-----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, IS8aTao9wgpsaa31OgiFhLBoQl/Q2mqOyRDZdybq2NpbvAe3w9ox0gt814twbPbc 1Bhag/ZuZzBfM6P8SEFJUg== 0000874016-99-000001.txt : 19990326 0000874016-99-000001.hdr.sgml : 19990326 ACCESSION NUMBER: 0000874016-99-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 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: SEC FILE NUMBER: 001-10746 FILM NUMBER: 99572913 BUSINESS ADDRESS: STREET 1: 250 RITTENHOUSE CIRCLE STREET 2: KEYSTONE PK CITY: BRISTOL STATE: PA ZIP: 19007 BUSINESS PHONE: 2157854000 MAIL ADDRESS: STREET 1: 250 RITTENHOUSE CIRCLE CITY: BRISTOL STATE: PA ZIP: 19007 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 For the fiscal year ended December 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 1-10746 JONES APPAREL GROUP, INC. (Exact name of registrant as specified in its charter) Pennsylvania 06-0935166 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 250 Rittenhouse Circle, Bristol, Pennsylvania 19007 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 785-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered - ----------------------------- ----------------------------- Common Stock, $0.01 par value New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 22, 1999 was approximately $2,087,400,914. As of March 22, 1999, there were 103,642,379 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 1999 Annual Meeting (the "Proxy Statement") that are specifically identified herein as incorporated by reference into this Form 10-K. - ----------------------------------------- STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE This Report includes, and incorporates by reference, "forward-looking statements" within the meaning of the securities laws. All statements regarding the Company's expected financial position, business and financing plans are forward-looking statements. Forward-looking statements also include representations of the Company's expectations or beliefs concerning future events that involve risks and uncertainties, including those associated with the effect of national and regional economic conditions, the overall level of consumer spending, the performance of the Company's products within the prevailing retail environment, customer acceptance of both new designs and newly-introduced product lines, financial difficulties encountered by customers, and the integration of Sun Apparel, Inc. or other acquired businesses into the Company's existing operations. 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, such expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed in this Report in conjunction with the forward-looking statements. 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. -2- 3 PART I ITEM 1. BUSINESS Jones Apparel Group, Inc. (the "Company") is a leading designer and marketer of better priced women's sportswear, suits, dresses and jeanswear. The Company has pursued a multi-brand strategy by marketing its products under several nationally known brands, including Jones New York, Evan-Picone and Rena Rowan, and the licensed brands Lauren by Ralph Lauren and Ralph by Ralph Lauren. Each label is differentiated by its own distinctive styling and pricing strategy. The Company primarily contracts for the manufacture of its products through a worldwide network of quality manufacturers. The Company has capitalized on its nationally known brand names by entering into 32 licenses for the Jones New York brand name and 14 licenses for the Evan-Picone brand name with select manufacturers of women's and men's apparel and accessories. On October 2, 1998, the Company acquired Sun Apparel, Inc. ("Sun"). Sun is a designer, manufacturer and distributor of jeanswear, sportswear and related apparel for men, women and children under various licensed, private label and Sun-owned brands, the most prominent of which is the licensed brand Polo Jeans Company. Through its brand marketing and development expertise, diversified product offerings, manufacturing capabilities and comprehensive distribution network, Sun reaches a broad range of consumers. On March 2, 1999, the Company announced that it had entered into a definitive agreement to acquire 100% of the common stock of Nine West Group Inc. ("Nine West") in a merger transaction. Nine West is a leading designer, developer and marketer of quality, fashionable footwear and accessories. Nine West markets its products under internationally recognized brands, including Nine West, Easy Spirit, Enzo Angiolini, Amalfi, Bandolino and cK/Calvin Klein (under license). In addition, Nine West markets shoes under the Company's Evan-Picone label under license. Products The Company's brands cover a broad array of categories for both the women's and men's markets. Within those brands, various product classifications include career and casual sportswear, jeanswear, dresses, suits, and a combination of all components termed lifestyle collection. Career and casual sportswear are marketed as groups of skirts, pants, jackets, blouses, sweaters and related accessories which, while sold as separates, are coordinated as to styles, color schemes and fabrics, and are designed to be worn together. For its sportswear and dress collections, the Company will develop several groups in a selling season. New sportswear and dress collections are introduced in four or five of the principal selling seasons - Spring, Summer, Fall I, Fall II and Holiday, 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. -3- 4 The Company's major product categories are summarized in the following table: Private Label, Career Casual Lifestyle Suits, Dresses Sportswear Sportswear Collection and Other -------------- ------------- -------------- ---------------- Industry Better Better Better Better, Moderate, Categories Moderate Mass Market Brand Labels Jones New York, Jones New York Lauren by Jones New York, Jones Wear, Sport, Ralph Lauren, Evan-Picone, Rena Rowan, Jones Wear, Jones New Saville, Evan-Picone Jones Jeans, York Country, Todd Oldham Jones & Co, Ralph by Jones Studio, Ralph Lauren, Polo Jeans Lauren Jeans Company Company Product Skirts, Skirts, Skirts, Suits, Offerings blouses, blouses, blouses, dresses, pants, pants, pants, pants, jackets, jackets, jackets, jeanswear sweaters sweaters, sweaters, casual tops, suits, jeanswear coats, jeanswear The Company's success is enhanced by its ability to maintain a name brand or designer image while its products are generally sold at the following retail price points:
Skirts Blouses Casual Tops Suits & Jackets and Pants and Sweaters and Bottoms Coats Dresses Jeanswear - --------- --------- ------------ ----------- --------- --------- --------- $150-$260 $70-$140 $55-$200 $22-$90 $220-$450 $125-$240 $13-$80
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 years. The results of operations of Sun are included in the Company's operating results from the date of acquisition. 1998 1997 1996 ------------ ------------ ------------ Career Sportswear $646,000 39% $613,000 45% $529,000 52% Casual Sportswear $454,000 27% $323,000 24% $292,000 29% Lifestyle Collection $413,000 25% $293,000 21% $59,000 6% Suits, Dresses and Other $156,000 9% $143,000 10% $141,000 13% Career Sportswear. The Company's flagship brand, Jones New York, offers consumers a broad array of better sportswear primarily targeting the needs of the career woman. Jones New York products are sold in misses, petites and women's sizes and are marketed under the Jones New York, Jones New York Petite and Jones New York Woman labels. Career sportswear under the Rena Rowan label is positioned at the opening price point in the better apparel sportswear market and includes misses, petites and women's sizes. The Company's Evan-Picone line of career sportswear has been positioned at a price point between the Jones New York and Rena Rowan brands. Starting with the Fall 1999 selling season, this brand will be repositioned to the moderate market and will include misses sizes. -4- 5 A career sportswear line under the Joneswear label is sold to retail accounts for the moderate market that do not carry the Jones New York or Rena Rowan Career Sportswear Lines. Casual Sportswear. Jones New York Sport offers a collection of casual sportswear designed for weekend and informal workday dressing. Jones New York Sport is offered in misses, petite and women's sizes. Jones & Co, a business casual collection, offers options for the informal workplace and business "dress down" days. Jones Jeans, a denim and cotton-based collection, is available in misses, petites and women's sizes. Joneswear Sport is a casual sportswear line sold to selected retail accounts that do not carry other Jones New York casual offerings. A collection of men's casual sportswear was introduced in August 1998 under the Jones New York label. Polo Jeans Company, a division of Sun which the Company acquired in October 1998, provides a denim-based sportswear collection which targets the younger market. The Polo Jeans brand is licensed, with the initial term expiring on December 31, 2000 and may be renewed in five-year increments for up to 30 additional years if certain minimum sales levels are met (see "Licensed Brands" below). Lifestyle Collection. Jones New York Country is a collection of classic country-styled casualwear which is distributed through the Company's own retail outlets and certain specialty store chains. Lauren by Ralph Lauren offers a collection of both casual and career sportswear, suits, dresses and coats to the better market. The collection is currently available in misses and petites sizes. Women's sizes will be added for the Fall 1999 selling season. Lauren Jeans Company is a denim-based product which the Company will offer in the Fall 1999 selling season to complement the existing Lauren by Ralph Lauren lifestyle collection. The Lauren by Ralph Lauren license expires on December 31, 2001, and is subject to renewal for an additional three-year period, provided that certain minimum sales levels are achieved (see "Licensed Brands" below). The Company has an exclusive license to design and manufacture women's apparel under the Ralph by Ralph Lauren brand name. The Ralph by Ralph Lauren Lifestyle collection will be offered in July 1999 for the younger consumer in the 16-25 year old age range. This license expires on December 31, 2003 and is subject to renewal for an additional three year period, if certain minimum sales levels are met (see "Licensed Brands" below). Private Label, Suits, Dresses & Other. The Company's Sun Division designs and manufactures jeanswear and casual bottoms under private label brands, contract manufacturing programs, licensed brands and Company-owned brands. The Company recently acquired the worldwide rights to the Todd Oldham trademark for a broad range of products, including apparel, footwear, cosmetics and accessories. A denim-based junior sportswear line will be introduced for the Fall 1999 selling season. The Company produces suits under the brand names Jones New York and Saville. Jones New York is a better priced brand. Saville targets the opening price points for the better category and is distributed exclusively to one of the Company's major accounts. The Company offers collections of day and evening dresses in the better category under the Jones New York and Evan-Picone brand names. Evan-Picone Dress will remain in the better market through the Summer 1999 selling season and then will be repositioned to the moderate market starting in 2000. -5- 6 Licensed Brands The Company licenses three major brands from Polo Ralph Lauren: Lauren by Ralph Lauren, Ralph by Ralph Lauren and Polo Jeans Company. In October 1995, the Company acquired an exclusive license to manufacture and market women's shirts, blouses, skirts, jackets, suits, sweaters, pants, vests, coats, outerwear and hats under the Lauren by Ralph Lauren trademark in the United States and Canada, pursuant to license and design service agreements with Polo Ralph Lauren, which expire on December 31, 2001. Upon expiration of the initial term, the Company has the right to renew the license for an additional three-year period, provided that it meets certain minimum sales level requirements. The agreements provide for the payment by the Company of a percentage of net sales against guaranteed minimum royalty and design service payments as set forth in the agreements. In May 1998, 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 Ralph by Ralph Lauren trademark in the United States and Canada, pursuant to license and design service agreements with Polo Ralph Lauren, which expire on December 31, 2003. Upon expiration of the initial term, the Company has the right to renew the license for an additional three-year period, provided that it meets certain minimum sales level requirements. The agreements provide for the payment by the Company of a percentage of net sales against guaranteed minimum royalty and design service payments as set forth in the agreements. As part of the acquisition of Sun, the Company obtained the right to sell Polo Jeans products under exclusive long-term license and design agreements that Sun entered into with Polo Ralph Lauren in 1995 (collectively, the "Polo Jeans License"). Under the Polo Jeans License, Polo Ralph Lauren has granted the Company an exclusive license for the design, manufacture and sale of men's and women's jeanswear, sportswear, and related apparel under the Polo Jeans trademarks in the United States and its territories. The initial term of the license agreement expires on December 31, 2000 and may be renewed by the Company in five year increments for up to 30 additional years if certain minimum sales requirements are met. Subject to the Polo Ralph Lauren purchase option described below, renewal of the Polo Jeans License by the Company after 2010 requires a one-time payment of $25.0 million or, at the Company's option, a transfer of a 20% interest in its Polo Jeans business to Polo Ralph Lauren, with no fees required for subsequent renewals. Polo Ralph Lauren has an option exercisable on or before June 1, 2010, to purchase the Company's Polo Jeans business at the end of 2010 for 80% of the then fair value of the business as a going concern, assuming continuation of the Polo Jeans License through 2030, payable in cash. 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 is recognized for its distinctive styling of garments and its ability to update fashion classics with contemporary trends. The Company's designers travel throughout the world for fabrics and colors, and attempt to stay continuously abreast of the latest fashion trends. In addition, the Company actively monitors the retail sales of its products to determine changes in consumer trends. For most sportswear lines, the Company will develop several groups in a season. A group typically consists of an assortment of skirts, pants, jackets, blouses, sweaters and various accessories. The Company believes that it is able to minimize design risks because the Company often will not have started cutting fabrics until the first few weeks of a major selling season. Since different styles within a group often use the same fabric, the Company can redistribute styles and, in some cases, colors, to fit current market demand. -6- 7 In accordance with standard industry practices for licensed products, Polo Ralph Lauren has the right to approve the Company's designs for the Lauren by Ralph Lauren, Ralph by Ralph Lauren and Polo Jeans Company product lines. 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 130 contractors located in the United States, approximately 50 in Mexico and approximately 330 in overseas locations. The Company also operates several manufacturing facilities of its own. Approximately 25% of the Company's products were manufactured in the United States and Mexico and 75% in other parts of the world (primarily Asia) during 1998. The Company believes that outsourcing a majority of its products 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 examine garments manufactured by contractors to ensure that they meet the Company's high standards. See "Quality Control" below. The Company's products are manufactured according to plans prepared each year which reflect prior years' experience, current fashion trends, economic conditions and management estimates of a line's performance. The Company orders piece goods concurrently with concept board development. The purchase of piece goods is controlled and coordinated on a divisional basis. The Company limits its exposure to specific colors and fabrics by committing to purchase a portion of total projected demand with options to purchase additional volume if demand meets the plan. The Company believes that its policy of limiting its commitments for purchases early in the season minimizes its exposure to excess inventory and obsolescence. The Company believes its extensive experience in logistics and production management underlies its success in coordinating with contractors who manufacture different garments included within the same product group. The Company has had long-term mutually satisfactory business relationships with many of its contractors, but does not have long-term written agreements with any of them. The Company has an active program in place to monitor compliance by its contract manufacturers with applicable laws relating to the payment of wages and working conditions. In 1996, the Company became a participant in the United States Department of Labor's Apparel Manufacturers Compliance Program for that purpose. Under that program, and through the Company's independent agreements with each of its domestic and foreign manufacturers, the Company regularly audits such compliance and requires corrective action when appropriate. Quality Control The Company's comprehensive quality control program is designed to ensure that purchased raw materials and finished goods meet the Company's exacting standards. Substantially all of the fabric purchases for garments manufactured domestically and in Mexico are inspected upon receipt in either the Company's warehouse facilities (where they are stored prior to shipment for cutting) or at the contractor's warehouse. Fabrics for garments manufactured offshore are inspected by the Company's contractors upon receipt in their warehouses. The Company's quality control program includes inspection of prototypes of each garment prior to cutting by the contractors to ensure compliance with the Company's specifications. Domestic contractors are supervised by the Company's quality control staff based primarily in Pennsylvania, while foreign manufacturers' operations are monitored by both Company personnel and -7- 8 buying agents located in other countries. All finished goods are shipped to the Company's warehouses for final inspection and distribution. Supplies For its sportswear business, 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's primary raw material in its jeanswear business is denim, of which approximately 95% is purchased from leading domestic mills. Denim purchase commitments and prices are negotiated on a quarterly or semi-annual basis. The Company performs its own extensive testing of denim, cotton twill and other fabrics to ensure consistency and durability. The Company does not have long-term formal arrangements with any of its suppliers. The Company has experienced little difficulty in satisfying its raw material requirements and considers its sources of supply adequate. Marketing During 1998, no single customer accounted for more than 10% of sales; however, certain of the Company's customers are under common ownership. When considered together as a group under common ownership, sales to seven department store customers currently owned by Federated Department Stores, Inc. ("Federated") accounted for approximately 16% of 1998 sales and sales to eight department store customers currently owned by The May Department Stores Company ("May") also accounted for approximately 16% of 1998 sales; the Company's ten largest customer groups accounted for approximately 62% of sales in 1998. 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 is 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. The Company distributes its sportswear products through approximately 840 customers, including department stores, specialty retailer accounts and direct mail catalog companies throughout the United States and Canada, representing approximately 6,200 locations. In addition, the Polo Jeans men's and women's lines are sold in approximately 1,700 and 1,300 department store doors, respectively, and 1,600 specialty store doors. The Company also markets its Polo Jeans line through Polo Ralph Lauren retail stores. The Company has a direct sales force of 354 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 and Los Angeles. The Company also has a small number of independent sales representatives. In addition, senior management is actively involved in selling to major accounts. Sportswear 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 sportswear 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 -8- 9 until the first few weeks of a marketing period, the Company is able to tailor production schedules and styles to current market demands and minimize excess inventory. As one of the primary apparel resources for many of its customers, the Company is able to influence the mix, quantity and timing of orders placed by its retail accounts, enabling the Company to market complete lines of sportswear and minimize excess inventory. The Company's close relationships with its retail accounts allow it to efficiently monitor production schedules and inventories. The Company believes retail demand for its products is enhanced by the Company's ability to provide its retail accounts and consumers with knowledgeable sales support. In this regard, the Company has an established program to place retail sales specialists in many major department stores. These individuals have been trained by the Company to support the sale of its products by educating other store personnel and consumers about the Company's products and by coordinating the Company's marketing activities with those of the stores. In addition, the retail sales specialists provide the Company with firsthand information concerning consumer reactions to the Company's products. In addition, the Company has a program of designated sales personnel in which a store agrees to designate certain sales personnel who will devote a substantial portion of their time to selling the Company's products in return for certain benefits. The Company employs a cooperative advertising program for its branded products, 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. Both the Company and Sun have had national advertising campaigns for the Lauren by Ralph Lauren and Polo Jeans Company products since their inception. Beginning with the Fall 1998 season, the Company launched a national advertising campaign for its Jones New York label, primarily in the print media, encompassing both Company products and products of its licensees. Given the strong recognition and brand loyalty already afforded its brands, the Company believes these campaigns will serve to further enhance and broaden its customer base. The Company also plans a creative campaign for its new Ralph by Ralph Lauren label to be launched in Fall 1999. Factory Outlet Stores At December 31, 1998, the Company operated a total of 215 factory outlet stores and six full price stores. Manufacturer's outlet malls are generally located either in high traffic tourist areas or on major highways to vacation destinations and major cities. The factory outlet stores operated by the Company are located in 111 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 opened 47 and closed 45 stores in 1998 and opened 45 and closed 26 stores in 1997. The Company plans to operate approximately 200 stores during 1999. Licensing of Company Brands As of December 31, 1998, the Company had 32 license agreements under which independent licensees sell products under the Company's Jones New York (and related) trademarks in accordance with designs furnished or approved by the Company in various territories in the United States and Canada. Current licenses include men's tailored clothing and overcoats, women's intimate apparel, women's rainwear, outerwear, leather outerwear and woolen coats, footwear and handbags, belts, scarves, women's swimwear, umbrellas, eyewear, fragrances, costume jewelry, hair accessories, and cosmetic travel accessories. Each of -9- 10 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 1998, the Company received $10,797,000 of Jones New York (and related names) licensing income. As of December 31, 1998, the Company had 14 license agreements under which independent licensees sell products under the Company's Evan-Picone trademarks in accordance with designs furnished or approved by the Company in various territories in the United States and Canada. These licenses include women's woolen coats, footwear, men's tailored clothing, men's neckwear, and men's and women's hosiery. Each of the licenses provides for the payment to the Company of a percentage of the licensee's net sales of the licensed products against guaranteed minimum royalty payments which generally increase over the term of the agreement. During 1998, the Company received $5,368,000 of Evan-Picone licensing income. Trademarks The Company utilizes a variety of trademarks which it owns, including Jones New York, Jones New York Sport, Jones & Co, Jones*Wear, Jones Wear, JNY, Jones New York Country, Jones Jeans, Saville, Rena Rowan, Ellen Kaye, Evan-Picone, Picone Sport, Elements by Evan-Picone, Picone Studio, Evan-Picone Sport, Todd Oldham, Code Bleu, Executive Suite and Strictly Business. The Company has registered or applied for registration for these and other trademarks for use on a variety of items of apparel and apparel-related products in the United States and Canada. In addition, the Company has registered certain of its trademarks in certain other countries. The Company's material registered trademarks, Jones New York, Jones New York Sport, Rena Rowan and Evan-Picone, have their Federal trademark registrations expire in 2006, 2004, 2002, and 2003, respectively, with its other registered trademarks expiring at various dates through 2014, all of which are subject to renewal. The Company carefully monitors trademark expiration dates to ensure uninterrupted registration of its trademarks. The Company also licenses the Lauren by Ralph Lauren, Ralph by Ralph Lauren and Polo Jeans Company labels (see "Licensed Brands" 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 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. -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. However, the recent instability of Asian financial markets has not had a material impact on the Company's financial results. Backlog On December 31, 1998, the Company had unfilled customer orders of approximately $704 million, compared to approximately $557 million of such orders at December 31, 1997. These amounts include both confirmed 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 anticipate and respond to changing consumer demands, its 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 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, 1998, the Company had approximately 8,685 full-time employees. This total includes approximately 6,995 in quality control, production, design and distribution positions, approximately 845 in administrative, sales, clerical and office positions and approximately 845 in the Company factory outlet and -11- 12 full-price retail stores. The Company also employs approximately 800 part-time employees, of which approximately 755 work in the Company factory outlet and full-price retail stores. Approximately 340 of the Company's employees, all of whom are located in Bristol, Pennsylvania, are members of the Teamsters Union, which has a four year labor agreement with the Company expiring in March 2002. Approximately 130 employees, all of whom work in the Company's cutting facility in El Paso, Texas, are covered by a collective bargaining agreement with Local 360, Union of Needletrades, Industrial and Textile Employees, AFL-CIO, which expires December 31, 1999. The Company considers its relations with its employees to be satisfactory. ITEM 2. PROPERTIES The general location, use and approximate size of the Company's principal properties are set forth below:
Approximate Area Location Owned/leased Use in Square Feet - ------------------------- ------------ ----------------------------------- ------------------ Bristol, Pennsylvania leased Headquarters and distribution 419,200 warehouse Bristol, Pennsylvania leased Materials and distribution warehouses 310,400 Bristol, Pennsylvania leased Administrative and computer services 106,400 New York, New York leased Administrative, executive and sales offices 265,200 Vaughan, Canada leased Canadian headquarters and 125,000 distribution warehouse Lawrenceburg, Tennessee leased Distribution warehouses 1,195,000 South Hill, Virginia owned Distribution warehouses 533,500 Rural Hall, North Carolina leased Materials and distribution warehouse 240,800 El Paso, Texas owned Administrative and preproduction facilities 50,000 El Paso, Texas owned Finishing, cutting, and distribution warehouse facilities 385,000 El Paso, Texas leased Distribution warehouses 195,000 Ciudad Juarez, Mexico owned Production 66,850 Durango, Mexico owned Finishing and assembly facilities 209,600
As of December 31, 1998, the Company leased space for 215 outlet stores and six full-price retail stores (aggregating approximately 700,000 square feet) at locations across the United States under long-term leases (typically five years). The average store size is approximately 3,166 square feet, ranging from a minimum of 995 square feet to a maximum of 9,000 square feet. The Company also leases regional sales offices and showrooms in Atlanta, Dallas and Los Angeles. 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 On or about January 13, 1999, 23 unidentified Asian garment workers filed a purported class-action lawsuit against twenty-two garment manufacturers with factories located in Saipan (part of the U.S. Commonwealth of the Northern Mariana Islands). The lawsuit, filed in federal court in Saipan, alleges violations of federal labor statutes and other laws. Also on or about January 13, 1999, a similarly unidentified group of garment workers represented by some of the same law firms which brought the Saipan case filed a similar lawsuit in federal court in Los Angeles against eleven Saipan garment manufacturers (including ten named in the first suit) and seventeen U.S. clothing retailers and marketers, including the Company, alleging violations of federal racketeering statutes and other laws based on allegedly unfair and illegal treatment of -12- 13 foreign workers. Also on or about January 13, 1999, a third lawsuit was filed in state court in San Francisco by a labor union and three nonprofit groups asserting claims of unlawful and unfair business practices and misleading advertising against all of the retailers and marketers named in the Los Angeles action, including the Company, one additional retailer and other unnamed defendants. The two suits against the Company seek unspecified compensatory and punitive damages as well as injunctive relief. The Company is reviewing the claims in the suits and has not answered or otherwise responded to the suits. At this early stage, the Company is not in a position to evaluate the likelihood of an unfavorable outcome. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- --------- Price range of common stock: 1998 High $29-1/4 $34-11/16 $37-3/4 $25-3/16 Low $18-3/4 $26-1/2 $17 $15-7/8 1997 High $20-11/16 $24-9/16 $28-19/32 $28-21/32 Low $16-1/16 $18-1/16 $23-5/16 $20-7/32 The Company's common stock is traded on the New York Stock Exchange under the symbol "JNY". The above figures set forth, for the periods indicated, the high and low sale prices per share of the Company's common stock as reported on the New York Stock Exchange Composite Tape. The last reported sale price per share of the Company's common stock on March 22, 1999 was $24-3/16 and on that date there were 227 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 June 25, 1998. -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, 1998. On October 2, 1998, the Company completed its acquisition of Sun Apparel, Inc. ("Sun"). The results of operations of Sun are included in the Company's operating results from the date of acquisition. (All amounts in thousands except income per share data)
Year Ended December 31, 1998 1997 1996 1995 1994 ---------- ---------- -------- -------- -------- Income Statement Data Net sales $1,669,432 $1,372,458 $1,021,042 $776,365 $633,257 Licensing income 15,797 15,013 13,036 10,314 8,487 ---------- ---------- -------- -------- -------- Total revenues 1,685,229 1,387,471 1,034,078 786,679 641,744 Cost of goods sold 1,100,666 940,149 717,250 546,413 438,575 ---------- ---------- -------- -------- -------- Gross profit 584,563 447,322 316,828 240,266 203,169 Selling, general and administrative expense 319,994 250,685 186,572 139,135 115,307 Amortization of goodwill 2,714 - - - - ---------- ---------- -------- -------- -------- Operating income 261,855 196,637 130,256 101,131 87,862 Interest expense 11,845 3,584 3,040 1,908 1,212 Interest income (1,801) (1,556) (547) (445) (695) ---------- ---------- -------- -------- -------- Income before provision for income taxes 251,811 194,609 127,763 99,668 87,345 Provision for income taxes 96,947 72,884 46,889 36,183 32,425 ---------- ---------- -------- -------- -------- Net income $154,864 $121,725 $80,874 $63,485 $54,920 ========== ========== ======== ======== ======== Per Share Data Net income per share Basic $1.52 $1.17 $0.77 $0.61 $0.53 Diluted $1.47 $1.13 $0.75 $0.60 $0.52 Dividends paid per share - - - - - Weighted average number of common shares outstanding Basic 101,614 103,797 104,667 104,260 103,313 Diluted 105,128 107,810 107,303 106,047 105,778 December 31, 1998 1997 1996 1995 1994 ---------- -------- -------- -------- --------- Balance Sheet Data Working capital $ 457,955 $330,569 $293,970 $260,853 $204,221 Total assets 1,188,672 580,767 488,109 400,959 318,286 Short-term debt, including current portion of capital lease obligations 6,522 4,199 3,067 2,327 1,859 Long-term debt, including capital lease obligations 414,653 27,290 12,141 10,151 8,029 Stockholders' equity 594,349 435,632 376,729 314,975 248,678
On May 6, 1998 and July 30, 1996, the Company's Board of Directors approved two-for-one stock splits of the Company's common stock in the form of a 100% stock dividend for shareholders of record as of June 25, 1998 and September 12, 1996, respectively. A total of 50,497,911 and 26,744,580 shares of common stock were issued on June 25, 1998 and October 2, 1996, respectively, in connection with the splits. 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 splits. -14- 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENTS OF INCOME EXPRESSED AS A PERCENTAGE OF TOTAL REVENUES Year Ended December 31, 1998 1997 1996 ------ ------ ------ Net sales 99.1% 98.9% 98.7% Licensing income 0.9% 1.1% 1.3% ------ ------ ------ Total revenues 100.0% 100.0% 100.0% Cost of goods sold 65.3% 67.8% 69.4% ------ ------ ------ Gross profit 34.7% 32.2% 30.6% Selling, general and administrative expenses 19.0% 18.1% 18.0% Amortization of goodwill 0.2% - - ------ ------ ------ Operating income 15.5% 14.2% 12.6% Interest expense 0.7% 0.3% 0.3% Interest income (0.1%) (0.1%) (0.1%) ------ ------ ------ Income before provision for income taxes 14.9% 14.0% 12.4% Provision for income taxes 5.8% 5.3% 4.5% ------ ------ ------ Net income 9.2% 8.8% 7.8% ====== ====== ====== Totals may not agree due to rounding. GENERAL The following discussion provides information and analysis of the Company's results of operations from 1996 through 1998, 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 27.7% for total revenues and 41.8% for operating income from 1996 to 1998. Total revenues and operating income in 1998 increased 21.5% and 33.2%, respectively, over 1997. The Company believes that it has achieved this growth by enhancing the brand equity of its labels through its focus on design, quality and value, and by successfully adding new labels, such as Lauren by Ralph Lauren and Polo Jeans Company. The Company has leveraged the strength of its brands to increase both the number of locations and amount of selling space in which its products are offered, as well as to introduce new product extensions, such as the Ralph by Ralph Lauren label which will debut for Fall 1999. The Company also plans to reposition its Evan-Picone sportswear brand from the better to the moderate price category for Fall 1999, placing the line in the much larger moderate distribution channel. 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. On October 2, 1998, the Company completed its acquisition of Sun Apparel, Inc. ("Sun"). The results of operations of Sun are included in the Company's operating results from the date of acquisition. -15- 16 RESULTS OF OPERATIONS 1998 Compared to 1997 Net Sales. Net sales in 1998 increased 21.6%, or $0.3 billion, to $1.7 billion, compared to $1.4 billion in 1997. The increase was due primarily to an increase in the number of units shipped, as well as the impact of a higher average price per unit resulting from the mix of products shipped. In addition, the acquisition of Sun added $120.3 million of net sales during 1998. The breakdown of net sales by category for both periods is as follows: Percent (In millions) 1998 1997 Increase Change -------- -------- -------- ------ Career sportswear $645.8 $612.8 $33.0 5.4% Casual sportswear 454.0 323.4 130.6 40.4% Lifestyle collection 413.2 292.9 120.3 41.1% Suits, dress, and other 156.4 143.4 13.0 9.1% -------- -------- -------- ------ Net sales $1,669.4 $1,372.5 $296.9 21.6% ======== ======== ======== ====== The increase in Lifestyle collection was primarily due to a large increase in shipments under the Lauren by Ralph Lauren label. The increase in casual was due to increased shipments of Jones New York Sport, the addition of Polo Jeans since the acquisition of Sun, and the initial shipments of the Jones New York Men's collection during the third and fourth quarters of 1998. Licensing Income. Licensing income increased $0.8 million to $15.8 million in 1998 compared to $15.0 million in 1997. Income from licenses under the Jones New York label increased $1.4 million, while income from licenses under the Evan-Picone label decreased $0.6 million. Gross Profit. The gross profit margin was 34.7% in 1998 compared to 32.2% in 1997. The gross margin improvement was attributable to the significant increase in sales of the Lifestyle collection and the inclusion of Polo Jeans sales since the acquisition of Sun, both of which carry higher margins than the corporate average, as well as lower overseas production costs due to the favorable impact of currency devaluations in Asia and improved inventory management. SG&A Expenses. Selling, general and administrative expenses ("SG&A" expenses) of $320.0 million in 1998 represented an increase of $69.3 million over 1997. As a percentage of total revenues, SG&A expenses increased to 19.0% in 1998 from 18.1% for 1997. The acquisition of Sun Apparel at the beginning of the fourth quarter of 1998 accounted for $28.3 million of the increase. Retail store operating expenses increased $11.0 million, reflecting an average of 227 stores open during 1998 compared to an average of 208 for 1997. Operating Income. The resulting 1998 operating income of $261.9 million increased 33.2%, or $65.3 million, compared to $196.6 million during 1997. The operating margin increased to 15.5% for 1998 from the 14.2% achieved during 1997. Net Interest Expense. Net interest expense was $10.0 million in 1998 compared to $2.0 million in 1997. This increase is primarily due to interest on long- term debt issued to finance the purchase of Sun Apparel. Provision for Income Taxes. The effective income tax rate was 38.5% for 1998 compared to 37.5% for 1997. The increase was primarily due to higher state and Canadian income tax provisions for 1998. -16- 17 Net Income. Net income increased 27.2% to $154.9 million in 1998, an increase of $33.2 million over the net income of $121.7 million earned in 1997. Net income as a percentage of total revenues was 9.2% in 1998 and 8.8% in 1997. 1997 Compared to 1996 Net Sales. Net sales in 1997 increased 34.4%, or $0.4 billion, to $1.4 billion, compared to $1.0 billion in 1996. The increase was due primarily to an increase in the number of units shipped and also, to a lesser extent, the impact of a higher average price per unit resulting from the mix of products shipped. The breakdown of net sales by category for both periods is as follows: Percent (In millions) 1997 1996 Increase Change -------- -------- -------- ------ Career sportswear $612.8 $528.9 $83.9 15.9% Casual sportswear 323.4 291.9 31.5 10.8% Lifestyle collection 292.9 58.8 234.1 398.1% Suits, dress, and other 143.4 141.4 2.0 1.4% -------- -------- -------- ------ Net sales $1,372.5 $1,021.0 $351.5 34.4% ======== ======== ======== ====== The increase in Lifestyle collection was primarily due to a large increase in shipments under the Lauren by Ralph Lauren label. Licensing Income. Licensing income increased $2.0 million to $15.0 million in 1997, compared to $13.0 million in 1996. Income from licenses under the Jones New York label increased $1.8 million while income from licenses under the Evan- Picone label rose $0.2 million. The increases were primarily due to higher sales volume by licensees. Gross Profit. The gross profit margin was 32.2% in 1997, compared to 30.6% in 1996. The increase was attributable to the impact of stronger margins across major product categories and the proportionately larger increase in sales of the Lauren by Ralph Lauren label, which was introduced in Fall 1996 and carries higher margins than the corporate average. SG&A Expenses. Selling, general and administrative expenses of $250.7 million in 1997 represented an increase of $64.1 million over $186.6 million in 1996. As a percentage of total revenues, SG&A expenses increased to 18.1% in 1997 from 18.0% in 1996. Expenses associated with Lauren by Ralph Lauren product advertising, royalties, store displays and associated operating costs, as well as the Company's overall sales growth, added significant expenses during 1997. Retail store operating expenses increased $6.9 million, reflecting an average of 208 stores open during 1997 compared to an average of 185 for 1996. Operating Income. The resulting 1997 operating income increased $66.3 million to $196.6 million, compared to $130.3 million during 1996. The operating margin increased to 14.2% in 1997 from 12.6% in 1996 as a result of the higher gross profit margins during 1997. Net Interest Expense. Net interest expense was $2.0 million in 1997 compared to $2.5 million in 1996. The primary reason for the change was an increase in interest income of $1.0 million, which offset higher interest on capital leases for additional warehouse facilities constructed during 1997. -17- 18 Provision for Income Taxes. The effective income tax rate for 1997 was 37.5% compared to 36.7% in 1996. The increase was primarily due to higher state income tax provisions for 1997. Net Income. Net income increased 50.5% to $121.7 million in 1997, an increase of $40.8 million over the net income of $80.9 million earned in 1996. Net income as a percentage of total revenues was 8.8% in 1997 compared to 7.8% in 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital requirements have been to fund working capital needs, capital expenditures and to repurchase the Company's common stock on the open market. The Company has historically relied primarily on internally generated funds, trade credit and bank borrowings to finance its operations and expansion. As of December 31, 1998, total cash and cash equivalents were $129.0 million, an $88.9 million increase over the $40.1 million reported as of December 31, 1997. Cash Provided by Operations. Net cash provided by operations was $224.9 million in 1998, $110.6 million in 1997 and $70.7 million in 1996. The increase for 1998 was primarily due to higher net income and a $66.3 million decrease in inventories (net of the acquisition of Sun) compared to an increase in the prior year. For 1997, the increase was primarily due to higher net income and a decrease in trade receivables compared to an increase in the prior year. Cash Used in Investing Activities. Net cash used in investing activities increased $114.4 million in 1998, primarily as a result of the acquisition of Sun. In 1997, additional capital improvements and replacements, including cash restricted for use in completing a warehouse facility, accounted for the majority of the $8.0 million increase over the prior year. Cash Provided by (Used in) Financing Activities. Net cash provided by financing activities was $22.0 million in 1998, the result of long-term debt issued for the acquisition and debt refinancing of Sun and additional repurchases of the Company's common stock. In 1997, cash used in financing activities of $57.2 million increased from $22.2 million in 1996 due primarily to repurchases of the Company's common stock. The Company repurchased $108.1 million, $85.8 million and $33.6 million of its common stock on the open market for 1998, 1997 and 1996, respectively, for a total of $227.5 million expended under announced programs to acquire up to $300.0 million of such shares. The Company may authorize additional share repurchases in the future depending on, among other things, market conditions and the Company's financial condition. Proceeds from the issuance of common stock to employees exercising stock options amounted to $9.4 million, $12.5 million and $9.1 million in 1998, 1997 and 1996, respectively. In connection with the Sun acquisition, the Company replaced its existing credit agreements with $265.0 million of 6.25% three-year Senior Notes due 2001, and entered into an agreement with First Union National Bank, as administrative agent, and other lending institutions to borrow an aggregate principal amount of up to $550.0 million under Senior Credit Facilities. The Senior Notes, all of which were outstanding at December 31, 1998, pay interest semiannually on April 1 and October 1 of each year. These notes contain certain covenants, including, among others, restrictions on liens, sale-leaseback transactions, and additional secured debt. The Senior Credit Facilities consist of (i) a $150.0 million Three-Year Revolving Credit Facility, (ii) a $300.0 million 364-Day Revolving Credit Facility, the entire amount of which is available for trade letters of credit or cash borrowings, and (iii) a $100.0 million Three-Year Term Loan Facility. At December 31, 1998, $207.3 million was outstanding under the 364-Day Revolving Credit Facility (which was comprised of the Company's letters of credit outstanding on that date) and $100.0 million was outstanding under the Company's Three-Year Term Loan Facility. Borrowings under the Senior Credit Facilities may also be used for working capital and other general corporate purposes, including permitted -18- 19 acquisitions and stock repurchases. The Senior Credit Facilities are unsecured and require the Company to satisfy an earnings before interest, taxes, depreciation, amortization and rent to interest expense plus rents coverage ratio, and a net worth maintenance covenant, as well as other restrictions, including (subject to exceptions) limiting the Company's ability to incur additional indebtedness, prepay subordinated indebtedness, make acquisitions, enter into mergers, and pay dividends. The Company also has unsecured lines of credit for $50 million with First Union National Bank and C$5 million with the Bank of Montreal. No amounts were outstanding under these lines at December 31, 1998. The Company believes that funds generated by operations, the Senior Notes, the new Senior Credit Facilities and the other unsecured lines of credit mentioned above will provide the financial resources sufficient to meet its foreseeable working capital, letter of credit, capital expenditure and stock repurchase requirements and any ongoing obligations to the former Sun shareholders. However, the Company will have to obtain additional financing to consummate the acquisition of Nine West Group Inc. (see Note 19 of Notes to Consolidated Financial Statements). Year 2000 The Company uses various types of technology in the operations of its business. Some of this technology incorporates date identification functions; however, many of these date identification functions were developed to use only two digits to identify a year. These date identification functions, if not corrected, could cause their related technologies to fail or create erroneous results on or before January 1, 2000. The Company is continuing to assess, with both internal and external resources, the impact of Year 2000 issues on its information and non-information technology systems. As part of this process, the Company retained the services of an independent consultant that specializes in Year 2000 evaluation and remediation work. In addition, the Company has developed a plan with respect to the Year 2000 readiness of its internal technology systems. This plan involves (i) creating awareness inside the Company of Year 2000 issues, (ii) analyzing the Company's Year 2000 state of readiness, (iii) testing, correcting and updating systems and computer software as needed, and (iv) incorporating the corrected or updated systems and software into the Company's business. The Company is finalizing the assessment phase of this plan, and has moved into the testing and correcting phase with respect to those technology systems that have been identified as having Year 2000 issues. The Company anticipates substantially completing the implementation of this plan by the middle of 1999; however, it may revise the estimated date of completion of this plan based upon any unforeseen delays in implementing such plan. In a continuing effort to become more productive and competitive, the Company replaces portions of its software and hardware when warranted by significant business and/or technology changes. While these replacements are not specifically intended to resolve the Year 2000 issue, the new software and hardware is designed to function properly with respect to dates related to the Year 2000 and beyond. The Company also has initiated discussions with its significant suppliers, customers and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues when their systems interface with the Company's systems or may otherwise impact operations. The Company anticipates substantially completing the implementation of this plan by the middle of 1999; however, there can be no assurances that such plan will be completed by the estimated date or that the systems and products of other companies on which the Company relies will not have an adverse effect on its business, operations or financial condition. As of December 31, 1998, the Company had incurred approximately $445,000 in direct external costs related to the Year 2000 issue. The Company does not separately track the internal costs incurred for Year 2000 projects as such costs are principally the related payroll costs for the management information systems service group. The Company believes that additional costs related to the Year 2000 issue will not be material to its business, operations or financial condition. However, estimates of Year 2000 related costs are based on -19- 20 numerous assumptions and there is no certainty that estimates will be achieved and actual costs could be materially greater than anticipated. The Company anticipates that it will fund its additional Year 2000 costs from current working capital. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires entities to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal years beginning after June 15, 1999. The Company is currently reviewing SFAS No. 133 and has of yet been unable to fully evaluate the impact, if any, it may have on future operating results or financial statement disclosures. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA STATEMENT OF MANAGEMENT RESPONSIBILITY To the stockholders of Jones Apparel Group, Inc. 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. 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 -20- 21 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, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jones Apparel Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP BDO Seidman, LLP New York, New York February 5, 1999, except as to Note 19, which is as of March 2, 1999 -21- 22 Jones Apparel Group, Inc. Consolidated Balance Sheets (All amounts in thousands except per share data) December 31, 1998 1997 ---------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $129,024 $40,134 Accounts receivable, net of allowance of $3,303 and $2,767 for doubtful accounts 169,225 91,747 Inventories 268,175 255,055 Receivable from and advances to contractors 19,207 7,833 Prepaid and refundable income taxes - 5,993 Deferred taxes 32,143 26,269 Prepaid expenses and other current assets 14,069 13,740 ---------- -------- TOTAL CURRENT ASSETS 631,843 440,771 PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization 156,043 81,934 CASH RESTRICTED FOR CAPITAL ADDITIONS - 11,193 GOODWILL, less accumulated amortization 323,009 - OTHER INTANGIBLES, at cost, less accumulated amortization 29,705 30,604 OTHER ASSETS 48,072 16,265 ---------- -------- $1,188,672 $580,767 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $6,522 $4,199 Accounts payable 100,282 90,429 Income taxes payable 13,654 - Accrued interest 5,369 210 Accrued expenses and other current liabilities 48,061 15,364 ---------- -------- TOTAL CURRENT LIABILITIES 173,888 110,202 ---------- -------- NONCURRENT LIABILITIES: Long-term debt 379,247 8,833 Obligations under capital leases 35,406 18,457 Other 5,782 6,107 ---------- -------- TOTAL NONCURRENT LIABILITIES 420,435 33,397 ---------- -------- TOTAL LIABILITIES 594,323 143,599 ---------- -------- COMMITMENTS AND CONTINGENCIES EXCESS OF NET ASSETS ACQUIRED OVER COST - 1,536 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value - shares authorized 1,000; none issued - - Common stock, $.01 par value - shares authorized 200,000;issued 115,412 and 108,955 1,154 545 Additional paid-in capital 234,787 122,582 Retained earnings 593,781 438,917 Accumulated other comprehensive income (2,287) (1,524) ---------- -------- 827,435 560,520 Less treasury stock, 11,918 and 6,767 shares, at cost (233,086) (124,888) ---------- -------- TOTAL STOCKHOLDERS' EQUITY 594,349 435,632 ---------- -------- $1,188,672 $580,767 ========== ======== See accompanying notes to consolidated financial statements -22- 23 Jones Apparel Group, Inc. Consolidated Statements of Income (All amounts in thousands except per share data) Year Ended December 31, 1998 1997 1996 ---------- ---------- ---------- NET SALES $1,669,432 $1,372,458 $1,021,042 LICENSING INCOME 15,797 15,013 13,036 ---------- ---------- ---------- Total revenues 1,685,229 1,387,471 1,034,078 COST OF GOODS SOLD 1,100,666 940,149 717,250 ---------- ---------- ---------- Gross profit 584,563 447,322 316,828 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 319,994 250,685 186,572 AMORTIZATION OF GOODWILL 2,714 - - ---------- ---------- ---------- Operating income 261,855 196,637 130,256 INTEREST EXPENSE 11,845 3,584 3,040 INTEREST INCOME (1,801) (1,556) (547) ---------- ---------- ---------- Income before provision for income taxes 251,811 194,609 127,763 PROVISION FOR INCOME TAXES 96,947 72,884 46,889 ---------- ---------- ---------- NET INCOME $154,864 $121,725 $80,874 ========== ========== ========== EARNINGS PER SHARE Basic $1.52 $1.17 $0.77 Diluted $1.47 $1.13 $0.75 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 101,614 103,797 104,667 Diluted 105,128 107,810 107,303 See accompanying notes to consolidated financial statements -23- 24 Jones Apparel Group, Inc. Consolidated Statements of Stockholders' Equity (All amounts in thousands) CAPTION> Total Accumulated stock- Additional other holders' Common paid-in Retained comprehensive Treasury equity stock capital earnings income stock --------- ------- ---------- -------- ------------- --------- BALANCE, DECEMBER 31, 1995 $314,975 $ 263 $ 84,172 $236,318 $ (1,140) $ (4,638) YEAR ENDED DECEMBER 31, 1996: Comprehensive income: Net income 80,874 - - 80,874 - - Foreign currency translation adjustments (14) - - - (14) - -------- Total comprehensive income 80,860 -------- Amortization of deferred compensation in connection with executive stock options 290 - 290 - - - Exercise of stock options 9,068 6 9,825 - - (763) Tax benefit derived from exercise of stock options 5,157 - 5,157 - - - Treasury stock acquired (33,584) - - - - (33,584) Effect of 2-for-1 stock split - 267 (267) - - - Registration of 1996 Stock Option Plan (37) - (37) - - - -------- ------ -------- -------- -------- --------- BALANCE, DECEMBER 31, 1996 376,729 536 99,140 317,192 (1,154) (38,985) YEAR ENDED DECEMBER 31, 1997: Comprehensive income: Net income 121,725 - - 121,725 - - Foreign currency translation adjustments (370) - - - (370) - -------- Total comprehensive income 121,355 -------- Amortization of deferred compensation in connection with executive stock options and related items 2,778 - 2,778 - - - Exercise of stock options 12,506 9 12,597 - - (100) Tax benefit derived from exercise of stock options 8,067 - 8,067 - - - Treasury stock acquired (85,803) - - - - (85,803) -------- ------ -------- -------- -------- --------- BALANCE, DECEMBER 31, 1997 435,632 545 122,582 438,917 (1,524) (124,888) YEAR ENDED DECEMBER 31, 1998: Comprehensive income: Net income 154,864 - - 154,864 - - Foreign currency translation adjustments (763) - - - (763) - -------- Total comprehensive income 154,101 -------- Amortization of deferred compensation in connection with executive stock options and related items 178 - 178 - - - Stock issued relating to Acquisition of Sun Apparel 97,344 54 97,290 - - - Exercise of stock options 9,370 6 9 464 - - (100) Tax benefit derived from exercise of stock options 5,847 - 5,847 - - - Effect of 2-for-1 stock split - 549 (549) - - - Treasury stock acquired (108,098) - - - - (108,098) Other (25) - (25) - - - -------- ------ -------- -------- -------- --------- BALANCE, DECEMBER 31, 1998 $594,349 $1,154 $234,787 $593,781 $(2,287) $(233,086) ======== ====== ======== ======== ======== =========
See accompanying notes to consolidated financial statements -24- 25 Jones Apparel Group, Inc. Consolidated Statements of Cash Flows (All amounts in thousands) Year Ended December 31, 1998 1997 1996 -------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $154,864 $121,725 $80,874 -------- ------- ------- Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition of Sun Apparel, Inc.: Depreciation and amortization 21,226 14,594 8,948 Provision for losses on trade receivables 188 1,870 800 Deferred taxes 4,958 (17,907) 7,233 Other 413 264 416 Decrease (increase) in: Trade receivables (7,818) 18,917 (21,349) Inventories 66,250 (40,961) (37,814) Prepaid expenses and other current assets (10,291) 1,264 10,624 Other assets (925) (6,273) (3,703) Increase (decrease) in: Accounts payable (16,978) 17,909 13,498 Taxes payable 18,838 (5,253) 6,673 Accrued expenses and other current liabilities (5,866) 4,428 4,492 -------- ------- ------- Total adjustments 69,995 (11,148) (10,182) -------- ------- ------- Net cash provided by operating activities 224,859 110,577 70,692 -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Sun Apparel, Inc. net of cash acquired (121,006) - - Capital expenditures (48,497) (32,149) (34,066) Proceeds from disposition of assets 562 - 261 Increase (decrease) in cash restricted for capital additions 11,193 (11,193) - Acquisition of trademarks and licenses - - (1,492) -------- ------- ------- Net cash used in investing activities (157,748) (43,342) (35,297) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of 6.25% Senior Notes, net of discount 264,735 - - Debt issuance costs (7,568) - - Refinancing of acquired long-term debt of Sun Apparel (237,807) - - Net borrowings under long-term credit facilities 105,288 10,000 - Borrowings under capital lease - 10,000 5,000 Principal payments on capital leases (3,936) (3,939) (2,623) Purchases of treasury stock (108,098) (85,803) (33,584) Proceeds from exercise of stock options 9,370 12,507 9,068 Other (25) - (37) -------- ------- ------- Net cash provided by (used in) financing activities 21,959 (57,235) (22,176) -------- ------- ------- EFFECT OF EXCHANGE RATES ON CASH (180) 49 2 -------- ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 88,890 10,049 13,221 CASH AND CASH EQUIVALENTS, BEGINNING 40,134 30,085 16,864 -------- ------- ------- CASH AND CASH EQUIVALENTS, ENDING $129,024 $40,134 $30,085 ======== ======= ======= See accompanying notes to consolidated financial statements -25- 26 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements NOTE 1. SUMMARY OF ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Jones Apparel Group, Inc. and its wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. The Company designs, contracts for the manufacture of, manufactures and markets a broad range of women's career and casual sportswear, suits and dresses and jeanswear for men, women and children. The Company sells its products through a broad array of distribution channels, including better specialty and department stores and mass merchandisers. The Company also operates its own network of factory outlet stores. In addition, the Company licenses the use of several of its brand names to select manufacturers of women's and men's apparel and accessories. The Company considers itself to be operating in one reportable business segment. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Credit Risk Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash, cash equivalents and accounts receivable. The Company places its cash and cash equivalents in investment-grade, short-term debt instruments with quality financial institutions and the U.S. Government and, by policy, limits the amount of credit exposure in any one financial vehicle. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The allowance for non-collection of accounts receivable is based upon the expected collectibility of all accounts receivable. Financial Instruments The fair value of cash and cash equivalents and receivables approximate their carrying value due to their short-term maturities. The fair value of long-term debt instruments, including the current portion, approximates the carrying value and is estimated based on the current rates offered to the Company for debt of similar maturities. Inventories Inventories are stated at the lower of cost or market. Wholesale inventories are determined using the first-in, first-out method while retail inventories are determined using the retail method. Property, Plant, Equipment and Depreciation Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the assets ranging from three to 31-1/2 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. -26- 27 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) Other Intangibles Other intangibles, which include trademarks and license agreements, are amortized on a straight-line basis over the estimated useful lives of the assets. Goodwill Goodwill recorded in connection with the acquisition of Sun Apparel, Inc. is being amortized using the straight-line method over 30 years. Foreign Currency Translation The financial statements of foreign subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translations." Where the functional currency of a foreign subsidiary is its local currency, balance sheet accounts are translated at the current exchange rate and income statement items are translated at the average exchange rate for the period. Gains and losses resulting from translation are accumulated in a separate component of stockholders' equity. Where the local currency of a foreign subsidiary is not its functional currency, financial statements are translated at either current or historical exchange rates, as appropriate. These adjustments, along with gains and losses on currency transactions, are reflected in the statements of consolidated operations. Segment data is not provided as foreign operations are not material. Treasury Stock Treasury stock is recorded at net acquisition cost. Gains and losses on disposition are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings. Revenue Recognition Sales are recognized upon shipment of products or, in the case of retail sales, at the time of register receipt. Allowances for estimated returns are provided when sales are recorded. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Current tax assets and liabilities are recognized for the estimated Federal, foreign, state and local income taxes payable or refundable on the tax returns for the current year. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary timing differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income tax provisions are based on the changes to the respective assets and liabilities from period to period. Stock Options The Company uses the intrinsic value method of accounting for employee stock options as permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount the employee must pay to acquire the stock. The compensation cost is recognized over the vesting period of the options. -27- 28 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) 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 reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options. The difference between reported basic and diluted weighted-average common shares results from the assumption that all dilutive stock options outstanding were exercised. The following options to purchase shares of common stock were outstanding during a portion of each year but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares and, therefore, would be antidilutive. 1998 1997 1996 ------ ------ ------ Number of options (in thousands) 4,447 3,180 480 Weighted-average exercise price $24.66 $23.84 $16.46 Cash Equivalents The Company considers all highly liquid short-term investments to be cash equivalents. Long-Lived Assets The Company reviews certain long-lived assets and identifiable intangibles (including goodwill) for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In that regard, the Company assesses the recoverability of such assets based upon estimated non- discounted cash flow forecasts. Presentation of Prior Year Data Certain reclassifications have been made to conform prior year data with the current presentation. New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" which requires entities to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal years beginning after June 15, 1999. The Company is currently reviewing SFAS No. 133 and has of yet been unable to fully evaluate the impact, if any, it may have on future operating results or financial statement disclosures. -28- 29 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 2. ACQUISITION OF SUN APPAREL On October 2, 1998, the Company acquired Sun Apparel, Inc. ("Sun"), a designer, manufacturer and distributor of jeanswear, sportswear and related apparel for men, women and children. Sun markets its products under various licensed private label and owned brands, the most prominent of which is the Polo Jeans Company licensed from Polo Ralph Lauren. The purchase price was $215.7 million (subject to additional contingent purchase price adjustments as described below), with payments through December 31, 1998 amounting to $127.5 million in cash and 4.4 million shares of common stock, valued for financial reporting purposes at $18.00 per share as of September 10, 1998, the date the definitive Acquisition and Merger Agreement was signed. The Company also assumed Sun debt of $241.5 million (including accrued interest and prepayment penalties), of which $237.8 million was refinanced in conjunction with the closing of the transaction. The acquisition has been accounted for under the purchase method of accounting for business combinations. Accordingly, the consolidated financial statements include the results of operations of Sun from the acquisition date. The purchase price was allocated to Sun's assets and liabilities, tangible and intangible, with the excess of the cost over the fair value of the net assets acquired of approximately $325.7 million being amortized on a straight-line basis over 30 years. As part of the purchase price allocation, $10 million was recorded for severance payments and expected costs and losses from moving and closing certain facilities currently located in El Paso, Texas, of which $5 million remained accrued at December 31, 1998. The terms of the Acquisition and Merger Agreement provide for additional consideration of $2.00 to be paid for each $1.00 that Sun's earnings before interest and taxes (as defined in the merger agreement) for each of the years 1998 through 2001 exceed certain targeted levels. Such additional consideration will be paid 59% in cash and 41% in the Company's common stock, the value of which will be determined by the prices at which the common stock trades in a defined period preceding delivery in each year. Any additional consideration paid will be recorded as goodwill when payment is made. The following unaudited pro forma information presents a summary of the consolidated results of operations of the Company as if the acquisition and its related financing had taken place on January 1, 1997. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on January 1, 1997, or which may result in the future. December 31, 1998 1997 ------------ ---------- ---------- Net sales (in thousands) $2,015,756 $1,732,130 Net income (in thousands) 169,100 116,381 Basic earnings per common share $1.61 $1.08 Diluted earnings per common share $1.56 $1.04 -29- 30 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 3. INVENTORIES Inventories are summarized as follows: December 31, 1998 1997 ------------ -------- -------- (In thousands) Raw materials $33,928 $27,045 Work in process 43,041 41,294 Finished goods 191,206 186,716 -------- -------- $268,175 $255,055 ======== ======== NOTE 4. PROPERTY, PLANT AND EQUIPMENT Major classes of property, plant and equipment are as follows: December 31, 1998 1997 ------------ -------- -------- (In thousands) Land and buildings $ 72,054 $ 37,893 Leasehold improvements 48,348 29,230 Machinery and equipment 87,863 31,979 Furniture and fixtures 14,829 9,666 Construction in progress 9,409 17,355 -------- -------- 232,503 126,123 Less: accumulated depreciation and amortization 76,460 44,189 -------- -------- $156,043 $81,934 ======== ======== Depreciation and amortization expense relating to property, plant and equipment was $17,055,000, $11,869,000, and $8,711,000 in 1998, 1997, and 1996, respectively. Included in property, plant and equipment are the following capitalized leases: December 31, 1998 1997 ------------ -------- -------- (In thousands) Buildings $48,585 $32,137 Machinery and equipment 5,911 3,759 Construction in progress - 9,937 -------- -------- 54,496 45,833 Less: accumulated amortization 8,862 12,626 -------- -------- $45,634 $33,207 ======== ======== -30- 31 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 5. OTHER INTANGIBLE ASSETS Other intangible assets consist of the following: Useful lives December 31, 1998 1997 (years) ------------ ------- ------- ----------- (In thousands) Trademarks $32,972 $32,972 8 to 20 License agreements 6,652 5,319 5-1/2 to 19 ------- ------- 39,624 38,291 Less: accumulated amortization 9,919 7,687 ------- ------- $29,705 $30,604 ======= ======= NOTE 6. CREDIT FACILITIES Until October 2, 1998, the Company had credit arrangements with seven financial institutions which totaled $470,000,000. These lines, which could be used for unsecured borrowings and letters of credit (issued primarily to finance foreign inventory purchases), contained an aggregate sub-limit of $170,000,000 for unsecured borrowings with rates depending on the borrowing vehicle utilized. In connection with the acquisition of Sun on October 2, 1998, the Company replaced its existing credit agreements with $265,000,000 of 6.25% three-year Senior Notes due 2001 and entered into an agreement with First Union National Bank, as administrative agent, and other lending institutions to borrow an aggregate principal amount of up to $550,000,000 under Senior Credit Facilities. Interest on the Senior Notes is payable semiannually on April 1 and October 1 of each year. These notes contain certain covenants, including, among others, restrictions on liens, sale-leaseback transactions, and additional secured debt. The Senior Credit Facilities consist of (i) a $150,000,000 Three-Year Revolving Credit Facility, (ii) a $300,000,000 364-Day Revolving Credit Facility, the entire amount of which will be available for trade letters of credit or cash borrowings, and (iii) a $100,000,000 Three-Year Term Loan Facility. Borrowings under the Senior Credit Facilities may be used for working capital and other general corporate purposes, including permitted acquisitions and stock repurchases. The Senior Credit Facilities are unsecured and require the Company to satisfy an earnings before interest, taxes, depreciation, amortization and rent to interest expense plus rents coverage ratio, and a net worth maintenance covenant, as well as other restrictions, including (subject to exceptions) limiting the Company's ability to incur additional indebtedness, prepay subordinated indebtedness, make acquisitions, enter into mergers, and pay dividends. The Company was committed for unexpired bank letters of credit at December 31, 1998 in the amount of $207,322,000 and there were no short-term borrowings outstanding. The Company also has unsecured lines of credit with First Union National Bank for $50,000,000 and the Bank of Montreal for C$5,000,000 to be used for unsecured borrowings under which no amounts were outstanding at December 31, 1998. -31- 32 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 7. LONG-TERM DEBT Long-term debt consists of the following: December 31, 1998 1997 ------------ -------- -------- (In thousands) 6.25% Senior Notes due 2001, net of unamortized discount of $243 $264,757 $ - Term Loan due 2001, variable rate (5.61% at December 31, 1998) 100,000 - Mortgage payable, final payment due 2002, variable rate (7.25% at December 31, 1998) 2,268 - 11% Mortgage payable, final payment due 2001 842 - 6.98% Industrial revenue bonds, final payment due 2007 13,483 9,833 Other debt - 10 -------- -------- 381,350 9,843 Less: current portion 2,103 1,010 -------- -------- $379,247 $ 8,833 ======== ======== Long-term debt maturities for each of the next five years are $2,029,000 in 1999, $2,079,000 in 2000, $367,133,000 in 2001, $1,843,000 in 2002 and $1,867,000 in 2003. NOTE 8. OBLIGATIONS UNDER CAPITAL LEASES Obligations under capital leases consist of the following: December 31, 1998 1997 ------------ -------- -------- (In thousands) Warehouses, office facilities and equipment $39,825 $21,646 Less: current portion 4,419 3,189 -------- -------- Obligations under capital leases - noncurrent $35,406 $18,457 ======== ======== The Company occupies warehouse and office facilities leased from the City of Lawrenceburg, Tennessee. Four ten-year net leases run until February 2004, July 2005, May 2006 and April 2007, respectively, and require minimum annual rent payments of $500,000, $500,000, $500,000, and $1,000,000, respectively, plus accrued interest. In connection with these leases, the Company guaranteed $25,000,000 of Industrial Development Bonds issued in order to construct the facilities, $17,917,000 of which remained unpaid as of December 31, 1998. 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 warehouse and office facilities in Bristol, Pennsylvania. Two fifteen-year net leases run until March and October 2013, respectively, and require minimum annual rent payments of $1,150,000 and $772,000, respectively. -32- 33 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) The Company also leases various equipment under three to five year leases at an aggregate annual rental of $1,639,000. The equipment has been capitalized at its fair market value of $4,802,000, 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, 1998: December 31, ------------ (In thousands) 1999 $ 6,997 2000 7,144 2001 5,442 2002 5,175 2003 5,100 Later years 28,369 -------- Total minimum lease payments 58,227 Less: amount representing interest 18,402 -------- Present value of net minimum lease payments $39,825 ======== NOTE 9. SIGNIFICANT CUSTOMERS A significant portion of the Company's sales are to retailers throughout the United States and Canada. Sales to department stores owned by Federated Department Stores, Inc. ("Federated") accounted for 16%, 20% and 20% for the years ended December 31, 1998, 1997 and 1996, respectively. Sales to department stores owned by The May Department Stores Company ("May") accounted for 16%, 19% and 20% for the years ended December 31, 1998, 1997 and 1996, respectively. Federated and May accounted for approximately 30% of accounts receivable at December 31, 1998. NOTE 10. COMMITMENTS (a) 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. On or about January 13, 1999, 23 unidentified Asian garment workers filed a purported class-action lawsuit against twenty-two garment manufacturers with factories located in Saipan (part of the U.S. Commonwealth of the Northern Mariana Islands). The lawsuit, filed in federal court in Saipan, alleges violations of federal labor statutes and other laws. Also on or about January 13, 1999, a similarly unidentified group of garment workers represented by some of the same law firms which brought the Saipan case filed a similar lawsuit in federal court in Los Angeles against eleven Saipan garment manufacturers (including ten named in the first suit) and seventeen U.S. clothing retailers and marketers, including the Company, alleging violations of federal racketeering statutes and other laws based on allegedly unfair and illegal treatment of foreign workers. Also on or about January 13, 1999, a third lawsuit was filed in state court in San Francisco by a labor union and three nonprofit groups asserting claims of unlawful and unfair business practices and -33- 34 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) misleading advertising against all of the retailers and marketers named in the Los Angeles action, including the Company, one additional retailer and other unnamed defendants. The two suits against the Company seek unspecified compensatory and punitive damages as well as injunctive relief. The Company is reviewing the claims in the suits and has not answered or otherwise responded to the suits. At this early stage, the Company is not in a position to evaluate the likelihood of an unfavorable outcome. (b) ROYALTIES. Under exclusive licenses to manufacture certain items under the Lauren by Ralph Lauren and Ralph by Ralph Lauren trademarks pursuant to license and design service agreements with Polo Ralph Lauren Corporation ("Polo"), the Company is obligated to pay Polo a percentage of net sales of Lauren by Ralph Lauren and Ralph by Ralph Lauren products. Minimum payments of $7,000,000 are due for each of the years 2000 and 2001 under the Lauren by Ralph Lauren agreements and minimum payments of $5,250,000 are due for each of the years 2002 and 2003 under the Ralph by Ralph Lauren agreements. The Lauren by Ralph Lauren agreements expire on December 31, 2001 and the Ralph by Ralph Lauren agreements expire on December 31, 2003. Both sets of agreements provide for renewal options upon expiration provided that certain sales levels have been met. Under a similar exclusive license to manufacture certain items under the Polo Jeans Company trademark pursuant to license and design service agreements with Polo, the Company is obligated to pay Polo a percentage of net sales of Polo Jeans Company products. The Company is also obligated to spend on advertising a percentage of net sales of these licensed products. The initial term of the license and design service agreements expires December 31, 2000 and may be renewed by the Company in five-year increments for up to 30 additional years if certain sales requirements are met. Commencing in 2001, certain minimum annual royalty payments are required if the Company exercises its renewal options. Renewal after 2010 requires a one-time payment of $25 million or, at the Company's option, a transfer of 20% interest in its Polo Jeanswear business to Polo. Polo has a one-time right, in blockage of such renewal, to purchase the Company's Polo Jeanswear business at the end of 2010 for 80% of its then fair market value, as defined, payable in cash. (c) LEASES. Total rent expense charged to operations for the years ended December 31, 1998, 1997 and 1996 was $27,374,000, $22,159,000 and $18,888,000, respectively. The following is a schedule by year of future minimum rental payments required under operating leases for the next five years: December 31, ------------ (In thousands) 1999 $ 21,091 2000 18,902 2001 17,188 2002 12,016 2003 8,647 Later years 29,042 -------- $106,886 ======== Certain of the leases provide for renewal options and the payment of real estate taxes and other occupancy costs. -34- 35 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 11. INCOME TAXES The following summarizes the provision for income taxes: Year ended December 31, 1998 1997 1996 ----------------------- --------- -------- --------- (In thousands) Current: Federal $79,442 $78,811 $34,522 State and local 9,083 10,524 3,733 Foreign 3,464 1,456 1,401 -------- -------- -------- 91,989 90,791 39,656 -------- -------- -------- Deferred: Federal 2,680 (15,359) 7,722 State and local 2,060 (2,240) (489) Foreign 218 (308) - -------- -------- -------- 4,958 (17,907) 7,233 -------- -------- -------- Provision for income taxes $96,947 $72,884 $46,889 ======== ======== ======== The foreign and domestic components of income before provision for income taxes were as follows: Year ended December 31, 1998 1997 1996 ----------------------- --------- -------- --------- (In thousands) United States $243,790 $192,482 $125,650 Canada 8,199 1,815 2,378 Other (178) 312 (265) -------- -------- -------- Income before provision for income taxes $251,811 $194,609 $127,763 ======== ======== ======== 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, 1998 1997 1996 ----------------------- --------- -------- --------- (In thousands) Provision for Federal income taxes at the statutory rate $88,134 $68,113 $44,717 State and local income taxes, net of federal benefit 7,241 5,385 2,108 Amortization of goodwill 950 - - Amortization of excess of net assets acquired over cost (537) (645) (645) Other items, net 1,159 31 709 -------- -------- -------- Provision for income taxes $96,947 $72,884 $46,889 ======== ======== ======== -35- 36 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) The Company has not provided for U.S. Federal and foreign withholding taxes on $7,668,000 of foreign subsidiaries' undistributed earnings as of December 31, 1998. Such earnings are intended to be reinvested indefinitely. The following is a summary of the significant components of the Company's deferred tax assets and liabilities: Year ended December 31, 1998 1997 ----------------------- -------- --------- (In thousands) Deferred tax assets: Nondeductible accruals and allowances $31,299 $23,587 Depreciation and amortization 890 561 Other (net) 2,215 2,286 -------- -------- Net deferred tax asset $34,404 $26,434 ======== ======== NOTE 12. COMMON STOCK On May 6, 1998 and July 30, 1996, the Company's Board of Directors authorized two-for-one stock splits of the Company's common stock in the form of a 100% stock dividend for shareholders of record as of June 4, 1998 and September 12, 1996, respectively. In connection with the stock splits, the Board of Directors approved increases in the number of shares authorized to 200,000,000. On June 25, 1998 and October 2, 1996, a total of 50,497,911 and 26,744,580 shares, respectively, of common stock were issued in connection with these splits. Under each stock split, the stated par value of each share was not changed from $0.01. The issuance of authorized but unissued shares resulted in the transfer of $549,000 in 1998 and $267,000 in 1996 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 both stock splits. In 1995 and 1997, the Board of Directors authorized two separate repurchase programs under which up to $100,000,000 of the Company's common stock was to be repurchased in open market transactions. Under these programs, 10,137,941 shares have been acquired at a cost of $200,000,000. In 1998, the Board of Directors authorized an additional program to repurchase the Company's common stock from time to time in open market transactions not to exceed $100,000,000 in aggregate price. This program commenced upon the full utilization of the previous buy-back programs and has no time limit. As of December 31, 1998, 1,715,959 shares had been acquired at a cost of $32,123,000. -36- 37 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 13. STATEMENT OF CASH FLOWS Year ended December 31, 1998 1997 1996 ----------------------- --------- -------- --------- (In thousands) Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 6,015 $ 3,941 $ 3,207 Income taxes 75,650 96,251 32,110 Supplemental disclosures of non-cash investing and financing activities: Acquisition of trademark - 6,107 - Tax benefits related to stock options 5,846 8,067 5,157 Detail of acquisitions: Fair value of assets acquired $537,335 - - Liabilities assumed (318,985) - - Common stock issued (97,344) - - -------- -------- -------- Net cash paid for acquisitions 121,006 - - Cash acquired in acquisitions 6,537 - - -------- -------- -------- Cash paid for acquisitions $127,543 - - ======== ======== ======== NOTE 14. STOCK OPTIONS Under two stock option plans, the Company may grant stock options and other awards from time to time to key employees, officers, directors, advisors and independent consultants to the Company or to any of its subsidiaries. In general, options become exercisable over a five-year period from the grant date and expire 10 years after the date of grant. In certain cases for non- employee directors, options become exercisable six months after the grant date and expire 10 years after date of grant. Shares available for future option grants at December 31, 1998, totaled 165,000. The following table summarizes information about stock option transactions (shares in thousands): 1998 1997 1996 ---------------- --------------- --------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ------ ------ ------ ------ ------ Outstanding at beginning of year 9,848 $14.44 8,218 $9.09 6,101 $5.35 Granted 2,432 22.98 3,434 23.52 4,332 12.27 Exercised (1,049) 9.03 (1,766) 7.14 (2,063) 4.77 Cancelled (295) 19.13 (38) 10.73 (152) 7.46 ------ ------ ------ ------ ------ ------ Outstanding at December 31 10,936 $16.73 9,848 $14.44 8,218 $9.09 ====== ====== ====== ====== ====== ====== -37- 38 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) The following table summarizes information about stock options outstanding at December 31, 1998 (shares in thousands): Outstanding Exercisable --------------------------------- ------------------- Weighted Average Remaining Weighted Weighted Years of Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices of Options Life Price of Options Price ---------------- --------------------------------- ------------------- $0.20 to $10 2,179 5.0 $5.72 1,345 $5.05 $10 to $20 4,505 9.4 $18.56 919 $18.21 $20 to $30 4,192 8.9 $24.56 774 $24.12 $30 to $40 60 9.5 $33.69 - - --------------------------------- ------------------- In total 10,936 7.9 $16.73 3,038 $12.08 ================================= =================== Pursuant to a provision in FASB Statement 123, "Accounting for Stock-Based Compensation," the Company has elected to continue using the intrinsic-value method of accounting for stock-based awards granted to employees in accordance with APB Opinion 25, "Accounting for Stock Issued to Employees." Accordingly, the Company has only recognized compensation expense for its stock-based awards to employees for options granted at below-market prices. The following table reflects pro forma net income and earnings per share had the Company elected to adopt the fair value approach of SFAS 123: Year ended December 31, 1998 1997 1996 ----------------------- --------- -------- --------- (In thousands) Net income (in thousands) As reported $154,864 $121,725 $80,874 Pro forma $144,708 $116,120 $79,074 Basic earnings per share As reported $1.52 $1.17 $0.77 Pro forma $1.42 $1.12 $0.76 Diluted earnings per share As reported $1.47 $1.13 $0.75 Pro forma $1.38 $1.08 $0.74 These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. -38- 39 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) The estimated fair value of each option granted included in the pro forma results is calculated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: no dividends paid for all years; expected volatility of 40.1%, 34.7% and 38.9%; risk-free interest rates of 5.12%, 6.04% and 6.20%; and expected lives of 3.6, 3.4 and 3.0 years. The weighted average fair values of options at their grant date during 1998, 1997 and 1996, where the exercise price equaled the market price on the grant date, were $9.65, $7.45 and $4.00, respectively. The weighted average fair values of options at their grant date during 1998, 1997 and 1996, where the exercise price was less than the market price on the grant date, were $21.05, $17.86, and $4.23, respectively. NOTE 15. UNAUDITED CONSOLIDATED FINANCIAL INFORMATION Unaudited interim consolidated financial information for the two years ended December 31, 1998 is summarized as follows: (In thousands except per share data) First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- 1998 Net sales $380,151 $305,361 $495,728 $488,192 Total revenues 383,774 308,554 500,318 492,583 Gross profit 131,213 107,468 175,593 170,289 Operating income 64,019 41,062 97,251 59,523 Net income 38,610 25,038 59,098 32,118 Basic earnings per share $0.38 $0.25 $0.59 $0.31 Diluted earnings per share $0.37 $0.24 $0.57 $0.30 1997 Net sales $317,990 $262,988 $445,972 $345,508 Total revenues 321,455 266,289 450,508 349,219 Gross profit 106,571 87,747 147,201 105,803 Operating income 47,475 31,115 79,383 38,664 Net income 29,540 19,280 48,938 23,967 Basic earnings per share $0.28 $0.19 $0.47 $0.23 Diluted earnings per share $0.27 $0.18 $0.45 $0.22 NOTE 16. EMPLOYEE BENEFIT PLAN The Company maintains the Jones Apparel Group, Inc. Retirement Plan (the "Plan") under Section 401(k) of the Internal Revenue Code. Full-time employees not covered by a collective bargaining agreement and meeting certain other requirements are eligible to participate in the Plan. Under the Plan, employees may elect to have up to 10% of their salary deferred and deposited with a qualified trustee, who in turn invests the money in a variety of investment vehicles as selected by each employee. -39- 40 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) From January 1, 1995 through March 31, 1996, the Company matched 30% of each participant's contributions with the Company's contribution limited to a maximum of 1.8% of the employee's total compensation for employees earnings less than $150,000 per year. For employees earning over $150,000 per year, the Company matched 25% of each participant's contributions with the Company's contribution limited to a maximum of 1% of the employee's total compensation. On April 1, 1996, the Company matching contribution rates were increased to 50% and 3.0% of total compensation, respectively, for employees earning up to $150,000 per year and 35% and 2.1% of total compensation, respectively, for employees earning over $150,000 per year. Contributions and salary deferrals are subject to limitations imposed by the Internal Revenue Code. The Company may, at its sole discretion, contribute additional amounts to all employees on a pro rata basis. All employee contributions into the Plan are 100% vested, while the Company's matching contributions vest over a five-year period. The Company contributed approximately $1,521,000, $1,241,000 and $801,000 to the Plan during the years ended December 31, 1998, 1997 and 1996, respectively. NOTE 18. SUPPLEMENTAL PRO FORMA CONDENSED FINANCIAL INFORMATION On January 1, 1999, Jones Apparel Group, Inc. consummated a corporate reorganization under which two new wholly owned subsidiaries named Jones Apparel Group USA, Inc. ("Jones USA") and Jones Apparel Group Holdings, Inc. ("Jones Holdings") were created. On that date, the operating assets of Jones Apparel Group, Inc. were transferred to Jones USA and Jones USA assumed the role of obligor of the Senior Notes due 2001 (which were issued on October 2, 1998 in conjunction with the acquisition of Sun Apparel, Inc.) with Jones Apparel Group, Inc. remaining and Jones Holdings becoming co-obligors of the Notes. The following condensed financial information represents, on a pro forma basis, the results of Jones USA had the reorganization occurred on January 1, 1996 (all amounts in thousands). Separate pro forma financial statements and other disclosures concerning Jones USA and Jones Holdings are not presented as such information is not considered material to the holders of the Senior Notes. Year ended December 31, 1998 1997 1996 ----------------------- --------- -------- --------- Current assets $506,182 $365,020 $331,104 Noncurrent assets 145,293 95,349 58,962 Current liabilities 238,170 256,605 199,043 Noncurrent liabilities 413,476 28,094 12,420 Excess of net assets acquired over cost - 1,536 3,379 For the Year ended December 31, 1998 1997 1996 ------------------------------- ---------- ---------- --------- Total revenues $1,426,427 $1,261,159 $921,500 Gross profit 456,954 371,521 244,302 Operating income 160,987 112,946 56,820 Net income 80,254 61,358 30,616 -40- 41 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 19. SUBSEQUENT EVENTS On March 2, 1999, the Company announced that it had entered into a definitive agreement to acquire 100% of the common stock of Nine West Group Inc. ("Nine West") in a merger transaction. Nine West is a leading designer, developer and marketer of quality, fashionable footwear and accessories. Nine West markets its products under internationally recognized brands, including Nine West, Easy Spirit, Enzo Angiolini, Amalfi, Bandolino, and cK/Calvin Klein (under license). In addition, Nine West markets shoes under the Company's Evan-Picone label under license. The Company will exchange approximately one-half of a share of its common stock and $13 in cash for each Nine West Group common share. Based on a value of the Company's common stock of $26 per share, the Company will pay approximately $885 million for the Nine West common shares. Including assumed debt, the transaction has a total value of approximately $1.4 billion. As of March 2, 1999, Nine West had approximately 34 million common shares outstanding. The acquisition will be accounted for under the purchase method of accounting. The transaction is expected to close by the end of June 1999. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. -41- 42 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 71 Chairman, Chief Executive Officer and Director Jackwyn Nemerov 47 President and Director Irwin Samelman 68 Executive Vice President, Marketing and Director Wesley R. Card 51 Chief Financial Officer Patrick M. Farrell 49 Vice President and Corporate Controller Geraldine Stutz 70 Director Howard Gittis 65 Director Eric A. Rothfeld 47 President and Chief Executive Officer of Sun Apparel, Inc. and Director Mark J. Schwartz 41 Director Each director who is not a full-time employee of the Company receives an annual grant of options to purchase 2,000 shares of the Company's common stock at an exercise price of $1.00 per share. Each option expires on the tenth anniversary of its date of grant, and will be exercisable, in whole or in part, commencing six months from the date of grant and thereafter during the exercise period. Officers are appointed by the Board of Directors. The Board of Directors has appointed an Audit Committee consisting of Ms. Stutz, Mr. Gittis and Mr. Schwartz. 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, Mr. Gittis and Mr. Schwartz to determine cash and other incentive compensation to be paid to the Company's executive officers. Mr. Kimmel founded the Jones Apparel Division of W.R. Grace & Co. in 1970. Mr. Kimmel has served as Chairman and Chief Executive Officer 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. -42- 43 Ms. Nemerov was appointed President in January 1997. She joined the Company in 1985 and served as President of the Company's casual sportswear divisions and the Lauren by Ralph Lauren division. Prior to joining Jones, Ms. Nemerov was President of the Gloria Vanderbilt division of Murjani, Inc. from 1980 through 1985. Mr. Samelman has been Executive Vice President, Marketing of the Company since 1991. In addition, from 1987 to 1991, Mr. Samelman provided marketing consulting services to the Company through Samelman Associates, Inc., a private consulting company controlled by him. Prior thereto, Mr. Samelman was Regional Marketing Manager of Russ Togs, Inc. and Vice President of Villager, Inc. Mr. Card joined the Company in 1990. Prior to joining Jones, Mr. Card held the positions of Executive Vice President and Chief Financial Officer of Carolyne Roehm, Inc., and Corporate Vice President, Controller and Assistant Secretary of Warnaco, Inc. Mr. Farrell was appointed Vice President and Corporate Controller in November 1997. He joined the Company in 1994 as Director of Internal Audit and served as Vice President, Finance and Administration of Retail Operations of the Company since 1995. Prior to joining the Company, Mr. Farrell was Director of Internal Audit for Crystal Brands, Inc. Ms. Stutz has been a principal partner of 959 Group, a fashion and marketing service since 1998. From 1993 until 1998, Ms. Stutz was a principal partner of Panache Productions, a fashion and marketing service. Prior to 1993, 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' principal occupation during the past five years has been Vice Chairman and Chief Administrative Officer and a director of MacAndrews & Forbes Holdings Inc., a diversified holding company. In addition, Mr. Gittis is a director of Golden State Bancorp, Inc., Golden State Holdings, Inc., Loral Space and Communications Ltd., M&F Worldwide Corp., Panavision, Inc., Revlon, Inc., Revlon Consumer Products Corporation, REV Holdings, Inc., Rutherford-Moran Oil Corporation and Sunbeam Corporation. Mr. Rothfeld serves as President and Chief Executive Officer of Sun Apparel, Inc, a wholly-owned subsidiary of the Company acquired in October 1998. Mr. Rothfeld served as President of Sun from 1986 to September 1997, and as Chairman and Chief Executive Officer of Sun from September 1997 until its acquisition by the Company. Mr. Schwartz is President and Chief Executive Officer of Palladin Capital Group, Inc., a New York-based private merchant banking firm he founded in 1997. From 1994 to 1997, he was a principal, and most recently President, of Rosecliff Inc., also a private merchant banking firm. He is currently a Director of Platinum Entertainment, Inc., a full-service recorded music company, and Balance Pharmaceuticals, Inc. During the past five years Mr. Schwartz has managed acquisitions, and has served as the chairman or a director, of various public and private corporations. From 1985 to 1994, Mr. Schwartz was a member of the Investment Banking Division of Merrill Lynch & Co. Mr. Schwartz will become the Chairman and Chief Executive Officer of Nine West Group Inc. upon completion of its acquisition by the Company, which is anticipated to occur by the end of June 1999. -43- 44 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) During the quarter ended December 31, 1998, a Current Report on Form 8-K, dated October 2, 1998, was filed with the Commission by the Company announcing the consummation of the acquisition of Sun Apparel, Inc. -44- 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment to the Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 25, 1999 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 25, 1999 - ----------------- (Chief Executive Officer) (Sidney Kimmel) /s/ Jackwyn Nemerov President and Director March 25, 1999 - ------------------- (Jackwyn Nemerov) /s/ Wesley R. Card Chief Financial Officer March 25, 1999 - ------------------ (Principal Financial Officer) (Wesley R. Card) /s/ Patrick M. Farrell Vice President and March 25, 1999 - ---------------------- Corporate Controller (Patrick M. Farrell) (Principal Accounting Officer) /s/ Irwin Samelman Executive Vice President, March 25, 1999 - ------------------ Marketing and Director (Irwin Samelman) Director - ------------------- (Geraldine Stutz) /s/ Howard Gittis Director March 25, 1999 - ----------------- (Howard Gittis) /s/ Eric A. Rothfeld Director March 25, 1999 - -------------------- (Eric A. Rothfeld) /s/ Mark J. Schwartz Director March 25, 1999 - -------------------- (Mark J. Schwartz) -45- 46 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 - ------------ ------- ---------------------- (1) 2.1 2.1 Agreement and Plan of Merger dated September 10, 1998, by and among the Company, SAI Acquisition Corp., Sun Apparel, Inc. and the selling shareholders. (2) 2.2 2.2 Agreement and Plan of Merger dated as of March 1, 1999 among the Company, Jill Acquisition Sub Inc. and Nine West Group Inc. * 3.1 Articles of Incorporation, as amended (3) 3.3 3.3 By-Laws (4) 3.4 3.4 Amendment to By-Laws (5) 4.1 4.1 Exchange and Registration Rights Agreement dated October 2, 1998, by and among the Company and Chase Securities Inc., Merrill Lynch, Pierce Fenner & Smith Incorporated and Bear, Stearns & Co. Inc. (6) 4.2 4.2 Indenture dated as of October 2, 1998, by and between the Company and The Chase Manhattan Bank, as trustee (7) 4.3 4.3 Supplemental Indenture dated as of January 1, 1999, by and between Jones Apparel Group, Inc., Jones Apparel Group Holdings, Inc., Jones Apparel Group USA, Inc. and The Chase Manhattan Bank, as trustee (3) 10.5 10.1 Form of 1991 Stock Option Plan (3) 10.7 10.2 Employment and Stock Option Agreements between the Registrant and Herbert J. Goodfriend (8) 10.29 10.3 Agreement between the Registrant and Herbert J. Goodfriend with respect to consulting services following termination of employment (9) 10.33 10.4 Form of 1996 Stock Option Plan (9) 10.40 10.5 License Agreement between the Registrant and Polo Ralph Lauren, L.P., dated October 18, 1995# (9) 10.41 10.6 Design Services Agreement between the Registrant and Polo Ralph Lauren, L.P., dated October 18, 1995# -46- 47 Incorporated by Reference Exhibit to Exhibit Nos. Description of Exhibit - ------------ ------- ---------------------- (10) 10.47 10.7 Letter Agreement between the Registrant and First Union National Bank (10) 10.48 10.8 Letter Agreement between the Registrant and CoreStates Bank (10) 10.49 10.9 Letter Agreement between the Registrant and BankBoston (10) 10.50 10.10 Money Market Line Commercial Promissory Note between the Registrant and BankBoston (10) 10.51 10.11 Letter Agreement between the Registrant and The Chase Manhattan Bank (10) 10.52 10.12 Term Note and Unconditional Guaranty with First Union National Bank (6) 10.2 10.13 Amended and Restated 364-Day Credit Agreement dated as of October 15, 1998, by and among the Company, as Borrower, the Lenders referred to therein and First Union National Bank, as Administrative Agent (6) 10.3 10.14 Amended and Restated Three-Year Credit Agreement dated as of October 15, 1998, by and among the Company, as Borrower, the Lenders referred to therein and First Union National Bank, as Administrative Agent (7) 10.2 10.15 Master Joinder Agreement dated as of January 1,1999 to the Credit Agreements referred to therein, by an among the Company, Jones Apparel Group USA, Inc. and Jones Apparel Group Holdings, Inc. as credit parties, and First Union National Bank, as Administrative Agent (11) 10.53 10.16 License Agreement dated as of August 1, 1995 by and between PRL USA, Inc., as assignee of Polo Ralph Lauren Corporation, successor to Polo Ralph Lauren, L.P., and Sun Apparel, Inc., as amended to date (11) 10.54 10.17 Design Services Agreement dated as of August 1, 1995 by and between Polo Ralph Lauren Corporation, successor to Polo Ralph Lauren, L.P., and Sun Apparel, Inc., as amended to date (1) 10.1 10.18 Employment Agreement dated September 10, 1998, by and between SAI Acquisition Corp. and Eric A. Rothfeld * 10.19 License Agreement between the Registrant and Polo Ralph Lauren, L.P., dated May 11, 1998# * 10.20 Design Services Agreement between the Registrant and Polo Ralph Lauren, L.P., dated May 11, 1998# * 11 Computation of Earnings per Share * 12 Computation of Ratio of Earnings to Fixed Charges * 21 List of Subsidiaries * 23 Consent of BDO Seidman, LLP * 27 Financial Data Schedule (12) * 27.1 Restated Financial Data Schedules for the Years ended December 31, 1997 and 1996 (12) * 27.2 Restated Financial Data Schedules for the Three Months ended March 30, 1997, the Six Months ended June 29, 1997 and the Nine Months ended September 28, 1997 (12) -47- 48 Incorporated by Reference Exhibit to Exhibit Nos. Description of Exhibit - ------------ ------- ---------------------- * 27.3 Restated Financial Data Schedule for the Three Months ended March 29, 1998 (12) ____________________ * 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 Current Report on Form 8-K dated September 24, 1998. (2) Incorporated by reference to the Company's Current Report on Form 8-K dated March 2, 1999. (3) Incorporated by Reference to the Company's Registration Statement on Form S-1 (file No. 33-39742). (4) Incorporated by Reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (5) Incorporated by reference to the Company's Form S-4, filed on December 9, 1998. (6) Incorporated by reference to Shelf Registration Statement on Form S-3, filed on October 28, 1998 (Registration No. 333-66223). (7) Incorporated by reference to Form S-4/A, filed on January 25, 1999 (Registration No. 333-68587). (8) Incorporated by Reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (9) Incorporated by Reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (10) Incorporated by Reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (11) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the nine months ended September 27, 1998. (12) Submitted as an exhibit only in the electronic format of this Annual Report on Form 10-K submitted to the Securities and Exchange Commission. -48- 49 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Jones Apparel Group, Inc. New York, New York The audits referred to in our dated February 5, 1999, except as to Note 19, which is as of March 2, 1999 relating to the consolidated financial statements of Jones Apparel Group, Inc. and subsidiaries which is contained in Item 8 of Form 10-K, included the audits of the financial statement schedule listed in the accompanying index for each of the three years ended December 31, 1998. 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 5, 1999, except as to Note 19, which is as of March 2, 1999 -49- 50 SCHEDULE II JONES APPAREL GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (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, 1996: Allowance for doubtful accounts $2,257 $(800) $ - $(806) $2,263 For the year ended December 31, 1997: Allowance for doubtful accounts $2,263 $(1,870) $ - $2,374 $2,767 For the year ended December 31, 1998: Allowance for doubtful accounts $2,767 $(188) $ - $724 $3,303
Doubtful accounts written off (recovered) against accounts receivable. -50- EX-3.(I) 2 Exhibit 3.(i). 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 the 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: TWO HUNDRED ONE MILLION (201,000,000) consisting of (i) Two Hundred Million (200,000,000) 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; 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. 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. EX-10.19 3 EXHIBIT 10.19 (Jones - License) LICENSE AGREEMENT, dated as of May 11, 1998 by and between PRL USA, INC. ("Licensor"), with a place of business at Suite 201, Wilmington, Delaware 19803, 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 PRL USA, Inc., a corporation 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 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 Licensors Offer in writing. If Licensee rejects Licensors Offer or if Licensee initially accepts Licensors Offer but thereafter is unable to satisfy the Offer Terms, then Licensor shall be free to make a substantially similar Licensors 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) except as may hereafter be expressly agreed upon in a writing signed by both Licensor and Licensee, 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 -2- manufacture or cause to be manufactured the Licensed Products outside of the Territory, but solely for purposes of sale within the Territory pursuant to the terms of this Agreement. 2.3. Licensee shall not have the right to use Licensee's name on or in connection with the Licensed Products, except with the prior approval by Licensor of the use and placement of Licensee's name. Licensee shall, at the option of Licensor, include on its business materials and/or the Licensed Products an indication of the relationship of the parties hereto in a form approved by Licensor. 2.4. Licensee shall not use or permit or authorize another person or entity in its control to use the words "Polo" or "Ralph Lauren" as part of a corporate name or tradename without the express written consent of Licensor and Licensee shall not permit or authorize use of the Trademark in such a way so as to give the impression that the name "Ralph Lauren," or the Trademark, or any modifications thereof, are the property of Licensee. 2.5. In the event that (i) Sidney Kimmel is no longer the Chairman and Chief Executive Officer of 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" trademark(s) or label(s); in such event Licensee hereby accepts the exclusive license to use such "Ralph Lauren" trademark(s) 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 labeled 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 -3- 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 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 Corporation (the "Design Company"), which provides for the furnishing to Licensee by the Design Company 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 Company's design shall nonetheless be subject to royalty payments pursuant to paragraph 6 hereof. -4- 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 Licensors 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 Licensors or the Design Company'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 discount off the regular wholesale price equal to the discount given by Licensee to Licensor with respect to "Lauren" merchandise pursuant to paragraph 4 of the letter agreement between Licensee and Licensor dated November 17, 1997 (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) at such other locations as Licensor may hereafter approve. 3.4. At the request of Licensor, Licensee shall cause to be placed on all Licensed Products appropriate notice designating Licensor or the Design Company 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 -5- promote or seek customers for the Licensed Products outside of the Territory and Licensee shall not establish a branch, wholly owned subsidiary, distribution or warehouse with inventories of Licensed Products outside of the Territory. 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 -6- or avoid any misuse of the Trademark by any of its customers, contractors or other resources. 4.6. During each year of this Agreement, Licensee shall expend for the advertising of Licensed Products, which shall consist of cooperative advertising and national institutional and media 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] 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 -7- Licensed Products within such retail stores. 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 [OMITTED; MATERIAL FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]. 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, and be in accordance with paragraph 4 hereof. 5.2. All uses of the Trademark by Licensee in advertising, promotions, labels and packaging shall include at Licensees 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 -8- Agreement. 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 Company, whether created by Licensor or the Design Company, 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 Company, 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: [OMITTED; MATERIAL FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] 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 2002, 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 [OMITTED; MATERIAL FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]. For the purposes of this Agreement, the term "year" shall mean a period of twelve -9- (12) months commencing on each January I during the term of this Agreement; provided, however, that the "first year", or "Year V shall mean the period commencing on the date hereof and expiring on December 31, 1999. 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. 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 any outlet stores owned by Licensee with Licensor's prior approval ("Licensee Outlet Stores") shall be calculated on the basis of the actual invoice price to such 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 [OMITTED; MATERIAL FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] or more -10- 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. 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 Company. Licensee shall not have the right to set-off, compensate or make any deduction from such royalty payments for any reason whatsoever. 6.5. All payments of royalties due to Licensor shall, unless Licensor shall otherwise direct by written notice to Licensee, be made by wire transfer on the date due, which wire transfer shall be directed to PRL International, Inc., the general partner of Licensor, as follows: Chase Manhattan Bank Delaware 1201 Market Street, Wilmington, Delaware, 19801-1167, ABA#031100267 Account Name and Number: PRL USA, Inc.: 6301-225177-500 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 -11- 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 Licensees 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. 8. Term. 8.1. The term of this Agreement shall commence as of the date hereof and shall terminate on December 31, 2003; 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, 2002 through December 31, 2002, Licensee shall have the option, upon providing notice to Licensor on or before April 1, 2003, to renew this Agreement for an additional three (3) year period (the "Renewal Term") so as to expire on December 31, 2006, 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, 2002 to December 31, 2002 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, 2006, of its desire to extend the term hereof beyond December 31, 2006. In the event Licensee does not achieve the Minimum Renewal Volume as hereinabove provided, Licensee may nevertheless request an extension of the term beyond December 31, 2003, 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 -12- 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. 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 Company 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 Company; (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 -13- 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 Licensee which results in ownership inconsistent with the terms of paragraph 9.3 hereof; (x) An event of default occurs under the Design Agreement, or any other license agreement entered into between Licensor (or its predecessor-in- interest or successors) and Licensee or design agreement between Licensee and the Design Company (or its predecessor-in-interest or successors); (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 -14- 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: (i) Licensor shall notify Licensee of its or its designee's 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 License 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. 0. B. price of the Licensed Products together with customs, duties, and brokerage, freight and insurance. -15- (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 -16- 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 Company 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 Company or their affiliates, arising from any alleged goodwill created by Licensee for the benefit of any or all of the said parties or from the alleged creation or increase of a market for Licensed Products. 11.2. Licensee acknowledges and admits that there would be no adequate remedy at law for its failure (except as otherwise provided in paragraph 10 hereof) to cease the manufacture or sale of the Licensed Products covered by this Agreement at the termination of the License, and Licensee agrees that in the event of such failure Licensor shall be entitled to equitable relief by the way of temporary and permanent injunction and such other and further relief as any court with jurisdiction may deem just and proper. 12. Showroom. Licensee 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 sell such Licensed Products to Licensor's employees for their personal use (and not for resale) 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 -17- 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 Company, PRL USA Holdings, Inc. and Ralph Lauren, individually, and their assignees, directors, officers, servants, agents and employees (collectively, "Indemnified Parties"), 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 each of the Indemnified Parties 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 each of the Indemnified Parties. 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 -18- 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 Company 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 -19- Telecopier: (212) 921-5370 b) if to Licensor, addressed as follows: PRL USA, Inc. 103 Foulk Road Suite 201 Wilmington, Delaware 19803 Telecopier: 302.778.1008 Attention: President with a copy to: Victor Cohen, Esq. Eighth Floor 650 Madison Avenue New York, New York 10022 Telecopier: 212-318-7183 Anyone entitled to notice hereunder may change the address to which notices or other communications are to be sent to it by notice given in the manner contemplated hereby. 17.2. Nothing herein contained shall be construed to place the parties in the relationship of partners or joint venturers, and no party hereto shall have any power to obligate or bind any other party hereto in any manner whatsoever, except as otherwise provided 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 Company (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 -20- 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 standards set forth herein and with the Operating Guidelines annexed hereto as Schedule E, as such Operating Guidelines may be amended from time-to-time, 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 as Schedule F 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. 17.7. 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 -21- 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. PRL USA, INC. By: /s/ JONES APPAREL GROUP, INC. By: /s/ Jackwyn Nemerov -22- Schedule A LICENSED PRODUCTS 1. Licensed Products shall mean the following women's "better" apparel products bearing the Trademark: dresses, 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. 2. 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, or, subject to paragraph 3 of this Schedule A, other womenswear line, notwithstanding the similarity of any such products to Licensed Products. 3. 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" women's 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. Notwithstanding anything to the contrary contained herein, the restriction on Licensor set forth in this paragraph 3 with respect to a Competing Line shall not apply to a line of "better" womenswear currently sold under the "Lauren" mark (or to a successor line which may hereafter be sold under a different trademark). 4. Licensor shall phase out its use in the Territory of the trademark "Ralph/ Ralph Lauren" for womenswear and thereafter during the term hereof shall not in the Territory use or license to any third party the right to use the trademark "Ralph/Ralph Lauren" for women's dresses, shirts, blouses, skirts, jackets, suits, sweaters, pants, vests, coats, outerwear or hats. 5. Licensee shall not sell or market Licensed Products in "bridge" or "collection" areas. -23- Schedule B TRADEMARK "RALPH/RALPH LAUREN" -24- Schedule C Restricted Individuals and Entities [OMITTED; MATERIAL FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] -25- Schedule D Approved Customers [OMITTED; MATERIAL FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] -26- Schedule E OPERATING GUIDELINES Polo Ralph Lauren (the "Company") is dedicated to conducting its operations throughout the world on principles of ethical business practice and recognition of the dignity of workers. We expect our business partners to respect and adhere to the same standards in the operation of their business, and we will utilize these criteria to evaluate our relationships with customers and suppliers. WAGES / BENEFITS / WORKING HOURS. Our business partners must comply with all laws regulating local wages, work hours and benefits. Wage and benefit policies must be consistent with prevailing national standards, and also be acceptable under a broader international understanding as to the basic needs of workers and their families. We will not work with companies whose wage structure violates local law or prevailing industry practice. CHILD LABOR- Our business partners must not use child labor, defined as school age children. Our business partners will not employ workers under the age of 14. This provision extends to all partner facilities. HEALTH & SAFETY. Our business partners must ensure that their workers are provided a safe and healthy work environment, and are not subject to unsanitary or hazardous conditions. FREEDOM OF ASSOCIATION. Our business partners should respect the legal rights of employees to freely and without harassment participate in worker organizations of their choice. PRISON OR FORCED LABOR- Our business partners will not work with or arrange for purchase of any materials from business partners who utilize prison or forced labor in any stage of the manufacture of our products. DISCIPLINARY PRACTICES. Our business partners will not employ or conduct any business activity with partners who employ any form of physical or mental coercion or punishment against workers. DISCRIMINATION. Our business partners will not practice nor do business with business partners who practice any form of improper discrimination in hiring and employment, including on the basis of age, race, color, gender, or religion. ENVIRONMENT. Our business partners must embrace a fundamental concern for environmental protection and conduct their operations consistent with both local and internationally recognized environmental practices. LEGAL REQUIREMENTS. Our business relationship must be built on a mutual respect for and adherence to legal requirements. Our business partners will observe both local and applicable international standards. ETHICAL STANDARDS. We intend to conduct all our business in a manner consistent with the highest ethical standards, and we will seek and utilize partners who will do likewise, as this contributes directly to our corporate reputation and the collective success of our organization and selected business partners. SUBCONTRACTING. Our business partners may not subcontract all or any part of the work on our products without our express written consent, which will not be given unless each subcontractor meets all of the criteria set forth herein. CONFLICTS OF INTEREST. Our business partners may not give Company employees a gift of value in excess of US$25.00, and may not bribe foreign officials to benefit the Company or its business. IMPLEMENTATION. We will apply these criteria in all business partner determinations, and will continue to implement these policies in the conduct of all activities. This will include our business partners sharing information on production facilities and procedures, with the objective of improving our collective service to customers in a responsible manner. Failure by a business partner to meet these standards, will result in our taking appropriate actions, up to and including cancellation of existing orders. -27- Schedule F TRADEMARK AND DESIGN PROTECTION AGREEMENT Re: Orders for Polo/Ralph Lauren Merchandise TO _______________________________ Our company may be entering into Purchase Order Contracts for samples and various products with you in the near future and would like to take this opportunity to call to your attention the basis upon which we will enter such agreements. Pursuant to our agreements we may be providing you with certain designs and art work and requisitions for finished products (including samples), packaging, and business materials, among other things. By accepting our orders or contracts, your company will have agreed that it has only a limited, non- transferable right to use any trademarks and/or designs and/or art work (including specifically, colors, shapes, and textures) of Polo Ralph Lauren Corporation and its affiliates ("Polo") as necessary for merchandise shipped or services rendered under our orders or contracts. You agree that such trademarks, designs, logos and art work shall not be used by your firm at any time, whether or not they are used in conjunction with the Ralph Lauren name or trademarks, for any purpose other than that for which they were placed in your trust, i.e. in fulfillment of specific purchase orders, and you shall exercise due diligence so that they are not made available to third parties. No rights shall remain in your firm or its employees or agents as to such trademarks, logos, art work, or designs of Polo and its affiliates and you agree that to the extent your firm may acquire any rights to said marks, logos, art work or designs, such rights shall revert to Polo or its affiliates, as the case may be, without any further act of the parties hereunder. By accepting our orders, you hereby agree to indemnify Polo and its affiliates for any losses, costs or expenses (of any kind whatsoever) which may arise as a result, directly or indirectly, of a breach of this Agreement. Please place the acknowledgment signature of two (2) of your executive officers in the space provided below and return one signed copy of this letter to the undersigned as soon as possible. Thank you for your cooperation. Sincerely yours, Polo Ralph Lauren, L.P. By: Polo Ralph Lauren Corporation, General Partner By: We have read and accept and agree to the above in consideration of orders from Polo Ralph Lauren, L.P. CONTRACTOR NAME: _______________________ By: (1) _________________________________ and (2) ___________________________ Name: Name: Date: -28- EX-10.20 4 EXHIBIT 10.20 (Jones - Design) DESIGN SERVICES AGREEMENT dated as of May 11, 1998, by and between Polo Ralph Lauren Corporation (the "Design Company"), 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. PRL USA, INC., a Delaware corporation ("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 Company. The Company desires to obtain the services of the Design Company 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 Company to create and provide to the Company the designs for its line of Licensed Products. The Design Company 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 Company of designs for Licensed Products, which designs will be reviewed by the Design Company and which the Design Company may approve, disapprove or modify in its sole discretion, in accordance with the terms and conditions set forth herein. 1.2. The Design Company and the Company shall create each season, from the Design Company'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 Company shall confer on Design Concepts and shall make such modifications as are required to meet the Design Company's final approval, which final approval may be granted or withheld in the Design Company's sole discretion. 1.3. The Design Company may engage such employees, agents, and consultants operating under the Design Company'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 Company may (a) develop or modify and implement designs from the Design Concepts or other designs furnished by the Design Company 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 Company 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 Company 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 Company or such other entities. 1.7. All patents and copyrights on designs of the Licensed Products created or supplied by the Design Company shall be owned exclusively, and applied for, by the Design Company or its designee, at the Design Company's discretion and expense, and shall designate the Design Company 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 -2- 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 Company or any designs which are comparable and/or competitive with Licensed Products and which may be identified as Design Company designs. 2. Design Legends: Copyright Notice and License. 2.1. All designs, patterns, sketches, artwork, logos and other materials of Licensed Products and the use of such designs, artwork, sketches, logos and other materials created by the Design Company or the Design Studio, or, subject to paragraph 2.7 hereof, created by or for the Company and reviewed and approved by the Design Company, or developed by or for the Company from Design Concepts or subsequent design concepts furnished or approved by the Design Company (all of which shall hereinafter constitute Design Concepts), shall be the property of the Design Company 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 Company, 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 Company, are hereby assigned to and shall be the sole property of the Design Company. The Company shall cause to be placed on all Licensed Products appropriate notice designating the Design Company 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 Company prior to use thereof by the Company. 2.3. The Design Company 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 -3- Company. The License shall continue only for such period as this Agreement shall be effective. The Design Company 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 Company, 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 Company all documents and instruments necessary to perfect or evidence such reversion, (ii) refrain from further use of any of the Design Concepts and (iii) refrain from manufacturing, selling or distributing any products (whether or not they bear the Trademark) which are confusingly similar to or derived from the Licensed Products or Design Concepts. 2.4. Company shall not sublicense any of the rights granted hereunder without first obtaining the Design Company's prior written consent in connection therewith, which consent may be withheld by the Design Company in its sole discretion. 2.5. The Design Company 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 Company 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 Company 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 Company, 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 Company 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 -4- 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 Company, in which event the item may be sold by the Company without payment or compensation hereunder. 3.3. The Design Company 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 Company'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 Company, 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 be applicable to the manufacture, distribution, sale or promotion of Licensed Products. The Company shall advise the Design Company 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 Company. The Company shall make available to the Design Company, 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 Company each year during the term of this Agreement. The minimum compensation to the Design Company in connection with the manufacture and sale and importation and sale of Licensed Products for each year shall be as follows: -5- [OMITTED; MATERIAL FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] 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 [OMITTED; MATERIAL FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION], 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 License Agreement) shall be an amount equal to [OMITTED; MATERIAL FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]. 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 V shall mean the period commencing on the date hereof and expiring on December 31, 1999. 4.2. The Company shall pay to the Design Company 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, that no earned compensation shall be due in respect of sales by Company to Polo's outlet stores at the discount specified in paragraph 3.3 of the License Agreement. 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 Company 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 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 -6- 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 outlet stores owned by the Company shall be calculated on the basis of the actual invoice price to such 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 Company pursuant to paragraph 7 hereof, all sales to affiliates. 4.3. The Company shall reimburse the Design Company for all its travel and promotion expenses incurred by the Design Company or Polo in the performance of the Design Company's duties under this Agreement with the prior written approval of the Company. Amounts payable to the Design Company 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. 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 Company in accordance with paragraph 4.1 hereof. Such statements shall account separately for each different product category and shall include all aggregate -7- 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 Company 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 Company 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 Company 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 Company by an amount equal to three and one-half percent (3%%) 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 Company 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 Company. The Company shall not have the right to set-off, compensate or make any deduction from such compensation payments for any reason whatsoever. 4.7. All accounting statements and payments of compensation due to PRLC shall, unless PRLC shall otherwise direct by written notice to Company, be made by wire transfer on the date due, which wire transfer shall be directed to Polo, as agent for PRLC, as follows: Chase Manhattan Bank Delaware 1201 Market Street, Wilmington, Delaware, 19801-1167, ABA#031100267 Account Name and Number: PRL USA, Inc.: 6301-225177-500 -8- 5. Death or Incapacity of Lauren. The Design Company shall perform its obligations hereunder notwithstanding any death or incapacity of Lauren and the Company shall accept the services of the Design Company. 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. 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 Company 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 Company 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 Company 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 Company 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 Company 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 Company, including without limitation, damages -9- 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 Company 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 Company 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 Company, Lauren, Polo, PRL USA Holdings, Inc. 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 Company, Lauren or Polo, or their affiliates, arising from any alleged goodwill created by the Company for the benefit of any or all of the said parties or from the alleged creation or increase of a market for Licensed Products. 7. Indemnity. 7.1. The Company shall indemnify and save and hold the Design Company, Polo, PRL USA Holdings, Inc. and Lauren, individually, and their directors, officers, servants, agents and employees, (collectively, "Indemnified Parties") 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 -10- 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 Indemnified Parties 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 Trademarks, or the Design Concepts furnished by the Design Company hereunder, in strict accordance with the terms and conditions of this Agreement and the License Agreement. 8. Disclosure. The Design Company 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 -11- 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 the Design Company addressed as follows: Polo Ralph Lauren Corporation 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 Company 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 -12- Polo, shall be deemed to have acquired any rights by reason of anything contained in this Agreement. 9.4. The Design Company 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 Company's rights, duties and obligations hereunder may be assigned by the Design Company 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 Company, which may be withheld in the Design Company'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 Company 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. 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 Company 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 Company. 9.9. In the event of a breach or threatened breach of this Agreement by the Company, the Design Company 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. -13- 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 CORPORATION By: /s/ Michael Newman JONES APPAREL GROUP, INC. By: /s/ Jackwyn L. Nemerov -14- EX-11 5 EXHIBIT 11 JONES APPAREL GROUP, INC. Computation of Basic and Diluted Earnings per Share (In thousands except per share amounts) For the Year Ended December 31, -------------------------------- 1998 1997 1996 -------- -------- ------- Basic Earnings per Share: - ------------------------- Net income........................... $154,864 $121,725 $80,874 ======== ======== ======= Weighted average number of shares outstanding.......................... 101,614 103,797 104,667 ======== ======== ======= Basic earnings per share............. $1.52 $1.17 $0.77 ======== ======== ======= Diluted Earnings per Share: - --------------------------- Net income........................... $154,864 $121,725 $80,874 ======== ======== ======= Weighted average number of shares outstanding.......................... 101,614 103,797 104,667 Assumed issuances under exercise of stock options..................... 3,514 4,013 2,636 -------- -------- ------- 105,128 107,810 107,303 ======== ======== ======= Diluted earnings per share........... $1.47 $1.13 $0.75 ======== ======== ======= Adjusted for 2-for-1 stock split effective June 25, 1998. EX-12 6 JONES APPAREL GROUP, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, ------------------------------------ 1998 1997 1996 -------- -------- -------- Income before income taxes........ $251,811 $194,609 $127,763 -------- -------- -------- Fixed charges Interest expense and amortization of financing costs............... 11,845 3,584 3,040 Portion of rent expense representing interest......... 9,116 7,379 6,290 -------- -------- -------- Total fixed charges excluding capitalized interest............ 20,961 10,963 9,330 Capitalized interest.............. 671 370 181 -------- -------- -------- Total fixed charges............... 21,632 11,333 9,511 -------- -------- -------- Income before income taxes and fixed charges................... $272,772 $205,572 $137,093 ======== ======== ======== Ratio of earnings to fixed charges................... 12.6 18.1 14.4 ======== ======== ======== EX-21 7 EXHIBIT 21 SUBSIDIARIES OF JONES APPAREL GROUP, INC. State or County Percentage of Voting Name of Incorporation Securities Owned * - --------------- ---------------- -------------------- Jones Apparel Group USA, Inc. Pennsylvania 100% Melru Corporation New Jersey 100% Jones Apparel Group Canada Inc. Canada 100% Jones Investment Co., Inc. Delaware 100% Jones Apparel Group Holdings, Inc. Delaware 100% Jones Holding Corporation Delaware 100% Jones Management Service Company Delaware 100% Jones Factor Company 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% Sun Apparel, Inc. (formerly Delaware 100% SAI acquisition Corp.) Sun Apparel, Inc. (Delaware) Delaware 100% Lone Star Selling Group, Inc. New York 100% RL Management, Inc. Delaware 100% Import Technology of Texas, Inc. Texas 100% Sun Apparel of Texas, Ltd. Texas 100% Maquilas Pami S.A. de C.V. Mexico 100% CNC West Division, S.A. de C.V. Mexico 100% * Directly or Indirectly EX-23 8 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 5, 1999, except as to Note 19, which is as of March 2, 1999 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, 1998. 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 25, 1999 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JONES APPAREL GROUP, INC. FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1998 DEC-31-1998 129,024 0 172,528 3,303 268,175 631,843 232,503 76,460 1,188,672 173,888 264,757 0 0 1,154 593,195 1,188,672 1,669,432 1,685,229 1,100,666 1,100,666 319,994 188 11,845 251,811 96,947 154,864 0 0 0 154,864 1.52 1.47 EX-27.1 10 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JONES APPAREL GROUP, INC. FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR YEAR DEC-31-1997 DEC-31-1996 DEC-31-1997 DEC-31-1996 40,134 30,085 0 0 94,514 114,941 2,767 2,263 255,055 214,437 440,771 389,830 126,123 94,823 44,189 33,127 580,767 488,109 110,202 95,860 0 0 0 0 0 0 545 536 435,087 376,193 580,767 488,109 1,372,458 1,021,042 1,387,471 1,034,078 940,149 717,250 940,149 717,250 250,685 186,572 1,870 800 3,584 3,040 194,609 127,763 72,884 46,889 121,725 80,874 0 0 0 0 0 0 121,725 80,874 1.17 0.77 1.13 0.75
EX-27.2 11 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JONES APPAREL GROUP, INC. FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-30-1997 JUN-29-1997 SEP-28-1997 20,529 30,010 12,315 0 0 0 189,986 108,116 214,827 3,757 3,533 3,757 221,032 274,067 277,003 462,817 452,848 543,386 100,324 108,140 116,032 35,740 38,567 41,379 563,946 568,693 665,729 140,119 124,619 181,273 0 0 0 0 0 0 0 0 0 538 541 543 408,685 421,149 462,658 563,946 568,693 665,729 317,990 580,978 1,026,950 321,455 587,744 1,038,252 214,884 393,426 696,733 214,884 393,426 696,733 59,096 115,729 183,547 1,556 1,783 2,009 362 629 1,710 47,113 77,960 156,262 17,573 29,141 58,504 29,540 48,819 97,758 0 0 0 0 0 0 0 0 0 29,540 48,819 97,758 0.28 0.47 0.94 0.27 0.45 0.90
EX-27.3 12 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JONES APPAREL GROUP, INC. FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS DEC-31-1998 MAR-30-1998 15,365 0 195,893 2,977 242,705 499,858 137,195 39,637 653,874 168,842 0 0 0 547 439,578 653,874 380,151 383,774 252,561 252,561 67,193 213 1,556 62,781 24,171 38,610 0 0 0 38,610 0.38 0.37
-----END PRIVACY-ENHANCED MESSAGE-----