-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QZUPaDCllpPzBpxTcEX8swyHuqQZzSJw3NOZrHTiFT9jHUCzO+8nAUSgqghnrzRk iDpgIuwpb/fTLaHDT+ds9w== 0000874016-97-000001.txt : 19970328 0000874016-97-000001.hdr.sgml : 19970328 ACCESSION NUMBER: 0000874016-97-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: JONES APPAREL GROUP INC CENTRAL INDEX KEY: 0000874016 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 060935166 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10746 FILM NUMBER: 97565108 BUSINESS ADDRESS: STREET 1: 250 RITTENHOUSE CIRCLE CITY: BRISTOL STATE: PA ZIP: 19007 BUSINESS PHONE: 2157854000 MAIL ADDRESS: STREET 1: 250 RITTENHOUSE CIRCLE CITY: BRISTOL STATE: PA ZIP: 19007 10-K 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 [FEE REQUIRED] For the fiscal year ended December 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 24, 1997 was approximately $1,598,323,842. As of March 24, 1997, there were 52,165,060 shares of the registrant's Common Stock outstanding. 2 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 1997 Annual Meeting (the "Proxy Statement") that are specifically identified herein as incorporated by reference into this Form 10-K. - 2 - 3 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 severally nationally known brands, including its Jones New York, Evan-Picone and Rena Rowan for Saville labels and the recently licensed Lauren Ralph Lauren label. 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 35 licenses for the Jones New York brand name and 14 licenses for the Evan-Picone brand name with select manufacturers of women's and men's apparel and accessories. In 1996, the Company had net sales of $1.0 billion, which was a 31.5% increase in net sales over 1995. Products The Company participates in four principal segments of the women's apparel market: career sportswear, casual sportswear, suits and dresses. 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 Suits & Sportswear Sportswear Coats Dresses ------------- -------------- ------------ ------------ Industry Better Better Better Better Categories Brand Jones New Jones New Jones New Jones New Labels York, York Sport, York, York, Lauren Ralph Lauren Ralph Lauren Ralph Lauren Ralph Lauren, Lauren, Lauren, Lauren, Jones*Wear, Jones*Wear, Jones*Wear, Evan-Picone, Rena Rowan Jones Jeans, Saville Picone Evening for Saville, Jones & Co, Evan-Picone Jones New York Country, Jones Studio Product Skirts, Skirts, Suits Dresses Offerings blouses, blouses, pants, pants, jackets, jackets, sweaters sweaters - 3 - 4 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 - --------- --------- ------------ ----------- --------- --------- $130-$250 $60-$150 $50-$150 $25-$100 $170-$500 $100-$275 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. 1994 1995 1996 ------------- ------------- ------------- Career Sportswear $410,000 65% $439,000 57% $577,000 56% Casual Sportswear $107,000 17% $211,000 27% $302,000 30% Suits, Dresses and Other $116,000 18% $126,000 16% $142,000 14% Career Sportswear. The Company's flagship label, Jones New York, offers consumers an extensive range of better sportswear geared primarily for the career woman's working needs. The 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. In 1991, the Company first shipped a line of career sportswear under the Rena Rowan for Saville label and subsequently introduced women's sizes for this label in the Spring 1992 season and petite sizes in the Spring 1993 season. In 1992, the Company commenced shipment of a new career sportswear line using the Jones*Wear label. This line is sold to selected retail accounts that do not carry the Company's other lines of career sportswear. In November 1993, the Company acquired the Evan-Picone and other related trademarks. The Company introduced a line of career sportswear under this label for the Spring 1994 season. In 1996, the Company made a $1.5 million payment to satisfy all future royalty obligations to the former owner of the Evan-Picone trademark. 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 Ralph 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 license 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. In March 1997, the Company introduced a collection of Petite sportswear to begin shipping for the Fall 1997 season. Coats and suits were also introduced in March 1997 for the Fall 1997 season. 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 in a less formal working environment as well as for weekend and casual wear. Jones New York Sport is offered in misses, petite and women's sizes. - 4 - 5 The Company also offers a line of casual products under the Jones & Co label designed primarily to be worn in a less formal working environment. In 1995, the Company introduced two new casual sportswear lines. Jones Studio, introduced for the Spring 1996 season, provides casual separates based on emerging trends in the retail marketplace. Jones New York Country, introduced for the Fall 1995 season, is a collection of classic country-styled casualwear that is sold exclusively through the Company's two full price retail stores and twenty-two factory outlet stores bearing the Jones New York Country name. In 1996, the Company introduced Jones Jeans, a denim and cotton-based collection for the women's market. Suits. The Company produces suits under the brand names Jones New York and Saville. Jones New York is a better priced brand, which was introduced by the Company in 1989. Saville, the Company's original line of suits, is targeted to sell in 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 is phasing out its licensed Christian Dior suit business. Dresses. In June 1992, the Company commenced shipping collections of career dresses under the Jones New York brand name, targeted to sell at better prices. In 1994, the Company also introduced a line of better priced career dresses under the Evan-Picone Dress label. A line of evening dresses under the Picone Evening label was launched in 1996 for the Holiday 1996 season. 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. 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 210 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. The design process generally begins with the development of a color scheme and fabric selection for all groups within a product line and takes 14-16 weeks before final samples are produced. Jones' designers and product managers generally meet twice weekly at its production facilities in Bristol, Pennsylvania to review design concepts, styles and sample garments. Once a concept for a line is developed, it takes a design team approximately four weeks to prepare sketches and pick colors and fabrics. The line is developed completely and silhouettes are prepared during the next eight to twelve weeks. Final designs and fabric swatches are formalized on concept boards which are reviewed internally to determine their appeal and ensure consistency with the Company's offerings. In some cases, concept boards are also previewed with major customers before being finalized. As a line is being finalized, samples of the garments are produced and designs are modified accordingly. 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. - 5 - 6 Once prototypes are approved for production, the Company's pattern makers create the patterns that will be used to cut the material. Cutting patterns are designed using a computer-aided design ("CAD") system which minimizes the amount of fabric needed to manufacture each garment, thereby maximizing fabric yield. Once a design is completed on the system, the cutting pattern may be automatically traced on paper patterns or copied on computer tapes for automatic cutting machines. In accordance with standard industry practices for licensed products, Polo Ralph Lauren Enterprises, L.P. has the right to approve the Company's designs for the Lauren 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 118 contractors located in the United States and 208 in overseas locations. The Company also operates two manufacturing facilities of its own. During 1996, approximately 35% of the Company's products were manufactured in the United States and Mexico and 65% in other parts of the world, primarily Asia. 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 average lead time from the commitment for the purchase of piece goods in the greighe phase (no specific color assortment) through the production and shipment of finished goods ranges from six to eight months. However, the average lead time from assortment of greighe piece goods by specific colors to subsequent shipment of finished goods ranges from four to six months. 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's production administration staff oversees all apparel manufacturing. This staff coordinates product engineering (including pattern and sample making), allocation of production among contractors and quality control. The Company allocates product among contractors based on a manufacturer's capabilities, the availability of production capacity and quota, quality, pricing and flexibility in meeting changing production requirements on relatively short notice. The staff also attempts to ensure that all garments in a particular group arrive at the Company's distribution centers at the same time for consolidation and delivery to customers. 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 had 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 - 6 - 7 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 Bristol, 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 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 1,550 customers, including department stores, specialty retailer accounts and direct mail catalog companies throughout the United States and Canada representing approximately 7,700 locations. Department stores account for approximately two-thirds of the Company's sales. The Company's ten largest customers accounted for approximately 64% of sales in 1996. 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 nine department store customers currently owned by the Federated Department Stores, Inc. ("Federated") accounted for approximately 20% of 1996 sales and sales to eight department store customers currently owned by the May Department Stores Company ("May") accounted for approximately 20% of 1996 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 Lord & Taylor, Hecht's and Foley's stores, which are a part of the May group, Macy's Department Stores, Lazarus and Bloomingdale's, which are part of the Federated group, Dillard's, Dayton Hudson and Nordstrom. - 7 - 8 The Company has a direct sales force of 144 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 five domestic and ten Canadian independent sales representatives who work on a commission basis and who, in some cases, also market products of other non-competing apparel companies. 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. Certain of the retail sales specialists rotate among several different stores rather than working at just one store. The salary expenses for the retail sales specialists are frequently shared by the stores. The Company currently has 75 retail sales specialists in department stores such as Macy's, Dillard's, Bloomingdale's, Lord & Taylor, Hecht's and Foley's. 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. The Company currently has approximately 750 designated sales personnel. 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, 1996, the Company operated a total of 196 factory outlet stores and four full price stores. The Company operates four coffee bars in close proximity to four 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 196 factory outlet stores operated by the Company are located in 107 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. - 8 - 9 The Company opened 54, closed 10 and combined two stores in 1995 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, 1996.
1994 1995 1996 Retail stores open at end of period: ---- ---- ---- Store Type Description - ---------------------- ----------------------------- Jones New York Jones New York sportswear 70 78 82 Jones New York Full price retail showcase 2 2 2 for products Executive Suite Jones New York and Executive 26 33 28 Suite men's and women's suits and furnishings Jones New York Woman Large sizes 7 5 2 Jones New York Dress Jones New York dresses 3 2 3 Saville Rena Rowan for Saville 3 1 1 merchandise Jones New York Sport Jones New York Sport and 3 2 22 Jones & Co casual sportswear Strictly Business Women's and men's suits 5 5 4 Evan-Picone Evan-Picone sportswear 1 23 17 Jones New York Country Jones New York Country 0 9 22 casual sportswear Jones New York Country Full price retail showcase 0 0 2 for products Factory Finale Close out merchandise 13 15 15 --- --- --- Total retail stores open at end of period 133 175 200 Aggregate net store sales (in thousands) $77,393 $102,307 $129,767 Square footage of gross store space at end of period 358,884 478,975 557,100
Nearly all stores are leased under long-term leases (typically five years). The average store size is 2,785 square feet, ranging from a minimum of 1,386 square feet to a maximum of 6,600 square feet. Licensing of Company Brands As of December 31, 1996, the Company had 35 license agreements pursuant to 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 cover men's tailored clothing and overcoats, women's intimate apparel, women's rainwear, outerwear, leather outerwear and woolen coats, footwear, belts, scarves, umbrellas, eyewear, fragrances, costume jewelry, hair accessories, cosmetic travel accessories and home sewing patterns, mens' knit and woven shirts and sweaters, mens' and boys' neckwear and men's and women's hosiery and slippers. 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 1996, the Company received $7,651,000 of Jones New York (and related names) licensing income. - 9 - 10 As of December 31, 1996, the Company had 14 license agreements pursuant to 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 cover women's coats, footwear, eyewear and accessories, men's tailored clothing, men's topcoats, mens' knit and woven shirts and sweaters, men's and boy's neckwear, men's and women's hosiery and home sewing patterns. 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 1996, the Company received $5,855,000 of Evan-Picone licensing income. Trademarks The Company utilizes a variety of owned trademarks, including Jones New York, Jones New York Sport, Jones & Co, Jones*Wear, JNY, Jones New York Country, Jones Jeans, Saville, Rena Rowan for Saville, Ellen Kaye, Evan-Picone, Picone Sport, Elements by Evan-Picone, Studio Picone, Evan-Picone Sport, Tailored by Evan-Picone New York, Executive Suite, Strictly Business and Factory Finale. 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 other countries. These registered trademarks expire at various dates through 2011. The Company also licenses the Lauren 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. The bilateral agreements through which quotas are imposed have been negotiated under the framework established by the Arrangement Regarding International Trade in Textiles, known as the Multifiber Arrangement ("MFA"). Under the Uruguay Round Agreement on Textiles and Clothing, dated December 15, 1993, quotas established pursuant to the MFA will be gradually phased out over a ten-year transition period, after which textile and clothing trade will be fully integrated into the General Agreement on Trade and Tariffs ("GATT") and will be subject to the same disciplines as other sectors. The GATT agreement provides for expanded trade, improved market access, lower tariffs, and improved safeguard mechanisms. 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 passage by Congress of the North America Free Trade Act ("NAFTA") at the end of 1993 has enabled the Company to take advantage of lower manufacturing costs in Mexico. - 10 - 11 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. Backlog At December 31, 1996, the Company had unfilled customer orders of approximately $419 million, compared to approximately $301 million of such orders at December 31, 1995 (excluding approximately $27 million and $25 million, respectively, with respect to merchandise on order for the Company's factory outlet and full-price retail stores). 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 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, 1996, the Company had approximately 2,945 full-time employees. This total includes approximately 20 in executive or senior managerial positions, approximately 1,800 in quality control, production, design and distribution positions, approximately 345 in sales, clerical and office positions and - 11 - 12 approximately 780 in the Company factory outlet and full-price retail stores. The Company also employs approximately 686 part-time employees, of which approximately 656 work in the Company factory outlet and full-price retail stores. Approximately 335 of the Company's employees are members of the Teamsters Union, which has a four year labor agreement with the Company expiring in March 1998. The Company considers its relations with its employees to be satisfactory. ITEM 2. PROPERTIES The Company's principal executive office, warehousing and distribution facilities are located in Bristol, Pennsylvania. The Company leases its headquarters facility from a partnership which is equally owned by its Chairman and Chief Executive Officer and a former shareholder of the Company. See "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." The lease for this facility terminates in 1998. 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 403,000 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 870,000 New York, New York Executive and sales offices 145,700 Rural Hall, North Carolina Materials warehouse 232,200 The Company leases space for 196 outlet stores, four full-price retail stores and four coffee bars (aggregating approximately 560,866 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. 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. - 12 - 13 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: 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 1995 High $13-15/16 $15-7/16 $18-3/8 $19-3/4 Low $11-5/16 $12-15/16 $14-7/8 $15-3/16
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 February 26, 1997 was $37-3/8 and on that date there were 146 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. - 13 - 14 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, 1996.
Year Ended December 31, 1996 1995 1994 1993 1992 ---------- -------- -------- -------- -------- Income Statement Data Net sales $1,021,042 $776,365 $633,257 $541,152 $436,572 Gross profit 303,792 229,952 194,682 177,410 150,728 Operating income 130,256 101,131 87,862 78,925 67,552 Income before provision for income taxes 127,763 99,668 87,345 79,019 66,617 Provision for income taxes 46,889 36,183 32,425 30,660 25,314 Net income 80,874 63,485 54,920 48,359 41,303 Per Share Data Net income per share $1.50 $1.19 $1.04 $0.92 $0.79 Dividends paid per share - - - - - Weighted average number of common shares and share equivalents outstanding 54,077 53,458 52,925 52,413 52,379 December 31, 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Balance Sheet Data Working capital $293,970 $260,853 $204,221 $159,175 $122,376 Total assets 488,109 400,959 318,286 266,594 184,639 Short-term debt, including current portion of capital lease obligations 3,067 2,327 1,859 1,722 1,131 Long-term debt, including capital lease obligations 12,141 10,151 8,029 9,545 4,783 Stockholders' equity 376,729 314,975 248,678 189,120 134,791
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 109 which increased net income by $1,376,000. Net income per share for the year ended December 31, 1993, including this change in accounting principle, was $0.95. All net income per share numbers are presented on a fully diluted basis. Net income per share for the years ended December 31, 1996 and 1995 on a primary basis was $1.51 and $1.20, respectively. No dilution existed for all other periods presented. 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. - 14 - 15 ITEM 7. 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 from 1994 through 1996 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 27% for net sales and 22% for income from operations from 1994 to 1996. Net sales and income from operations in 1996 increased 32% and 29%, respectively, over 1995. The Company believes that it has achieved this growth by enhancing the brand equity of each of its labels through its focus on exceptional design, quality and value. The Company has also 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. As an example of the success of its product extensions, the Company's casual sportswear division, designed to address the trend toward more casual dressing, increased to 30% of the Company's net sales in 1996 as compared to 17% in 1994. The Company believes that it has continued opportunities to increase both its career and casual sportswear businesses by further developing its brands, increasing the number of locations that sell its product, expanding the amount of floor space within existing locations, and introducing new products. Career sportswear sales, which increased to $577.2 million in 1996 from $409.9 million in 1994, will be aided by the full rollout of the new Lauren Ralph Lauren label, which was first shipped to customers in the third quarter of 1996. Casual sportswear sales, which grew from $107.5 million in 1994 to $302.4 million in 1996, also present growth opportunities, although not necessarily at the rates historically achieved. Increases in the Company's suit and dress businesses (principally the Jones New York, Evan-Picone and Saville labels) will be offset by the phaseout of the Christian Dior label. RESULTS OF OPERATIONS 1996 Compared to 1995 Net Sales Net sales in 1996 increased by 31.5%, or $244.6 million, to $1,021.0 million as compared to $776.4 million in 1995, due primarily to an increase in the number of units shipped. Career sportswear sales increased by 31.5%, or $138.1 million, to $577.2 million in 1996 as compared to $439.1 million in 1995. Casual sportswear sales in 1996 increased by 43.3%, or $91.4 million, to $302.4 million as compared to $211.0 million in 1995. Net sales for the Company's suit, dress and other category increased by 12.0%, or $15.1 million, to $141.4 million in 1996 as compared to $126.3 million in 1995. - 15 - 16 Gross Profit The gross profit margin was 29.8% in 1996 as compared to 29.6% 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 Ralph Lauren label, which carries higher margins than the corporate average. SG&A Expenses Selling, general and administrative 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 sales, SG&A expenses increased to 18.3% in 1996 from 17.9% in 1995. Expenses associated with the Lauren 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 by $10.2 million, reflecting the added cost of 25 new stores in operation at the end of 1996. Licensing Income Licensing income increased by $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 by $0.6 million. Operating Income The resulting 1996 operating profit of $130.3 million increased by $29.2 million, as compared to $101.1 million during 1995. The operating profit margin decreased to 12.8% in 1996 from 13.0% 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 by 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 sales was 7.9% in 1996, compared to 8.2% in 1995. 1995 Compared to 1994 Net Sales Net sales in 1995 increased by 22.6%, or $143.1 million, to $776.4 million as compared to $633.3 million in 1994, due primarily to an increase in the number of units shipped. Career sportswear sales increased by 7.1%, or $29.2 million, to $439.1 million in 1995 as compared to $409.9 million in 1994. Casual sportswear sales in 1995 increased by 96.3%, or $103.5 million, to $211.0 million as compared to $107.5 million in 1994. Net sales for the Company's suit, dress and other category increased by 9.0%, or $10.4 million, to $126.3 million in 1995 as compared to $115.9 million in 1994. Gross Profit The gross profit margin was 29.6% in 1995 as compared to 30.7% in 1994. The gross margin impact of the large increase in casual sportswear sales, which carry lower margins than the Company's other product - 16 - 17 categories, was the major factor, although the impact was somewhat offset by improved margins in the Company's career sportswear divisions. SG&A Expenses Selling, general and administrative expenses ("SG&A" expenses) of $139.1 million in 1995 represented an increase of $23.8 million over 1994. As a percentage of sales, SG&A expenses decreased to 17.9% in 1995 from 18.2% in 1994. Retail store operating expenses increased by $10.7 million, reflecting the added cost of 42 new stores in operation at the end of 1995. Amortization of the Evan-Picone trademark amounted to $1.3 million for each year, offset by amortization of the excess of net assets acquired over cost of $1.8 million and $3.0 million in 1995 and 1994, respectively. Capitalized startup costs for new labels, net of amortization, were $1.6 million in 1995. Licensing Income Licensing income increased by $1.8 million to $10.3 million in 1995 as compared to $8.5 million in 1994. Licenses under the Jones New York and Evan-Picone labels contributed equally to the growth. Operating Income The resulting 1995 operating profit of $101.1 million increased by $13.2 million, as compared to $87.9 million during 1994. The operating profit margin decreased to 13.0% in 1995 from 13.9% in 1994, largely as a result of the lower gross profit margins offset by the lower percentage of SG&A expenses to sales achieved during 1995. Net Interest Expense Net interest expense was $1.5 million in 1995 compared to $0.5 million in 1994. The increase was the result of higher average overall borrowings and borrowing rates during 1995. Provision for Income Taxes The effective income tax rate for 1995 was 36.3% as compared to 37.1% in 1994. The decrease was primarily due to reduced state income tax provisions for 1995. Net Income Net income increased by 15.6% to $63.5 million in 1995, an increase of $8.6 million over the net income of $54.9 million earned in 1994. Net income as a percentage of sales was 8.2% in 1995, compared to 8.7% in 1994. 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. Net cash provided by operations was $70.7 million, $8.9 million and $8.8 million in 1996, 1995 and 1994, respectively. The $61.8 million improvement for 1996 was primarily due to higher net income, a $37.8 million increase in inventories in 1996 as compared to a $53.1 million increase in 1995, a $10.6 million reduction in prepaid expenses and other current assets and a larger increase in accrued expenses in 1996 over 1995 ($4.5 million and $0.8 million, respectively). The inventory increase for 1995 and 1996 was the result of the inventory levels required to meet anticipated wholesale shipments for the first quarter of the following year and the net addition of 42 retail stores in 1995 and 25 retail stores during 1996. The increase in accounts receivable for both 1995 and 1996 resulted from the increase in net sales during the fourth quarter. The increase in cash provided by operations from 1994 to 1995 was primarily due to higher adjusted net income - 17 - 18 and an increase in accounts payable of $13.4 million, offset by net increases in accounts receivable of $17.9 million and inventories of $53.1 million. Net cash used in investing activities increased by $19.9 million in 1996 to $35.3 million and increased by $1.1 million in 1995 to $15.4 million. Cash used in investing activities has been primarily for the opening of additional warehouse facilities, the acquisition of the minority interest of Fashion Enterprises, Inc. in 1994 (see Note 3 to Notes to Consolidated Financial Statements) 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 an additional warehouse facility in 1997. This facility, including related equipment, is estimated to cost $10.0 million and the Company plans to finance all or a portion of the construction through capital lease financing. Net cash provided by (used in) financing activities was $(22.2) million in 1996, $2.4 million in 1995 and $(0.1) million in 1994. The principal reasons for the changes were $5.0 million in proceeds from capital leases in each of the years 1996 and 1995 for construction of additional warehouse facilities and transactions involving the Company's Common Stock. In 1996 and 1995, the Company repurchased $33.6 million and $4.6 million, respectively, of its Common Stock on the open market under an announced program under which the Company is authorized to acquire up to $100.0 million of such shares through the end of 1997. As of December 31, 1996, an aggregate of $38.2 million had been expended pursuant to the stock repurchase program. Proceeds from the issuance of common stock to employees exercising stock options amounted to $9.1 million, $4.7 million and $1.6 million in 1996, 1995 and 1994, respectively. As of December 31, 1996, the Company had credit arrangements with six United States financial institutions which totalled $330.0 million (see Note 6 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 $190.0 million for unsecured borrowings with rates depending on the borrowing vehicle utilized. At December 31, 1996, $100.1 million was utilized for letters of credit and there were no short-term borrowings outstanding, leaving $229.9 million available for additional borrowings or letters of credit at that date. 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, 1996. 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. INFLATION The Company does not believe that the relatively moderate rates of inflation which have been experienced in the United States and Canada, where it competes, have 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 16 of Notes to Consolidated Financial Statements. - 18 - 19 NEW ACCOUNTING STANDARDS In February 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 as opposed to the current "primary" and "fully diluted" earnings per share. 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 reflects the potential dilution from the assumed exercise of stock options in a manner similar to fully diluted earnings per share, except that the use of the market price at the end of the period when that price is higher than the average market price for the period has been eliminated. This standard is effective for periods ending after December 15, 1997. The adoption of this standard is not expected to have a significant effect on the Company's earnings per share calculation. 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 of 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 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. - 19 - 20 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, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP BDO Seidman, LLP New York, New York February 7, 1997 - 20 - 21 Jones Apparel Group, Inc. Consolidated Balance Sheets (All amounts in thousands except per share data)
December 31, 1996 1995 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 30,085 $ 16,864 Accounts receivable, net of allowance of $2,263 and $2,257 for doubtful accounts 112,678 92,147 Inventories 214,437 176,626 Receivable from and advances to contractors 11,490 21,083 Deferred taxes 9,708 12,265 Prepaid expenses and other current assets 11,432 12,480 -------- -------- TOTAL CURRENT ASSETS 389,830 331,465 PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization 61,696 36,657 INTANGIBLES, at cost less accumulated amortization 26,288 26,585 DEFERRED TAXES 461 120 OTHER ASSETS 9,834 6,132 -------- -------- $488,109 $400,959 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 41 $ 71 Current portion of capital lease obligations 3,026 2,256 Accounts payable 72,569 59,077 Income taxes payable 8,959 2,427 Accrued expenses and other current liabilities 11,265 6,781 -------- -------- TOTAL CURRENT LIABILITIES 95,860 70,612 -------- -------- NONCURRENT LIABILITIES: Obligations under capital leases 12,134 10,102 Long-term debt 7 49 -------- -------- TOTAL NONCURRENT LIABILITIES 12,141 10,151 -------- -------- TOTAL LIABILITIES 108,001 80,763 -------- -------- COMMITMENTS AND CONTINGENCIES - - EXCESS OF NET ASSETS ACQUIRED OVER COST 3,379 5,221 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value - shares authorized 1,000; none issued - - Common stock, $.01 par value - shares authorized 100,000; issued 53,595 and 52,563 536 263 Additional paid-in capital 99,140 84,172 Retained earnings 317,192 236,318 Cumulative foreign currency translation adjustment (1,154) (1,140) -------- -------- 415,714 319,613 Less treasury stock, 1,600 and 261 shares, at cost (38,985) (4,638) -------- -------- TOTAL STOCKHOLDERS' EQUITY 376,729 314,975 -------- -------- $488,109 $400,959 ======== ========
See accompanying notes to consolidated financial statements - 21 - 22 Jones Apparel Group, Inc. Consolidated Statements of Income (All amounts in thousands except per share data)
Year Ended December 31, 1996 1995 1994 ---------- -------- -------- NET SALES $1,021,042 $776,365 $633,257 COST OF GOODS SOLD 717,250 546,413 438,575 ---------- -------- -------- Gross profit 303,792 229,952 194,682 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 186,572 139,135 115,307 LICENSING INCOME (13,036) (10,314) (8,487) ---------- -------- -------- Income from operations 130,256 101,131 87,862 INTEREST EXPENSE 3,040 1,908 1,212 INTEREST INCOME (547) (445) (695) ---------- -------- -------- Income before provision for income taxes 127,763 99,668 87,345 PROVISION FOR INCOME TAXES 46,889 36,183 32,425 ---------- -------- -------- NET INCOME $ 80,874 $ 63,485 $ 54,920 ========== ======== ======== EARNINGS PER SHARE Primary $1.51 $1.20 $1.04 Fully diluted $1.50 $1.19 $1.04 WEIGHTED AVERAGE COMMON SHARES AND SHARE EQUIVALENTS OUTSTANDING Primary 53,665 53,046 52,924 Fully diluted 54,077 53,458 52,925
See accompanying notes to consolidated financial statements - 22 - 23 Jones Apparel Group, Inc. Consolidated Statements of Stockholders' Equity (All amounts in thousands)
Cumulative foreign currency trans- Total Additional lation stock- Common paid-in Retained adjust- Treasury holders' stock capital earnings ments stock equity ---- ------- -------- ------- -------- -------- BALANCE, JANUARY 1, 1994 $256 $71,688 $117,996 $ (820) $ - $189,120 YEAR ENDED DECEMBER 31, 1994: Executive stock options issued - 428 - - - 428 Recognition of deferred compensation in connection with executive stock options - (428) - - - (428) Amortization of deferred compensation of executive stock options outstanding - 274 - - - 274 Net income - - 54,920 - - 54,920 Exercise of stock options 3 1,620 - - - 1,623 Tax benefit derived from exercise of stock options - 3,129 - - - 3,129 Foreign currency translation adjustments - - - (388) - (388) ---- ------- -------- ------- ------- -------- BALANCE, DECEMBER 31, 1994 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: Executive stock options issued - 274 - - - 274 Recognition of deferred compensation in connection with executive stock options - (274) - - - (274) 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 ==== ======= ======== ======= ======== ========
See accompanying notes to consolidated financial statements - 23 - 24 Jones Apparel Group, Inc. Consolidated Statements of Cash Flows (All amounts in thousands)
Year Ended December 31, 1996 1995 1994 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $80,874 $63,485 $54,920 ------- ------- ------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,948 6,724 4,192 Provision for losses on trade receivables 800 (464) (355) Deferred taxes 7,233 7,622 3,038 Other 416 40 390 Decrease (increase) in: Trade receivables (21,349) (17,873) (27,200) Inventories (37,814) (53,077) (23,326) Prepaid expenses and other current assets 10,624 (10,746) (4,656) Other assets (3,703) (5,027) (2,416) Increase (decrease) in: Accounts payable 13,498 13,371 3,668 Taxes payable 6,673 4,116 1,775 Accrued expenses and other current liabilities 4,492 768 (1,187) ------- ------- ------- Total adjustments (10,182) (54,546) (46,077) ------- ------- ------- Net cash provided by operating activities 70,692 8,939 8,843 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (34,066) (16,013) (9,490) Proceeds from disposition of assets 261 635 3 Acquisition of trademarks and licenses (1,492) (28) (78) Acquisition of minority interest in Fashion Enterprises, Inc. - - (4,694) ------- ------- ------- Net cash used in investing activities (35,297) (15,406) (14,259) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt and capital leases (2,623) (2,606) (1,760) Purchases of treasury stock (33,584) (4,638) - Proceeds from capital leases 5,000 5,000 - Proceeds from exercise of stock options 9,068 4,651 1,623 Other (37) - - ------- ------- ------- Net cash provided by (used in) financing activities (22,176) 2,407 (137) ------- ------- ------- EFFECT OF EXCHANGE RATES ON CASH 2 (202) (331) ------- ------- ------- NET INCREASE (DECREASE) IN CASH 13,221 (4,262) (5,884) CASH AND CASH EQUIVALENTS, BEGINNING 16,864 21,126 27,010 ------- ------- ------- CASH AND CASH EQUIVALENTS, ENDING $30,085 $16,864 $21,126 ======= ======= =======
See accompanying notes to consolidated financial statements - 24 - 25 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 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. 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 five to eight 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. Startup Costs Costs incurred in the startup phase of new labels are capitalized and amortized over a period of 18 months beginning in the period with initial shipments of products bearing the label. 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. - 25 - 26 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) Foreign Currency Translation The financial statements of the 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 the 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 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 The computation of earnings per share is based on the weighted average number of common shares outstanding during the period plus, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options. Fully diluted earnings per share also reflect additional dilution related to stock options due to the use of the market price at the end of the period when this price is higher than the average market price for the period. Cash Equivalents The Company considers all highly liquid debt instruments to be cash equivalents. Long-Lived Assets The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in 1996. 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. - 26 - 27 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 2. 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. NOTE 3. ACQUISITIONS On November 8, 1993, the Company acquired 80% ownership of Fashion Enterprises, Inc. ("FEI") as a result of a reorganization plan confirmed by the U.S. Bankruptcy Court for the Western District of Texas. FEI operates as an exclusive manufacturing contractor for the Company. FEI was located in El Paso, Texas with two manufacturing facilities in Ciudad de Juarez, Mexico. The Company acquired its 80% ownership in satisfaction of a $410,000 advance that had been made to FEI prior to bankruptcy and its agreement to finance FEI's reorganization plan with up to $650,000 in loans. The acquisition was accounted for as a purchase with the results of FEI included from the acquisition date. In connection with the FEI acquisition, the Company recorded a deferred tax asset for the tax effect of FEI's net operating loss carryforward, which was completely utilized by December 31, 1996. The acquisition of FEI and its net operating losses resulted in an excess of net assets acquired over cost of $15,336,000 after application to all noncurrent assets acquired. This amount is being amortized on a straight-line basis over five years from the date of acquisition. On December 15, 1994, the Company acquired the remaining 20% of FEI for $4,694,000 in cash. The acquisition of this minority interest reduced the recorded excess of net assets acquired over cost by $4,755,000. On December 31, 1994, FEI was merged with and into the Company. NOTE 4. INVENTORIES Inventories are summarized as follows:
December 31, 1996 1995 (In thousands) -------- -------- Raw materials $ 38,571 $ 36,908 Work in process 37,682 30,872 Finished goods 138,184 108,846 -------- -------- $214,437 $176,626 ======== ========
- 27 - 28 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 5. PROPERTY, PLANT AND EQUIPMENT Major classes of property, plant and equipment are as follows:
December 31, 1996 1995 (In thousands) -------- -------- Land and buildings $ 36,763 $ 13,839 Leasehold improvements 24,712 19,424 Machinery and equipment 25,340 16,203 Furniture and fixtures 6,932 5,197 Construction in progress 1,076 7,379 -------- -------- 94,823 62,042 Less: accumulated depreciation and amortization 33,127 25,385 -------- -------- $ 61,696 $ 36,657 ======== ========
Included in property, plant and equipment are the following capitalized leases:
December 31, 1996 1995 (In thousands) -------- -------- Buildings $ 31,006 $ 13,839 Machinery and equipment 3,538 3,186 Construction in progress - 6,733 -------- -------- 34,544 23,758 Less: accumulated amortization 10,243 8,394 -------- -------- $ 24,301 $ 15,364 ======== ========
NOTE 6. SHORT-TERM BORROWINGS At December 31, 1996, the Company had credit arrangements with six United States financial institutions which totalled $330,000,000. 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 $190,000,000 for unsecured borrowings with rates depending on the borrowing vehicle utilized. At December 31, 1996, the estimated aggregate interest rate on the lines was 7.25%. The Company was committed for unexpired bank letters of credit at December 31, 1996 in the amount of $100,124,000 and there were no short-term borrowings outstanding, leaving $229,876,000 available for additional borrowings or letters of credit at that date. 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, 1996. - 28 - 29 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, 1996 1995 (In thousands) -------- -------- Warehouses, office facility and equipment $ 15,160 $ 12,358 Less: current portion 3,026 2,256 -------- -------- Obligations under capital leases - noncurrent $ 12,134 $ 10,102 ======== ========
The Company occupies a warehouse and office facility leased from an affiliated real estate partnership which is 50% owned by the Company's Chairman. The fifteen year net lease runs until March 15, 1998 and requires minimum annual rent payments of $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. The Company occupies warehouse and office facilities leased from the City of Lawrenceburg, Tennessee. Three ten-year net leases run until February 2004, July 2005 and May 2006, respectively, and require minimum annual rent payments of $500,000 each plus accrued interest. In connection with these leases, the Company guaranteed $15,000,000 of Industrial Development Bonds issued in order to construct the facilities, $12,583,000 of which remained unpaid as of December 31, 1996. 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 $671,000. The equipment has been capitalized at its fair market value of $2,429,000, 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, 1996:
Year Ending December 31, (In thousands) 1997 $ 3,996 1998 2,885 1999 2,601 2000 2,012 2001 1,910 Later years 5,853 ------ Total minimum lease payments 19,257 Less: amount representing interest 4,097 ------- Present value of net minimum lease payments $15,160 =======
- 29 - 30 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 8. COMMITMENTS (a) LEASES. Total rent expense charged to operations for the years ended December 31, 1996, 1995 and 1994 was $18,888,000, $15,359,000 and $11,155,000, 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) 1997 $ 15,580 1998 14,365 1999 13,210 2000 11,012 2001 9,347 Later years 5,859 -------- $ 69,373 ========
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 Ralph Lauren trademark pursuant to license and design service agreements with Polo Ralph Lauren, L.P., the Company is obligated to pay Polo Ralph Lauren, L.P. a percentage of net sales of Lauren 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. - 30 - 31 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 9. INCOME TAXES The following summarizes the provision for income taxes:
Year ended December 31, 1996 1995 1994 (In thousands) -------- -------- -------- Current: Federal $ 34,522 $ 23,236 $ 25,528 State and local 3,733 3,030 2,545 Foreign 1,401 2,295 1,314 -------- -------- -------- 39,656 28,561 29,387 -------- -------- -------- Deferred: Federal 7,722 7,653 2,774 State and local (489) (31) 264 -------- -------- -------- 7,233 7,622 3,038 -------- -------- -------- Provision for income taxes $ 46,889 $ 36,183 $ 32,425 ======== ======== ========
The foreign and domestic components of income before provision for income taxes were as follows:
Year ended December 31, 1996 1995 1994 (In thousands) -------- -------- -------- United States $125,650 $ 94,224 $ 84,164 Canada 2,378 2,666 1,516 Other (265) 2,778 1,665 -------- -------- -------- Income before provision for income taxes $127,763 $ 99,668 $ 87,345 ======== ======== ========
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, 1996 1995 1994 (In thousands) -------- -------- -------- Provision for Federal income taxes at the statutory rate $ 44,717 $ 34,884 $ 30,571 State and local income taxes, net of federal benefit 2,108 1,949 2,449 Amortization of excess of net assets acquired over cost (645) (645) (1,056) Other items, net 709 (5) 461 -------- -------- -------- Provision for income taxes $ 46,889 $ 36,183 $ 32,425 ======== ======== ========
- 31 - 32 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) The Company has not provided for U.S. Federal and foreign withholding taxes on $1,545,000 of foreign subsidiaries' undistributed earnings as of December 31, 1996. Such earnings are intended to be reinvested indefinitely. It is not practical to determine the amount of income tax liability that would have resulted had such earnings been actually repatriated. On repatriation certain foreign countries impose withholding taxes. The amount of withholding tax that would be payable on remittance of the entire amount of undistributed earnings would approximate $85,000. The following is a summary of the significant components of the Company's deferred tax assets and liabilities:
December 31, 1996 1995 (In thousands) -------- -------- Deferred tax assets: Nondeductible accruals and allowances $ 8,009 $ 1,860 Operating loss carryforwards - 10,670 Depreciation and amortization 1,118 (25) Other (net) 1,042 (120) -------- -------- Net deferred tax asset $ 10,169 $ 12,385 ======== ========
NOTE 10. INTANGIBLE ASSETS Intangible assets consist of trademarks and license agreements. Intangibles are amortized on a straight-line basis over their estimated lives, which vary from 1-1/2 to 20 years. Trademarks and license agreements as of December 31, 1996 and 1995 consisted of:
Useful lives December 31, 1996 1995 (years) (In thousands) -------- -------- ----------- Trademarks $ 26,865 $ 25,373 20 License agreements 5,319 5,319 1-1/2 to 19 -------- -------- 32,184 30,692 Less: accumulated amortization 5,896 4,107 -------- -------- $ 26,288 $ 26,585 ======== ========
- 32 - 33 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 11. SIGNIFICANT CUSTOMERS The significant portion of the Company's sales are to retailers throughout the United States and Canada. Sales to nine department store customers currently owned by the Federated Department Stores, Inc. ("Federated") accounted for 20%, 21% and 20% for the years ended December 31, 1996, 1995 and 1994, respectively. Sales to eight department store customers currently owned by the May Department Stores Company ("May") accounted for 20%, 19% and 19% for the years ended December 31, 1996, 1995 and 1994, respectively. Federated and May accounted for 42% of accounts receivable at December 31, 1996. NOTE 12. COMMON STOCK REPURCHASE PROGRAM 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. As of December 31, 1996, 1,572,200 shares had been acquired at a total cost of $38,222,000, leaving $61,778,000 available for future repurchases. NOTE 13. STOCK OPTIONS At December 31, 1996, 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 1995 and 1996, respectively: no dividends paid for all years; expected volatility of 40.7% and 38.9%; risk-free interest rates of 6.16% and 6.20%; and expected lives of 3.0 and 3.0 years. - 33 - 34 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) 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, 1996 1995 ------- ------- Net income (in thousands) As reported $80,874 $63,485 Pro forma 79,074 63,387 Primary earnings per share As reported $1.51 $1.20 Pro forma $1.47 $1.19 Fully diluted earnings per share As reported $1.50 $1.19 Pro forma $1.46 $1.19
The following table contains information on stock options for the three year period ended December 31, 1996:
Exercise Weighted Option price range average shares per share price --------- ------------------ -------- Outstanding, January 1, 1994 5,038,200 $0.40 to $16.125 $7.59 Granted 1,274,000 $12.00 to $17.125 $12.76 Exercised 660,500 $0.40 to $11.25 $2.46 Forfeited 1,925,334 $0.40 to $17.125 $8.79 --------- ------------------ -------- Outstanding, December 31, 1994 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 $16.80 --------- ------------------ -------- Outstanding, December 31, 1996 4,109,170 $0.40 to $34.375 $18.17 ========= ================== ======== Exercisable at year-end 1994 941,966 $0.40 to $16.125 $6.20 1995 980,400 $0.40 to $15.0625 $8.93 1996 733,770 $0.40 to $17.50 $9.56
1991 Plan 1996 Plan --------- --------- Available for future grants 1994 1,040,334 - 1995 938,334 - 1996 49,534 2,799,000
- 34 - 35 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued)
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
The following table summarizes information about stock options outstanding at December 31, 1996.
Range of exercise prices: $0.40 $11.25 $21.125 $32.625 $0.40 to to to to to $9.50 $19.625 $24.75 $34.375 $34.375 -------- --------- --------- ------- --------- Outstanding Options Number outstanding at December 31, 1996 450,600 1,663,570 1,755,000 240,000 4,109,170 Weighted-average remaining contractual life (years) 5.5 8.5 10.6 10.4 9.2 Weighted-average exercise price $6.30 $13.13 $23.98 $23.80 $18.17 Exercisable options Number outstanding at December 31, 1996 280,600 453,170 - - 733,770 Weighted-average exercise price $4.59 $12.63 - - $9.56
NOTE 14. 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 15% 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 July 1, 1991 through March 31, 1994, 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 subject to limitations imposed by the Internal Revenue Code. On April 1, 1994, these amounts were increased to 30% and 1.8%, respectively, for employees earning less than $150,000 per year. On April 1, 1996, the contribution rates were increased to 50% and 3.0%, respectively, for employees earning less than $150,000 per year and 35% and 2.1%, respectively, for employees earning over $150,000 per year. 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 $801,000, $369,000 and $292,000 to the Plan during the years ended December 31, 1996, 1995 and 1994, respectively. - 35 - 36 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 15. STATEMENT OF CASH FLOWS Cash interest payments during the years ended December 31, 1996, 1995 and 1994 were $3,207,000, $2,118,000 and $1,279,000, respectively. Cash income tax payments during the years ended December 31, 1996, 1995 and 1994 were $32,110,000, $23,068,000 and $26,459,000, respectively. Equipment acquired through capital lease financing during the years ended December 31, 1996, 1995 and 1994 amounted to $353,000, $216,000 and $381,000, respectively. Reductions in income tax payments resulting from the exercise of employee stock options during the years ended December 31, 1996, 1995 and 1994 were $5,157,000, $2,499,000 and $3,129,000, respectively. Under the provisions of the Company's 1991 Stock Option Plan, employees exercising stock options 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. NOTE 16. UNAUDITED CONSOLIDATED FINANCIAL INFORMATION Unaudited interim consolidated financial information for the two years ended December 31, 1996 is summarized as follows (earnings per share are fully diluted where applicable):
First Second Third Fourth (In thousands except per share data) Quarter Quarter Quarter Quarter -------- -------- -------- -------- 1996 Net sales $260,350 $193,275 $309,019 $258,398 Gross profit 72,793 61,032 95,497 74,470 Income from operations 32,652 21,534 49,788 26,282 Net income 20,339 13,338 30,878 16,319 Earnings per share $0.38 $0.25 $0.58 $0.30 1995 Net sales $191,987 $156,303 $243,505 $184,570 Gross profit 59,037 48,994 69,376 52,545 Income from operations 27,092 17,365 38,159 18,515 Net income 16,728 10,720 23,978 12,059 Earnings per share $0.32 $0.20 $0.45 $0.22
- 36 - 37 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 69 Chairman and Director Herbert J. Goodfriend 70 Vice Chairman and Director Jackwyn Nemerov 45 President Irwin Samelman 66 Executive Vice President, Marketing and Director Wesley R. Card 49 Chief Financial Officer Gary R. Klocek 46 Controller Geraldine Stutz 68 Director Howard Gittis 63 Director Prior to February 11, 1997, each director who was not a full-time employee of the Company received an annual retainer of $20,000 for services as a director plus $1,500 for each board and separate committee meeting attended during the year. Effective February 11, 1997, 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, 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. - 37 - 38 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 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 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. Klocek has been Controller of the Company 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. 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: - 38 - 39 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. 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. 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 joined Jones in 1994 in the dual capacity of Senior Vice President - Corporate Merchandising Manager and President of Evan-Picone division. 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. 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. Robert Kutner, President of Jones Apparel Group Canada, Inc., joined the Company in 1983. Prior to 1983, Mr. Kutner was employed by Highland Queen Corp. Jeffrey Levy, President of Rena Rowan for Saville, 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 joined Jones Apparel Group in December 1995 as Creative Director of the Lauren Ralph Lauren division. 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 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. 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. 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. - 39 - 40 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. - 40 - 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 27, 1997 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 27, 1997 - ----------------- (Chief Executive Officer) (Sidney Kimmel) /s/ Wesley R. Card Financial Officer March 27, 1997 - ------------------ (Principal Financial Officer) (Wesley R. Card) /s/ Gary R. Klocek Controller March 27, 1997 - ------------------ (Principal Accounting Officer) (Gary R. Klocek) /s/ Herbert J. Goodfriend Vice Chairman and Director March 27, 1997 - ------------------------- (Herbert J. Goodfriend) /s/ Irwin Samelman Executive Vice President, March 27, 1997 - ------------------ Marketing and Director (Irwin Samelman) /s/ Geraldine Stutz Director March 27, 1997 - ------------------- (Geraldine Stutz) /s/ Howard Gittis Director March 27, 1997 - ----------------- (Howard Gittis) - 41 - 42 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 - ------------ ------- ---------------------- * 3.1 Articles of Incorporation, as amended (1) 3.1 3.3 By-Laws (3) 3.3 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 (3) 10.20 10.20 Letter Agreement between the Registrant and Philadelphia National Bank (3) 10.21 10.21 Letter Agreement between the Registrant and First Fidelity Bank (3) 10.22 10.22 Letter Agreement between the Registrant and the Bank of New York - 42 - 43 Incorporated by Reference Exhibit to Exhibit Nos. Description of Exhibit - ------------ ------- ---------------------- (3) 10.23 10.23 Letter Agreement between the Registrant and Chase Manhattan Bank (4) 10.24 10.24 Letter Agreement between the Registrant and Chase Manhattan Bank (4) 10.25 10.25 Letter Agreement between the Registrant and Bank of Boston (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 + * 10.30 Series 1996 Note Agreement with The Industrial Development Board of the City of Lawrenceburg, Tennessee * 10.31 Industrial Development Board of the City of Lawrenceburg Taxable Revenue Note, Series 1996 * 10.32 Lease Agreement between the Registrant and the Industrial Development Board of the City of Lawrenceburg * 10.33 Form of 1996 Stock Option Plan + * 10.34 Letter Agreement between the Registrant and CoreStates Bank * 10.35 Master Short Term Borrowing Agreement between the Registrant and CoreStates Bank * 10.36 Letter Agreement between the Registrant and First Union Bank * 10.37 Letter Agreement between the Registrant and the Bank of New York * 10.38 Letter Agreement between the Registrant and Bank of Boston * 10.39 Money Market Line Commercial Promissory Note between the Registrant and Bank of Boston * 10.40 License Agreement between the Registrant and Polo Ralph Lauren, L.P., dated October 18, 1995# - 42 - 43 Incorporated by Reference Exhibit to Exhibit Nos. Description of Exhibit - ------------ ------- ---------------------- * 10.41 Design Services Agreement between the Registrant and Polo Ralph Lauren, L.P., dated October 18, 1995# * 10.42 Lease Agreement between the Registrant and The Shelton Companies * 10.43 Letter Agreement between the Registrant and Israel Discount Bank of New York * 11 Computation of Earnings per Share * 21 List of Subsidiaries * 23 Consent of BDO Seidman, LLP * 27 Financial Data Schedule. (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.) ____________________ * 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. - 44 - 45 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Jones Apparel Group, Inc. New York, New York The audits referred to in our report dated February 7, 1997 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 audit of the financial statement schedule listed in the accompanying index for each of the three years ended December 31, 1996. 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 7, 1997 - 45 - 46 SCHEDULE II JONES APPAREL GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (In Thousands)
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 period - ------------ ---------- ---------- ----------- ---------- --------- For the year ended December 31, 1994: Allowance for doubtful accounts $3,720 $(355) $ - $805 $2,560 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
Doubtful accounts written off (recovered) against accounts receivable. - 46 - EX-3.1 2 EXHIBIT 3.1 Amended and Restated Articles of incorporation of the Corporation. 1. The name of the corporation is Jones Apparel Group, Inc. 2. The location and post office address of the initial registered office of the corporation in this Commonwealth is 220 Rittenhouse Circle, Keystone Industrial Park, Bristol, Pennsylvania, 19007. 3. The corporation is incorporated under the Business Corporation Law of the Commonwealth of Pennsylvania for the following purpose or purposes: the corporation shall have unlimited power to engage in and do any lawful act concerning any or all lawful business for which corporations may be incorporated under the Pennsylvania Business Corporation Law, including to power to engage in manufacturing, this corporation being incorporated under the said Business Corporation Law. 4. The term for which the corporation is to exist is perpetual. 5. The aggregate number of shares which the corporation shall have authority to issue is: ONE HUNDRED ONE MILLION (101,000,000) consisting of (i) One Hundred Million (100,000,000) shares of Common Stock of the par value of $.01 per share and (ii) One Million (1,000,000) shares of Preferred Stock of the par value of $.01 per share. The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof of the Preferred Stock, and of the Common Stock are as follows: A. Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this Article 5, to file an amendment to the corporation's Articles of Incorporation pursuant to 15 Pa.C.S. Section 1914(c) to provide for the issuance of the Preferred Stock in series and to establish the number of shares to be included in each such series. The Preferred Stock may be issued either as a class without series, or as so determined from time to time by the Board of Directors, either in whole or in part in one or more series, each series to be appropriately designated by a distinguishing number, letter or title prior to the issue of any shares thereof. Whenever the term "Preferred Stock" is used in this Article 5, it shall be deemed to mean and include Preferred Stock issued as a class without series, or one or more series thereof, or both, unless the context shall otherwise require. There is hereby expressly granted to the Board of Directors of the corporation authority, subject to the limitations provided by law, to fix the voting power, the designations, and the relative preferences, powers, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of each series of said Preferred Stock and the variations in the relative powers, rights, preferences and limitations as between series, and to increase the number of shares constituting each series, and to decrease such number of shares (but not less than the number of outstanding shares of the series), in the resolution or resolutions adopted by the Board of Directors providing for the issue of said Preferred Stock. The authority of the Board of Directors of the corporation with respect to each series shall include, but shall not be limited to, the authority to determine the following: 1. The designation of the series; 2. The number of shares initially constituting such series; 3. The increase, and the decrease to a number not less than the number of the outstanding shares of such series, of the number of shares constituting such series theretofore fixed; 4. The rate or rates and the times and conditions under which dividends on the shares of such series shall be paid, and, (i) if such dividends are payable in preference to, or in relation to, the dividends payable on any other class or classes of stock, the terms and conditions of such payment, and (ii) if such dividends shall be cumulative, the date or dates from and after which they shall accumulate; - 1 - 2 5. Whether or not the shares of such series shall be redeemable, and, if such shares shall be redeemable, the terms and conditions of such redemption, including, but not limited to, the date or dates upon or after which such shares shall be redeemable and the amount per share which shall be payable upon such redemption, which amount may vary under conditions and at different redemption dates; 6. The amount payable on the shares of such series in the event of a dissolution of, or upon any distribution of the assets of, the corporation; 7. Whether or not the shares of such series may be convertible into, or exchangeable for, shares of any other class or series and the price or prices and the rates of exchange and the terms of any adjustments to be made in connection with such conversion or exchange; 8. Whether or not the shares of such series shall have voting rights in addition to the voting rights provided by law, and, if such shares shall have such voting rights, the terms and conditions thereof, including but not limited to, the right of the holders of such shares to vote as a separate class either alone or with the holders of shares of one or more other series of Preferred Stock and the right to have more or less than one vote per share; 9. Whether or not a purchase fund shall be provided for the shares of such series, and, if such a purchase fund shall be provided, the terms and conditions thereof; 10. Whether or not a sinking fund shall be provided for the redemption of the shares of such series and if such a sinking fund shall be provided, the terms and conditions thereof; and 11. Any other powers, preferences and relative, participating, optional, or other special rights, and qualifications, limitations or restrictions thereof, as shall not be inconsistent with the provisions of this Article 5 or the limitations provided by law. B. Common Stock. 1. Subject to the rights of the Preferred shareholders, the holders of the Common Stock shall be entitled to receive such dividends as may be declared thereon by the Board of Directors of the Corporation in its discretion, from time to time, out of any funds or assets of the corporation lawfully available for the payment of such dividends. 2. In the event of any liquidation, dissolution or winding up of the corporation, or any reduction of its capital, resulting in a distribution of its assets to its shareholders, whether voluntary or involuntary, then, after there shall have been paid or set apart for the holders of the Preferred Stock the full preferential amounts to which they are entitled, the holders of the Common Stock shall be entitled to receive, as a class, pro rata, the remaining assets of the corporation available for distribution to its shareholders. 3. For any and all purposes of these Articles of Incorporation, neither the merger or consolidation of the Corporation into or with any other corporation, nor the merger or consolidation of any other corporation into or with the corporation, nor a sale, transfer or lease of all or substantially all of the assets of the corporation, or any other transaction or series of transactions having the effect of a reorganization shall be deemed to be a liquidation, dissolution or winding-up of the corporation. 4. Except as otherwise expressly provided by law or in a resolution of the Board of Directors providing voting rights to the holders of the Preferred Stock, the holders of the Common Stock shall possess exclusive voting power for the election of directors and for all other purposes and each holder thereof shall be entitled to one vote for each share thereof. - 2 - 3 6. The name(s) and post office address(es) of each incorporator(s) and the number and class of shares subscribed by such incorporator(s) is (are): Name Address Number and class of shares Frances Kuzinar 1510 The Fidelity Building One (1) Common Philadelphia, PA 19109 7. In all elections for Directors, each shareholder entitled to vote shall be entitled to only one vote for each share held, it being intended hereby to deny shareholders the right of cumulative voting in the election of Directors. 8. Except as otherwise provided by law, and subject to the provisions of, applicable law, any action which may be taken at a meeting of the shareholders or of a class of shareholders of the corporation may be taken without a meeting, provided a consent or consents in writing to such action, setting forth the action so taken, shall be (1) signed by the shareholders entitled to cast a majority (or such larger percentage as may be required by law) of the number of votes which all such shareholders are entitled to cast thereon, and (2) filed with the Secretary of the corporation. - 3 - EX-10.30 3 EXHIBIT 10.30 NOTE AGREEMENT NOTE AGREEMENT (this "Agreement"), dated as of May 1, 1996, 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 7-53-101 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 proposed to lease 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 requested the Board to reimburse it for expenses incurred by Lessee in connection with the Board's acquisition 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 acquiring such facilities; and WHEREAS, the Board proposes to issue and sell its 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 note proposed to be issued under this Agreement will be secured by an assignment of the rental payments under the Lease and a deed of trust from the Board with respect to the property acquired with the proceeds of the Note; 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 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 Assignment Agreement of even date herewith 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. - 1 - 2 "Closing Date' means May 1, 1996 or such later date as shall be agreed to by the Board, the Lessee and the Purchaser. "Deed of Trust" means the Deed of Trust and Security Agreement with respect to the Project dated as of May 1, 1996 from the Board for the benefit of the Purchaser. "Default Rate" shall have the same meaning as in the Note. "Documents" means the Lessee Documents and the Note Documents. "Environmental Indemnity" means the Environmental Law Compliance and Indemnity Agreement dated as of May 1, 1996 among the Lessee and the Purchaser. "Escrow and Security Agreement" means the Escrow and Security Agreement dated as of May 1, 1996 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. "Guaranty" means that certain Guaranty Agreement dated as of May 1, 1996 from Lessee. "Holder," whether or not capitalized, means the registered owner from time to time of the 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. "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 Guaranty, the Escrow and Security Agreement and the Environmental Indemnity. "Note" means the Taxable Revenue Note, Series 1996 (Jones Apparel Group, Inc. Project) dated the Closing Date in the principal amount of $5,000,000 issued by the Board. "Note Documents" means this Agreement, the Lease, the Note, the Deed of Trust, the Guaranty, the Escrow and Security Agreement and the Assignment. "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 Note, and any subsequent registered owner of the Note. "Prior Note Agreements" means collectively the Note Agreement, dated November 23, 1993 and the Series 1995 Note Agreement dated as of June 30, 1995, both by and among the Board, the Lessee and the Purchaser. "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. "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. - 2 - 3 "Total Liabilities" shall mean total liabilities determined in accordance with generally accepted accounting principles consistently applied. ARTICLE II AMOUNT AND TERMS OF THE NOTE SECTION 2.01. The 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 1996 (Jones Apparel Group, Inc. Project) of the Board in the principal amount of Five Million Dollars ($5,000,000) (the "Note"). The Note shall contain the terms and conditions and shall be substantially in the form of Exhibit A hereto. SECTION 2.02. Purchasing the Note. The Note shall be purchased on the date hereof. Not later than 4:00 P.M. (Nashville time) on the Closing Date, and upon fulfillment of the applicable conditions set forth in Article K the Purchaser will purchase the Note by application of immediately available funds on behalf of the Board in the manner set forth in Section 2.03 of the Lease. SECTION 2.03. Application of Payments. Any payment or prepayment of Basic Rent under the Lease shall be applied as a payment or prepayment on the Note, and any payment or prepayment on the Note shall be applied as a payment or prepayment of Basic Rent under the Lease. SECTION 2.04. Payments. Each payment on the Note shall be made not later than 12:00 Noon (Nashville time) on the day when due at the place designated in the Note in immediately available funds. Whenever any payment to be made hereunder or under the 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 Note will be used as provided in Section 2.03 of the Lease. ARTICLE III CONDITIONS OF PURCHASE SECTION 3.01. Conditions Precedent to the Purchase of the Note. The obligation of the Purchaser to purchase the 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 Note duly executed by the Board. (b) The Assignment duly executed by the Board. (c) The 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 Guaranty duly executed by the Lessee. (f) The Environmental Indemnity duly executed by the Lessee. (g) 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 liens, assignments and security interests created by the Documents have been taken. (h) Certified copies of the resolutions of the Board of Directors of the Board approving each Note Document and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to each Note Document. (i) 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 Note Document and the other documents to be delivered by it hereunder. - 3 - 4 (j) 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. (k) 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. (l) The opinion of Boston, Bates & Holt, counsel for the Lessee, dated the date hereof, and in form acceptable to Purchaser. (m) The opinion of White and Betz, counsel for the Board, dated the date hereof, and in form acceptable to Purchaser. (n) 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 $5,000,000 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. (o) 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; (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. (p) Suitable policies or evidence of insurance in accordance with the terms of the Lease and this Agreement. (q) 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. (r) 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. (s) Such other items as the Purchaser may reasonably request. - 4 - 5 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 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 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. (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 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 Note Document when delivered hereunder will be, legal valid and binding special obligations of the (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 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 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 Note or the validity of any of the 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 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 Note under the Assignment. The Note constitutes the only note or other obligation of the Board in any manner payable from the revenues to be derived from the Lease, and except for the Note no bonds 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 the laws of the State of Tennessee which default would affect its existence or its powers referred to in subsection (b) of this Section. - 5 - 6 (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 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 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 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 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 enter into the Lease and the Purchaser to purchase the 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 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. - 6 - 7 (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 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. (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 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 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. - 7 - 8 (d) The obligations of the Lessee under this Section 5.04 shall survive the payment in full of all amounts payable under the Note to the extent set forth above. SECTION 5.05. Performance of Lessee or Board Obligations by 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 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 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, but including a complete balance sheet and profit and loss statement for each quarter; (ii) within one hundred fifty 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 7.0 to 1.0. 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, It dividends, and treasury stock repurchases. 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 Total liabilities divided by its Tangible Net Worth to be greater than .75 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 $5,000,000 aggregate liability and fire and extended coverage insurance on the Project 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. - 8 - 9 SECTION 5.15. Notice to Purchaser of Certain Events. Lessee covenants to give Purchaser prompt written notice of any litigation, arbitration, administrative proceeding or investigation that may hereafter be instituted or threatened against Lessee in which the potential liability of Lessee exceeds $100,000. 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 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. 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 Note; or (b) non-payment when due of any installment of principal on the 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; or (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; or (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 either 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 the financial covenants contained in Section 5.07, 5.08 and 5.11 hereof, which the parties agree shall supersede and replace Sections 5.07, 5.08 and 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. - 9 - 10 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. Note Registration. The 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 Note furnished to the note registrar. Principal of, premium, if any, and interest on the 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. The person in whose name the 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 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 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 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 Note For Account of the Purchaser. The Purchaser represents and warrants that it will acquire the Note and the other 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 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 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 Note. SECTION 7.06. Severability. In the event that any clause or provision of any 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 Note Document. SECTION 7.07. Payment on Non-Business Days. Whenever any payment to be made hereunder or under the 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. 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 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, - 10 - 11 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 Note or otherwise, of any sum that may be due and unpaid by the Board 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 Board 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 execution of this Agreement and the issue of the 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 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 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 Note and shall not be merged into the Note or any other documents evidencing the 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 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 instruments, agreements or documents 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), and the rules of practice and procedure for the arbitration of commercial disputes of J.A.M.S./Endispute, or any successor thereto, as supplemented by any special rules set forth in any of the Loan Documents. Judgment upon any arbitration award may be entered in any court having jurisdiction. Any party to this Agreement may bring an action, including a summary of expedited proceeding, to compel arbitration of any controversy or claim to which this Agreement applies in any court having jurisdiction over such action. 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: /s/ Carolyn Thompson Secretary NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION By: /s/ Tim Pettus Title: V. P. JONES APPAREL GROUP, INC. By /s/ Gary R. Klocek Title: Corp. Controller - 11 - 12 FIRST AMENDMENT TO NOTE AGREEMENT THIS FIRST AMENDMENT TO NOTE AGREEMENT ("First Amendment") dated as of October 1, 1996, among THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG ("Board"), NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION ("Purchaser") and JONES APPAREL GROUP, INC. ("Lessee"). WHEREAS, the parties hereto entered into a certain Note Agreement (the "Note Agreement") dated as of May 1, 1996; and WHEREAS, the parties wish to amend Section 5.08 of said Note Agreement; NOW, THEREFORE, in consideration of One Dollar ($1.00) and other good and valuable consideration, the parties agree that the second sentence to Section 5.08 is deleted and the following is substituted in its stead: "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, interest and capitalized leases, dividends, and treasury stock repurchases." EXCEPT AS PROVIDED ABOVE, the Note Agreement remains in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto dully authorized as of the day first above written. THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG By: /s/ Jerry Putman Chairman ATTEST: /s/ Carolyn Thompson Secretary NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION By: /s/ Tim Pettus Title: V. P. - 12 - EX-10.31 4 EXHIBIT 10.31 THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG TAXABLE REVENUE NOTE, SERIES 1996 (JONES APPAREL GROUP, INC. PROJECT) $5,000,000 May 1, 1996 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 FIVE MILLION DOLLARS ($5,000,000), plus interest at the rate of seven and thirty five one hundredth percent (7.35%) 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 June 5, 1996. 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 June 5, 1996. 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 1, 2001. 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 Note Agreement (the "Note Purchase Agreement") dated as of the date hereof among the Maker, NationsBank of Tennessee, National Association and Jones Apparel Group, Inc., a Pennsylvania corporation (the "Lessee"), and is secured by (i) an Assignment Agreement of even date 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 (the "Lease"), (ii) a Deed of Trust from Maker for the benefit of NationsBank of Tennessee, National Association, of even date herewith and of record in the Register's Office for Lawrence County, Tennessee and (iii) an Escrow and Security Agreement dated as of May 1, 1996 by and among Maker, Lessee and NationsBank of Tennessee, N.A. as escrow agent and trustee. 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, 1999 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. - 1 - 2 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 solely (i) pursuant to the Assignment referred to in the Note Purchase Agreement, and (ii) from revenues of the Maker derived and to be derived pursuant to the Lease of even date herewith (the "Lease") between the Maker and the Lessee. 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 an 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. - 2 - 3 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. 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: /s/ Carolyn Thompson Secretary Date of Name and Address Registration Registered Owner - ------------------ -------------------------- May 1, 1996 NationsBank of Tennessee, National Association 255 N. Military Avenue Lawrenceburg, TN 38464 - 3 - EX-10.32 5 EXHIBIT 10.32 This Instrument Prepared By: Alexander B. Buchanan, Esq. Waller Lansden Dortch & Davis 511 Union Street, Suite 2100 Nashville, Tennessee 37219-1760 THIS LEASE (the "Lease"), made and entered into as of May 1, 1996, 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 is a public nonprofit corporation and a public instrumentality of the City of Lawrenceburg, Tennessee, and is authorized under Sections 7-53-101 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 prompting industry and developing trade by inducing manufacturing, industrial governmental educational and commercial enterprises to locate in or remain in the State of Tennessee and further the use of its agricultural products and natural resources; and WHEREAS, to induce Lessee to operate a clothing distribution center on certain real property located in Lawrenceburg, Lawrence County, Tennessee, Lessor has acquired such real property, and Lessor will lease said real property and the building and improvements to be constructed thereon to Lessee on the terms and conditions hereof; and WHEREAS, to obtain funds for such purposes, Lessor will issue and sell its Taxable Revenue Note, Series 1996 (Jones Apparel Group, Inc. Project) (herein sometimes referred to as the "Note") in the principal amount of $5,000,000, under and pursuant to the Act and the Note Agreement dated the date hereof (the "Note Purchase Agreement") among Lessor, NationsBank of Tennessee, National Association (the "Purchaser"), a national banking association with its principal office in Nashville, Tennessee, and Lessee, and the proceeds from the sale of the Note shall be disbursed in the manner and for the purposes hereinafter set forth; NOW, THEREFORE, Lessor, for and in consideration of the payments hereinafter stipulated to be made by Lessee, and the covenants and agreements hereinafter contained to be kept and performed by Lessee, does by these presents demise, lease and let unto Lessee, and Lessee does by these presents hire, lease and rent from Lessor, for the Term and upon the conditions hereinafter stated, the premises described in Schedule A attached hereto and incorporated herein (hereinafter called the "Land") together with the Building (as defined herein), all other improvements now or hereafter located on the Land and any and all other personal property now or hereafter located on the Land (excluding Lessee's inventory); UNDER AND SUBJECT, however, to the encumbrances, if any, shown on Schedule B attached hereto and incorporated herein (the "Permitted Encumbrances"); and UNDER AND SUBJECT to the following terms and conditions: - 1 - 2 ARTICLE I Definitions Section 1.01. In addition to the words, terms and phrases elsewhere defined in this Lease, the following words, terms and phrases as used in this Lease shall have the following respective meanings: "Act" means Sections 7-53-101 to 7-53-311, inclusive, of Tennessee Code Annotated, as amended. "All Unpaid Installments" means an amount equal to (i) the then unpaid principal amount of the Note, 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 Note or on which the Note becomes due, whether by acceleration or otherwise, and (ii) any additional rental due or to become due hereunder prior to the time that the Note is 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 Note is paid in full. "Assignment' means the Assignment Agreement of even date herewith from the Lessor to the Purchaser. "Authorized Lessee Representative" means the President, any Vice President or the Treasurer of Lessee, except that Lessee may, by written notice to the Purchaser, designate additional Authorized Lessee Representatives or delete Authorized Lessee Representatives. "Basic Rent" means the amounts described in Section 4.01 hereof. "Building" means the improvements constructed on the Land in accordance with the terms of the Construction Contract. "Business Day" means any day other than a Saturday, a Sunday, or a public holiday or the equivalent for banks generally under the laws of State of Tennessee. "Construction Contract" means the standard form of agreement dated December 15, 1995 between Lessee and Contractor, as design/builder. "Contractor" means Evers Construction Company, Inc. "Deed of Trust" means the Deed of Trust dated as of the date hereof from the Lessor for the benefit of the Purchaser with respect to the Project, of record in Book 23, Page 175 Register's Office for Lawrence County, Tennessee. "Environmental Indemnity" means the Environmental Law Compliance Certificate and Indemnity Agreement dated as of the Closing Date between the Lessee and the Purchaser. "Guaranty" means that certain Guaranty Agreement dated as of the date hereof from Lessee. "Land" means the real property described in Schedule A attached hereto and incorporated herein. "Lease" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more instruments supplemental hereto. "Leased Property" means the Land, the Building and all other improvements now or hereafter located on the land and any and all personal property now or hereafter located on the Land (excluding Lessee's inventory). "Lessee Documents" means this Lease, the Note Purchase Agreement, the Guaranty and the Environmental Indemnity. "Note" means the Taxable Revenue Note, Series 1996 (Jones Apparel Group, Inc. Project) in the principal amount of $5,000,000 issued by the Lessor. "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 Note, and any subsequent registered owner of the Note. - 2 - 3 "Note Documents" means this Lease, the Note Purchase Agreement, the Note, the Assignment and the Deed of Trust. "Note Purchase Agreement" means the Note Agreement of even date herewith among the Lessor, the Lessee and the Purchaser, "Project" means 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. "Term" means the term described in Section 3.01. ARTICLE II Acquisition and Completion of Project; Issuance of the Note; Compliance with Laws; Lessee's Acceptance; Permitted Contests; Assignment of Lessor's Rights Section 2.01. Acquisition and Completion of the Project. Lessor has acquired or will acquire title to the Project on the Closing Date with funds provided by Lessee. Lessee agrees to complete the Project in accordance with the plans and specifications as provided in Article X-V hereof and to lease the Project from Lessor in accordance with the terms hereof. Section 2.02. Agreement to Issue Note. In order to provide funds for reimbursement of the Lessee for the costs of the acquisition and completion of the Project as set forth in Section 2.01 hereof and certain costs incurred in connection with the issuance of the Note, Lessor agrees that it will sell the Note as provided in the Note Purchase Agreement. Section 2.03. Use of Proceeds. The proceeds of the sale of the Note shall be disbursed by the Purchaser as follows: (a) $119,000 shall be paid to the Lawrenceburg Power System to pay for the balance of the purchase price needed to acquire the Land. (b) $41,646.70 shall be paid to or at the direction of the Lessee to pay for certain costs in connection with the issuance of the Note. (c) $4,839,353.30 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 May 1, 1996 by and among Lessor, Lessee and Escrow Agent. Section 2.04. Lessor to Pursue Remedies Against Contract Subcontractors and Suppliers and Their Sureties. In the event of default of the Contractor or any other contractor, subcontractor or supplier under any contract made by it in connection with the Project 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, m 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 2.05. 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. - 3 - 4 Section 2.06. Lessee's Acceptance of Leased Property. With regard to Lessor but subject to Section 2.04, 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 any present or future, latent or patent defects therein or from the failure of the Project to comply with all legal requirements applicable thereto, reserving, however, any and all rights of Lessee with respect to parties other than Lessor. Section 2.07. Assignment of Lessor's Rights. Concurrently with the execution of this Lease, Lessor will enter into the Assignment pursuant to which the Lessor will assign to the Purchaser Lessor's rights under this Lease as security for, among other things, the payment of the Note and other amounts payable by Lessor or Lessee under the Note Purchase Agreement. 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 this Lease without regard to whether the Lessor is then in default with respect to the Note or the Note Purchase Agreement. Concurrently with the execution of this Lease, Lessor will also execute and deliver to the Purchaser the Deed of Trust pursuant to which the Lessor grants to the Purchaser a lien on the Project as security for the payment of the Note and as security for the obligations of Lessor and Lessee under the Note Purchase Agreement and this Lease. Section 2.08. 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 II 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. ARTICLE III Lease Term Section 3.01. Term. Subject to the provisions contained in this Lease, this Lease shall be in full force and effect for a Term commencing on the date hereof and ending at midnight, April 30, 2006; and provided further that Lessee's obligations hereunder shall survive until principal of and interest on the Note and all obligations of Lessor under the Note Purchase Agreement are paid in full. ARTICLE IV Rent Section 4.01. Basic Rent. Lessee will pay to Lessor without notice or demand, as Basic Rent on June 5, 1996, and on each day thereafter on which any interest or principal is due on the Note (whether by maturity, acceleration or mandatory prepayment) an amount equal to the principal of and interest on the Note, if any, due on such date; provided, that all such payments and all advance payments of rent shall be made to the Purchaser, as assignee of the Lessor's rights hereunder. Any payment of rent hereunder made, or deemed made, by Lessee to Purchaser for the benefit of Lessor shall be deemed paid to Lessor as if delivered to Lessor. All Basic Rent paid hereunder shall be absolutely net to Lessor, free of any taxes, costs, expenses, liabilities, charges or other deduction whatsoever with respect to the Leased Property and the possession, operation, maintenance, repair, rebuilding or use thereof or of any portion thereof, so that this Lease shall yield such rent net to or for the account of Lessor throughout the Term. Section 4.02. Advance Payment of Rent. The Lessee may at any time that prepayment of the Note is permitted, at its option, pay in advance all or any portion of any installment or installments of Basic Rent to become due hereunder (which shall include any prepayment penalty payable under the Note). Any such prepayment shall be applied first to accrued interest on the Note, and the remainder, if any, to prepayment penalty, if any, and then to principal installments on the Note in the inverse order of maturity. Upon full prepayment of All Unpaid Installments, the Lessee shall have no further obligation to pay Basic Rent during the remaining portion of the Term hereof. - 4 - 5 Section 4.03. Additional Rent. Lessee agrees to pay, as additional rent, all other amounts, liabilities and obligations which Lessee herein assumes or agrees to pay. In the event of any failure on the part of Lessee to pay any such amounts, liabilities or obligations, Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of the Basic Rent. Lessee also agrees to pay Lessor, on demand, as additional rent, to the extent legally enforceable, interest at the Default Rate (as defined in the Note) on all overdue installments of Basic Rent. Section 4.04. Payments Under Guaranty. All payments made by Lessee under the Guaranty shall be credited as payments made by Lessee pursuant to Article IV of this Lease. ARTICLE V Rent Absolute: State of Title; Restrictive Covenants Section 5.01. No Termination or Abatement for Damage or Destruction, Etc. except as otherwise expressly provided herein, and until the Note has been paid in full, this Lease shall not terminate, nor shall Lessee have any right to terminate this Lease or be entitled to the abatement of any rent or any reduction thereof nor shall the obligations hereunder of Lessee be otherwise affected, by reason of any damage to or the destruction of all or any part of the Leased Property from whatever cause, the loss or theft of the Leased Property or any part thereof the taking of the Leased Property or any portion thereof by condemnation or otherwise, the prohibition, limitation or restriction of Lessee's use of the Leased Property, or the interference with such use by any private person or corporation, or by reason of any eviction by paramount title or otherwise, or for any other cause whether similar or dissimilar to the foregoing, any present or future law to the contrary notwithstanding, it being the intention of the parties hereto that the Basic Rent and additional rent reserved hereunder shall continue to be payable in all events and the obligations of Lessee hereunder shall continue unaffected, unless the requirement to pay or perform the same shall be terminated pursuant to an express provision of this Lease. Lessee acknowledges that Lessor has made no representations as to the condition of the Leased Property. This Lease shall not terminate, nor shall Lessee have any right to terminate this Lease, or be entitled to the abatement of any rent or any reduction thereof, nor shall the obligations hereunder of Lessee be otherwise affected, by reason of or due to the condition of the Leased Property. The obligations of Lessee to make the payments required in Article IV and to perform and observe the other agreements on its part contained herein shall be absolute and unconditional. Until such time as the principal of and interest on the Note shall have been fully paid, Lessee (i) will not suspend or discontinue any payments provided for in Article IV, (ii) will perform and observe all of its other agreements contained in this Lease and (iii) except as otherwise herein expressly provided will not terminate this Lease for any cause including, without limiting the generality of the foregoing, failure of Lessee to complete the Project, any acts or circumstances that may constitute failure of consideration, destruction of or damage to the Leased Property, commercial frustration of purpose, or any change in the tax or other laws of the United States of America or any political subdivision thereof. Section 5.02. No Termination for Insolvency. etc, of Lessor. Lessee covenants and agrees that it will remain obligated under this Lease in accordance with its terms, and that Lessee will not take any action to terminate, rescind or avoid this Lease, notwithstanding the bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding-up or other proceedings affecting Lessor or Lessee or any assignee thereof in any such proceeding and notwithstanding any action with respect to this Lease which may be taken by any trustee or receiver of Lessor or Lessee or any assignee thereof in any such proceeding, or by any court in any such proceeding. Lessor covenants and agrees that it will not voluntarily submit to any bankruptcy, insolvency, reorganization, composition, readjustment, action for appointment of a receiver, liquidation, dissolution, winding-up or other proceeding affecting it or any assignee under this Lease without the prior written consent of Lessee, so long as Lessee is not in default hereunder. Section 5.03. Waiver of Rights by Lessee. Until such time as the principal of, premium, if any, and interest on the Note shall have been paid in full Lessee waives, to the extent legally permissible, all rights now or hereafter conferred, by law (i) to quit, terminate or surrender this Lease or the Leased Property or any part thereof or (ii) to any abatement, suspension, deferment or reduction of the Basic Rent or additional rent or any other sums payable under this Lease, except as otherwise expressly provided herein, regardless of whether such rights shall arise from any present or future constitution, statute or rule of law. - 5 - 6 Section 5.04. Condition and Title of Leased Property. Lessee acknowledges that Lessor has acquired title to the Land from the Lawrenceburg Power System. Lessee further acknowledges that it has examined the Land and the state of title thereto prior to the making of this Lease and Lessee represents that Lessor has fee simple title to the Land, subject only to Permitted Encumbrances. Notwithstanding the foregoing, no failure of or defect in Lessor's title or delay shall terminate this Lease or entitle Lessee to any abatement, in whole or in part, of any of the rentals or any other sums provided to be paid by Lessee pursuant to any of the terms of this Lease. Lessor makes no warranty, either express or implied, that the Leased Property will be suitable for Lessee's purposes or needs. Section 5.05. No Conveyance of Title by Lessor. Lessor covenants and agrees that, during the Term of this Lease and if Lessee shall then not be in default under this Lease, it will not convey, or suffer or permit the conveyance of, by any voluntary act on its part, its title to the Project to any person, firm or corporation whatsoever, irrespective of whether any such conveyance or attempted conveyance shall recite that it is expressly subject to the terms of this Lease; provided, however, that nothing herein shall restrict the conveyance or transfer of the Project in accordance with any terms or requirements of this Lease. ARTICLE VI Taxes and Other Charges Section 6.01. Payment by Lessee - General. Lessee agrees, subject to the provisions of Section 13.02 to pay and discharge, as additional rent, punctually as and when the same shall become due and payable, each and every cost, expense and obligation of every kind and nature, foreseen or unforeseen, for the payment of which Lessor or Lessee is or shall become liable by reason of its estate or interest in the Leased Property or any portion thereof by reason of any right or interest of Lessor or Lessee in or under this Lease, or by reason of or in any manner connected with or arising out of the possession, operation, maintenance, alteration, repair, rebuilding or use of the Leased Property. Section 6.02. Taxes and Other Governmental Charges. Lessee agrees, subject to the provisions of Sections 6.08 and 13.02, to pay and discharge, as additional rent, punctually as and when the same shall become due and payable without penalty, all real estate taxes, personal property taxes, business and occupation taxes, occupational license taxes, water charges, sewage charges, assessments (including, but not limited to, assessments for public improvements or benefits) and all other governmental taxes, impositions and charges of every kind and nature, extraordinary or ordinary, general or special unforeseen or foreseen, whether similar or dissimilar to any of the foregoing, which at any time during the Term shall be or become due and payable by Lessor or Lessee and which shall be levied, assessed or imposed: (i) upon, or which shall be or become liens upon, the Leased Property or any portion thereof or any interest of Lessor or Lessee therein or under this Lease; (ii) upon or with respect to the possession, operation, maintenance, alteration, repair, rebuilding, use or occupancy of the Leased Property or any portion thereof; or (iii) upon this transaction or any document to which Lessee is a party creating or transferring an interest or an estate in the Leased Property; under and by virtue of any present or future law, statute, regulation or other requirement of any governmental authority, whether federal, state, county, city, municipal or otherwise; provided, however, Lessee shall have no liability (a) for any tax, charge, assessment or imposition attributable to properties or operations of Lessor not involving the Leased Property, or (b) with respect to payment of any income taxes or similar taxes imposed upon Lessor. It is the intention of the parties hereto that, insofar as the same may be lawfully done, Lessor shall be free from all costs, expenses and obligations and all such taxes, water charges, sewer charge, assessments and all such other governmental impositions and charges, and that this Lease shall yield net to Lessor not less than the Basic Rent reserved hereunder throughout the Term. Section 6.03. Lessee Subrogated to Lessor's Rights. To the extent of any payments of additional rent by Lessee under this Article VI, Lessee shall be subrogated to Lessor's rights in respect to the proceedings or matter which cause the Basic Rent to be insufficient and any recovery by Lessor or release by Lessor of moneys in such proceedings or matter shall be used to reimburse Lessee for the amount of such additional rent so paid by Lessee, provided always that the Basic Rent is paid in the manner and at the time herein set forth. Section 6.04. Utility Services. Lessee agrees to pay or cause to be paid all charges for gas, water, sewer, electricity, light, heat, power, telephone and other utility services used, rendered or supplied to, upon or in connection with the Leased Property. Lessee agrees that Lessor is not, nor shall it be, required to furnish to Lessee or any other user of the Leased Property any gas, water, sewer, electricity, light, heat, power or any other facilities, equipment, labor, materials or services of any kind. - 6 - 7 Section 6.05. Fees and Expenses of Lessor. Lessee agrees to pay as additional rent, or cause to be paid, the expenses of Lessor and Purchaser relating to the Leased Property or to Lessor's or Purchasee's rights or obligations hereunder or under the Note Purchase Agreement, whether or not such fees or expenses are payable before the commencement of, during, or after the expiration of the Term. Section 6.06. Proof of Payment. Lessee covenants to furnish to Lessor, promptly upon request, proof of the payment of any tax, assessment, and other governmental or similar charge, and any utility charges, which is payable by Lessee as provided in this Article. Section 6.07. Proration. Upon expiration or earlier termination of this Lease taxes, assessments and other charges which shall be levied, assessed or become due upon the Leased Property or any part thereof shall be prorated to the date of such expiration or earlier termination with the Lessee being responsible for the payment of any such taxes, assessments and other changes to the date of termination or expiration. Section 6.08. Payments in Lieu of Taxes. Lessor and Lessee recognize that under present law, including specifically Section 7-53-305 of the Act, the properties owned by Lessor are exempt from all taxation in the State of Tennessee. However, Lessee agrees to make payments in lieu of taxes to Lawrence County and the City of Lawrenceburg in accordance with the provisions of this Section 6.08. For the years 1996 through and including 2002, no such payments in lieu of taxes shall be payable to either Lawrence County or the City of Lawrenceburg. For the years 2002 through and including 2006, such payments in lieu of taxes shall equal the percentage specified below (the "Applicable Percentage") multiplied by such amounts as would result from taxes levied upon the Project by Lawrence County and the City of Lawrenceburg if the Project were owned by Lessee. To this end, it is agreed by and between the parties hereto that Lessor in cooperation with Lessee shall cause the Project to be valued and assessed by the assessor or cause the Project to be valued and assessed by the assessor or other official or officials charged with the responsibility of assessing privately owned property in the area where the Project is located at the time such privately owned property is valued or assessed, shall cause to be applied to the appropriate taxable value of the Project the tax rate or rates which would be applicable for state and local tax purposes if the property were then privately owned, and shall cause the county trustee or other official or officials charged with the responsibility of collecting taxes to submit annually to Lessee a statement of the taxes which would otherwise then be chargeable to the Project, and the Applicable Percentage of the amount thereof shall be paid by Lessee to Lawrence County and the City of Lawrenceburg, as the case may be; provided, however, that the right is reserved to Lessee to the same extent as if Lessee were the owner of the Project to contest the validity or amount of any such payment in lieu of taxes. It is the intent of this Section 6.08 that Lawrence County and the City of Lawrenceburg shall receive the Applicable Percentage of the amounts which would be payable if the Project were privately owned and fully subject to property taxation, notwithstanding Lessor's ownership of all or any part thereof. However, nothing contained in this Section 6.08 is intended or shall be construed to require the payment by Lessee of any greater amounts in lieu of taxes than would be payable as taxes if the Project were privately owned as aforesaid. It is accordingly understood and agreed that the amount payable by Lessee in any year under the provisions of this Section 6.08 shall be reduced by the amount of any taxes lawfully levied upon the Project or any part thereof, or upon Lessee's leasehold estate therein, and actually paid by Lessee pursuant to the requirements of Section 6.08 hereof. The percentages shall be as follows: Year Percentage ---- ---------- 2002 20% 2003 40% 2004 60% 2005 80% 2006 and thereafter 100% The payments in lieu of taxes provided in this Section 6.08 shall be due on or before the last day of February for the payments with respect to the immediately preceding year. Lessee shall receive a credit against the payments in lieu of taxes described above for (i) all payments of ad valorem taxes, ff any, with respect to the Project and (ii) all ad valorem taxes paid by the Lessee with respect to its leasehold interest in the Project. Any such payments of taxes shall be deducted from the payments in lieu of taxes in the order in which such payments in lieu of taxes are due. - 7 - 8 ARTICLE VII Insurance Section 7.01. The Lessee agrees to obtain and maintain, or cause to be maintained, insurance with respect to the Leased Property, in accordance with its customary insurance practices, but not less than $500,000 for each occurrence in liability limits with respect to public liability insurance and at least $5,000,000 aggregate liability with Purchaser named as additional insured. ARTICLE VIII Maintenance and Repair Section 8.01. Maintenance of Building and Equipment, Lessee, at its expense, will keep and maintain the Building and equipment in good repair and appearance. So long as Lessor has title to the Building and equipment, Lessee shall promptly make, or cause to be made, all repairs, interior and exterior, structural and nonstructural, ordinary and extraordinary, foreseen and unforeseen, necessary to keep the Building and equipment in good and lawful order and condition, wear and tear from reasonable use excepted, whether or not such repairs are due to any law, rules, regulations or ordinances hereafter enacted which involve a change of policy on the part of the governmental body enacting the same, provided, however, that if the Note has been paid in full, Lessee, in lieu of malting any structural or extraordinary repairs required during the Term, may elect to terminate this Lease, and in such event Lessee shall have no further rights or obligations hereunder except its rights under Article XVIII. Section 8.02. Lessor Not Required to Repair. Lessor shall not be required to make any repairs, replacements or renewals of any nature or description to the Leased Property or to make any expenditures whatsoever in connection with this Lease or to maintain the Leased Property in any way. Lessee expressly waives the right contained in any law now or hereafter in effect to make any repairs at the expense of Lessor. ARTICLE IX Condemnation Section 9.01. Awards Assigned to Lessor. If, during the Term, all or any part of the Leased Property be taken by the exercise of the power of eminent domain or condemnation, or sold under the threat of condemnation, Lessor shall, subject to the terms of the Deed of Trust, be entitled to, and shall receive, the entire award for the taking. Section 9.02. Condemnation of all or Material Part of Leased Property. (a) If title to, or the temporary use or control of, all or substantially all of the Leased Property, shall be taken by the exercise of the power of eminent domain or condemnation, or sold under the threat of condemnation, or if such use or control of a substantial part of the Leased Property shall be so taken or so sold as results in rendering the Leased Property unsatisfactory to Lessee for the purposes for which the same was used immediately prior to such taking or condemnation (to be determined in the sole judgment of Lessee), Lessee shall purchase for cash Lessor's interest in the remaining portion of the Leased Property not taken or sold, and such purchase shall be made as of the first day of the first month occurring subsequent to sixty (60) days after the effective date of such taking or sale. The purchase price for Lessor's interest in the remaining portion of the Leased Property not taken or sold, shall be equal to All Unpaid Installments plus $100. Lessee shall deliver to Lessor and the Purchaser at least thirty (30) days before the date of purchase a certificate, signed by an Authorized Lessee Representative, to the effect that title to, or the temporary use or control of, all or substantially all of the Leased Property has been taken by the exercise of the power of eminent domain or condemnation or sold under the threat of the exercise of such power. - 8 - 9 (b) On the date of purchase the purchase price shall be paid as follows: (i) an amount equal to the unpaid principal amount of the Note, plus any prepayment penalty, and interest accrued thereon to the purchase date shall be paid to the Purchaser as the assignee of the Lessor to be applied to the payment of corresponding amounts of principal of, premium, if any, and interest on the Note; and (ii) the balance of the purchase price shall be paid to the Lessor. Upon payment of the purchase price in cash, Lessor shall convey Lessor's interest in the remaining portion, if any, of the Leased Property to Lessee, subject to and pursuant to Article XVIII. Section 9.03. Condemnation of Less than Material Part of Leased Property. (a) If a lesser portion of the Leased Property be taken by exercise of the power of eminent domain or condemnation or sold under the threat of condemnation, this Lease shall nevertheless continue in full force and effect without abatement of rent (except such rental reduction as results from a partial prepayment of the Note) and if such taking or sale shall have caused damage to, or necessitated restoration or rebuilding of, any of the improvements on the Land, Lessee, at its sole cost and expense, may at its option restore such improvement to such condition as shall be reasonable in view of the nature of the taking or the sale and the then intended use of the Leased Property by Lessee, whether or not the award for the taking or the proceeds from a sale under threat of condemnation are sufficient for the purpose. Except as provided in Section 9.03(b) hereof if the Lessee shall not elect to so restore the Leased Property, the Lessee shall purchase for cash the remaining portion of the Leased Property, and such purchase shall be made as of the first day of the first month occurring subsequent to sixty (60) days after the effective date of such taking or sale. The Lessee shall deliver to the Lessor and the Purchaser at least thirty (30) days before such date a certificate signed by an Authorized Lessee Representative to the effect that such lesser portion of the Leased Property has been taken or sold and stating whether or not the Lessee is exercising its option to restore the Leased Property. If the Lessee shall not elect to so restore the Leased Property, the Lessee, the Lessor and the Purchaser shall proceed as provided in Section 9.02. If the Lessee shall elect to restore the Leased Property, the Lessee shall promptly begin and diligently proceed with such restoration. (b) So long as the Note has not been paid in full the Lessee shall file with the Lessor and the Purchaser a certificate stating that the restoration and rebuilding required by this Section 9.03 have been completed and certifying the cost thereof or stating that such restoration and rebuilding are not required, as the case may be. If there shall remain any balance of the proceeds of such taking or sale under threat of condemnation, the Lessee shall apply the balance to the payment of interest and the remainder to the prepayment of principal installments of the Note in the inverse order of maturity. In lieu of such rebuilding or restoring as herein provided, Lessee may apply the entire amount of the proceeds of such taking or sale under threat of condemnation to the payment of interest and the remainder to the prepayment of principal installments of the Note in the inverse order of maturity. Section 9.04. Notice of Condemnation. In the case of any taking or proposed taking of all or any part of the Leased Premises, the Lessee shall give prompt notice to the Lessor and the Purchaser. Each such notice shall describe generally the nature and extent of such taking, loss, proceeding or negotiations. - 9 - 10 ARTICLE X Casualty Section 10.01. Lessee to Rebuild or Repair. Subject to the provisions of Section 10.02 hereof, if during the Term all or any material part of the Leased Property shall be destroyed or materially damaged, Lessee shall promptly notify Lessor, and at Lessee's expense Lessee shall promptly and diligently rebuild, restore, replace and repair the same in such manner as to restore the Leased Property, to at least the market value thereof immediately prior to such damage or destruction. Section 10.02. Major Casualty Lessee May Terminate. If during the Term, the Leased Property or any material part thereof shall be materially damaged or destroyed to such an extent as to render the Leased Property unsatisfactory to Lessee for the purposes for which the same were used immediately prior to such damage or destruction, or if Lessee deems it unwise to rebuild, repair and restore the Leased Property, Lessee, in lieu of rebuilding, restoring, replacing and repairing the Leased Property, shall purchase Lessor's interest in the remainder of the Leased Property, and such purchase shall be made as of the first day of the first month occurring subsequent to Sixty (60) days after the effective date of such damage or destruction. The purchase price for Lessor's interest in the remaining portion of the Leased Property shall be equal to All Unpaid Installments plus $100. The Lessee shall deliver to the Lessor and the Purchaser at least thirty (30) days before such date a certificate signed by an Authorized Lessee Representative to the effect that such damage or destruction has occurred and stating whether or not the Lessee is exercising its option to restore the Leased Property. If the Lessee shall not elect to so restore the Leased Property, the Lessee, the Lessor and the Purchaser shall proceed as provided in Section 9.02(b). Notwithstanding any other provision hereof if all or any part of the Project shall be destroyed or damaged after the Note has been paid in full, (i) Lessee shall have no obligation to effect the repair or restoration of the Leased Property and (ii) Lessee may elect by written notice to Lessor to terminate this Lease, in which event Lessee shall have no further liability hereunder. Section 10.03. Application of Insurance Proceeds. So long as Lessee is not default, any insurance proceeds received as a result of a casualty to which this Article X applies shall be applied (a) to the extent that Section 10.01 is applicable, to the extent necessary to the rebuilding, restoration, replacement and repair of the Leased Property, provided that in the event of a major casualty the consent of the Purchaser shall be required, or (b) to the extent that Section 10.02 is applicable, to the extent necessary to purchase Lessor's interest in the remainder of the Leased Property as provided in Section 9.02(b), and in either event any excess proceeds shall be paid to Lessee. Section 10.04. Notice of Casualty. In the case of any material damage to or destruction of all or any part of the Leased Property, the Lessee shall give prompt notice thereof to the Lessor and the Purchaser. Each such notice shall describe generally the nature and extent of such damage, destruction, loss, proceeding or negotiations. - 10 - 11 ARTICLE XI Additions, Alterations, Improvements, Replacements and New Construction Section 11.01. Additions, Alterations and Improvements by Lessee. Lessee shall have the right to make additions to, alterations of, and improvements on the Building, structural or otherwise, and to construct additional facilities, at its expense; provided, however, that the Lessee shall not make any alterations to the Building or construct any additions thereto the cost of which alteration or construction exceeds $50,000 without the prior written consent of the Purchaser. With the prior written consent of Purchaser, Lessee shall have the privilege of erecting any additional buildings and of remodeling the Building from time to time as it in its discretion may determine to be desirable for its uses and purposes, with no obligation to restore or return the Building to its original condition, but the cost of such new building or buildings and improvements and remodeling shall be paid for by it and upon the expiration or termination of this Lease shall belong to and be the property of Lessor absent the exercise of Lessee's option to purchase the Project as hereinafter provided. Section 11.02. Installation and Removal of Equipment by Lessee. Lessee may at any time or times during the Term install or commence the installation of any equipment, machinery, furniture or fixtures as Lessee may deem desirable but any such property shall become the property of the Lessor subject to Lessee's purchase option provided by Article XVIII hereof; Lessee may also remove any obsolete equipment, machinery, furniture or fixtures; provided, however, that Lessee shall use due care in connection with such removal to avoid damage to the Building and any proceeds received from the disposal of such obsolete property shall be used to prepay rents. Section 11.03. Additions and Alterations Not to Diminish Value of Leased Property. The Leased Property as improved or altered upon completion of additions, alterations, improvements or construction made pursuant to the provisions of this Article XI shall be of a value of not less than the value of the Leased Property immediately prior to the making of such additions, alterations, improvements or the construction of additional facilities. Section 11.04. Quality of Work; Compliance With Laws; Insurance. All work done in connection with such additions, alterations, improvements or construction, or repair or restoration in the event of condemnation, damage or destruction shall be done promptly, and in good and workmanlike manner, and in material compliance with all laws, ordinances, orders, rules, regulations and requirements of all federal, state and municipal governments and the appropriate departments, commissions, boards and offices thereof. Lessee shall maintain or cause to be maintained, at all times when any work is in process in connection with such additions, alterations, improvements or construction, workmen's compensation insurance covering all persons employed in connection with such work and with respect to whom death or bodily injury claims could be asserted against Lessor, Lessee or the Leased Property. ARTICLE XII Subletting, Assignments and Mortgaging Section 12.01. Continuing Obligations of Lessee. Without the prior written consent of Purchaser, Lessee may not sublet the Leased Property or any part thereof and may not assign, mortgage, encumber or otherwise transfer any of its rights and interest hereunder. - 11 - 12 ARTICLE XIII Performance of Lessee's Obligations by Lessor: Permitted Contests Section 13.01. Performance of Lessee's Obligations by Lessor. If Lessee at any time shall fail to make any payment or perform any act on its part to be made or performed under this Lease, then, subject to the provisions of Section 13.02, Lessor may (but shall not be obligated to), upon ten days' prior written notice to Lessee and without waiving or releasing Lessee from any obligations or default of Lessee hereunder, make any such payment or perform any such act for the account and at the expense of Lessee, and may enter upon the Leased Property for the purpose and take all such action thereon as may be reasonably necessary therefor. No such entry shall be deemed an eviction of Lessee. All sums so paid by Lessor and all necessary and incidental costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection with the performance of any such act by Lessor, together with interest, to the extent legally enforceable, at the Default Rate (as defined in the Note) from the date of the making of such payment or the incurring of such costs and expenses by Lessor, shall be deemed additional rent hereunder and shall be payable by Lessee to Lessor on demand, and Lessee covenants to pay any such sum or sums with interest as aforesaid. Section 13.02. Permitted Contests. Lessee shall not be required to pay, discharge or remove any tax, lien or assessment, or any mechanics, laborer's or materialman's lien, or any other lien or encumbrance, or any other imposition or charge against the Leased Property or any part thereof, so long as Lessee shall, at Lessee's expense, contest the same or the validity thereof in good faith, by appropriate proceedings which shall operate to prevent the collection of the tax, lien, assessment, encumbrance, imposition, charge, fine or penalty so contested or resulting from such contest and the sale of the Leased Property or any part thereof to satisfy the same. Such contest may be made by Lessee in the name of Lessor or of Lessee, or both, as Lessee shall determine, and Lessor agrees that it will, at Lessee's expense, cooperate with Lessee in any such contest to such extent as Lessee may reasonably request. It is understood, however, that Lessor shall not be subject to any liability for the payment of any costs or expenses in connection with any such proceeding brought by Lessee, and Lessee covenants to pay, and to indemnify and save harmless Lessor from, any such costs or expenses and shall provide Purchaser with such security as Purchaser shall request. Pending any such proceeding Lessor shall not have the right to pay, remove or cause to be discharged the tax, lien, assessment, encumbrance, imposition or charge thereby being contested, provided, that Lessee shall have given such security as may be required in the proceeding and such reasonable security as may be demanded by Lessor or the Purchaser to insure such payment and prevent any sale or forfeiture of the Leased Property or any part thereof by reason of such nonpayment, and provided further that Lessor would not be in substantial danger of civil or any danger of criminal liability by reason of such nonpayment. - 12 - 13 ARTICLE XIV Events of Default; Termination Section 14.01. If any one or more of the following events (herein individually alleged an "Event of Default") shall happen: (a) non-payment when due of any payment of Basic Rent, or (b) default by the Lessee in the due observance or performance of any term, covenant, condition or agreement on its part to be performed under this Lease (other than a default under subsection (a) above) continued for thirty (30) days after written notice specifying such default has been given to the Lessee; then in any such event (regardless of the pendency of any proceeding which has or might have the effect of preventing Lessee from complying with the terms of this Lease) Lessor at any time thereafter may give a written termination notice to Lessee, and, subject to the provisions of Section 17.01 relating to the survival of Lessee's obligations, the Term shall expire and terminate by limitation and all rights of Lessee under this Lease shall cease. ARTICLE XV Title of Property and Completion of Project. Lessee represents that all property located at the Project is or shall be titled in the name of the Board (excluding Lessee's inventory) and any property to be acquired after the date hereof for use at the Project will be acquired in the name of the Board. Lessee will furnish the Board upon request evidence of compliance with this covenant. Lessee has heretofore furnished Lessor with plans and specifications for the Project. Lessee agrees to complete the Project in accordance with the plans and specifications by no later than December 1, 1996. Lessee agrees not to make any changes to the plans and specifications without the prior written consent of Lessor. ARTICLE XVI Additional Expenses. Lessee agrees to pay any and all costs, including attorney's fees, incurred by Lessor and/or Purchaser in enforcing or monitoring the Lease or any of the Note Documents. Any such costs shall be due and payable on demand. ARTICLE XVII Survival of Lessee's Obligations; Subordination Section 17.01. Lessee's Obligations to Survive Expiration. No expiration of the Term pursuant to Section 14.01 shall relieve Lessee of its liability and obligations hereunder, all of which shall survive any such expiration. Section 17.02. Subordination. Lessee acknowledges and agrees that the terms of this Lease are and at all times shall be subordinate to the Deed of Trust. - 13 - 14 ARTICLE XVIII Purchase and Purchase Prices Section 18.01. Option to Purchase. At any time during the Term, and provided that amounts owing under the Note are paid at such time and all defaults hereunder are cured, Lessee shall have an option to Purchase the Leased Property for an amount equal to All Unpaid Installments plus the sum of $100. Lessee shall deliver to Lessor and the Purchaser at least thirty (30) days before the proposed date of purchase a notice signed by an Authorized Lessee Representative stating that Lessee desires to exercise its option to purchase under the provisions of this Section on the date specified in such notice. On the proposed date of purchase the purchase price shall become due and payable and upon payment of the purchase price, in cash, Lessor shall convey the Leased Property to Lessee subject and pursuant to this Article. The purchase price shall be paid as follows: (i) an amount equal to the unpaid principal amount of the Note, premium, if any, and interest accrued thereon to the purchase date shall be paid to the Purchaser as the assignee of the Lessor to be applied to the payment of corresponding amounts of principal of, premium, if any, and interest on the Note; and (ii) the balance of the purchase price shall be paid to the Lessor. Section 18.02. Conveyance on Purchase. In the event of any Purchase of the Leased Property by Lessee pursuant to any provision of this Lease, Lessor shall (i) convey merchantable title to the Leased Property, but Lessor shall not be obligated to give or assign any better title to Lessee than existed on the first day of the Term. In the event of any purchase of the Leased Property by Lessee pursuant to any provision of this Lease, Lessor shall convey title free of any liens, encumbrances, charges, exceptions and restrictions created or caused by Lessor. Although Lessor shall exercise its option to convey title to the Leased Property as aforesaid on the date of purchase upon receipt of the purchase price therefor, Lessor shall nevertheless have such additional time as is reasonably required by Lessor to deliver or cause to be delivered to Lessee all instruments and documents reasonably required by Lessee and necessary to remove from record or otherwise discharge any liens, encumbrances, charges or restrictions in order that Lessor may convey title as aforesaid. Section 18.03. Charges Incident to Conveyance. Lessee shall pay all charges incident to any conveyance, including any escrow fees, recording fees, title insurance premiums and any applicable federal, state or local taxes and the like, including any federal or local documentary or transfer taxes. Section 18.04. Payment of Purchase Price. Notwithstanding any other provisions hereof, this Lease shall not terminate on the date on which Lessee shall be obligated to purchase the Leased Property (whether or not any delay in the completion of such purchase shall be the fault of Lessor), nor shall Lessee's obligations hereunder cease until Lessee shall have paid the purchase price then payable for the Leased Property, without set-off, counterclaim, abatement, suspension, deduction, diminution, or defense for any reason whatsoever, so long as the Note has not been paid in full and until Lessee shall have discharged or made provision satisfactory to Lessor for the discharge of, all of its obligations under this Lease, which obligations have arisen on or before the date for the purchase of the Leased Property, including the obligation to pay the Basic Rent due and payable on the date for the purchase of Lessor's interest in the Leased Property. ARTICLE XIX Miscellaneous Section 19.01. Waiver of Rights. This Lease shall not be affected by any laws, ordinances, or regulations, whether federal, state, county, city, municipal or otherwise, which may be enacted or become effective from and after the date of this Lease affecting or regulating or attempting to affect or regulate (i) the Basic Rent and other amounts herein reserved or (ii) the continuing in occupancy of Lessee or any sublessees, transferees or assignees of Lessee's interest in the Leased Property beyond the dates of termination of their respective leases, or otherwise. Lessee also waives its statutory rights of redemption, if any, including those set forth in Tennessee Code Annotated 66-8-101 et seq., its equitable right of redemption and agrees that it will not set up, claim or seek to take advantage of any appraisement, valuation, stay, extension, or other exemption to hinder or prevent the enforcement of the Deed of Trust. Lessee further waives the benefit of all laws and an right to have assets securing the Note marshalled upon any foreclosure or sale. Section 19.02. Non-Waiver by Lessor. No failure by Lessor or by any assignee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no acceptance of the Basic Rent, in full or in part, during the continuance of such breach, shall constitute a waiver of such breach or of such term. No waiver of any breach shall affect or alter this Lease or constitute a waiver of a then existing or subsequent breach. - 14 - 15 Section 19.03. Remedies Cumulative. Each right, power and remedy of Lessor provided for in this Lease shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise, in any jurisdiction where such rights, powers and remedies are sought to be enforced, and the exercise or beginning of the exercise by Lessor of any one or more of the rights, powers or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by Lessor of any or all such other rights, powers or remedies. Section 19.04. Surrender of the Leased Property. Except as otherwise provided in this Lease, Lessee shall, upon the expiration or termination of this Lease for any reason whatsoever, surrender the Leased Property to Lessor in good order, condition and repair, except for uninsured war damage and reasonable wear and tear. Section 19.05. Acceptance of Surrender. No surrender to Lessor of this Lease or of the Leased Property or any part thereof or of any interest therein shall be valid or effective unless agreed to and accepted in writing by Lessor, and no act by any representative or agent of Lessor, and no act by Lessor, other than such a written agreement and acceptance by Lessor, together with the concurring written consent of the Purchaser if the Note has not been paid in full shall constitute an acceptance of any such surrender. Section 19.06. No Claims Against Lessor. Nothing contained in this Lease shall constitute any consent or request by Lessor, expressed or implied, for the performance of any labor or services or the furnishing of any materials or other property in respect of the Leased Property or any part thereof nor give Lessee any right, power or authority to contract for or permit the performance of any labor or services or the furnishings of any materials or other property in such fashion as would permit the making of any claim against Lessor. Section 19.07. Amendments, Changes and Modification. Subsequent to the sale of the Note, this Lease may not be effectively amended, changed, modified, altered or terminated without the concurring written consent of the Purchaser. Section 19.08. Applicable Law. This Lease shall be governed exclusively by the provisions hereof and by the applicable laws of the State of Tennessee, except to the extent that Federal law may govern any rate of interest. Section 19.09. Severability. In the event that any clause or provision of this Lease 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 hereof. Section 19.10. Notices and Demands. All notices, certificates, demands, requests, consents, approvals and other similar instruments under this Lease shall be in writing (including telegraphic, telecopy or telex communication) and mailed by first-class United States mail, postage prepaid, telecopied, telexed or telegraphed or delivered at the following address: (a) if to Lessee addressed to Jones Apparel Group, Inc., 250 Rittenhouse Circle, Bristol, Pennsylvania 19007, Attention: Chief Financial Officer; (b) if to Lessor addressed to The Industrial Development Board of the City of Lawrenceburg, c/o Alan C. Betz, Esq., White & Betz, 22 Public Square, Lawrenceburg, Tennessee 38464-0488; and (c) if to the Purchaser addressed to NationsBank of Tennessee, National Association, 255 N. Military Avenue, Lawrenceburg, Tennessee 38464, Attention: Timothy E. Pettus; or, with respect to any of the foregoing, at such address as it may have designated, from time to time, by written notice to the rest of the foregoing. Lessor shall promptly forward to Lessee copies of any notice received by it from the Purchaser under the Note Purchase Agreement. 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, addressed as aforesaid. All such notices and communications otherwise transmitted shall be effective upon receipt by the addressee. Section 19.11. Headings and References. The headings in this Lease are for convenience of reference only and sell not define or limit the provisions thereof. All references in this Lease to particular Articles or Sections are references to Articles or Sections of this Lease, unless otherwise indicated. Section 19.12. Successors and Assigns. The terms and provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors end assigns. Section 19.13. Multiple Counterparts. This Lease may be executed in multiple counterparts, each of which shall be an original but all of which together shall constitute but one and the same instrument. Section 19.14. Quiet Possession Lessee, by keeping and performing the covenants and agreements on its part herein contained, shall at all times during the Term peaceably and quietly have, hold and enjoy the Leased Property without suit, trouble or hindrance from Lessor or its successors or assigns. Section 19.15. Amendments, Changes and Modifications of the Note. Lessor and Lessee covenant and agree during the Term that they will not, without the prior written consent of Purchaser, enter into or consent to any amendment, change or modification of the Note Documents. - 15 - 16 Section 19.16. No Liability of Officers, Etc. No recourse under or upon any obligation, covenant or agreement contained in this Lease shall be had against any incorporator, member, director or officer, as such, past, present or future, of the Lessor, either directly or through the Lessor. 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 is hereby expressly waived and released by Lessee as a condition of and consideration for the execution of this Lease. Section 19.17. No Usury. No provision in this Lease shall require the payment or permit the collection of interest in excess of the maximum permitted by law. If any excessive interest in such respect is hereby provided for, or shall be adjudicated to be so provided for herein, the provisions of this paragraph shall govern, and the undersigned 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 Lessor or the Purchaser shall collect monies hereunder or otherwise which are deemed to constitute interest which would increase any effective interest rate 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. Section 19.18. Recording. This Lease and every supplement and modification hereof (or a memorandum thereof) shall be recorded in the Register's Office of Lawrence County, Tennessee, or in such other office as may be at the time provided by law as the proper place for the recordation of a deed conveying the Land. Section 19.19. Indemnification and Non-Liability of Lessor. Lessee covenants and agrees, at its expense, to pay, and to indemnify and save Lessor and the Purchaser harmless against and from any and all claims by or on behalf of any person, firm, corporation, or governmental authority, arising from the occupation, use, possession, conduct or management of or from any work done in or about the Project, including any liability for violation of conditions, agreements, restrictions, laws, ordinances, or regulations affecting the Project or the occupancy or use thereof. Lessee also covenants and agrees, at its expense, to pay, and to indemnify and save Lessor harmless against and from, any and all claims arising from (i) any condition of the Project, (ii) any breach or default on the part of Lessee in the performance of any covenant or agreement to be performed by Lessee pursuant to this Lease, (iii) any act or negligence of Lessee, or any of its agents, contractors, servants, employees or licensees, or (iv) any accident, injury or damage whatever caused to any person, firm or corporation in or about the Project and from and against all costs, reasonable counsel fees, expenses and liabilities incurred in any action or proceeding brought by reason of any claim referred to in this Section. In the event that any action or proceeding is brought against lessor or Purchaser by reason of any such claims, Lessee, upon notice from Lessor or Purchaser, covenants to resist or defend such action or proceeding. Lessee covenants and agrees to pay, and to indemnify Lessor and the Purchaser against all costs and charges, including reasonable counsel fees, lawfully and reasonably incurred in obtaining possession of the Project after default of Lessee or upon expiration or earlier termination of any term hereof, or in enforcing any covenant or agreement of Lessee contained in this Lease. IN WITNESS WHEREOF, THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG and JONES APPAREL GROUP, INC. have each executed this Lease by causing its name to be hereunto subscribed and attested by its duly authorized officers, all being done as of the day and year first above written, but actually on the dates hereinafter indicated in the acknowledgments. THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG By: /s/ Jerry Putman Chairman ATTEST: By: /s/ Carolyn Thompson Secretary JONES APPAREL GROUP, INC. By: /s/ Gary R. Klocek Title: Controller - 16 - 17 STATE OF TENNESSEE COUNTY OF LAWRENCE Before me, the undersigned, a Notary Public in and for the State and County aforesaid, personally appeared JERRY PUTMAN and CAROLYN THOMPSON, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged themselves to be the Chairman and Secretary, respectively, of THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG, the within named bargainer, a corporation, and that they as such officers executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by the said JERRY PUTMAN and attesting the same by CAROLYN THOMPSON as Secretary. WITNESS my hand, at office, in Lawrenceburg, Lawrence County, Tennessee, this 1st day of May, 1996. /s/ Alan C. Betz Notary Public My Commission Expires: 11-22-99 - 17 - 18 STATE OF TENNESSEE COUNTY OF DAVIDSON Before me, the undersigned, a Notary Public in and for the county and state aforesaid, personally appeared GARY KLOCEK with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged himself to be the Controller of JONES APPAREL GROUP, INC., the within named bargainer, a corporation, and that he as such officer executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation. WITNESS my hand, at office in Nashville, Tennessee, this 1st day of May, 1996. /s/ Bonnie L. Erickson Notary Public My Commission Expires: 3/22/97 - 18 - 19 Schedule "A" Legal Description A tract of land in the Eighth Civil District of Lawrence County, in the City of Lawrenceburg, Tennessee, lying on the south side of Motivation Drive, a 60-foot road and on the East side of W.O. Smith Road, a 60-foot road, and being further described as follows: Being all of Tract 9 as shown on plat of Simonton Fork Industrial Park, a plat of which is recorded in Plat Cabinet A, Slide 82, Register's Office of Lawrence County, Tennessee and is subject to minimum setback lines, public utilities and drainage easements, 20-foot powerline easement and other matters as shown on said plat. Being a portion of the property conveyed to Lawrenceburg Power System, Inc. by deed dated November 3, 1988, of record in Deed Book 240, pages 267/69, Register's Office of Lawrence County, Tennessee. SCHEDULE B 1. Rights or claims of parties in possession not shown by the public records. 2. Easements, or claims of easements, not shown by the public records. 3. The lien of the following general and special taxes for the year or years specified and subsequent years: 1996 and subsequent years. 4. Subject to minimum setback lines, public utilities, drainage easements, a 20-foot powerline easement and other matters as shown on plat of Simonton Fork Industrial Park a plat of which is recorded in Plat Cabinet A, Slide 82, Register's Office of Lawrence County, Tennessee. - 19 - EX-10.33 6 EXHIBIT 10.33 JONES APPAREL GROUP, INC. 1996 STOCK OPTION PLAN 1. Purpose of the 1996 Stock Option Plan. Jones Apparel Group, Inc. (the "Corporation") desires to attract and retain the best available talent and to encourage the highest level of performance. The 1996 Stock Option Plan (the "Stock Option Plan") is intended to contribute significantly to the attainment of these objectives, by (i) providing long-term incentives and rewards to all key employees of the Corporation (including officers and directors who are key employees of the Corporation and also including key employees of any subsidiary of the Corporation which may include officers or directors of any subsidiary of the Corporation who are also key employees of said subsidiary), and those directors and officers, consultants, advisers, agents or independent representatives of the Corporation or of any subsidiary (together, "Eligible Individuals"), who are contributing or in a position to contribute to the long-term success and growth of the Corporation or of any subsidiary, (ii) assisting the Corporation and any subsidiary in attracting and retaining Eligible Individuals with experience and ability, and (iii) associating more closely the interests of such Eligible Individuals with those of the Corporation's stockholders. 2. Scope and Duration of the Stock Option Plan. Under the Stock Option Plan, options ("Options") to purchase Shares of common stock, par value $.01 per share ("Common Stock"), may be granted to Eligible Individuals. Options granted to employees (including officers and directors who are employees) of the Corporation or a subsidiary corporation thereof, may, at the time of grant, be designated by the Corporation's Board of Directors either as incentive stock options ("ISOs"), with the attendant tax benefits as provided for under Sections 421 and 422 of the Internal Revenue Code of 1986, as amended (the "Code") or as nonqualified stock options. Stock appreciation rights (the "Rights") may be granted in association with Options. The aggregate number of shares of Common Stock reserved for grant from time to time under the Stock Option Plan is 2,000,000 shares of Common Stock which shares of Common Stock may be authorized but unissued shares of Common Stock or shares of Common Stock, which shall have been or which may be reacquired by the Corporation, as the Board of Directors of the Corporation shall from time to time determine. Such aggregate numbers shall be subject to adjustment as provided in Paragraph 12. If an Option shall expire or terminate for any reason without having been exercised in full or surrendered in full in connection with the exercise of a Right, the - 1 - 2 shares of Common Stock represented by the portion thereof not so exercised or surrendered shall (unless the Stock Option Plan shall have been terminated) become available for other options under the Stock Option Plan. Subject to Paragraph 14, no Option or Right shall be granted under the Stock Option Plan after April 22, 2006. The grant of an Option and/or a Right is sometimes referred to herein as an Award thereof. 3. Administration of the Stock Option Plan. This Stock Option Plan will be administered by the Board of Directors of the Corporation (the "Board of Directors"). The Board of Directors, in its discretion, may designate an option committee (the "Option Committee" or "Committee") composed of at least two members of the Board of Directors to administer this Stock Option Plan. Members of the Stock Option Committee shall meet such qualifications as the Board of Directors may determine. Subject to the express provisions of this Plan, the Board of Directors or the Committee (hereinafter, the terms "Option Committee" or "Committee" shall mean the Board of Directors whenever no such Option Committee has been designated) shall have authority in its discretion, subject to and not inconsistent with the express provisions of this Stock Option Plan, to direct the grant of Options, to determine the purchase price of the Common Stock covered by each Option, the Eligible Individuals to whom, and the time or times at which, Options shall be granted and subject to the maximum set forth in Paragraph 4 hereof, the number of shares of Common Stock to be covered by each Option; to designate Options as ISOs; to direct the grant of Rights in connection with any Option; to interpret the Stock Option Plan; to determine the time or times at which Options may be exercised; to prescribe, amend and rescind rules and regulations relating to the Stock Option Plan, including, without limitation, such rules and regulations as it shall deem advisable, so that transactions involving Options may qualify for exemption under such rules and regulations as the Securities and Exchange Commission may promulgate from time to time exempting transactions from Section 16(b) of the Securities and Exchange Act of 1934; to determine the terms and provisions of and to cause the Corporation to enter into agreements with Eligible Individuals in connection with Options (Awards) granted under the Stock Option Plan (the "Agreements"), which Agreements may vary from one another as the Committee shall deem appropriate; and to make all other determinations it may deem necessary or advisable for the administration of the Stock Option Plan. Members of the Committee shall serve at the pleasure of the Board of Directors. The Committee shall have and may exercise all of the powers of the Board of Directors under the Stock Option Plan, other than the power to appoint a director to committee membership. A majority of the Committee shall constitute a quorum, and acts of a majority of the members present at any meeting at - 2 - 3 which a quorum is present shall be deemed the acts of the Committee. The Committee may also act by instrument signed by a majority of the members of the Committee. Every action, decision, interpretation or determination by the Committee with respect to the application or administration of this Stock Option Plan shall be final and binding upon the Corporation and each person holding any Option granted under this Stock Option Plan. 4. Eligibility: Factors to be Considered in Granting Options and Designating ISOs (Awards). (a) Options may be granted only to (i) key employees (including officers and directors who are employees) of the Corporation or any subsidiary corporation thereof on the date of grant (Options so granted may be designated as ISOs), and (ii) directors or officers of the Corporation or a subsidiary corporation thereof on the date of grant, without regard to whether they are employees, and (iii) consultants or advisers to or agents or independent representatives of the Corporation or a subsidiary thereof. In determining the persons to whom Options (Awards) shall be granted and the number of shares of Common Stock to be covered by each Award, the Committee shall take into account the nature of the duties of the respective persons, their present and potential contributions to the Corporation's (including subsidiaries) successful operation and such other factors as the Board of Directors in its discretion shall deem relevant. Subject to the provisions of Paragraph 2, an Eligible Individual may receive Options (Awards) on more than one occasion under the Stock Option Plan. No person shall be eligible for an Option grant if he shall have filed with the Secretary of the Corporation an instrument waiving such eligibility; provided that any such waiver may be revoked by filing with the Secretary of the Corporation an instrument of evocation, which revocation will be effective upon such filing. (b) In the case of each ISO granted to an employee, the aggregate fair market value (determined at the time the ISO is granted) of the Common Stock with respect to which the ISO is exercisable for the first time by such employee during any calendar year (under all plans of the Corporation and any subsidiary corporation thereof) may not exceed $100,000. (c) In no event shall any Eligible Individual be granted options to purchase more than 400,000 shares of Common Stock pursuant to this Stock Option Plan. 5. Option Price. (a) The purchase price per share of the Common Stock covered by each Option shall be established by the Committee, but in no - 3 - 4 event shall it be less than the fair market value of a share of the Common Stock on the date the Option is granted with respect to an ISO. Options which are not designated as ISOs may be issued with such purchase price per share as the Committee shall determine, which purchase price may be less than the fair market value of a share of the common stock on the date the Option is granted. If, at the time an Option is granted, the Common Stock is publicly traded, such fair market value shall be the closing price (or the mean of the latest bid and asked prices) of a share of Common Stock on such date as reported in The Wall Street Journal (or a publication or reporting service deemed equivalent to The Wall Street Journal for such purpose by the Board of Directors) for any national securities exchange or other securities market which at the time is included in the stock price quotations of such publication. In the event that the Committee shall determine such stock price quotation is not representative of fair market value by reason of the lack of a significant number of recent transactions or otherwise, the Committee may determine fair market value in such a manner as it shall deem appropriate under the circumstances. If, at the time an Option is granted, the Common Stock is not publicly traded, the Committee shall make a good faith attempt to determine such fair market value. (b) In the case of an employee who at the time an ISO is granted owns stock possessing more than 10% of the total combined voting power of all classes of the stock of the employer corporation or of its parent or a subsidiary corporation thereof (a "10% Holder"), the purchase price of the Common Stock covered by any ISO shall in no event be less than 110% of the fair market value of the Common Stock at the time the ISO is granted. 6. Term of Options. The term of each Option shall be fixed by the Committee, but in no event shall it be exercisable more than 10 years from the date of grant, subject to earlier termination as provided in Paragraphs 10 and 11. An ISO granted to a 10% Holder shall not be exercisable more than 5 years from the date of grant. 7. Exercise of Options. (a) Subject to the provisions of the Stock Option Plan, an Option granted to an employee under the Stock Option Plan shall become fully exercisable at such time or times as the Committee in its sole discretion shall determine at the time of the granting of the Option, except that in no event shall any such Option be exercisable earlier than six months or later than 10 years after its grant. (b) An Option may be exercised as to any or all full shares of Common Stock as to which the Option is then exercisable. - 4 - 5 (c) The purchase price of the shares of Common Stock as to which an Option is exercised shall be paid in full in cash at the time of exercise; provided that, the purchase price may be paid (i) in whole or in part, by surrender or delivery to the Corporation of securities of the Corporation having a fair market value on the date of the exercise equal to the portion of the purchase price being so paid, or (ii) in cash by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise. Fair market value shall be determined as provided in Paragraph 5 for the determination of such value on the date of the grant. In addition, the holder shall, upon notification of the amount due and prior to or concurrently with delivery to the holder of a certificate representing such shares of Common Stock, pay promptly any amount necessary to satisfy applicable federal, state or local tax requirements. (d) Except as provided in Paragraphs 10 and 11, no Option may be exercised unless the original grantee thereof is then an Eligible Individual. (e) The Option holder shall have the rights of a stockholder with respect to shares of Common Stock covered by an Option only upon becoming the holder of record of such shares of Common Stock. (f) Notwithstanding any other provision of this Stock Option Plan, the Corporation shall not be required to issue or deliver any share of stock upon the exercise of an Option prior to the admission of such share to listing on any stock exchange or automated quotation system on which the Corporation's Common Stock may then be listed. 8. Award and Exercise of Rights. (a) A Right may be awarded by the Committee in association with any Option either at the time such Option is granted or at any time prior to the exercise, termination or expiration of such Option. Each such Right shall be subject to the same terms and conditions as the related Option and shall be exercisable only to the extent such Option is exercisable, and the Right Value, as hereinafter defined, is a positive amount. (b) A Right shall entitle the holder to surrender to the Cor- poration unexercised the related Option (or any portion or portions thereof which the holder from time to time shall determine to surrender for this purpose) and to receive in exchange therefor, subject to the provisions of the Stock Option Plan and such rules and regulations as from time to time may be established by the Committee, a payment having an aggregate value equal to the product of (A) the Right Value of one share of Common Stock, as hereinafter defined, and (B) the number of shares of Common Stock called for by the Option, or portion thereof, which is surrendered. For purposes - 5 - 6 of the Stock Option Plan: the Right Value of one share of Common Stock shall be the excess of (i) the fair market value of one share of Common Stock on the date on which the Right is exercised, over (ii) the purchase price per share of the Common Stock covered by the surrendered Option. The date on which the Committee shall receive notice from the holder of the exercise of a Right shall be considered the date on which the Right is exercised. Upon exercise of a Right, a holder shall indicate to the Committee what portion of the payment he desires to receive in cash and what portion in shares of Common Stock of the Corporation; provided, that the Board of Directors shall have sole discretion to determine in any case or cases that payment will be made in the form of all cash, all shares of Common Stock, or any combination thereof. If the holder is to receive a portion of such payment in shares of Common Stock, the number of shares of Common Stock shall be determined by dividing the amount of such portion by the fair market value of one share of Common Stock on the date on which the Right is exercised. The number of shares of Common Stock which may be received pursuant to the exercise of a Right may not exceed the number of shares of Common Stock covered by the related Option, or portion thereof, which is surrendered. No fractional shares of Common Stock will be issued, but instead cash will be paid for any such fractional share of Common Stock. No payment will be required from the holder upon exercise of a Right, except that the holder shall, upon notification of the amount due and prior to or concurrently with delivery to the holder of cash or a certificate representing shares of Common Stock, pay promptly any amount necessary to satisfy applicable federal, state or local tax requirements, and the Corporation shall have the right to deduct from any payment any taxes required by law to be withheld by the Corporation with respect to such payment. (c) The fair market value of one share of Common Stock for the date on which a Right is exercised shall be determined as provided in Paragraph 5 for the determination of such value on the date of grant. (d) Upon exercise of a Right, the number of shares of Common Stock subject to exercise under the related Option shall automa- tically be reduced by the number of shares of Common Stock repre- sented by the Option, or portion thereof, which is surrendered. Shares of Common Stock subject to Options, or portions thereof, which are surrendered in connection with the exercise of Rights shall not be available for subsequent Option grants under the Stock Option Plan. (e) Whether payments upon exercise of Rights are made in cash, shares of Common Stock or a combination thereof, the Committee shall have the sole discretion as to the timing of the payments, including whether payment shall be made in a lump sum or - 6 - 7 installments, but payments may not be deferred beyond the first business day of the twenty-fifth calendar month next following the month of exercise of a Right. Deferred payments may bear interest at a rate determined by the Committee, provided that such rate of interest shall not be less than the lowest rate which avoids imputation of interest at a higher rate under the Code. The Board of Directors may make such further provisions and adopt such rules and regulations as it shall deem appropriate, not inconsistent with the Stock Option Plan, related to the timing of the exercise of a Right and the determination of the form and timing of payment to the holder upon such exercise. 9. Non-transferability of Options. No Options or Rights granted under the Stock Option Plan shall be transferable other than by will or by the laws of descent and distribution ("Permitted Transferee"). With respect to ISOs, Options may be exercised, during the lifetime of the holder, only by the holder, or by his guardian or legal representative. 10. Termination of Relationship to the Corporation. (a) In the event that any original grantee shall cease to be an Eligible Individual of the Corporation (or any subsidiary thereof), except as set forth in Paragraph 11, such Option may (subject to the provisions of the Stock Option Plan) be exercised (to the extent that the original grantee was entitled to exercise such Option at the termination of his employment or service as a director, officer, consultant, adviser, agent or independent representative, as the case may be) at any time within three months after such termination, but not more than 10 years (five years in the case of a 10% Holder) after the date on which such Option was granted or the expiration of the Option, if earlier. Notwithstanding the foregoing, if the position of an original grantee shall be terminated by the Corporation or any subsidiary thereof for cause or if the original grantee terminates his employment or position voluntarily and without the written consent of the Corporation or any subsidiary corporation thereof, as the case may be (which consent shall be presumed in the case of normal retirement), the Options granted to such person, whether held by such person or by a Permitted Transferee shall, to the extent not theretofore exercised, forthwith terminate immediately upon such termination. The holder of any ISO may not exercise such Option unless at all times during the period beginning with the date of grant of the ISO and ending on the three months before the date of exercise he is an employee of the Corporation granting such Option, a subsidiary thereof, or a corporation or a subsidiary corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies. - 7 - 8 (b) Other than as provided in Paragraph 10(a), Options granted under the Stock Option Plan shall not be affected by any change of duties or position so long as the holder remains an Eligible Individual. (c) Any Option Agreement may contain such provisions as the Committee shall approve with reference to the determination of the date employment terminates or the date other positions or relationships terminate for purposes of the Stock Option Plan and the effect of leaves of absence, which provisions may vary from one another. (d) Nothing in the Stock Option Plan or in any Option granted pursuant to the Stock Option Plan shall confer upon any Eligible Individual or other person any right to continue in the employ of the Corporation or any subsidiary corporation (or the right to be retained by, or have any continued relationship with the Corporation or any subsidiary corporation thereof), or affect the right of the Corporation or any such subsidiary corporation, as the case may be, to terminate his employment, retention or relationship at any time. The grant of any option pursuant to the Stock Option Plan shall be entirely in the discretion of the Committee and nothing in the Stock Option Plan shall be construed to confer on any Eligible Individual any right to receive any Option under the Stock Option Plan. 11. Death or Disability of Holder. (a) If a person to whom an Option has been granted under the Stock Option Plan shall die (and the conditions in sub-paragraph (b) below are met) or become permanently and totally disabled (as such term is defined below) while serving as an Eligible Individual and if the Option was otherwise exercisable immediately prior to the happening of such event, then the period for exercise provided in Paragraph 10 shall be extended to one year after the date of death of the original grantee, or in the case of the permanent and total disability of the original grantee, to one year after the date of permanent and total disability of the original grantee, but, in either case, not more than 10 years (five years in the case of a 10% Holder) after the date such Option was granted, or the expiration of the Option, if earlier, as shall be prescribed in the original grantee's Option Agreement. An Option may be exercised as set forth herein in the event of the original grantee's death, by a Permitted Transferee or the person or persons to whom the holder's rights under the Option pass by will or applicable law, or if no such person has the right, by his executors or administrators; or in the event of the original grantee's permanent and total disability, by the holder or his guardian. (b) In the case of death of a person to whom an Option was originally granted, the provisions of subparagraph (a) apply if such person dies (i) while in the employ of the Corporation or a - 8 - 9 subsidiary corporation thereof or while serving as an Eligible Individual of the Corporation or a subsidiary corporation thereof or (ii) within three months after the termination of such position other than termination for cause, or voluntarily on the original grantee's part and without the consent of the Corporation or a subsidiary corporation thereof, which consent shall be presumed in the case of normal retirement. (c) The term "permanent and total disability" as used above shall have the meaning set forth in Section 22(e)(3) of the Code. 12. Adjustments upon Changes in Capitalization. Notwithstanding any other provision of the Stock Option Plan, each Agreement may contain such provisions as the Committee shall determine to be appropriate for the adjustment of the number and class of shares of Common Stock covered by such Option, the Option prices and the number of shares of Common Stock as to which Options shall be exercisable at any time, in the event of changes in the outstanding Common Stock of the Corporation by reason of stock dividends, split-ups, split-downs, reverse splits, recapitalizations, mergers, consolidations, combinations or exchanges of shares, spin-offs, reorganizations, liquidations and the like. In the event of any such change in the outstanding Common Stock of the Corporation, the aggregate number of shares of Common Stock as to which Options may be granted under the Stock Option Plan to any Eligible Individual shall be appropriately adjusted by the Committee whose determination shall be conclusive. In the event of (i) the dissolution, liquidation, merger or consolidation of the Corporation or a sale of all or substantially all of the assets of the Corporation, or (ii) the disposition by the Corporation of substantially all of the assets or stock of a subsidiary of which the original grantee is then an employee, officer or director, consultant, adviser, agent or independent representative or (iii) a change in control (as hereinafter defined) of the Corporation has occurred or is about to occur, then, if the Committee shall so determine, each Option under the Stock Option Plan, if such event shall occur with respect to the Corporation, or each Option granted to an employee, officer, director, consultant, adviser, agent or independent representative of a subsidiary respecting which such event shall occur, shall (x) become immediately and fully exercisable or (y) terminate simultaneously with the happening of such event, and the Corporation shall pay the optionee in lieu thereof an amount equal to (a) the excess of the fair market value over the exercise price of one share on the date on which such event occurs, multiplied by (b) the number of shares subject to the Option, without regard to whether the Option is then otherwise exercisable. - 9 - 10 13. Effectiveness of the Stock Option Plan. Options may be granted under the Stock Option Plan, subject to its authorization and adoption by stockholders of the Corporation, at any time or from time to time after its adoption by the Committee, but no Option shall be exercised under the Stock Option Plan until the Stock Option Plan shall have been authorized and adopted by a majority of the votes properly cast thereon at a meeting of stockholders of the Corporation duly called and held within 12 months from the date of adoption of the Stock Option Plan by the Board of Directors. If so adopted, the Stock Option Plan shall become effective as of the date of its adoption by the Board of Directors. The exercise of the Options shall also be expressly subject to the condition that at the time of exercise a registration statement under the Securities Act of 1933, as amended (the "Act") shall be effective, or other provisions satisfactory to the Committee shall have been made to ensure that such exercise will not result in a violation of such Act, and such other qualification under any state or federal law, rule or regulation as the Corporation shall determine to be necessary or advisable shall have been effected. If the shares of Common Stock issuable upon exercise of an Option are not registered under such Act, and if the Committee shall deem it advisable, the Optionee may be required to represent and agree in writing (i) that any shares of Common Stock acquired pursuant to the Stock Option Plan will not be sold except pursuant to an effective registration statement under such Act or an exemption from the registration provisions of the Act and (ii) that such Optionee will be acquiring such shares of Common Stock for his own account and not with a view to the distribution thereof and (iii) that the holder accepts such restrictions on transfer of such shares, including, without limitation, the affixing to any certificate representing such shares of an appropriate legend restricting transfer as the Corporation may reasonably impose. 14. Termination and Amendment of the Stock Option Plan. The Board of Directors of the Corporation may, at any time prior to the termination of the Stock Option Plan, suspend, terminate, modify or amend the Stock Option Plan; provided that any increase in the aggregate number of shares of Common Stock reserved for issue upon the exercise of Options, any amendment which would materially increase the benefits accruing to participants under the Stock Option Plan, or any material modification in the requirements as to eligibility for participation in the Stock Option Plan, shall be subject to the approval of stockholders in the manner provided in Paragraph 13, except that any such increase, amendment or change that may result from adjustments authorized by Paragraph 12 or adjustments based on revisions to the Code or regulations promulgated thereunder (to the extent permitted by such authorities) shall not require such approval. No suspension, termination, modification or amendment of the Stock Option Plan may, without the express written consent of the Eligible Individual - 10 - 11 (or his Permitted Transferee) to whom an Option shall theretofore have been granted, adversely affect the rights of such Eligible Individual (or his Permitted Transferee) under such Option. 15. Financing for Investment in Stock of the Corporation. The Board of Directors may cause the Corporation or any subsidiary to give or arrange for financing, including direct loans, secured or unsecured, or guaranties of loans by banks which loans may be secured in whole or in part by assets of the Corporation or any subsidiary, to any Eligible Individual under the Stock Option Plan who shall have been so employed or so served for a period of at least six months at the end of the fiscal year ended immediately prior to arranging such financing; but the Board of Directors may, in any specific case, authorize financing for an Eligible Individual who shall not have served for such a period. Such financing shall be for the purpose of providing funds for the purchase by the Eligible Individual of shares of Common Stock pursuant to the exercise of an Option and/or for payment of taxes incurred in connection with such exercise, and/or for the purpose of otherwise purchasing or carrying a stock investment in the Corporation. The maximum amount of liability incurred by the Corporation and its subsidiaries in connection with all such financing outstanding shall be determined from time to time in the discretion of the Board of Directors. Each loan shall bear interest at a rate not less than that provided by the Code and other applicable law, rules, and regulations in order to avoid the imputation of interest at a higher rate. Each recipient of such financing shall be personally liable for the full amount of all financing extended to him. Such financing shall be based upon the judgment of the Board of Directors that such financing may be reasonably be expected to benefit the Corporation, and that such financing as may be granted shall be consistent with the Certificate of Incorporation and By-Laws of the Corporation or such subsidiary, and applicable laws. If any such financing is authorized by the Board of Directors, such financing shall be administered by the Board of Directors. 16. Severability. In the event that any one or more provisions of the Stock Option Plan or any Agreement, or any action taken pursuant to the Stock Option Plan or such Agreement, should, for any reason, be unenforceable or invalid in any respect under the laws of the United States, any state or the United States or any other government, such unenforceability or invalidity shall not affect any other provision of the Stock Option Plan or of such or any other Agreement, but in such particular jurisdiction and instance the Stock Option Plan and the affected Agreement shall be construed as if such unenforceable or invalid provision had not been - 11 - 12 contained therein or if the action in question had not been taken thereunder. 17. Applicable Law. The Stock Option Plan shall be governed and interpreted, construed and applied in accordance with the laws of the State of Pennsylvania. 18. Withholding. A holder shall, upon notification of the amount due and prior to or concurrently with delivery to such holder of a certificate representing such shares of Common Stock, pay promptly any amount necessary to satisfy applicable federal, state, local or other tax requirements. 19. Miscellaneous. 1. The terms "parent," "subsidiary" and "subsidiary corporation" shall have the meanings set forth in Sections 424(e) and (f) of the Code, respectively. 2. The term "terminated for cause" shall mean termination by the Corporation (or a subsidiary thereof) of the employment of or other relationship with, the original grantee by reason of the grantee's (i) willful refusal to perform his obligations to the Corporation (or a subsidiary thereof), (ii) willful misconduct, contrary to the interests of the Corporation (or a subsidiary thereof), or (iii) commission of a serious criminal act, whether denominated a felony, misdemeanor or otherwise. In the event of any dispute regarding whether a termination for cause has occurred, the Board of Directors may by resolution resolve such dispute and such resolution shall be final and conclusive on all parties. 3. The term "change in control" shall mean an event or series of events that would be required to be described as a change in control of the Corporation in a proxy or information statement distributed by the Corporation pursuant to Section 14 of the Securities Exchange Act of 1934 in response to Item 6(e) of Schedule 14A promulgated thereunder, or any substitute provision which may hereafter be promulgated thereunder or otherwise adopted. The determination of whether and when a change in control has occurred or is about to occur shall be made by the Board of Directors in office immediately prior to the occurrence of the event or series of events constituting such change in control. - 12 - 13 JONES APPAREL GROUP, INC. STOCK OPTION AGREEMENT (NON-QUALIFIED STOCK OPTION) THIS AGREEMENT, made as of this ___ day of _______ 1996 by JONES APPAREL GROUP, INC., a Pennsylvania Corporation (herein- after called the "Company"), with ____________________________ _________ (hereinafter call the "Holder"): The Company has adopted a 1996 Stock Option Plan (the "Plan"). Said Plan, as it may hereafter be amended and continued, is incorporated herein by reference and made part of this Agreement. The Committee, which is charged with the administration of the Plan pursuant to Section 3 thereof, has determined that it would be to the advantage and interest of the Company to grant the option provided for herein to the Holder as an inducement to remain in the service of the Company or one of its subsidiaries, and as an incentive for increased efforts during such service. NOW, THEREFORE, pursuant to the Plan, the Company with the approval of the Committee hereby grants to the Holder as of the date hereof an option to purchase all or any part of _______ shares of Common Stock of the Company, par value $[ ] per share, at a price per share of $_________, which price is not less than the fair market value of a share of Common Stock on the date hereof (the "Option"), and upon the following terms and conditions: 1. The Option shall continue in force through _______ ___, ____ (the "Expiration Date"), unless sooner terminated as provided herein and in the Plan. Subject to the provisions of the Plan, the Option shall become exercisable as to [20%] of the number of shares originally covered thereby upon the first anniversary of the date of grant of the Option, and as to [20%] of the number of shares originally covered thereby upon the second, [third and fourth] anniversaries of the date of grant of the Option, and on the [fifth] anniversary, the Option shall become fully exercisable. Such installments shall be cumulative, subject to the following: a. Except as provided hereinbelow, the Option may not be exercised unless the Holder is then an employee (including directors and officers who are employees), director, consultant, advisor, agent or independent representative of the Company or any subsidiary of the Company or any combination thereof and unless the Holder has remained in the continuous employ or service thereof from the date of grant. - 13 - 14 2. In the event that the employment or service of the Holder shall be terminated prior to the Expiration Date (otherwise than by reason of death or disability), the Option may, subject to the provisions of the Plan, be exercised (to the extent that the Holder was entitled to do so at the termination of this employment or service) at any time within three months after such termination, but not after the Expiration Date, provided, however, that if such termination shall have been for cause or voluntarily by the Holder and without the consent of the Company or any subsidiary corporation thereof, as the case may be (which consent shall be presumed in the case of normal retirement), the Option and all rights of the Holder hereunder, to the extent not theretofore exercised, shall forthwith terminate immediately upon such termination. Nothing in this Agreement shall confer upon the Holder any right to continue in the employ or service of the Company or any subsidiary of the Company or affect the right of the Company or any subsidiary to terminate his employment or service at any time. 3. If the Holder shall (a) die while he is employed by or serving the Company or a corporation which is a subsidiary thereof or within three months after the termination of such position (other than termination for cause, or voluntarily on his part and without the consent of the Company or subsidiary corporation thereof, as the case may be, which consent shall be presumed in the case of normal retirement), or (b) become permanently and totally disabled within the meaning of Section 22 (e) (3) of Code while employed by or serving any such company, and if the Option was otherwise exercisable, immediately prior to the occurrence of such event, then such Option may be exercised as set forth herein by the Holder or by the person or persons to whom the Holder's rights under the Option pass by will or applicable law, or if no such person has such right, by his executors or administrators, at any time within one year after the date of death of the original Holder, or one year after the date of permanent or total disability, but in either case, not later than the Expiration Date. 4. a. The Holder may exercise the Option with respect to all or any part of the shares then purchasable hereunder by giving the Company written notice in the form annexed, as provided in paragraph 8 hereof, of such exercise. Such notice shall specify the number of shares as to which the Option is being exercised and shall be accompanied by payment in full in cash of an amount equal to the exercise price of such shares multiplied by the number of shares as to which the Option is being exercised; provided that, if permitted by the Board, the purchase price may be paid, in whole or in part, by surrender or delivery to the Company of securities of the Company having a fair market value on the date of the exercise equal to the portion of the purchase price being so paid. In such event fair market value should be determined pursuant to paragraph 5 of the Plan. - 14 - 15 b. Prior to or concurrently with delivery by the Company to the Holder of a certificate(s) representing such shares, the Holder shall, upon notification of the amount due, pay promptly any amount necessary to satisfy applicable federal, state or local tax requirements. In the event such amount is not paid promptly, the Company shall have the right to apply from the purchase price paid any taxes required by law to be withheld by the Company with respect to such payment and the number of shares to be issued by the Company will be reduced accordingly. 5. Notwithstanding any other provision of the Plan, in the event of a change in the outstanding Common Stock of the Company by reason of a stock dividend, split-up, split-down, reverse split, recapitalization, merger, consolidation, combination or exchange of shares, spin-off, reorganization, liquidation or the like, then the aggregate number of shares and price per share subject to the Option shall be appropriately adjusted by the Board, whose determination shall be conclusive. 6. No options granted hereunder shall be transferable other than by will or by the laws of descent and distribution. Options may be exercised, during the lifetime of the Holder, only by the Holder, or by his guardian or legal representative. In the event of any attempt by the Holder to transfer, assign, pledge, hypothecate or otherwise dispose of this Option or of any right hereunder, except as provided for herein, or in the event of the levy or any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate this Option by notice to the Holder and it shall thereupon become null and void. 7. Neither the Holder nor in the event of his death, any person entitled to exercise his rights, shall have any of the rights of a stockholder with respect to the shares subject to the Option until share certificates have been issued and registered in the name of the Holder or his estate, as the case may be. 8. Any notice to the Company provided for in this Agreement shall be addressed to the Company in care of its Chief Financial Officer, 250 Rittenhouse Circle, Bristol, Pennsylvania 19007 and any notice to the Holder shall be addressed to him at his address now on file with the Company, or to such other address as either may last have designated to the other by notice as provided herein. Any notice so addressed shall be deemed to be given on the second business day after mailing, by registered or certified mail, at a post office or branch post office within the United States. 9. In the event that any question or controversy shall arise with respect to the nature, scope or extent of any one or more rights conferred by this Option, the determination by the - 15 - 16 Committee (as constituted at the time of such determination) of the rights of the Holder shall be conclusive, final and binding upon the Holder and upon any other person who shall assert any right pursuant to this Option. JONES APPAREL GROUP, INC. By:______________________________ Name:_________________________ Title:________________________ ACCEPTED AND AGREED ________________________ Holder - 16 - 17 FORM OF NOTICE OF EXERCISE TO: JONES APPAREL GROUP, INC. 250 Rittenhouse Circle Bristol, Pennsylvania 19007 The undersigned hereby exercises his/her option to purchase _____ shares of Common Stock of Jones Apparel Group, Inc. (the "Company"), as provided in the Stock Option Agreement dated as of _______, 199_ at $ _______ per share, a total of $ _____________, and makes payment therefor as follows: (a) To the extent of $_______ of the purchase price, the undersigned hereby surrenders to the Company certificates for shares of its Common Stock, which, valued at $__________________ per share, the fair market value thereof, equals such portion of the purchase price. (b) To the extent of the balance of the purchase price, the undersigned has enclosed a certificate or bank check payable to the order of the Company for $________________. A stock certificate or certificate for the shares should be delivered in person or mailed to the undersigned at the address shown below. The undersigned hereby represents and warrants that it is his (her) present intention to acquire and hold the aforesaid shares of Common Stock of the Company for his (her) own account for investment, and not with a view to the distribution of any thereof, and agrees that he (she) will make no sale, thereof, except in compliance with the applicable provisions of the Securities Act of 1933, as amended. Signature: ________________________ Address: ________________________ ________________________ Dated:________ - 17 - 18 JONES APPAREL GROUP, INC. STOCK OPTION AGREEMENT (INCENTIVE STOCK OPTION) THIS AGREEMENT, made as of this ___ day of _______ 1996 by JONES APPAREL GROUP, INC., a Pennsylvania corporation (herein- after called the "Company"), with _____________________________ ________ (hereinafter call the "Holder"): The Company has adopted a 1996 Stock Option Plan (the "Plan"). Said Plan, as it may hereafter be amended and continued, is incorporated herein by reference and made part of this Agreement. The Committee, which is charged, with the administra- tion of the Plan pursuant to Section 3 thereof, has determined that it would be to the advantage and interest of the Company to grant the option provided for herein to the Holder as an inducement to remain in the service of the Company or one of its subsidiaries, and as an incentive for increased efforts during such service. NOW, THEREFORE, pursuant to the Plan, the Company with the approval of the Committee hereby grants to the Holder as of the date hereof an option (the "Option") to purchase all or any part of _________ shares of Common Stock of the Company, par value $[ ] per share, at a price per share of $_________, which price is not less than the fair market value of a share of Common Stock on the date hereof (or 110% of the fair market value of a share of Common Stock if the Holder is a 10% Holder (as defined in the Plan)), and upon the following terms and conditions: 1. The Option shall continue in force through _______ ___, ____ (the "Expiration Date"), unless sooner terminated as provided herein and in the Plan. Subject to the provisions of the Plan, the Option shall become exercisable as to [20%] of the number of shares originally covered thereby upon the first anniversary of the date of grant of the Option, and as to [20%] of the number of shares originally covered thereby upon the second, [third and fourth] anniversaries of the date of grant of the Option, and on the [fifth] anniversary, the Option shall become fully exercisable. Such installments shall be cumulative, subject to the following: a. Except as provided hereinbelow, the Option may not be exercised unless the Holder is then an employee (including directors and officers who are employees), director, consultant, advisor, agent or independent representative of the Company or any subsidiary of the Company or any combination - 18 - 19 thereof and unless the Holder has remained in the continuous employ or service thereof from the date of grant. b. This Option is designated as an incentive stock option ("ISO") pursuant to the Internal Revenue Code of 1986, as amended (the "Code") and the regulations promulgated thereunder. 2. In the event that the employment or service of the Holder shall be terminated prior to the Expiration Date (otherwise than by reason of death or disability), the Option may, subject to the provisions of the Plan, be exercised (to the extent that the Holder was entitled to do so at the termination of this employment or service) at any time within three months after such termination, but not after the Expiration Date, provided, however, that if such termination shall have been for cause or voluntarily by the Holder and without the consent of the Company or any subsidiary corporation thereof, as the case may be (which consent shall be presumed in the case of normal retire- ment), the Option and all rights of the Holder hereunder, to the extent not theretofore exercised, shall forthwith terminate immediately upon such termination. Nothing in this Agreement shall confer upon the Holder any right to continue in the employ or service of the Company or any subsidiary of the Company or affect the right of the Company or any subsidiary to terminate his employment or service at any time. 3. If the Holder shall (a) die while he is employed by or serving the Company or a corporation which is a subsidiary thereof or within three months after the termination of such position (other than termination for cause, or voluntarily on his part and without the consent of the Company or subsidiary corporation thereof, as the case may be, which consent shall be presumed in the case of normal retirement), or (b) become permanently and totally disabled within the meaning of Section 22 (e) (3) of the Code, while employed by or serving any such company, and if the Option was otherwise exercisable, immediately prior to the occurrence of such event, then such Option may be exercised as set forth herein by the Holder or by the person or persons to whom the Holder's rights under the Option pass by will or applicable law, or if no such person has such right, by his executors or administrators, at any time within one year after the date of death of the original Holder, or one year after the date of permanent or total disability, but in either case, not later than the Expiration Date. 4. a. The Holder may exercise the Option with respect to all or any part of the shares then purchasable hereunder by giving the Company written notice in the form annexed, as provided in paragraph 8 hereof, of such exercise. Such notice shall specify the number of shares as to which the Option is being exercised and shall be accompanied by payment in - 19 - 20 full in cash of an amount equal to the exercise price of such shares multiplied by the number of shares as to which the Option is being exercised; provided that, if permitted by the Board, the purchase price may be paid, in whole or in part, by surrender or delivery to the Company of securities of the Company having a fair market value on the date of the exercise equal to the portion of the purchase price being so paid. In such event fair market value should be determined pursuant to paragraph 5 of the Plan. b. Prior to or concurrently with delivery by the Company to the Holder of a certificate(s) representing such shares, the Holder shall, upon notification of the amount due, pay promptly any amount necessary to satisfy applicable federal, state or local tax requirements. In the event such amount is not paid promptly, the Company shall have the right to apply from the purchase price paid any taxes required by law to be withheld by the Company with respect to such payment and the number of shares to be issued by the Company will be reduced accordingly. 5. Notwithstanding any other provision of the Plan, in the event of a change in the outstanding Common Stock of the Company by reason of a stock dividend, split-up, split-down, reverse split, recapitalization, merger, consolidation, combination or exchange of shares, spin-off, reorganization, liquidation or the like, then the aggregate number of shares and price per share subject to the Option shall be appropriately adjusted by the Board, whose determination shall be conclusive. 6. This Option shall, during the Holder's lifetime, be exercisable only by him, and neither this Option nor any right hereunder shall be transferable by him, by operation of law or otherwise, except by will or by the laws of descent and distribution. In the event of any attempt by the Holder to transfer, assign, pledge, hypothecate or otherwise dispose of this Option or of any right hereunder, except as provided for herein, or in the event of the levy or any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate this Option by notice to the Holder and it shall thereupon become null and void. 7. Neither the Holder nor in the event of his death, any person entitled to exercise his rights, shall have any of the rights of a stockholder with respect to the shares subject to the Option until share certificates have been issued and registered in the name of the Holder or his estate, as the case may be. 8. Any notice to the Company provided for in this Agreement shall be addressed to the Company in care of its Chief Financial Officer, 250 Rittenhouse Circle, Bristol, Pennsylvania 19007 and any notice to the Holder shall be addressed to him at his address now on file with the Company, or to such other - 20 - 21 address as either may last have designated to the other by notice as provided herein. Any notice so addressed shall be deemed to be given on the second business day after mailing, by registered or certified mail, at a post office or branch post office within the United States. 9. In the event that any question or controversy shall arise with respect to the nature, scope or extent of any one or more rights conferred by this Option, the determination by the Committee (as constituted at the time of such determination) of the rights of the Holder shall be conclusive, final and bind- ing upon the Holder and upon any other person who shall assert any right pursuant to this Option. JONES APPAREL GROUP, INC. By:___________________________ Name:______________________ Title:_____________________ ACCEPTED AND AGREED ________________________ Holder - 21 - 22 FORM OF NOTICE OF EXERCISE TO: JONES APPAREL GROUP, INC. 250 Rittenhouse Circle Bristol, PA 19007 The undersigned hereby exercises his/her option to purchase _____ shares of Common Stock of Jones Apparel Group, Inc. (the "Company"), as provided in the Stock Option Agreement dated as of _______, 199_ at $ _______ per share, a total of $_____________, and makes payment therefor as follows: (a) To the extent of $_______ of the purchase price, the undersigned hereby surrenders to the Company certificates for shares of its Common Stock, which, valued at $__________________ per share, the fair market value thereof, equals such portion of the purchase price. (b) To the extent of the balance of the purchase price, the undersigned has enclosed a certificate or bank check payable to the order of the Company for $________________. A stock certificate or certificate for the shares should be delivered in person or mailed to the undersigned at the address shown below. The undersigned hereby represents and warrants that it is his (her) present intention to acquire and hold the aforesaid shares of Common Stock of the Company for his (her) own account for investment, and not with a view to the distribution of any thereof, and agrees that he (she) will make no sale, thereof, except in compliance with the applicable provisions of the Securities Act of 1933, as amended. Signature: ________________________ Address: ________________________ ________________________ Dated:________ - 22 - EX-10.34 7 EXHIBIT 10.34 CoreStates Bank, NA FC 1-8-3 12 1345 Chestnut Street PO Box 7618 Philadelphia PA 19101-7618 215 973 7397 Fax 215 973 6745 James P Richards Vice President Southeast Corporate August 15, 1996 Wesley R. Card Chief Financial Officer JONES APPAREL GROUP 250 Rittenhouse Circle Bristol, PA 19007 Dear Wes: I take great pleasure in advising you that we have approved in favor of Jones Apparel Group the following credit facilities: I) A $75,000,000 discretionary line of credit for the issuance of documentary import letters of credit having a tenor of up to 180 days. II) A $25,000,000 discretionary line of credit available for working capital loans and/or documentary import letters of credit. Included in the facilities outlined above, there are sublimits available for standby letters of credit and bankers' acceptances. I'm assembling any new documentation we may require and shall forward it to you under separate cover. We're extremely pleased with the volume of new business we have seen and trust that these credit facilities will serve to clearly demonstrate our confidence in the Jones Apparel Group and its management. Sincerely, /s/ James P. Richards JPR/chc cc: Gary R. Klocek EX-10.35 8 EXHIBIT 10.35 CoreStates Bank PO Box 7618 Philadelphia PA 19101-7618 September 5, 1996 MASTER SHORT TERM BORROWING AGREEMENT Jones Apparel Group 250 Rittenhouse Circle Bristol, PA 19007 Attention: Gary R. Klocek Controller Gentlemen: You have indicated that you may wish to borrow from us from time to time on a short term basis for working capital or other short term purposes. We are interested in considering such loan requests and may from time to time like to bid on your short term borrowing needs. Short term borrowings or loans mean borrowings or loans which are payable on demand or have a maturity of 180 days or less and are referred to in this letter Agreement individually as a "Loan" and collectively as "Loans." The purpose of this letter is to outline and specify, among other things, how Loans may be requested and, if agreed to by us, the terms under which they will be made. As used in this Agreement, the terms we, us, our and the Bank mean CoreStates Bank, N.A. and the terms you and your mean the addressee of this Agreement. This letter does not constitute a commitment to lend or to make advances. It shall be solely within our discretion to make or refuse to make any Loan requested by you, and the making of one or more Loans hereunder shall not be considered a commitment by us to make any additional Loans. It is understood and agreed that any and all Loans will be governed by the following: 1. Requests for Loans. A duly authorized officer or other duly authorized person under Paragraph 2 may request Loans by telephone confirmed in writing or by letter. If we elect to make a Loan, then we will credit the proceeds to your designated account. Upon your request we will forward to you at your address set forth in Paragraph 16 written advices or statements of Loans, which will specify the rate or rates of interest payable on the Loan, and such other terms as may have been agreed to. 2. Resolutions Authorizing Loans. Any and all documents required to be executed in connection with Loans may be signed by any of the officers or other person duly authorized by your borrowing resolutions as in effect from time to time, provided that a copy of such resolutions is certified by the Secretary or an Assistant Secretary of your corporation and delivered to us. We shall incur no liability to you or any other person in acting on any request for a Loan which we believe in good faith to have been made by a person duly authorized to borrow on your behalf as set forth in your borrowing resolutions. - 1 - 2 3. Bank Records Conclusive. The amount and terms of each Loan including the rate of interest thereon and your payments of principal and interest, as well as any special terms and details of each such Loan, shall be established and evidenced by this letter Agreement and by our records, which shall be conclusively deemed to be correct in the absence of manifest error. 4. Payment of Loans. All Loans shall be payable on a demand, time or other basis mutually agreed upon at the time the Loan is made. Loans which are payable on a basis other than demand may not be prepaid prior to their maturity date or dates. If one or more Loans which are payable on a basis other than demand are repaid prior to their maturity date or dates (whether voluntarily by reason of acceleration or otherwise), you shall pay to the Bank an amount equal to all loss, cost and expense of the Bank resulting from such prepayment. Upon the payment in whole or in part of any Loan as provided above, accrued and unpaid interest on the amount repaid shall be simultaneously paid. 5. Interest. (a) Interest on each Loan shall be computed at the rate mutually agreed upon at the time the Loan is made and shall be paid monthly, if the Loan is payable on demand, or on the date or dates agreed to, if the Loan is payable on a time or other basis. If the rate of interest agreed to is based upon our "prime rate," such terms shall mean and refer to the rate of interest for commercial loans established and publicly announced by us from time to time as our prime rate and such rate of interest shall change each time our prime rate changes, effective on the date of change. (b) Unless other agreed, interest on all Loans shall be computed on the basis of a year of 360 days for each day of the year actually elapsed. 6. Payments. You irrevocably authorize us to effect payment of principal of and interest on and any fees in connection with all Loans whenever such payment is due and to debit your designated account for the amount of such payment. Alternatively, you may effect all payments to us via wire transfer on the date such payments are due. We shall furnish to you a written confirmation of the amount of each principal and interest payment charged against your designated account. You will pay to us promptly such amounts as may be due if your designated account balance is insufficient. All payments of principal and interest on Loans shall be made in lawful money of the United States in immediately available funds free and clear of and without deduction for any taxes, fees or other charges of any nature imposed by any governmental authority, or, if such withholding is required, you shall pay to us the same net amount as if no withholding was made. 7. Payment of Costs. In addition to the principal and interest payments specified in paragraphs 4 and 5, you agree to pay upon demand all costs and expenses (including reasonable attorneys' fees and legal expenses) we incur in enforcing the Loans and this Agreement. 8. Further Evidence of Loans. Upon our request, you hereby agree to execute and deliver to us a promissory note or notes payable to our order to evidence all or any part of any Loans. If any Loan is or shall be evidenced by one or more promissory notes, such note or notes shall be deemed to incorporate by reference, and to be supplemented and modified by, the terms of this Agreement. - 2 - 3 9. Your Representations. You represent and warrant that you are validly existing and in good standing in the jurisdiction under whose laws you were organized, that the execution, delivery and performance of this Agreement are within your powers, have been duly authorized by all necessary action and are not in contravention of the terms of your charter documents. You further represent and warrant that this Agreement has been validly executed and is enforceable in accordance with its terms, that the execution, delivery and performance by you of this Agreement are not in contravention of law and do not conflict with any indenture, agreement or undertaking to which you are a party or are otherwise bound, and that no consent or approval of any governmental authority or any third party is required in connection with the execution, delivery and performance of this Agreement. 10. Security. Loans may be secured by security interests, mortgages and other liens given especially for such purposes or given to secure other indebtedness. Whether such security interests and other liens were given to secure other indebtedness that you have to us or are given to secure Loans, you agree that such security interests and liens shall secure all of your existing and future indebtedness. As security for the payment of all sums owed by you to us, we shall have a lien upon, and security interest in, any balance belonging to you in any of your deposit or other accounts with us and any other amounts or property which from time to time may be owing by us to you or held by us for you. 11. Defaults. The occurrence of any of the following events shall cause you to be in default on any and all outstanding Loans that are payable on a basis other than demand: (a) the nonpayment when due of any amount payable on any of the Liabilities (the term "Liabilities" shall mean all loans and advances made under this Agreement and any renewals, extensions and modifications thereof and all of your other existing and future liabilities, whether absolute or contingent, to the Bank regardless of their source or nature and out of whatever transactions arising); (b) the failure of any Obligor to pay, observe or perform any indebtedness, obligation or agreement of any nature with the Bank (the term "Obligor" includes you and all persons otherwise liable for the payment of all Loans, and all renewals, extensions or modifications thereof, such as endorsers or guarantors); (c) if any representation, warranty, certificate, financial statement or other information made or given by any Obligor to the Bank is materially incorrect or misleading; (d) if any Obligor shall become insolvent or make an assignment for the benefit of creditors or if any petition shall be filed by or against any Obligor under any bankruptcy or insolvency law; (e) the entry of judgment against any Obligor which remains unsatisfied and unstayed for 15 days or the issuance of any attachment, tax lien, levy or garnishment against any property of material value in which any Obligor has an interest; (f) if any attachment, levy, garnishment or similar legal process is served upon the Bank as a result of any claim against any Obligor or against any property of any Obligor; (g) the dissolution, merger, consolidation, or the sale or change in control (as control is defined in Rule 12b-2 under the Securities Exchange Act of 1934) of any Obligor which is a corporation or partnership, or transfer of any substantial portion of any Obligor's assets, or if any agreement for such dissolution, merger, consolidation, change in control, sale or transfer is entered into by any Obligor, without the written consent of the Bank; - 3 - 4 (h) if the Bank determines reasonably and in good faith that an event has occurred or a condition exists which has had, or is likely to have, a material adverse effect on the financial condition or creditworthiness of any Obligor, or on the ability of any Obligor to perform the Liabilities; (i) if any Obligor shall fail to remit promptly when due to the appropriate government agency or authority depository, any amount collected or withheld from any employee of said Obligor for payroll taxes, Social Security payments or similar payroll deductions; (j) if any Obligor shall attempt to terminate or disclaim such Obligor's liability for the Liabilities; (k) if the Bank shall reasonably and in good faith determine and notify you that any collateral for the Liabilities is insufficient as to quality or quantity; (1) if any Obligor shall fail to pay when due any material indebtedness for borrowed money other than to the Bank; (m) if you shall be notified of the failure of any Obligor to provide such financial and other information promptly when reasonably requested by the Bank; or (n) the death of any Obligor who is a natural person. 12. Acceleration, Demand, Interest After Default. (a) If you are in default as described in Paragraph 11(a) through (n), including a default for failure to pay any Loans payable on demand upon demand for payment by us, at our election evidenced by notice in writing to you, all Loans, whether or not evidenced by a note, shall thereupon become due and payable without presentment, demand or protest, all of which are hereby waived. If you are in default as described in Paragraph 11(d), then forthwith and without any election or notice, all Loans, whether or not evidenced by a note, shall thereupon become due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived. You waive all right to stay of execution and exemption of property in any action to enforce your obligations to us hereunder. With respect to all Loans payable on demand, the Bank's right to demand payment shall not be restricted or impaired by the absence, non-occurrence or waiver of a default, and it is understood that for all Loans payable on demand, the Bank may demand payment at any time. (b) Upon the occurrence of any such default or at any time thereafter, the Bank may, at its option, and upon five days' written notice to you, begin accruing interest on the outstanding Loans, at a rate not to exceed five percent (5%) per annum in excess of the greater of: (i) the Prime Rate in effect from time to time and (ii) the rate of interest applicable to such Loan; provided, however, that no interest shall accrue in excess of the maximum rate permitted by law. All such additional interest shall be payable on demand. 13. Continuing Effect. This Agreement shall remain in full force and effect until all Loans outstanding, together will interest thereon, and all other sums required to be paid under the terms of this Agreement have been paid in full. 14. Governing Law. This Agreement and any note or notes evidencing Loans made shall be construed in accordance with and governed by the laws of the Pennsylvania. 15. Bank's Assignees. The Bank may at any time or from time to time grant to others assignments of or participations in the Loans. 16. Notices. Any notice given under this Agreement shall be effective on the date when it is delivered to a party at its address set forth as follows (or at such other address as the party to which notice may be given may specify to the other in writing): - 4 - 5 if to you at Jones Apparel Group 250 Rittenhouse Circle Bristol, PA 19007 Attention: Gary R. Klocek Controller and if to us at CORESTATES BANK, N.A. Broad and Chestnut Streets Philadelphia, PA 19107 Attention: James P. Richards F.C. 1-8-8-14 17. Miscellaneous. Any failure by us to exercise any right under this Agreement shall not be construed as a waiver of the right to exercise the same or any other right at any other time. If more than one person, including any form of legal entity, shall sign this Agreement as borrower, such persons shall be jointly and severally liable hereunder and the terms "you" and "your" shall be deemed to mean any and all such persons. The parties hereto intend this Agreement to be a sealed instrument and to be legally bound hereby. 18. JURISDICTION AND VENUE. IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER, YOU HEREBY IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN ANY COUNTY IN THE COMMONWEALTH OF PENNSYLVANIA WHERE THE BANK MAINTAINS AN OFFICE AND AGREE NOT TO RAISE ANY OBJECTION TO SUCH JURISDICTION OR TO THE LAYING OR MAINTAINING OF THE VENUE OF ANY SUCH PROCEEDING IN SUCH COUNTY. YOU AGREE THAT SERVICE OF PROCESS IN ANY SUCH PROCEEDING MAY BE DULY EFFECTED UPON YOU BY MAILING A COPY THEREOF, BY REGISTERED MAIL, POSTAGE PREPAID, TO YOU. 19. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK TO ENTER INTO THIS AGREEMENT. 20. Termination. This Agreement shall remain in full force and effect until either of us gives notice of termination to the other, which must be given or confirmed in writing, but no such termination shall affect your obligation to repay with interest to the date of repayment all sums due and owing with respect to Loans outstanding under the terms of this Agreement at the time of such termination. Please indicate your acceptance of this Agreement by signing and dating the enclosed copy in the place provided and returning such copy to us. Very truly yours, CORESTATES BANK, N.A. /s/ James P. Richards James P. Richards Vice President Acceptance Of And Agreement To Master Short Term Borrowing Agreement We, the addressee of the above Master Short Term Borrowing Agreement, intending to be legally bound, accept and agree to the terms and conditions of said Agreement and promise to pay the principal of and interest on all Loans made to us by CoreStates Bank, N.A., and all other sums required to be paid by us to said Bank, under and in accordance with the terms of said Master Short Term Borrowing Agreement. Signed this 12th day of September 1996. By /s/ Gary R. Klocek (SEAL) --------------------------- Corporate Controller Name and Title - 5 - EX-10.36 9 EXHIBIT 10.36 First Union National Bank Patrick A. McGovern 123 South Broad Street Senior Vice President Philadelphia, Pennsylvania 19109-1199 Large Corporate Credit 215 985-3031 Fax 215 985-7576 October 21, 1996 Mr. Gary Klocek Controller Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, PA 19007 Dear Gary: I am delighted to advise Jones Apparel Group, Inc. (the "Company") that First Union National Bank (the "Bank") has approved a Discretionary Line of Credit to a maximum aggregate amount outstanding at any one time of U.S.$75,000,000 (the "Line"). Under the Line at their discretion, the Bank's designated officers are authorized to approve short-term credit undertakings such as loans or letters of credit on terms in effect from time-to-time. The Line is intended to facilitate our consideration of your requests for extensions of credit, and, although it may be terminated by the Company or the Bank at any time, lines are formally reviewed and reset by the Bank on an annual basis. Availability under the Line is subject to the execution and delivery of such documents as the Bank from time-to-time considers necessary or desirable and the receipt of, and the Bank's continued satisfaction with, current financial and other information, which the Company will promptly furnish the Bank as it may from time-to-time request. We look forward to our continuing relationship and the opportunity to assist in fulfilling your financial needs. Sincerely, FIRST UNION NATIONAL BANK /s/ Patrick A. McGovern Patrick A. McGovern Senior Vice President PAMcG/bjc EX-10.37 10 EXHIBIT 10.37 THE BANK OF NEW YORK NEW YORK'S FIRST BANK - FOUNDED 1784 BY ALEXANDER HAMILTON 530 FIFTH AVENUE, NEW YORK, N.Y. 10036 February 23, 1996 Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, PA 19007 Attn: Wesley R. Card Chief Financial Officer Dear Mr. Card: I am pleased to advise you that The Bark of New York (the "Bank") has increased the line of credit that we hold available for you and your subsidiaries from $25,000,000 to $40,000,000. This line is fully available for import letters of credit and loans. As you know, lines of credit are cancellable by either party at any time and the making of advances and issuing letters of credit are subject to the discretion of the Bank. Without limiting the foregoing, the extension of such credit facilities is subject to the Bank's satisfaction with the business, operations, prospects and financial condition of the applicants at the time of each drawdown or request for issuance of a letter of credit. I look forward to further expanding our relationship with Jones Apparel Group, Inc. Sincerely, /s/ Russel A. Burr Russel A. Burr Senior Vice President cc: Herbert J. Goodfriend Vice Chairman and Secretary Gary Klocek Controller EX-10.38 11 EXHIBIT 10.38 BANK OF BOSTON June 27, 1996 Mr. Gary Klocek Controller Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, PA 10997 Dear Gary: The First National Bank of Boston is pleased to confirm that we hold available for Jones Apparel Group, Inc. a $35,000,000 364-day uncommitted letter of credit facility to extend through July 7, 1997. 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, THE FIRST NATIONAL BANK OF BOSTON By /s/ Nancy E. Fuller Nancy E. Fuller, Director Accepted: Jones Apparel Group, Inc. By /s/ Gary R. Klocek, Controller Date: Aug. 5, 1996 THE FIRST NATIONAL BANK OF BOSTON, Boston, Massachusetts 02106 EX-10.39 12 EXHIBIT 10.39 BANK OF BOSTON THE FIRST NATIONAL BANK OF BOSTON. Boston, Massachusetts 02106 July 18, 1996 Mr. Gary R. Klocek Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, PA 19007 Dear Gary, For your review and execution, attached is the required documentation for our new $20,000,000 Money Market lending arrangement. The Money Market line letter describes the borrowing procedures, and the Money Market note will evidence the actual draw-downs against this uncommitted facility. The standard Borrowing Resolutions and Certification of Title forms need to be completed as well. If either you or your counsel has any questions concerning these forms, or any of the assumptions contained therein, please do not hesitate to call me at 617-434-5310. Upon receipt of the executed documents, Bank of Boston is prepared to quote rates and fund on a same day basis. We look forward to expanding our good business relationship with Jones Apparel Group, Inc. with this new $20,000,000 lending facility. Regards, /s/ Nancy Fuller Nancy E. Fuller, Director cc: T. A. McLaughlin, Large Corporate G. R. Long, Department Executive - 1 - 2 MONEY MARKET LINE COMMERCIAL PROMISSORY NOTE Boston, Massachusetts July 19, 1996 FOR VALUE RECEIVED, the undersigned (jointly and severally if more than one) promise(s) to pay to the order of THE FIRST NATIONAL BANK OF BOSTON (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 19, 1996 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. - 2 - 3 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 all 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 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 - 4 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, preservation 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. - 4 - 5 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 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 - 5 - EX-10.40 13 EXHIBIT 10.40 (Jones - License) LICENSE AGREEMENT, dated as of October 18, 1995 by and between Polo Ralph Lauren, L.P. ("Licensor"), with a place of business at 650 Madison Avenue, New York, New York 10022, and Jones Apparel Group, Inc. ("Licensee"), a Pennsylvania corporation with a place of business at 250 Rittenhouse Circle, Bristol, Pennsylvania 19007. 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 the Trademark (as hereinafter defined) on the terms set forth herein; 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 Jones Apparel Group, Inc., a corporation organized under the laws of Pennsylvania. 1.5. "Territory" 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. In the event that Licensor wishes to use or license a third party to use the Trademark on Licensed Products sold in Canada during the term hereof, Licensor shall grant to Licensee a right of first refusal to act as the Licensee therefor. In the implementation of said first refusal - 1 - 2 rights, Licensor shall give Licensee notice of the Offer Terms upon which it proposes to grant a license ("Licensor's Offer") for such products. Licensee shall have a period of forty-five (45) days after the date of Licensor's notice of the Offer Terms to accept or reject Licensor's Offer in writing. If Licensee rejects Licensor's Offer or if Licensee initially accepts Licensor's Offer but thereafter is unable to satisfy the Offer Terms, then Licensor shall be free to make a substantially similar Licensor's Offer to any third party. If Licensor shall substantially (as determined in Licensor's reasonable discretion) change the Offer Terms then, during the term hereof, Licensee's right of first refusal as provided hereinabove shall apply to such changed Offer Terms. 1.6. "Trademark" shall mean the trademark set forth on Schedule B hereto, and no other trademark, regardless of whether such trademark is or includes any reference to "Ralph Lauren" or any other trademark owned by Licensor or its affiliates. Licensor shall have the sole right to determine the manner and use each of the Trademark in connection with each particular Licensed Product. 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, such license being specifically reserved for Licensor. 2.2. It is understood and agreed that the License applies solely to the use of the Trademark on the Licensed Products, and that (i) no use of any other trademark of Licensor or of any of Licensor's affiliates (including any trademark that uses the name "Ralph Lauren"), and (ii) no use of the Trademark on any other products, is authorized or permitted. 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. Licensee understands and agrees that Licensor may itself manufacture or authorize third parties to manufacture in the Territory, Licensed Products 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 - 2 - 3 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. In the event that (i) Sidney Kimmel is no longer the Chairman of Licensee and the owner of a controlling interest in Licensee, and (ii) Licensee, directly or indirectly, agrees to manufacture, distribute, sell or advertise during the term of this Agreement any items which bear the name or are associated with the name of any person or entity listed on Schedule C hereto, Licensor shall have the right to terminate the term of this Agreement upon sixty (60) days written notice. 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. In the event that Licensee or Licensor is charged with infringement on account of Licensee's use of any of the Trademark or, if in connection with the development of Licensor's program in the Territory, 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 other mutually agreeable "Ralph Lauren" trademarks) or label(s); in such event Licensee hereby accepts the exclusive license to use such "Ralph Lauren" trademarks) in connection with the manufacture and sale of Licensed Products in the Territory subject to all other terms of this License Agreement. In such event, Licensee shall immediately advise Licensor of its inventory of Licensed Products labelled with the Trademark(s) and of its stock of business materials bearing the Trademark(s) and Licensor shall, in its reasonable 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 Mark to any third party which, directly or indirectly, sells or proposes to sell such Licensed Products outside the Territory. Licensee shall use its best 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. Licensee recognizes that there are many uncertainties in the business contemplated by this Agreement. Licensee agrees and acknowledges that other than those representations explicitly contained in this Agreement, if any, no representations, warranties or guarantees of any kind have been made to Licensee, either by Licensor or its affiliates, or by anyone acting on their behalf. Without limitation, no representations concerning the value of the - 3 - 4 Licensed Products or the prospects for the level of their sales or profits have been made and Licensee has made its own independent business evaluation in deciding to manufacture and distribute the Licensed Products on the terms set forth herein. 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 Trademark has established prestige and goodwill and are well recognized in the minds of the public, and that it is of great importance to each 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 best efforts to make available each subcontractor's manufacturing facilities for inspection by Licensor's representatives during usual working hours. No sales of miscuts or damaged merchandise shall contain any labels or other identification bearing the Trademark without Licensor's prior written approval, but sales of all products of Licensor or the Design Partnership's design shall nonetheless be subject to royalty payments pursuant to paragraph 6 hereof. 3.3. In the event that any Licensed Product is, in the 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, the Trademark shall be promptly removed from the item, at the option of Licensor, in which event the item may be sold by Licensee without payment of any royalty hereunder, provided such miscut or damaged item does not contain any labels or other identification bearing the Trademark. Notwithstanding anything in this paragraph 3.3 to the contrary, 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. Licensor hereby approves Licensee's sale of excess inventory, cutups and clearly marked seconds or irregular merchandise, on all the terms set forth herein: (i) first, upon request to Licensor's factory outlet stores to the extent of their requirements (subject to a reasonable assortment being purchased), at a price equal to [Omitted; Material Filed Separately With The Securities And Exchange Commission] off the regular wholesale price of such products (but Licensee shall not be responsible for any royalty payments hereunder or for any compensation payments under the Design Agreement with respect to such sales) and (ii) second, at factory outlet stores owned by Licensee or its affiliates ("Licensee Outlet Stores") and (iii) at such other locations as Licensor may hereafter approve. Licensor and Licensee shall separately agree to the terms of license agreements for Licensee Outlet Stores, which shall bear the Trademark as a service mark, ("Store License Agreements") , it being understood that such Store License Agreements shall (i) not require Licensee to pay Licensor any separate royalty or other compensation for the right to use such service mark herein and in the Design Agreement; (ii) Licensor shall have a right to approve each location for each Licensee Outlet Store in its reasonable business judgment, it being understood that Licensor does not presently intend to approve more than one Licensee Outlet Store in each center and (iii) such Store License Agreements shall be consistent with other similar agreements Licensor has entered into with third parties and shall provide for Licensor's right to approve various aspects of the design, decoration, accessorization and operation of all Licensee outlet Stores. 3.4. At the request of Licensor, Licensee shall cause to be placed on all Licensed Products appropriate notice 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. 4. Marketing. 4.1. 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 Licensed Products, and whose operations will enhance the quality and prestige of the Trademark, and only to those customers listed on Schedule D hereto and other customers of similar quality and prestige. Licensor shall have the right to object by notice to Licensee to any customer not listed on Schedule D hereto, and Licensee shall not thereafter accept orders from such customer, (but Licensee may fulfill orders accepted prior to Licensee's receipt of such notice). In the event Licensor reasonably determines that the unauthorized resale of Licensed Products through unauthorized distribution channels is causing a negative impact on the reputation and desirability of Licensor's products, Licensee shall consult with Licensor in good faith regarding what steps, including the possibility of implementing an inventory marking system, may be taken to remedy such negative impact. Licensee shall not market or promote or seek customers for - 4 - 5 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. 4.2. Licensee acknowledges that in order to preserve the good will attached to the Ralph Lauren trademarks, the Licensed Products are to be sold at prices and terms reflecting the prestigious nature of such trademarks, 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. 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 best 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 4.5 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 shall exercise its best efforts to safeguard the established prestige and goodwill of the name "Ralph Lauren" and the trademarks associated therewith 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 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, - 5 - 6 contractors or other resources. 4.6. During each year of this Agreement, Licensee shall expend for the advertising of Licensed Products, which advertising may consist of cooperative advertising, an amount that is not less than the "Annual Advertising Obligation", as hereinafter defined, for such year. Licensor and Licensee shall consult with each other regarding the creation, production and placement of all advertising of Licensed Products, 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 The Securities And Exchange Commission] percent of the aggregate net sales price (as defined in paragraph 6.2 hereof) of Licensed Products sold during such year. 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 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. 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 advertising for any reason whatsoever (including an underestimate of the actual net sales 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 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 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 the terms of this Agreement. 4.9. Licensee agrees to make available for purchase and to sell on its customary price, credit and payment terms all lines and styles of Licensed Products to retail stores in the Territory bearing a trademark of Licensor or its affiliates and to any stores or facilities operated or owned by Licensor and its affiliates,, which are authorized to sell the Licensed Products within such retail stores. - 6 - 7 4.10. In consideration of the License granted herein, in the event Licensor elects to offer Licensed Products for sale in mail- order catalogs, 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 The 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. 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 bear the notation "Ralph (Polo Player Design) Lauren" or the representation of the Polo Player, as the case may be, and shall include at Licensor's option, a notice to the effect that each 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 Polo 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 and to Licensor's trademarks in any jurisdiction or attack the validity of this License or Licensor's 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. - 7 - 8 5.5. All right, title and interest in and to all samples, patterns, sketches, designs, artwork, logos and other materials furnished by Licensor or the Design Partnership, whether created by Licensor or the Design Partnership, and any logo or crest associated with the Trademark, even if such logo or crest was designed or furnished by Licensee, 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 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, in which case Licensee shall be entitled to all recoveries in such action. 6. Royalties. 6.1 Licensee shall 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 during the term hereof shall be as follows: Year 1 (1997) $0 Year 2 $0 Year 3 $0 Year 4 $1,400,000 Year 5 $1,400,000 Minimum royalties for each year shall be paid on a quarterly basis, beginning with the minimum royalty payment to be made for the first calendar quarter of 2000, in the manner set forth in paragraph 6.2 below. No credit shall be permitted against minimum royalties payable in any year on account of actual or minimum royalties paid in any other year, and minimum royalties shall not be returnable. Minimum royalties for each year of the "Renewal Term" (as defined in paragraph 8 hereof) shall be an amount equal to ninety percent (90%) of the actual earned royalty due to Licensor for sales of Licensed Products in 2001. 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 "first year", or "Year 1" shall mean the period commencing on the date hereof and expiring on December 31, 1997 (although minimum royalties shall not be due until calendar year 2000). - 8 - 9 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 equal [Omitted; Material Filed Separately With The 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 paragraph 10.2 hereof; provided, however,[Omitted; Material Filed Separately With The Securities And Exchange Commission]. Licensee shall prepare or cause to be prepared statements of operations for the first month in which Licensed Products are offered for sale to the trade, and for each month thereafter for so long as Licensee is offering Licensed Products for sale hereunder, which statements shall be furnished to Licensor together with the earned royalties due for each such month on the last day of the following month. The statement and royalty payment provided on the last day of each April (for the month of March), July (for the month of June), October (for the month of September) and January (for the month of December) during the term shall also include Licensee's minimum royalty obligation for the preceding calendar quarter, less the aggregate earned royalties paid for such calendar 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, or contributions for in-store personnel. No other deductions shall be taken. Any merchandise returns shall be credited in the month 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 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; provided, however, that royalties on sales to Licensee Outlet Stores (as defined in paragraph 3.3 hereof) shall be calculated on the basis of the actual invoice price to such Licensee Outlet Stores, but in no event less than an amount equal to [Omitted; Material Filed Separately With The Securities And Exchange Commission] less than the regular wholesale price of such Licensed Products. Licensee shall identify separately in the statements of operations provided to Licensor pursuant to paragraph 7 hereof, all sales to affiliates and through Licensee Outlet Stores. Notwithstanding anything to the contrary contained herein or in the Design Agreement, Licensee may sell to its own employees involved in the business contemplated hereunder, for their personal use, Licensed Products at a discount of thirty- five (35%) percent or more off the regular wholesale price thereof, without payment of royalties or compensation to Licensor; provided that such sales do not exceed $1,000,000 in any year. - 9 - 10 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 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 and shall render a full statement of such operations in writing to Licensor in accordance with paragraph 6.2 hereof. Such statements shall account separately for each different product category and shall include all aggregate gross sales, trade discounts, merchandise returns, sales of miscuts and damaged merchandise and net sales price of all sales for the previous month. 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 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 monthly financial statement furnished by Licensee shall be certified by the chief financial officer or controller 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 subject matter of this Agreement. 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 three and one-half percent (3-1/2%) 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. Licensee shall provide Licensor each year with a copy of its annual report, as soon as it is made available to Licensee's Shareholders. - 10 - 11 8. Term. 8.1 The term of this Agreement shall commence as of the date hereof and shall terminate on December 31, 2001; provided,, however, that if no Event of Default shall have occurred and not been cured or waived, and Licensee has achieved the Minimum Renewal Volume (as such term is hereinafter defined) for the period January 1, 2000 through December 31, 2000, Licensee shall have the option, upon providing notice to Licensor on or before April 1, 2001, to renew this Agreement for an additional three (3) year period (the "Renewal Term") so as to expire on December 31, 2004, on the terms and conditions herein except that there will be no further right to renewal. The minimum aggregate net sales price which Licensee must achieve in connection with sales of Licensed Products during the period from January 1, 2000 to December 31, 2000 to (the "Minimum Renewal Volume") in order to be entitled to renew this Agreement for a second term as hereinabove provided shall be [Omitted; Material Filed Separately With The Securities And Exchange Commission](the "Renewal Volume") . In the event Licensee exercises its option for a Renewal Term, each of Licensor and Licensee shall give the other notice, on or before January 1, 2004, of its desire to extend the term hereof beyond December 31, 2004. In the event Licensee does not achieve the Renewal Volume as hereinabove provided, Licensee may nevertheless request an extension of the term beyond December 31, 2001, and Licensor shall respond to such request (which response shall be in Licensor's sole discretion) within thirty (30) days after its receipt thereof. 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 at the end of the initial or any renewal term, 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 for the last year of the relevant period, 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 immediately following Spring season. 8.2 Notwithstanding the terms of paragraph 8.1 hereof or anything to the contrary contained herein or in the Design Agreement, in the event that the aggregate net sales price of Licensed Products sold during the period January 1, 1999 through December 31, 1999 is less than [Omitted; Material Filed Separately With The Securities And Exchange Commission], Licensee shall so notify Licensor immediately upon becoming aware of such event and in no event later than February 1, 2000 and, in such event, each of Licensor and Licensee shall have the right, in its sole discretion, by notice to the other on or before March 1, 2000, to terminate the term of this Agreement and the Design Services Agreement effective as of December 31, 2000. In the event either party gives notice of such termination, the effect for all purposes shall be the same as if the term of this Agreement and the Design Services Agreement expired on December 31, 2000; provided, however, that Licensee shall not be responsible for the minimum royalties which would otherwise be due pursuant to paragraph 6.1 hereof or for the minimum compensation payments which would otherwise be due pursuant to paragraph 4.1 of the Design Agreement, but shall be responsible for all earned royalty and other payments due hereunder and for all earned compensation and other payments due under the Design Agreement. - 11 - 12 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; (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 notice thereof (unless the default cannot be cured within such thirty (30) day period and Licensee shall have commenced to cure the default and proceeds diligently thereafter to cure within an additional fifteen (15) day period); (iv) Licensee fails within fifteen (15) days after written notice that payment is overdue to pay for any Licensed Products or materials, trim, fabrics, packaging or services relating to Licensed Products purchased by Licensee from Licensor or, unless Licensee is contesting in good faith the amount due, any agent or licensee of Licensor or any other supplier of such items; (v) If Licensee shall use the Trademark in an unauthorized or improper manner and/or if Licensee shall make an unauthorized disclosure of confidential information or materials given or loaned to Licensee by Licensor and/or the Design Partnership; (vi) 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; (vii) Licensee transfers or agrees to transfer substantially all of its property in a transaction which results in ownership inconsistent with the terms of paragraph 9.3 hereof; (viii) The calling of a meeting of creditors, appointment of a committee of creditors or liquidating agents, or offering a composition or extension to creditors by, for or of Licensee; (ix) There shall be a direct or indirect change in control of the company which results in ownership inconsistent with the terms of paragraph 9.3 hereof; - 12 - 13 (x) An event of default occurs under the Design, or any other license agreement entered into between Licensor (or its predecessor-in-interest) and Licensee or design agreement between Licensee and the Design Partnership (or its predecessor-in-interest); (xi) Licensee shall have failed to perform any material term, covenant or agreement on its part to be performed under any agreement or instrument (other than this Agreement) evidencing or securing or relating to any indebtedness owing by Licensee, if the effect of such failure is to accelerate the maturity of such indebtedness, or to permit the holder or holders of such indebtedness to cause such indebtedness to become due prior to the stated maturity thereof. 9.2. If any Event of Default described in paragraphs 9.1 (i), (ii), (iii), (iv), (v), (ix), (x) or (xi) 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 (vi), (vii) or (viii) 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 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. 9.3. During the term of this Agreement, Licensee shall not dissolve, liquidate or wind-up its business. In addition, in the event Licensee sells or transfers, or suffers a sale or a transfer of, by operation of law or otherwise, directly or indirectly, a controlling interest in Licensee (including, without limitation, in any direct or indirect parent of Licensee), Licensee shall promptly advise Licensor thereof in writing. If such sale or transfer results in such controlling interest being owned by an entity which, directly or indirectly, owns any trademark or tradename listed on Schedule C hereto, or the exclusive right to use any of such trademarks or tradenames, in connection with products similar to or competitive with Licensed Products, Licensee shall so notify Licensor, and within sixty (60) days of its receipt of notice, Licensor shall have the right to terminate this Agreement, such termination to become effective thirty (30) days after the date notice of termination is received by the Licensee. 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, but shall not be limited to, all fabrics, trim and packaging which are used in the manufacture and marketing of Licensed Products) 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 (but not the obligation) to purchase from Licensee all or any part of Licensee's then existing inventory of Licensed Products upon the following terms and conditions: - 13 - 14 (i) Licensor shall notify Licensee of its or its designees intention to exercise the foregoing option within fifteen (15) days of delivery of the certificate referred to above and shall specify the items of Licensed Products to be purchased. (ii) The price for Licensed Products manufactured by or on behalf of Licensee on hand or in process shall be Licensee's standard cost (the actual manufacturing cost) for each such Licensed Product. The price for all other 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, and brokerage, freight and insurance. (iii) Licensee shall deliver the Licensed Products purchased within fifteen (15) days of receipt of the notice referred to in clause (i) above. Payment of the purchase price for the Licensed Products so purchased by Licensor or its designee shall be payable upon delivery thereof, provided that Licensor shall be entitled to deduct from such purchase price any amounts owed it by Licensee (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). 10.2. In the event Licensee that, 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 takes place within ninety (90) days after notice of termination is given or the expiration of the term of this Agreement, as the case may be. 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 Lauren 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 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. - 14 - 15 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 represents that a separate showroom for the presentation and sale of the Licensed Products will be established and staffed and Licensee agrees 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. Licensor shall have a right of approval with respect to the design, layout, decoration and staffing of the showroom and all expenses incurred with respect to the design, construction, operation and maintenance of such showroom shall be borne by Licensee. 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. Licensee and Licensor shall mutually agree upon a policy in respect of such sales that will address reciprocity and avoid interference with Licensee's normal operations. 13. Indemnity. 13.1. Licensor shall indemnify and hold harmless Licensee 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 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 Licensed Mark or the designs furnished to Licensee by Licensor or Lauren, to the extent that such liability arises 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, such claim. 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, 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 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. 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 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 - 16 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. Licensee 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 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 Licensor'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 senior executive, approved in advance by Licensor (such approval not to be unreasonably withheld), whose primary responsibility shall be to manage all of Licensee's operations pursuant to this Agreement. 16.2. At all times during the term hereof, Licensee shall employ a Design Director, approved in advance by Licensor (such approval not to be unreasonably withheld), whose primary 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. 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 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: Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, Pennsylvania 19007 Attention: Mr. Sidney Kimmel Telecopier: (215) 785-1795 with a copy to: Jones Apparel Group, Inc. 1411 Broadway New York, New York 10018 Attention: Mr. Herbert Goodfriend Telecopier: (212) 921-5370 (b) if to Licensor, addressed as follows: Polo Ralph Lauren, 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 - 16 - 17 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 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. 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. 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. 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. Licensee may employ subcontractors subject to the prior written approval of Licensor for the manufacture of the Licensed Products; provided, however, that in any event, (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 (iv) such subcontractors shall comply with 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 and 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 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 - 18 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. The provisions hereof are severable, and if any 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. 17.9. 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. 17.10. 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, L.P. By: Polo Ralph Lauren Corporation, General Partner By: JONES APPAREL GROUP, INC. By: /s/ Sidney Kimmel - 18 - 19 Schedule A LICENSED PRODUCTS Licensed Products shall mean the following women's "better" apparel products bearing the Trademark: shirts, blouses, skirts, jackets, suits, sweaters, pants, vests, coats, outerwear, hats. Licensed Products shall also include such other articles of women's apparel as Licensor shall, from time to time, designate in its sole discretion. Licensed products shall not include denim pants or shorts, and Licensee's rights hereunder shall not be violated by virtue of the manufacture or sale by Licensor or any of its affiliates or licensees of any jeanswear apparel sold as part of a jeanswear line, notwithstanding the similarity of any such products to Licensed Products. Except as provided below, this Agreement does not cover any other trademark of Licensor or in any way limit Licensor's right to engage in business with such trademarks as it deems appropriate in its sole discretion. However, Licensor agrees not to sell or license another complete line of women's apparel with a "Ralph Lauren" trademark intended to be sold in the "better" area of women's departments in direct competition with Licensed Products (a "Competing Line") . The foregoing restriction is intended to limit Licensor's ability to market an equivalent line of "better" womens apparel under another name, and the parties agree that any womenswear sold as part of any other line (and not individually to be sold with "better" products) bearing any other trademark owned by Licensor or its affiliates, so long as such line is not a Competing Line, shall not violate the foregoing restriction, notwithstanding the similarity of particular products and/or their price points to Licensed Products. Licensee shall not sell or market Licensed Products in "bridge" or "collection" areas. - 19 - 20 Schedule B TRADEMARK LAUREN/RALPH LAUREN and/or LAUREN BY RALPH LAUREN Schedule C Restricted Individuals and Entities [Omitted; Material Filed Separately With The Securities And Exchange Commission] Schedule D Approved Customers [To be provided and approved] - 20 - EX-10.41 14 EXHIBIT 10.41 (Jones - Design) DESIGN SERVICES AGREEMENT dated as of October 18, 1995, by and between Polo Ralph Lauren Enterprises, L.P. (the "Design Partnership"), with a place of business at 650 Madison Avenue, New York, New York 10022 and Jones Apparel Group, Inc. (the "Company") with a place of business at 250 Rittenhouse Circle, Bristol, Pennsylvania 19007. 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 a specified trademark (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: 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 1.2 The Design Partnership and the Company shall create each season, from the Design Partnership's ideas, a program of design themes and concepts with respect to the design of the Licensed Products ("Design Concepts"), which shall be embodied in written descriptions of design themes and concepts, designs and sketches of all looks for the season, and samples of trim and fabrics in the desired qualities and colors. 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 final approval, which final approval may be granted or withheld in the Design Partnership's sole discretion. 1.3 The Design Partnership may 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 be principally responsible for creating designs for each season consistent in all respects with the approved Design Concepts for that season, and shall consult with the Design Partnership in good faith with respect to all such designs. 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 All patents and copyrights on designs of the Licensed Products created or supplied-by the Design Partnership 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. All patents and copyrights on designs of the Licensed Products created or supplied by the Company shall be owned exclusively, and applied for, by the Company or its designee, at the Company's discretion and expense, and shall designate the Company or its designee as the patent or copyright owner, as the case may be, therefor. 1.8 Company acknowledges that the Licensed Products contain elements which in concept, execution and/or presentation are unique. Company agrees that it will not, during the term of the Agreement, use 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 - 3 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 the Design Studio, 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 to Company by the Design Partnership, and in all logos or crests which become associated with the Trademark, regardless of whether such logos or crests are created or furnished by the Company or the Design Partnership, 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 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 and only for the seasonal collection for which such Design Concepts are approved. All other rights in and to the designs furnished hereunder, including 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. - 3 - 4 2.4 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. 3. Licensed Products. 3.1 All aspects of the design of Licensed Products for each season, including, but not limited to, the type and quality of materials, colors, workmanship, styling, detail, dimensions and construction to be used in connection therewith, shall strictly adhere to the Design Concepts approved by the Design Partnership for such season. In addition, all Licensed Products shall be at least of the same quality as comparable products in the Jones New York line as of the date of this Agreement. 3.2 In the event that any Licensed Product is, in the judgment of the Design Partnership, not designed, manufactured or sold in strict adherence to the approved Design Concepts, or if the quality is below the standards required hereunder, 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 or improvement in quality cannot be obtained after at least one (1) resubmission, 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 without payment or compensation hereunder. 3.3 The Design Partnership and its duly authorized representative shall have the right, 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. 3.4 The Company shall comply with all laws, rules regulations and requirements of any governmental body which may - 4 - 5 be applicable to the manufacture, distribution, sale or promotion of Licensed Products. The Company shall advise the Design Partnership to the extent any Final Prototype does not comply with any such law, rule, regulation or requirement. 3.5 The Company shall upon request make its personnel, and shall use its best efforts to make the personnel of any of its contractors, suppliers and other resources, available by appointment during normal business hours for consultation with the Design Partnership. 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. 3.6 The Company may employ subcontractors for the manufacture of Licensed Products solely on the terms set forth in paragraph 16.4 of the License Agreement. 4. Compensation; Accounting. 4.1 As compensation for the designs and services rendered hereunder, the Company shall pay minimum compensation to the Design Partnership each year during the term of this Agreement. The minimum compensation to the Design Partnership in connection with the manufacture and sale and importation and sale of Licensed Products for each year shall be as follows: Year 1 (1997) $0 Year 2 $0 Year 3 $0 Year 4 $5,600,000 Year 5 $5,600,000 Minimum compensation for each year shall be paid on a quarterly basis, beginning with the minimum compensation payment to be made for the first calendar quarter of 2000, in the manner set forth in paragraph 6.2 below. No credit shall be permitted against minimum compensation payable in any year on account of actual or minimum compensation paid in any other year, and minimum compensation shall not be returnable. Minimum Compensation for each year of the "Renewal Term" (as defined in paragraph 8 of the Licensee Agreement) shall be an amount equal to ninety percent (90%) of the actual earned compensation due to the Design Partnership for sales of Licensed Products in 2001. 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 "first year", or "Year 1" shall mean the period commencing on the date hereof and expiring on December 31, 1997 (although minimum compensation shall not be due until calendar year 2000). 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] of the net sales price of all Licensed Products sold under this Agreement, including, without limitation, sales made pursuant to paragraph 6.3 hereof; provided, however,[Omitted; Material Filed Separately With The Securities And Exchange Commission]. The Company shall prepare or cause to be prepared statements of operations for the first month in which Licensed Products are offered for sale to the trade, and for each month thereafter for so long as the Company is offering Licensed Products for sale hereunder, which statements shall be furnished to the Design Partnership together with the earned compensation due for each such month on the last day of the following month. The statement and compensation payment provided on the last day of each April (for the month of March), July (for the month of June), October (for the month of September) and January (for the month of December) during the - 5 - 6 term shall also include the Company's minimum compensation obligation for, the preceding calendar quarter, less the aggregate earned compensation paid for such calendar quarter. 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, or contributions for in-store personnel. No other deductions shall be taken. Any merchandise returns shall be credited in the month 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 will be based on the 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 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 compensation shall be calculated on the basis of the price paid by the end-user consumer, less applicable taxes; provided, however, that compensation on sales to Licensee Outlet Stores (as defined in paragraph 3.3 of the License Agreement) shall be calculated on the basis of the actual invoice price to such Licensee Outlet Stores, but in no event less than an amount equal to [Omitted; Material Filed Separately With The Securities And Exchange Commission] less than the regular wholesale price of such Licensed Products. The Company shall identify separately in the statements of operations provided to the Design Partnership pursuant to paragraph 7 hereof, all sales to affiliates. 4.3 The Company shall reimburse the Design Partnership for all its 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 the Company. Amounts payable to the Design Partnership pursuant to this paragraph shall become due and payable monthly within thirty (30) days of 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 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. - 6 - 7 4.5 The Company shall at all times keep an accurate account of all operations within the scope of this Agreement and shall render a full statement of such operations in writing to the Design Partnership in accordance with paragraph 4.1 hereof. Such statements shall account separately for each different product category and shall include all aggregate gross sales, trade discounts, merchandise returns, 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 or chief financial officer. Each quarterly financial 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 the Company and its successors with respect to the subject matter of this Agreement. 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 three and one-half percent (3-1/2%) 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 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 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 for so long as the License Agreement is in effect and shall terminate upon the termination of the License Agreement. - 7 - 8 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 ten (10) days after notice thereof; (ii) the Company 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 or the Company shall fail to timely ship a material portion of the orders of Licensed Products it has accepted; (iii) the Company shall use the designs in an unauthorized or improper manner and/or Company shall make an unauthorized disclosure of confidential information or materials given or loaned to Company by the Design Partnership or Polo; or (iv) 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 notice thereof (unless the default cannot be cured within such thirty (30) day period and the Company shall have commenced to cure the default and proceeds diligently thereafter to cure within an additional fifteen (15) day period); (v) an event of default 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 (vi) the License Agreement shall be terminated for any reason whatsoever. If any Event of Default other than that described in paragraph 6.2(vi) 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 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(vi) 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 10.1 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. Without limiting the generality of the foregoing, by its execution of the present Agreement, the Company hereby waives any claim which it has or 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. - 8 - 9 7. Indemnity. 7.1 The Company shall indemnify and save and hold the Design Partnership, Lauren, Polo and Polo Ralph Lauren Corporation, and their directors, officers, servants, 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 directors, officers, servants, 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. The Company 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 of samples for sale and 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. 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 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: Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, Pennsylvania 19007 Attention: Mr. Sidney Kimmel Telecopier: (215) 785-1795 with a copy to: Jones Apparel Group, Inc. 1411 Broadway New York, New York 10018 Attention: Mr. Herbert Goodfriend Telecopier: (212) 921-5370 - 9 - 10 (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 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. 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 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 not assign its rights and obligations under this Agreement without the prior written consent of the Design Partnership, which may be withheld in the Design Partnership's sole discretion. 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. 9.6 This Agreement shall be binding upon and inure to the benefit of the successors, heirs and permitted assigns of the 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. - 10 - 11 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 Provisions of this Agreement are severable, and if any 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. 9.11 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. Any ambiguity in this Agreement shall not be construed against the party who prepared this Agreement. 9.12 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: JONES APPAREL GROUP, INC. By: /s/ Sidney Kimmel - 11 - EX-10.42 15 EXHIBIT 10.42 NORTH CAROLINA WAREHOUSE LEASE MECKLENBURG COUNTY THIS WAREHOUSE LEASE (the "Lease") is made and entered into effective as of July 12, 1996, by and between THE SHELTON COMPANIES, a North Carolina General Partnership, (referred to as "LANDLORD"), and JONES APPAREL GROUP, INC., a Pennsylvania Corporation, (referred to as "TENANT"). In consideration of the mutual and reciprocal covenants, terms, provisions, conditions and agreements hereinafter set forth, LANDLORD and TENANT agree as follows: 1. PREMISES. LANDLORD hereby leases to TENANT and TENANT hereby hires from LANDLORD, on the terms and conditions hereinafter provided, that real property outlined in bold on the plot plan attached hereto as Exhibit "A" (the "Premises"), said real property being more particularly described as Forsyth County, North Carolina Tax Block 4967E, Lot 005 (the "Property"), together with the improvements located thereon (the "Building"). 2. TERM. The initial term of this Lease shall begin on September 15, 1996, and shall end at midnight on September 14, 2001, unless terminated sooner in accordance with the provisions hereof. As used in this Lease, the word "Term" shall mean the initial term of this Lease as specified in this paragraph and any extension or renewal thereof as provided under this Lease. 3. BASE RENTAL. TENANT shall pay to LANDLORD during the Term a monthly base rental of Fifty-Six Thousand One Hundred Fifteen Dollars & No/00 ($56,115.00), which shall be due and payable in advance on the first day of each month during the Term. Rental for any partial month shall be payable in advance and shall be prorated on a daily basis. 4. TAXES. As additional rental, TENANT shall pay all ad valorem taxes and assessments which shall be due by reason of the Premises (Property and Building) . TENANT shall pay said ad valorem taxes for each calendar year of the Term; however, said ad valorem taxes shall be prorated for the first partial calendar year of the Term and upon vacancy by TENANT at the expiration of the Term. Said ad valorem taxes shall be due and payable by TENANT to LANDLORD on or before December 15th of each year. TENANT shall pay ad valorem taxes and assessments on TENANT'S personal property, fixtures, equipment and inventory located at the Premises. 5. REPAIRS AND ALTERATIONS. With the exception of the roof, steel structure and panels, masonry walls, and foundation, and floor subject to the definition of floor repairs as hereinafter defined, for which LANDLORD (except for damages caused by TENANT or its employees, agents, or invitees, which shall be TENANT'S responsibility) accepts responsibility, any and all improvements, interior and exterior, including grounds, landscaping, sidewalks and paved parking area, shall be kept in good and substantial order and repair by TENANT at its sole cost and expense, and TENANT shall comply with all laws, ordinances, orders and regulations of every kind and nature. TENANT shall have the right and privilege to make, at its own expense, reasonable alterations to the Premises provided that no alterations or changes of a structural nature shall be made without the prior written consent of LANDLORD, which consent shall not be unreasonably withheld. Upon termination of this Lease, TENANT shall remove, at its own cost and expense, all alterations made by it and restore the Building and Premises to its condition as of the commencement of the term of this Lease, ordinary wear and tear excepted, unless LANDLORD shall agree in writing to allow such alterations, or a designated portion thereof, to remain. - 1 - 2 Definition of Floor Repairs: The LANDLORD represents that the 6" reinforced concrete floor is built on soil with a compaction of 3,000 lbs psf. In the event of a floor failure, the LANDLORD will have a qualified engineer conduct tests to determine if there is a sub-grade failure and a concrete thickness of at least 5 inches. The floor repairs shall be the responsibility of the LANDLORD if either of these two conditions do not exist. All other floor damages and repairs shall be the responsibility of the TENANT. 6. LANDLORD'S RIGHT TO ENTER TO MAKE REPAIRS. Upon not less than five (5) days written notice (except for emergency repairs) LANDLORD and its agents or other representatives shall have the right to enter into and upon the Premises and Property or any part thereof at all reasonable hours, for the purpose of examining the same, and in case of the neglect or default of TENANT in making repairs or alterations to the same for which the TENANT is responsible by the terms hereof, LANDLORD may make such after reasonable notice to TENANT, except that no notice shall be required in case of emergencies (defined herein as any item that would cause additional damage to the Premises or injury to people or property) during the Term, and all the costs and expenses consequent thereof with interest thereon shall be repaid by TENANT to LANDLORD. 7. NO DEDUCTIONS AGAINST RENT. It is the intention of the parties that subject to conditions and exceptions stated in this Lease, LANDLORD shall receive rents and additional rents and all sum or sums which shall or may become payable hereunder by TENANT under any contingency, free from all taxes, fees, charges, expenses, damages and deductions of every kind or sort whatsoever, except as otherwise specifically provided herein, and that TENANT shall and hereby expressly agrees to pay as additional rent all such taxes, fees, charges and expenses and such other sums which would have been payable by LANDLORD and chargeable against the Premises or the rental paid hereunder. TENANT, however, shall not be under any obligation to pay any principal or interest in any mortgage or deed of trust which may be a lien against the Property or to pay any income or similar tax of LANDLORD. 8. UTILITIES. LANDLORD covenants and agrees that the Premises shall be adequately serviced with electric, telephone, water, and sewer sufficient to meet TENANT'S requirements as of the commencement of the Term. TENANT shall pay all charges for utility services furnished to the Premises during the Term and such utility services shall be provided in the name of TENANT and billed directly to TENANT by the utility company providing such services. 9. USE OF PREMISES. TENANT shall use the Premises solely as a warehouse distribution and storage facility, and TENANT covenants that neither the Premises nor any part thereof shall be used for any unlawful purpose or for any purpose which shall be deemed extra-hazardous by fire insurance companies or used or occupied in any manner which shall result in the cancellation of any policy of insurance on the Building or the Premises, unless TENANT shall replace at no additional expense to LANDLORD the policies so to be canceled by another policy in the same amount and in a company or companies of equally good standing. TENANT shall not use the Premises for the manufacture, storage, disposal or handling of any hazardous substances, as the same may be defined by any statute, rule or regulation adopted by any governmental authority having jurisdiction over such matters, and TENANT shall indemnify and hold harmless LANDLORD from and against any and all claims, damages and liabilities, including remediation costs and expenses associated therewith, incurred by LANDLORD arising from or relating to TENANT'S violation of the terms hereof. 10. INDEMNIFICATION OF LANDLORD. TENANT shall hold LANDLORD harmless against any and all claims, damages arising after the commencement of the Term, or any renewal thereof and any orders, decrees or judgements which may be entered therein, brought for - 2 - 3 damages or alleged damages resulting from any injury to person(s) or property or from loss of life sustained in or about the said Premises and the improvements thereon by any person or persons whatsoever, except for damages which are not covered by liability insurance policies required to be carried by TENANT hereunder and which also result from the negligence of LANDLORD, its agents or employees. 11. CONDEMNATION. (a) If at any time during the Term hereof, the whole of the Premises shall be taken for any public or quasi-public use, under any statute, or by right of eminent domain, then, in such event, when possession of the Premises shall have been taken thereunder by the condemning authority, the Term and all rights of TENANT hereunder shall immediately cease and terminate, and the rent shall be apportioned and paid to the time of such termination. (b) If only part of the Premises shall be so taken or condemned, the entire award shall belong to LANDLORD without any deduction therefrom for any estate or interest of TENANT, and TENANT hereby assigns to LANDLORD any and all such award with any and all rights, estate and interest of TENANT now existing or hereafter arising in and to the same or any part thereof; provided, however, if the part of the Premises so taken or condemned shall, in the sole and absolute judgement of TENANT, reduce the Premises to such extent as to prevent TENANT from continuing the substantial operation and conduct of its business on the Premises, then TENANT shall have the right, at its election, to cancel and terminate this Lease. If the Lease is not so terminated, rent shall be abated in proportion to the portion of the Premises so taken. 12. PROPERTY INSURANCE. (a) During the Term hereof and for the benefit of LANDLORD, the Building and all improvements and equipment on, in or appurtenant to the Premises shall be insured against loss or damage by fire and all standard extended coverage for the full, fair and insurable replacement value thereof. LANDLORD shall purchase and keep in force such insurance policy or policies. LANDLORD retains the sole right to adjust and settle all claims in regards to this property insurance coverage. (b) TENANT shall bear all risk of loss or damage to its property, equipment, and supplies located at or in the Premises and shall be responsible to insure the same at its own cost and expense. 13. PUBLIC LIABILITY INSURANCE. (a) During the Term hereof TENANT shall provide and keep in force in such form as LANDLORD shall direct, public liability insurance protecting LANDLORD against any and all liability in the amounts of not less than $1,000,000.00 in respect to any one accident or disaster and in the amount of not less than $500,000.00 in respect to injuries to any one person. LANDLORD (and its mortgagee) shall be named as an insured in such policy or policies and TENANT shall provide LANDLORD an original certificate of insurance confirming such coverage. Any such policy shall require advance notice to LANDLORD (and its mortgagee) of at least thirty (30) days prior to cancellation. (b) All premiums and charges for all of said insurance policies shall be paid by TENANT as additional rent and if TENANT shall fail to make any such payment when due or fail to provide or keep in force any such policy that TENANT is required or has agreed to provide, LANDLORD may make, but shall not be obligated to make, such payment or carry such policy, and the amount paid by LANDLORD, with interest thereon, shall be repaid to the LANDLORD by TENANT on demand, and all such amounts so repayable together with such interest, shall be considered as additional rent payable hereunder. - 3 - 4 14. REPAIR OR RECONSTRUCTION DUE TO FIRE. LANDLORD agrees that if the Premises are damaged or destroyed by fire or the elements at any time during the Term and if, and to the extent that, insurance proceeds payable with respect to such damage are paid to LANDLORD, LANDLORD will at its own expense commence to repair or reconstruct the same within thirty (30) days and complete same within ninety (90) days after commencement; provided, rental shall be abated as to any part of the Premises which in the sole and absolute judgement of TENANT, is rendered unfit for occupancy for the period such unfitness continues. If, however, within the last year of the original Term or any renewal term of this Lease said damage or destruction shall be in excess of twenty-five percent (25%) of the total replacement value of the Premises, then at the option of LANDLORD, on not less than ninety (90) days notice to TENANT this Lease may be terminated and the obligation of TENANT under this Lease shall thereupon cease and terminate as of the date of such termination. LANDLORD shall be entitled to the proceeds of all insurance policies providing coverage with respect to the Premises for fire or other extended coverage perils. 15. RELEASE. LANDLORD hereby releases TENANT to the extent of LANDLORD'S insurance coverage, from any liability for loss or damage caused by fire or any of the extended coverage casualties included in LANDLORD'S insurance policies, even if such fire or other casualty should be brought about by the negligence of TENANT, its agents or employees. TENANT hereby releases LANDLORD to the extent of TENANT'S insurance coverage, from any liability for loss or damage caused by fire or any of the extended coverage casualties included in TENANT's insurance policies, even if such fire or other casualty should be brought about by the negligence of LANDLORD, its agents or employees. 16. SURRENDER OF PREMISES. TENANT shall, on or before the last day of the Term, peaceably and quietly leave, surrender and yield up unto LANDLORD all and singular the improvements and appurtenances on the Premises in good order, condition and state of repair, reasonable wear and tear excepted, together with all alterations, additions, improvements, and fixtures put in at the expense of TENANT, which LANDLORD has agreed in writing to allow to remain. The LANDLORD will make a video tape of the Premises prior the commencement date of this Lease and this video tape shall be used to show the condition of the Premises at the commencement of the Lease. 17. DEFAULT DEFINED. Each of the following shall be deemed a default by TENANT and a breach of this Lease: (a) failure to pay the rental herein reserved, or any part thereof (including additional rental), for a period of fifteen (15) days after the date payment thereof is due; (b) failure to do, observe, keep and perform any of the terms, covenants, conditions and provisions of this Lease contained on the part of TENANT to be done, observed, kept and performed, including to pay additional rent or any other charge or expense required to be paid by TENANT hereunder, for a period of fifteen (15) days after written notice; provided, if the failure complained of is a failure other -than one which may be cured by the payment of money, no default on the part of TENANT in the performance of work required to be performed or acts to be done or conditions to be met shall be deemed to exist if, within the aforesaid fifteen (15) day period, steps shall have been in good faith commenced by TENANT to rectify the same and shall be prosecuted to completion with diligence and continuity; and (c) the abandonment of the Premises by TENANT, the adjudication of TENANT as bankrupt, the making by TENANT of a general assignment for the benefit of creditors, the taking by TENANT of the benefit of any insolvency act or law, or the appointment of a permanent receiver or trustee in bankruptcy for TENANT'S property. - 4 - 5 18. LANDLORD'S REMEDIES. Should TENANT be in payment or other material default hereunder, LANDLORD, if it shall so elect may, upon not less than ten (10) days prior written notice (1) terminate the Term of this Lease, or (2) re-enter the Premises with or without process of law and expel or remove TENANT or any other occupying the Premises, thereby terminating TENANT'S right to possession without terminating the Term of this Lease. Upon such termination of the Term hereof, TENANT shall promptly surrender possession of the Premises. If LANDLORD shall elect to terminate TENANT'S right to possession only, without terminating the Term of this Lease, LANDLORD may (i) re-enter the Premises and remove TENANT, without releasing TENANT from its obligations hereunder, (ii) refurbish, redecorate, alter, repair or otherwise prepare the Premises for lease to others, and (iii) attempt to relet the Premises, and if the amount of rental collected by LANDLORD upon such reletting is not sufficient to pay monthly the full amount of the rental herein reserved (plus charges and expenses payable by TENANT) over the remainder of the Term, together with all costs of repossession and reletting (including leasing commissions) , TENANT shall pay to LANDLORD the amount of each monthly deficiency upon demand; and if the rent so collected from such reletting is more than sufficient to pay the full amount of rent and other TENANT obligations reserved hereunder, together with the aforementioned costs, LANDLORD shall be entitled to the surplus. 19. SUBORDINATION. TENANT agrees that LANDLORD may, from time to time, encumber LANDLORD'S interest in the Property with a mortgage or deed of trust, and, in connection with the execution of such mortgage or deed of trust, LANDLORD may, at its option, make this Lease subordinate in lien, priority and claim to the lien or liens or such mortgage or deed of trust. This provision is intended to be self-operative and no further act or agreement by TENANT shall be necessary to establish the subordination of this Lease to any such mortgage or deed of trust; however, TENANT covenants and agrees that TENANT will, from time to time, at the request of LANDLORD, execute an agreement in such form as may be required by LANDLORD or by the mortgagee under any such mortgage or deed of trust to effect such subordination. If TENANT fails or refuses to execute such agreement on demand, LANDLORD may, as the attorney-in-fact and agent of TENANT, execute such agreement and in such event, TENANT hereby confirms and ratifies any such agreement executed by LANDLORD on behalf of TENANT. LANDLORD, however, will arrange with the holder of any such present or future mortgage or deed of trust for an agreement that if by foreclosure such holder, or any successor in interest, shall become the owner of the Property, it will not disturb the possession, use or enjoyment of the Premises by TENANT, provided TENANT is not in payment or other material default hereunder. 20. SUBLEASE AND ASSIGNMENT RESTRICTED. Except in the normal course of its business, TENANT shall not have the right to assign this Lease, nor sublet the Premises, in whole or in part, without first obtaining the written consent of LANDLORD. LANDLORD covenants and agrees that it will not unreasonably or arbitrarily withhold said consent. TENANT shall always remain primarily responsible for the performance of this Lease. 21. LIMITED LIABILITY. The liability of LANDLORD hereunder shall be limited solely to the interest of LANDLORD in the Property; and neither LANDLORD nor any general Partner of LANDLORD shall be personally liable with respect to any claim arising out of or related to this Lease, and a deficit capital account of a partner of LANDLORD shall not be deemed an asset or property of LANDLORD. 22. NON-WAIVER PROVISION. No waiver of any condition or covenant contained in this Lease, or of any rule or regulation which is a part hereof, shall be implied as a result of LANDLORD'S or TENANT'S failure to enforce such condition, covenant, rule or regulation or failure to take advantage of any of its rights on - 5 - 6 account of the same; and no express waiver shall effect any condition, covenant, rule or regulation other than the one specified in such waiver and that one only for the time and in the manner specifically stated. No reference in this Lease to any specific right or remedy shall preclude LANDLORD or TENANT from exercising any other right or having any other remedy or from maintaining any other action to which it may otherwise be entitled at law or in equity. 23. INTEREST AND EXPENSE OF ENFORCEMENT. After a default by TENANT under this Lease, any amounts due or becoming due LANDLORD shall accrue interest at the rate of ten (10%) percent per annum until paid. TENANT agrees to pay to LANDLORD reasonable attorney's fees if the obligations of TENANT evidenced by this Lease need to be referred to an attorney for enforcement after a breach of this Lease. Should LANDLORD incur any expenses in successfully enforcing any provision of this Lease, TENANT shall pay to LANDLORD all expenses so incurred, including reasonable attorney's fees. 24. NOTICES. Wherever in this Lease it shall be required or permitted that notice or demand be given or served by either party to this Lease to or on the other, such notices or demand shall be given or served and shall not be deemed to have been duly given or served unless in writing and forwarded by registered mail and addressed as follows: TO LANDLORD: THE SHELTON COMPANIES 3600 One First Union Center 301 South College Street Charlotte, NC 28202 Attn: Ballard G. Norwood TO TENANT: Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, PA 19007 Attn: Controller Such addresses may be changed from time to time by either party serving notices as above provided. 25. SHORT FORM. At the request of either party, the parties hereto agree to execute a short form of Lease for purposes of recording and of setting in writing the date of delivery and the commencement of the Lease Term. The cost of preparing and recording such short form of Lease shall be borne by the party requesting the same. 26. GOVERNING LAW. This Lease shall be governed by and construed in accordance with the laws of the State of North Carolina. If any provision of this Lease shall be held as invalid or unenforceable, the remainder of this Lease shall not be affected thereby, and there shall be deemed substituted for the affected provisions a valid and enforceable provision as similar as possible to the affected provision. Time is of the essence under this Lease, and all provisions herein relating thereto shall be strictly construed. Notwithstanding any termination of this Lease, any provisions hereof which would require observance and performance by LANDLORD or TENANT subsequent to the termination hereof shall continue in force and effect. 27. ENTIRE AGREEMENT. This document constitutes the entire agreement between LANDLORD and TENANT relating to the Premises, and may be altered or revoked only by a document in writing signed by both parties. The terms, covenants and conditions in this Lease shall extend to and be binding upon the heirs, representatives, executors, administrators, successors and assigns of the respective parties hereto; however, the foregoing shall not be construed as granting TENANT the right to assign this Lease or sublet the Premises, except as provided under the terms of this Lease. - 6 - 7 28. RULES AND REGULATIONS. Rules and regulations for use of the Premises, Building and Property and for parking are stated in the Declaration of The Northridge Business Park Association and, compliance with such rules and regulations including the payment of Common Area Expenses to the Association shall be required as a condition of this Lease. LANDLORD shall not establish any unreasonable rules or regulations which alter the terms and conditions of this Lease or impose any additional costs or expenses upon TENANT. 29. ADJACENT EXPANSION LAND. The LANDLORD will withhold the land attached hereto as Exhibit "B" from the market for one (1) year from the commencement of the Term. Beginning September 15, 1997 and continuing during the term of the Lease, TENANT shall have the first right of refusal for this proposed expansion. If the LANDLORD has reason to proceed with the expansion it will notify TENANT of its plans in writing and TENANT shall have thirty (30) days from date of notice to advise LANDLORD in writing if or if not it has an interest in exercising its first right of refusal to lease and occupy the expansion space. If TENANT does not exercise its right of refusal, and LANDLORD proceeds with expansion which adjoins the existing building LANDLORD will not allow a use with an odor or chemicals that could effect TENANTS product, and TENANT may not unreasonably withhold its approval of LANDLORD'S construction of a building that adjoins the existing building. LANDLORD will provide a four (4) hour fire wall between the existing building and the expansion building. LANDLORD shall not perform any work for the expansion which will diminish the adequacy of access to the Lease Premises or permit any work, which will impair TENANTS use of the Premises. 30. RENEWAL. (a) LANDLORD agrees that if TENANT shall not be in default in performing any of its obligations under this Lease, TENANT shall have and is hereby granted the option to extend the Term of this Lease for three (3) separate and successive three (3) year Terms. This option shall be automatically extended unless TENANT notifies LANDLORD in writing no later than ninety (90) days prior to the end of the then current term that it does not intend to exercise it's option. If TENANT exercises an option as hereinabove set forth, the base rent which TENANT shall pay during the extended Term shall be determined as follows: The annual rental for the 232,200 square foot building shall be $719,820.00 for the first renewal term, $766,260.00 for the second renewal term and $812,700.00 for the third renewal term, each payable in equal monthly installments. (b) All of the terms of this Lease shall apply to an extended Term, except that rental as provided above, and TENANT shall have no rights to extend the Term of the Lease except as provided in subparagraph (a) above. 31. POSSESSION. LANDLORD will take possession from its existing tenant on August 1, 1996, at which time removal of racks by LANDLORD will begin. It is estimated that removal of the racks will take four (4) weeks. LANDLORD agrees to coordinate its work with TENANT'S work, so that TENANT may have partial occupancy for the purpose of beginning building renovations in areas of the Premises where the existing racks have been removed. 32. CONDITION OF BUILDING AT LEASE COMMENCEMENT. Subject to TENANT'S occupancy for rack installation and improvements, LANDLORD will deliver the Premises in a broom-clean condition, with the existing plumbing, electrical and HVAC systems in good working order. TENANT may have its engineers inspect the Premises, provided that LANDLORD shall not be obligated to make any changes if the equipment is in good working order. - 7 - 8 33. LANDLORD OBLIGATIONS FOR TENANT IMPROVEMENTS. At the time of execution of this Lease by the parties, LANDLORD will pay to TENANT the sum of $110,000, which amount (or any part thereof) may be used by TENANT for such renovations to the Premises as TENANT, in its absolute discretion, shall determine to make. TENANT shall be responsible for any such renovations, including satisfying such requirements as may be imposed with respect thereto by TENANT'S insurance carrier for the Premises. IN WITNESS WHEREOF, this Lease has been duly executed by and duly authorized representative of LANDLORD and TENANT effective the day and year first above written. LANDLORD Witness: THE SHELTON COMPANIES, a North Carolina General Partnership /s/ Ballard Norwood BY: /s/ R. E. Shelton (SEAL) General Partner TENANT JONES APPAREL GROUP, INC., a Pennsylvania Corporation Attest: BY: /s/ Wesley R. Card (SEAL) (CORPORATE SEAL) Chief Financial Officer /s/ Gary R. Klocek Corp. Controller - 8 - EX-10.43 16 EXHIBIT 10.43 Israel Discount Bank of New York 511 FIFTH AVENUE, NEW YORK, NY 10017-4997 (212) 551-8500 October 30, 1996 Mr. Gary R. Klocek, Controller Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, Pennsylvania 19007 Dear Mr. Kimmel: We are pleased to advise you that Israel Discount Bank of New York (the "Bank") has approved Jones Apparel Group, Inc.'s (the "Company") request for the following line of credit: 1. LINE OF CREDIT $20,000,000.00 for working capital purposes. 2. INTEREST RATES Own Paper: As determined by the Bank, in its sole discretion, at the time of the request. 3. CONDITIONS Utilization of this line of credit is subject to the following additional terms and conditions: Satisfactory mutual revisions with other banks. 4. FINANCIAL INFORMATION AND EXAMINATIONS The Company shall furnish the Bank: (a) within 90 days after the end of each of its fiscal years, the audited balance sheet and income statements as of the end of each fiscal year. Said balance sheet and income statements shall be audited by a certified public accountant, acceptable to the Bank, without material exception or qualification. (b) within 45 days after each quarterly financial period, financial statements for the period then ended. Said statements may be prepared internally by management. - 1 - 2 (c) any other such information, reports, and statements as the Bank may reasonably request. 5. DOCUMENTATION Utilization of this line of credit is subject to the Company's execution of such documentation and instruments, all in form and substance satisfactory to the Bank and its counsel, all of which shall contain such provisions, representations, covenants and events of default as are satisfactory to the Bank and its counsel. 6. EXPIRY Availability of this line of credit is dependent upon satisfactory review, from time to time, of Company's condition, financial or otherwise and may be amended, reduced, withdrawn and canceled, in whole or in part, at anytime in the Bank's sole discretion without prior notice to the Company. Notwithstanding the above, the line of credit will expire on April 30, 1997, unless extended by the Bank, in its sole discretion. This letter is furnished to the Company solely for informational purposes. The line of credit described herein is not a commitment and compliance by the Company with the terms of this letter does not in any way bind the Bank to make loans, advances, or grant extensions of credit. Please indicate Company's agreement and acceptance of the foregoing by signing and returning the enclosed copy of this letter by November 7, 1996. If there are any questions or comments, please feel free to call me at 551-8827. We look forward to beginning an excellent relationship with Jones Apparel Group, Inc. Very truly yours, By: /s/ Lissa Baum ----------------------- Lissa Baum, Senior Vice President By: /s/ Antonia Brocato ----------------------- Antonia Brocato, Assistant Vice President Agreed to and Accepted: JONES APPAREL GROUP, INC. By: /s/ Gary R. Klocek ----------------------- Name: Gary R. Klocek Title: Corporate Controller cc: Herbert J. Goodfriend - Vice Chairman, Secretary and Director Wesley R. Card - Chief Financial Officer - 2 - EX-11 17 EXHIBIT 11 JONES APPAREL GROUP, INC. AND SUBSIDIARIES Computation of Primary and Fully Diluted Earnings per Share (In thousands except per share amounts) For the Year Ended December 31, ------------------------------- 1996 1995(1) 1994(1) ------- ------- ------- Primary Earnings per Share: - --------------------------- Net income........................... $80,874 $63,485 $54,920 ======= ======= ======= Weighted average number of shares outstanding.......................... 52,333 52,130 51,656 Assumed issuances under exercise of stock options..................... 1,332 916 1,268 ------- ------- ------- 53,665 53,046 52,924 ======= ======= ======= Primary earnings per share........... $1.51 $1.20 $1.04 ======= ======= ======= Fully Diluted Earnings per Share: - --------------------------------- Net income........................... $80,874 $63,485 $54,920 ======= ======= ======= Weighted average number of shares outstanding.......................... 52,333 52,130 51,656 Assumed issuances under exercise of stock options..................... 1,744 1,328 1,269 ------- ------- ------- 54,077 53,458 52,925 ======= ======= ======= Fully diluted earnings per share................................ $1.50 $1.19 $1.04 ======= ======= ======= (1) Adjusted for 2-for-1 stock split effective October 2, 1996. EX-21 18 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 EX-23 19 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 7, 1997, 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, 1996. 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, 1997 EX-27 20 FINANCIAL DATA SCHEDULE
5 1000 YEAR DEC-31-1996 DEC-31-1996 30,085 0 114,941 2,263 214,437 389,830 94,823 33,127 488,109 95,860 0 0 0 536 376,193 488,109 1,021,042 1,021,042 717,250 717,250 186,572 800 3,040 127,763 46,889 80,874 0 0 0 80,874 1.51 1.50
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