- ------- --------- ---------
Total revenues.......................................... 500,317 450,508 1,192,646 1,038,252
Cost of goods sold...................................... 324,724 303,308 778,372 696,733
------- ------- --------- ---------
Gross profit............................................ 175,593 147,200 414,274 341,519
Selling, general and administrative expenses............ 78,342 67,818 211,942 183,547
------- ------- --------- ---------
Operating income........................................ 97,251 79,382 202,332 157,972
Net interest expense.................................... 1,156 1,081 2,745 1,710
------- ------- --------- ---------
Income before provision for income taxes................ 96,095 78,301 199,587 156,262
Provision for income taxes.............................. 36,997 29,363 76,841 58,504
------- ------- --------- ---------
Net income.............................................. $59,098 $48,938 $122,746 $97,758
======= ======= ========= =========
Earnings per share
Basic................................................. $0.59 $0.47 $1.22 $0.94
Diluted............................................... $0.57 $0.45 $1.17 $0.90
Weighted average common shares and
share equivalents outstanding
Basic................................................. 100,886 104,372 100,821 104,124
Diluted............................................... 104,426 108,634 104,613 108,184
<FN>
All amounts in thousands except per share data
See notes to consolidated financial statements
</FN>
</TABLE>
- 4 -
<PAGE>
<TABLE>
JONES APPAREL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<CAPTION>
Accumulated
Total Additional other
stockholders' Common paid-in Retained comprehensive Treasury
equity stock capital earnings income stock
------------- ------- ----------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997...................... $435,632 $545 $122,582 $438,917 ($1,524) ($124,888)
Thirty-nine weeks ended September 27, 1998:
Comprehensive income
Net income.................................... 122,746 - - 122,746 - -
Foreign currency translation adjustments...... (535) - - - (535) -
-------------
Total comprehensive income.................. 122,211
-------------
Amortization of deferred compensation in
connection with executive stock options........ 158 - 158 - - -
Exercise of stock options....................... 8,986 6 9,080 - - (100)
Tax benefit derived from exercise of
stock options................................... 5,685 - 5,685 - - -
Effect of 2-for-1 stock split................... - 549 (549) - - -
Treasury stock acquired......................... (72,149) - - - - (72,149)
------------- ------- ----------- -------- ------------- ---------
Balance, September 27, 1998..................... $500,523 $1,100 $136,956 $561,663 ($2,059) ($197,137)
============= ======= =========== ======== ============= =========
<FN>
All amounts in thousands
See notes to consolidated financial statements
</FN>
</TABLE>
- 5 -
<PAGE>
<TABLE>
JONES APPAREL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Thirty-nine weeks ended
------------------------------
September 27, September 28,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................................................................. $122,746 $97,758
-------- -------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................. 11,254 11,494
Provision for losses on accounts receivable............................................... 825 2,009
Deferred taxes............................................................................ (3,174) (14,676)
Other..................................................................................... 362 154
(Increase) decrease in:
Trade receivables....................................................................... (165,353) (100,454)
Inventories............................................................................. 27,638 (62,623)
Prepaid expenses and other current assets............................................... (7,293) 2,691
Other assets............................................................................ (5,828) (4,780)
Increase (decrease) in:
Accounts payable........................................................................ (8,473) 21,064
Taxes payable........................................................................... 42,761 20,253
Accrued expenses and other current liabilities.......................................... 9,850 5,045
------- -------
Total adjustments..................................................................... (97,431) (119,823)
------- -------
Net cash provided by (used in) operating activities......................................... 25,315 (22,065)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................................... (37,546) (21,743)
Decrease (increase) in cash restricted for capital additions.............................. 11,193 (6,022)
Other..................................................................................... (116) -
------- -------
Net cash used in investing activities....................................................... (26,469) (27,765)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings......................................................... 37,929 45,104
Proceeds from capital lease............................................................... - 10,000
Repayment of capital leases and long-term debt............................................ (3,785) (2,738)
Increase in long-term debt................................................................ 5,000 -
Acquisition of treasury stock............................................................. (72,149) (30,636)
Proceeds from exercise of stock options................................................... 8,986 10,291
------- -------
Net cash provided by (used in) financing activities......................................... (24,019) 32,021
------- -------
EFFECT OF EXCHANGE RATES ON CASH............................................................ (5) 39
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................... (25,178) (17,770)
CASH AND CASH EQUIVALENTS, beginning of period.............................................. 40,134 30,085
------- -------
CASH AND CASH EQUIVALENTS, end of period.................................................... $14,956 $12,315
======= =======
<FN>
All amounts in thousands
See notes to consolidated financial statements
</FN>
</TABLE>
- 6 -
<PAGE>
JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Jones Apparel
Group, Inc. and its wholly-owned subsidiaries (collectively, the "Company").
The financial statements have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP") for interim financial information and
in accordance with the requirements of Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. The consolidated financial statements included herein
should be read in conjunction with the consolidated financial statements and
the footnotes therein included within the Company's Annual Report on Form 10-K.
In the opinion of management, the information presented reflects all
adjustments necessary for a fair statement of interim results. All such
adjustments are of a normal and recurring nature. The foregoing interim
results are not necessarily indicative of the results of operations for the
full year ending December 31, 1998. The Company reports interim results in
13 week quarters; however, the annual reporting period is the calendar year.
Certain reclassifications have been made to conform prior period data with
the current presentation.
2. Inventories
Inventories are summarized as follows (amounts in thousands):
September 27, December 31,
1998 1997
------------ -----------
Raw materials..................... $22,286 $27,045
Work in process................... 28,854 41,294
Finished goods.................... 175,831 186,716
-------- --------
$226,971 $255,055
======== ========
- 7 -
<PAGE>
JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Statement of Cash Flows
Cash payments made for interest for the thirty-nine weeks ended September 27,
1998 and September 28, 1997 were $4,039,000 and $2,892,000, respectively.
Cash payments made for income taxes for the thirty-nine weeks ended September
27, 1998 and September 28, 1997 were $49,518,000 and $52,892,000, respectively.
Property and equipment acquired through capital lease financing during the
thirty-nine weeks ended September 27, 1998 and September 28, 1997 amounted to
$21,310,000 and $220,000, respectively.
Reduction in income tax payments resulting from the exercise of employee stock
options during the thirty-nine weeks ended September 27, 1998 and September 28,
1997 were $5,685,000 and $6,389,000, respectively.
Under the provisions of the Company's 1991 Stock Option Plan, employees
exercising stock options during the thirty-nine weeks ended September 27, 1998
exchanged 3,826 shares of the Company's Common Stock (valued at $100,000) for
8,332 newly issued shares and during the thirty-nine weeks ended September 28,
1997 exchanged 4,244 shares of the Company's Common Stock (valued at $100,000)
for 17,926 newly issued shares.
4. New Accounting Standards
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise" and establishes new standards
for the way that public enterprises report information about operating segments
in annual financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to the public.
It also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments
as components of an enterprise about which separate financial information is
available that is evaluated regularly by management in deciding how to allocate
resources and in assessing performance.
SFAS No. 131 is effective for financial statement periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. The adoption of this standard is not expected to have a material
effect on the Company's financial position or results of operations. The
Company is currently reviewing SFAS No. 131 and has of yet been unable to fully
evaluate the impact, if any, it may have on future financial statement
disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which requires entities to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. The Company does not expect results of
operations and financial position to be affected by implementation of this
new standard.
- 8 -
<PAGE>
JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Capital Stock
On May 6, 1998, the Company's Board of Directors authorized a two-for-one
stock split of the Company's Common Stock in the form of a 100% stock dividend
for shareholders of record as of June 4, 1998, with stock certificates issued
on June 25, 1998. In connection with the Common Stock split, the Board of
Directors approved an increase in the number of shares authorized to
200,000,000. On June 25, 1998, a total of 50,497,911 shares of Common Stock
were issued in connection with the split. The stated par value of each share
was not changed from $0.01. All share and per share amounts have been restated
to retroactively reflect the stock split.
6. Subsequent Events
On September 10, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") to acquire 100% of the equity of Sun Apparel,
Inc. of El Paso, Texas ("Sun"). The acquisition was completed on October 2,
1998. Sun designs, manufactures and distributes 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, as well as other
owned, licensed and private label brands.
The Company purchased the equity of Sun for $216.6 million, comprised of
$137.8 million in cash and 4.4 million shares of common stock. 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 Company also assumed Sun debt of $228.5 million, which was refinanced in
conjunction with the closing of the transaction. The Merger Agreement also
provides for potential additional future payments based on Sun's operating
performance. The acquisition will be accounted for using the purchase method
of accounting and the results of Sun will be included in the Company's
financial records from the date of acquisition.
Concurrently, the Company announced the issuance of $265 million of Senior
Notes due 2001, and a new $550 million bank credit facility to finance the
acquisition and the Company's working capital, general corporate and trade
letter of credit requirements.
- 9 -
<PAGE>
7. Supplemental Pro Forma Condensed Financial Information
On January 1, 1999, Jones Apparel Group, Inc. consummated a corporate
reorganization under which two new wholly owned subsidiaries named Jones
Apparel Group USA, Inc. ("Jones USA") and Jones Apparel Group Holdings,
Inc. ("Jones Holdings") were created. On that date, the operating assets
of Jones Apparel Group, Inc. were transferred to Jones USA and Jones USA
assumed the role of obligor of the Senior Notes due 2001, with Jones Apparel
Group, Inc. remaining and Jones Holdings becoming co-obligors of the Notes.
The following condensed financial information represents, on a pro forma
basis, the results of Jones USA had the reorganization occurred on January 1,
1997 (all amounts in thousands). Separate pro forma financial statements and
other disclosures concerning Jones USA and Jones Holdings are not presented
as such information is not considered material to the holders of the Senior
Notes.
September 28, 1997 September 27, 1998
------------------ ------------------
Current assets $501,879 $510,381
Noncurrent assets 80,602 135,171
Current liabilities 337,401 403,689
Noncurrent liabilities 19,525 48,993
Excess of net assets
acquired over cost 1,996 154
For the Nine Months Ended
--------------------------------------
September 28, 1997 September 27, 1998
------------------ ------------------
Total revenues $953,417 $1,101,289
Gross profit 290,273 357,162
Operating income 156,364 139,262
Net income 59,559 75,848
<PAGE>
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The following discussion provides information and analysis of the Company's
results of operations for the thirteen and thirty-nine week periods ended
September 27, 1998 and September 28, 1997, respectively, and its liquidity and
capital resources. The following discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements included
elsewhere herein.
Results of Operations
Statements of Income Expressed as a Percentage of Total Revenues
Thirteen weeks ended Thirty-nine weeks ended
-------------------------- --------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
-------- -------- -------- --------
Net sales 99.1% 99.0% 99.0% 98.9%
Licensing income 0.9% 1.0% 1.0% 1.1%
-------- -------- -------- --------
Total revenue 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 64.9% 67.3% 65.3% 67.1%
-------- -------- -------- --------
Gross profit 35.1% 32.7% 34.7% 32.9%
Selling, general and
administrative expenses 15.7% 15.1% 17.8% 17.7%
-------- -------- -------- --------
Operating income 19.4% 17.6% 17.0% 15.2%
Net interest expense 0.2% 0.2% 0.2% 0.2%
-------- -------- -------- --------
Income before provision
for income taxes 19.2% 17.4% 16.7% 15.1%
Provision for income taxes 7.4% 6.5% 6.4% 5.6%
-------- -------- -------- --------
Net income 11.8% 10.9% 10.3% 9.4%
======== ======== ======== ========
Totals may not agree due to rounding.
Quarter Ended September 27, 1998 Compared to Quarter Ended September 28, 1997
Net Sales. Net sales in the thirteen weeks ended September 27, 1998
(hereinafter referred to as the "third quarter of 1998") increased 11.1%, or
$49.7 million, to $495.7 million, compared to $446.0 million in the thirteen
weeks ended September 28, 1997 (hereinafter referred to as the "third quarter
of 1997"). The increase was due primarily to an increase in the number of
units shipped, as well as the impact of a higher average price per unit
resulting from the mix of products shipped. The breakdown of net sales by
category for both periods is as follows:
- 10 -
<PAGE>
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Third Third
Quarter Quarter Increase/ Percent
(In millions) of 1998 of 1997 (Decrease) Change
------- ------- -------- -------
Career sportswear $197.3 $196.1 $1.2 0.6%
Casual sportswear 108.5 108.1 0.4 0.4%
Lifestyle collection 153.8 100.8 53.0 52.6%
Men's collection 6.9 0.0 6.9 N/A
Suits, dress, and other 29.2 41.0 (11.8) (28.8%)
------- ------- -------- -------
Net sales $495.7 $446.0 $49.7 11.1%
======= ======= ======== =======
The increase in Lifestyle collection was primarily due to a large increase
in shipments under the Lauren by Ralph Lauren label. The Jones New York Men's
collection was introduced with initial shipments beginning during the third
quarter of 1998. The decrease in suits, dress, and other was mainly the result
of a repositioning of the Saville Suit label.
Licensing Income. Licensing income increased $0.1 million to $4.6 million
in the third quarter of 1998 compared to $4.5 million in the third quarter
of 1997. Income from licenses under the Jones New York label increased $0.5
million, while income from licenses under the Evan-Picone label decreased
$0.4 million.
Gross Profit. The gross profit margin was 35.1% in the third quarter of 1998
compared to 32.7% in the third quarter of 1997. The gross profit improvement
was attributable to the significant increase in sales of the Lifestyle
collection, which carries higher margins than the corporate average and lower
overseas production costs due to the favorable impact of currency devaluations
in Asia.
SG&A Expenses. Selling, general and administrative expenses ("SG&A" expenses)
of $78.3 million in the third quarter of 1998 represented an increase of $10.5
million over the third quarter of 1997. As a percentage of total revenues, SG&A
expenses increased to 15.7% in the third quarter of 1998 from 15.1% for the
comparable period in 1997. While royalties and operating expenses added
significant expenses during the quarter, the effect was offset by the
proportionately larger increase in sales and gross profit. Retail store
operating expenses increased $2.6 million, reflecting the added cost of 18 more
stores in operation at the end of the third quarter of 1998 compared to the end
of the third quarter of 1997.
Operating Income. The resulting third quarter of 1998 operating income of
$97.3 million increased 22.5%, or $17.9 million, compared to $79.4 million
during the third quarter of 1997. The operating margin increased to 19.4%
for the third quarter of 1998 from the 17.6% achieved during the third quarter
of 1997.
Net Interest Expense. Net interest expense was $1.2 million in the third
quarter of 1998 compared to $1.1 million in the comparable period of 1997.
Provision for Income Taxes. The effective income tax rate was 38.5% for the
third quarter of 1998 compared to 37.5% for the third quarter of 1997. The
increase was primarily due to higher state income tax provisions for the third
quarter of 1998.
- 11 -
<PAGE>
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Net Income. Net income increased 20.8% to $59.1 million in the third quarter
of 1998, an increase of $10.2 million over the net income of $48.9 million
earned in the third quarter of 1997. Net income as a percentage of total
revenues was 11.8% in the third quarter of 1998 and 10.9% in the third quarter
of 1997.
Nine months Ended September 27, 1998 Compared to Nine months Ended
September 28, 1997
Net Sales. Net sales in the thirty-nine weeks ended September 27, 1998
(hereinafter referred to as the "first nine months of 1998") increased 15.0%,
or $0.2 billion, to $1.2 billion, compared to $1.0 billion in the thirty-nine
weeks ended September 28, 1997 (hereinafter referred to as the "first nine
months of 1997"). The increase was due primarily to an increase in the number
of units shipped, as well as the impact of a higher average price per unit
resulting from the mix of products shipped. The breakdown of net sales by
category for both periods is as follows:
First First
Nine Months Nine Months Increase/ Percent
(In millions) of 1998 of 1997 (Decrease) Change
---------- ---------- --------- -------
Career sportswear $505.3 $474.4 $30.9 6.5%
Casual sportswear 261.9 247.1 14.8 6.0%
Lifestyle collection 314.9 192.8 122.1 63.3%
Men's collection 6.9 0.0 6.9 N/A
Suits, dress, and other 92.2 112.7 (20.5) (18.2%)
---------- ---------- --------- -------
Net sales $1,181.2 $1,027.0 $154.2 15.0%
========== ========== ========= =======
The increase in Lifestyle collection was primarily due to a large increase in
shipments under the Lauren by Ralph Lauren label. The Jones New York Men's
collection was introduced with initial shipments beginning during the third
quarter of 1998. The decrease in suits, dress, and other was the result of the
termination of the Christian Dior suit license and a repositioning of the
Saville Suit label.
Licensing Income. Licensing income increased $0.1 million to $11.4 million
in the first nine months of 1998 compared to $11.3 million in the first nine
months of 1997. Income from licenses under the Jones New York label increased
$0.8 million while income from licenses under the Evan-Picone label decreased
$0.7 million.
Gross Profit. The gross profit margin was 34.7% in the first nine months of
1998 compared to 32.9% in the first nine months of 1997. The gross profit
improvement was attributable to the significant increase in sales of the
Lifestyle collection, which carries higher margins than the corporate average
and lower overseas production costs due to the favorable impact of currency
devaluations in Asia.
SG&A Expenses. Selling, general and administrative expenses of $211.9 million
in the first nine months of 1998 represented an increase of $28.4 million over
the first nine months of 1997. As a percentage of total revenues, SG&A expenses
increased to 17.8% in the first nine months of 1998 from 17.7% for the
comparable period in 1997. While advertising, royalties and operating
expenses added significant expenses during the quarter, the effect was offset
by the proportionately larger increase in sales and gross profit. Retail store
operating expenses increased $7.3 million, reflecting the added cost of 18 more
stores in operation at the end of the first nine months of 1998 compared to the
end of the first nine months of 1997.
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<PAGE>
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Operating Income. The resulting first nine months of 1998 operating income of
$202.3 million increased 28.1%, or $44.3 million, compared to $158.0 million
during the first nine months of 1997. The operating margin increased to 17.0%
for the first nine months of 1998 from the 15.2% achieved during the first nine
months of 1997.
Net Interest Expense. Net interest expense was $2.7 million in the first nine
months of 1998 compared to $1.7 million in the comparable period of 1997. The
change primarily reflects an increase in capital lease obligations and long-
term debt associated with the construction of warehouse facilities.
Provision for Income Taxes. The effective income tax rate was 38.5% for the
first nine months of 1998 compared to 37.4% for the first nine months of 1997.
The increase was primarily due to higher state income tax provisions for the
first nine months of 1998.
Net Income. Net income increased 25.6% to $122.7 million in the first nine
months of 1998, an increase of $24.9 million over the net income of $97.8
million earned in the first nine months of 1997. Net income as a percentage
of total revenues was 10.3% in the first nine months of 1998 and 9.4% in the
first nine months of 1997.
Liquidity and Capital Resources
The Company's principal capital requirements have been to fund working capital
needs, capital expenditures and to repurchase the Company's Common Stock on the
open market. The Company has historically relied primarily on internally
generated funds, trade credit and bank borrowings to finance its operations
and expansion.
Net cash provided by operations was $25.3 million in the first nine months of
1998, compared to net cash used in operations of $22.1 million in the first nine
months of 1997. The change primarily reflects the effect of higher net income
for the first nine months of 1998 and a $27.6 million decrease in inventories
compared to a $62.6 increase in inventories in 1997. These amounts were offset
by a larger increase in accounts receivables of $165.4 million in 1998 compared
to $100.5 million in 1997.
Net cash used in investing activities was $1.3 million lower in the first nine
months of 1998 than in the first nine months of 1997, as additional capital
improvements and replacements were offset by a decrease in restricted cash.
Expenditures for capital improvements, replacements and property under capital
leases for the full year 1998 are expected to approximate $55.0 million, of
which $17 million represents the cost of completing an additional warehouse
facility.
Net cash used in financing activities was $24.0 million in the first nine
months of 1998 compared to net cash provided by financing activities of $32.0
million in the first nine months of 1997. The principal reasons for the change
were a smaller increase in the amounts of short-term borrowings to fund working
capital requirements, the net decrease in proceeds from capital lease and long-
term debt and transactions involving the Company's Common Stock. The Company
repurchased $72.1 million and $30.6 million of its Common Stock on the open
market for the nine months ended September 27, 1998 and September 28, 1997,
respectively, under announced programs to acquire up to $200.0 million
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<PAGE>
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
of such shares. On September 16, 1998, the Board of Directors authorized an
additional $100.0 million stock repurchase plan. The Company had repurchased
$196.2 million of its shares as of September 27, 1998, since first announcing
a stock repurchase program in December 1995. The Company may authorize
additional share repurchases in the future depending on, among other things,
market conditions and the Company's financial condition. Proceeds from the
issuance of common stock to employees exercising stock options amounted to
$9.1 million in the first nine months of 1998 compared to $10.3 million in
the first nine months of 1997.
Under the Company's credit agreements in place at the end of the third quarter
of 1998, $124.8 million was utilized for letters of credit and $37.9 million of
short-term borrowings were outstanding on September 27, 1998. In connection
with the acquisition of Sun Apparel, Inc. ("Sun") on October 2, 1998, the
Company replaced its existing credit agreements with $265.0 million of 6.25%
three-year Senior Notes and entered into an agreement with First Union National
Bank, as administrative agent, and other lending institutions to borrow an
aggregate principal amount of up to $550.0 million under Senior Credit
Facilities. These facilities consist of (i) a $150.0 million Three-Year
Revolving Credit Facility, (ii) a $300.0 million 364-Day Revolving Credit
Facility, the entire amount of which will be available for trade letters of
credit or cash borrowings, and (iii) a $100.0 million Term Loan Facility.
Upon the closing of the Sun acquisition, the Company drew down the Term
Loan Facility in its entirety and the Three-Year Revolving Credit Facility in
the amount of $125.0 million to finance a portion of the acquisition, the
refinancing of Sun's debt, related transactions and for its short-term
working capital needs. Upon the closing of the acquisition, approximately
$141.8 million was outstanding under the 364-Day Revolving Credit Facility,
which was comprised of both Sun's and the Company's letters of credit
outstanding on that date. Borrowings under the Senior Credit Facilities
may also be used for working capital and other general corporate purposes,
including permitted acquisitions and stock repurchases. The Senior Credit
Facilities are unsecured and require the Company to satisfy an earnings
before interest, taxes, depreciation, amortization and rent to interest expense
plus rents coverage ratio and a net worth maintenance covenant as well as other
restrictions, including (subject to exceptions) limiting the Company's ability
to incur additional indebtedness, prepay subordinated indebtedness, make
acquisitions, enter into mergers, and pay dividends.
The Company believes that funds generated by operations, the Senior Notes and
the new Senior Credit Facilities will provide the financial resources sufficient
to meet its foreseeable working capital, letter of credit, capital expenditure
and stock repurchase requirements and its ongoing obligations to the former Sun
shareholders.
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<PAGE>
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000
The Company 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 related technologies to fail or create erroneous
results on or before January 1, 2000.
The Company 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, the Company retained the services
of an independent consultant that specializes in Year 2000 evaluation and
remediation work. In addition, the Company has developed a plan with respect to
the Year 2000 readiness of its internal technology systems. This plan involves
(i) creating awareness inside the Company of Year 2000 issues, (ii) analyzing
the Company's 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 the Company's business. The
Company 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 as having Year 2000 issues. The Company anticipates
substantially completing the implementation of this plan by early 1999; however,
it 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, the Company
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. The Company 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 the Company's systems or may otherwise impact operations.
The Company 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 the Company relies will not have an adverse effect on its
business, operations or financial condition.
As of September 27, 1998, the Company had incurred approximately $150,000 in
costs related to the Year 2000 issue. The Company 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.
The Company anticipates that it will fund its additional Year 2000 costs from
current working capital.
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<PAGE>
JONES APPAREL GROUP, INC.
OTHER INFORMATION
Part II.
Item 5. Other information
Statement Regarding Forward-looking Disclosure
This Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended which represent the Company's
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 the Company's products within the prevailing retail environment,
customer acceptance of both new designs and newly-introduced product lines, and
financial difficulties encountered by customers. All statements, other than
statements of historical facts included in this Quarterly Report, including,
without limitation, the statements under "Management's Discussion and Analysis
of Financial Condition and Results of Operations," are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that
could cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed in this Report. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.53 License Agreement dated as of August 1, 1995 by and between
PRL USA, Inc., as assignee of Polo Ralph Lauren Corporation,
successor to Polo Ralph Lauren, L.P., and Sun Apparel, Inc.,
as amended to date
Exhibit 10.54 Design Services Agreement dated as of August 1, 1995 by and
between Polo Ralph Lauren Corporation, successor to Polo Ralph
Lauren, L.P., and Sun Apparel, Inc., as amended to date
Exhibit 11 Computation of earnings per share
Exhibit 27 Financial data schedule dated September 27, 1998
(b) Reports on Form 8-K
During the quarter ended September 27, 1998, a Current Report on Form 8-K,
dated September 24, 1998, was filed with the Commission by the Company
announcing the acquisition of Sun Apparel, Inc.
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<PAGE>
JONES APPAREL GROUP, INC.
OTHER INFORMATION (CONTINUED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
JONES APPAREL GROUP, INC.
(Registrant)
Date: November 10, 1998 By /s/ Sidney Kimmel
----------------------------
SIDNEY KIMMEL
Chief Executive Officer
By /s/ Wesley R. Card
----------------------------
WESLEY R. CARD
Chief Financial Officer
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<PAGE>
Exhibit 10.53.
(Polo Jeans Company - License)
LICENSE AGREEMENT, dated as of August 1, 1995 by and between Polo Ralph
Lauren, L.P. ("Licensor") , a Delaware limited partnership with a place of
business at 650 Madison Avenue, New York, New York 10022, and Sun Apparel,
Inc. ("Licensee"), a Texas corporation with a place of business at 11201
Armour Drive, El Paso, Texas 79935.
WHEREAS, Licensor is engaged in the business of manufacturing, selling and
promoting, and licensing others the right to manufacture, sell and promote,
high quality apparel and related merchandise under certain Polo/Ralph Lauren
trademarks and trade names; and
WHEREAS, Licensee desires to obtain, and Licensor is willing to grant, a
license pursuant to which Licensee shall have the right to use certain Polo/
Ralph Lauren trademarks in the United States on the terms set forth herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual promises
and covenants herein contained, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Definitions. As used herein, the term:
1.1. "License" shall mean the exclusive, non-assignable right to use the
Trademark in connection with the manufacture and/or importation and sale of
Licensed Products in the Territory.
1.2. "Licensed Products" shall mean those items set forth on Schedule A
attached hereto and made a part hereof, and all bearing the Trademark. From
time to time Licensor may authorize Licensee to manufacture and distribute
products bearing the Trademark not expressly listed in Schedule A hereto.
Absent an agreement with respect to such products signed by Licensor and
Licensee, all such products shall be deemed Licensed Products for all purposes
hereunder; provided, however, that Licensee's rights with respect to such
products (i) shall be non-exclusive and (ii) may be terminated by Licensor
upon 90 days written notice.
1.3. "Licensor" shall mean Polo Ralph Lauren, L.P., a limited partnership
organized under the laws of the State of Delaware.
1.4. "Licensee" shall mean Sun Apparel, Inc., a corporation organized under
the laws of Texas.
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<PAGE>
1.5. "Net Sales Price" shall have the meaning set forth in paragraph 6.2
hereof.
1.6. "Territory" shall mean the United States of America, its territories
and possessions. From time to time Licensor may authorize Licensee to sell
certain Licensed Products to specific purchasers outside the Territory.
Absent an agreement with respect to such sales signed by Licensor and Licensee,
all such sales shall be made on all of the terms and conditions set forth in
this Agreement; provided, however, that Licensee's right to make such sales
shall be non-exclusive and may be terminated by Licensor immediately upon
written notice to Licensee. Any such termination shall not apply to orders
already taken by Licensee in accordance with Licensor's prior authorization.
1.7. "Trademark" shall mean the trademarks set forth on Schedule B hereto,
and no other trademarks, regardless of whether such trademark is or includes
"POLO" or "RALPH LAUREN", except as may be expressly authorized by Licensor in
writing. Licensor shall have the sole right to determine the manner and use of
the Trademark in connection with each particular Licensed Product. Each
particular form or logo selected by Licensor to be used as part of or in
connection with the Trademark shall be deemed within the definition of
"Trademark" hereunder, and such particular forms already approved are annexed
hereto as Schedule B.
2. Grant of License.
2.1. Subject to the terms and provisions hereof, Licensor hereby grants
Licensee and Licensee hereby accepts the License. Licensor shall neither use
nor authorize third parties to use the Trademark in connection with the
manufacture, sale and/or importation of Licensed Products in the Territory
during the term of this Agreement without Licensee's prior approval. To the
extent it is legally permissible to do so, no license is granted hereunder
for the manufacture, sale or distribution of Licensed Products to be used for
publicity purposes, other than publicity of Licensed Products, in combination
sales, as premiums or giveaways, or to be disposed of under or in connection
with similar methods of merchandising.
2.2. It is understood and agreed that the License applies solely to the use
of the Trademark on the Licensed Products, and that no rights are granted by
Licensor hereunder with respect to the use of: (i) any trademark of Licensor
or of any of Licensor's affiliates (including any trademark that uses "Polo"
or the name "Ralph Lauren") other than the Trademark, on or in connection with
any product (including, without limitation, jeanswear), or (ii) the use of the
Trademark on any products other than Licensed Products.
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<PAGE>
Licensor reserves the right to use, and to grant to any other licensee the
right to use, the Trademark, whether within or outside the Territory, in
connection with any and all products and services, other than Licensed
Products within the Territory. Notwithstanding the foregoing, Licensor
shall not itself use or license the right to use any "Polo" or "Ralph Lauren"
trademark, other than its "CHAPS" trademarks and derivatives thereof, in
connection with men's denim jean pants or shorts or women's denim jean pants
or shorts ("Denim Bottoms"); provided, however, that (i) Licensor or its
affiliates (but not an unaffiliated, licensed third party) shall be entitled
to include Denim Bottoms within Licensor's various "Polo" and "Ralph Lauren"
lines so long as the wholesale prices of such Denim Bottoms are at least
[OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]
higher than the wholesale prices of the Denim Bottoms generally applied to the
most comparable Licensed Products and (ii) Licensor and its affiliates shall
also be entitled to continue to develop its "cutup" program of Denim Bottoms
for Polo/Ralph Lauren outlet stores. Licensor shall be entitled to continue
to include Denim Bottoms within Licensor's "RRL" line of products at the
suggested retail price structure (or higher) at which such Denim Bottoms are
currently offered. In the event that Licensor, during the term hereof, opens
directly or indirectly one or more "Vertical RRL Stores" (as hereinafter
defined) and desires to offer at such Vertical RRL Stores Denim Bottoms
bearing the RRL mark at suggested retail prices below the prices at which
such Denim Bottoms were generally offered prior to the effective date of this
Agreement ("RRL Denim Bottoms"), Licensee shall have the right to act, during
the term hereof, as the exclusive licensee of the RRL mark in connection with
RRL Denim Bottoms for the purpose of supplying RRL Denim Bottoms, at wholesale,
to such RRL Vertical Stores; provided, however, that (a) Licensee shall
manufacture such RRL Denim Bottoms in accordance with all of Licensor's design
and construction specifications and on commercially competitive wholesale
prices and terms, which prices shall be no less than the wholesale prices of,
and which terms shall be no less favorable than the terms for, any comparable
Licensed Products,(b) the suggested retail price of such RRL Denim Bottoms
shall be at least [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND
EXCHANGE COMMISSION] above the suggested retail price of the most comparable
Licensed Products, (c) all sales of such RRL Denim Bottoms shall fall within
the definition of Net Sales Price for the purpose of calculating Licensor's
royalties on such sales pursuant to paragraph 6.2; provided, however, that the
royalty rate applicable to sales of RRL Denim Bottoms shall be 7% of the Net
Sales Price thereof, which amount shall be paid, in accordance with the terms
hereof, to Licensor or such other entity or entities as Licensor may designate
and (d) sales of RRL Denim Bottoms shall not be included within the definition
of Net Sales Price with respect to the calculations to be performed under
paragraph 4.6 hereof or paragraph 2 of Schedule C hereof. The term "Vertical
RRL Stores" shall mean any stores or shops doing business under a service mark
or tradename incorporating the RRL trademark,
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<PAGE>
the principal focus of which is the sale of
products bearing the RRL trademark, and in which Licensor or any of its
affiliates owns, directly or indirectly, an equity interest in excess of 25%.
Licensee understands and agrees that Licensor may itself manufacture or
authorize third parties to manufacture in the Territory, Licensed Products
but solely for ultimate sale outside of the Territory. Subject to the terms of
paragraph 17.4 hereof, Licensee may manufacture or cause to be manufactured the
Licensed Products outside of the Territory, but solely for purposes of sale
within the Territory pursuant to the terms of this Agreement.
2.3. Licensee shall not have the right to use Licensee's name on or in
connection with the Licensed Products, except with the prior approval by
Licensor of the use and placement of Licensee's name. Licensee shall, at the
option of Licensor, include on its business materials and/or the Licensed
Products an indication of the relationship of the parties hereto in a form
approved by Licensor.
2.4. Licensee shall not use or permit or authorize another person or entity
in its control to use the words "Polo" or "Ralph Lauren" as part of a
corporate name or tradename without the express written consent of Licensor
and Licensee shall not permit or authorize use of the Trademark in such a way
so as to give the impression that the name "Ralph Lauren," or the Trademark,
or any modifications thereof, are the property of Licensee.
2.5. Licensee (and its affiliates) shall not, directly or indirectly, by
license or otherwise, sell, advertise or promote the sale of during the term
of this Agreement any items which are comparable and/or competitive with
Licensed Products and which bear the name of any fashion apparel designer
other than Todd Oldham or Robert Stock. The foregoing shall not restrict
Licensee's right to act solely as the manufacturer, contractor or supplier of
or for merchandise comparable and/or competitive with Licensed Products to or
for any third party; provided, however, that Licensee shall not during the
term hereof, directly or indirectly, act as a manufacturer, contractor or
supplier of or for merchandise comparable or competitive with Licensed
Products bearing or associated with the following names: Tommy Hilfiger,
Nautica, Calvin Klein, Donna Karan or Armani.
2.6. Licensor represents and warrants that it has full right, power and
authority to enter into this Agreement, to perform all of its obligations
hereunder, and to consummate all of the transactions contemplated herein and
further that it is not aware of any claim or proceedings which would prevent
it from performing its obligations hereunder. In the event that Licensee or
Licensor is charged with infringement on account of Licensee's use of the
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<PAGE>
Trademark and, as a result, Licensor determines that the use by Licensee of
the Trademark should be discontinued upon reasonable written notice to
Licensee, this license under the Trademark shall be converted to a license
under another "Ralph Lauren" trademark or label; in such event Licensee shall
have the right to (i) accept the exclusive license to use such "Ralph Lauren"
trademark in connection with the manufacture and sale of Licensed Products in
the Territory subject to all other terms of this Agreement or (ii) terminate
this Agreement. In either such event, Licensee shall immediately advise
Licensor of its inventory of Licensed Products labelled with the Trademark
and of its stock of business materials bearing the Trademark and Licensor
shall, in its sole discretion and judgment, determine whether and to what
extent such inventory and materials of Licensee may continue to be used by
Licensee.
2.7. Licensee shall not purport to grant any right, permission or license
hereunder to any third party, whether at common law or otherwise. Licensee
shall not without Licensor's prior written approval sell any Licensed Products
bearing the Trademark to any third party which Licensee knows or should have
reason to know, directly or indirectly, sells or proposes to sell such
Licensed Products outside the Territory. Licensee shall use its commercially
reasonable efforts to prevent any such resale outside the Territory and shall,
immediately upon learning or receiving notice from Licensor that a customer is
selling Licensed Products outside the Territory, cease all sales and
deliveries to such customer.
2.8. Each of Licensee and Licensor recognizes that there are many
uncertainties in the business contemplated by this Agreement. Each of
Licensee and Licensor agrees and acknowledges that other than those
representations, warranties and guaranties explicitly contained in this
Agreement, if any, no representations, warranties or guarantees of any kind
have been made to either party by the other party, or by such other party's
affiliates, or by anyone acting on their behalf. Without limitation, no
representations concerning the value of the Licensed Products or the
prospects for the level of their sales or prof its have been made and each of
Licensee and Licensor has made its own independent business evaluation in
deciding to enter into this License Agreement and conduct the business
contemplated herein.
2.9. Licensee represents and warrants that it has full right, power and
authority to enter this Agreement, to perform all of its obligations
hereunder, and to consummate all of the transactions contemplated herein and
further that it is not aware of any claim or proceeding which would prevent
it from performing its obligations hereunder.
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<PAGE>
2.10. In the event during the term hereof Licensor acquires the right and
desires to license a third party to use the Trademark in the Territory in
connection with the manufacture or sale of women's denim pants (and such
related products as Licensor, in its sole discretion, may designate),
Licensor shall, provided that Licensee is not in default of any of its
obligations hereunder and this Agreement is in full force and effect, give
Licensee notice of the terms upon which it proposes to grant a license with
respect to the Trademark for such products. Upon receipt of such notice,
Licensee shall have thirty (30) days during which it may propose modified
terms to Licensor, and the terms initially proposed by Licensor, together
with such modifications proposed by Licensee as Licensor may, in its sole
discretion, agree to during such thirty-day period, shall, upon the expiration
of such thirty-day period, be deemed the "Final Offer Terms". Licensee shall
have a period of fifteen (15) days after the expiration such thirty-day period
to accept or reject the Final Offer Terms in writing. If Licensee rejects the
Final Offer Terms or if Licensee initially accepts the Final offer Terms but
thereafter is unable to satisfy the Final offer Terms, then Licensor shall be
free to make a substantially similar offer to any third party and, if such
offer is accepted within twelve (12) months after the fifteen (15) day period
set forth above ("Timely Third Party Acceptance"), Licensee shall have no
further rights pursuant to this paragraph 2.10. If, prior to any Timely Third
Party Acceptance, Licensor shall substantially change the Final Offer Terms,
or if Licensor does not receive a Timely Third Party Acceptance, then, during
the term hereof, Licensee's rights as provided hereinabove shall apply to such
changed terms or any subsequent proposed grant of rights by Licensor pursuant
to this paragraph 2.10.
3. Design Standards and Prestige of Licensed Products.
3.1. Licensee acknowledges that it has entered into a design services
agreement ("Design Agreement"), of even date herewith, with Polo Ralph
Lauren Enterprises, L.P. (the "Design Partnership"), which provides for the
furnishing to Licensee by the Design Partnership of design concepts and other
professional services so as to enable Licensee to manufacture or cause to be
manufactured the Licensed Products in conformity with the established prestige
and goodwill of the Trademark. Licensee shall manufacture, or cause to be
manufactured, and sell only such Licensed Products as are made in accordance
with the design and other information approved under, and in all other
respects in strict conformity with the terms of, the Design Agreement.
3.2. Licensee acknowledges that the Ralph Lauren trademarks have
established prestige and goodwill and are well recognized in the minds
of the public, and that it is of great importance to each
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<PAGE>
party that in the manufacture and sale of various lines of Licensor's products,
including the Licensed Products, the high standards and reputation that
Licensor and Ralph Lauren have established be maintained. Accordingly, all
items of Licensed Products manufactured or caused to be manufactured by
Licensee hereunder shall be of high quality workmanship with strict adherence
to all details and characteristics embodied in the designs furnished pursuant
to the Design Agreement. Licensee shall supply Licensor with samples of the
Licensed Products (including, if Licensor so requests, samples of labeling and
packaging used in connection therewith) prior to production and from time to
time during production, and shall, at all times during the term hereof, upon
Licensor's request, make its manufacturing facilities available to Licensor,
and shall use its commercially reasonable efforts to make available each
subcontractor's manufacturing facilities for inspection by Licensor's
representatives during usual working hours, which efforts shall include,
without limitation, not placing future orders for Licensed Products with
any subcontractor who fails to make such facilities available for inspection
by Licensor's representatives.
3.3. In the event that any Licensed Product is, in the reasonable judgment
of Licensor, not being manufactured, distributed or sold with first quality
workmanship or in strict adherence to all details and characteristics
furnished pursuant to the Design Agreement, Licensor shall notify Licensee
thereof in writing and Licensee shall promptly repair or change such Licensed
Product to conform thereto. If a Licensed Product as repaired or changed does
not strictly conform after Licensor's request and such strict conformity
cannot be obtained after at least one (1) resubmission, or if Licensee
determines that a Licensed Product does not strictly conform, the Trademark
shall be promptly removed from the item, at the option of Licensor, in which
event the item may be sold by Licensee, provided (a) such miscut or damaged
item does not contain any labels or other identification bearing the Trademark
without Licensor's prior approval and (b) further provided that Licensor agrees
Licensee will be permitted to sell Licensed Products as irregulars and seconds
bearing the Trademark, so long as such products are clearly labelled as such
in a manner reasonably approved by Licensor, are distributed in channels and
to outlets approved by Licensor, and are produced only as by-products of the
manufacture of first quality goods and only in reasonable quantities.
Notwithstanding anything in this paragraph 3.3 to the contrary, Licensee's
sales of all products of Licensor's or the Design Partnership's design,
whether or not bearing the Trademark, shall nonetheless be subject to
royalty payments pursuant to paragraph 6 hereof.
3.4. At the request of Licensor, Licensee shall cause to be
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placed on all Licensed Products appropriate notice in accordance with
applicable law designating Licensor or the Design Partnership as the copyright
or design patent owner thereof, as the case may be. The manner of
presentation of said notices shall be determined by Licensor.
3.5. Licensee agrees to maintain sound and ethical business practices and
to promptly pay in accordance with the purchase terms therefor all amounts
due for any Licensed Products or materials, trim, fabrics, packaging or
services relating to Licensed Products purchased by Licensee from Licensor
or any agent or licensee of Licensor or any other supplier of such items,
all subject to good faith errors or disputes.
4. Marketing.
4.1. Except as set forth in paragraph 4.11 hereof, the distribution of
the Licensed Products in the Territory shall be performed by Licensee
exclusively. The Licensed Products shall be sold by Licensee only to
those specialty shops, department stores and other retail outlets which
deal in products similar in quality and prestige to products bearing Ralph
Lauren trademarks other than the Trademark, whose operations are consistent
with the quality and prestige of such trademarks and only to those customers
expressly approved by Licensor. Whenever Licensee wishes to sell Licensed
Products to a customer not previously approved by Licensor, Licensee shall
submit a written list of its proposed customers to Licensor for Licensor's
approval, which shall be given or withheld in Licensor's discretion based on
whether the proposed customer shall enhance or not be inconsistent with the
quality and prestige of the Trademark and the distribution channels therefor.
Licensor shall have the right to withdraw its approval of a customer based on
its evaluation of the criteria set forth in the preceding sentence, subject
to orders for Licensed Products already accepted by Licensee. Licensee shall
take such steps as may be reasonably necessary, including the implementation
of an inventory marking system, to avoid any negative impact on the
reputation and desirability of Licensor's products as a result of the
unauthorized resale of Licensed Products through unauthorized distribution
channels. Licensee shall not market or promote or seek customers for the
Licensed Products outside of the Territory and Licensee shall not establish
a branch, wholly owned subsidiary, distribution or warehouse with inventories
of Licensed Products outside of the Territory; provided that upon prior
written notice to Licensor, Licensee may directly or through a controlled
affiliate own and operate a warehouse in Mexico for the purpose of storing
and/or shipping Licensed Products to be distributed in the Territory.
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4.2. Licensee acknowledges that in order to preserve the good will attached
to the Trademark, the Licensed Products are to be sold at prices and terms
reflecting the prestigious nature of the Trademark, it being understood,
however, that Licensor is not empowered to fix or regulate the prices at
which the Licensed Products are to be sold, either at the wholesale or
retail level.
4.3. Licensee shall maintain the high standards of the Trademark and the
Licensed Products, in all advertising, packaging and promotion of the
Licensed Products. Licensee shall not employ or otherwise release any of
such advertising or packaging or other business materials relating to any
Licensed Products or bearing the Trademark, unless and until Licensee shall
have made a request, in writing, for approval by Licensor. As promptly as
practicable, Licensor may, with respect to any advertising, packaging or
business materials submitted by Licensee, make such suggestions as Licensor
deems necessary or appropriate, or disapprove, in either event by notice to
Licensee. Any approval granted hereunder shall be limited to use during the
seasonal collection of Licensed Products to which such advertising relates
and shall be further limited to the use (e.g. TV or print) for which approval
by Licensor was granted. Licensee shall, at the option of Licensor, include
on its business materials an indication of the relationship of the parties
hereto in a form approved by Licensor.
4.4. Licensee shall use its commercially reasonable efforts to assure
that all cooperative advertising, whereby Licensee provides a customer with
a contribution toward the cost of an advertisement for Licensed Products,
whether Licensee's contribution be in the form of an actual monetary
contribution, a credit or otherwise, shall be subject to prior approval of
Licensor under the same terms and conditions as apply to advertising and
promotional materials prepared by or to be used by Licensee pursuant to
paragraph 4.3 hereof; provided, however, that in the event that Licensee is
not as a matter of practice given an opportunity to review the cooperative
advertising due to time constraints, then Licensee shall notify Licensor,
in advance, of those customers with whom it does cooperative Licensed Product
advertising and/or promotion, and Licensee at Licensor's request shall notify
the named customer of the terms of this Agreement which pertain to the said
advertising or promotional materials.
4.5. Licensee, in connection with the conduct of its business hereunder,
shall exercise its best efforts to safeguard the established prestige and
goodwill of the names "Polo" and "Ralph Lauren," and the Ralph Lauren image,
at the same level of prestige and goodwill as heretofore maintained.
"Image" as used herein refers primarily to quality and style of packaging,
advertising and promotion, creation and introduction of new products, type of
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outlets with reference to quality of service provided by retail outlets and
quality of presentation of Licensed Products in retail outlets. Licensee
shall take all necessary steps, and all steps reasonably requested by
Licensor, to prevent or avoid any misuse of the Trademark by any of its
customers, contractors or other resources.
4.6. During each year of this Agreement, Licensee shall expend for the
production and placement of national institutional and media advertising of
Licensed Products ("Institutional Advertising"), an amount that is not less
than the "Annual Advertising obligation", as hereinafter defined, for such
year. Licensor shall consult in advance with Licensee regarding the creation,
production and placement of Institutional Advertising, but all final decisions
with respect thereto shall be made by Licensor in its sole discretion. The
"Annual Advertising obligation" for each year during the term hereof shall be
[OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]
of the aggregate Net Sales Price of Licensed Products sold during such year,
but the Annual Advertising Obligation for the period from the date hereof to
December 31, 1997 shall be not less than [OMITTED; MATERIAL FILED SEPARATELY
WITH SECURITIES AND EXCHANGE COMMISSION], of which approximately [OMITTED;
MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION] is
intended to be spent during calendar year 1996. Licensee shall deliver to
Licensor within sixty (60) days after the end of each year hereof an
accounting statement in respect of amounts expended by Licensee on
Institutional Advertising for the prior year. Each such accounting statement
shall be signed, and certified as correct, by a duly authorized officer of
Licensee. Prior to each year hereof, Licensee shall submit Licensee's
advertising budget for the upcoming year, based on the aggregate Net Sales
Price of Licensed Products during the year then ending and on sales projected
for the upcoming year. Only actual advertising costs and expenses charged to
Licensee or Licensor in connection with the advertising of Licensed Products
under the Trademark shall be charged to Licensee's advertising budget
hereunder, and Licensor shall make available to Licensee or credit to
Licensee's budget any volume discounts for the advertising of Licensed
Products Licensor is able to achieve as a result of the advertising of
Licensed Products and other advertising placed by or for Licensor and/or
its other licensees. The Annual Advertising Obligation for such upcoming
year will initially be calculated and expended based upon such budget. If in
any year during the term hereof an amount less than the Annual Advertising
Obligation is expended on Institutional Advertising for any reason whatsoever
(including an underestimate of the actual Net Sales Price for such year or
because the actual cost of Institutional Advertising, if any, produced and
placed during such year is less than the Annual Advertising Obligation), the
entire amount not expended shall be added to the Annual Advertising
obligation for the following year.
4.7. During the term of this Agreement, Licensee shall, in
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consultation with Licensor, provide a budget for the design, construction,
re-fits and seasonal changeovers of in-store shops and fixtures to be used
exclusively for the presentation of Licensed Products, the design of which
shall be subject to Licensor's prior approval. Licensee's budget for such
purposes shall be adequate to present Licensed Products in a manner consistent
with the high quality and prestige associated with Licensor's trademarks and
the price structure of the Licensed Products.
4.8. To the extent permitted by applicable law Licensor may from time to
time, and in writing, promulgate reasonable and nondiscriminatory rules and
regulations to Licensee relating to the manner of use of the Trademark.
Licensee shall comply with such rules and regulations. Any such rules or
regulations shall not be inconsistent with or derogate from Licensee's
rights under this Agreement.
4.9. Licensee agrees to make available for purchase and to sell on its
customary price, credit and payment terms (subject to paragraph 4.11 hereof)
all lines and styles of Licensed Products to retail stores in the Territory
bearing a trademark of Licensor or its affiliates which are authorized to sell
the Licensed Products within such retail stores. Notwithstanding anything to
the contrary contained herein, to the extent that any such Licensed Products
are not so made available by Licensee to such stores, such Licensed Products
may be made available to such stores by Licensor (or its affiliates or other
licensees).
4.10. In consideration of the License granted herein, in the event Licensor
elects to offer Licensed Products for sale in mailorder catalogs or "vertical
retail stores of Licensor or its affiliates" (as hereinafter defined),
Licensee shall sell and timely ship Licensed Products to Licensor or its
affiliate for such purposes at a price equal to [OMITTED; MATERIAL FILED
SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION] less than the regular
wholesale price therefor. All such sales shall be separately reported by
Licensee in its accounting statements pursuant to paragraph 6.2 hereof, and
such sales shall not be subject to the royalty or advertising obligations set
forth herein, or to the compensation obligations set forth in the Design
Agreement, but such sales shall be included within the definition of Net
Sales Price for all purposes under paragraph 2 of Schedule C to this Agreement.
The term "vertical retail stores of Licensor or its affiliates" shall mean a
store or shop doing business under a service mark or tradename substantially
similar to the Trademark, the principal focus of which is the sale of products
bearing the Trademark, and in which Licensor or any of its affiliates owns,
directly or indirectly, an equity interest in excess of 25%.
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4.11. Licensor shall respond to any requests for approvals or consents from
Licensee hereunder as promptly as reasonably practicable consistent with the
level of review required.
5. Trademark Protection.
5.1. All uses of the Trademark by Licensee, including, without limitation,
use in any business documents, invoices, stationery, advertising, promotions,
labels, packaging and otherwise shall require Licensor's prior written consent
in accordance with paragraph 4 hereof.
5.2. All uses of the Trademark by Licensee in advertising, promotions,
labels and packaging shall include, at Licensor's option, a notice to the
effect that the Trademark is used by Licensee for the account and benefit
of Licensor or that Licensee is a registered user thereof or both such
statements. The use of the Trademark pursuant to this Agreement shall be for
the benefit of Licensor and shall not vest in Licensee any title to or right
or presumptive right to continue such use. For the purposes of trademark
registration, sales by Licensee shall be deemed to have been made by Licensor.
5.3. Licensee shall cooperate fully and in good faith with Licensor for the
purpose of securing and preserving Licensor's rights in and to the Trademark.
Nothing contained in this Agreement shall be construed as an assignment or
grant to Licensee of any right, title or interest in or to the Trademark, or
any of Licensor's other trademarks, it being understood that all rights
relating thereto are reserved by Licensor, except for the License hereunder
to Licensee of the right to use the Trademark only as specifically and
expressly provided herein. Licensee shall not file or prosecute a trademark
or service mark application or applications to register the Trademark, for
Licensed Products or otherwise.
5.4. Licensee shall not, during the term of this Agreement or thereafter,
(a) attack Licensor's title or rights in or to any Ralph Lauren trademarks
in any jurisdiction or attack the validity of this License or the Ralph Lauren
trademarks or (b) contest the fact that Licensee's rights under this Agreement
(i) are solely those of a licensee, manufacturer and distributor and (ii)
subject to the provisions of paragraph 10 hereof, cease upon termination
of this Agreement. The provisions of this paragraph 5.4 shall survive the
termination of this Agreement.
5.5. Subject to the provisions of paragraph 2.7 of the Design
Agreement, all right, title and interest in and to all samples,
patterns, sketches, designs, artwork, logos and other materials
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furnished by or to Licensor or the Design Partnership, whether
created by Licensor, the Design Partnership or Licensee, are hereby
assigned in perpetuity to, and shall be the sole property of, Licensor and/or
the Design Partnership, as the case may be. Licensee shall assist Licensor to
the extent necessary in the protection of or the procurement of any protection
of Licensor's rights to the Trademark, designs, design patents and copyrights
furnished hereunder and Licensor, if Licensor so desires, may commence or
prosecute any claims or suits in Licensor's own name or in the name of
Licensee or join Licensee as a party thereto. Licensee shall promptly notify
Licensor in writing of any uses which may be infringements or imitations by
others of the Trademark on articles similar to those covered by this Agreement
which may come to Licensee's attention. Licensor shall have the sole right to
determine whether or not any action shall be taken on account of any such
infringements or imitations. Licensor shall bear one hundred percent (100%)
of the costs of all actions or proceedings it undertakes, and shall be
entitled to all recoveries in such actions. If Licensor declines to take
action with respect to a particular infringer Licensee is not obligated to but
may, with Licensor's prior written consent, undertake such action at
Licensee's expense, and all recoveries in such actions shall first be applied
to reimbursement of Licensee's actual legal and investigative fees, and then
divided equally between Licensor and Licensee.
6. Royalties.
6.1. Commencing with the First Renewal Term (as hereinafter defined in
Schedule C), if the term hereof is extended beyond the Initial Term (as
hereinafter defined in paragraph 8), Licensee shall thereafter pay to
Licensor minimum royalties for each year during the term of this Agreement
as compensation for the License granted hereunder for the use of the Trademark
in the manufacture and sale, and/or importation and sale, of Licensed Products
in the Territory. The minimum royalty for each year commencing with the First
Renewal Term shall be an amount equal to [OMITTED; MATERIAL FILED SEPARATELY
WITH SECURITIES AND EXCHANGE COMMISSION] of the actual earned royalties due
for the immediately preceding year; provided, however, that the minimum
royalty obligation for each year of the First Renewal Term shall in no event
be less than [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE
COMMISSION]; for each year of the Second Renewal Term no less than [OMITTED;
MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]; for each
year of the Third -Renewal Term no less than [OMITTED; MATERIAL FILED
SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]; for each year of the
Forth Renewal Term no less than [OMITTED; MATERIAL FILED SEPARATELY WITH
SECURITIES AND EXCHANGE COMMISSION]; for each year of the Fifth Renewal Term
no less than [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE
COMMISSION]; and for each year of the Sixth Renewal Term no less than
[OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]
(each such Term as defined in Schedule C). Minimum royalties for each year
shall be paid on a quarterly basis, within thirty (30) days after the end
of each quarter during the term hereof, commencing with the first quarter
of the First Renewal Term. No
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credit shall be permitted against minimum royalties payable for any year on
account of actual or minimum royalties paid for any other year, and minimum
royalties shall not be returnable. For the purposes of this Agreement, the
term "year" shall mean a period of twelve (12) months commencing on each
January 1 during the term of this Agreement; provided, however, that the
term "first year" shall mean the 17-month period commencing
on August 1, 1995 and ending on December 31, 1996.
6.2. Licensee shall pay to Licensor earned royalties based on the Net Sales
Price of all Licensed Products manufactured or imported and sold by Licensee
hereunder. Earned royalties shall [OMITTED; MATERIAL FILED SEPARATELY WITH
SECURITIES AND EXCHANGE COMMISSION] of the Net Sales Price of all Licensed
Products sold under this Agreement, including, without limitation, any sales
made pursuant to the terms of paragraphs 3.2, 3.3 and 10.2 hereof. Licensee
shall prepare or cause to be prepared statements containing the information
set forth in paragraph 7.1 hereof for the period commencing on the date
hereof and ending on March 31, 1996 and for each quarter ending the last day
of March, June, September and December in each year hereof, which shall be
furnished to Licensor together with the earned royalties due for each such
quarter (less minimum royalties, when applicable, paid for such quarter)
within thirty (30) days after the end of each such quarter. The term "Net
Sales Price" shall mean the gross sales price to retailers of all Licensed
Products sold under this Agreement or, with respect to Licensed Products that
are not sold directly or indirectly to retailers, other ultimate consumers (as
in the case of accommodation sales by Licensee to its employees or sales by
Licensee in its own shops), less trade discounts, merchandise returns, sales
tax (if separately identified and charged) and markdowns and/or chargebacks
which, in accordance with generally accepted accounting principles, would
normally be treated as deductions from gross sales, and which, in any event,
do not include any chargebacks or the like for advertising, fixture or retail
shop costs or contributions. Notwithstanding the foregoing, Licensor hereby
waives its right to (i) receive royalties hereunder for, or (ii) include
within the calculation of Net Sales Price for the purpose of calculating the
Annual Advertising Obligation as set forth in paragraph 4.6 hereof, sales of
units of Licensed Products sold at a discount of [OMITTED; MATERIAL FILED
SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION] or more off the regular
wholesale price ("Discounted Units"), provided that such waiver shall only
apply to the extent that the aggregate Net Sales Price of Discounted Units
for any year does not exceed [OMITTED; MATERIAL FILED SEPARATELY WITH
SECURITIES AND EXCHANGE COMMISSION] of the Net Sales Price of all units of
Licensed Products other than Discounted Units sold in such year. No other
deductions shall be taken. Any merchandise returns shall be credited in
the quarter in which the returns are actually made. For purposes of this
Agreement, affiliates of Licensee shall mean all persons and business
entities, whether corporations, partnerships, joint ventures or otherwise,
which now or hereafter
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control, or are owned or controlled, directly or indirectly by Licensee, or
are under common control with Licensee. It is the intention of the parties
that royalties will be based on the bona fide wholesale prices at which
Licensee sells Licensed Products to independent retailers in arms' length
transactions. In the event Licensee shall sell Licensed Products to its
affiliates, royalties shall be calculated on the basis of such a bona fide
wholesale price irrespective of Licensee's internal accounting treatment of
such sale unless such products are sold by its affiliates directly to the
end-user consumer, in which case royalties shall be calculated on the basis
of the price paid by the end-user consumer, less applicable taxes. Licensee
shall identify separately in the statements provided to Licensor pursuant to
paragraph 7 hereof, all sales to affiliates. At least once annually and no
later than 90 days after the close of Licensee's fiscal year, Licensee shall
furnish to Licensor a statement of the Net Sales Price of all Licensed
Products sold during the year just ended, which shall be certified by the
independent auditor for Licensee as correct and in accordance with the terms
of this Agreement.
6.3. If the payment of any installment of royalties is delayed for any
reason, interest shall accrue on the unpaid principal amount of such
installment from and after the date which is 10 days after the date the
same became due pursuant to paragraphs 6.1 or 6.2 hereof at the lower of
the highest rate permitted by law in New York and 2% per annum above the
prime rate of interest in effect from time to time at Chemical Bank, New
York, New York or any successor bank.
6.4. The obligation of Licensee to pay royalties hereunder shall be
absolute notwithstanding any claim which Licensee may assert against
Licensor or the Design Partnership. Licensee shall not have the right
to set-off, compensate itself or any third party, or make any deduction
from such royalty payments for any reason whatsoever.
7. Accounting.
7.1. Licensee shall at all times keep an accurate account of all
operations within the scope of this Agreement. Licensee shall render a
full statement in writing to Licensor in accordance with paragraph 6.2
hereof, which shall account separately for each different product category
and shall include all aggregate gross sales, trade discounts, merchandise
returns, sales tax, markdowns, chargebacks, unit sales, sales of Discounted
Units, sales of miscuts and damaged merchandise and net sales price of all
sales for the previous quarter. Such statements shall be in sufficient
detail to be audited from the books of Licensee. Once annually, which may
be in connection with the regular annual audit of
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Licensee's books, Licensee shall furnish an annual statement of the aggregate
gross sales, trade discounts, merchandise returns and Net Sales Price of all
Licensed Products made or sold by Licensee certified by Licensee's independent
accountant. Each quarterly statement furnished by Licensee shall be certified
by the chief financial officer of Licensee.
7.2. Licensor and its duly authorized representatives, on reasonable notice,
shall have the right, no more than once in each year during regular business
hours, for the duration of the term of this Agreement and for three (3) years
thereafter, to examine the books of account and records and all other
documents, materials and inventory in the possession or under the control of
Licensee and its successors with respect to the statements required, and
Licensee's obligations, hereunder. All such books of account, records and
documents shall be maintained and kept available by Licensee for at least the
duration of this Agreement and for three (3) years thereafter. Licensor shall
have free and full access thereto in the manner set forth above and shall
have the right to make copies and/or extracts therefrom. If as a result of
any examination of Licensee's books and records it is shown that Licensee's
payments to Licensor hereunder with respect to any twelve (12) month period
were less than or greater than the amount which should have been paid to
Licensor by an amount equal to two percent (2%) of the amount which should
have been paid during such twelve (12) month period, Licensee will, in
addition to reimbursement of any underpayment, with interest from the date
on which each payment was due at the rate set forth in paragraph 6.3 hereof,
promptly reimburse Licensor for the cost of such examination. Licensor shall
reimburse Licensee for any overpayment of royalties it discovers during such
examination, after deducting from the amount of such overpayment all costs and
expenses incurred in connection with such examination.
7.3. With respect to each notice Licensee may give to Licensor that it is
exercising an option for a Renewal Term pursuant to paragraph 2 of Schedule
C to this Agreement, Licensee shall provide to Licensor, simultaneously with
such notice, a profit and loss statement, statement of cash flows and
balance sheet covering Licensee's most recent fiscal year ("Financial
Statement"), each of which shall be certified by the independent auditor
for Licensee. In addition, if the term hereof remains in effect on April 1,
2010, Licensee shall provide Licensor on such date with Financial Statements
covering Licensee's last three fiscal years, and thereafter with such updated
and additional information and documentation as Licensor may reasonably
request in considering whether to exercise the Buyout Option set forth in
paragraph 4 of Schedule C to this Agreement. All Financial Statements
required to be furnished herein shall be prepared in
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accordance with generally accepted accounting principles and any officer's
certificate relative thereto shall state that such statements are true,
complete and correct in all material respects and present fairly the financial
position of Licensee as of the respective date of the balance sheets and the
results of operations for the respective periods covered.
8. Term.
The initial term of this Agreement shall commence as of the date hereof and
shall terminate on December 31, 2000 (the "Initial Term"). In addition,
Licensee and Licensor shall have the respective option rights relating to the
term set forth in Schedule C to this Agreement. It is expressly understood
that only the company (which may be Licensee) whose licensed term covers the
period subsequent to the expiration of this Agreement shall be entitled to
receive designs for Licensed Products intended to be sold after the expiration
of this Agreement, and to make presentations of such Licensed Products during
the market presentation weeks that relate to such subsequent period, even if
such market presentation occurs prior to the termination of this Agreement.
Without limiting the generality of the foregoing, in the event the term
hereof is not renewed or extended, the last season for which Licensee shall
be entitled to receive designs and, during the term hereof, to manufacture
and sell Licensed Products shall be the Cruise/Holiday season of the final
year of either the Initial Term or the relevant Renewal Term (the "Final
Season"), and Licensor shall be entitled to undertake, directly or through
a successor licensee, all activities associated with the design, manufacture
and sale Licensed Products commencing with the season immediately following
the Final Season.
9. Default; Change of Control.
9.1. Each of the following shall constitute an event of default ("Event of
Default") hereunder:
(i) Any installment of royalty payments is not paid when due and such
default continues for more than fifteen (15) days after written notice
thereof to Licensee;
(ii) Licensee shall fail to timely present for sale to the trade a
broadly representative and fair collection of each seasonal collection of
Licensed Products designed by the Design Partnership under the Design
Agreement or Licensee shall fail to timely ship to its customers a material
portion of the orders of Licensed Products it has accepted, and in either
case such failure results in material injury to Licensee's or Licensor's
reputation or causes reasonable
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uncertainty regarding Licensee's ability to timely fulfill its obligations
in the future;
(iii) Licensee defaults in performing any of the other terms of this
Agreement and continues in such default for a period of thirty (30) days
after written notice thereof (unless the default cannot be cured within
such thirty (30) day period and Licensee shall have in good faith advised
Licensor that it has commenced to cure the default and thereafter diligently
cures such default within an additional forty-five (45) day period);
(iv) If Licensee shall knowingly use the Trademark in an unauthorized or
improper manner and/or if Licensee shall knowingly make an unauthorized
disclosure of confidential information or materials given or loaned to
Licensee by Licensor and/or the Design Partnership;
(v) Licensee institutes proceedings seeking relief under a bankruptcy
act or any similar law, or consents to entry of any order for relief against
it in any bankruptcy or insolvency proceeding or similar proceeding, or
files a petition for or consent or answer consenting to reorganization or
other relief under any bankruptcy act or other similar law, or consents to
the filing against it of any petition for the appointment of a receiver,
liquidator, assignee, trustee, custodian, sequestrator (or other similar
official) of it or of any substantial part of its property, or a proceeding
seeking such an appointment shall have been commenced without Licensee's
consent and shall continue undismissed for sixty (60) days or an order
providing for such an appointment shall have been entered, or makes an
assignment for the benefit of creditors, or admits in writing its inability
to pay its debts as they become due or fails to pay its debts as they become
due, or takes any action in furtherance of the foregoing;
(vi) Licensee transfers or agrees to transfer substantially all of its
property (other than as permitted in paragraph 17.4 hereof);
(vii) The voluntary calling of a meeting of creditors, or the voluntary
or involuntary appointment of a committee of creditors or liquidating agents,
or offering a composition or extension to creditors by, for or of Licensee;
(viii) There shall be a change in control of Licensee other than as
permitted in paragraph 17.4 hereof or Licensee shall dissolve liquidate or
wind-up its business;
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(ix) An event of default occurs under the Design, or any other license
agreement entered into between Licensor and Licensee or design agreement
between Licensee and the Design Partnership;
(x) Licensee shall fail to timely comply with the terms of paragraph 4
of Schedule C to this Agreement.
9.2. If any Event of Default described in paragraphs 9.1(i),(ii),(iii),(iv),
(viii),(ix), or (x) shall occur, Licensor shall have the right, exercisable
in its sole discretion, to terminate this Agreement and the License upon ten
(10) days' written notice to Licensee of its intention to do so, and upon the
expiration of such ten (10) day period, this Agreement and the License shall
terminate and come to an end. If the Event of Default described in paragraphs
9.1 (v),(vi) or (vii) shall occur, this Agreement and the License shall
thereupon forthwith terminate and come to an end without any need for notice
to Licensee. This Agreement will terminate automatically upon the expiration
or termination for any reason whatsoever of the Design Agreement. Any
termination of this Agreement shall be without prejudice to any remedy of
Licensor for the recovery of any monies then due it under this Agreement or in
respect to any antecedent breach of this Agreement, and without prejudice to
any other right of Licensor including, without limitation, damages for breach
to the extent that the same may be recoverable and Licensee agrees to
reimburse Licensor for any reasonable costs and expenses (including attorneys'
fees) incurred by Licensor in enforcing its rights hereunder. No assignee
for the benefit of creditors, receiver, liquidator, sequestrator, trustee in
bankruptcy, sheriff or any other officer of the court or official charged
with taking over custody of Licensee's assets or business shall have any
right to continue the performance of this Agreement.
10. Disposal of Stock Upon Termination or Expiration.
10.1. Within ten (10) days following the termination of this Agreement for
any reason whatsoever including the expiration of the term hereof, and on the
last day of each month during the disposal period set forth in paragraph 10.2
hereof, Licensee shall furnish to Licensor a certificate of Licensee listing
its inventories of Licensed Products (which defined term for purposes of this
paragraph 10.1 shall include finished Licensed Products and all fabrics, trim,
and packaging used in the manufacture and marketing of Licensed Products and
bearing the Trademark) on hand or in process wherever situated. Licensor shall
have the right to conduct a physical inventory of Licensed Products in
Licensee's possession or under Licensee's control. Licensor or Licensor's
designee shall have the option to purchase from Licensee all or any part of
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Licensee's then existing inventory of Licensed Products; provided, however,
that if (i) Licensee has exercised its option for a Third Renewal Term but
has not exercised its Extension Option (all as set forth in Schedule C
hereto) I and (ii) upon the expiration of the Third Renewal Term Licensor
does not offer Licensee the right to extend the term of this Agreement, then
Licensor shall have the obligation to purchase all of Licensee's then existing
inventories of Licensed Products upon the expiration of the Third Renewal Term.
Any purchase by Licensor of Licensee's inventory of Licensed Products
pursuant to this paragraph 10 shall be upon the following terms and
conditions:
(i) If the purchase is taking place at Licensor's option, Licensor shall
notify Licensee of its or its designee's intention to exercise the foregoing
option within thirty (30) days of delivery of the certificate referred to
above and shall specify the items of Licensed Products to be purchased.
Prior to and during such period of thirty (30) days Licensee shall be entitled
to continue distribution in the ordinary course subject to paragraph 10.2
hereof;
(ii) The price for Licensed Products manufactured by or on behalf of
Licensee on hand or in process shall be the lower of: (a) the fair market
value of the inventory to be purchased or (b) Licensee's standard cost
(the actual manufacturing cost) for each such Licensed Product. The "cost"
for all Licensed Products which are not manufactured by Licensee shall be
Licensee's landed costs therefor. Landed costs for the purposes hereof
means the F.O.B. price of the Licensed Products together with customs,
duties, brokerage charges, freight and insurance.
(iii) Licensee shall ship the Licensed Products to be purchased by
Licensor in "as is" condition within fifteen (15) days of receipt of the
notice referred to in clause (i) above (other than those products sold and
shipped between the date Licensee delivered the certificate of its
inventories and the date it received such notice from Licensor). Payment
of the purchase price for the Licensed Products so purchased by and shipped
to Licensor or its designee shall be payable upon shipment thereof; provided,
that Licensor shall be entitled to deduct from such purchase price any amounts
owed by Licensee to Licensor, the Design Partnership or their respective
affiliates (and/or to direct payment of any part of such merchandise to any
supplier of Licensed Products in order to reduce an outstanding balance due
to such supplier from Licensee). Licensor shall be responsible for the cost
of freight for shipment of the products to Licensor from Licensee's warehouse
facility in the United States of America.
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10.2. In the event that Licensee, pursuant to paragraph 10.1 hereof,
Licensee timely provides the certificate of inventory and Licensor chooses
not to exercise its option with respect to all or any portion of Licensed
Products, for a period of ninety (90) days after termination of this
Agreement for any reason whatsoever, except on account of breach of the
provisions of paragraph 3, 4 or 6 hereof, Licensee may dispose of Licensed
Products which are on hand or in the process of being manufactured at the
time of termination of this Agreement, provided that (i) Licensee fully
complies with the provisions of this Agreement, including specifically those
contained in paragraphs 3, 4 and 6 hereof in connection with such disposal,
and (ii) said disposal with respect to each shipment of Licensed Products
received by Licensee takes place within sixty (60) days after such shipment
is received; provided, however, that Licensee shall have no disposal rights
with respect to any Licensed Products it may receive more than 120 days
after the expiration or termination of this Agreement.
10.3. Notwithstanding anything to the contrary contained herein, in the
event that upon the expiration or termination of the term hereof for any
reason Licensee has not rendered to Licensor all accounting statements
then due, and paid (i) all royalties and other amounts then due to Licensor,
(ii) all compensation then due to the Design Partnership under the Design
Agreement and (iii) all amounts then due to any affiliate of or supplier to
Licensor or its affiliates (collectively, "Payments"), Licensee shall have
no right whatsoever to dispose of any inventory of Licensed Products in any
manner. In addition, if during any disposal period Licensee fails timely to
render any accounting statements, or certificates of inventory required
pursuant to paragraph 10.1 hereof, or to make all Payments when due,
Licensee's disposal rights hereunder shall immediately terminate without
notice.
11. Effect of Termination.
11.1. It is understood and agreed that except for the License to use the
Trademark only as specifically provided for in this Agreement, Licensee
shall have no right, title or interest in or to the Trademark. Upon and
after the termination of this License, all rights granted to Licensee
hereunder, together with any interest in and to the Trademark which
Licensee may acquire, shall forthwith and without further act or instrument
be assigned to and revert to Licensor. In addition, Licensee will execute
any instruments requested by Licensor which are necessary to accomplish or
confirm the foregoing. Any such assignment, transfer or conveyance shall
be without consideration other than the mutual agreements contained herein.
Licensor shall thereafter be free to license to others the right to use the
Trademark in connection with the manufacture and sale of the Licensed
Products covered hereby, and Licensee will
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refrain from further use of the Trademark or any further reference to them,
direct or indirect, or any other trademark, trade name or logo that is
confusingly similar to the Trademark, or associated with the Trademark in
any way, in connection with the manufacture, sale or distribution of
Licensee's products, except as specifically provided in paragraph 10 hereof.
It is expressly understood that under no circumstances shall Licensee be
entitled, directly or indirectly, to any form of compensation or indemnity
from Licensor, the Design Partnership or their affiliates, as a consequence
to the termination of this Agreement, whether as a result of the passage of
time, or as the result of any other cause of termination referred to in this
Agreement. Without limiting the generality of the foregoing, by its
execution of the present Agreement, Licensee hereby waives any claim which
it has or which it may have in the future against Licensor, the Design
Partnership or their affiliates, arising from any alleged goodwill created by
Licensee for the benefit of any or all of the said parties or from the alleged
creation or increase of a market for Licensed Products.
11.2. Licensee acknowledges and admits that there would be no adequate
remedy at law for its failure (except as otherwise provided in paragraph 10
hereof) to cease the manufacture or sale of the Licensed Products covered by
this Agreement at the termination of the License, and Licensee agrees that in
the event of such failure Licensor shall be entitled to equitable relief by
the way of temporary and permanent injunction and such other and further
relief as any court with jurisdiction may deem just and proper.
12. Showroom.
Licensee agrees to establish a separate showroom for the presentation and
sale of the Licensed Products and to maintain, operate, decorate and staff
the showroom in a manner consistent with that of the showrooms established
for the presentation and sale of Licensor's other products and with the price
structure of the Licensed Products. Licensor shall have a right of approval
with respect to the location, design, layout and decoration of the showroom
and all expenses incurred with respect to the design, construction, operation
and maintenance of such showroom shall be borne by Licensee. Licensor and
Licensee shall mutually agree to a budget for the construction of such
showroom. Licensee shall admit Licensor's employees to its showroom and
shall sell to such employees for their personal use (and not for resale)
such Licensed Products as any such employee may reasonably request, at
prices equal to the regular wholesale price less a discount equal to not
less than thirty percent (30%) of such regular wholesale price.
13. Indemnity.
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13.1. Licensor shall indemnify and hold harmless Licensee and its
affiliates, permitted assignees, directors, officers, agents and employees,
from and against any and all liability, claims, causes of action, suits,
damages and expenses (including reasonable attorneys' fees and expenses in
actions involving third parties or between the parties hereto) ("Claims")
which Licensee is or becomes liable for, or may incur solely by reason of
its use within the Territory, in strict accordance with the terms and
conditions of this Agreement and the Design Agreement, of the Trademark or
the designs furnished to Licensee by Licensor or the Design Partnership, to
the extent that any such Claims arise through infringement of another's
design patent, trademark, copyright or other proprietary rights; provided,
however, that Licensee gives Licensor prompt notice of, and full cooperation
in the defense against, all such Claims. If any action or proceeding shall be
brought or asserted against Licensee in respect of which indemnity may be
sought from Licensor under this paragraph 13.1, Licensee shall promptly
notify Licensor thereof in writing, and Licensor shall assume and direct
the defense thereof. Licensee may thereafter, at its own expense, be
represented by its own counsel in such action or proceeding.
13.2. To the extent not inconsistent with paragraph 13.1 hereof, Licensee
shall indemnify and save and hold Licensor, the Design Partnership, Polo
Ralph Lauren Corporation and Ralph Lauren, individually, and their assignees,
directors, officers, agents and employees, harmless from and against any and
all liability, claims, causes of action, suits, damages and expenses
(including reasonable attorneys' fees and expenses in actions involving
third parties or between the parties hereto), which they, or any of them,
are or become liable for, or may incur, or be compelled to pay by reason of
any acts, whether of omission or commission, that may be committed or suffered
by Licensee or any of its servants, agents or employees in connection with
Licensee's performance of this Agreement, including Licensee's use of
Licensee's own designs, in connection with Licensed Products manufactured
by or on behalf of Licensee or otherwise in connection with Licensee's
business. If any action or proceeding shall be brought or asserted against
Licensor in respect of which indemnity may be sought from Licensee under this
paragraph 13.2, Licensor shall promptly notify Licensee thereof in writing,
and Licensee shall assume and direct the defense thereof. Licensor may
thereafter, at its own expense, be represented by its own counsel in such
action or proceeding.
14. Insurance.
Licensee shall carry product liability insurance with limits of
liability in the minimum amount, in addition to defense costs, of
$3,000,000 per occurrence and $3,000,000 per person and
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Licensor, the Design Partnership, Polo Ralph Lauren Corporation and Ralph
Lauren, individually, shall be named therein as insureds, as their interests
may appear. The maximum deductible with respect to such insurance shall be
$100,000. Licensee shall, promptly after the signing of this Agreement,
deliver to Licensor a certificate of such insurance from the insurance
carrier, setting forth the scope of coverage and the limits of liability
and providing that the policy may not be canceled or amended without at
least thirty (30) days prior written notice to Licensor, the Design
Partnership, Polo Ralph Lauren Corporation and Ralph Lauren, individually.
15. Disclosure.
15.1. Licensor and Licensee, and their affiliates, employees, attorneys,
accountants and bankers shall hold in confidence and not use or disclose,
except as permitted by this Agreement, (i) confidential information of the
other or (ii) the terms of this Agreement, except upon consent of the other
or pursuant to, or as may be required by law, or in connection with regulatory
or administrative proceedings and only then with reasonable advance notice of
such disclosure to the other. Each of Licensee and Licensor shall take all
reasonable precautions to protect the secrecy of the material used pursuant
to this Agreement prior to the commercial distribution or the showing of
samples for sale, and Licensee shall not sell any merchandise employing or
adapted from any of said designs sketches, artwork, logos, and other
materials or their use except under the Trademark.
15.2. Licensee agrees that all press releases and other public announcements
related to Licensee's operations hereunder, shall be subject to approval by
Licensor, and that each request for a statement, release or other inquiry
shall be sent in writing to the advertising/publicity director of Licensor
for response.
16. Key Personnel.
16.1. At all times during the term hereof, Licensee shall employ a
divisional President, approved in advance by Licensor, whose sole
responsibility shall be to manage all of Licensee's operations pursuant
to this Agreement. Such individual shall report to the President of Licensee.
16.2. At all times during the term hereof, Licensee shall employ a Design
Director, approved in advance by Licensor, those sole responsibility shall be
to work with Licensor and the Design Partnership on the creation and
implementation of designs for the Licensed Products and related activities
under this Agreement.
17. Miscellaneous.
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17.1. All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been properly given or sent
(i) on the date when such notice, request, consent or communication is
personally delivered or (ii) five (5) days after the same was sent, if sent
by certified or registered mail, return receipt requested, or (iii) two (2)
days after the same was sent, if sent by overnight courier delivery or
confirmed telecopier, as follows:
(a) if to Licensee, addressed as follows:
Sun Apparel, Inc.
11201 Armour Drive
El Paso, Texas 79935
Attention: Mr. Miles Rubin
Telecopier: 915.592.1343
with a copy to:
Sun Apparel, Inc.
111 West 40th Street
New York, New York 10018
Attention: Mr. Eric Rothfeld
Telecopier: 212.391.2780
(b) if to Licensor, addressed as follows:
Polo Ralph Lauren, L.P.
650 Madison Avenue
New York, New York 10022
Attention: Vice Chairman
Telecopier: 212.318.7186
with a copy to:
Victor Cohen, Esq.
Eighth Floor
650 Madison Avenue
New York, New York 10022
Telecopier: 212.318.7183
Anyone entitled to notice hereunder may change the address to which notices
or other communications are to be sent to it by notice given in the manner
contemplated hereby.
17.2. Nothing herein contained shall be construed to place the parties
in the relationship of partners or joint venturers, and no party hereto
shall have any power to obligate or bind any other party hereto in any
manner whatsoever, except as otherwise provided
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for herein.
17.3. None of the terms hereof can be waived or modified except by an
express agreement in writing signed by the party to be charged or, in the
case of the Licensee, its chairman or president. The failure of any party
hereto to enforce, or the delay by any party in enforcing, any of its rights
hereunder shall not be deemed a continuing waiver or a modification thereof
and any party may, within the time provided by applicable law, commence
appropriate legal proceedings to enforce any and all of such rights. All
rights and remedies provided for herein shall be cumulative and in addition
to any other rights or remedies such parties may have at law or in equity.
Any party hereto may employ any of the remedies available to it with respect
to any of its rights hereunder without prejudice to the use by it in the
future of any other remedy with respect to any of such rights. No person,
firm or corporation, other than the parties hereto and the Design Partnership
(and, to the extent set forth in paragraphs 13.1 and 13.2 hereof, Polo Ralph
Lauren Corporation and Ralph Lauren, individually), shall be deemed to have
acquired any rights by reason of anything contained in this Agreement.
17.4. (a) This Agreement shall be binding upon and inure to the benefit of
the successors and permitted assigns of the parties hereto. Licensor may
assign all or any portion of the royalties payable to Licensor hereunder, as
designated by Licensor, and in addition, Licensor may assign all of its
rights, duties and obligations hereunder to any entity to which the
Trademark, or the right to use the Trademark, has been transferred, or to an
affiliate of any such entity. The rights granted to Licensee hereunder are
unique and personal in nature, and neither this Agreement nor the License
may be assigned by Licensee without Licensor's prior written consent, which
may be withheld in Licensor's sole discretion. Notwithstanding anything to
the contrary contained in the prior sentence, Licensee may assign all of its
rights, duties, and obligations hereunder to any affiliated entity, provided
(i) such entity shall agree to be bound by the terms and provisions hereof,
including, without limitation, the right of Licensor to approve or reject
any successor to the individuals appointed by Licensee and approved by
Licensor pursuant to paragraphs 16.1 and 16.2 hereof; (ii)[intentionally
left blank](iii) such entity shall have the financial capacity to perform
the obligations of Licensee hereunder and the assignment shall not be
effectuated to avoid any provision of this Agreement; and (iv) such
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assignment shall not relieve Licensee of its duties and obligations
hereunder. Licensee shall reimburse Licensor for all reasonable costs and
expenses (including attorney's fees) incurred by Licensor in connection with
such assignment and Licensee shall give reasonable prior written notice to
Licensor of its intent to make such an assignment, setting forth in its
notice the name and address of such assignee, a description of its
capitalization, and the names and addresses of its stockholders, directors,
and officers, partners, and/or managers, as the case may be. Any event or
change of control of Licensee such that clause (ii) of this paragraph 17.4(a)
is no longer true with respect to Licensee (or any entity to which this
Agreement is assigned) shall be considered an assignment in violation of this
Agreement; provided, however, that a "change in control of the Licensee"
shall be deemed not to have occurred as aforesaid if an applicable change in
ownership is the result of (x) public offerings or sales to underwriters of
capital stock in anticipation thereof by Licensee or any successor thereto
or (y) any acquisition of Licensee through merger, purchase of assets or
otherwise effected in whole or in part by issuance or reissuance of shares
of capital stock, if clause (ii) of this paragraph 17.4(a) is true with
respect to the surviving or controlling entity. Licensee agrees that it
will not effectuate an initial public offering of its securities without
Licensor's prior consent if Licensee's primary business (i.e., more than
fifty (50%) percent of Licensee's sales or more than sixty-five (65%) percent
of Licensee's net profits before taxes, in each case determined by Licensee's
independent auditors for the latest fiscal year of Licensee preceding such
offering) relates to Licensee's operations pursuant to this Agreement. Except
as expressly permitted pursuant to this paragraph 17.4(a), any attempt by
Licensee to transfer any of its rights or obligations under this Agreement,
whether by assignment, sublicense or otherwise, without having received the
prior written consent of Licensor, shall constitute an Event of Default, but
shall otherwise be null and void.
(b) Licensee may employ subcontractors with the prior approval of
Licensor for the manufacture of the Licensed Products. Prior to each
season Licensee shall advise Licensor of the names and addresses of the
subcontractors it intends to use and the products each such subcontractor
will be manufacturing. Licensor shall promptly advise Licensee if it
withholds its approval to the use of any such subcontractor by Licensee
but, irrespective of the grant of approval by Licensor, (i) the supervision
of production of Licensed Products shall remain under the control of
Licensee, (ii) Licensee shall maintain appropriate quality controls, (iii)
such subcontractors shall comply with the quality and other requirements of
Licensor consistent with the terms of this Agreement, including, but not
limited to, the execution by subcontractor of the Trademark and Design
Protection Agreement attached hereto as Schedule D and
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made a part hereof.
17.5. Licensee shall comply with all laws, rules, regulations and
requirements of any governmental body which may be applicable to the
operations of Licensee contemplated hereby, including, without limitation,
as they relate to the manufacture, distribution, sale or promotion of Licensed
Products, notwithstanding the fact that Licensor may have approved such item
or conduct. Licensee shall advise Licensor in the event any Final Prototype
(as defined in the Design Agreement) does not comply with any such law, rule,
regulation or requirement.
17.6. This Agreement shall be construed in accordance with and governed by
the laws of the State of New York, applicable to contracts made and to be
wholly performed therein without regard to its conflicts of law rules.
17.7. The parties hereby consent to the jurisdiction of the United States
District Court for the Southern District of New York and of any of the courts
of the Southern District of New York and of any of the courts of the State of
New York located within the Southern District in any dispute arising under
this Agreement and agree further that service of process or notice in any such
action, suit or proceeding shall be effective if in writing and delivered as
provided in paragraph 17.1 hereof. Notwithstanding anything to the contrary
set forth herein, neither Polo Ralph Lauren Corporation nor any other general
or limited partner of Licensor shall be liable for any claim based on, arising
out of, or otherwise in respect of, this Agreement, and Licensee shall not
have nor claim to have any recourse for any such claim against any general
or limited partner of Licensor.
17.8. In the event either party hereto is delayed or hindered in or
prevented from the performance of any act required hereunder by reason of war,
revolution, insurrection, civil disorder, fire, flood, accident, explosion,
strikes, embargo, prohibition or substantial limitation on import or export
of (or unavailability from any source of) product or raw materials,
governmental orders or regulations or any other similar cause which is beyond
the control of such party hereto, the performance of such act shall be excused
for the period during which the cause of failure of performance exists
provided (i) such period shall in any event not extend beyond six (6) months
and shall not affect the running of the term of this Agreement; (ii) that no
such event shall excuse performance of a payment or other financial obligation
hereunder; and (iii) the excused party shall promptly notify the other in
writing advising of the cause for delay.
17.9. The provisions hereof are severable, and if any
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provision shall be held invalid or unenforceable in whole or in part in any
jurisdiction, then such invalidity or unenforceability shall affect only such
provision, or part thereof in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction, or any other provision in
this Agreement in any jurisdiction. To the extent legally permissible, an
arrangement which reflects the original intent of the parties shall be
substituted for such invalid or unenforceable provision.
17.10. The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Each party acknowledges and represents to the other that this
Agreement has been reviewed by its counsel and the provisions hereof shall be
construed without regard to which party prepared this Agreement.
17.11. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused the same to be executed by a duly authorized officer as of the day and
year first above written.
POLO RALPH LAUREN, L.P.
By: Polo Ralph Lauren Corporation,
General Partner
By: /s/ Michael Newman
SUN APPAREL, INC.
By: /s/ Eric Rothfeld
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Schedule A
LICENSED PRODUCTS
The term "Licensed Products" shall mean a men's jeans collection comprised of
the following products: (i) jean pants, jean jackets, jean shorts and jean
vests, (ii) coordinated outerwear, casual pants and shorts, t-shirts, woven
and knit shirts, sweaters, and hats and caps and (iii) such additional men's
products as may be designated by written agreement of Licensor and Licensee,
in all cases bearing the Trademark.
A women's jeans collection comprised of the following products: (i) jean pants,
jean jackets, jean shorts and jean vests, (ii) coordinated outerwear, casual
pants and shorts, t-shirts, woven and knit shirts, sweaters, hats and caps,
denim dresses and skirts, and solid chanbray dresses and skirts, and (iii)
such additional women's products as may be designated by written agreement of
Licensor and Licensee, in all cases (a) bearing the Trademark and (b) offered
as part of a women's jeans collection and not as individual or groups of items
of "better" or "bridge" apparel. Without limiting the generality of the
foregoing, not less than fifty percent (50%) of the SKUs of Licensed Products
offered each season shall be made substantially of denim, and Licensee shall
strive to achieve a retail presentation which is focused predominantly on the
denim portion of the line.
Schedule B
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TRADEMARK
POLO JEANS COMPANY BY RALPH LAUREN
POLO JEANS CO. BY RALPH LAUREN
POLO JEANS COMPANY RALPH LAUREN
POLO JEANS CO. RALPH LAUREN
Logos associated with the Trademark shall be added to this Schedule B as
approved by Licensor.
Licensor will apply to register the Trademark in at least one of the forms
in which it is finally adopted.
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Schedule C
LICENSOR AND LICENSEE OPTIONS
RELATING TO THE TERM OF THIS LICENSE AGREEMENT
As set forth in paragraph 8 of this Agreement, this Schedule C to this
Agreement sets forth the respective rights and obligations of Licensor and
Licensee with respect to the extension of the term of this Agreement beyond
the Initial Term.
1. Additional Definitions. The following words and phrases, unless the
context otherwise requires shall have the following meanings:
"Business" shall mean the entire business and assets which shall be owned
and operated by Licensee with respect to the design, manufacture, advertising,
promotion and sale of Licensed Products pursuant to the terms of this
Agreement, including but not limited to the following:
(a) All of the rights which Licensee has under this Agreement, including
but not limited to the License;
(b) Accounts receivable;
(c) Inventory;
(d) Furniture, fixtures, tools and equipment;
(e) Expendables, including but not limited to office supplies, sales
slips and other sales materials, bags and packaging materials,
brochures, fliers and other advertising and promotional materials
and copy;
(f) Prepaid fees, dues or subscriptions and prepaid compensation;
(g) All other assets relating to the design, manufacture, advertising,
promotion and sale of Licensed Products pursuant to the terms of this
Agreement, including without limitation all customer, mailing,
telephone and marketing lists, vendor warranties and other business
records;
(h) Goodwill and other intangible rights, whether acquired from
Licensor or from others (but excluding any value for the License
in excess of the present value of the projected sales, earnings
and cash flow relevant to the Going Concern value of the Business
assuming the continuation of the License through December
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31, 2030).
The Business shall also include all of the debts, liabilities, obligations or
claims owed by or due from Licensee incurred in the ordinary course and which
are necessary in connection with the Business, existing on the Closing Date
(as hereinafter defined) or arising thereafter with respect to events
occurring prior to the Closing Date, including but not limited to the
following:
(a) Trade and other accounts payable;
(b) Accrued expenses, including but not limited to accrued rent., accrued
compensation, pension plan liability, bonuses, retirement pay and
other fees and costs;
Liabilities included in the Business shall not include indebtedness to
individuals, banks or financial institutions (whether long- or short-term)
incurred other than in the ordinary course of Licensee's business hereunder,
guarantees of third-party obligations incurred other than in the ordinary
course of Licensee's business hereunder, any taxes owing or accrued prior to
the Closing Date incurred other than in the ordinary course of Licensee's
business hereunder or litigation claims. All of the liabilities included in
the Business and disclosed in writing to Licensor (but not those not so
included and disclosed) are hereinafter referred to as the "Liabilities."
Licensee will be required to supply Licensor with a schedule of Liabilities
within ten (10) days of receipt of a notice from Licensor that it is
exercising the Buyout Option.
"Purchase Price" shall mean an amount equal to eighty percent (80%) of the
fair value of the Business as a going concern as it exists on the Closing
Date ("Going Concern"), determined as set forth below.
The fair value of the Business as a Going Concern shall be determined in
the following manner:
(a) Each of Licensor and Licensee shall, within ten (10) days after
Licensor gives notice that it intends to exercise the Buyout Option,
select a reputable investment banker having a national reputation and
experienced in evaluating businesses as going concerns in connection
with public and private financings, mergers and acquisitions and in
representing companies engaged in national apparel manufacturing and
sales businesses in such transactions;
(b) Each such investment banker shall evaluate the Business as a going
concern, assuming the License is to continue
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("Going Concern") taking into account all factors which it considers
relevant to such an evaluation, including but not limited to the
following:
(i) Historical and projected sales and earnings;
(ii) Historical and projected cash flow;
(iii) The book value of the assets of the Business;
(iv) The value of the assets of the Business on a Going Concern basis;
(v) Multiples of sales and/or earnings used in evaluating companies
engaged in similar businesses for purposes of public or private
financings or for sale, acquisition or merger;
(vi) Relevant financial ratios, including but not limited to debt-
equity ratios, current ratios and return on investment;
(vii) Known business and economic risks and contingencies.
(viii) Liabilities to be assumed or not to be assumed.
In evaluating the Business the investment bankers shall not ascribe any
value over and above the Going Concern value of the Business to the License
assuming the continuation of the License through December 31, 2030. No
evaluation by an investment banker shall occur until Licensor shall have
received from Licensee a schedule of Liabilities and shall have confirmed
its undertaking to proceed with the purchase of the Business.
(c) Such investment bankers shall, within sixty (60) days after their
selection, attempt to agree as to the fair value of the Business as a Going
Concern on the Closing Date. Licensee shall make its books, records,
facilities and such other materials as may be necessary or desirable in
connection with such evaluation available to such investment bankers for
such purposes. In conducting their evaluation, such investment bankers shall
exercise such reasonable judgment and apply such standards as are customary
in the investment banking profession, recognizing that it is the desire of the
parties hereto to reach an accommodation with the least cost, effort and time
necessary.
(d) If such investment bankers are unable to so agree
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within such sixty (60) day period, then they shall, within fifteen (15) days
after the expiration of such sixty (60) day period, mutually appoint a third
investment banker of comparable stature and experience and each shall submit
to such third investment banker their respective analysis and conclusions as
to the fair value of the Business as a Going Concern. Within 30 days after
such third investment banker is provided with such material, such third
investment banker shall, based upon its own evaluation (following the
standards set forth herein) as well as the analysis and conclusions of the
other investment bankers, select one or the other of their evaluations, which
evaluation shall thereafter be deemed to be the fair value of the Business as
a Going Concern. Each of Licensor and Licensee shall be responsible for the
costs associated with the evaluation by the investment banker it selects, and
Licensor and Licensee shall share equally the costs associated with the
evaluation of a third investment banker, if necessary.
Eighty Percent (80%) of the fair value of the Business as a Going Concern
as determined pursuant to clauses (c) or (d) of this definition on the Closing
Date shall constitute the Purchase Price and shall be final and binding on the
parties hereto for the purposes of this Agreement.
2. Licensee Renewal Options.
a. Provided no Event of Default shall have occurred which is not timely
cured or waived, and Licensee has achieved the First Minimum Renewal Volume
(hereinafter defined) for the period January 1, 1999 to December 31, 1999,
Licensee shall have the option, upon providing notice to Licensor on or before
March 31, 2000, to renew this Agreement for an additional five (5) year period
(the "First Renewal Term") so as to expire on December 31, 2005, on the terms
and conditions set forth herein. The minimum aggregate Net Sales Price which
Licensee must achieve in connection with sales of Licensed Products during the
period from January 1, 1999 to December 31, 1999 (the "First Minimum Renewal
Volume") in order to be entitled to renew this Agreement for the First Renewal
Term as hereinabove provided shall be [OMITTED; MATERIAL FILED SEPARATELY WITH
SECURITIES AND EXCHANGE COMMISSION].
b. Provided no Event of Default shall have occurred which is not timely
cured or waived, and Licensee has achieved the Second Minimum Renewal Volume
(hereinafter defined) for the period January 1, 2004 to December 31, 2004,
Licensee shall have the option, upon providing notice to Licensor on or
before March 31, 2005, to renew this Agreement for an additional five (5)
year period (the "Second Renewal Term") so as to expire on December 31, 2010,
on the terms and conditions set forth herein. The minimum aggregate Net
Sales Price which Licensee must achieve in connection with sales of
Licensed Products during the period from January 1, 2004 to
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December 31, 2004 (the "Second Minimum Renewal Volume") in order to be
entitled to renew this Agreement for the Second Renewal Term as hereinabove
provided shall be [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND
EXCHANGE COMMISSION].
c. Subject to Licensor's Buyout Option as set forth in paragraph 4 of this
Schedule C, provided (i) no Event of Default shall have occurred which is not
timely cured or waived and (ii) Licensee has achieved the Third Minimum Renewal
Volume (hereinafter defined) for the period January 1, 2009 to December 31,
2009, Licensee shall have the option (in addition to the Extension option set
forth in paragraph 3 of this Schedule C), upon providing notice to Licensor on
or before March 31, 2010, to renew this Agreement for an additional five (5)
year period (the "Third Renewal Term") so as to expire on December 31, 2015,
on the terms and conditions set forth herein; provided, however, that if
Licensee does not exercise the Extension Option, Licensee shall have no right
to renew the term of this Agreement beyond the Third Renewal Term. The minimum
aggregate Net Sales Price which Licensee must achieve in connection with sales
of Licensed Products during the period from January 1, 2009 to December 31,
2009 (the "Third Minimum Renewal Volume") in order to be entitled to renew
this Agreement for the Third Renewal Term as hereinabove provided shall be
[OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION].
d. Provided (i) no Event of Default shall have occurred which is not
timely cured or waived, (ii) Licensee timely exercised its Extension Option
as set forth in paragraph 3 of this Schedule C, and (iii) Licensee has
achieved the Fourth Minimum Renewal Volume (hereinafter defined) for the
period January 1, 2014 to December 31, 2014, Licensee shall have the option,
upon providing notice to Licensor on or before March 31, 2015, to renew this
Agreement for an additional five (5) year period (the "Fourth Renewal Term")
so as to expire on December 31, 2020, on the terms and conditions set forth
herein. The minimum aggregate Net Sales Price which Licensee must achieve in
connection with sales of Licensed Products during the period from January 1,
2014 to December 31, 2014 (the "Fourth Minimum Renewal Volume") in order to
be entitled to renew this Agreement for the Fourth Renewal Term as hereinabove
provided shall be [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND
EXCHANGE COMMISSION].
e. Provided (i) no Event of Default shall have occurred which is not
timely cured or waived, (ii) Licensee timely exercised its Extension Option
and (iii) Licensee -has achieved the Fifth Minimum Renewal Volume (hereinafter
defined) for the period January 1, 2019 to December 31, 2019, Licensee shall
have the option, upon providing notice to Licensor on or before March 31,
2020, to renew this Agreement for an additional five (5) year period (the
"Fifth Renewal Term") so as to expire on December 31, 2025, on the terms
and conditions set forth herein. The minimum aggregate Net Sales
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Price which Licensee must achieve in connection with sales of Licensed
Products during the period from January 1, 2019 to December 31, 2019 (the
"Fifth Minimum Renewal Volume") in order to be entitled to renew this
Agreement for the Fifth Renewal Term as hereinabove provided shall be
[OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION].
f. Provided (i) no Event of Default shall have occurred which is not
timely cured or waived, (ii) Licensee timely exercised its Extension Option
and (iii) Licensee has achieved the Sixth Minimum Renewal Volume (hereinafter
defined) for the period January 1, 2024 to December 31, 2024, Licensee shall
have the option, upon providing notice to Licensor on or before March 31, 2025,
to renew this Agreement for an additional five (5) year period (the "Sixth
Renewal Term") so as to expire on December 31, 2030, on the terms and
conditions set forth herein, except that Licensee shall have no further right
of renewal. The minimum aggregate Net Sales Price which Licensee must achieve
in connection with sales of Licensed Products during the period from January 1,
2024 to December 31, 2024 (the "Fifth Minimum Renewal Volume") in order to be
entitled to renew this Agreement for the Sixth Renewal Term as hereinabove
provided shall be [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND
EXCHANGE COMMISSION].
g. As a condition to Licensee"s right to exercise each renewal option
under this paragraph 2, Licensee must, in each notice to Licensor that any
renewal option is being exercised, certify to Licensor that Licensee is not
in material default under its loan agreements with its principal lender(s).
3. Licensee's Extension Option. Subject to Licensor's Buyout Option as set
forth in paragraph 4 of this Schedule C, if (i) no Event of Default shall have
occurred and not been cured or waived and (ii) Licensee has achieved the Third
Minimum Renewal Volume, Licensee shall have the option to acquire the options
set forth in paragraphs 2(d) through 2(f) of this Schedule C (the "Extension
Option"). Licensee must give Licensor notice that it is exercising the
Extension Option in the same notice by which it gives Licensor notice that
Licensee is exercising its option to extend this Agreement f or the Third
Renewal Term, which notice must be given on or before March 31, 2010. If
Licensee does not, on or before March 31, 2010, give Licensor notice that is
exercising its option to extend this Agreement for the Third Renewal Term,
with or without exercising the Extension Option, the term of this Agreement
and the Design Agreement shall expire on December 31, 2010, and the provisions
of paragraphs 10 and 11 of this Agreement shall apply. If Licensee does
exercise the Extension Option, in consideration of the additional rights it
acquires thereby Licensee shall pay Licensor the Extension Option Price, as
hereinafter defined, on December 31, 2010 (the "Closing Date"). At Licensee's
option subject to the last sentence of clause (b) below, the "Extension
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Option Price" shall be either:
a. Twenty-Five Million Dollars ($25,000,000), payable by wire transfer,
certified or bank check on the Closing Date; or
b. A twenty percent (20%) equity interest in the Business. The term
"twenty percent (20%) equity interest in the Business" shall mean, if at
the time the Extension Option is exercised the Business is conducted in the
form of a corporation engaged solely in the conduct of the Business, twenty
percent (20%) of the issued and outstanding equity and voting shares of such
corporation, on a fully-diluted basis. In such event, Licensee shall deliver
to Licensor on the Closing Date stock certificates representing such shares,
free and clear of all liens and encumbrances, with all necessary stock
transfer tax stamps attached, accompanied by stock powers duly executed in
blank, and otherwise in form acceptable for transfer on the books of such
corporation. If at the time the Extension Option is exercised the Business
is conducted in any form other than as a corporation engaged solely in the
conduct of the Business, the term "twenty percent (20%) equity interest in
the Business" shall mean, and Licensee shall deliver in a form reasonably
acceptable to Licensor on the Closing Date, such other consideration (by way
of example, shares of a parent corporation, shares of a limited partnership,
etc.) ("Alternate Equity Interest") as the parties may mutually agree, within
thirty (30) days after Licensee gives notice that it is exercising the
Extension Option and intends to convey a twenty percent (20%) equity interest
in the Business, as represents the equivalent of twenty percent (20%) of the
issued and outstanding voting shares of a corporation engaged solely in the
conduct of the Business. If the parties do not timely agree on an Alternate
Equity Interest, the Extension Option Price shall be the amount set forth in
clause (a) of this paragraph 3.
4. Licensor's Buyout Option. Notwithstanding anything to the contrary
contained herein, Licensor shall have the option, by giving written notice
to Licensee on or before June 1, 2010 and regardless of whether Licensee has
given notice that it intends to exercise the Extension Option or the option
to renew for the Third Renewal Term, to purchase the Business from Licensee
(the "Buyout Option"). If Licensor exercises the Buyout Option, Licensee
shall have no further rights or obligations with respect to the Extension
Option. The Buyout Option shall be in addition to and shall not alter or
affect Licensor's rights to terminate this Agreement as a result of any Event
of Default, as otherwise provided in this Agreement. If Licensor gives notice
that it will exercise the Buyout Option, Licensor (or its designee) shall
purchase and Licensee shall sell the Business for the Purchase Price including
assumption of the Liabilities. The closing date for the purchase
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<PAGE>
and sale of the Business shall be December 31, 2010 (or the last business
day of the year 2010 if prior thereto) (the "Closing Date"), it being mutually
agreed by Licensor and Licensee that time shall be of the essence. On the
Closing Date, Licensor shall deliver the Purchase Price to Licensee by wire
transfer or a certified or bank cashier's check, together with such
instruments of assumption of the Liabilities as counsel to the parties shall
mutually agree are appropriate to cause the Liabilities to be assumed by
Licensor (or its designee), and Licensee shall deliver to Licensor such
instruments of transfer as counsel to the parties shall mutually agree are
appropriate to effect the purchase and sale of the Business and to give
Licensor (or its designee) good title to all of the assets of the Business,
free and clear of all liens and encumbrances.
5. Good Faith Obligation; Dispute Resolution; Indemnification. Licensor and
Licensee shall act in good faith to consummate the transactions contemplated
by either the Extension Option or the Buyout Option, if either such option is
exercised, while minimizing any negative tax implications to either party. Any
dispute arising out of either party's exercise of such option shall be
submitted to binding arbitration pursuant to the rules of the American
Arbitration Association. If the Buyout Option is exercised, Licensee shall
indemnify and save and hold Licensor, the Design Partnership, Polo Ralph
Lauren Corporation and Ralph Lauren, individually, and their assignees,
directors, officers, servants, agents and employees, harmless from and against
any and all liability, claims, causes of action, suits, damages and expenses
(including reasonable attorneys' fees and expenses) arising out of or relating
to the conduct of the Business up to and including the Closing Date (other
than with respect to the disclosed Liabilities assumed), and Licensor shall
indemnify and save and hold Licensee and its assignees, directors, officers,
servants, agents and employees, harmless from and against any and all
liability, claims, causes of action, suits, damages and expenses (including
reasonable attorneys' fees) arising out of the conduct of the Business after
the Closing Date.
6. Closing Procedures. In the event Licensee exercises the Extension Option
and is conveying a twenty percent (20%) equity interest in the Business
pursuant to paragraph 3(b) of this Schedule C, or in the event Licensor
exercises the Buyout Option, at the closing on the Closing Date Licensee
shall deliver to Licensor an absolute assignment of the relevant instruments
of transfer and shall represent and warrant that as of the closing Date:
(a) that the shares of Licensee or the Alternate Equity
Interest is owned by the Licensee free and clear
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of all pledges, security interests, liens, charges, encumbrances and
claims of any nature whatsoever, except any encumbrances otherwise
agreed to in writing by Licensor;
(b) that Licensee has the full and complete right, power and authority
to make the assignment and that such assignment does not violate any
agreement or government order;
(c) that no litigation exists or threat of litigation has been made with
respect to the Business that has not been disclosed in writing to
Licensor; and
(d) that all financial information and materials delivered by Licensee
in connection with any calculation of the Purchase Price or the
Alternate Equity Interest were true and correct as of the date made.
Licensee shall further deliver a letter from seller's counsel reasonably
satisfactory to Licensor which contains such legal opinions as are customarily
given in connection with the sale of a business such as the Business and
subject to standard limitations and qualifications thereto.
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Exhibit 10.54.
(Polo Jeans Company - Design)
DESIGN SERVICES AGREEMENT dated as of August 1, 1995, by and between Polo
Ralph Lauren Enterprises, L.P. (the "Design Partnership"), a Delaware
limited partnership with a place of business at 650 Madison Avenue, New York,
New York 10022 and Sun Apparel, Inc. (the "Company") a Texas corporation with
a place of business at 11201 Armour Drive, El Paso, Texas 79935.
Ralph Lauren ("Lauren") is an internationally famous designer who has been
twice inducted into the Coty Hall of Fame for his design of men's and women's
fashions, is the recipient of the CFDA Lifetime Achievement Award, and is a
creator of original designs for cosmetics, jewelry, home furnishings and
other products.
Polo Ralph Lauren, L.P., a Delaware limited partnership ("Polo"), holds the
right and interest in and to certain trademarks and trade names, as same may
be used in connection with the manufacture and sale of Licensed Products, as
hereinafter defined, and on even date herewith, the Company has obtained the
right to use certain trademarks (the "Trademark") in connection with the
Licensed Products, pursuant to a license agreement ("License Agreement")
of even date herewith by and between the Company and Polo.
The value of the Trademark is largely derived from the reputation, skill
and design talents of Lauren, and Lauren, directly and through his designees,
provides design services through the Design Partnership.
The company desires to obtain the services of the Design Partnership in
connection with the creation and design of the Licensed Products.
The Company desires, in order to exploit the rights granted to it under the
License Agreement, to engage and retain the Design Partnership to create and
provide to the Company the designs for its line of Licensed Products. The
Design Partnership is willing to furnish such designs and render such services
on the basis hereinafter set forth. As used herein, the term "Licensed
Products" shall have the meaning set forth in the License Agreement.
In consideration of the foregoing premises and of the mutual promises and
covenants herein contained, the parties hereto, intending to be legally bound,
hereby agree as follows:
<PAGE>
1. Designs; Assistance.
1.1 The parties understand and agree that the Company will be principally
responsible for the development and presentation to the Design Partnership
of designs for Licensed Products, which, designs will be reviewed by the
Design Partnership and which the Design Partnership may approve, disapprove
or modify in its sole discretion, in accordance with the terms and conditions
set forth herein.
1.2 The Design Partnership shall provide the Company with a program of
suggested, broad design themes and concepts with respect to the design of
the Licensed Products ("Design Concepts") which shall be embodied in oral
and/or written descriptions of design themes and concepts and such other
detailed designs and sketches therefor, as the Design Partnership deems
appropriate. The Design Partnership shall have full discretion with respect
to the manner in which the Design Concepts shall be formulated and presented
by the Design Partnership to the Company. The Company and the Design
Partnership shall confer on Design Concepts and shall make such modifications
as are required to meet the Design Partnership's approval.
1.3 The Design Partnership may, at its sole expense, engage such employees,
agents, and consultants operating under the Design Partnership's creative
supervision and control as it may deem necessary and appropriate.
1.4 From time to time while this Agreement is in effect, the Design
Partnership may (a) develop or modify and implement designs from the Design
Concepts or other designs furnished by the Design Partnership or (b) develop
and implement new designs.
1.5 The Company shall prepare and present designs to the Design
Partnership based on the Design Concepts.
1.6 The company understands that all or portions of the Design Concepts
may be furnished to the Company through or in cooperation with other entities
to which the Design Partnership has provided design services. The Company
upon its prior written authorization shall pay all costs, including shipping
and handling charges, for fabric swatches or mill chips, sketches,
specifications, paper sample patterns and product samples furnished to the
Company by the Design Partnership or such other entities.
1.7 Subject to paragraph 2.7 hereof, all patents and
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copyrights on designs of the Licensed Products shall be Owned exclusively,
and applied for, by the Design Partnership or its designee, at the Design
Partnership's discretion and expense, and shall designate the Design
Partnership or its designee as the patent or copyright owner, as the case may
be, therefor.
1.8 The Company acknowledges that the Licensed Products contain elements
which in concept, execution and/or presentation are unique. The Company
agrees that it will not, during the term of the Agreement, use any designs
used in the Licensed Products or any designs submitted or modified by the
Design Partnership or any designs which are comparable and/or competitive
with Licensed Products and which may be identified as Design Partnership
designs.
2. Design Legends; Copyright Notice and License.
2.1 All designs, patterns, sketches, artwork, logos and other materials
of Licensed Products and the use of such designs, artwork, sketches, logos
and other materials created by the Design Partnership, or, subject to
paragraph 2.7 hereof, created by or for the Company and reviewed and approved
by the Design Partnership, or developed by or for the Company from Design
Concepts or subsequent design concepts furnished or approved by the Design
Partnership (all of which shall hereinafter constitute Design Concepts), shall
be the property of the Design Partnership and shall be subject to the
provisions of this paragraph 2.
2.2 All right, title and interest in and to the samples, sketches, design,
artwork, logos and other materials furnished by or to Company or submitted to
the Design Partnership, whether created by the Design Partnership or the
Company, are hereby assigned to and shall be the sole property of the Design
Partnership. The Company shall cause to be placed on all Licensed Products
appropriate notice in accordance with applicable law designating the Design
Partnership as the copyright or design patent owner thereof, as the case may
be. The manner of presentation of said notices shall be reviewed and approved
by the Design Partnership prior to use thereof by the Company.
2.3 The Design Partnership hereby grants to the Company the exclusive
right, license and privilege ("License") to use the designs furnished
hereunder and all copyrights, if any, and patents, if any therein; provided,
however, that the License is limited to use in connection with Licensed
Products manufactured and sold, or imported and sold, pursuant to the License
Agreement, subject, however, to paragraph 3.2 hereof. All other rights in
and to the designs furnished hereunder, including
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without limitation all rights to use such designs in connection with products
other than Licensed Products (as defined in the License Agreement) and in
territories other than the Territory (as defined in the License Agreement)
are expressly reserved by the Design Partnership. The License shall continue
only for such period as this Agreement shall be effective. The Design
Partnership shall execute and deliver to the Company all documents and
instruments necessary to perfect or evidence the License. Upon termination
of this Agreement, for any reason whatsoever, any and all of the Company's
right, title and interest in and to the License shall forthwith and without
further act or, instrument be assigned to, revert to and be the sole and
exclusive property of the Design Partnership, and the Company shall have no
further or continuing right or interest therein, except the limited right to
complete the manufacture of and sell Licensed Products during any Disposal
Period, as set forth in paragraph 6.3 hereof. In addition, the company shall
thereupon (i) execute and deliver to the Design Partnership all documents and
instruments necessary to perfect or evidence such reversion, (ii) refrain from
further use of any of the Design Concepts and (iii) refrain from manufacturing,
selling or distributing any products (whether or not they bear the Trademark)
which are confusingly similar to or derived from the Licensed Products or
Design Concepts.
2.4 Except as expressly permitted under paragraph 17.4 of the License
Agreement, the Company shall not sublicense any of the rights granted
hereunder without first obtaining the Design Partnership's prior written
consent in connection therewith, which consent may be withheld by the Design
Partnership in its sole discretion.
2.5 The Design Partnership represents and warrants to the Company that it
has full right, power and authority to enter into this Agreement, to perform
all of its obligations hereunder and to consummate all of the transactions
contemplated herein.
2.6 The Company represents and warrants to the Design Partnership that
the Company has full right, power and authority to enter into this Agreement,
to perform all of its obligations hereunder and to consummate all the
transactions contemplated herein.
2.7 Notwithstanding any provision to the contrary contained herein, each
party recognizes that a distinction is drawn between (i) the appearance,
packaging and marketing presentation of the Licensed Products, and (ii) the
technology (including washes and finishing treatments) used in the making of
denim Licensed Products. The term "Technology" as used herein shall mean the
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chemistry, formulas, production processes and method and other technology
actually used for making denim Licensed Products. "Technology" includes, but
is not limited to, all information, samples, sketches, blueprints, plans and
other data relating to the chemistry, formulas, processes or methods of
production, technology, physical properties, or other inherent characteristics
of Licensed Products, as well as design elements with respect to which
Licensee gives Licensor written notice in advance that such design elements
are original and proprietary to Licensee and need not be used by Licensee
exclusively for Licensed Products. The parties agree that unless developed
by the Design Partnership or at the direction of the Design Partnership, the
Technology used by the Company to make denim Licensed Products shall not
belong to the Design Partnership and may be used by the Company both during
and after the term of this Agreement except as follows: even when developed
by the Company, if a Technology has been used first for or introduced as an
innovation for Licensed Products, then Company will not use such Technology
for its other lines of products unless and until such Technology has become
used in a commercially significant manner by its competitors for their
products without violation of a proprietary right of the Company or the
Design Partnership. The Design Partnership agrees to cooperate fully with
the Company, at Company's expense, in the filing, prosecution, maintenance
or protection of any patent applications which Company may wish to file on
its Technology. Upon termination or expiration of this Agreement, should it
so desire, the Design Partnership shall be entitled to produce or have third
parties produce previously marketed products which might otherwise infringe
upon the Company's Technology provided that such products are marketed solely
under the Trademark and Company covenants not to make any claim against any
party for manufacturing, advertising, promoting or selling such products under
the Design Partnership's authority; provided, however, that if the Design
Partnership does market products previously marketed by the Company which
would in fact violate valid proprietary rights of the Company, the Design
Partnership shall compensate the Company for the use of such Technology on
commercially reasonable terms, and in any event on terms no less favorable
than the terms on which the Company licenses the use of such Technology to
any unrelated Third Party. Fabrics, finishes and silhouettes used in
connection with Licensed Products may also be used by Licensee in connection
with other products, if such fabrics, finishes and silhouettes do not violate
proprietary rights of Licensor or its affiliates and are generally available
in the marketplace.
3. Licensed Products.
3.1 The Company shall obtain the written approval of the
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Design Partnership of all Licensed Products to be manufactured or caused to
be manufactured by the Company, by submitting a Prototype, as hereinafter
defined, of each different design or model of a Licensed Product, including,
but not limited to, the type and quality of materials, colors and workmanship
to be used in connection therewith, prior to any commercial production
thereof. In the event that the Design Partnership rejects a particular
Prototype or Prototypes, the Design Partnership shall so notify the Company
and shall in certain cases where the Design Partnership desires to include
the Prototype in the collection, provide the company with suggestions for
modifying the particular Prototype or Prototypes which the Design Partnership
is rejecting. The Company shall promptly correct said Prototype or
prototypes, resubmit said Prototype or Prototypes to the Design Partnership
and seek the Design Partnership's approval under- the same terms and
conditions as set forth herein with respect to the first submission of
Prototypes. As used herein, the term "Prototype" shall mean any and all
models, or actual samples, of Products; and the term "Final Prototype" shall
mean the actual final sample of a Licensed Product from which the first
commercial production thereof will be made and which has been approved by
the Design Partnership prior to the first commercial production thereof
pursuant to this paragraph 3.
3.2 The written approval of the Design Partnership of the Prototypes for
each seasonal collection shall be evidenced by a written list, signed on
behalf of the Design Partnership setting forth those Prototypes which have
been approved for inclusion in such collection. Prototypes so approved
shall be deemed Final Prototypes in respect of such collection. Approval of
any and all Prototypes as Final Prototypes shall be in the sole discretion of
the Design Partnership. The Company shall present for sale, through the
showing of each seasonal collection to the trade, all Final Prototypes so
approved in respect of such collection. Approved Final Prototypes for Denim
Bottoms (as defined in paragraph 2.2 of the License Agreement) may run from
season-to-season without additional approval from the Design Partnership,
but the Design Partnership, in consultation with the Company shall be
entitled to withdraw such approval upon written notice given reasonably in
advance of any season and, upon receipt of such notice, the Company shall
not place any additional orders for such products, but may sell any such
products previously approved and ordered.
3.3 The Licensed Products thereafter manufactured and sold by the
company shall strictly adhere, in all respects, including, without
limitation, with respect to materials, color, workmanship, designs,
dimensions, styling, detail and quality, to the Final Prototypes
approved by the Design Partnership, subject
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however, in the case of denim products to minor variations which
arise in the ordinary course from wash and other finishing treatments.
3.4 In the event that any Licensed Product is, in the reasonable
judgment of the Design Partnership, not being manufactured or sold in
strict adherence to the materials, color, workmanship, designs, dimensions,
styling detail and quality, embodied in the Final Prototypes, or is otherwise
not in accordance with the Final Prototypes, the Design Partnership shall
notify the Company thereof in writing and the Company shall promptly repair
or change such Licensed Product to conform strictly thereto. If an item of
Licensed Product as repaired or changed does not strictly conform to the
Final Prototypes and such strict conformity cannot be obtained after at
least one (1) resubmission, or if the Company determines that a Licensed
Product does not strictly conform, the Trademark shall be promptly removed
from the item, at the option of the Design Partnership, in which event the
item may be sold by the Company, provided (a) it is in no way identified as
a Licensed Product and (b) further provided that the Company and the Design
Partnership agree that the Company will be permitted to sell Licensed
Products bearing the Trademark so long as such products are clearly labelled
as such in a manner approved by the Design Partnership or Polo, are
distributed in channels and outlets approved by Polo, and are produced only
as by-products of the manufacture of first quality goods and only in
reasonable quantities. Notwithstanding anything in this paragraph 3.4 to the
contrary, sales of all products using the Design Concepts, whether or not
bearing the Trademark, shall be subject to compensation payments pursuant to
paragraph 4 hereof.
3.5 The Design Partnership and its duly authorized representative shall
have the right, at its expense upon reasonable notice during normal business
hours, to inspect all facilities utilized by the Company (and its contractors
and suppliers) in connection with the preparation of Prototypes and the
manufacture, sale, storage or distribution of Licensed Products pursuant
hereto and to examine Licensed Products in process of manufacture and when
offered for sale within the company's operations. The Company hereby consents
to the Design Partnership's examination of Licensed Products held by its
customers for resale provided the Company has such right of examination. The
company shall take all necessary steps, and all steps reasonably requested by
the Design Partnership, to prevent or avoid any misuse of the licensed designs
by any of its customers, contractors or other resources.
3.6 Intentionally omitted.
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3.7 The Company shall upon request make its personnel available, and shall
use its commercially reasonable efforts to make the personnel of any of its
contractors, suppliers and other resources available at their facilities, for
consultation with the Design Partnership by appointment during normal business
hours. The Company shall make available to the Design Partnership, upon
reasonable notice, marketing plans, reports and information which the Company
may have with respect to Licensed Products.
3.8 The Company may employ subcontractors for the manufacture of Licensed
Products solely on the terms set forth in paragraph 17.4 of the License
Agreement.
3.9 The Company shall include within each seasonal collection of Licensed
Products a fully representative assortment of designs therefor designated by
the Design Partnership for inclusion therein. Notwithstanding anything to
the contrary contained herein or in the License Agreement, in the event the
Company chooses not to or is unable to include within a seasonal collection
of Licensed Products a particular Licensed Product which the Design
Partnership has designed or designated for inclusion in such collection, the
Design Partnership shall be entitled to authorize third parties to manufacture
such Licensed Product(s) on behalf of the Company and the Company shall, at
the Design Partnership's option, display, present and sell such Licensed
Product(s) in the manner in which all other Licensed Products are displayed,
presented and sold hereunder.
3.10 The Design Partnership shall respond to any requests for approvals or
consents from the Company hereunder as promptly as reasonably practicable
consistent with the level of review required and the timing of the
collections to be presented each season.
4. Compensation: Accounting.
4.1 Commencing with the First Renewal Term (as defined in Schedule C to
the License Agreement), if the term hereof is extended beyond the Initial
Term (as defined in paragraph 8 of the License Agreement), Company shall pay
to the Design Partnership minimum compensation for each year during the term
of this Agreement. The minimum compensation for each year commencing with
the First Renewal Term shall be an amount equal to [Omitted; Material Filed
Separately With The Securities And Exchange Commission]% of the actual earned
compensation due for the immediately preceding year; provided, however, that
the minimum compensation obligation for each year of the First Renewal Term
shall in no event be less than [Omitted; Material Filed Separately With The
Securities And Exchange Commission]; for each year of the Second Renewal Term
no less than [Omitted; Material Filed Separately With The Securities And
Exchange Commission]; for each year of the Third
8
<PAGE>
Renewal Term no less than [Omitted; Material Filed Separately With The
Securities And Exchange Commission]; for each year of the Fourth Renewal
Term no less than [Omitted; Material Filed Separately With The Securities
And Exchange Commission]; for each year of the Fifth Renewal Term no less
than [Omitted; Material Filed Separately With The Securities And Exchange
Commission]; and for each year of the Sixth Renewal Term no less than
[Omitted; Material Filed Separately With The Securities And Exchange
Commission](each such term as defined in Schedule C to the License Agreement).
Minimum compensation for each year shall be paid on a quarterly basis within
thirty (30) days after the end of each quarter during the term hereof,
commencing with the-first quarter of the First Renewal Term. No credit shall
be permitted against minimum compensation payable for any year on account of
actual or mini compensation paid for any other year, and minimum compensation
shall not be returnable. For the purposes of this Agreement, the term "Year"
shall mean a period of twelve (12) months commencing on each January 1 during
the term of this Agreement; provided, however, that the term "first year"
shall mean the 17-month period commencing on August 1, 1995 and ending on
December 31, 1996.
4.2 The company shall pay to the Design Partnership earned compensation
based on the Net Sales Price of Licensed Products manufactured or imported
and sold by the Company hereunder. Earned compensation shall equal [Omitted;
Material Filed Separately With The Securities And Exchange Commission] percent
of the Net Sales Price of all Licensed Products sold under this Agreement,
including, without limitation, sales made pursuant to paragraphs 3.4 and 6.3
hereof. The company shall prepare or cause to be prepared statements
containing the information set forth in paragraph 4.5 hereof for the period
commencing on the date hereof and ending on March 31, 1996 and for each three
(3) month period ended the last day of March, June, September and December in
each year hereof, which shall be furnished to the Design Partnership together
with earned compensation due for each such period within thirty (30) days
after the end of each such period. Any excess of earned compensation
determined under this paragraph 4.2 over the minimum compensation provided in
paragraph 4.1 hereof, shall be remitted to the Design Partnership within
thirty (30) days after the end of each such three (3) month period. The term
"Net Sales Price" shall mean the gross sales price of all Licensed Products
sold under this Agreement to retailers or, with respect to Licensed Products
that are not sold directly or indirectly to retailers, other ultimate
consumers (as in the case of accommodation sales by Company to its employees
or sales by company in its own stores), less trade discounts, merchandise
returns, sales tax (if separately identified and charged) and markdowns and/or
chargebacks which, in accordance with generally accepted accounting principles,
would normally be treated as deductions from gross sales, and which, in any
event, do not include any chargebacks or the like for advertising, fixture or
retail shop costs or contributions. Notwithstanding the foregoing, the
9
<PAGE>
Design Partnership hereby waives its right to receive compensation hereunder
with respect to units of Licensed Products sold at a discount of 40% or more
off the regular wholesale price ("Discounted Units"), provided that such
waiver shall only apply to the extent that the aggregate Net Sales Price of
Discounted Units for any year does not exceed 10% of the Net Sales Price of
all units of Licensed Products other than Discounted Units sold in such year.
No other deductions shall be taken. Any merchandise returns shall be credited
in the three (3) month period in which the returns are actually made. For
purposes of this Agreement, affiliates of the Company shall mean all persons
and business entities, whether corporations, partnerships, joint ventures or
otherwise, which now or hereafter control, or are owned or controlled,
directly or indirectly by the Company, or, are under common control with the
Company. It is the intention of the parties that compensation payments will
be based on bona fide wholesale prices at which the Company sells Licensed
Products to independent retailers in arms' length transactions. In the event
the Company shall sell Licensed Products to its affiliates, compensation
payments shall be calculated on the basis of such a bona fide wholesale price
irrespective of the Company's internal accounting treatment of such sale,
unless such products are sold by its affiliates directly to the end-user
consumer, in which case royalties shall be calculated on the basis of the
price paid by the end-user consumer, less applicable taxes. The Company
shall identify separately in the statements provided to the Design Partnership
pursuant to paragraph 4.5 hereof, all sales to its affiliates. At least once
annually and no later than 90 days after the close of Company's fiscal year,
Company shall furnish to the Design Partnership a statement of the Net Sales
Price of all Licensed Products sold during the year just ended, which shall be
certified by the independent auditor for Company as correct and in accordance
with the terms of this Agreement.
4.3 The Company shall reimburse the Design Partnership for any travel and
promotion expenses incurred by the Design Partnership or Polo in the
performance of the Design Partnership's duties under this Agreement with the
prior written approval of Licensee. Such amounts shall include first class
travel and hotel accommodations. Amounts payable to the Design Partnership
pursuant to this paragraph shall become due and payable monthly within thirty
(30) days after the date of mailing of the invoices, accompanied by
corresponding receipts, for such costs incurred during the preceding month.
4.4 If the payment of any installment of compensation is delayed for any
reason, interest shall accrue on the unpaid principal amount of such
installment from and after the date
10
<PAGE>
which is 10 days after the date on which the same became due pursuant to
paragraphs 4.1 or 4.2 hereof at the lower of the highest rate permitted by
law in New York and two percent (2%) per annum above the prime rate of
interest in effect from time to time at Chemical Bank, New York, New York
or its successor.
4.5 The Company shall at all times keep an accurate account of all
operations within the scope of this Agreement. The Company shall render
a full statement in writing to the Design Partnership in accordance with
paragraph 4.1 hereof, which shall account separately for each different
product category and shall include all aggregate gross sales, trade
discounts, merchandise returns, sales tax, markdowns, chargebacks, unit
sales, sales of Discounted Units, sales of miscuts and damaged merchandise
and net sales price of all sales for the preceding three (3) month period.
Such statements shall be in sufficient detail to be audited from the books
of the Company. Once annually, which may be in connection with the regular
annual audit of the Company's books, the Company shall furnish an annual
statement of the aggregate gross sales, trade and prompt payment discounts,
merchandise returns and Net Sales Price of all Licensed Products made or sold
by the Company, certified by Company's independent accountant. Each quarterly
statement furnished by Company shall be certified by the chief financial
officer of the Company or a certified public accountant who may be in the
employ of the Company. The Design Partnership and its duly authorized
representatives, on reasonable notice, shall have the right, no more than
once in each year during regular business hours, for the duration of the term
of this Agreement and for three (3) years thereafter, to examine the books of
account and records and all other documents, materials and inventory in the
possession or under the control of Licensee and its successors with respect
to the statements required, and Licensee's obligations, hereunder. All such
books of account, records and documents shall be maintained and kept available
by the Company for at least the duration of this Agreement and for three (3)
years thereafter. The Design Partnership shall have free and full access
thereto in the manner set forth above and shall have the right to make copies
and/or extracts therefrom. If as a result of any examination of the Company's
books and records it is shown that the Company's payments to the Design
Partnership hereunder with respect to any twelve (12) month period were less
than or greater than the amount which should have been paid to the Design
Partnership by an amount equal to two percent (2%) of the amount which should
have been paid during such twelve (12) month period, the Company will, in
addition to reimbursement of any underpayment, with interest from the date
on which each payment was due at the rate set forth in paragraph 4.4 hereof,
promptly reimburse the Design Partnership for the cost of such
11
<PAGE>
examination. The Design Partnership shall reimburse the Company for any
overpayment of compensation it discovers during such examination, after
deducting from the amount of such overpayment all costs and expenses
incurred in connection with such examination.
4.6 The obligation of the Company to pay compensation hereunder shall
be absolute notwithstanding any claim which the Company may assert against
Polo or the Design Partnership. The Company shall not have the right to
set-off, compensate itself or any third party, or make any deduction from
such compensation payments for any reason whatsoever.
5. Death or Incapacity of Lauren.
The Design Partnership shall perform its obligations hereunder
notwithstanding any death or incapacity of Lauren and the Company shall
accept the services of the Design Partnership.
6. Term and Termination.
6.1 Unless sooner terminated in accordance with the terms and provisions
hereof, this Agreement shall continue in effect f or so long as the License
Agreement is in effect and shall terminate upon the expiration or termination
of the License Agreement.
6.2 Each of the following shall constitute an event of default ("Event of
Default") hereunder: (i) any compensation is not paid when due and such
default continues for more than fifteen (15) days after written notice to
the Company thereof; (ii) the Company defaults in performing any of the other
terms of this Agreement and continues in such default for a period of thirty
(30) days after written notice thereof to the Company (unless the default
cannot be cured within such thirty (30) day period and the Company shall have
in good faith advised the Design Partnership that it has commenced to cure the
default and thereafter diligently cures such default within an additional
forty-five (45) day period); (iii) an Event of Default (as defined in the
License Agreement) shall occur under the License Agreement or any other design
agreement entered into between the Company and the Design Partnership or
license agreement between the Company and Polo; or (iv) the License Agreement
shall be terminated as a result of an Event of Default thereunder. If any
Event of Default other than that described in paragraph 6.2(iv) shall occur,
the Design Partnership shall have the right, exercisable in its sole
discretion, to terminate this Agreement upon ten (10) days' written notice
to the Company of its intention to do so. Upon the expiration of such ten
(10) day
12
<PAGE>
period, this Agreement shall terminate and come to an end and, subject to
paragraph 6.3 hereof, all rights of the Company in and to the designs
furnished or used hereunder and all copyrights and designs patents therein
and their contemplated use shall terminate. If the Event of Default described
in paragraph 6.2(iv) shall occur, this Agreement and the License shall
thereupon forthwith terminate and come to an end without any need for notice
to the Company. Termination of this Agreement shall be without prejudice to
any remedy of the Design Partnership for the recovery of any monies then due
to it under this Agreement or in respect of any antecedent breach of this
Agreement, and without prejudice to any other right of the Design Partnership,
including without limitation, damages for breach to the extent that the same
may be recoverable.
6.3 In the event Polo chooses not to exercise the option referred to in
paragraph 10 of the License Agreement with respect to all or any portion of
the Licensed Products (as therein defined), the Company may dispose of
Licensed Products, to the extent permitted by and in the manner set forth
in paragraph 10.2 of the License Agreement. Such sales shall be subject to
the payment of earned compensation pursuant to paragraph 4.2 hereof. Upon
the conclusion of the disposal period all rights and interests in and to the
designs furnished or used hereunder and design patents therein and all
copyrights licensed hereby shall belong to and be the property of the Design
Partnership and the Company shall have no further or continuing right or
interest therein.
6.4 The company acknowledges and admits that there would be no adequate
remedy at law for its failure to cease the manufacture or sale of Licensed
Products at the termination of this Agreement, by expiration or otherwise,
and the Company agrees that in the event of such failure, the Design
Partnership shall be entitled to relief by way of temporary or permanent
injunction and such other and further relief as any court with jurisdiction
may deem proper.
6.5 It is expressly understood that under no circumstances shall the
Company be entitled, directly or indirectly, to any form of compensation
or indemnity from the Design Partnership, Lauren, Polo or their affiliates
as a consequence to the termination of this Agreement, whether as a result
of the passage of time, or as the result of any other cause of termination
referred to in this Agreement; provided, however, that nothing herein
contained shall modify the Company's rights with respect to Polo under the
License Agreement. Without limiting the generality of the foregoing, by its
execution of the present Agreement, the Company hereby waives any claim which
it has or
13
<PAGE>
which it may have in the future against the Design Partnership, Lauren, Polo,
Polo Ralph Lauren Corporation or their affiliates, arising from any alleged
goodwill created by the Company for the benefit of any or all of the said
parties or from the alleged creation or increase of a market for Licensed
Products.
7. Indemnity.
7.1 The Company shall indemnify and save and hold the Design Partnership,
Lauren, Polo and Polo Ralph Lauren Corporation, and their assignees,
directors, officers, agents and employees, harmless from and against any
and all liability, claims, causes of action, suits, damages and expenses
(including reasonable attorney's fees and expenses in actions involving third
parties or between the parties hereto) , which they, or any of them, are or
become liable for, or may incur, or be compelled to pay by reason of any acts,
whether of omission or commission, that may be committed or suffered by the
company or any of its directors, officers, servants, agents or employees in
connection with the Company's performance of this Agreement, in connection
with Licensed Products manufactured by or on behalf of the Company or
otherwise in connection with the Company's business; provided, however, that
the Company shall not be responsible for any liability, claims, causes of
action, suits, damages or expenses incurred or suffered by the Design
Partnership, Lauren, Polo or Polo Ralph Lauren corporation, or their
assignees, directors, officers, agents and employees in connection with any
suit or proceeding for infringement of another's design patent, trademark,
copyright or other proprietary rights brought against them as a result of the
Company's use of the Trademark, or the Design Concepts furnished by the Design
Partnership hereunder, in strict accordance with the terms and conditions of
this Agreement and the License Agreement.
8. Disclosure.
The Design Partnership and the Company, and their affiliates, employees,
attorneys, bankers and accountants, shall hold in confidence and not use or
disclose, except as permitted by this Agreement, (i) confidential information
of the other or (ii) the terms of this Agreement, except upon consent of the
other or pursuant to, or as may be required by law, or in connection with
regulatory or administrative proceedings and only then with reasonable advance
notice of such disclosure to the other. Each of Licensee and Licensor shall
take all reasonable precautions to protect the secrecy of the materials,
samples, sketches, designs, artwork, logos and other materials used pursuant
to this Agreement prior to the commercial distribution or the showing or
samples for sale, and Licensee shall not sell
14
<PAGE>
any merchandise employing or adapted from any of said designs, sketches,
artwork, logos, and other materials or their use except under the Trademark.
9. Miscellaneous.
9.1 All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been properly given or sent
(i) on the date when such notice, request, consent or communication is
personally delivered, or (ii) five (5) days after the same was sent, if sent
by certified or registered mail, return receipt requested, or (iii) two (2)
days after the same was sent, if sent by overnight courier delivery or
confirmed telecopier, as follows:
(a) if to the Company, addressed as follows:
Sun Apparel, Inc.
11201 Armour Drive
El Paso, Texas 79935
Attention: Mr. Miles Rubin
Telecopier: 915.592.1343
with a copy to:
Sun Apparel, Inc.
111 West 40th Street
New York, New York 10018
Attention: Mr. Eric Rothfeld
Telecopier: 212.391.2780
(b) if to the Design Partnership addressed as follows:
Polo Ralph Lauren Enterprises, L.P.
650 Madison Avenue
New York, New York 10022
Attention: President
Telecopier: 212-318.7186
with a copy to:
Victor Cohen, Esq.
Eighth Floor
650 Madison Avenue
New York, New York 10022
Telecopier: 212.318.7183
Anyone entitled to notice hereunder may change the address to
15
<PAGE>
which notices or other communications are to be sent to it by notice given
in the manner contemplated hereby.
9.2 Nothing herein contained shall be construed to place the parties in
the relationship of partners or joint venturers, and neither the Design
Partnership nor the Company shall have any power to obligate or bind the
other in any manner whatsoever, except as otherwise provided for herein.
9.3 None of the terms hereof can be waived or modified except by an
express agreement in writing signed by the party to be charged or, in the
case of the Company, its chairman or president. The failure of any party
hereto to enforce, or the delay by any party in enforcing, any of its rights
hereunder shall not be deemed a continuing waiver or a modification thereof
and any party may, within the time provided by applicable law, commence
appropriate legal proceedings to enforce any and all of such rights. All
rights and remedies provided for herein shall be cumulative and in addition
to any other rights or remedies such parries may have at Law or in equity.
Any party hereto may employ any of the remedies available to it with respect
to any of its rights hereunder without prejudice to the use by it in the
future of any other remedy with respect to any of such rights. No person,
firm or corporation, other than the parties hereto and Polo, shall be deemed
to have acquired any rights by reason of anything contained in this Agreement.
9.4 The Design Partnership may assign its right to receive all or any
portion of its compensation under this Agreement and, in addition, this
Agreement and all of the Design Partnership's rights, duties and obligations
hereunder may be assigned by the Design Partnership to any entity to which
the right to own or use the Trademark has been assigned, or to an affiliate
of any such entity. The Company may only assign its rights and obligations
hereunder under the same circumstances and on the same terms and conditions
as set forth with respect to assignments of Licensee's rights and obligations
under the License Agreement, and only to an entity to which Licensee is
rightfully and simultaneously assigning its rights and obligations under
the License Agreement.
9.5 The Company will comply with all laws, rules, regulations and
requirements of any governmental body which may be applicable to the
operations of the Company contemplated hereby, including, without limitation,
as they relate to the manufacture, distribution, sale or promotion of Licensed
Products, notwithstanding the fact that the Design Partnership may have
approved such item or conduct. The Company shall advise the Design
Partnership to the extent any Final Prototype does not comply with any such
law, rule, regulation or requirement.
16
<PAGE>
9.6 This Agreement shall be binding upon and inure to the benefit it of
the successors, heirs and permitted assigns of tile parties hereto.
9.7 This Agreement shall be construed in accordance with and governed by
the laws of the State of New York, applicable to contracts made and to be
wholly performed therein without regard to its conflicts of law rules.
9.8 If any dispute between the parties leads to litigation, the parties
agree that the courts of the State of New York in the City of New York, or
the federal courts in that City, shall have the exclusive jurisdiction and
venue over such litigation. All parties consent to personal jurisdiction in
the State of New York, and agree to accept service of process outside of the
State of New York as if service had been made in that state. Notwithstanding
anything to the contrary set forth herein, neither Polo Ralph Lauren
corporation nor any other general or limited partner of the Design Partnership
shall be liable for any claim based on, arising out of, or otherwise in
respect of, this Agreement, and the Company shall not have nor claim to have
any recourse for any such claim against any general or limited partner of the
Design Partnership.
9.9 In the event of a breach or threatened breach of this Agreement by the
Company, the Design Partnership shall have the right, without the necessity of
proving any actual damages, to obtain temporary or permanent injunctive or
mandatory relief in a court of competent jurisdiction, it being the intention
of the parties that this Agreement be specifically enforced to the maximum
extent permitted by law.
9.10 In the event either party hereto is delayed or hindered in or
prevented from the performance of any act required hereunder by reason of war,
revolution, insurrection, civil disorder, fire, flood, accident, explosion,
strikes, embargo, prohibition or substantial limitation on import or export of
(or unavailability from any source of) product or raw materials, governmental
orders or regulations or any other similar cause which is beyond the control
of such party hereto, the performance of such act shall be excused for the
period during which the cause of failure of performance exists provided (i)
such period shall in any event not extend beyond six (6) months and shall not
affect the running of the term of this Agreement; (ii) that no such event
shall excuse performance of a payment or other financial obligation hereunder;
and (iii) the excused party shall promptly notify the other in writing
advising of the cause for delay.
9.11 Provisions of this Agreement are severable, and if any
17
<PAGE>
provision shall be held invalid or unenforceable in whole or in part in any
jurisdiction, then such invalidity or unenforceability shall affect only such
provision, or part thereof, in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction, or any other provision in
this Agreement in any jurisdiction. To the extent legally permissible, an
arrangement which reflects the original intent of the parties shall be
substituted for such invalid or unenforceable provision.
9.12 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect: in any way the, meaning or interpretation
of this Agreement. Each party acknowledges and represents to the other that
this Agreement has been reviewed by its counsel and the provisions hereof
shall be construed without regard to which party prepared this Agreement.
9.13 This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused the same to be executed by a duly authorized officer as of the day
and year first above written.
POLO RALPH LAUREN ENTERPRISES, L.P.
By: Polo Ralph Lauren Corporation,
General Partner
By: /s/ Michael Newman
SUN APPAREL INC.
By: /s/ Eric Rothfeld
18
<PAGE>
EXHIBIT 11
JONES APPAREL GROUP, INC.
Computation of Basic and Diluted Earnings per Share
(In thousands except per share amounts)
For the Quarter Ended For the Nine Months Ended
-------------------------- --------------------------
September 27, September 28, September 27, September 28,
1998 1997<F1> 1998 1997<F1>
------------ ------------ ------------ ------------
Basic Earnings per Share:
Net income................ $59,098 $48,938 $122,746 $97,758
======== ======= ======== =======
Weighted average number of
shares outstanding........ 100,886 104,372 100,821 104,124
======== ======= ======= =======
Basic earnings per share.. $0.59 $0.47 $1.22 $0.94
======== ======= ======= =======
Diluted Earnings per Share:
- ---------------------------
Net income................ $59,098 $48,938 $122,746 $97,758
======== ======= ======== =======
Weighted average number of
shares outstanding........ 100,886 104,372 100,821 104,124
Assumed issuances under
exercise of stock options. 3,540 4,262 3,792 4,060
-------- ------- ------- -------
104,426 108,634 104,613 108,184
======== ======= ======= =======
Diluted earnings per share $0.57 $0.45 $1.17 $0.90
======== ======= ======= =======
<F1> Adjusted for 2-for-1 stock split effective June 28, 1998.
EXHIBIT 27
<TABLE>
<S> <C>
PERIOD-TYPE 9-MOS
FISCAL-YEAR-END DEC-31-1998
PERIOD-END SEP-27-1998
CASH 14,956
SECURITIES 0
RECEIVABLES 259,315
ALLOWANCES 3,337
INVENTORY 226,971
CURRENT-ASSETS 551,922
PP&E 176,655
DEPRECIATION 47,009
TOTAL-ASSETS 736,069
CURRENT-LIABILITIES 181,096
BONDS 0
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 1,100
OTHER-SE 499,423
TOTAL-LIABILITY-AND-EQUITY 736,069
SALES 1,181,240
TOTAL-REVENUES 1,192,646
CGS 778,372
TOTAL-COSTS 778,372
OTHER-EXPENSES 211,942
LOSS-PROVISION 825
INTEREST-EXPENSE 3,762
INCOME-PRETAX 199,587
INCOME-TAX 76,841
INCOME-CONTINUING 122,746
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 122,746
EPS-PRIMARY 1.22
EPS-DILUTED 1.17
</TABLE>
