-----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, FHjpftqLHOIx9lcXCmKxWoxkCTmDAkdphmcIobLqjKhDhBi6jze+KykN/9S/MNFU XbO0CVedJEz9/OY5LJX7qQ== 0000950157-99-000044.txt : 19990125 0000950157-99-000044.hdr.sgml : 19990125 ACCESSION NUMBER: 0000950157-99-000044 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990101 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JONES APPAREL GROUP INC CENTRAL INDEX KEY: 0000874016 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 060935166 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-10746 FILM NUMBER: 99509803 BUSINESS ADDRESS: STREET 1: 250 RITTENHOUSE CIRCLE STREET 2: KEYSTONE PK CITY: BRISTOL STATE: PA ZIP: 19007 BUSINESS PHONE: 2157854000 MAIL ADDRESS: STREET 1: 250 RITTENHOUSE CIRCLE CITY: BRISTOL STATE: PA ZIP: 19007 8-K 1 CURRENT REPORT =========================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): January 1, 1999 Jones Apparel Group, Inc. (Exact name of registrant as specified in its charter) ----------------- PENNSYLVANIA 06-0935166 (State or other jurisdiction 1-10746 (IRS Employer of incorporation) (Commission File Number) Identification Number) 250 RITTENHOUSE CIRCLE BRISTOL, PA 19007 (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code: (215) 785-4000 Not applicable (Former name or former address, if changed since last report) =========================================================================== Item 5. Other Events. On January 1, 1999, Jones Apparel Group, Inc. (the "Company") consummated a corporate reorganization (the "Asset Drop-Down Transaction"), which the Company believes will provide certain tax benefits. Under the Asset Drop-Down Transaction, the Company transferred all operations which it had previously directly conducted to a new wholly owned subsidiary, Jones Apparel Group USA, Inc. ("Jones USA"), a Pennsylvania corporation. In addition, the Company formed another new wholly owned subsidiary, Jones Apparel Group Holdings, Inc. ("Jones Holdings"), a Delaware corporation. Jones Holdings serves as an intermediate holding company, immediately above Jones USA and immediately below the Company, and holds the interests, either directly or indirectly, in all the Company's other subsidiaries. As a result of the Asset Drop-Down Transaction: o The Company is the parent holding company and holds 100% of the equity in Jones Holdings; o Jones Holdings is an intermediate holding company and the only direct subsidiary of the Company; o Jones Holdings holds 100% of the equity in Jones USA; and o The Company's other subsidiaries have become either direct or indirect subsidiaries of Jones Holdings. Concurrently with the consummation of the Asset Drop-Down Transaction, Jones USA assumed the role of obligor of the Company's Senior Notes due 2001, with the Company remaining and Jones Holdings becoming co-obligors of the Senior Notes. In addition, Jones USA assumed the role of obligor under the Company's Senior Credit Facilities, with the Company remaining and Jones Holdings becoming co-obligors under the Senior Credit Facilities. It is expected that Jones USA will make all payments in connection with the Senior Notes and the Senior Credit Facilities. The exhibits described below are being provided in connection with the Company's Registration Statement on Form S-4 for its Senior Notes due 2001. Exhibit 99.1 contains consolidated financial statements of the Company for each of the three fiscal years in the period ended December 31, 1997 (the "Company Annual Financial Statements"). THE COMPANY ANNUAL FINANCIAL STATEMENTS, WHICH INCLUDE THE OPINION OF BDO SEIDMAN, LLP, THE COMPANY'S INDEPENDENT ACCOUNTANTS, ARE IDENTICAL TO THE CORRESPONDING FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, EXCEPT THAT A NEW NOTE NUMBER 17, CONTAINING SUMMARIZED FINANCIAL INFORMATION FOR JONES USA, HAS BEEN ADDED. The Company Annual Financial Statements are hereby incorporated by reference. Exhibit 99.2 contains unaudited condensed consolidated financial statements of the Company for the nine months ended September 27, 1998 (the "Company Nine-Month Financial Statements"). THE COMPANY NINE-MONTH FINANCIAL STATEMENTS ARE IDENTICAL TO THE CORRESPONDING FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998, EXCEPT THAT A NEW NOTE NUMBER 7, CONTAINING SUMMARIZED FINANCIAL INFORMATION FOR JONES USA, HAS BEEN ADDED. The Company Nine-Month Financial Statements are hereby incorporated by reference. Item 7. Financial Statements and Exhibits. (c) Exhibits Exhibit 99.1 Consolidated financial statements of the Company for each of the three fiscal years in the period ended December 31, 1997 Exhibit 99.2 Condensed consolidated financial statements of the Company for the nine months ended September 27, 1998 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. JONES APPAREL GROUP, INC., Registrant By: /s/ Wesley R. Card ------------------------- Wesley R. Card Chief Financial Officer January , 1999 EXHIBIT LIST Exhibit 99.1 Consolidated financial statements of the Company for each of the three fiscal years in the period ended December 31, 1997 Exhibit 99.2 Condensed consolidated financial statements of the Company for the nine months ended September 27, 1998 EX-99.1 2 FORM 10-K EXHIBIT 99.1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 1-10746 JONES APPAREL GROUP, INC. (Exact name of registrant as specified in its charter) Pennsylvania 06-0935166 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 250 Rittenhouse Circle, Bristol, Pennsylvania 19007 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 785-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered - ----------------------------- ----------------------------- Common Stock, $0.01 par value New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 23, 1998 was approximately $2,365,861,580. As of March 23, 1998, there were 50,322,550 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The documents incorporated by reference into this Form 10-K and the Parts hereof into which such documents are incorporated are listed below: Document Part ------------------------------------ ---- Those portions of the registrant's III proxy statement for the registrant's 1998 Annual Meeting (the "Proxy Statement") that are specifically identified herein as incorporated by reference into this Form 10-K. - 2 - PART I ITEM 1. BUSINESS General Jones Apparel Group, Inc. (the "Company") is a leading designer and marketer of better priced women's sportswear, suits and dresses. The Company has pursued a multi-brand strategy by marketing its products under several nationally known brands, including Jones New York, Evan-Picone and Rena Rowan, and the licensed brand Lauren by Ralph Lauren. Each label is differentiated by its own distinctive styling and pricing strategy. The Company primarily contracts for the manufacture of its products through a worldwide network of quality manufacturers. The Company has capitalized on its nationally known brand names by entering into 32 licenses for the Jones New York brand name and 16 licenses for the Evan-Picone brand name with select manufacturers of women's and men's apparel and accessories. Products The Company's brands cover the entire women's better apparel market. Within those brands, various product classifications include career and casual sportswear, dresses and suits, and a combination of all components termed lifestyle collection. Career and casual sportswear are marketed as groups of skirts, pants, jackets, blouses, sweaters and related accessories which, while sold as separates, are coordinated as to styles, color schemes and fabrics, and are designed to be worn together. For its sportswear and dress collections, the Company will develop several groups in a selling season. New sportswear and dress collections are introduced in four or five of the principal selling seasons - Spring, Summer, Fall I, Fall II and Holiday/Resort, while suit collections have traditionally been developed for the Fall and Spring seasons. The introduction of different groups in each season is spaced to ensure that retail customers frequently are introduced to new merchandise. The Company's major product categories are summarized in the following table: Career Casual Lifestyle Suits, Dresses Sportswear Sportswear Collection and Other -------------- ------------- ------------- ---------------- Industry Better Better Better Better Categories Brand Labels Jones New York, Jones New York Lauren by Jones New York, Jones Wear, Sport, Ralph Lauren, Evan-Picone, Rena Rowan, Jones Wear, Jones New Saville Evan-Picone, Jones Jeans, York Country Jones & Co, Jones Studio Product Skirts, blouses Skirts, blouses, Skirts, Suits, Offerings pants, jackets, pants, jackets, blouses, dresses sweaters sweaters pants, jackets, sweates, suits, coats -3- The Company's success is enhanced by its ability to maintain a name brand or designer image while its products are generally sold in the women's better market at the following retail price points: Skirts Blouses Casual Tops Suits & Jackets and Pants and Sweaters and Bottoms Coats Dresses - --------- --------- ------------ ----------- --------- --------- $150-$280 $70-$140 $70-$200 $25-$90 $200-$450 $125-$250 The following chart sets forth a breakdown of the Company's apparel sales by dollar amount (in thousands and as a percentage of the Company's total sales) during the past three fiscal years. 1997 1996 1995 ------------ ------------ ------------ Career Sportswear $613,000 45% $529,000 52% $439,000 57% Casual Sportswear $323,000 24% $292,000 29% $209,000 27% Lifestyle Collection $293,000 21% $59,000 6% $2,000 0% Suits, Dresses and Other $143,000 10% $141,000 13% $126,000 16% Career Sportswear. The Company's flagship brand, Jones New York, offers consumers an extensive range of better sportswear geared primarily for the career woman's working needs. Jones New York products are sold in misses, petites and women's sizes and are marketed under the Jones New York, Jones New York Petite and Jones New York Woman labels. Career sportswear under the Rena Rowan label is positioned at the opening price point in better apparel and includes misses, petites and women's sizes. The Company's Evan-Picone line of career sportswear is positioned at a price point between the Jones New York and Rena Rowan brands and includes misses and women's sizes. A career sportswear line using the Jones Wear label is sold to selected retail accounts that do not carry the Company's other lines of career sportswear. Casual Sportswear. Jones New York Sport offers a collection of casual sportswear which complements the Jones New York career line. These products are designed to be worn for weekend and informal workday dressing. Jones New York Sport is offered in misses, petite and women's sizes. The Company also offers a business casual collection under the Jones & Co label designed to meet the needs of the informal workplace and business "dress down" days. Jones Studio, introduced for the Spring 1996 season, provides business casual sportswear separates. In 1996, the Company introduced Jones Jeans, a denim and cotton-based collection for the women's market. Petites and misses sizes were added for Spring 1998. Lifestyle Collection. Jones New York Country, introduced for the Fall 1995 season, is a collection of classic country-styled casualwear. Prior to 1997, this label was exclusive to the Company's own retail outlets. The distribution of Jones New York Country products has now been extended to several specialty stores. In October 1995, the Company acquired an exclusive license to manufacture and market women's shirts, blouses, skirts, jackets, suits, sweaters, pants, vests, coats, outerwear and hats under the Lauren by Ralph -4- Lauren trademark in the United States, pursuant to license and design service agreements with the licensor, which expire on December 31, 2001. Upon expiration of the initial term, the Company has the right to renew the license for an additional three-year period, provided that it meets certain minimum sales level requirements. The agreements provide for the payment by the Company of a percentage of net sales against guaranteed minimum royalty and design service payments as set forth in the agreements. In July 1996, the Company began shipping a collection of better career and casual sportswear under this label for the Fall 1996 season. The Company introduced a collection of Petite sportswear which began shipping in the Fall 1997 season. Coats and suits were also introduced in the Fall 1997 season. Suits. The Company produces suits under the brand names Jones New York and Saville. Jones New York is a better priced brand. Saville is targeted to sell at the opening price points of the better price category. Jones New York currently offers products in misses and petite sizes and Saville offers petite, misses and women's sizes. During 1997, the Company phased out its licensed Christian Dior suit business. Dresses. The Company ships collections of career dresses under the Jones New York and Evan-Picone brand names, targeted to sell at better prices. Other. The Company also produces sportswear for the private label market. While there is significant additional demand in this market, the Company has not actively pursued more private label business in order to concentrate on the expansion of its name brand business. The Company has introduced a collection of men's casual sportswear under the Jones New York label for the Fall 1998 selling season. Design Each product line of the Company has its own design team which is responsible for the creation, development and coordination of the product group offerings within each line. The Company believes its design staff of 215 people is widely recognized for its distinctive styling of garments and its ability to update fashion classics with contemporary trends. The Company's designers travel throughout the world for fabrics and colors, and attempt to stay continuously abreast of the latest fashion trends. In addition, the Company actively monitors the retail sales of its products to determine changes in consumer trends. For most sportswear lines, the Company will develop several groups in a season. A group typically consists of an assortment of skirts, pants, jackets, blouses, sweaters and various accessories. The Company believes that it is able to minimize design risks because the Company often will not have started cutting fabrics until the first few weeks of a major selling season. Since different styles within a group often use the same fabric, the Company can redistribute styles and, in some cases, colors, to fit current market demand. In accordance with standard industry practices for licensed products, Polo Ralph Lauren Corporation has the right to approve the Company's designs for the Lauren by Ralph Lauren product line. Manufacturing Apparel sold by the Company is produced in accordance with its design, specification and production schedules. The Company contracts for the cutting and sewing of the majority of its garments with approximately 133 contractors located in the United States and 280 in overseas locations. The Company also operates one manufacturing facility of its own. During 1997, approximately 30% of the Company's products were manufactured in the United States and Mexico, and 70% in other parts of the world, primarily Asia. -5- The Company believes that outsourcing allows it to maximize production flexibility while avoiding significant capital expenditures, work-in-process inventory build-ups and costs of managing a larger production work force. The Company's fashion designers, production staff and quality control personnel closely supervise garments manufactured by contractors to ensure that they meet the Company's high standards. See "Quality Control" below. The Company's products are manufactured according to plans prepared each year which reflect prior years' experience, current fashion trends, economic conditions and management estimates of a line's performance. The Company orders piece goods concurrently with concept board development. The purchase of piece goods is controlled and coordinated on a divisional basis. The Company limits its exposure to specific colors and fabrics by committing to purchase a portion of total projected demand with options to purchase additional volume if demand meets the plan. The Company believes that its policy of limiting its commitments for purchases early in the season minimizes its exposure to excess inventory and obsolescence. The Company believes its extensive experience in logistics and production management underlies its success in coordinating with contractors who manufacture different garments included within the same product group. The Company has had long-term mutually satisfactory business relationships with many of its contractors, but does not have long-term written agreements with any of them. The Company has an active program in place to monitor compliance by its contract manufacturers with applicable laws relating to the payment of wages and working conditions. In 1996, the Company became a participant in the United States Department of Labor's Apparel Manufacturers Compliance Program for that purpose. Under that program, and through the Company's independent agreements with each of its domestic and foreign manufacturers, the Company regularly audits such compliance and requires corrective action when appropriate. Quality Control The Company's comprehensive quality control program is designed to ensure that purchased raw materials and finished goods meet the Company's exacting standards. Substantially all of the fabric purchases for domestically manufactured garments are inspected upon receipt in either the Company's Pennsylvania and North Carolina warehouse facilities (where they are stored prior to shipment for cutting) or at the contractor's warehouse. Fabrics for foreign manufactured garments are inspected by the Company's contractors upon receipt in their warehouses. The Company's quality control program includes inspection of prototypes of each garment prior to cutting by the contractors to ensure compliance with the Company's specifications. Domestic contractors are supervised by the Company's quality control staff based primarily in Pennsylvania, while foreign manufacturers' operations are monitored by both Company personnel and buying agents located in other countries. All finished goods are shipped to the Company's warehouses for final inspection and distribution. Supplies The Company generally supplies the raw material to its domestic manufacturers and occasionally to foreign manufacturers. Otherwise, the raw materials are purchased directly by the manufacturer in accordance with the Company's specifications. Raw materials, which are in most instances made and/or colored especially for the Company, consist principally of piece goods and yarn and are purchased by the Company from a number of domestic and foreign textile mills and converters. The Company's foreign finished goods purchases are generally purchased on a letter of credit basis, while its domestic purchases are generally purchased on an open order basis. The Company does not have long-term formal arrangements -6- with any of its suppliers. However, the Company has experienced little difficulty in satisfying its raw material requirements and considers its sources of supply adequate. Marketing The Company distributes its products through approximately 1,225 customers, including department stores, specialty retailer accounts and direct mail catalog companies throughout the United States and Canada representing approximately 6,800 locations. Department stores account for approximately two-thirds of the Company's sales. The Company's ten largest customers accounted for approximately 67% of sales in 1997. No single customer accounted for more than 10% of net sales; however, certain of the Company's customers are under common ownership. When considered together as a group under common ownership, sales to seven department store customers currently owned by Federated Department Stores, Inc. ("Federated") accounted for approximately 20% of 1997 sales and sales to eight department store customers currently owned by The May Department Stores Company ("May") accounted for approximately 19% of 1997 sales. While the Company believes that purchasing decisions are generally made independently by each department store customer (including the stores in the Federated and May groups), in some cases the trend may be toward more centralized purchasing decisions. The Company attempts to minimize its credit risk from its concentration of customers by closely monitoring accounts receivable balances and shipping levels and the ongoing financial performance and credit status of its customers. Among the Company's leading customers are May group members Lord & Taylor, Hecht's and Foley's; Federated group members Macy's Department Stores, Lazarus and Bloomingdale's; and independent stores Dillard's, Dayton Hudson and Nordstrom. The Company has a direct sales force of 174 sales people (excluding employees in the Company's factory outlet stores) which includes individuals located in the Company's New York and Toronto showrooms as well as in regional sales offices and showrooms that the Company leases in Atlanta, Dallas, Los Angeles and Seattle. The Company also has a small number of independent sales representatives. In addition, senior management is actively involved in selling to major accounts. Products are marketed to department stores and specialty retailing customers during "market weeks," which are generally four to six months in advance of the five corresponding industry selling seasons. While the Company typically will allocate a six week period to market a line, most major orders are written within the first three weeks of any market period. Since piece goods for a line usually are not cut until the first few weeks of a marketing period, the Company is able to tailor production schedules and styles to current market demands and minimize excess inventory. As one of the primary apparel resources for many of its customers, the Company is able to influence the mix, quantity and timing of orders placed by its retail accounts enabling the Company to market complete lines of sportswear and minimize excess inventory. The Company's close relationships with its retail accounts allow it to efficiently monitor production schedules and inventories. The Company believes retail demand for its products is enhanced by the Company's ability to provide its retail accounts and consumers with knowledgeable sales support. In this regard, the Company has an established program to place retail sales specialists in many major department stores. These individuals have been trained by the Company to support the sale of its products by educating other store personnel and consumers about the Company's products and by coordinating the Company's marketing activities with those of the stores. In addition, the retail sales specialists provide the Company with firsthand information concerning consumer reactions to the Company's products. In addition, the Company has a program of designated sales personnel in which a store agrees to designate certain sales personnel who will devote a substantial portion of their time to selling Jones products in return for certain benefits. -7- The Company employs a cooperative advertising program with its major retail accounts, whereby it shares the cost of its retail accounts' advertising and promotional expenses, up to a preset maximum percentage of the retail accounts' purchases. An important part of the marketing program includes prominent displays of the Company's products in retail accounts' sales catalogs. Factory Outlet Stores At December 31, 1997, the Company operated a total of 214 factory outlet stores and 5 full price stores. The Company operates six coffee bars in close proximity to six of its factory outlet stores as a convenience to its customers. Manufacturer's outlet malls are generally located either in high traffic tourist areas or on major highways to vacation destinations and major cities. The 214 factory outlet stores operated by the Company are located in 120 outlet malls throughout the United States. These locations are generally situated in select geographic markets which are not in direct competition with the Company's primary customers. The Company's outlet stores focus on breadth of product line and customer service as well as value pricing. In addition to its brand name merchandise, these stores also sell merchandise produced by licensees of the Company. The Company's outlet store expansion strategy is to continue to open multiple stores in select outlet malls for specific product lines which target different customer segments. The Company opened 45 and closed 26 stores in 1997 and opened 47 and closed 22 stores in 1996. The following table sets forth certain information regarding the number and type of stores open and aggregate store sales for each of the years in the three year period ended December 31, 1997. Retail stores open at end of period: Store Type Description 1997 1996 1995 - ---------------------- ---------------------------- ---- ---- ---- Jones New York Jones New York sportswear 85 82 78 Jones New York Full price retail showcase 2 2 2 for products Executive Suite Jones New York and Executive 21 28 33 Suite men's and women's suits and furnishings Jones New York Sport Jones New York Sport and 31 22 2 Jones & Co casual sportswear Evan-Picone Evan-Picone sportswear 15 17 23 Jones New York Country Jones New York Country 35 22 9 casual sportswear Jones New York Country Full price retail showcase 3 2 - for products Factory Finale Close out merchandise 19 15 15 Other concepts Various 8 10 13 ---- ---- ---- Total retail stores open at end of period 219 200 175 Aggregate net store sales (in thousands) $153,830 $129,767 $102,307 Square footage of gross store space at end of period 607,632 557,100 478,975 Nearly all stores are leased under long-term leases (typically five years). The average store size is approximately 2,775 square feet, ranging from a minimum of 1,386 square feet to a maximum of 6,600 square feet. -8- Licensing of Company Brands As of December 31, 1997, the Company had 32 license agreements under which independent licensees sell products under the Company's Jones New York (and related) trademarks in accordance with designs furnished or approved by the Company in various territories in the United States and Canada. Current licenses include men's tailored clothing and overcoats, women's intimate apparel, women's rainwear, outerwear, leather outerwear and woolen coats, footwear and handbags, belts, scarves, women's swimwear, umbrellas, eyewear, fragrances, costume jewelry, hair accessories, and cosmetic travel accessories. Each of the licenses provides for the payment to the Company of a percentage of the licensee's net sales of the licensed products against guaranteed minimum royalty payments which generally increase over the term of the agreement. During 1997, the Company received $9,436,000 of Jones New York (and related names) licensing income. As of December 31, 1997, the Company had 16 license agreements under which independent licensees sell products under the Company's Evan-Picone trademarks in accordance with designs furnished or approved by the Company in various territories in the United States and Canada. These licenses include women's woolen coats, footwear, men's tailored clothing, mens' knit and woven shirts and sweaters, men's neckwear, and men's and women's hosiery. Each of the licenses provides for the payment to the Company of a percentage of the licensee's net sales of the licensed products against guaranteed minimum royalty payments which generally increase over the term of the agreement. During 1997, the Company received $5,945,000 of Evan-Picone licensing income. Trademarks The Company utilizes a variety of trademarks which it owns, including Jones New York, Jones New York Sport, Jones & Co, Jones*Wear, Jones Wear, JNY, Jones New York Country, Jones Jeans, Saville, Rena Rowan, Ellen Kaye, Evan-Picone, Picone Sport, Elements by Evan-Picone, Picone Studio, Evan-Picone Sport, Executive Suite and Strictly Business. The Company has registered or applied for registration for these and other trademarks for use on a variety of items of apparel and apparel-related products in the United States and Canada. In addition, the Company has registered certain of its trademarks in certain other countries. The Company's material registered trademarks Jones New York, Jones New York Sport, Rena Rowan and Evan-Picone, have their Federal trademark registrations expire in 2006, 2004, 2002, and 2003, respectively, with its other registered trademarks expiring at various dates through 2014, all of which are subject to renewal. The Company carefully monitors trademark expiration dates to ensure uninterrupted registration of its trademarks. The Company also licenses the Lauren by Ralph Lauren label (see "Products" above). The Company regards its trademarks and other proprietary rights as valuable assets and believes that they have significant value in the marketing of its products. The Company vigorously protects its trademarks against infringement. Imports and Import Restrictions The Company's transactions with its foreign manufacturers and suppliers are subject to the risks of doing business abroad. The Company's import operations are subject to constraints imposed by bilateral textile agreements between the United States and a number of foreign countries, including Hong Kong, Taiwan and Korea. These agreements impose quotas on the amount and type of goods which can be imported into the United States from these countries. Such agreements also allow the United States to impose at any time restraints on the importation of categories of merchandise that, under the terms of the agreements, are not subject to specified limits. -9- The Company monitors duty, tariff and quota-related developments and continually seeks to minimize its potential exposure to quota-related risks through, among other measures, geographical diversification of its manufacturing sources, the maintenance of overseas offices, allocation of overseas production to merchandise categories where more quota is available and shifts of production among countries and manufacturers. The Company's imported products are also subject to United States customs duties and, in the ordinary course of business, the Company is from time to time subject to claims by the United States Customs Service for duties and other charges. The United States and the other countries in which the Company's products are manufactured may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adversely adjust presently prevailing quotas, duty or tariff levels, which could adversely affect the Company's operations and its ability to continue to import products at current or increased levels. The Company cannot predict the likelihood or frequency of any such events occurring. Because the Company's foreign manufacturers are located at greater geographic distances from the Company than its domestic manufacturers, the Company is generally required to allow greater lead time for foreign orders, which reduces the Company's manufacturing flexibility. Foreign imports are also affected by the high cost of transportation into the United States. In addition to the factors outlined above, the Company's future import operations may be adversely affected by political instability resulting in the disruption of trade from exporting countries, any significant fluctuation in the value of the dollar against foreign currencies and restrictions on the transfer of funds. However, the recent instability of Asian financial markets is not expected to have a material impact on the Company's financial results. Backlog On December 31, 1997, the Company had unfilled customer orders of approximately $557 million, compared to approximately $419 million of such orders at December 31, 1996. These amounts include both confirmed orders and unconfirmed orders which the Company believes, based on industry practice and past experience, will be confirmed. The amount of unfilled orders at a particular time is affected by a number of factors, including the timing of the receipt and processing of customer orders and scheduling of the manufacture and shipping of the product, which in some instances is dependent on the desires of the customer. Accordingly, a comparison of unfilled orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. Competition There is intense competition in the sectors of the apparel industry in which the Company participates. The Company competes with many other manufacturers, some of which are larger and have greater resources than the Company. The Company competes primarily on the basis of fashion, price and quality. The Company believes its competitive advantages include its ability to effectively anticipate and respond to changing consumer demands, its premier brand names and range of products and its ability to operate within the industry's production and delivery constraints. Furthermore, the Company's established brand names and relationships with retailers have resulted in a highly loyal following of customers. The Company considers the risk of formidable new competitors to be minimal due to barriers to entry such as significant startup costs and the long-term nature of supplier and customer relations. It has been the -10- Company's belief that during the past few years, major department stores and specialty retailers have been increasingly unwilling to source garments from suppliers who are not well capitalized or do not have established reputations for delivering quality merchandise in a timely manner. However, there can be no assurance that significant new competitors will not develop in the future. Employees At December 31, 1997, the Company had approximately 3,135 full-time employees. This total includes 25 in executive or senior managerial positions, approximately 1,870 in quality control, production, design and distribution positions, approximately 380 in sales, clerical and office positions and approximately 860 in the Company factory outlet and full-price retail stores. The Company also employs approximately 790 part-time employees, of which approximately 720 work in the Company factory outlet and full-price retail stores. Approximately 350 of the Company's employees are members of the Teamsters Union, which has a four year labor agreement with the Company expiring in March 2002. The Company considers its relations with its employees to be satisfactory. ITEM 2. PROPERTIES The general location, use and approximate size of the Company's principal properties, all of which are leased, are set forth below: Approximate Area Location Use in Square Feet - --------------------- ----------------------------- ---------------- Bristol, Pennsylvania Headquarters, warehouse 419,200 and distribution Bristol, Pennsylvania Materials warehouse 102,400 Bristol, Pennsylvania Distribution warehouse 208,000 Bristol, Pennsylvania Computer and accounting 16,425 services Bristol, Pennsylvania Administrative services 22,500 Ciudad Juarez, Mexico Production 66,850 Downsview, Canada Canadian headquarters, 114,300 warehouse and distribution El Paso, Texas Administrative services 33,250 Lawrenceburg, Tennessee Distribution warehouses 1,205,100 New York, New York Executive and sales offices 156,700 Rural Hall, North Carolina Materials warehouse 232,200 The Company leases space for 214 outlet stores, five full-price retail stores and six coffee bars (aggregating approximately 613,500 square feet) at locations across the United States. The Company also leases regional sales offices and showrooms in Atlanta, Dallas, Los Angeles and Seattle. The Company believes that its existing facilities are well maintained, in good operating condition and that its existing and planned facilities will be adequate for its operations for the foreseeable future. The Company occupies a warehouse and office facility which is leased from an affiliated real estate partnership which is 50% owned by the Company's Chairman. The lease runs until March 31, 1998. Minimum annual rent payments are $1,000,000. The lease was capitalized at the fair market value of the facility which approximated the present value of the minimum lease payments. Upon the expiration of the lease, the Company has agreed to purchase the property from the partnership for $10,500,000, which -11- approximates fair market value, and enter into a sale and leaseback arrangement with an unrelated third party. See "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company is a party or to which any of its property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Price range of common stock: 1997 High $41 3/8 $49 1/8 $57 3/16 $57 5/16 Low $32 1/8 $36 1/8 $46 5/8 $40 7/16 1996 High $24 1/4 $27 3/4 $37 3/8 $37 3/8 Low $17 13/16 $23 1/4 $22 9/16 $29 5/8 The Company's Common Stock is traded on the New York Stock Exchange under the symbol "JNY". The above figures set forth, for the periods indicated, the high and low sale prices per share of the Company's Common Stock as reported on the New York Stock Exchange Composite Tape. The last reported sale price per share of the Company's Common Stock on March 17, 1998 was $55 11/16 and on that date there were 154 holders of record of the Company's Common Stock. To date, the Company has not paid any cash dividends on shares of its Common Stock. The Company anticipates that all of its future earnings will be retained for its financial requirements and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. All stock prices have been adjusted to reflect the 2-for-1 stock split effective October 2, 1996. -12- ITEM 6. SELECTED FINANCIAL DATA The following financial information is qualified by reference to, and should be read in conjunction with, the Company's Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this report. The selected consolidated financial information presented below is derived from the Company's audited Consolidated Financial Statements for each of the five years in the period ended December 31, 1997.
Year Ended December 31, 1997 1996 1995 1994 1993 ---------- ---------- -------- -------- -------- Income Statement Data Net sales $1,372,458 $1,021,042 $776,365 $633,257 $541,152 Licensing income 15,013 13,036 10,314 8,487 4,907 ---------- ---------- -------- -------- -------- Total revenues 1,387,471 1,034,078 786,679 641,744 546,059 Cost of goods sold 940,149 717,250 546,413 438,575 363,742 ---------- ---------- -------- -------- -------- Gross profit 447,322 316,828 240,266 203,169 182,317 Selling, general and administrative expense 250,685 186,572 139,135 115,307 103,392 ---------- ---------- -------- -------- -------- Operating income 196,637 130,256 101,131 87,862 78,925 Interest expense 3,584 3,040 1,908 1,212 716 Interest income (1,556) (547) (445) (695) (810) ---------- ---------- -------- -------- -------- Income before provision for income taxes 194,609 127,763 99,668 87,345 79,019 Provision for 72,884 46,889 36,183 32,425 30,660 income taxes ---------- ---------- -------- -------- -------- Net income $121,725 $80,874 $63,485 $54,920 $48,359 ========== ========== ======== ======== ======== Per Share Data Net income per share Basic $2.35 $1.55 $1.22 $1.06 $0.95 Diluted $2.26 $1.51 $1.20 $1.04 $0.92 Dividends paid per share - - - - - Weighted average number of common shares outstanding Basic 51,899 52,333 52,130 51,656 50,789 Diluted 53,905 53,651 53,024 52,889 52,286 December 31, 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Balance Sheet Data Working capital $330,569 $293,970 $260,853 $204,221 $159,175 Total assets 580 767 488,109 400,959 318,286 266,594 Short-term debt, including current portion of capital lease obligations 4,199 3,067 2,327 1,859 1,722 Long-term debt, including capital lease obligations 27,290 12,141 10,151 8,029 9,545 Stockholders' equity 435,632 376,729 314,975 248,678 189,120
Represents license fees received by the Company (net of related expenses). -13- Historically, the Company included licensing income as a separate line item in operating income. In accordance with current industry practice, the Company has included this amount in total revenues and gross profit. All periods presented reflect this reclassification of licensing income. Represents income before cumulative effect of change in accounting principle for the year ended December 31, 1993. In 1993, the Company recorded a cumulative effect of a change in accounting principle for income taxes as a result of the adoption of SFAS No. 109 which increased net income by $1,376,000. Basic and diluted income per share for the year ended December 31, 1993, including this change in accounting principle, was $0.98 and $0.95, respectively. On July 30, 1996, the Company's Board of Directors approved a two-for-one stock split of the Company's Common Stock in the form of a 100% stock dividend for shareholders of record as of September 12, 1996. Concurrently, the number of authorized shares of Common Stock was increased to 100,000,000. On October 2, 1996, a total of 26,744,580 shares of Common Stock were issued in connection with the split. The stated par value of each share remained at $0.01. All share and per share amounts have been restated to retroactively reflect the stock split. During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which provides for the calculation of "basic" and "diluted" earnings per share. This Statement, effective for financial statements issued for periods ending after December 15, 1997, requires restatement of all prior-period EPS data presented. All periods have been restated to comply with the provisions of SFAS No. 128. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENTS OF INCOME EXPRESSED AS A PERCENTAGE OF TOTAL REVENUES Year Ended December 31, 1997 1996 1995 ------ ------ ------ Net sales 98.9% 98.7% 98.7% Licensing income 1.1% 1.3% 1.3% ------ ------ ------ Total revenues 100.0% 100.0% 100.0% Cost of goods sold 67.8% 69.4% 69.5% ------ ------ ------ Gross profit 32.2% 30.6% 30.5% Selling, general and administrative expenses 18.1% 18.0% 17.7% ------ ------ ------ Operating income 14.2% 12.6% 12.9% Interest expense 0.3% 0.3% 0.2% Interest income (0.1%) (0.1%) (0.1%) ------ ------ ------ Income before provision for income taxes 14.0% 12.4% 12.7% Provision for income taxes 5.3% 4.5% 4.6% ------ ------ ------ Net income 8.8% 7.8% 8.1% ====== ====== ====== Totals may not agree due to rounding. -14- GENERAL The following discussion provides information and analysis of the Company's results of operations from 1995 through 1997 and its liquidity and capital resources. The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements included elsewhere herein. The Company has achieved compound annual growth rates of 32.8% for total revenues and 39.4% for operating income from 1995 to 1997. Total revenues and operating income in 1997 increased 34.2% and 51.0%, respectively, over 1996. The Company believes that it has achieved this growth by enhancing the brand equity of each of its labels and successfully adding new labels, such as Lauren by Ralph Lauren, through its focus on exceptional design, quality and value. The Company has leveraged the strength of its brands to increase both the number of locations and amount of selling space in which its products are offered, as well as to introduce new product extensions. The Company has also benefitted from a trend among its major retail accounts to concentrate their women's apparel buying among a narrowing group of apparel vendors. RESULTS OF OPERATIONS 1997 Compared to 1996 Net Sales Net sales in 1997 increased 34.4%, or $0.4 billion, to $1.4 billion compared to $1.0 billion in 1996, due primarily to an increase in the number of units shipped, and also, to a lesser extent, higher average selling prices per unit. Career sportswear sales increased 15.9%, or $83.9 million, to $612.8 million in 1997 compared to $528.9 million in 1996. Casual sportswear sales in 1997 increased 10.8%, or $31.5 million, to $323.4 million compared to $291.9 million in 1996. Lifestyle collection sales in 1997 increased $234.1 million, to $292.9 million compared to $58.8 million in 1996, largely the result of the rapid growth in sales of the Lauren by Ralph Lauren label. Net sales for the Company's suit, dress and other category increased 1.4%, or $2.0 million, to $143.4 million in 1997, compared to $141.4 million in 1996. Licensing Income Licensing income increased $2.0 million to $15.0 million in 1997, compared to $13.0 million in 1996. Income from licenses under the Jones New York label increased $1.8 million while income from licenses under the Evan-Picone label rose $0.2 million. The increases were primarily due to higher sales volume by licensees. Gross Profit The gross profit margin was 32.2% in 1997, compared to 30.6% in 1996. The increase was attributable to the impact of stronger margins across major product categories and the proportionately larger increase in sales of the Lauren by Ralph Lauren label, which was introduced in Fall 1996 and carries higher margins than the corporate average. SG&A Expenses Selling, general and administrative expenses ("SG&A" expenses) of $250.7 million in 1997 represented an increase of $64.1 million over $186.6 million in 1996. As a percentage of total revenues, SG&A expenses increased to 18.1% in 1997 from 18.0% in 1996. Expenses associated with Lauren by Ralph Lauren product advertising, royalties, store displays and associated operating costs, as well as the Company's overall sales growth, added significant expenses during 1997. Retail store operating expenses increased $6.9 million, reflecting the added cost of 19 new stores in operation at the end of 1997. -15- Operating Income The resulting 1997 operating income increased $66.3 million to $196.6 million, compared to $130.3 million during 1996. The operating margin increased to 14.2% in 1997 from 12.6% in 1996 as a result of the higher gross profit margins during 1997. Net Interest Expense Net interest expense was $2.0 million in 1997 compared to $2.5 million in 1996. The primary reason for the change was an increase in interest income of $1.0 million, which offset higher interest on capital leases for additional warehouse facilities constructed during 1997. Provision for Income Taxes The effective income tax rate for 1997 was 37.5% compared to 36.7% in 1996. The increase was primarily due to higher state income tax provisions for 1997. Net Income Net income increased 50.5% to $121.7 million in 1997, an increase of $40.8 million over the net income of $80.9 million earned in 1996. Net income as a percentage of total revenues was 8.8% in 1997 compared to 7.8% in 1996. 1996 Compared to 1995 Net Sales Net sales in 1996 increased 31.5%, or $244.6 million, to $1,021.0 million, compared to $776.4 million in 1995, due primarily to an increase in the number of units shipped. Career sportswear sales increased 20.5%, or $89.8 million, to $528.9 million in 1996 compared to $439.1 million in 1995. Casual sportswear sales in 1996 increased 39.7%, or $83.0 million, to $291.9 million compared to $208.9 million in 1995. Lifestyle collection sales in 1996 increased $56.7 million to $58.8 million, compared to $2.1 million in 1995, primarily due to the 1996 introduction of the Lauren by Ralph Lauren label. Net sales for the Company's suit, dress and other category increased 12.0%, or $15.1 million, to $141.4 million in 1996 compared to $126.3 million in 1995. Licensing Income Licensing income increased $2.7 million to $13.0 million in 1996 as compared to $10.3 million in 1995. Income from licenses under the Jones New York label increased $2.1 million, while income from licenses under the Evan-Picone label rose $0.6 million. Gross Profit The gross profit margin was 30.6% in 1996 compared to 30.5% in 1995. The increase was primarily attributable to the impact of higher gross profit margins from the Company's major product lines, as well as the introduction of the new Lauren by Ralph Lauren label, which carries higher margins than the corporate average. SG&A Expenses SG&A expenses of $186.6 million in 1996 represented an increase of $47.5 million over $139.1 million in 1995. As a percentage of total revenues, SG&A expenses increased to 18.0% in 1996 from 17.7% in 1995. Expenses associated with the Lauren by Ralph Lauren product advertising and royalties and associated operating costs, as well as the Company's overall sales growth, added significant expenses during 1996. Retail store operating expenses increased $10.2 million, reflecting the added cost of 25 new stores in operation at the end of 1996. -16- Operating Income The resulting 1996 operating income of $130.3 million increased $29.2 million, as compared to $101.1 million during 1995. The operating margin decreased to 12.6% in 1996 from 12.9% in 1995, largely as a result of the higher percentage of SG&A expenses to sales during 1996. Net Interest Expense Net interest expense was $2.5 million in 1996 compared to $1.5 million in 1995. The primary reasons for the change were higher average overall borrowings and interest on capital leases for additional warehouse facilities during 1996. Provision for Income Taxes The effective income tax rate for 1996 was 36.7% as compared to 36.3% in 1995. The increase was primarily due to higher state income tax provisions for 1996. Net Income Net income increased 27.4% to $80.9 million in 1996, an increase of $17.4 million over the net income of $63.5 million earned in 1995. Net income as a percentage of total revenues was 7.8% in 1996, compared to 8.1% in 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital requirements have been to fund working capital needs, capital expenditures and, beginning in 1995, to repurchase the Company's Common Stock on the open market. The Company has historically relied primarily on internally generated funds, trade credit and bank borrowings to finance its operations and expansion. As of December 31, 1997, total cash and cash equivalents were $40.1 million, a $10.0 million increase over the $30.1 million reported as of December 31, 1996. Net cash provided by operations was $110.6 million, $70.7 million and $8.9 million in 1997, 1996 and 1995, respectively. The $39.9 million improvement for 1997 was primarily due to a higher net income and a decrease in trade receivables compared to an increase in the previous two years. While fourth quarter 1997 sales increased 33.7% over 1996, accounts receivable at the end of 1997 decreased $18.9 million from 1996. This was due to the provision for allowances that will be granted to customers and fourth quarter shipments occurring earlier than in prior years, allowing cash collections on a greater portion of the resulting receivables before the end of the year. Inventories increased $41.0 million in 1997, $37.8 million in 1996 and $53.1 million in 1995, all of which reflected the inventory levels required to meet anticipated wholesale shipments for the first quarter of the following year and the net addition of 19 retail stores in 1997, 25 in 1996, and 42 in 1995. Net cash used in investing activities increased to $43.3 million, an increase of $8.0 million over 1996. Cash used in investing activities has been primarily for the opening of additional warehouse facilities (including, in 1997, cash restricted for use in completing warehouse facilities under construction at the end of the year), new retail stores and existing store renovations, computer system hardware and software upgrades and a $1.5 million payment made in 1996 to satisfy all future royalty obligations to the former owner of the Evan-Picone trademark. In addition, to support anticipated growth in the number of units shipped, the Company has committed to the construction of additional warehouse facilities in 1998. These facilities, including related equipment, are estimated to cost $28.0 million and the Company plans to finance all or a portion of the construction through capital lease financing and long-term debt. Net cash provided by (used in) financing activities was $(57.2) million in 1997, $(22.2) million in 1996 and $2.4 million in 1995. The principal reasons for the changes were: (i) $10.0 and $5.0 million in proceeds from capital leases in 1997 and 1996, respectively, for construction of additional warehouse facilities; (ii) issuance of $10.0 million in long-term debt in 1997 for construction of an additional warehouse facility; and (iii) -17- transactions involving the Company's Common Stock. In 1997 and 1996, the Company repurchased $85.8 million and $33.6 million, respectively, of its Common Stock on the open market under two announced programs under which the Company is authorized to acquire an aggregate of up to $200.0 million of such shares. As of December 31, 1997, $100.0 million had been expended pursuant to the first stock repurchase program (the maximum authorized) and an additional $24.0 million had been expended under the second program. Proceeds from the issuance of common stock to employees exercising stock options amounted to $12.5 million, $9.1 million and $4.7 million in 1997, 1996 and 1995, respectively. As of December 31, 1997, the Company had credit arrangements with six United States financial institutions which totaled $425.0 million (see Note 5 of Notes to Consolidated Financial Statements). These lines, which may be used for unsecured borrowings and letters of credit (issued primarily to finance foreign inventory purchases), contain an aggregate sub-limit of $170.0 million for unsecured borrowings with rates depending on the borrowing vehicle utilized. At December 31, 1997, $153.7 million was utilized for letters of credit and there were no short-term borrowings outstanding. The Company also has a line of credit with a Canadian institution for C$4.0 million to be used for unsecured borrowings under which no amounts were outstanding at December 31, 1997. The Company believes that funds generated by operations and the bank credit arrangements will provide the financial resources sufficient to meet its foreseeable working capital, letter of credit, capital expenditure and stock repurchase requirements. THE YEAR 2000 The Company is currently evaluating the impact of the Year 2000 on its management and information systems. At this time, management believes that the impact of the Year 2000 will have no material effect on its operations or financial results. INFLATION The Company believes that the relatively moderate rates of inflation which have been experienced in the United States and Canada, where it competes, have not had a significant effect on its net sales or profitability. SEASONALITY OF BUSINESS Historically, the Company's sales and profit levels fluctuate by quarter. As a result, the Company experiences seasonal increases and decreases in its working capital requirements. These patterns result primarily from the timing of shipments for each season; however, the timing of seasonal shipments can vary from quarter to quarter. Fall merchandise is shipped principally in the third quarter while Spring merchandise is shipped primarily in the first quarter. Summer and Holiday/Resort goods, the smaller of the seasons, are shipped primarily in the second and fourth quarters, respectively. For an analysis of quarterly historical operating trends, see Note 14 of Notes to Consolidated Financial Statements. NEW ACCOUNTING STANDARDS In 1997, the Financial Accounting Standards Board issued two new disclosure standards. Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," established standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments -18- by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of and enterprise about which separate financial information is available that is evaluated regularly by Management in deciding how to allocate resources and in assessing performance. Both SFAS Nos. 130 and 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. The adoption of these standards is not expected to have a material effect on the Company's financial position or results of operations. The Company is currently reviewing SFAS No. 131 and has of yet been unable to fully evaluate the impact, if any, it may have on future financial statement disclosures. STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE This Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended which represent the Company's expectations or beliefs concerning future events that involve risks and uncertainties, including those associated with the effect of national and regional economic conditions, the overall level of consumer spending, the performance of the Company's products within the prevailing retail environment, customer acceptance of both new designs and newly-introduced product lines, and financial difficulties encountered by customers. All statements other than statements of historical facts included in this Annual Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition," are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed in this Report. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA STATEMENT OF MANAGEMENT RESPONSIBILITY The management of Jones Apparel Group, Inc. is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this report. The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and properly reflect the effects of certain estimates and judgements made by management. The Company's management maintains an effective system of internal control that is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management's authorization. The system is continuously monitored by direct management -19- review, the independent accountants and by internal auditors who conduct an extensive program of audits throughout the Company. The Company's consolidated financial statements have been audited by BDO Seidman, LLP, independent accountants. Their audits were conducted in accordance with generally accepted auditing standards, and included a review of financial controls and tests of accounting records and procedures as they considered necessary in the circumstances. The Audit Committee of the Board of Directors, which consists of outside directors, meets regularly with management, the internal auditors and the independent accountants to review accounting, reporting, auditing and internal control matters. The committee has direct and private access to both internal and external auditors. /s/ Sidney Kimmel /s/ Wesley R. Card Sidney Kimmel Wesley R. Card Chairman Chief Financial Officer REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Jones Apparel Group, Inc. We have audited the accompanying consolidated balance sheets of Jones Apparel Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jones Apparel Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP BDO Seidman, LLP New York, New York February 6, 1998 -20- Jones Apparel Group, Inc. Consolidated Balance Sheets (All amounts in thousands except per share data) December 31, 1997 1996 ------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $40,134 $30,085 Accounts receivable, net of allowance of $2,767 and $2,263 for doubtful accounts 91,747 112,678 Inventories 255,055 214,437 Receivable from and advances to contractors 7,833 11,490 Prepaid and refundable income taxes 5,993 - Deferred taxes 26,269 9,708 Prepaid expenses and other current assets 13,740 11,432 -------- -------- TOTAL CURRENT ASSETS 440,771 389,830 PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization 81,934 61,696 CASH RESTRICTED FOR CAPITAL ADDITIONS 11,193 - INTANGIBLES, at cost, less accumulated amortization 30,604 26,288 OTHER ASSETS 16,265 10,295 -------- -------- $580,767 $488,109 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $4,199 $3,067 Accounts payable 90,429 72,569 Income taxes payable - 8,959 Accrued expenses and other current liabilities 15,574 11,265 -------- -------- TOTAL CURRENT LIABILITIES 110,202 95,860 -------- -------- NONCURRENT LIABILITIES: Obligations under capital leases 18,457 12,134 Long-term debt 8,833 7 Other 6,107 - -------- -------- TOTAL NONCURRENT LIABILITIES 33,397 12,141 -------- -------- TOTAL LIABILITIES 143,599 108,001 -------- -------- COMMITMENTS AND CONTINGENCIES - - EXCESS OF NET ASSETS ACQUIRED OVER COST 1,536 3,379 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value - shares authorized 1,000; none issued - - Common stock, $.01 par value - shares authorized 100,000;issued 54,478 and 53,595 545 536 Additional paid-in capital 122,582 99,140 Retained earnings 438,917 317,192 Cumulative foreign currency translation adjustment (1,524) (1,154) -------- -------- 560,520 415,714 Less treasury stock, 3,384 and 1,600 shares, at cost (124,888) (38,985) -------- -------- TOTAL STOCKHOLDERS' EQUITY 435,632 376,729 -------- -------- $580,767 $488,109 ======== ======== See accompanying notes to consolidated financial statements -21- Jones Apparel Group, Inc. Consolidated Statements of Income (All amounts in thousands except per share data)
Year Ended December 31, 1997 1996 1995 ---------- ---------- -------- NET SALES $1,372,458 $1,021,042 $776,365 LICENSING INCOME 15,013 13,036 10,314 ---------- ---------- -------- Total revenues 1,387,471 1,034,078 786,679 COST OF GOODS SOLD 940,149 717,250 546,413 ---------- ---------- -------- Gross profit 447,322 316,828 240,266 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 250,685 186,572 139,135 ---------- ---------- -------- Operating income 196,637 130,256 101,131 INTEREST EXPENSE 3,584 3,040 1,908 INTEREST INCOME (1,556) (547) (445) ---------- ---------- -------- Income before provision for income taxes 194,609 127,763 99,668 PROVISION FOR INCOME TAXES 72,884 46,889 36,183 ---------- ---------- -------- NET INCOME $121,725 $80,874 $63,485 ========== ========== ======== EARNINGS PER SHARE Basic $2.35 $1.55 $1.22 Diluted $2.26 $1.51 $1.20 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 51,899 52,333 52,130 Diluted 53,905 53,651 53,024
See accompanying notes to consolidated financial statements -22- Jones Apparel Group, Inc. Consolidated Statements of Stockholders' Equity (All amounts in thousands)
Cumulative foreign Total Additional currency Stock- Common paid-in Retained translation Treasury holders' stock capital earnings adjustments stock equity ---- -------- -------- ------- --------- -------- BALANCE, JANUARY 1, 1995 $259 $76,711 $172,916 $(1,208) $ - $248,678 YEAR ENDED DECEMBER 31, 1995: Amortization of deferred compensation in connection with executive stock options - 232 - - - 232 Net income - - 63,485 - - 63,485 Exercise of stock options 4 4,730 (83) - 168 4,819 Tax benefit derived from exercise of stock options - 2,499 - - - 2,499 Stock tendered as payment for options exercised - - - - (168) (168) Treasury stock acquired - - - - (4,638) (4,638) Foreign currency translation adjustments - - - 68 - 68 --- -------- -------- ------- ------- -------- BALANCE, DECEMBER 31, 1995 263 84,172 236,318 (1,140) (4,638) 314,975 YEAR ENDED DECEMBER 31, 1996: Amortization of deferred compensation in connection with executive stock options - 290 - - - 290 Net income - - 80,874 - - 80,874 Exercise of stock options 6 9,825 - - - 9,831 Tax benefit derived from exercise of stock options - 5,157 - - - 5,157 Stock tendered as payment for options exercised - - - - (763) (763) Treasury stock acquired - - - - (33,584) (33,584) Effect of 2-for-1 stock split 267 (267) - - - - Registration of 1996 Stock Option Plan - (37) - - - (37) Foreign currency translation adjustments - - - (14) - (14) --- -------- -------- ------- -------- -------- BALANCE, DECEMBER 31, 1996 536 99,140 317,192 (1,154) (38,985) 376,729 YEAR ENDED DECEMBER 31, 1997: Amortization of deferred compensation in connection with executive stock options and related items - 2,778 - - - 2,778 Net income - - 121,725 - - 121,725 Exercise of stock options 9 12,597 - - - 12,606 Tax benefit derived from exercise of stock options - 8,067 - - - 8,067 Stock tendered as payment for options exercised - - - - (100) (100) Treasury stock acquired - - - - (85,803) (85,803) Foreign currency translation adjustments - - - (370) - (370) ---- -------- -------- ------- --------- -------- BALANCE, DECEMBER 31, 1997 $545 $122,582 $438,917 $(1,524) $(124,888) $435,632 ==== ======== ======== ======= ========= ========
See accompanying notes to consolidated financial statements -23- Jones Apparel Group, Inc. Consolidated Statements of Cash Flows (All amounts in thousands) Year Ended December 31, 1997 1996 1995 -------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $121,725 $80,874 $63,485 -------- ------- ------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,594 8,948 6,724 Provision for losses on trade receivables 1,870 800 (464) Deferred taxes (17,907) 7,233 7,622 Other 264 416 40 Decrease (increase) in: Trade receivables 18,917 (21,349) (17,873) Inventories (40,961) (37,814) (53,077) Prepaid expenses and other current assets 1,264 10,624 (10,746) Other assets (6,273) (3,703) (5,027) Increase (decrease) in: Accounts payable 17,909 13,498 13,371 Taxes payable (5,253) 6,673 4,116 Accrued expenses and other current liabilities 4,428 4,492 768 -------- ------- ------- Total adjustments (11,148) (10,182) (54,546) -------- ------- ------- Net cash provided by operating activities 110,577 70,692 8,939 -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (32,149) (34,066) (16,013) Proceeds from disposition of assets - 261 635 Increase in cash restricted for capital additions (11,193) - - Acquisition of trademarks and licenses - (1,492) (28) -------- ------- ------- Net cash used in investing activities (43,342) (35,297) (15,406) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt and capital leases (3,939) (2,623) (2,606) Purchases of treasury stock (85,803) (33,584) (4,638) Proceeds from issuance of long-term debt 10,000 - - Proceeds from capital leases 10,000 5,000 5,000 Proceeds from exercise of stock options 12,507 9,068 4,651 Other - (37) - Net cash provided by (used in) -------- ------- ------- financing activities (57,235) (22,176) 2,407 -------- ------- ------- EFFECT OF EXCHANGE RATES ON CASH 49 2 (202) -------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,049 13,221 (4,262) CASH AND CASH EQUIVALENTS, BEGINNING 30,085 16,864 21,126 -------- ------- ------- CASH AND CASH EQUIVALENTS, ENDING $40,134 $30,085 $16,864 ======== ======= ======= See accompanying notes to consolidated financial statements -24- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements NOTE 1. SUMMARY OF ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Jones Apparel Group, Inc. and its wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. The Company designs, contracts for the manufacture of, and markets a broad range of women's career and casual sportswear, suits and dresses. The Company sells its products to better specialty and department stores and also operates its own network of factory outlet stores. In addition, the Company licenses the use of several of its brand names to select manufacturers of women's and men's apparel and accessories. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Credit Risk Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash, cash equivalents and accounts receivable. The Company places its cash and cash equivalents in investment-grade, short-term debt instruments with quality financial institutions and the U.S. Government and, by policy, limits the amount of credit exposure in any one financial vehicle. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The allowance for non-collection of accounts receivable is based upon the expected collectibility of all accounts receivable. Financial Instruments The fair value of cash and cash equivalents and receivables approximate their carrying value due to their short-term maturities. The fair value of long-term debt instruments, including the current portion, approximates the carrying value and is estimated based on the current rates offered to the Company for debt of similar maturities. Inventories Inventories are stated at the lower of cost or market. Wholesale inventories are determined using the first-in, first-out method while retail inventories are determined using the retail method. Property, Plant, Equipment and Depreciation Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the assets ranging from three to twenty years. Leased Property Under Capital Leases Property under capital leases is amortized over the lives of the respective leases or the estimated useful lives of the assets. Intangibles Intangibles, which include trademarks and license agreements, are amortized on a straight-line basis over the estimated useful lives of the assets. -25- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) Excess of Net Assets Acquired Over Cost The excess of net assets acquired over cost of acquired businesses is amortized using the straight-line method over a five year period. Foreign Currency Translation The financial statements of foreign subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translations." Balance sheet accounts are translated at the current exchange rate and income statement items are translated at the average exchange rate for the period. Gains and losses resulting from translation are accumulated in a separate component of stockholders' equity. Segment data is not provided as foreign operations are not material. Treasury Stock Treasury stock is recorded at net acquisition cost. Gains and losses on disposition are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings. Revenue Recognition Sales are recognized upon shipment of products or, in the case of retail sales, at the time of register receipt. Allowances for estimated returns are provided when sales are recorded. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Current tax assets and liabilities are recognized for the estimated Federal, foreign, state and local income taxes payable or refundable on the tax returns for the current year. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary timing differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income tax provisions are based on the changes to the respective assets and liabilities from period to period. Stock Options The Company uses the intrinsic value method of accounting for employee stock options as permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount the employee must pay to acquire the stock. The compensation cost is recognized over the vesting period of the options. Earnings per Share During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which provides for the calculation of "basic" and "diluted" earnings per share. This Statement, effective for financial statements issued for periods ending after December 15, 1997, requires restatement of all prior-period EPS data presented. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options. All periods presented have been restated to comply with the provisions of SFAS No. 128. Cash Equivalents The Company considers all highly liquid short-term investments to be cash equivalents. -26- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) Long-Lived Assets The Company reviews certain long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In that regard, the Company assesses the recoverability of such assets based upon estimated non-discounted cash flow forecasts. Presentation of Prior Year Data Certain reclassifications have been made to conform prior year data with the current presentation. New Accounting Standards Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," established standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of and enterprise about which separate financial information is available that is evaluated regularly by Management in deciding how to allocate resources and in assessing performance. Both SFAS Nos. 130 and 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. The adoption of these standards is not expected to have a material effect on the Company's financial position or results of operations. The Company is currently reviewing SFAS No. 131 and has of yet been unable to fully evaluate the impact, if any, it may have on future financial statement disclosures. NOTE 2. INVENTORIES Inventories are summarized as follows: December 31, 1997 1996 (In thousands) -------- -------- Raw materials $27,045 $38,571 Work in process 41,294 37,682 Finished goods 186,716 138,184 -------- -------- $255,055 $214,437 ======== ======== -27- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 3. PROPERTY, PLANT AND EQUIPMENT Major classes of property, plant and equipment are as follows: December 31, 1997 1996 (In thousands) ------- ------- Land and buildings $37,893 $36,763 Leasehold improvements 29,230 24,712 Machinery and equipment 31,979 25,340 Furniture and fixtures 9,666 6,932 Construction in progress 17,355 1,076 ------- ------- 126,123 94,823 Less: accumulated depreciation and amortization 44,189 33,127 ------- ------- $81,934 $61,696 ======= ======= Included in property, plant and equipment are the following capitalized leases: December 31, 1997 1996 (In thousands) ------- ------- Buildings $32,137 $31,006 Machinery and equipment 3,759 3,538 Construction in progress 9,937 - ------- ------- 45,833 34,544 Less: accumulated amortization 12,626 10,243 ------- ------- $33,207 $24,301 ======= ======= At December 31, 1997, the Company had commitments to construct additional warehouse facilities. These facilities, which will be completed during 1998, will cost an estimated $28,000,000 in the aggregate. As of December 31, 1997, a total of $9,937,000 had been expended on these projects and the Company had $11,193,000 in cash on hand restricted for use in their completion. -28- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 4. INTANGIBLE ASSETS Intangible assets consist of the following: Useful lives December 31, 1997 1996 (years) (In thousands) ------- ------- ---------- Trademarks $32,972 $26,865 15 to 20 License agreements 5,319 5,319 51/2 to 19 ------- ------- 38,291 32,184 Less: accumulated amortization 7,687 5,896 ------- ------- $30,604 $26,288 ======= ======= NOTE 5. SHORT-TERM BORROWINGS At December 31, 1997, the Company had credit arrangements with six United States financial institutions which totaled $425,000,000. These lines, which may be used for unsecured borrowings and letters of credit (issued primarily to finance foreign inventory purchases), contain an aggregate sub-limit of $170,000,000 for unsecured borrowings with rates depending on the borrowing vehicle utilized. At December 31, 1997, the estimated aggregate interest rate on the lines was 7.1%. The Company was committed for unexpired bank letters of credit at December 31, 1997 in the amount of $153,744,000 and there were no short-term borrowings outstanding. The Company also has a line of credit with a Canadian institution for C$4,000,000 to be used for unsecured borrowings under which no amounts were outstanding at December 31, 1997. NOTE 6. LONG-TERM DEBT Long-term debt consists of the following: December 31, 1997 1996 (In thousands) ------ ------ 7.125% Industrial revenue bonds, due 2007 $9,833 $ - Other debt 10 48 ------ ------ 9,843 48 Less: current portion 1,010 41 ------ ------ $8,833 $ 7 ====== ====== During 1997, the Company issued $10.0 million of long-term debt to finance construction of a new warehouse facility. The aggregate maturities for long-term debt for the five years after December 31, 1997 are approximately $1,000,000 per year. -29- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 7. OBLIGATIONS UNDER CAPITAL LEASES Obligations under capital leases consist of the following: December 31, 1997 1996 (In thousands) ------- ------- Warehouses, office facilities and equipment $21,646 $15,160 Less: current portion 3,189 3,026 ------- ------- Obligations under capital leases - noncurrent $18,457 $12,134 ======= ======= The Company occupies a warehouse and office facility which is leased from an affiliated real estate partnership which is 50% owned by the Company's Chairman. The lease runs until March 15, 1998. Minimum annual rent payments are $1,000,000. The lease was capitalized at the fair market value of the facility which approximated the present value of the minimum lease payments. Upon the expiration of the lease, the Company has agreed to purchase the property from the partnership for $10,500,000, which approximates fair market value, and enter into a sale and leaseback arrangement with an unrelated third party. The Company occupies warehouse and office facilities leased from the City of Lawrenceburg, Tennessee. Four ten-year net leases run until February 2004, July 2005, May 2006 and April 2007, respectively, and require minimum annual rent payments of $500,000, $500,000, $500,000, and $1,000,000, respectively, plus accrued interest. In connection with these leases, the Company guaranteed $25,000,000 of Industrial Development Bonds issued in order to construct the facilities, $20,417,000 of which remained unpaid as of December 31, 1997. The financing agreement with the issuing authority (i) requires the Company to maintain stipulated levels of insurance and tangible net worth, (ii) requires the Company to maintain minimum ratios of cash flow to debt service and liabilities to tangible net worth and (iii) contains certain other restrictions. The Company also leases various equipment under three to five year leases at an aggregate annual rental of $767,000. The equipment has been capitalized at its fair market value of $2,650,000, which approximates the present value of the minimum lease payments. The following is a schedule by year of future minimum lease payments under capital leases, together with the present value of the net minimum lease payments as of December 31, 1997: Year Ending December 31, (In thousands) 1998 $4,638 1999 4,254 2000 3,523 2001 3,345 2002 3,166 Later years 8,994 ------- Total minimum lease payments 27,920 Less: amount representing interest 6,274 ------- Present value of net minimum lease payments $21,646 ======= -30- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 8. SIGNIFICANT CUSTOMERS A significant portion of the Company's sales are to retailers throughout the United States and Canada. Sales to department stores owned by Federated Department Stores, Inc. ("Federated") accounted for 20%, 20% and 21% for the years ended December 31, 1997, 1996 and 1995, respectively. Sales to department stores owned by The May Department Stores Company ("May") accounted for 19%, 20% and 19% for the years ended December 31, 1997, 1996 and 1995, respectively. Federated and May accounted for approximately 43% of accounts receivable at December 31, 1997. NOTE 9. COMMITMENTS (a) LEASES. Total rent expense charged to operations for the years ended December 31, 1997, 1996 and 1995 was $22,159,000, 18,888,000 and $15,359,000, respectively. The following is a schedule by year of future minimum rental payments required under operating leases for the next five years: Year Ending December 31, (In thousands) 1998 $18,059 1999 17,320 2000 15,124 2001 13,416 2002 8,506 Later years 17,617 ------- $90,042 ======= Certain of the leases provide for renewal options and the payment of real estate taxes and other occupancy costs. (b) CONTINGENT LIABILITIES. Various lawsuits and claims arising during the normal course of business are pending against the Company and its consolidated subsidiaries. In the opinion of management, the ultimate liability, if any, resulting from these matters will have no significant effect on the Company's consolidated financial position, results of operations or liquidity. (c) ROYALTIES. Under an exclusive license to manufacture certain items under the Lauren by Ralph Lauren trademark pursuant to license and design service agreements with Polo Ralph Lauren Corporation, the Company is obligated to pay Polo Ralph Lauren Corporation a percentage of net sales of Lauren by Ralph Lauren products. Under these agreements, minimum payments of $7,000,000 are due for each of the years 2000 and 2001. The license and design service agreements expire on December 31, 2001 and provide for certain renewal options at that time. -31- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 10. INCOME TAXES The following summarizes the provision for income taxes: Year ended December 31, 1997 1996 1995 (In thousands) ------- ------- ------- Current: Federal $78,811 $34,522 $23,236 State and local 10,524 3,733 3,030 Foreign 1,456 1,401 2,295 ------- ------- ------- 90,791 39,656 28,561 ------- ------- ------- Deferred: Federal (15,359) 7,722 7,653 State and local (2,240) (489) (31) Foreign (308) - - ------- ------- ------- (17,907) 7,233 7,622 ------- ------- ------- Provision for income taxes $72,884 $46,889 $36,183 ======= ======= ======= The foreign and domestic components of income before provision for income taxes were as follows: Year ended December 31, 1997 1996 1995 (In thousands) -------- -------- ------- United States $192,482 $125,650 $94,224 Canada 1,815 2,378 2,666 Other 312 (265) 2,778 -------- -------- ------- Income before provision for income taxes $194,609 $127,763 $99,668 ======== ======== ======= -32- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) The provision for income taxes on adjusted historical income differs from the amounts computed by applying the applicable Federal statutory rates due to the following: Year ended December 31, 1997 1996 1995 (In thousands) ------- -------- ------- Provision for Federal income taxes at the statutory rate $68,113 $44,717 $34,884 State and local income taxes, net of federal benefit 5,385 2,108 1,949 Amortization of excess of net assets acquired over cost (645) (645) (645) Other items, net 31 709 (5) ------- ------- ------- Provision for income taxes $72,884 $46,889 $36,183 ======= ======= ======= The Company has not provided for U.S. Federal and foreign withholding taxes on $2,727,000 of foreign subsidiaries' undistributed earnings as of December 31, 1997. Such earnings are intended to be reinvested indefinitely. The following is a summary of the significant components of the Company's deferred tax assets and liabilities: December 31, 1997 1996 (In thousands) ------- ------- Deferred tax assets: Nondeductible accruals and allowances $23,587 $ 8,009 Depreciation and amortization 561 1,118 Other (net) 2,286 1,042 ------- ------- Net deferred tax asset $26,434 $10,169 ======= ======= -33- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 11. COMMON STOCK On July 30, 1996, the Company's Board of Directors approved a two-for-one stock split of the Company's Common Stock in the form of a 100% stock dividend for shareholders of record as of September 12, 1996. Concurrently, the number of authorized shares of Common Stock was increased to 100,000,000. On October 2, 1996, a total of 26,744,580 shares of Common Stock were issued in connection with the split. The stated par value of each share remained at $0.01. The issuance of authorized but unissued shares resulted in the transfer of $267,000 from additional paid-in capital to common stock, representing the par value of the shares issued. All share and per share amounts have been restated to retroactively reflect the stock split. In 1995, the Board of Directors authorized the repurchase of up to $100,000,000 of the Company's Common Stock in open market transactions over a two-year period ending in December, 1997. The program expired on October 27, 1997, through which date 2,823,394 shares had been acquired at a cost of $100,000,000. In 1997, the Board of Directors authorized an additional program to repurchase the Company's Common Stock from time to time in open market transactions not to exceed $100,000,000 in aggregate price. This program was to commence upon the earlier of December 15, 1997 or the full utilization of the previous buy-back program and has no time limit. As of December 31, 1997, 530,106 shares had been acquired at a cost of $24,025,000, leaving $75,975,000 available for future repurchases at that date. NOTE 12. STATEMENT OF CASH FLOWS Cash interest payments during the years ended December 31, 1997, 1996 and 1995 were $3,941,000, $3,207,000 and $2,118,000, respectively. Cash income tax payments during the years ended December 31, 1997, 1996 and 1995 were $96,251,000, $32,110,000 and $23,068,000, respectively. In connection with an agreement entered into for the formal acquisition of and payment for a currently utilized trademark, the Company recorded a $6,107,000 intangible asset and an offsetting long-term liability. Reductions in income tax payments resulting from the exercise of employee stock options during the years ended December 31, 1997, 1996 and 1995 were $8,067,000, $5,157,000 and $2,499,000, respectively. Under the provisions of the Company's 1991 Stock Option Plan, employees exercising stock options during the year ended December 31, 1997 exchanged 2,122 shares of the Company's Common Stock (valued at $100,000) for 8,163 newly issued shares, during the year ended December 31, 1996 exchanged 28,000 shares of the Company's Common Stock (valued at $763,000) for 67,430 newly issued shares and during the year ended December 31, 1995 exchanged 11,536 shares of the Company's Common Stock (valued at $168,000) for 24,000 newly issued shares. -34- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 13. STOCK OPTIONS At December 31, 1997, the Company has two stock option plans, which are described below. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for the plans. Under APB Opinion 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost is recognized. Under the Company's 1991 and 1996 Stock Option Plans, options to purchase an aggregate of not more than 5,000,000 shares and 4,000,000 shares, respectively, of common stock may be granted from time to time to key employees, officers, directors, advisors and independent consultants to the Company or to any of its subsidiaries. The Plans are administered by the Board of Directors, which has empowered a committee of directors to administer the Plans. Under both plans, the per share exercise price for incentive stock options ("ISOs") will not be less than 100% of the fair market value of a share of the common stock on the date the option is granted (110% of fair market value on the date of grant of an ISO if the optionee owns more than 10% of the Company). Under the 1991 Plan, the per share exercise price for non- qualified stock options ("NQSOs") will not be less than 75% of the fair market value on the date the option is granted. The 1996 Plan has no restrictions on NQSO pricing. Under the 1991 Plan, options may be granted for a term to be determined by the committee of not less than one or more than ten years from the date of grant; under the 1996 Plan, options may be granted for a term of not less than six months or more than ten years from the date of grant. FASB Statement 123, "Accounting for Stock-Based Compensation," requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value-based method prescribed in FASB Statement 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively: no dividends paid for all years; expected volatility of 34.7%, 38.9% and 40.7%; risk-free interest rates of 6.04%, 6.20% and 6.16%; and expected lives of 3.4, 3.0 and 3.0 years. Under the accounting provisions of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table. December 31, 1997 1996 1995 -------- ------- ------- Net income (in thousands) As reported $121,725 $80,874 $63,485 Pro forma 116,120 79,074 63,387 Basic earnings per share As reported $2.35 $1.55 $1.22 Pro forma $2.24 $1.51 $1.22 Diluted earnings per share As reported $2.26 $1.51 $1.20 Pro forma $2.15 $1.47 $1.20 -35- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) The following table contains information on stock options for the three year period ended December 31, 1997: Exercise Weighted Option price range average shares per share price --------- ------------------ ------ Outstanding, January 1, 1995 3,726,366 $0.40 to $16.125 $9.65 Granted 180,000 $12.00 to $17.75 $14.28 Exercised 777,766 $0.40 to $14.25 $6.20 Forfeited 78,000 $7.00 to $16.125 $13.63 --------- ------------------ ------ Outstanding, December 31, 1995 3,050,600 $0.40 to $17.75 $10.71 Granted 2,166,000 $14.715 to $34.375 $24.53 Exercised 1,031,230 $0.40 to $14.5625 $9.53 Forfeited 76,200 $7.00 to $24.00 $14.93 --------- ------------------ ------ Outstanding, December 31, 1996 4,109,170 $0.40 to $34.375 $18.17 Granted 1,717,000 $1.00 to $51.50 $47.04 Exercised 883,118 $7.00 to $36.625 $14.28 Forfeited 18,800 $12.375 to $24.75 $21.46 --------- ------------------ ------ Outstanding, December 31, 1997 4,924,252 $0.40 to $51.50 $28.88 ========= ================== ====== Exercisable at year-end 1995 980,400 $0.40 to $15.0625 $8.93 1996 733,770 $0.40 to $17.50 $9.56 1997 894,854 $0.40 to $34.375 $13.90 1991 Plan 1996 Plan --------- --------- Available for future grants 1995 938,334 - 1996 49,534 2,799,000 1997 3,134 1,147,200 Exercise price Exercise price Total less than market equal to market options ---------------- --------------- ------- Weighted-average fair value of: Options granted in 1995 - $4.74 $4.74 Options granted in 1996 $8.46 $8.00 $8.01 Options granted in 1997 $35.72 $14.90 $15.20 -36- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) The following table summarizes information about stock options outstanding at December 31, 1997.
Range of exercise prices: $0.40 $11.25 $21.125 $32.625 $44.00 $0.40 to to to to to to $9.50 $19.625 $24.3125 $39.25 $51.50 $51.50 ------- --------- --------- ------- --------- --------- Outstanding Options Number outstanding at December 31, 1997 361,167 1,044,867 1,579,218 324,000 1,615,000 4,924,252 Weighted-average remaining contractual life (years) 3.4 6.9 8.6 9.0 9.8 8.3 Weighted-average exercise price $5.86 $13.55 $23.97 $34.53 $47.61 $28.88 Exercisable options Number outstanding at December 31, 1997 261,169 373,067 253,618 7,000 - 894,854 Weighted-average exercise price $4.61 $13.16 $23.98 $34.38 - $13.90
NOTE 14. UNAUDITED CONSOLIDATED FINANCIAL INFORMATION Unaudited interim consolidated financial information for the two years ended December 31, 1997 is summarized as follows: First Second Third Fourth (In thousands except per share data) Quarter Quarter Quarter Quarter -------- -------- -------- -------- 1997 Net sales $317,990 $262,988 $445,972 $345,508 Total revenues 321,455 266,289 450,508 349,219 Gross profit 106,571 87,747 147,201 105,803 Operating income 47,475 31,115 79,383 38,664 Net income 29,540 19,280 48,938 23,967 Diluted earnings per share $0.55 $0.36 $0.90 $0.45 1996 Net sales $260,350 $193,275 $309,019 $258,398 Total revenues 262,926 195,934 313,228 261,990 Gross profit 75,369 63,691 99,706 78,062 Operating income 32,652 21,534 49,788 26,282 Net income 20,339 13,338 30,878 16,319 Diluted earnings per share $0.38 $0.25 $0.58 $0.30 -37- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 15. EMPLOYEE BENEFIT PLAN The Company maintains the Jones Apparel Group, Inc. Retirement Plan (the "Plan") under Section 401(k) of the Internal Revenue Code. Full-time employees not covered by a collective bargaining agreement and meeting certain other requirements are eligible to participate in the Plan. Under the Plan, employees may elect to have up to 10% of their salary deferred and deposited with a qualified trustee, who in turn invests the money in a variety of investment vehicles as selected by each employee. From January 1, 1995 through March 31, 1996, the Company matched 30% of each participant's contributions with the Company's contribution limited to a maximum of 1.8% of the employee's total compensation for employees earnings less than $150,000 per year. For employees earning over $150,000 per year, the Company matched 25% of each participant's contributions with the Company's contribution limited to a maximum of 1% of the employee's total compensation. On April 1, 1996, the Company matching contribution rates were increased to 50% and 3.0% of total compensation, respectively, for employees earning up to $150,000 per year and 35% and 2.1% of total compensation, respectively, for employees earning over $150,000 per year. Contributions and salary deferrals are subject to limitations imposed by the Internal Revenue Code. The Company may, at its sole discretion, contribute additional amounts to all employees on a pro rata basis. All employee contributions into the Plan are 100% vested, while the Company's matching contributions vest over a five-year period. The Company contributed approximately $1,241,000, $801,000 and $369,000 to the Plan during the years ended December 31, 1997, 1996 and 1995, respectively. -38- Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 16. EARNINGS PER SHARE Basic and diluted earnings per share for each of the three years ended December 31, 1997, 1996 and 1995 are calculated as follows (in thousands except per share amounts): Net Per-share Income Shares Amount -------- ------ ------ For the year ended December 31, 1997: Basic earnings per share $121,725 51,899 $2.35 Effect of assumed conversion of employee stock options - 2,006 $0.09 -------- ------ ------ Diluted earnings per share $121,725 53,905 $2.26 ======== ====== ====== For the year ended December 31, 1996: Basic earnings per share $80,874 52,333 $1.55 Effect of assumed conversion of employee stock options - 1,318 $0.04 ------- ------ ------ Diluted earnings per share $80,874 53,651 $1.51 ======= ====== ====== For the year ended December 31, 1995: Basic earnings per share $63,485 52,130 $1.22 Effect of assumed conversion of employee stock options - 894 $0.02 ------- ------ ------ Diluted earnings per share $63,485 53,024 $1.20 ======= ====== ====== Options to purchase 1,590,000 shares of common stock at exercise prices ranging from $45 5/16 to $51 1/2 per share were outstanding during a portion of 1997 but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares. These options, which expire between July 22 and December 12, 2007, were all outstanding at the end of 1997. NOTE 17. SUPPLEMENTAL PRO FORMA CONDENSED FINANCIAL INFORMATION On January 1, 1999, Jones Apparel Group, Inc. consummated a corporate reorganization under which two new wholly owned subsidiaries named Jones Apparel Group USA, Inc. ("Jones USA") and Jones Apparel Group Holdings, Inc. ("Jones Holdings") were created. On that date, the operating assets of Jones Apparel Group, Inc. were transferred to Jones USA and Jones USA assumed the role of obligor of the Senior Notes due 2001 (which were issued on October 2, 1998 in conjunction with the acquisition of Sun Apparel, Inc.) with Jones Apparel Group, Inc. remaining and Jones Holdings becoming co-obligors of the Notes. The following condensed financial information represents, on a pro forma basis, the results of Jones USA had the reorganization occurred on January 1, 1995 (all amounts in thousands). Separate pro forma financial statements and other disclosures concerning Jones USA and Jones Holdings are not presented as such information is not considered material to the holders of the Senior Notes. December 31, December 31, December 31, 1995 1996 1997 ----------- ----------- ----------- Current assets $284,805 $331,104 $365,019 Noncurrent assets 33,045 58,962 95,349 Current liabilities 141,514 199,043 256,605 Noncurrent liabilities 10,151 12,420 28,094 Excess of net assets acquired over cost 5,221 3,379 1,536 For the Year Ended December 31, --------------------------------------- 1995 1996 1997 -------- -------- ---------- Total revenues $690,339 $921,500 $1,261,159 Gross profit 177,533 244,302 371,522 Operating income 35,361 56,820 112,946 Net income 21,671 30,616 61,358 -39- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors and Executive Officers The directors and executive officers of the Company are as follows: Name Age Office - --------------------- --- ----------------------------------- Sidney Kimmel 70 Chairman and Director Herbert J. Goodfriend 71 Vice Chairman and Director Jackwyn Nemerov 46 President Irwin Samelman 67 Executive Vice President, Marketing and Director Wesley R. Card 50 Chief Financial Officer Patrick M. Farrell 48 Vice President and Corporate Controller Geraldine Stutz 69 Director Howard Gittis 64 Director Each director who is not a full-time employee of the Company will receive an annual grant of options to purchase 1,000 shares of the Company's common stock at an exercise price of $1.00 per share. Each option will expire on the tenth anniversary of its date of grant, and will be exercisable, in whole or in part, commencing six months from the date of grant and thereafter during the exercise period. Officers are appointed by the Board of Directors. The Board of Directors has appointed an Audit Committee consisting of Ms. Stutz and Mr. Gittis. The Audit Committee meets periodically to review and make recommendations with respect to the Company's internal controls and financial reports, and in connection with such reviews, has met with appropriate Company financial personnel and the Company's independent certified public accountants. The Board of Directors has also appointed a Stock Option Committee consisting of Ms. Stutz and Mr. Gittis to administer the 1991 and 1996 Stock Option Plans and a Compensation Committee consisting of Ms. Stutz and Mr. Gittis to determine cash and other incentive compensation to be paid to the Company's executive officers. Mr. Kimmel founded the Jones Apparel Division of W.R. Grace & Co. in 1970. Mr. Kimmel has served as Chairman since 1975. Prior to 1975, Mr. Kimmel occupied various executive offices including President -40- of Jones New York and Vice President of John Meyer of Norwich. Prior to founding Jones, Mr. Kimmel was employed by W.R. Grace & Co. and was President of Villager, Inc., a sportswear company. Mr. Goodfriend joined the Company in 1990 after serving as the Company's legal counsel for the previous three years and has served as a director since July 1991. Before joining Jones, Mr. Goodfriend served as a director of Villager, Inc. and Venice Industries, Inc. In addition, Mr. Goodfriend is engaged in the practice of law and is of counsel to the firm of Phillips Nizer Benjamin Krim & Ballon LLP, which performs legal services for the Company. Ms. Nemerov was appointed President in January 1997. She joined the Company in 1985 and served as President of the Company's casual sportswear divisions and the Lauren by Ralph Lauren division. Prior to joining Jones, Ms. Nemerov was President of the Gloria Vanderbilt division of Murjani, Inc. from 1980 through 1985. Mr. Samelman has been Executive Vice President, Marketing of the Company since 1991 and has served as a director since July 1991. In addition, from 1987 to 1991, Mr. Samelman provided marketing consulting services to the Company through Samelman Associates, Inc., a private consulting company controlled by him. Prior thereto, Mr. Samelman was Regional Marketing Manager of Russ Togs, Inc. and Vice President of Villager, Inc. Mr. Card joined the Company in 1990. Prior to joining Jones, Mr. Card held the positions of Executive Vice President and Chief Financial Officer of Carolyne Roehm, Inc., and Corporate Vice President, Controller and Assistant Secretary of Warnaco, Inc. Mr. Farrell was appointed Vice President and Corporate Controller in November 1997. He joined the Company in 1994 as Director of Internal Audit and served as Vice President, Finance and Administration of Retail Operations of the Company since 1995. Prior to joining the Company, Mr. Farrell was Director of Internal Audit for Crystal Brands, Inc. Ms. Stutz has been a director of the Company since July 1991. Since 1993, Ms. Stutz has been a principal partner of Panache Productions, a fashion and marketing service. During the previous five years, she was Publisher of Panache Press at Random House, a book publisher. From 1960 until 1986, Ms. Stutz was President of Henri Bendel. Ms. Stutz serves on the Board of Directors of Tiffany & Co., The Theatre Development Fund and The Actors' Fund. Mr. Gittis has been a director of the Company since April 1992. During the past five years, Mr. Gittis' principal occupation has been Director and Vice Chairman of MacAndrews & Forbes Holdings Inc., a diversified holding company. In addition, Mr. Gittis is a director of Andrews Group Incorporated, California Federal Bank, a Federal Savings Bank, Consolidated Cigar Corporation, Consolidated Cigar Holdings Inc., First Nationwide Holdings Inc., First Nationwide (Parent) Holdings Inc., Loral Space and Communications Ltd., Mafco Consolidated Group Inc., Pneumo Abex Corporation, Power Control Technologies, Inc., Revlon, Inc., Revlon Consumer Products Corporation, Revlon Worldwide Corporation and Rutherford-Moran Oil Corporation. Key Employees The following persons, although not executive officers of the Company, make significant business contributions to the Company: Rena Rowan was the original creator of the Jones New York line and served as the division's Chief Designer from 1970 to 1982. She is currently Vice President, Design of the Company. From 1991 to 1993, Ms. -41- Rowan was an executive vice president of the Company. Prior to the inception of Jones New York, Ms. Rowan was employed by Villager, Inc. and Rosenau, Inc. Anita Britt, Director of Investor Relations and Financial Planning, joined the Company in December 1993. Prior to joining the Company, Ms. Britt was Director of Internal Audit of American Reliance Group, Inc. Howard Buerkle has been President of Retail Operations for the Company since 1989. From 1986 through 1989, Mr. Buerkle was President of the retail division of Inwear/Martinique. Ellen Daniel, President of the Evan-Picone Collection division, joined Jones in 1994. From 1982 through 1994, Ms. Daniel was employed by Liz Claiborne, most recently as Senior Vice President - Corporate Design Director. Ira Dansky joined the Company in 1996 as General Counsel. Prior to joining the Company, Mr. Dansky was engaged in private law practice from 1987 through 1996, prior to which he served as Associate General Counsel of Xerox Corporation. Ronald Harrison, Vice President of Manufacturing, joined the Company in 1981. Mr. Harrison had been Plant Manager for Chief Apparel, Inc. from 1965 through 1981. Joseph Hiess was appointed President of the Jones New York Men's Sportswear division in August 1997. Prior to his appointment, Mr. Hiess served as head of Design and Marketing of JJ Farmer, a menswear company he founded in 1986 and subsequently sold to Salant Corporation in 1993. Barbara Kennedy has been President of the Jones New York Dress Division since August 1991. From 1983 through August 1991, Ms. Kennedy was employed by Bloomingdale's in various capacities, most recently as Vice President, Merchandise Manager. Gary R. Klocek has been Controller of Jones Apparel Group, Inc. since August 1987. Prior to joining Jones, Mr. Klocek held various positions with Atlantic Richfield Company ("ARCO") from 1979 through 1987, his last position being Manager of Cost and Inventory Control for one of ARCO's subsidiaries. Jeffrey Levy, President of Rena Rowan, joined the Company in 1990. Prior to joining Jones, Mr. Levy was Vice President of Sales and National Sales Manager, of Russ Togs, Inc. from 1984 through 1990. Benny Lin, Senior Vice President - Creative Director, joined Jones Apparel Group in December 1995. Mr. Lin had been Fashion Director at Macy's East prior to joining the Company. Martin Marlowe joined Jones Apparel Group in 1992 as Vice President of Foreign Manufacturing. Prior to joining Jones, Mr. Marlowe was President of Jodi International, an apparel importer, from 1988 to 1992. Helen Merril, President of the Evan-Picone Dress Divisions, joined Jones Apparel Group in October 1993. Prior to joining the Company, Ms. Merril held the positions of President of Scassi Dress of De Peche Corporation and President of Nippon Boutique of Albert Nippon Inc. Susan Metzger, Vice President of Sales for the Lauren by Ralph Lauren division, joined the Company in May 1996. Prior to joining Jones Apparel Group, Ms. Metzger held the positions of Vice President of Sales of Chaus, Inc. and Sales Manager of JH Collectibles. Heather Pech, President of the Jones New York Sport Collection division, joined the Company in 1990. Ms. Pech had been Account Executive at Calvin Klein, Inc. prior to joining Jones. -42- Deanna Randall, who joined the Company in 1981, has held various sales and marketing positions with the Company, and is currently President of the Jones New York career division. Susan Rieland, President of Casual Design, joined the Company in 1994. Ms. Rieland had been Account Executive at Rafaella prior to joining Jones. John Sammaritano, Vice President of Distribution, joined Jones in 1975. Mr. Sammaritano had been Vice President of Distribution for Villager, Inc. from 1964 through 1975. Richard Shaw, President of Jones Apparel Group Canada, Inc., joined the Company in May 1997. Prior to joining the Company, Mr. Shaw served as President of Liz Claiborne Canada, which he helped launch in 1987. ITEM 11. EXECUTIVE COMPENSATION The information appearing in the Proxy Statement under the captions "EXECUTIVE COMPENSATION" and "EMPLOYMENT AND COMPENSATION ARRANGEMENTS" is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing in the Proxy Statement under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing in the Proxy Statement under the captions "CERTAIN TRANSACTIONS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" are incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. The schedule and report of independent certified public accountants thereon, listed on the Index to Financial Statement Schedules attached hereto. 2. The Exhibits, which are listed on the Exhibit Index attached hereto. (b) No reports on Form 8-K were filed by the registrant during the last quarter of the period covered by this report. -43- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment to the Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 26, 1998 JONES APPAREL GROUP, INC. (Registrant) By: /s/ Sidney Kimmel Sidney Kimmel, Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------------------- ----------------------------- -------------- /s/ Sidney Kimmel Chairman and Director March 26, 1998 - ----------------- (Chief Executive Officer) (Sidney Kimmel) /s/ Wesley R. Card Chief Financial Officer March 26, 1998 - ------------------ (Principal Financial Officer) (Wesley R. Card) /s/ Patrick M. Farrell Vice President and March 26, 1998 - ---------------------- Corporate Controller (Patrick M. Farrell) (Principal Accounting Officer) /s/ Herbert J. Goodfriend Vice Chairman and Director March 26, 1998 - ------------------------- (Herbert J. Goodfriend) /s/ Irwin Samelman Executive Vice President, March 26, 1998 - ------------------ Marketing and Director (Irwin Samelman) /s/ Geraldine Stutz Director March 26, 1998 - ------------------- (Geraldine Stutz) /s/ Howard Gittis Director March 26, 1998 - ----------------- (Howard Gittis) -44- JONES APPAREL GROUP, INC. INDEX TO FINANCIAL STATEMENT SCHEDULES Report of Independent Certified Public Accountants on Schedule Schedule II. Valuation and qualifying accounts Schedules other than those listed above have been omitted since the information is not applicable, not required or is included in the respective financial statements or notes thereto. EXHIBIT INDEX Incorporated by Reference Exhibit to Exhibit Nos. Description of Exhibit - ------------ ------- ---------------------- (5) 3.1 3.1 Articles of Incorporation, as amended (1) 3.3 3.3 By-Laws (3) 3.4 3.4 Amendment to By-Laws (1) 10.2 10.2 Lease Agreement between the Registrant and Bristol Associates, L.P., re: 250 Rittenhouse Circle (1) 10.5 10.5 Form of 1991 Stock Option Plan+ (1) 10.7 10.7 Employment and Stock Option Agreements between the Registrant and Herbert J. Goodfriend+ (2) 10.17 10.17 Note Agreement with The Industrial Development Board of the City of Lawrenceburg, Tennessee (2) 10.18 10.18 Industrial Development Board of the City of Lawrenceburg Taxable Revenue Note, Series 1995 (2) 10.19 10.19 Lease agreement between the Registrant and the Industrial Development Board of the City of Lawrenceburg (4) 10.26 10.26 Series 1996 Note Agreement with The Industrial Development Board of the City of Lawrenceburg, Tennessee (4) 10.27 10.27 Industrial Development Board of the City of Lawrenceburg Taxable Revenue Note, Series 1996 (4) 10.28 10.28 First Amendment to Lease Agreement between the Registrant and the Industrial Development Board of the City of Lawrenceburg (4) 10.29 10.29 Agreement between the Registrant and Herbert J. Goodfriend with respect to consulting services following termination of employment -45- Incorporated by Reference Exhibit to Exhibit Nos. Description of Exhibit - ------------ ------- ---------------------- (5) 10.30 10.30 Series 1996 Note Agreement with The Industrial Development Board of the City of Lawrenceburg, Tennessee (5) 10.31 10.31 Industrial Development Board of the City of Lawrenceburg Taxable Revenue Note, Series 1996 (5) 10.32 10.32 Lease Agreement between the Registrant and the Industrial Development Board of the City of Lawrenceburg (5) 10.33 10.33 Form of 1996 Stock Option Plan+ (5) 10.34 10.34 Letter Agreement between the Registrant and CoreStates Bank (5) 10.35 10.35 Master Short Term Borrowing Agreement between the Registrant and CoreStates Bank (5) 10.36 10.36 Letter Agreement between the Registrant and First Union National Bank (5) 10.37 10.37 Letter Agreement between the Registrant and the Bank of New York (5) 10.38 10.38 Letter Agreement between the Registrant and Bank of Boston (5) 10.39 10.39 Money Market Line Commercial Promissory Note between the Registrant and Bank of Boston (5) 10.40 10.40 License Agreement between the Registrant and Polo Ralph Lauren, L.P., dated October 18, 1995# (5) 10.41 10.41 Design Services Agreement between the Registrant and Polo Ralph Lauren, L.P., dated October 18, 1995# (5) 10.42 10.42 Lease Agreement between the Registrant and The Shelton Companies (5) 10.43 10.43 Letter Agreement between the Registrant and Israel Discount Bank of New York * 10.44 Series 1997 Note Agreement with The Industrial Development Board of the City of Lawrenceburg, Tennessee * 10.45 Industrial Development Board of the City of Lawrenceburg Taxable Revenue Note, Series 1997 * 10.46 Amendment to Lease Agreement between the Registrant and the Industrial Development Board of the City of Lawrenceburg * 10.47 Letter Agreement between the Registrant and First Union National Bank -46- Incorporated by Reference Exhibit to Exhibit Nos. Description of Exhibit - ------------ ------- ---------------------- * 10.48 Letter Agreement between the Registrant and CoreStates Bank * 10.49 Letter Agreement between the Registrant and BankBoston * 10.50 Money Market Line Commercial Promissory Note between the Registrant and BankBoston * 10.51 Letter Agreement between the Registrant and The Chase Manhattan Bank * 10.52 Term Note and Unconditional Guaranty with First Union National Bank * 11 Computation of Earnings per Share * 21 List of Subsidiaries * 23 Consent of BDO Seidman, LLP * 27 Financial Data Schedule (6) * 27.1 Restated Financial Data Schedule for 1996 and 1995 (6) * 27.2 Restated Financial Data Schedule for 1997 interim periods (6) * 27.3 Restated Financial Data Schedule for 1996 interim periods (6) ____________________ * Filed herewith. # Portions deleted pursuant to application for confidential treatment under Rule 24B-2 of the Securities Exchange Act of 1934. + Management contract or compensatory plan or arrangement. (1) Incorporated by Reference to the Company's Registration Statement on Form S-1 (file No. 33-39742). (2) Incorporated by Reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (3) Incorporated by Reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (4) Incorporated by Reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (5) Incorporated by Reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (6) Exhibit 27 is submitted as an exhibit only in the electronic format of this Annual Report on Form 10-K submitted to the Securities and Exchange Commission.) -47- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Jones Apparel Group, Inc. New York, New York The audits referred to in our dated February 6, 1998 relating to the consolidated financial statements of Jones Apparel Group, Inc. and subsidiaries, which is contained in Item 8 of Form 10-K, included the audits of the financial statement schedule listed in the accompanying index for each of the three years ended December 31, 1997. The financial statement schedule is the responsibility of management. Our responsibility is to express an opinion on the financial statement schedule based upon our audits. In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP BDO Seidman, LLP New York, New York February 6, 1998 -48- SCHEDULE II JONES APPAREL GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (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, 1995: Allowance for doubtful accounts $2,560 $(464) $ - $(161) $2,257 For the year ended December 31, 1996: Allowance for doubtful accounts $2,257 $(800) $ - $(806) $2,263 For the year ended December 31, 1997: Allowance for doubtful accounts $2,263 $(1,870) $ - $2,374 $2,767
Doubtful accounts written off (recovered) against accounts receivable. -49- EXHIBIT 10.44 SERIES 1997 NOTE AGREEMENT SERIES 1997 NOTE AGREEMENT (this "Agreement"), dated as of April 1, 1997, among THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG, a Tennessee public nonprofit corporation (the "Board"), NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION, a national banking association with its principal office in Nashville, Tennessee (the "Purchaser"), and JONES APPAREL GROUP, INC., a Pennsylvania corporation (the "Lessee"). PRELIMINARY STATEMENTS: WHEREAS, the Board is a public nonprofit corporation and a public instrumentality of the City of Lawrenceburg, Tennessee, and is authorized under Sections 7-53101 to 7-53-311, inclusive, Tennessee Code Annotated, as amended (hereinafter called the "Act"), to acquire, whether by purchase, exchange, gift, lease, or otherwise, and to own, lease and dispose of properties for the public purpose of promoting industry and developing trade by inducing manufacturing, industrial, governmental, educational and commercial enterprises to locate in or remain in the State of Tennessee; and WHEREAS, the Lessee heretofore leased from the Board pursuant to the Lease (as defined herein) certain distribution facilities located on land owned by the Board and located in the City of Lawrenceburg, Tennessee, and in connection therewith the Board issued its Taxable Revenue Note Series 1996 Jones Apparel Group Project, Inc.) (the "Series 1996 Note") to finance the cost thereof; and WHEREAS, Lessee has requested the Board to reimburse it for its costs to be incurred by Lessee in connection with the Board's enhancement of such facilities by issuing its note to the Purchaser and by using the proceeds from the issuance of such note for the purpose of reimbursing the Lessee for the cost of constructing and equipping a new 210,000 square foot distribution facility to be located on the leased premises adjacent to the existing distribution facility; and WHEREAS, the Board proposes to issue and sell its 1997 note (the "Series 1997 Note") to the Purchaser pursuant to this Agreement and further proposes to use the proceeds from the sale thereof to perform its obligations under such Lease; and WHEREAS, the Series 1996 Note and the Series 1997 Note proposed to be issued under this Agreement will be secured by, among other security, the amended and restated assignment of the rental payments under the Lease and the amended and restated deed of trust from the Board with respect to the property on which the distribution facilities are located. -1- NOW, THEREFORE, in consideration of the premises, the Board, the Purchaser and the Lessee hereby agree as follows: ARTICLE I DEFINITIONS In addition to the terms defined in the preamble hereto, and elsewhere herein, the following terms have the following respective meanings as used in this Agreement unless the context otherwise requires: "Act" means Sections 7-53-101 to 7-53-311, inclusive, of Tennessee Code Annotated, as amended. "Agreement" means this Series 1997 Note Agreement as it now exists and as it may hereafter be amended. "All Unpaid Installments" shall have the same meaning as in the Lease. "Assignment" means the Amended and Restated Assignment Agreement dated as of April 1, 1997 from the Board to the Purchaser. "Authorized Lessee Representative" means the President or any Vice President of the Lessee, except that the Lessee may, by written notice to the Noteholder, designate additional Authorized Lessee Representatives or delete Authorized Lessee Representatives. "Basic Rent" means the Basic Rent payable pursuant to Section 4.01 of the Lease. "Building" shall have the same meaning as in the Lease. "Business Day" means any day other than a Saturday, Sunday, or a public holiday or the equivalent for banks generally under the laws of State of Tennessee. "Closing Date" means the date agreed to by the parties as the date to close the sale of the Series 1997 Note but in no event later than April 18, 1997. "Deed of Trust" means the Amended and Restated Construction Deed of Trust and Security Agreement with respect to the Project dated as of April 1, 1997 from the Board for the benefit of the Purchaser as amended, restated and supplemented. "Default Rate" shall have the same meaning as in the Series 1996 Note. "Documents" means the Lessee Documents and the Series 1997 Note Documents. -2- "Environmental Indemnity' means the Environmental Law Compliance and indemnity Agreement dated -as of April 1, 1997 among the Lessee and the Purchaser. "Escrow and Security Agreement" means the Escrow and Security Agreement dated as of April 1, 1997 by and among the Board, Lessee and NationsBank of Tennessee, National Association, as Escrow Agent and Trustee. "Event of Default" means an Event of Default as defined in Article VI hereof. "First Amendment to Lease" means the First Amendment to Lease dated as of April 1, 1997 by and between the Board and Lessee. "First Amendment to the Amended and Restated Deed of Trust And Security Agreement" means the First Amendment to the Amended and Restated Deed of Trust said Security Agreement dated as of April 1, 1997 entered into by the Board, NationsBank of Tennessee, National Association and Lessee. "Holder," whether or not capitalized, means the registered owner from time to time of the Series 1997 Note. "Land" means the real property described in Schedule A to the Lease. "Lease" means the Lease dated as of May 1, 1996 between the Board, as lessor, and the Lessee, as lessee, as amended by the First Amendment to Lease and as such lease may hereafter be amended. "Leased Property" means the Land, the Building and all other improvements now or hereafter located on the Land. "Lessee" means Jones Apparel Group, Inc., a Pennsylvania corporation. "Lessee Documents" means this Agreement, the Lease, the Series 1997 Guaranty, the Escrow and Security Agreement and the Environmental Indemnity. "Noteholder" or "Purchaser" means NationsBank of Tennessee, National Association, a national banking association with its principal office in Nashville, Tennessee, as the original purchaser and registered owner of the Series 1997 Note, and any subsequent registered owner of the Series 1997 Note. "Notes" mean collectively the Series 1996 Note and the Series 1997 Note. "Prior Note Agreements" means collectively the Note Agreement, dated November 23, 1993, the Series 1995 Note Agreement dated as of June 30, 1995, the Note Agreement dated as of May 1, 1996, all by and among the Board, the Lessee and the Purchaser. -3- "Prime Rate" shall have the same meaning as in the Series 1997 Note. "Project" means the Land, the Building and any personal property located therein including any and all equipment used at or in connection with the Project, but excluding any inventory owned by Lessee. "Series 1996 Note" means the Taxable Revenue Note, Series 1996 (Jones Apparel Group, Inc. Project) dated May 1, 1996 in the principal amount of $5,000,000 issued by the Board. "Series 1997 Guaranty" means that certain Series 1997 Guaranty Agreement dated as of April 1, 1997 from Lessee. "Series 1997 Note" means the Taxable Revenue Note, Series 1997 (Jones Apparel Group, Inc. Project) dated the date hereof in the principal amount of $10,000,000 issued by the Board. "Series 1997 Note Documents" means this Agreement, the Lease, the Series 1997 Note, the Deed of Trust, the First Amendment to the Amended and Restated Deed of Trust and Security Agreement, the Series 1997 Guaranty, the Escrow and Security Agreement and the Assignment. "Tangible Net Worth" means the excess of Lessee's Total Assets (excluding receivables from Lessee's officers and intangible assets determined in accordance with generally accepted accounting principles) over Total Liabilities (exclusive of capital stock and surplus), all determined in accordance with generally accepted accounting principles consistently applied. "Total Assets" shall mean total assets determined in according with generally accepted accounting principles consistently applied. "Total Liabilities" shall mean total liabilities determined in accordance with generally accepted accounting principles consistently applied. ARTICLE II AMOUNT AND TERMS OF THE SERIES 1997 NOTE SECTION 2.01. The Series 1997 Note. The Purchaser agrees to purchase and the Board agrees to sell, at par, on the terms and conditions hereinafter set forth, the Taxable Revenue Note, Series 1997 (Jones Apparel Group, Inc. Project) of the Board in the principal amount of Ten Million Dollars ($10,000,000). The Series 1997 Note shall contain the terms and conditions and shall be substantially in the form of Exhibit A hereto. SECTION 2.02. Purchasing the Series 1997 Note. The Series 1997 Note shall be purchased on the Closing Date. Not later than 4:00 P.M. (Nashville time) on the Closing -4- Date, and upon fulfillment of the applicable conditions set forth in Article III, the Purchaser will purchase the Series 1997 Note by application of immediately available funds on behalf of the Board in the manner set forth in Section 20.03 of the Lease. SECTION 2.03. Application of Payments. Except as otherwise provided in Article XX of the Lease, any payment or prepayment of Basic Rent under the Lease shall be applied as a payment or prepayment first to accrued interest on the Notes and the remainder, if any, to prepayment penalty, if any, and then to principal installments on the Notes in the inverse order of maturity. Any payment or prepayment on the Series 1996 Note or the Series 1997 Note shall be applied as a payment or prepayment of Basic Rent under the Lease. SECTION 2.04. Payments. Each payment on the Series 1997 Note shall be made not later than 12:00 Noon (Nashville time) on the day when due at the place designated in the Series 1997 Note in immediately available funds. Whenever any payment to be made hereunder or under the Series 1997 Note shall be stated to be due on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day and such extension of time shall in such case be included in computing such interest. SECTION 2.05. Use of Proceeds. All of the proceeds from the sale of the Series 1997 Note will be used as provided in Section 20.03 of the Lease. ARTICLE III CONDITIONS OF PURCHASE SECTION 3.01. Conditions Precedent to the Purchase of the Series 1997 Note. The obligation of the Purchaser to purchase the Series 1997 Note is subject to the conditions precedent that the Purchaser shall have received on or before the Closing Date the following, each in form and substance satisfactory to the Purchaser: (a) The Series 1997 Note duly executed by the Board. (b) The Assignment duly executed by the Board. (c) The First Amendment to Lease and the Escrow and Security Agreement duly executed by the Board and the Lessee. (d) The Deed of Trust duly executed by the Board. (e) The First Amendment to the Amended and Restated Deed of Trust and Security Agreement executed by the parties thereto. (f) The Series 1997 Guaranty duly executed by the Lessee. (g) The Environmental Indemnity duly executed by the Lessee. -5- (h) Evidence of the completion of all recordings and filings as may be necessary or, in the opinion of the Purchaser, desirable to perfect the liens, assignments and security interests created by the Documents, and evidence that all other actions necessary or, in the opinion of the Purchaser, desirable to perfect and protect the priority lien, assignment and security interest created by the Documents have been taken. (i) Certified copies of the resolutions of the Board of Directors of the Board approving each Series 1997 Note Document and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to each Series 1997 Note Document. (j) A Certificate of the Secretary, or similar officer, of the Board certifying the names and true signatures of the officers of the Board authorized to sign each Series 1997 Note Document and the other documents to be delivered by it hereunder. (k) Certified copies of the Resolutions of the Board of Directors of the Lessee approving each Lessee Document and of all documents evidencing other necessary corporate action and governmental approval, if any, with respect to each Lessee Document. (l) A Certificate of the Secretary, or similar officer, of the Lessee certifying the names and true signatures of the officers of the Lessee authorized to sign each Lessee Document and the other documents to be delivered by it hereunder. (m) The opinion of Boston, Bates & Holt, counsel for the Lessee, dated the date hereof, and in form acceptable to Purchaser. (n) The opinion of White and Betz, counsel for the Board, dated the date hereof, and in form acceptable to Purchaser. (o) A paid title insurance policy, prepared upon an opinion of counsel approved by the Purchaser, in form and content, and with a company, acceptable to the Purchaser, in the amount of $15,000,000 insuring that the Deed of Trust creates a valid first lien in and upon the Project, free and clear of all defects and encumbrances except as set forth on Schedule B to the Lease and containing full coverage against liens of mechanics, materialmen, laborers and any other party who might claim statutory or common law liens. (p) Evidence satisfactory to the Purchaser as to: (i) Methods of access to and egress from the Project, and nearby or adjoining public ways, meeting the reasonable requirements of similar projects; (ii) The availability of storm and sanitary sewer facilities meeting the reasonable requirements of the Project; -6- (iii) The availability of other required utilities, such as electricity, water, etc., reasonably required to serve the Project; and (iv) The securing of all requisite governmental approvals of sanitary facilities, and other matters that are subject to the jurisdiction of any governmental authority. (q) Suitable policies or evidence of insurance in accordance with the terms of the Lease and this Agreement. (r) A survey, certified by a surveyor registered as such in Tennessee, to which is attached a certificate satisfactory to the Purchaser, which survey shall disclose all improvements, easements and rights-of-way, and the Building. (s) An environmental report, prepared by an environmental engineering firm acceptable to the Purchaser, if requested by Purchaser, with respect to the premises, in form, substance and detail satisfactory to the Purchaser. (t) Such other items as the Purchaser may reasonably request. ARTICLE IV REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE BOARD SECTION 4.01. Representations and Warranties of the Board. The Board represents and warrants as follows: (a) The Board is a duly established, organized and existing public corporation under the laws of the State of Tennessee. Each of the directors of the Board is a duly qualified elector of and taxpayer in the City of Lawrenceburg, Tennessee, and no director is an officer or employee of the City of Lawrenceburg, Tennessee. The composition of the Board of Directors of the Board is in conformity with the requirements of Section 7-53-301 of the Act. (b) The Board has all requisite power, authority and legal right to execute and deliver the Series 1997 Note Documents and all other instruments and documents to be executed and delivered by the Board pursuant hereto, to perform and observe the provisions thereof and to carry out the transactions contemplated thereby. All corporate action on the part of the Board which is required for the execution, delivery, performance and observance by the Board of the Series 1997 Note Documents has been duly authorized and effectively taken, and such execution, delivery, performance and observation by the Board do not contravene applicable law or any contractual restriction binding on or affecting the Board. -7- (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution and delivery by the Board of, and performance by the Board of its obligations under, any Series 1997 Note Document except for the filing of a Report on Debt Obligation with the Division of Local Finance, Comptroller's Office, as required by Chapter 402, Public Acts of 1989. (d) This Agreement is, and each other Series 1997 Note Document when delivered hereunder will be, legal, valid and binding special obligations of the Board enforceable against the Board in accordance with their respective terms. (e) There is no default of the Board in the payment of the principal of or interest on any of its indebtedness for borrowed money or under any instrument or instruments or agreements under and subject to which any indebtedness for borrowed money has been incurred which does or could affect the validity and enforceability of the Series 1997 Note Documents or the ability of the Board to perform its obligations thereunder, and no event has occurred and is continuing under the provisions of any such instrument or agreement which constitutes or, with the lapse of time or the giving of notice, or both, would constitute such a default. (f) There is not pending or, to the knowledge of the undersigned officers of the Board, threatened any action or proceeding before any court, governmental agency or arbitrator (i) to restrain or enjoin the issuance or delivery of the Series 1997 Note or the collection of any revenues pledged under the Assignment, (ii) in any way contesting or affecting the authority for the issuance of the Series 1997 Note or the validity of any of the Series 1997 Note Documents, or (iii) in any way contesting the existence or powers of the Board. (g) In connection with the authorization, issuance and sale of the Series 1997 Note, the Board has complied with all provisions of the Constitution and laws of the State of Tennessee, including the Act and Sections 8-44-104, et seq., of Tennessee Code Annotated (the "Public Meetings Act"). (h) The Board has not assigned or pledged and will not assign or pledge its interest in the Lease for any purpose other than to secure the Series 1996 Note and the Series 1997 Note under the Assignment. The Series 1996 Note and the Series 1997 Note constitute the only notes or other obligations of the Board in any manner payable from the revenues to be derived from the Lease, and except for the Series 1996 Note and the Series 1997 Note, no notes or other obligations have been or will be issued on the basis of the Lease. (i) The Board is not in default under any provision of its Certificate of Incorporation or By-Laws, and is not in default under any of the provisions of -8- the laws of the State of Tennessee which default would affect its existence or its powers referred to in subsection (b) of this Section. (j) No member, officer or other official of the Board has any interest whatsoever in the Lessee or in the transactions contemplated by the Lease. (k) The Board will not enter into any agreement or instrument which might in any way prevent or materially impair its ability to perform its obligations under the Series 1997 Note Documents. (l) The Board will not consent or agree to any modification of the Lease or waive compliance with any of the terms thereof, unless any such modification or waiver shall have been agreed to in writing by the Noteholder. (m) The Board will execute, acknowledge where appropriate, and deliver from time to time promptly at the request of the Noteholder all such instruments and documents as in the opinion of the Noteholder are necessary or desirable to carry out the intent and purpose of any of the Documents. SECTION 4.02. Affirmative Covenants. So long as the Series 1997 Note shall remain unpaid, the Board will, upon request of the Noteholder and provided it shall be furnished with sufficient funds to pay all costs and expenses (including attorney's fees) reasonably incurred by it as such costs and expenses accrue: (a) Take all action and do all things which it is authorized by law to take and do in order to perform and observe all covenants and agreements on its part to be performed and observed under the Series 1997 Note Documents. (b) Execute, acknowledge where appropriate, and deliver from time to time promptly at the request of the Noteholder all such instruments and documents as in the opinion of the Noteholder are necessary or desirable to carry out the intent and purpose of the Series 1997 Note Documents or Lessee Documents (or any of them). ARTICLE V OTHER REPRESENTATIONS, COVENANTS AND WARRANTIES OF LESSEE SECTION 5.01. Representations and Warranties. In order to induce the Board to amend and modify the Lease and the Purchaser to purchase the Series 1997 Note, Lessee hereby represents and warrants to, and agrees with, the Board, the Purchaser and any subsequent Noteholder as follows: (a) Organization. The Lessee is a corporation duly organized, validly existing and in good standing under the laws of the State of Pennsylvania and has all requisite power and -9- authority to own and operate its properties and to carry on its business as now being conducted. Lessee shall remain a corporation duly organized and existing and in good standing under the laws of the State of Pennsylvania, and is and shall remain duly qualified to do business in Tennessee and each state other than Tennessee in which qualification is necessary. Neither the execution, the delivery, nor the performance of this Agreement and all related documents by Lessee will constitute a default under or conflict with Lessee's charter or bylaws or any agreement, contract, document, or instrument to which Lessee now is a party. The execution of all necessary resolutions and other prerequisites of corporate actions have been duly performed so that the individual executing this Agreement and related documents on behalf of Lessee is duly authorized to bind Lessee by his signature. (b) Requisite Power and Authorization. This Agreement constitutes, and upon execution and delivery thereof, the other Lessee Documents will constitute, legal, valid and binding obligations of the Lessee enforceable against the Lessee in accordance with their respective terms, except as enforcement thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors' rights generally. The Lessee has full power and authority, corporate and otherwise, to execute and deliver, and to perform all of its obligations under, each of the Lessee Documents. All corporate action which is required for such execution, delivery and performance has been validly taken. (c) Approvals. No approval, consent or other authorization (corporate, governmental or otherwise) of, or filing with, any court, agency, commission or other authority or entity is required for the due execution, delivery, performance or observance by the Lessee of this Agreement or for the payment of any sums thereunder. (d) Litigation. There is no litigation or proceeding pending against Lessee or, to the knowledge of Lessee, threatened that, if decided adversely to Lessee, would have a material effect upon its financial condition. Lessee is not subject to any outstanding court or administrative order. (e) Financial Statements. The financial statements of Lessee heretofore delivered to the Purchaser fairly and accurately reflect the financial condition and capital structure of Lessee as of the dates thereof. Since said date, no material adverse change in either has occurred or, to the knowledge of Lessee, is threatened. All financial statements delivered to Purchaser have been prepared in accordance with generally accepted accounting principles, consistently applied, and are true, accurate and complete in every material respect. Without limiting the foregoing, Lessee warrants that such financial statements disclose all known contingent liabilities as well as direct liabilities. Lessee acknowledges that Purchaser agreed to purchase the Series 1997 Note in reliance upon such financial statements, and Lessee warrants that no material adverse change has occurred in the financial condition of any person or entity as set forth in such financial statements. Lessee warrants that Lessee has good and marketable title to the assets disclosed on Lessee's balance sheet disclosed to Purchaser, subject only to liens, security interests and other encumbrances noted thereon. -10- (f) Taxes. Lessee is not presently delinquent in the payment of any taxes imposed by any governmental authority or in the filing of any tax return and Lessee is not involved in a dispute with any taxing authority over tax amounts due. Lessee covenants that all future taxes assessed against Lessee shall be timely paid and that all tax returns required of Lessee shall be timely filed. SECTION 5.02. Lease. The Lessee shall punctually pay all Basic Rent and other amounts due under the Lease and shall promptly perform all of its other obligations under the Lease. SECTION 5.03. Inspection. The Lessee and the Board shall permit the Noteholder and any representative of the Noteholder to visit and inspect the Leased Property at such time as either the Board or the Lessee has title to any part thereof, to examine the books of account of the Lessee and to discuss Lessee's affairs, finances and accounts with Lessee and independent certified public accountants, all during business hours and as often as the Noteholder or any such representatives may reasonably request. Any inspection or examination pursuant to this paragraph shall be for the sole purpose of protecting the security of the Noteholder and shall not be construed as a representation by the Noteholder that there has been compliance with the plans and specifications for the Project or that the Project will be or is free of faulty materials or workmanship, or a waiver of any right the Noteholder may have against Lessee or any other party. SECTION 5.04. Expenses Paid by Lessee, indemnification. (a) The Lessee will pay in full all reasonable out-of-pocket expenses of the Board and the Purchaser incurred in connection with the preparation, execution and delivery of this Agreement and the Lease and the consummation of the transactions contemplated by such documents, including but not limited to (i) the fees and disbursements of the Board's counsel, and Purchaser's counsel, (ii) all taxes(other than income taxes) applicable to such transactions, (iii) all present and future recording and filing fees and recording and filing taxes, (iv) all expenses incident to the preparation of the Documents and any other documents relating to the Lease or the Series 1997 Note, and (v) all survey and title insurance premiums, fees and expenses. (b) The Lessee shall pay to or reimburse in full the Board and Noteholder for all costs and expenses incurred in the collection or enforcement of (or in respect of any action taken to collector enforce) the Documents upon any default thereunder, or in any investigation of any such default, including reasonable attorneys' fees. (c) The Lessee shall indemnify and hold harmless both the Board, the Purchaser and any subsequent Noteholder (and all officers and directors of both the Board, the Purchaser and any subsequent Noteholder) against all liabilities, claims, costs and expenses imposed or asserted against either the Board or the Purchaser for (i) any loss or damage to property or injury or death of any person that may be occasioned by any cause whatsoever pertaining to the renovation, maintenance, operation or use of the Leased Property, (ii) any breach or default on the part of the Lessee in the performance of any covenant or agreement -11- under the Lessee Documents or arising from any act or failure to act by the Lessee or any of his agents, contractors, servants, employees or licensees or arising from any accident, injury or damage whatsoever caused to any person, firm or corporation occurring in or about the Leased Property, or (iii) any such claim or action or proceeding brought thereon. (d) The obligations of the Lessee under this Section 5.04 shall survive the payment in full of all amounts payable under the Series 1997 Note to the extent set forth above. SECTION 5.05. Performance of Lessee or Board Obligations by Series 1997 Noteholder. Without having any obligation to do so and only if an Event of Default has occurred and is continuing, the Noteholder may perform or pay any obligation which the Lessee is obligated to pay or perform under any of the Lessee Documents or which the Board is obligated to pay or perform under any of the Series 1997 Note Documents. All of the following shall bear interest at the Default Rate and, together with such interest, be repaid by the Lessee to the Noteholder on demand: (1) all sums advanced or paid by the Noteholder under this Section, and (2) all costs reasonably incurred or paid by the Noteholder in the exercise of its rights under this Section. SECTION 5.06. Further Assurances. Lessee will execute such other assignments, security agreements, financing statements, and other documents that Purchaser may deem necessary to further evidence the obligations provided for in the Lease or to perfect, extend, or clarify Purchaser's rights in any property securing or intended to secure the Series 1997 Note. Any Vice President of Purchaser is hereby appointed as Lessee's attorney-in-fact with full power of substitution for the signing of financing statements and other similar filings with government offices for perfecting security interests granted hereby. Purchaser acknowledges that this power of attorney is coupled with an interest and is irrevocable. SECTION 5.07. Financial Statements. The Lessee will provide to the Purchaser (i) within forty-five days in the case of the Lessee, after the end of the Lessee's fiscal quarter, financial statements of the Lessee, in form and content satisfactory to Purchaser including a complete balance sheet and profit and loss statement for each quarter; (ii) within one hundred twenty days after the close of Lessee's fiscal year, complete certified audited financial statements of Lessee, prepared in accordance with generally accepted accounting principles, consistently applied, prepared by a certified public accountant acceptable to Purchaser; and (iii) a quarterly compliance certificate from an officer of the Lessee acknowledging that the Lessee is not in default in the performance of any provisions of the Lessee Documents and that the Lessee is in compliance with all fiscal covenants contained in the Lessee Documents. SECTION 5.08. Cash Flow to Debt Service Ratio. Lessee shall at all times maintain a ratio of Cash Flow to Debt Service of not less than 10.0 to 1.0 except as provided below. For the purposes of this covenant, "cash flow" shall mean earnings of Lessee before interest, taxes, depreciation and amortization and "debt service" shall mean the sum of the current portion of long term debt and capitalized leases, dividends, and treasury stock repurchases. In the event Lessee is engaged in an active stock repurchase program, Lessee shall -12- at all times maintain a ratio of Cash Flow to Debt Service of not less than 1.5 to 1.0. An active stock repurchase program shall mean that Lessor has purchased during the immediately preceding thirty day period not less than $1,000,000 of its own Common Stock. SECTION 5.09. RESERVED SECTION 5.10. Dividends and Loans or Advances. The Lessee will not pay or make, directly or indirectly, to any related company, (i) dividends; (ii) royalty fees or related company management or consulting fees; and (iii) any loans or advances for the duration of this Agreement unless immediately before and immediately after paying or making such dividend, royalty fee or related company management or consulting fee or any loan or advance, the Lessee was and remains in compliance with the other covenants contained herein. SECTION 5.11. Liabilities to Tangible Net Worth. Lessee will not permit its ratio of Total Liabilities to its Tangible Net Worth to exceed .75 to 1 at any time during the term of the Lease. SECTION 5.12. Insurance. The Lessee will maintain public liability insurance insuring against bodily injury and property damage with liability limits of $500,000 for each occurrence and $10,000,000 aggregate liability and fire and extended coverage insurance on all assets in such form and in such amounts as are consistent with industry practices and with insurers satisfactory to the Purchaser. The Lessee shall provide evidence of insurance (together with written agreement by the insurer or insurers to give Purchaser 30 days' prior written notice of cancellation) to the Purchaser and the Lessee shall name the Purchaser as the loss payee on any and all such insurance policies relating to the Leased Property. SECTION 5.13. Use of Project. Lessee will keep the Project free from any lien, security interest, or encumbrance other than that granted to Purchaser by the Board pursuant to the Deed of Trust and in good order and repair and will not waste or destroy the Project or any part thereof. Lessee will not use the Project in violation of any statute or ordinance. Lessee's business activities are conducted in accordance with all applicable laws and regulations, and Lessee covenants that such activities shall continue to be so conducted. Purchaser may examine and inspect the Project at any time. SECTION 5.14. No Conflicting Agreements. Lessee is not a party to any contract or agreement and is not subject to any contingent liability that does or may impair Lessee's ability to perform under the terms of this Agreement. The execution and performance of this Agreement will not cause a default under any other contract or agreement to which Lessee or any property of Lessee is subject, and will not result in the imposition of any charge, penalty, lien or other encumbrance against any of Lessee's property except in favor of Purchaser. SECTION 5.15. Notice to Purchaser of Certain Events. Lessee covenants to give Purchaser prompt written notice of any litigation, arbitration, administrative proceeding or -13- investigation that may hereafter be instituted or threatened against Lessee in which the potential liability of Lessee exceeds $250,000. Lessee covenants to give Purchaser written notice within ten days of (i) the creation or discovery of any material additional contingent liability or the occurrence of any other material adverse change in the financial condition of Lessee, (ii) the occurrence of any event, or presence of any condition, which constitutes an Event of Default or which with the giving of notice, the passage of time, or both, would constitute a default, and (iii) the change of the name of Lessee. SECTION 5.16. Further Assurances. Lessee covenants that it will execute, acknowledge where appropriate, and deliver from time to time promptly at the request of the purchaser all such instruments and documents as in the opinion of the Purchaser are necessary or desirable to carry out the intent and purpose of the Series 1997 Note Documents or Lessee Documents (or any of them). SECTION 5.17. Merger, Sale of Assets, Certificates and-Loans. Lessee will not, without the prior written consent of the Purchaser: (a) enter into any merger or consolidation; provided, however, that Lessee may, without the consent of Purchaser, merge or consolidate with any other company as long as the Lessee shall be the continuing or surviving corporation; (b) sell, lease, convey or otherwise dispose of any of its property or assets, except that Lessee may (i) grant liens or encumber any of its property (other than its interest in the Lease) (ii) dispose of property in the ordinary course of business and (iii) otherwise dispose of its properties as long as the aggregate fair market value of the property so disposed of in any fiscal year of the Lessee also does not exceed $1,000,000; and (c) submit to the Purchaser any certificate or other document that contains any untrue statement of a material fact or omits to state a material fact necessary to make it not misleading. SECTION 5.18. Borrowing. Lessee will not create, incur, assume or become liable in any manner for any indebtedness for borrowed money, deferred payment for the purchase of assets, lease payments, as surety or guarantor for the debt of another, or otherwise plan to purchase, except for normal trade debts incurred in the ordinary course of Lessee's business, and except for existing indebtedness disclosed to Purchaser in writing and acknowledged by Purchaser prior to the date of this Agreement. -14- ARTICLE VI EVENTS OF DEFAULT The occurrence of any one or more of the following events shall constitute an Event of Default hereunder: (a) non-payment when due of any installment of interest on the Series 1996 Note or the Series 1997 Note; or (b) non-payment when due of any installment of principal on the Series 1996 Note or the Series 1997 Note whether at maturity, by acceleration or mandatory prepayment; or (c) non-payment when due of any other amount required to be paid by the Lessee or the Board hereunder or under any other Document (other than a default under subsections (a) or (b) above) continued for ten (10) days after written notice thereof to the Lessee; or (d) the occurrence of an "Event of Default" as defined in Article 14.01 of the Lease which continues beyond the applicable cure period provided therein, if any; or (e) indebtedness of the Lessee in excess of $50,000 shall be declared to be due and payable, or required to be prepaid other than by regularly scheduled or other mandatory required prepayment, prior to the stated maturity thereof; or (f) any representation or warranty made by Lessee herein or in the Lease is untrue in any material respect when made; (g) default by the Lessee in the due observance or performance of any term, covenant, condition or agreement on its part to be performed under any of the Documents (other than a default under subsections (a), (b), (c), (d), (e) or (f) above) continued for thirty (30) days after written notice specifying such default has been given to the Lessee; (h) default by the Lessee in the due observance or performance of any term covenant, condition or agreement on its part to be performed under the Prior Note Agreements, or any of them, except that no default shall be deemed to exist under the Prior Note Agreements by reason of a breach of the financial covenants contained in Sections 5.07, 5.08 and 5.11 of the Prior Note Agreements unless there is a breach of any of the financial covenants contained in -15- Section 5.07 through 5.11 hereof, which the parties agree shall supersede and replace Sections 5.07 through 5.11 of the Prior Note Agreements. The parties further agree that the provisions of Section 5.09 contained in the Prior Note Agreements are deleted and are of no further force and effect. Except as modified hereby, the terms of the Prior Note Agreements remain in full force and effect; or (i) default under any notes issued by the Board or Purchaser for the benefit of Lessee or under any and all other documents, instructions, deeds of trust, mortgages, security agreements, guaranties, executed and/or delivered by Lessee or the Board in connection therewith (the "Loan Documents"); it being agreed that a default under any of such Loan Documents shall be a default hereunder and vice versa. ARTICLE VII MISCELLANEOUS SECTION 7.01. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telegraphic, telecopy, or telex communication) and mailed, telecopied, telexed, telegraphed or delivered, if to the Board, at its address, c/o White & Betz, 22 Public Square, Lawrenceburg, Tennessee 38464-0488, Attention: Alan C. Betz, Esq.; if to the Purchaser, at its address at NationsBank of Tennessee, National Association, 255 N. Military Avenue, Lawrenceburg, Tennessee 38464, Attention: Mr. Timothy E. Pettus; if to any Noteholder other than the Purchaser, at the address indicated on the note register maintained pursuant to Section 7.02 hereof; if to the Lessee, at its address at Jones Apparel Group, Inc., 250 Rittenhouse Circle, Bristol, Pennsylvania 19007, Attention: Chief Financial Officer; or, as to each party, at such other address as shall be designated by such party in a written notice to the other party. All such notices and communications shall, when mailed or telegraphed; be effective three days after deposit in the mails or delivery to the telegraph company, respectively, addressed as aforesaid. All such notices and communications otherwise transmitted shall be effective upon receipt by the addressee. SECTION 7.02. Series 1997 Note Registration. The Series 1997 Note shall be registered (as hereinafter provided) in the name of the owner on a note register to be provided for that purpose by the Board in the office of the Lessee, as note registrar. The note registrar and the note register shall be subject to change upon written notice thereof from the Noteholder. No transfer thereof shall be valid unless made at the written request of the registered owner or his legal representative, on said note register and evidence of transfer of the Series 1997 Note furnished to the note registrar. Principal of, premium, if any, and interest on the Series 1997 Note will be paid by check to the registered owner by mail at the address shown on the note register or at such other place as may be directed by the Noteholder, which directions shall be noted in the note register. -16- The person in whose name the Series 1997 Note shall be registered shall be deemed and regarded as the absolute owner thereof for all purposes, and payment of or on account of the interest on or the principal of the Series 1997 Note shall be made only to or upon the order of the registered owner thereof or his legal representative, but such registration may be changed as hereinabove provided. All such payments shall be valid and effectual to satisfy and discharge the liability upon the Series 1997 Note to the extent of the sum or sums paid. SECTION 7.03. No Waiver: Remedies. No failure on the part of the Noteholder to exercise, and no delay in exercising, any right under any Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right under any Document preclude any other or further exercise thereof or the exercise of any other right. The remedies provided in the Documents are cumulative and not exclusive of any remedies provided by law. SECTION 7.04. Binding Effect, Governing Law. This Agreement shall be binding upon and inure to the benefit of the Board, the Purchaser and the Lessee and their respective successors and assigns, except that the Board shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Purchaser. This Agreement and the Series 1997 Note shall be governed by, and construed in accordance with, the laws of the State of Tennessee except to the extent that applicable federal law may permit any higher rate of interest. SECTION 7.05. Acquisition of the Series 1997 Note For Account of the Purchaser. The Purchaser represents and warrants that it will acquire the Series 1997 Note and the other Series 1997 Note Documents to be acquired by it for its own account and, except that the Purchaser may grant participation interests therein to other financial institutions, not with a view to the distribution or any disposition thereof, and that it has no present intention of making any such distribution or disposition provided that the disposition of the Purchaser's property shall at all times be and remain within its control. In the event that the Purchaser or any subsequent Noteholder should transfer the Series 1997 Note, the Purchaser or any subsequent Noteholder shall give prompt written notice to the Board and the Lessee of the name and address of the transferee. Until such time as the Board and the Lessee receive such notice from the Purchaser and the name and address of the transferee have been entered on the note register and noted on the Series 1997 Note, the Board and the Lessee shall be entitled to assume that the Purchaser is the Noteholder and that the Noteholder is as reflected in the most recent entry on the note register and the most recent notation on the Series 1997 Note. SECTION 7.06. Severability. In the event that any clause or provision of any Series 1997 Note Document shall be held to be invalid by any court of competent jurisdiction, the invalidity of such clause or provision shall not affect any of the remaining provisions of such Series 1997 Note Document. SECTION 7.07. Payment on Non-Business Days. Whenever any payment to be made hereunder or under the Series 1997 Note shall be stated to be due on a day which is not a Business Day, such payment may be made on the next succeeding Business Day. -17- SECTION 7.08. No Liability of Board's Officers, Etc. No recourse under or upon any obligation, covenant or agreement contained in this Agreement or the Assignment, or in the Series 1997 Note, or under any judgment obtained against the Board, or by the enforcement of any assessment or by any legal or equitable proceeding by virtue of any constitution or statute or otherwise or under any circumstances, under or independent of this Agreement or the Assignment, shall be had against any incorporator, member, director or officer, as such, past, present or future, of the Board, either directly or through the Board, or otherwise, for the payment for or to the Board or any receiver thereof, or for or to the holder of the Series 1997 Note or otherwise, of any sum that may be due and unpaid by the Board upon the Series 1997 Note. Any and all personal liability of every nature, whether at common law or in equity, or by statute or by constitution or otherwise, of any such incorporator, member, director or officer, as such, to respond by reason of any act or omission on his part or otherwise, for the payment for or to the Board or any receiver thereof, or for or to the holder of the Series 1997 Note or otherwise, of any sum that may remain due and unpaid upon the Series 1997 Note, is hereby expressly waived and released as a condition of and consideration for the execution of this Agreement and the issue of the Series 1997 Note. SECTION 7.09. No Liability of the City of Lawrenceburg, Tennessee, The City of Lawrenceburg, Tennessee shall not in any event be liable for the payment of the principal of, premium, if any, or interest on the Series 1997 Note, or for the performance of any pledge, mortgage, obligation or agreement of any kind whatsoever herein or indebtedness by the Board, and neither the Series 1997 Note nor any of the agreements or obligations of the Board contained in this Agreement or the Assignment or otherwise shall be construed to constitute an indebtedness of the City of Lawrenceburg, Tennessee, within the meaning of any constitutional or statutory provision whatsoever. SECTION 7.10. Term of Agreement. This Agreement and all terms and provisions hereof shall survive the closing of the purchase and delivery of the Series 1997 Note and shall not be merged into the Series 1997 Note or any other documents evidencing the Series 1997 Note or the purchase thereof. The term of this Agreement shall be from the date hereof until the date of payment in full of the Series 1997 Note and all other obligations of the Board or the Lessee hereunder and under the other Documents. SECTION 7.11. Arbitration. Any controversy or claim between or among the parties hereto including but not limited to those arising out of or relating to this Agreement, or any related notes or instruments, including any claim based on or arising from an alleged tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, the applicable state law), the rules of practice and procedure for the arbitration of commercial disputes of Judicial Arbitration and Mediation Services, Inc. (J.A.M.S.) Endispute or any successors thereto as supplemented by any special rules set forth in any of the Loan Documents including the special rules set forth below. In the event of any inconsistency, the special rules shall control. Judgment upon any arbitration award may be entered in any court having jurisdiction. Lessee consents to the exclusive jurisdiction of the courts of competent jurisdiction in Davidson County, Tennessee. Any party to the Agreement may bring an action, -18- withholding a summary of expeditional providing, to compel arbitration of any controversy or claim to which this Agreement applies to any court having jurisdiction over such action. (A) Special Rules. The arbitration shall be conducted in Davidson County, Tennessee and administered by J.A.M.S. who will appoint an arbitrator. If J.A.M.S. is unable or legally precluded from administering the arbitration, then the American Arbitration Association will serve. All arbitration hearings will be commenced within 90 days of the demand for arbitration; further, the arbitrator shall only, upon a showing of cause, be permitted to extend the commencement of such hearing for an additional 60 days. (B) Reservation of Rights. Nothing herein shall be deemed to (i) limit the applicability of any otherwise applicable statutes of limitation or repose and any waivers contained in this Agreement; or (ii) be a waiver by the Purchaser of the protection afforded to it by 12 U.S.C. Sec. 91 or any substantially equivalent state law; or (iii) limit the right of the purchaser (a) to exercise self help remedies such as (but not limited to) setoff, or (b) to foreclosure against any real or personal property collateral, or (c) to obtain from a court provisional or ancillary remedies such as (but not limited to) injunctive relief, writ of possession or the appointment of a receiver. The Purchaser may exercise such self help rights, foreclosure upon such property, or obtain such provisional or ancillary remedies before, during or after the pendency of any arbitration proceeding brought pursuant to this Agreement. Neither the exercise or self help remedies nor the institution or maintenance of an action for foreclosure or provisional or ancillary remedies shall constitute a waiver of the right of any party, including the claimant in such action, to arbitrate the merits of the controversy or claim occasioning resort to such remedies. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG By: /s/ Jerry Putman Chairman ATTEST: Caralyne Thompson Secretary -19- NATIONSBANK OF TENNESSEE, NATIONAL ASSOCIATION By: /s/ Tim Pettus Title: Senior V. Pres. JONES APPAREL GROUP, INC. By: /s/ Gary R. Klocek Title: Corp. Controller -20- EXHIBIT 10.45 THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG TAXABLE REVENUE NOTE, SERIES 1997 (JONES APPAREL GROUP, INC. PROJECT) $10,000,000 April 17, 1997 FOR VALUE RECEIVED, the undersigned, THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG, a Tennessee public nonprofit corporation (the "Maker"), promises to pay to the registered owner hereof (the "holder"), at the main office of NationsBank of Tennessee, National Association, Lawrenceburg, Tennessee, or at such other place as the holder may from time to time designate in writing, the principal sum of TEN MILLION DOLLARS ($10,000,000), plus interest at the rate of seven and thirty one hundredth percent (7.30%) on the outstanding principal balance hereof from the date hereof. Principal and interest hereunder shall be payable monthly on the fifth day of each month, commencing on May 5, 1997. Unless the principal shall be declared due earlier and except as hereinafter provided, the principal hereof shall be payable in one hundred and twenty (120) equal monthly installments commencing on May 5, 1997. Notwithstanding the above, the entire outstanding principal balance, if any, together with all accrued and unpaid interest shall be immediately due and payable in full on May 5, 2002. Overdue installments of principal and, to the extent legally enforceable, interest and other amounts payable under this Note shall bear interest from their due date at the Default Rate (as hereinafter defined). All calculations of interest hereunder shall be on the basis of actual days elapsed in a 360-day year. Anything herein to the contrary notwithstanding, at no time shall the interest rate hereunder exceed the highest rate permitted from time to time by applicable law. As used herein, (a) "Prime Rate" means the rate of interest set by NationsBank of Tennessee, National Association, as such bank's Prime Rate from time to time, and (b) "Default Rate" means the lesser of the Prime Rate plus 4%, or the maximum rate from time to time permitted under applicable law. This Note is the Note referred to in, and is entitled to the benefits of, the Series 1997 Note Agreement (the "Note Purchase Agreement") dated as of April 1, 1997 among the Maker, NationsBank of Tennessee, National Association and Jones Apparel Group, Inc., a Pennsylvania corporation (the "Lessee"), and is secured by, among others, (i) an Amended and -1- Restated Assignment Agreement, dated as of April 1, 1997, from the Maker to NationsBank of Tennessee, National Association assigning to NationsBank of Tennessee, National Association maker's interest in that certain' Lease from Maker to Lessee dated as of May 1, 1996 herewith and of record in the Register's Office for Lawrence County, Tennessee, as amended by the First Amendatory Lease Agreement dated as of April 1, 1997 (the "Lease"), (ii) an Amended and Restated Construction Deed of Trust and Security Agreement from Maker for the benefit of NationsBank of Tennessee, National Association, dated as of April 1, 1997, and of record in the Register's Office for Lawrence County, Tennessee; (iii) an Escrow and Security Agreement dated as of April 1, 1997 by and among Maker, Lessee and NationsBank of Tennessee, N.A. as escrow agent and trustee; and (iv) such other security as has heretofore or will be hereafter provided as security for any loan made by NationsBank of Tennessee, National Association, for the benefit of Lessee. This Note shall be prepayable at the option of the Maker at any time with the prepayment penalties set forth in the following schedule if this Note is prepaid through refinancing of the indebtedness by any outside lender, other than NationsBank of Tennessee, National Association, or its affiliates, including any financial institution, credit union, trust fund or like source of funds. Prepayment Date Prepayment Penalty Before May 1, 2000 2% and thereafter 0% Notwithstanding the foregoing paragraph, this Note shall be prepayable by the Maker without penalty in the event the Note is prepaid through funds of the Lessee generated solely from its operations. All payments hereunder shall be payable in lawful money of the United States of America representing legal tender in payment of all debts and dues, public and private, at the time of payment. Payment of each monthly installment as herein above provided, when received by the holder shall be first applied to accrued interest at the rate aforesaid on the then outstanding balance of principal and the remainder of said installment shall be applied to reduction of principal. Demand, notice, presentment and protest are waived. This Note is issued in accordance with Sections 7-53-101 to 7-53-311 of Tennessee Code Annotated and constitutes a special obligation of the Maker, the principal of, premium, if any, and interest on this Note, and all other amounts payable by the Maker pursuant to the Note Purchase Agreement and this Note, are payable pursuant to the Assignment referred to in the Note Purchase Agreement; (ii) from revenues of the Maker derived and to be derived pursuant -2- to the Lease. All payments made as provided above shall, to the extent of the sum or sums so paid, satisfy and discharge the liability of the Maker under the Note or the Note Purchase Agreement, as the case may be. Neither the faith and credit nor any taxing power of the Maker, the State of Tennessee nor the City of Lawrenceburg, Tennessee, is pledged to the payment of the principal or premium, if any, or interest on this Note. No recourse under or upon any obligation, covenant or agreement contained in this Note, or under any judgment obtained against the Maker, or by the enforcement of any assessment or by any legal or equitable proceeding by virtue of any constitution or statute or otherwise or under any circumstances, under or independent of this Note, shall be had against any incorporator, member, director or officer, as such, past, present or future, of the Maker, either directly or through the Maker, or otherwise, for the payment for or to the Maker or any receiver thereof, or for or to the holder of the Note or otherwise, of any sum that may be due and unpaid by the Maker upon the Note. Any and all personal liability of every nature, whether at common law or in equity, or by statute or by constitution or otherwise, of any such incorporator, member, director or officer, as such, to respond by reason of any act or omission on his part or otherwise, for the payment for or to the Maker or any receiver thereof, or for or to the holder of the Note or otherwise, of any sum that may remain due and unpaid upon the Note, is hereby expressly waived and released as a condition of and consideration for the issue of the Note. Upon the occurrence of an Event of Default under the Note Purchase Agreement, the Lease or the Deed of Trust, the balance of the principal sum of the indebtedness evidenced hereby, with all arrearages of interest thereon, and any other sums advanced hereunder or under any other document evidencing or securing the indebtedness evidenced hereby, shall, at the option of the holder, become and be due and payable immediately, without notice, anything contained herein to the contrary notwithstanding, time being of the essence of this contract. From and after the date of acceleration in accordance with this paragraph, interest will accrue at the Default Rate. In the event this Note is placed in the hands of an attorney for collection or for enforcement or protection of the security, the Maker shall pay reasonable attorney's fees and all court and other costs upon demand. The failure of the holder to exercise any option to accelerate the indebtedness hereunder in the event of any default as above provided, or any forbearance, indulgence, or other delay by such holder in the exercise of any such option, shall not constitute a waiver of the right to exercise such option prior to the curing of any such default or in the event of any subsequent default, whether similar or dissimilar to any prior default. The Maker consents to any extension of time of payment hereof, release of all or any part of the security for the payment hereof, or release of any party liable for this obligation. Any such extension or release may be made without notice to said Maker and without discharging any of its liability hereunder. -3- No provision in this Note shall require the payment or permit the collection of interest in excess of the maximum permitted by law. If any excess of interest in such respect is herein provided for, or shall be adjudicated to be so provided for herein, the provisions of this paragraph shall govern, and the Maker shall not be obligated to pay the amount of such interest to the extent that it is in excess of the amount permitted by law. In the event the holder shall collect monies which are deemed to constitute interest which would otherwise increase the effective interest rate on this Note to a rate in excess of that permitted to be charged by applicable law, all such sums deemed to constitute interest in excess of the legal rate shall be immediately returned to the payor thereof upon such determination. This Note shall be construed according to the laws of the State of Tennessee except to the extent-that applicable federal law may permit any higher rate of interest. Any notice to the Maker of this Note shall be effective when delivered by personal service or when placed in the first-class United States mails, postage prepaid, addressed to Maker, c/o Alan C. Betz, Esq., White & Betz, 22 Public Square, Lawrenceburg, Tennessee 38464-0488, or at such other address as may be designated in writing to holder by Maker. This Note may be transferred or assigned by the holder by giving notice to the Lessee as note registrar at its main office, currently at 250 Rittenhouse Circle, Bristol, Pennsylvania 19007. The principal hereof, premium, if any, and interest hereon will be paid by check of the note registrar at the times provided herein to the holder by mail to the address shown on the registration books or at such other place as may be directed by the holder. The law pursuant to which this Note is issued requires that the following statement appear on the face hereof: Neither the principal of or interest on this Note is taxable by the State of Tennessee or by any county or municipality thereof. However, such interest is subject to the Tennessee corporate excise tax and the Tennessee privilege tax imposed on savings and loan associations and the principal hereof may be subject to Tennessee inheritance tax. -4- IN WITNESS WHEREOF, THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG, has caused this Note to be duly executed by its Chairman and its seal to be impressed hereon and attested by its Secretary as of the date first above written. THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG By: /s/ Jerry Putman Chairman (SEAL) ATTEST: Caralyn Thompson Secretary -5- Date Of Name and Address Registration Registered Owner April 17, 1997 NationsBank of Tennessee, National Association 255 N. Military Avenue Lawrenceburg, TN 38464 -6- EXHIBIT 10.46 This instrument Prepared By Alexander B. Buchanan, Esq. Waller Lansden Dortch & Davis 511 Union Street, Suite 2100 Nashville, Tennessee 37219-1760 FIRST AMENDMENT TO LEASE This First Amendment to Lease (the "First Amendment") made and entered into as of April 1, 1997, by and between THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG, a public non-profit corporation organized and existing under the laws of the State of Tennessee (hereinafter called "Lessor") and JONES APPAREL GROUP, INC., a Pennsylvania corporation (hereinafter called "Lessee"). WITNESSETH WHEREAS, Lessor and Lessee have heretofore entered into a Lease dated as of May 1, 1996 (the "Lease") noted in Note Book 23, Page 175, registered in Trust Book 400, Page 99-128, Register's Office of Lawrence County, Tennessee; and WHEREAS, Lessee has agreed to construct enhancements on the Leased Premises (as defined in the Lease) consisting of a 210,000 square foot distribution facility located adjacent to the existing facility and has received the prior written consent of NationsBank of Tennessee, N.A. to the enhancement as required by the Lease; and WHEREAS, the parties wish to amend the Lease in order to set forth more fully the understanding of the parties with respect to matters arising by reason of the proposed enhancement; and WHEREAS, to obtain funds for the enhancement, Lessor will issue and sell its Taxable Revenue Note, Series 1997 (Jones Apparel Group, Inc. Project) (herein sometimes referred to as the "Series 1997 Note") in the principal amount of $10,000,000 under and pursuant to the Act (as defined in the Lease) and the Series 1997 Note Purchase Agreement dated as of the date hereof (the "Series 1997 Note Purchase Agreement") among Lessor, NationsBank of Tennessee, National Association (the "Purchaser") and Lessee and proceeds from the sale of the Series 1997 Note shall be disbursed in the manner and for the purposes hereinafter set forth. SECTION I Section 1.01 of the Lease is amended in the following particulars: a. The definition of "All Unpaid Installments" is deleted and the following substituted in its stead: -1- "All Unpaid Installments" means an amount equal to (i) the then unpaid principal amount of the Notes, premium, if any, and all interest accrued or to accrue on and prior to the next succeeding date or dates on which the Lessor may prepay the Notes or on which the Notes become due, whether by acceleration or otherwise, and (ii) any additional rental due or to become due hereunder prior to the time that the Notes are paid in full, including without limitation any unpaid fees and expenses of Lessor which are then due or will become due prior to the time that the Notes are paid in full. b. The definition of "Building" is deleted and the following is substituted in its stead: "Building" means the improvements constructed on the Land in accordance with the Construction Contract. From and after the issuance of the Series 1997 Note, "Building" shall also include improvements constructed on the Land in accordance with the Series 1997 Construction Contract. c. The definition of "Deed of Trust" is deleted and the following substituted in its stead: "Deed of Trust" means the Deed of Trust dated as of May 1, 1996 from the Lessor for the benefit of the Purchaser with respect to the Project, of record in Trust Book 400, Page 86-96 Register's Office for Lawrence County, Tennessee, as amended, restated and supplemented. d. The definition of "Lessee Documents" is deleted and the following is substituted in its stead: " Lessee Documents" means this Lease, the Note Purchase Agreement, the Guaranty, the Environmental Indemnity, the Series 1997 Note Purchase Agreement, the Series 1997 Guaranty, and the Series 1997 Environmental Indemnity. e. The definition of "Note Documents" is deleted and the following is substituted in its stead: "Note Documents" means this Lease, the Note Purchase Agreement, the Note, the Assignment, the Series 1997 Note Purchase Agreement, the Series 1997 Note, the Series 1997 Assignment, the First Amendment to the Amended and Restated Deed of Trust and Security Agreement, and the Deed of Trust. -2- f. The following new definitions shall be added to the Lease in alphabetical order: "Enhancement" means the 210,000 square foot distribution facility to be located on the Leased Premises and constructed in accordance with the terms of the Series 1997 Construction Contract. "First Amendment to the Amended and Restated Deed of Trust and Security Agreement" means the First Amendment to the Amended and Restated Deed of Trust and Security Agreement dated as of April 1, 1997 by and among the Lessor, the Lessee and NationsBank of Tennessee, National Association. "First Amendment to Lease" means this First Amendment to Lease dated as of June 1, 1997 by and between Lessor and Lessee. "Notes" means, collectively, the Note and the Series 1997 Note. "Note Purchase Agreements" means, collectively, the Note Purchase Agreement and the Series 1997 Note Purchase Agreement. "Series 1997 Assignment" means the Restated and Amended Assignment Agreement dated as of April 1, 1996 from Lessor to the Purchaser. "Series 1997 Construction Contract" means the form of agreement dated January 23, 1997 between Lessee and the Series 1997 Contractor. "Series 1997 Contractor" means Evers Construction Company Inc. "Series 1997 Environmental Indemnity" means the Environmental Law and Compliance Certificate and Indemnity Agreement dated as of April 1, 1997 between Lessee and Purchaser. "Series 1997 Guaranty" means that certain Guaranty Agreement dated as of April 1, 1997 from Lessee. "Series 1997 Note" means the Taxable Revenue Note, Series 1997 (Jones Apparel Group, Inc. Project) in the principal amount of $10,000,000 issued by the Lessor. -3- "Series 1997 Noteholder" means NationsBank of Tennessee, National Association, a national banking association with its principal office in Nashville, Tennessee as the original purchaser and registered owner of the Series 1997 Note and any subsequent registered owner of the Series 1997 Note. "Series 1997 Note Agreement" means the Series 1997 Note Agreement dated as of April 1, 1997 among Lessor, Lessee and the Series 1997 Noteholder. SECTION II Article III through Article XIX of the Lease are hereby amended in the following particulars: (a) all references to the "Note" appearing in such Articles of the Lease shall be changed to the "Notes"; (b) all references to the "Note Purchase Agreement" shall be changed to the "Note Purchase Agreements"; and (c) all verbs modifying such terms shall be pluralized where necessary to provide correct grammar. SECTION III The following new Article XX is added immediately following Article XIX of the Lease: ARTICLE XX Construction and Equipping of Enhancement; Issuance of the Series 1997 Note; Lessee's Acceptance; Permitted Contests, Assignment of Lessor's Rights Section 20.01. Construction and Equipping of the Enhancement. Lessee agrees to complete the Enhancement in accordance with the Series 1997 Construction Contract by October 1, 1997 and to lease the Project, including the Enhancement, from Lessor in accordance with the terms hereof. Lessee agrees that any property acquired for use at the Project will be acquired in the name of the Lessor and any property located on the Leased Premises (other than Lessee's inventory) shall be deemed the property of Lessor without any further act of the Lessee. -4- Section 20.02 Agreement to Issue Series 1997 Note. In order to provide funds for reimbursement of the Lessee for the costs of the constructing and equipping the Enhancement as set forth in Section 20.01 hereof and certain costs incurred in connection with the issuance of the Series 1997 Note, Lessor agrees that it will sell the Series 1997 Note as provided in the Series 1997 Note Purchase Agreement. Section 20.03 Use of Proceeds. The proceeds of the sale of the Series 1997 Note shall be disbursed by the Purchaser as follows: (a) $63,839 shall be paid to or at the direction of the Lessee to pay it for certain costs in connection with the issuance of the Series 1997 Note. (b) $9,936,161 shall be paid to NationsBank of Tennessee, N.A. as Escrow Agent and Trustee (the "Escrow Agent") and disbursed as provided in that certain Escrow and Security Agreement dated as of April 1, 1997 by and among Lessor, Lessee and Escrow Agent. Section 20.04. Lessor to Pursue Remedies Against Contract Subcontractors and Suppliers and Their Sureties. In the event of default of the Series 1997 Contractor or any other contractor, subcontractor or supplier under any contract made by it in connection with the Enhancement or in the event of breach of warranty with respect to any material, workmanship or performance guarantee, Lessor will at the request of Lessee promptly proceed (subject to Lessee's advice to the contrary), either separately or in conjunction with others, to exhaust the remedies of Lessor against the contractor, subcontractor or supplier so in default and against each surety for the performance of such contract. Lessee agrees to advise Lessor of the steps it intends to take in connection with any such default. If Lessee shall so notify Lessor, Lessee may, in its own name or in the name of Lessor, prosecute or defend any action or proceeding or take any other action involving any such contractor, subcontractor or surety which the Lessee deems reasonably necessary, and in such event Lessor hereby agrees to cooperate fully with Lessee and to take all action necessary to effect the substitution of Lessee for Lessor in any such action or proceeding. Any amounts recovered by way of damages, refunds, adjustments or otherwise in connection with the foregoing shall be paid to Lessee. Section 20.05. Use of Leased Property. Lessee is hereby granted and shall have the right during the Term to occupy and use the Leased Property as a facility for use as a clothing distribution center. Lessor agrees that at Lessee's request and expense it will use all reasonable efforts to ensure that such uses are and will continue to be lawful uses under all applicable zoning laws and regulations. Section 20.06. Lessee's Acceptance of Leased Property. With regard to Lessor but subject to Section 20.04, Lessee agrees to accept the Leased Property in its condition on the date that title thereto was transferred to the Lessor and assumes all risks, if any, resulting from -5- any present or future, latent or patent defects therein or from the failure of the Project or the Enhancement to comply with all legal requirements applicable thereto, reserving, however, any and all rights of Lessee with respect to parties other than Lessor. Section 20.07. Assignment of Lessor's Rights. Concurrently with the execution of the First Amendment to Lease, Lessor will enter into the Series 1997 Assignment pursuant to which the Lessor will assign to the Purchaser Lessor's rights under the Lease as security for, among other things, the payment of the Notes and other amounts payable by Lessor or Lessee under the Note Purchase Agreements. Lessee hereby consents to such assignment and agrees to make all payments to Lessor required hereunder directly to the Purchaser without defense or set-off by reason of any dispute between Lessee and Lessor. Lessee further agrees that upon such assignment the Purchaser shall be entitled to enforce the provisions of the Lease without regard to whether the Lessor is then in default with respect to the Notes, or either of them, or under the Note Purchase Agreements, or either of them. Concurrently with the execution of the First Amendment to Lease, Lessor will also amend and restate the Deed of Trust pursuant to which the Lessor will make clear that the lien on the Project includes the Enhancement and serves as security for the payment of both the Note and the Series 1997 Note and as security for the obligations of Lessor and Lessee under the Note Purchase Agreement, the Series 1997 Note Purchase Agreement and this Lease. Section 20.08. Authorized Lessee Representative. Anything herein contained to the contrary notwithstanding, any notice, request, direction or similar communication of Lessee required or permitted under this Article XX shall be executed by the Authorized Lessee Representative on behalf of the Lessee, and the Purchaser shall not be obligated to accept or act upon any such notice request direction or other communication unless it is made by an Authorized Lessee Representative on behalf of the Lessee. Section 20.09. Application of Moneys. All moneys received pursuant to any right given or action taken under the Deed first shall be applied to the payment of (i) the cost and expenses of the proceedings resulting in the collection of such moneys and of the expenses, liabilities and advances incurred or made by the Deed of Trust Trustee, including reasonable attorneys' fees, and all other outstanding fees and expenses of the Deed of Trust Trustee, and (ii) any sums due to the Lessor under the Lease, such moneys shall be applied in the order set forth below: (a) Unless the principal of all Notes shall have become or been declared due and payable, all such moneys shall be applied: First: To the payment of all installments of interest then due on the Notes in order of priority first to installments past due for the greatest period and, if the amount available shall not be sufficient to pay in full any particular installment, then to the ratable payment of the amounts due on such installment; and -6- Second: To the payment of the unpaid principal of any of the Notes which shall have become due and, if the amount available shall not be sufficient to pay in full Notes due on any particular date, together with such interest, then to the ratable payment of the amounts due on such date. (b) If the principal of all the Notes shall have become or been declared due and payable, all such moneys shall be applied to the payment of the principal, premium, if any, and interest then due and unpaid upon the Notes, without preference or priority as between principal, premium, interest, installments of interest or bonds, ratably according to the amounts due respectively for principal, premium and interest to the persons entitled thereto. THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF LAWRENCEBURG By: /s/ Jerry Putnam Chairman JONES APPAREL GROUP, INC. By: /s/ Gary R. Klocek Title: Corp. Controller -7- EXHIBIT 10.47 First Union Capital Markets Group 123 South Broad Street Philadelphia, Pennsylvania 19109-1199 215 985-6000 Fax 215 985-8793 October 22, 1997 Mr. Gary R. Klocek Controller Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, PA 19007 Dear Gary: I am pleased to inform you that First Union National Bank (the "Bank") has approved, on an uncommitted basis, a $90 million facility for the use of Jones Apparel Group, Inc. The facility is subject to the following conditions: Sublimit(s): The facility is divided into two sublimits. One for $50 million, to be used for the express purpose of issuing import letters of credit. Each letter of credit will be risk participated with a bank of our mutual choice on a 50% basis for a total letter of credit facility, including the risk participation of $100 million. Initially the risk participant bank will be BankBoston. The second sublimit will be for direct borrowings, not to exceed $40 million. Advances under both sublimits will be at the Bank's sole discretion. Letters of Credit: Fees: As previously negotiated. -1- October 22, 1997 Mr. Gary R. Klocek Page Two Terms of Advances: The interest rates, amount, maturity date and other payment terms with respect to any cash advance will be on an offering basis on terms mutually agreed upon. Guarantors: MELRU Corp., Jones Investment Company, Inc., Jones International LTD, and Jones Holdings Corp. will continue to guarantee the facility as reflected in the Guaranty and Suretyship Agreements dated July 26, 1993. All borrowings under the sublimit of $40 million for direct advances will be subject to the terms outlined in a Money Market Master Note dated July 26, 1993. Please feel free to call me if you have any questions on the aforementioned matter. Best regards, /s/ Carl E. Goelz Carl E. Goelz Vice President -2- EXHIBIT 10.48 CoreStates Bank, FC. 1-8-8-14 PO Box 7618 1345 Chestnut Street Philadelphia PA 19101-7618 215 973 7397 Fax 215 973 7671 James P Richards Vice President Retailer and Apparel Group August 5, 1997 Gary R. Klocek Controller JONES APPAREL GROUP 250 Rittenhouse Circle Bristol, PA 19007 Dear Gary: I take great pleasure in advising you that we have approved in favor of Jones Apparel Group, the following credit facilities: A) A $150,000,000 discretionary fine of credit for the issuance of documentary trade letters of credit, This amount is gross of any risk participations. Chase Manhattan Bank has advised us they plan to risk participate 30%, or $45,000,000, of this facility. B) A $25,000,000 discretionary line of credit available for money market loans and/or standby letters of credit. There is currently outstanding a $100,000 standby LOC issued on behalf of Melru Corporation. C) We have also reapproved facilities for foreign exchange and other types of transactional business. I'm currently reviewing our documentation file to ensure that everything is current and in good order. I will notify you should I find anything to the contrary. We are pleased to play an important role in Jones Apparel's growth and very happy to have been favored with the opportunity to demonstrate our international capabilities. I trust we have met--or exceeded--your expectations. We look forward to further opportunities to demonstrate our confidence in the Jones Apparel Group and its management. Sincerely, /s/ James P. Richards cc: Wesley R. Card EXHIBIT 10.49 BankBoston, N. A. 100 Federal Street Boston, Massachusetts 02110 August 19, 1997 Mr. Gary Klocek Controller Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, PA 10997 Dear Gary: BankBoston, N.A. is pleased to confirm that we hold available for Jones Apparel Group, Inc., a $55,000,000 364-day uncommitted letter of credit facility to extend through July 5, 1998. The availability of borrowings under this facility is subject to (i) our usual reservation that we continue to be satisfied with the affairs of Jones Apparel Group, Inc.; (ii) the execution of documentation for this facility that is satisfactory to the Bank and (iii) any changes in government regulations or monetary policy. If the foregoing is satisfactory, please execute and return the enclosed copy of this letter. Very truly yours, BankBoston, N.A. By /s/ Nancy E. Fuller Nancy E. Fuller, Director /s/ Terese A. McLaughlin, Assistant Vice President Accepted: Jones Apparel Group, Inc. By /s/ Gary R. Klocek Date 9-10-97 EXHIBIT 10.50 BankBoston, N.A. 100 Federal Street Boston, Massachusetts 02110 July 7, 1997 Mr. Gary R. Klocek Controller Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, PA 19007 Dear Gary; We are pleased to inform you that the necessary internal approval has been obtained for the establishment of an informal "money market" lending arrangement with Jones Apparel Group. Loans under this arrangement will be at fixed rates quoted by BankBoston, N.A. with maturities of up to ninety days. Prepayment of loans will not be permitted and if any loans are paid on a date other than the maturity date thereof (whether by acceleration or otherwise), you shall compensate us for any funding losses and other costs (including lost profits) incurred as a result of such payment. Each loan must be at least $750,000 and aggregate loans under this arrangement may not exceed $20,000,000. This arrangement is not a commitment to lend, and from time to time the Bank may not quote rates on some or all maturities. We agree that upon your advice by telephone from time to time to our Money Market Desk at (617) 434-7725 that you wish to borrow money under this facility and our agreement to lend, we will forthwith lend you such amount at the quoted rate of interest by crediting such an amount to your demand deposit account with us, or, upon your instructions, by wiring such amount to such other account as you may direct. Borrowings shall be evidenced by a Promissory Note in the form attached hereto. Each borrowing and the corresponding information (see attached note schedule) will be recorded the day of the telephone call. Our corresponding advices of credit and debit will be additional evidence of borrowings. You authorize us to keep the official record of all borrowings under this "money market" lending arrangement in the format described above, and you agree that this record shall be prima facie evidence of the amount of the borrowings under this facility. This letter and the Promissory Note evidence your promise to pay all such borrowings with interest on their respective maturity dates. -1- This "money market" lending arrangement remains in force until July 7, 1998. If the foregoing satisfactorily sets forth the terms and conditions of this lending arrangement, please indicate your acceptance thereof by executing and returning the attached copy of this letter and the attached Promissory Note. Sincerely, /s/ Linda H. Thomas Linda H. Thomas, Managing Director Accepted: Jones Apparel Group, Inc. BY: /s/ Gary R. Klocek TITLE Controller DATE: 7-14-97 -2- MONEY MARKET LINE COMMERCIAL PROMISSORY NOTE Boston, Massachusetts July 7, 1997 FOR VALUE RECEIVED, the undersigned (jointly and severally if more than one) promise(s) to pay to the order of BANKBOSTON, N.A. (together with any successors or assigns, the "Bank"), a national banking association with its Head Office at 100 Federal Street, Boston, Massachusetts 02110, the aggregate principal amount of all loans made by the Bank to the undersigned pursuant to the letter agreement between the Bank and the undersigned dated July 7, 1997, as shown in the schedule attached hereto (the "Note Schedule"), together with interest on each loan from the date such loan is made until the maturity thereof at the applicable rate set forth in the Note Schedule. The principal amount of each loan shall be payable on the maturity date of such loan as indicated in the Note Schedule. Interest on the principal amount of each loan shall be payable in arrears on the same day as the principal amount is due. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed including holidays and days on which the Bank is not open for the conduct of banking business. SECTION 1. PAYMENT TERMS. 1.1 PAYMENTS; PREPAYMENTS. All payments hereunder shall be made by the undersigned to the Bank in United States currency at the Bank's address specified above (or at such other address as the Bank may specify), in immediately available funds, on or before 2:00 p.m. (Boston, Massachusetts time) on the due date thereof Payments received by the Bank prior to the occurrence of an Event of Default (as defined in Section 2) will be applied first to fees, expenses and other amounts due hereunder (excluding principal and interest); second, to accrued interest; and third to outstanding principal; after the occurrence of an Event of Default, payments will be applied to the Obligations under this Note as the Bank determines in its sole discretion. No prepayment of any loan shall be permitted. 1.2 PREPAYMENT CHARGE. If any payment of principal is made for any reason on any day other than the date scheduled therefor, whether as a result of acceleration or otherwise, the undersigned shall reimburse the Bank for the loss, if any, including any lost profits, resulting from such prepayment, as reasonably determined by the Bank. The undersigned shall pay such loss upon presentation by the Bank of a statement of the amount of such loss, setting forth the Bank's calculation thereof, which notice and calculation (including the method of calculation) shall be deemed true and correct absent manifest error. 1.3 DEFAULT RATE. To the extent permitted by applicable law, upon and after the occurrence of an Event of Default (whether or not the Bank has accelerated payment of this Note), interest on principal and overdue interest shall, at the option of the Bank, be payable on demand at a rate per annum equal to 2% above the greater of the rate of interest otherwise payable hereunder or the rate announced by the Bank from time to time as its Base Rate. -3- SECTION 2. DEFAULTS AND REMEDIES. 2.1 DEFAULT. The occurrence of any of the following events or conditions shall constitute an "Event of Default" hereunder: (a) (i) default in the payment when due of the principal of or interest on this Note or (ii) any other default in the payment or performance of this Note or of any other Obligation or (iii) default in the payment or performance of any obligation of any Obligor to others for borrowed money or in respect of any extension of credit or accommodation or under any lease; (b) failure of any representation or warranty herein or in any agreement, instrument, document or financial statement delivered to the Bank in connection herewith to be true and correct in any material respect; (c) failure to furnish the Bank promptly on request with financial information about, or to permit inspection by the Bank of any books, records and properties of, any Obligor; (d) merger, consolidation, sale of all or substantially all of the assets or change in control of any Obligor; or (e) any Obligor generally not paying its debts as they become due; the death, dissolution, termination of existence or insolvency of any Obligor; the appointment of a trustee, receiver, custodian, liquidator or other similar official for such Obligor or any substantial part of its property or the assignment for the benefit of creditors by any Obligor; or the commencement of any proceedings under any bankruptcy or insolvency laws by or against any Obligor. As used herein, "Obligation" means any obligation hereunder or otherwise of any Obligor to the Bank or to any of its affiliates, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising; and "Obligor" means the undersigned, any guarantor or any other person primarily or secondarily liable hereunder or in respect hereof. 2.2 REMEDIES. Upon an Event of Default described in Section 2.1(e) immediately and automatically, and upon or after the occurrence of any other Event of Default at the option of the Bank, all Obligations of the undersigned shall become immediately due and payable without notice or demand. All rights and remedies of the Bank are cumulative and are exclusive of any rights or remedies provided by law or in equity or any other agreement, and may be exercised separately or concurrently. SECTION 3. MISCELLANEOUS. 3.1 WAIVER; AMENDMENT. No delay or omission on the part of the Bank in exercising any right hereunder shall operate as a waiver of such right or of any other right under this Note. No waiver of any right or any amendment hereto shall be effective unless in writing and signed by the Bank, nor shall a waiver on one occasion bar or waive the exercise of any such right on any future occasion. Without limiting the generality of the foregoing, the acceptance by the Bank of any late payment shall not be deemed to be a waiver of the Event of Default arising as a consequence thereof Each Obligor waives presentment, demand, notice, protest, and an other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and assents to any extensions or postponements of the time of payment and to any other -4- indulgences under this Note, and to any additions or releases of any other parties or persons primarily or secondarily liable hereunder, that from time to time may be granted by the Bank in connection herewith. 3.2 SET-OFF. Regardless of the adequacy of any collateral or other means of obtaining repayment of the Obligations, the Bank is hereby authorized at any time and from time to time, without notice to the undersigned (any such notice being expressly waived by the undersigned) and to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) and other sums credited by or due from the Bank to the undersigned or subject to withdrawal by the undersigned against the Obligations of the undersigned, although such Obligations may be contingent or unmatured. 3.3 TAXES. The undersigned agrees to indemnify the Bank and hold it harmless from and against any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution, delivery, and performance of this Note. 3.4 EXPENSES. The undersigned will pay on demand all expenses of the Bank in connection with the preparation, administration, default, collection, waiver or amendment of the Obligations or in connection with the Bank's exercise, reservation or enforcement of any of its rights, remedies or options thereunder, including, without limitation, fees of outside legal counsel or the allocation costs of in-house legal counsel, accounting, consulting, brokerage or other similar professional fees or expenses, and any fees or expenses associated with any travel or other costs relating to any appraisals or examinations conducted in connection with the Obligations or any collateral therefor, and the amount of all such expenses shall, until paid, bear interest at the rate applicable to principal hereunder (including any default rate) and be an Obligation secured by any such collateral. 3.5 BANK RECORDS. The entries on the records of the Bank (including any appearing on this Note) shall be prima facie evidence of the aggregate principal amount outstanding under this Note and interest accrued thereon. 3.6 INFORMATION. The undersigned shall furnish the Bank from time to time with such financial statements and other information relating to any Obligor or any collateral securing, this Note as the Bank may require. All such information shall be true and correct and fairly represent the financial condition and the operating results of such Obligor as of the date and for the periods for which the same are furnished. The undersigned shall permit representatives of the Bank to inspect its properties and its books and records, and to make copies or abstracts thereof Each Obligor authorizes the Bank to release and disclose to its affiliates, agents and contractors any financial statements and other information relating to said Obligor provided to or prepared by or for the Bank in connection with any Obligation. The undersigned will notify the Bank promptly of the existence or upon the occurrence of any Event of Default or event which, with the giving of notice or the passage of time or both, would become an Event of Default. 3.7 GOVERNING LAW; CONSENT TO JURISDICTION. This Note is intended to take effect as a sealed instrument and shall be governed by, and construed in accordance with, the laws of The Commonwealth of Massachusetts, without regard to its conflicts of law rules. The undersigned agrees that any suit for the enforcement of this Note may be brought in the courts of such state or any Federal Court sitting in such state and consents to the non-exclusive jurisdiction of each such court and to service of process in any such suit being made upon the undersigned by mail at the address specified below. The undersigned hereby waives any objection that it may now -5- or hereafter have to the venue of any such suit or any such court or that such suit was brought in an inconvenient court. 3.8 SEVERABILITY; AUTHORIZATION TO COMPLETE; PARAGRAPH HEADINGS. If any provision of this Note shall be invalid, illegal or unenforceable, such provisions shall be severable from the remainder of this Note and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. The Bank is hereby authorized, without further notice, to fill in any blank spaces on this Note, and to date this Note as of the date funds are first advanced hereunder. Paragraph headings are for the convenience of reference only and are not a part of this Note and shall not affect its interpretation. 3.9 JURY WAIVER. THE BANK (BY ITS ACCEPTANCE OF THIS NOTE) AND THE UNDERSIGNED AGREE THAT NEITHER OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS NOTE, ANY RELATED INSTRUMENTS, ANY COLLATERAL OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER THE BANK NOR THE UNDERSIGNED HAS AGREED WITH OR REPRESENTED TO THE OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. By: /s/ Gary R. Klocek Gary R. Klocek, Controller Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, PA 19007 -6- EXHIBIT 10.51 The Chase Manhattan Bank George Neuman 1411 Broadway, 5th Floor Vice President New York, NY 10018 Seventh Avenue Region Tel 212-391-4050 Fax 212-391-7118 August 14,1997 Mr. Gary Klocek Controller Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, PA 19007 Dear Gary: We are pleased to advise you that based on your annual financial statements for the fiscal year 1996, The Chase Manhattan Bank (the "Bank") has approved your request for a line of credit in the amount of $25,000,000. Our officers may, at their discretion, make short term loans to Jones Apparel Group, Inc. on such terms as are mutually agreed upon between us from time to time. We also advise a $45,000,000 participation in the $150,000.000 line of credit for commercial letters of credit extended by CoreStates Bank, N.A. Borrowings under this line are intended to be used to meet your normal short term working capital needs and will bear interest at such a rate as shall be mutually agreed upon by each of us from time to time. As this line is not a commitment, credit availability is, in addition, subject to your execution and delivery of such documentation as the Bank deems appropriate and the receipt and continuing satisfaction with current financial information, which information will be furnished to the Bank as it may from time to time reasonably request. This line expires on June 30, 1998. We are pleased to be of service and trust you will call on us to assist in any of your banking requirements. Very truly yours, /s/ George Neuman EXHIBIT 10.52 TERM NOTE Philadelphia, Pennsylvania October 1, 1997 $10,000,000 FOR VALUE RECEIVED, and intending to be legally bound hereby, JONES APPAREL GROUP, INC., a Pennsylvania corporation with offices at 250 Rittenhouse Circle, Bristol, PA 19007 (the "Borrower") unconditionally promises to pay to the order of FIRST UNION NATIONAL BANK (the "Bank") the principal sum of Ten Million Dollars ($10,000,000), with interest, in accordance with the provisions hereinafter set forth. A. Terms of Note. 1. Interest Rate. Interest will accrue on the outstanding principal balance of this Note during each Interest Period at a rate per annum (computed on the basis of a 360-day year and the actual number of days elapsed) equal to the sum of the One Month LIBOR for such Interest Period, plus 60 basis points (.6 of 1%). The term "Interest Period" means the calendar month. The term "One Month LIBOR" means the rate for U.S. dollar deposits of one month maturity as reported on Telerate page 3750 as of 11:00 a.m., London time, on the second London business day before the relevant Interest Period begins (or if not so reported, then as determined by the Bank from another recognized source or interbank quotation). 2. Payment of Principal and Interest. This Note shall be Paid in one hundred nineteen (119) consecutive monthly installments of principal and interest on the first day Of each month (or, if not a business day, the next succeeding business day) commencing on November 3, 1997, in an amount equal to the sum of (i) all accrued and unpaid interest on the Note plus (ii) a principal payment of $83,333.33, with a final installment of principal and interest on the Maturity Date in an amount equal to the sum of (i) all accrued and unpaid interest on the Note plus (ii) a principal payment of $83,333.73. - 1 - 3. Payment Terms. All payments made hereunder shall be made on the due date thereof, in immediately available funds and in lawful currency of the United States of America. All payments made hereunder shall be made to the Bank at its offices set forth in this Note or at such other address as the Bank shall notify the Borrower of in writing. 4. Late Charge. If any payment is not paid in full when the same is due, the Borrower shall pay the Bank a fee on such unpaid amount equal to five percent (5%) of such amount. 5. Default Rate. At the Bank's option, interest will be assessed on any principal which remains unpaid at the maturity of this Note, whether by acceleration or otherwise, at a rate which is two percent (2%) higher than the rate otherwise charged hereunder (the "Default Rate") provided that at no time shall the Default Rate exceed the highest rate of interest allowed by law. Such Default Rate of interest shall also be charged on the amounts owed by the Borrower to the Bank pursuant to any judgment entered in favor of Bank with respect to this Note. 6. Prepayment. Borrower may, without penalty or premium, on any date installments of principal are due, prepay the principal amount of this Note in whole or in part, any partial prepayment to be made in the sum of $83,333.33 or an integral multiple thereof. All such partial prepayments shall be applied against the installments of principal due under Paragraph A.2 above in the inverse order of maturity thereof. 7. Security for Note. 7.1. As security for the payment of all amounts owing under this Note, the Borrower will execute and deliver to the Bank the Deed of Trust (as hereinafter defined) at the time of the acquisition of the Project (as hereinafter defined). 7.2 As security for the payment of all amounts owing under this Note, the Borrower hereby assigns and grants to the Bank a security interest in and to the Project Account (as hereinafter defined) pursuant to a separate Assignment of Interest in a Custodian Account of even date herewith. Unless there has occurred an Event of Default under this Note, Borrower may withdraw from the Project Account (i) all accrued earnings for any corporate -2- purpose or use, and (ii) amounts in excess of the accrued earnings so long as the funds withdrawn are used for the acquisition or construction of the Project or the purchase of equipment to be installed on the Project; provided, however, that until the Deed of Trust is recorded, aggregate withdrawals from the Project Account (other than withdrawals of accrued earnings) will not exceed $500,000.00. At the time of any permitted withdrawal from the Project Account (other than withdrawals of accrued earnings), the Chief Financial Officer of the Borrower (or his written designee) will certify in writing to the Bank that the funds withdrawn are for the uses herein permitted. B. Certain Definitions. As used herein, the following terms shall have the following meanings (additional terms are defined elsewhere in this Note): 1. Affiliate. The term "Affiliate" means First Union Corporation and any of its direct and indirect affiliates and subsidiaries. 2. Consolidated Net Income. The term "Consolidated Net Income" means, for any period, the net income after taxes of the Borrower and its subsidiaries for such period, as shown by the consolidated income statement of the Borrower and its subsidiaries, calculated in accordance with GAAP. 3. Consolidated Tangible Net Worth. The term "Consolidated Tangible Net Worth" means, at any time, the sum of Stockholders' Equity plus the lesser of the cost of the Borrower's treasury stock purchased after June 29, 1997, or Fifty Million Dollars ($50,000,000), less the sum of: (a) Any surplus resulting from any write-up of assets; (b) Goodwill, including any amounts, however designated on the consolidated balance sheet of the Borrower and its subsidiaries, representing the excess of the purchase price paid for assets or stock acquired over the value assigned thereto on the books of the Borrower and its subsidiaries; (c) Patents, trademarks, trade names and copyrights; (d) Any amount at which shares of capital stock of the Borrower or any subsidiary appear as an asset on the consolidated balance sheet of the Borrower and its subsidiaries; -3- (e) Loans and advances to stockholders, directors, officers or employees or to any affiliate of the Borrower or any subsidiary; and (f) Deferred expenses 4. Funded Debt. The term "Funded Debt" means any and all indebtedness, obligations or liabilities (whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, or joint or several) for or in respect of: W borrowed money, (ii) amounts raised under or liabilities in respect of any note purchase or acceptance credit facility,(iii) reimbursement obligations under any letter of credit, currency swap agreement, interest rate swap, cap, collar or floor agreement or other interest rate management device, (iv) any other transaction (including without limitation forward sale or purchase agreements, capitalized leases, synthetic leases and conditional sales agreements) having the commercial effect of a borrowing of money entered into to finance its operations or capital requirements (but not including trade payables and accrued expenses incurred in the ordinary course of business which are not represented by a promissory note or other evidence of indebtedness), or (v) any guaranty of Funded Debt for borrowed money. 5. GAAP. The term "GAAP" means generally accepted accounting principles as in effect at the time of application to the provisions hereof, consistently applied. 6. Guarantors. The term "Guarantors" means, individually and collectively, Melru Corp., Jones Investment Company Inc., Jones International Ltd., and Jones Holding Corp. 7. Guaranties. The term "Guaranties" means those agreements now or hereafter in effect, from the Guarantors in favor of the Bank. 8. Liabilities. The term "Liabilities" means any and all obligations and indebtedness of every kind and description of the Borrower owing to the Bank or to any Affiliate, whether under the Loan Documents or not and whether such debts or obligations are primary or secondary, direct or indirect, absolute or contingent, sole, joint or several, secured or unsecured, due or to become due, contractual or tortious, arising by operation of law or otherwise, or now or hereafter existing, including, without limitation, principal, -4- interest, fees, late fees, expenses, attorneys' fees and costs. 9. Loan Documents. The term "Loan Documents" means this Note, the Deed of Trust, the Guaranties and any and all credit accommodations, notes, mortgages, loan agreements, other agreements and documents, now or hereafter existing, creating, evidencing, guarantying, securing or relating to any or all of the Liabilities, together with all amendments, modifications, renewals, or extensions thereof. 10. Deed of Trust. The term "Deed of Trust" means a Deed of Trust and Security Agreement in form and substance reasonably acceptable to the Borrower and the Bank to be executed and delivered by the Borrower to the Bank which, when recorded, will grant to the Bank a first lien on and first priority security interest in the Project and all equipment to be installed thereon. 11. Note. The term "Note" means this Term Note together with all attachments hereto and all amendments and modifications hereto in effect from time to time. 12. Obligor. The term "Obligor" means the Borrower and each and every maker, endorser, guarantor or surety including, without limitation, the Guarantors, of or For the Liabilities or any part thereof. 13. Maturity Date. The term "Maturity Date" means October 1, 2007. 14. Project. The term "Project" means approximately 47.3 acres of land in South Hill, Virginia, to be acquired by the Borrower and all improvements, including the warehouse and distribution center buildings, to be constructed thereon. 15. Project Account. The term "Project Account" means the Borrower's Money Management Custodian Account at the Bank (No. 1556594048) into which the loan proceeds of the Note have been deposited. 16. Stockholders' Equity. The term "Stockholders' Equity" means, at any time, sum of the following accounts set forth in a consolidated balance sheet of the Borrower and its subsidiaries, prepared in accordance with GAAP: (a) the par or stated value of all outstanding capital stock; (b) capital surplus; and (c) retained earnings. 17. Total Capital. The term "Total Capital" means Stockholders, Equity plus Funded Debt. -5- C. Representations and Warranties. The Borrower represents and warrants to the Bank that: 1. Use of Proceeds. The proceeds of the Note will be used only for the acquisition or construction of the Project or the purchase of equipment installed on the Project. 2. Financial Statements. All financial statements heretofore delivered by the Borrower to the Bank are true, correct, and complete in all material respects, fairly represent the Borrower's and Guarantors' financial condition as of the date hereof, and no information has been omitted which would make the information previously furnished misleading or incorrect in any material respect. There have been no material adverse changes in the Borrower's or Guarantors' financial condition or business since the date of such statements. 3. Suits and Defaults. There are no actions, suits, proceedings, or claims pending or threatened against the Borrower or Guarantors or any of their property, and the Borrower and Guarantors are not in violation of any applicable order, law, rule or regulation, which would have material adverse effect on the Borrower's or Guarantors' business. The Borrower and Guarantors are not in default under any agreement to which the Borrower or the Guarantors are a party or by which the Borrower or the Guarantors or any of their property is bound, or under any instrument evidencing any indebtedness of the Borrower or Guarantors, and neither the Borrower's nor Guarantors' execution of or performance under the Loan Documents will create a default or any lien or encumbrance under any such agreement or instrument other than a lien or encumbrance in favor of the Bank. D. Affirmative Covenants. The Borrower covenants and agrees that so long as there are any outstanding amounts due under this Note, the Borrower shall: 1. Financial Reporting. Promptly deliver to the Bank (but in no event later than thirty (30) days after they are filed) all regular and periodic reports including, but not limited to, Forms 10-K, 10-Q and 8-K filed by the Borrower with the U.S. Securities and Exchange Commission, or its successor. If the Borrower ceases to be subject to the reporting requirements under the Securities Exchange Act of 1934, the Borrower will deliver to the Bank audited annual consolidated financial statements within ninety (90) days of the end of each year and unaudited quarterly consolidated -6- financial statements within forty-five (45) days of the end of each of the first three fiscal quarters certified as accurate by the Borrower's Chief Financial Officer, such financial statements to be prepared in accordance with GAAP in form reasonably acceptable to the Bank. 2. Project Account. Maintain and operate the Project Account in accordance with Paragraph A.7.2 hereof. 3. Notice of Certain Events. Promptly give written notice to the Bank of: (i) the occurrence of any event which alone or with notice, the passage of time, or both, would constitute an Event of Default; and (ii) the commencement of any proceeding or litigation which, if adversely determined, would materially and adversely affect its financial condition or ability to conduct its business. 4. Consolidated Tangible Net Worth. Maintain Consolidated Tangible Net Worth, measured at the end of each fiscal quarter, of Three Hundred Twenty-Five Million Dollars ($325,000,000) plus fifty percent (50%) of Consolidated Net Income for each of the fiscal quarters after December 31, 1996, with no deduction for any quarterly losses. 5. Additional Affirmative Covenants. Shall perform any other affirmative covenants set forth in the Loan Documents to which the Borrower is a party. 6. Covenant Compliance Certificate. Within ninety (90) days after the end each fiscal year, deliver to the Bank a covenant compliance certificate in form acceptable to the Bank indicating with specificity the compliance or non-compliance with each of the affirmative and negative covenants in the Loan Documents. E. Negative Covenants. So long as any amounts due under this Note are outstanding, the Borrower shall not, without the prior written consent of the Bank: 1. Funded Debt. Permit the ratio of its Funded Debt divided by its Total Capital to exceed forty-five percent (45%). 2. Additional Negative Covenants. Undertake any activities prohibited by any negative covenant set forth in the Loan Documents to which the Borrower is a party. -7- F. Event of Default. The occurrence of any one of the following shall-constitute an Event of Default under this Note: 1. Nonpayment. Failure to pay any principal or interest payment when due under the Liabilities and such failure shall continue for a period of three (3) days; 2. Breach. A breach by any obligor of any term, obligation, provision, covenant, representation or warranty, arising under (i) this Note, or any other Loan Document; (ii) any present or future agreement with or in favor of the Bank and/or any Affiliate, including the failure to make any payment when due; or (iii) any present or future agreement or instrument for borrowed money or other financial accommodations with any person or entity, which breach is not cured or satisfied within ten (10)days; 3. Bankruptcy; Insolvency. (i) Any obligor commences any bankruptcy, reorganization, debt arrangement, or other case or proceeding under the United States Bankruptcy Code or under any similar foreign, federal, state, or local statute, or any dissolution or liquidation proceeding, or makes a general assignment for the benefit of creditors, or takes any action for the purpose of effecting any of the foregoing; (ii) Any bankruptcy, reorganization, debt arrangement, or other case or proceeding under the United States Bankruptcy Code or under any similar foreign, federal, state or local statute, or any dissolution or liquidation proceeding, is involuntarily commenced against or in respect of any Obligor or an order for relief is entered in any such proceeding; (iii) The appointment, or the filing of a petition seeking the appointment, of a custodian, receiver, trustee, or liquidator for any Obligor or any of its property, or the taking of possession of any part of the property of any Obligor at the instance of any governmental authority; or (iv) Any Obligor becomes insolvent (however defined), is generally not paying its debts as they become due, or has suspended transaction of its usual business; 4. Material Misstatement. Any statement, representation or warranty made in or pursuant to this Note or any other Loan Document or to induce the Bank to enter into this Note shall prove to be untrue or misleading in any material respect; 5. Transfer of Assets. Any Obligor transfers or sells all or substantially all of its assets, without the prior -8- written consent of the Bank, which consent shall not be unreasonably withheld. G. Remedies. 1. Acceleration of Liabilities; Rights of Bank. Upon the occurrence of an Event of Default described in Section F hereof (other than any Event of Default described in Paragraph F.3), at the Bank's sole option, the Bank's commitment, if any, to make any further advances or loans to the Borrower under any Loan Document shall terminate and the Loan and all other Liabilities shall immediately become due and payable in full, all without protest, presentment, demand or further notice of any kind to the Borrower or any other Obligor, all of which are expressly waived. Upon the occurrence of an Event of Default described in Paragraph F.3 hereof, immediately and automatically, the Bank's commitment, if any, to make any further advances or loans to the Borrower under any Loan Document, shall terminate, and the Loan and all other Liabilities shall immediately become due and payable in full, all without protest, presentment, demand or further notice of any kind to the Borrower or any other obligor, all of which are expressly waived. Upon and following an Event of Default, the Bank, at its option, may exercise any and all rights and remedies it has under this Note, the other Loan Documents and under applicable law, including, without limitation, the right to charge and collect interest on the principal portion of the Liabilities at the Default Rate, which rate shall, at the Bank's option, apply upon and after an Event of Default, maturity, whether by acceleration or otherwise, and the entry of judgment with respect to any or all of the Liabilities. Upon and following an Event of Default hereunder, the Bank may proceed to protect and enforce the Bank's rights under any Loan Document and/or under applicable law by action at law, in equity, or other appropriate proceeding, including, without limitation, an action for specific performance to enforce or aid in the enforcement of any provision contained herein or in any other Loan Document. 2. Right of Set-off. If any of the Liabilities shall be due and payable and whether or not the Bank shall have made any demand under this Note and regardless of the adequacy of any collateral for the Liabilities or other means of obtaining repayment of the Liabilities, the Bank shall have the right, without notice to the Borrower or to any other Obligor, and is specifically authorized hereby to set-off against and apply to the then unpaid balance of the Liabilities any items or -9- funds of the Borrower and/or any Obligor held by the Bank or any Affiliate, any and all deposits (whether general or special, time or demand, matured or unmatured) or any other property of the Borrower and/or any Obligor, including, without limitation, securities and/or certificates of deposit, now or hereafter maintained by the Borrower and/or any Obligor for its or their own account with the Bank or any Affiliate, and any other indebtedness at any time held or owing by the Bank or any Affiliate to or for the credit or the account of the Borrower and/or any Obligor, even if effecting such set-off results in a loss or reduction of interest or the imposition of a penalty applicable to the early withdrawal of time deposits. For such purpose, the Bank shall have, and the Borrower hereby grants to the Bank, a first lien on and security interest in such deposits, property, funds and accounts and the proceeds thereof. The Borrower further authorizes any Affiliate, upon and following the occurrence of an Event of Default, at the request of the Bank, and without notice to the Borrower, to turn over to the Bank any property of the Borrower, including, without limitation, funds and securities held by the Affiliate for the Borrower's account, and to debit any deposit account maintained by the Borrower with such Affiliate (even if such deposit account is not then due or there results a loss or reduction of interest or the imposition of a penalty in accordance with law applicable to the early withdrawal of time deposits), in the amount requested by the Bank up to the amount of the Liabilities, and to pay or transfer such amount or property to the Bank for application to the Liabilities. 3. Remedies Cumulative; No Waiver. The rights, powers and remedies hereunder and under the other Loan Documents are cumulative and concurrent, and are not exclusive of any other rights, powers or remedies available to the Bank. No failure or delay on the part of the Bank in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. 4. Continuing Enforcement of the Loan Documents. If, after receipt of any payment of all or any part of the Note or the Liabilities, the Bank is compelled or agrees, for settlement purposes, to surrender such payment to any person or entity for any reason, then this Note and the other Loan Documents shall continue in full force and effect or be reinstated, as the case -10- may be. The provisions of this Paragraph shall survive the termination of this Note and the other Loan Documents and shall be and remain effective notwithstanding the payment of the Liabilities, the cancellation of the Note, the release of any security interest, lien or encumbrance securing the Liabilities or any other action which the Bank may have taken in reliance upon its receipt of such payment. H. Miscellaneous. 1. Waiver of Demand. The Borrower (i) waives presentment, notice of dishonor and protest of this Note; (ii) consents to any and all extensions of time, renewals, waivers, or modifications that may be granted by the Bank with respect to the payment or other provisions of this Note; and (iii) agrees that makers, endorsers, guarantors, including but not limited to the Guarantors, and sureties for the indebtedness evidenced hereby may be added or released without notice to the Borrower and without affecting the Borrower's liability hereunder. The liability of the Borrower hereunder shall be absolute and unconditional. 2. Notices. Notices and communications under this Note shall be in writing and shall be given by either (i) hand-delivery, (ii) first class mail (postage prepaid), or (iii) reliable overnight commercial courier (charges prepaid) to the addresses listed in this Note. Notice shall be deemed to have been given and received (a) if by hand delivery, upon delivery, (b) if by mail, three (3) calendar days after the date first deposited in the United States mail, and (c) if by overnight courier, on the date scheduled for delivery. A party may change its address by giving written notice to the other party as specified herein. 3. Costs and Expenses. The Borrower shall promptly pay (or reimburse, as the Bank may elect) all costs and expenses which the Bank may hereafter incur after the occurrence of an Event of Default in connection with the enforcement of this Note and the other Loan Documents, the collection of all amounts due under this Note and the other Loan Documents. The Borrower's reimbursement obligations under this Paragraph shall survive any termination of this Note or any other Loan Document. 4. Payment Due on a Day Other than a Business Day. If any payment due or action to be taken under this Note or any other Loan Document falls due or is required to be taken on a day that the Bank is not open for business, -11- such payment or action shall be made or taken on the next succeeding day when the Bank is open for business and such extended time shall be included in the computation of interest. 5. Governing Law. This Note shall be construed in accordance with and governed by the substantive laws of the Commonwealth of Pennsylvania without reference to conflict of laws principles. 6. Integration; Amendment. This Note and the other Loan Documents constitute the sole agreement of the parties with respect to the subject matter hereof and thereof and supersede all oral negotiations and prior writings with respect to the subject matter hereof and thereof. No amendment of this Note, and no waiver of any one or more of the provisions hereof shall be effective unless set forth in writing and signed by the parties hereto. 7. Successors and Assigns. This Note (i) shall be binding upon the Borrower and the Bank and, where applicable, their respective heirs, executors, administrators, successors and permitted assigns, and (ii) shall inure to the benefit of the Borrower and the Bank and, where applicable, their respective heirs, executors, administrators, successors and permitted assigns; provided, however, that the Borrower may not assign its rights or obligations hereunder or any interest herein without the prior written consent of the Bank, and any such assignment or attempted assignment by the Borrower shall be void and of no effect with respect to the Bank. The Bank may from time to time sell or assign, in whole or in part, or grant participations in the Loan and/or the Note and/or the obligations evidenced thereby. The Borrower authorizes the Bank to provide information concerning the Borrower to any prospective purchaser, assignee or participant in compliance with the banks internal confidentiality procedures. 8. Severability and Consistency. The illegality, unenforceability or inconsistency of any provision of this Note or any instrument or agreement required hereunder shall not in any way affect or impair the legality, enforceability or consistency of the remaining provisions of this Note or any instrument or agreement required hereunder. The Loan Documents are intended to be consistent. However, in the event of any inconsistencies among any of the Loan Documents, such inconsistency shall not affect the validity or enforceability of any Loan Document. The Borrower agrees that in the event of any inconsistency or ambiguity in any of the Loan Documents, the Loan -12- Documents shall not be construed against any one party but shall be interpreted consistent with the Bank's policies and procedures 9. Consent to Jurisdiction and Service of Process. The Borrower hereby consents and agrees that (i) any action or proceeding against it may be commenced and maintained in any court within the Commonwealth of Pennsylvania or in the United States District Court for any District of Pennsylvania by service of process on it and (ii) the courts of the Commonwealth of Pennsylvania and the United States District Court for any District of Pennsylvania shall have Jurisdiction with respect to the subject matter hereof and the person of the Borrower and all collateral for the Liabilities. The Borrower agrees that any action brought by the Borrower shall be commenced and maintained only in a court in the federal judicial district or county in which the Bank has its principal place of business in Pennsylvania. 10. Judicial Proceeding; Waivers. THE BORROWER AND THE BANK ACKNOWLEDGE AND AGREE THAT (i) ANY SUIT, ACTION OR PROCEEDING, WHETHER CLAIM OR COUNTERCLAIM, BROUGHT OR INSTITUTED BY THE BANK OR THE BORROWER OR ANY SUCCESSOR OR ASSIGN OF THE BANK OR THE BORROWER, ON OR WITH RESPECT TO THIS NOTE OR ANY OTHER LOAN DOCUMENT OR THE DEALINGS OF THE PARTIES WITH RESPECT HERETO, OR THERETO, SHALL BE TRIED ONLY BY A COURT AND NOT BY A JURY AND EACH PARTY WAIVES THE RIGHT TO TRIAL BY JURY; (ii) EACH WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; AND (iii) THIS SECTION IS A SPECIFIC AND MATERIAL ASPECT OF THIS NOTE AND THAT THE BANK WOULD NOT EXTEND CREDIT TO THE BORROWER IF THE WAIVERS SET FORTH IN THIS SECTION WERE NOT A PART OF THIS NOTE. 11. Arbitration. Upon demand of any party hereto, whether made before or after institution of any judicial proceeding, any dispute, claim or controversy arising out of, connected with or relating to this Note and other Loan Documents ("Disputes") between or among parties to this Note shall be resolved by binding arbitration as provided herein. Institution of a judicial proceeding by a party does not waive the right of that party to demand arbitration hereunder. Disputes may include, without limitation, tort claims, counterclaims, disputes as to whether a matter is -13- subject to arbitration, claims brought as class actions, claims arising from Loan Documents executed in the future, or claims arising out of or connected with the transaction reflected by this Note. Arbitration shall be conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA") and Title 9 of the U.S. Code. All arbitration hearings shall be conducted in the city in which the office of Bank first stated above is located. The expedited procedures set forth in Rule 51 et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000. All applicable statutes of limitation shall apply to any Dispute. A judgment upon the award may be entered in any court having jurisdiction. The panel from which all arbitrators are selected shall be comprised of licensed attorneys. The single arbitrator selected for expedited procedure shall be a retired judge from the highest court of general jurisdiction, state or federal, of the state where the hearing will be conducted or if such person is not available to serve, the single arbitrator may be a licensed attorney. Notwithstanding the foregoing, this arbitration provision does not apply to disputes under or related to swap agreements. Notwithstanding the preceding binding arbitration provisions, the Bank and the Borrower agree to preserve, without diminution, certain remedies that any party hereto may employ or exercise freely, independently or in connection with an arbitration proceeding or after an arbitration action is brought. The Bank and the Borrower shall have the right to proceed in any court of proper jurisdiction or by self- help to exercise or prosecute the following remedies, as applicable: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale granted under Loan Documents or under applicable law or by judicial foreclosure and sale, including a proceeding to confirm the sale; (ii) all rights of self-help including peaceful occupation of real property and collection of rents, set-off, and peaceful possession of personal property; (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and filing an involuntary bankruptcy proceeding; and (iv) when applicable, a judgment by confession of judgment. Preservation of these remedies does not limit the power of an arbitrator to grant similar remedies that may be requested by a party in a Dispute. -14- The Borrower and the Bank agree that they shall not have a remedy of punitive or exemplary damages against the other in any Dispute and hereby waive any right or claim to punitive or exemplary damages they have now or which may arise in the future in connection with any Dispute whether the Dispute is resolved by arbitration or judicially. IN WITNESS WHEREOF, the Borrower has executed and delivered to the Bank this Note as of the day and year first above written. ATTEST JONES APPAREL GROUP, INC. BY: /s/ Gary R. Klocek Name: Name: Gary R. Klocek Title: Title: Corporate Controller FIRST UNION NATIONAL BANK Address: 123 South Broad Street Philadelphia, PA 19109-1199 -15- FIRST UNION UNCONDITIONAL GUARANTY October 1, 1997 Jones Apparel Group, Inc. 250 Rittenhouse Circle Bristol, Pennsylvania 19007 (individually and collectively "Borrower") Melru Corp.; Jones Investment Company, Inc.; Jones International, Ltd.; and Jones Holding Corp. 250 Rittenhouse Circle Bristol, Pennsylvania 19007 (Individually and collectively "Guarantor") First Union National Bank 123 South Broad Street Philadelphia, Pennsylvania 19109 (Hereinafter referred to as "Bank") To induce Bank to make, extend or renew loans, advances, credit, or other financial accommodations to or for the benefit of Borrower, and in consideration of loans, advances, credit, or other financial accommodations made, extended or renewed to or for the benefit of Borrower, Guarantor hereby absolutely, irrevocably and unconditionally guarantees to Bank and its successors, assigns and affiliates the timely payment and performance of all liabilities and obligations of Borrower to Bank and its affiliates, including, but not limited to, all obligations under any notes, loan agreements, security agreements, letters of credit, swap agreements (as defined in 11 U.S. Code Sec. 101), instruments, accounts receivable, contracts, drafts, leases, chattel paper, indemnities, acceptances, repurchase agreements, overdrafts, and the Loan Documents defined below, however and whenever incurred or evidenced, whether primary, secondary, direct, indirect, absolute, contingent, due or to become due, now existing or hereafter contracted or acquired, and all modifications, extensions or renewals thereof, including without limitation all principal, interest, charges, and costs and expenses incurred thereunder (including attorneys' fees and other costs of collection incurred, regardless of whether suit is commenced) (collectively, the "Guaranteed Obligations"). Guarantor further covenants and agrees: GUARANTOR'S LIABILITY. This Guaranty is a continuing and unconditional guaranty of payment and performance and not of collection. The parties to this Guaranty are jointly and severally obligated hereunder. This Guaranty does not impose any obligation on Bank to extend or continue to extend credit or otherwise deal with Borrower at any subsequent time. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of the Guaranteed Obligations is rescinded, avoided or for any other reason must be returned by Bank, and the returned payment shall remain payable as part of the Guaranteed Obligations, all as though such payment had not been made. Except to the extent the provisions of this Guaranty give the Bank additional rights, this Guaranty shall not be deemed to supersede or replace any other guaranties given to Bank by Guarantor; and the obligations guaranteed hereby shall be in addition to any other obligations guaranteed by Guarantor pursuant to any other agreement of guaranty given to Bank and other guaranties of the Guaranteed Obligations. -16- TERMINATION OF GUARANTY. Guarantor may terminate this Guaranty by written notice, delivered personally to or received by certified or registered United States Mail by an authorized officer of the Bank at the address for notices provided herein. Such termination shall be effective with respect to Guaranteed Obligations arising more than 15 days after the date such written notice is received by said Bank officer. Guarantor may not terminate this Guaranty as to Guaranteed Obligations (including any subsequent extensions, modifications or compromises of the Guaranteed Obligations) then existing, or to Guaranteed Obligations arising subsequent to receipt by Bank of said notice if such Guaranteed Obligations are a result of Bank's obligation to make advances pursuant to a commitment entered into prior to expiration of the 15 day notice period, or are a result of advances which are necessary for Bank to protect its collateral or otherwise preserve its interests. Termination of this Guaranty by any single Guarantor will not affect the existing and continuing obligations of any other guarantor hereunder. APPLICATION OF PAYMENTS, BANK LIEN AND SET-OFF. Monies received from any source by Bank for application toward payment of the Guaranteed Obligations may be applied to such Guaranteed Obligations in any manner or order deemed appropriate by Bank. Except as prohibited by law, Guarantor grants Bank a security interest in all of Guarantor's accounts maintained with Bank and any of its affiliates (collectively, the "Accounts"). If a Default occurs, Bank is authorized to exercise its right of set-off or to foreclose its lien against any obligation of Bank to Guarantor including, without limitation, all Accounts or any other debt of any maturity, without notice. CONSENT TO MODIFICATIONS. Guarantor consents and agrees that Bank may from time to time, in its sole discretion, without affecting, impairing, lessening or releasing the obligations of the Guarantor hereunder: (a) extend or modify the time, manner, place or terms of payment or performance and/or otherwise change or modify the credit terms of the Guaranteed Obligations; (b) increase, renew, or enter into a novation of the Guaranteed Obligations; (c) waive or consent to the departure from terms of the Guaranteed Obligations; (d)permit any change in the business or other dealings and relations of Borrower or any other guarantor with Bank; (e) proceed against, exchange, release, realize upon, or otherwise deal with in any manner any collateral that is or may be held by Bank in connection with the Guaranteed Obligations or any liabilities or obligations of Guarantor; and (f) proceed against, settle, release, or compromise with Borrower, any insurance carrier, or any other person or entity liable as to any part of the Guaranteed Obligations, and/or subordinate the payment of any part of the Guaranteed Obligations to the payment of any other obligations, which may at any time be due or owing to Bank; all in such manner and upon such terms as Bank may deem appropriate, and without notice to or further consent from Guarantor. No invalidity, irregularity, discharge or unenforceability of, or action or omission by Bank relating to any part of, the Guaranteed Obligations or any security therefor shall affect or impair this Guaranty. WAIVERS AND ACKNOWLEDGMENTS. Guarantor waives and releases the following rights, demands, and defenses Guarantor may have with respect to Bank and collection of the Guaranteed Obligations: (a) promptness and diligence in collection of any of the Guaranteed Obligations from Borrower or any other person liable thereon, and in foreclosure of any security interest and sale of any property serving as collateral for the Guaranteed Obligations; (b) any law or statute that requires that Bank make demand upon, assert claims against, or collect from Borrower or other persons or entities, foreclose any security interest, sell collateral, exhaust any remedies, or take any other action against Borrower or other persons or entities prior to making demand upon, collecting from or taking action against Guarantor with respect to the Guaranteed Obligations, including any such rights Guarantor might otherwise have had under Va. Code Sec. 49-25 and 49-26, et seq., N.C.G.S. Secs. 26-7, et seq., Tenn. Code Ann. Sec. 47-12-101, O.C.G.A. 10-7-24 (and any successor statute) and any other applicable law; (c) any law or statute that requires that Borrower or any -17- other person be joined in, notified of or made part of any action against Guarantor; (d) that Bank preserve, insure or perfect any security interest in collateral or sell or dispose of collateral in a particular manner or at a particular time; (e) notice of extensions, modifications, renewals, or novations of the Guaranteed Obligations, of any new transactions or other relationships between Bank, Borrower and/or any guarantor, and of changes in the financial condition of, ownership of, or business structure of Borrower or any other guarantor; (f) presentment, protest, notice of dishonor, notice of default, demand for payment, notice of intention to accelerate maturity, notice of acceleration of maturity, notice of sale, and all other notices of any kind whatsoever; (g) the right to assert against Bank any defense (legal or equitable), set-off, counterclaim, or claim that Guarantor may have at any time against Borrower or any other party liable to Bank; (h) all defenses relating to invalidity, insufficiency, unenforceability, enforcement, release or impairment of Bank's lien on any collateral, of the Loan Documents, or of any other guaranties held by Bank; (i) any claim or defense that acceleration of maturity of the Guaranteed Obligations is stayed against Guarantor because of the stay of assertion or of acceleration of claims against any other person or entity for any reason including the bankruptcy or insolvency of that person or entity; and (j) the benefit of any exemption claimed by Guarantor. Guarantor acknowledges and represents that it has relied upon its own due diligence in making its own independent appraisal of Borrower, Borrower's business affairs and financial condition, and any collateral; Guarantor will continue to be responsible for making its own independent appraisal of such matters; and Guarantor has not relied upon and will not hereafter rely upon Bank for information regarding Borrower or any collateral. FINANCIAL CONDITION. Guarantor warrants, represents and covenants to Bank that on and after the date hereof: (a) the fair saleable value of Guarantor's assets exceeds its liabilities, Guarantor is meeting its current liabilities as they mature, and Guarantor is and shall remain solvent; (b) all financial statements of Guarantor furnished to Bank are correct and accurately reflect the financial condition of Guarantor as of the respective dates thereof; (c) since the date of such financial statements, there has not occurred a material adverse change in the financial condition of Guarantor; (d) there are not now pending any court or administrative proceedings or undischarged judgments against Guarantor, no federal or state tax liens have been filed or threatened against Guarantor, and Guarantor is not in default or claimed default under any agreement; and (e) at such reasonable times as Bank requests, Guarantor will furnish Bank with such other financial information as Bank may reasonably request. INTEREST. Regardless of any other provision of this Guaranty or other Loan Documents, if for any reason the effective interest on any of the Guaranteed Obligations should exceed the maximum lawful interest, the effective interest shall be deemed reduced to and shall be such maximum lawful interest, and any sums of interest which have been collected in excess of such maximum lawful interest shall be applied as a credit against the unpaid principal balance of the Guaranteed Obligations. DEFAULT. If any of the following events occur, a default ("Default") under this Guaranty shall exist: (a) Failure of timely payment or performance of the Guaranteed Obligations or a default under any Loan Document; (b) A breach of any agreement or representation contained or referred to in the Guaranty, or any of the Loan Documents, or contained in any other contract or agreement of Guarantor with Bank or its affiliates, whether now existing or hereafter arising; (c) The death of, appointment of a guardian for, dissolution of, termination of existence of, loss of good standing status by, appointment of a receiver for, assignment for the benefit of creditors of, or the commencement of any insolvency or bankruptcy proceeding by or against, Guarantor or any general partner of or the holder(s) of the majority ownership interests of Guarantor; and/or (d) The entry of -18- any monetary judgment or the assessment against, the filing of any tax lien against, or the issuance of any writ of garnishment or attachment against any property of or debts due Guarantor. If a Default occurs, the Guaranteed Obligations shall be due immediately and payable without notice. Guarantor shall pay interest on the Guaranteed Obligations from such Default at the highest rate of interest charged on any of the Guaranteed Obligations. ATTORNEY'S FEES AND OTHER COSTS OF COLLECTION. Guarantor shall pay all of Bank's reasonable expenses incurred to enforce or collect any of the Guaranteed Obligations, including, without limitation, reasonable arbitration, paralegals', attorneys' and experts' fees and expenses, whether incurred without the commencement of a suit, in any suit, arbitration, or administrative proceeding, or in any appellate or bankruptcy proceeding. SUBORDINATION OF OTHER DEBTS. Guarantor agrees: (a) to subordinate the obligations now or hereafter owed by Borrower to Guarantor ("Subordinated Debt") to any and all obligations of Borrower to Bank now or hereafter existing while this Guaranty is in effect, provided however that Guarantor may receive regularly scheduled principal and interest payments on the Subordinated Debt so long as (i) all sums due and payable by Borrower to Bank have been paid in full on or prior to such date, and (ii) no event or condition which constitutes or which with notice or the lapse or time would constitute an event of default with respect to the Guaranteed Obligations, shall be continuing on or as of the payment date; (b) Guarantor will place a legend indicating such subordination on every note, ledger page or other document evidencing any part of the Subordinated Debt; and (c) except as permitted by this paragraph, Guarantor will not request or accept payment of or any security for any part of the Subordinated Debt, and any proceeds of the Subordinated Debt paid to Guarantor, through error or otherwise, shall immediately be forwarded to Bank by Guarantor, properly endorsed to the order of Bank, to apply to the Guaranteed Obligations. MISCELLANEOUS. (a) Assignment. This Guaranty and other Loan Documents shall inure to the benefit of and be binding upon the parties and their respective heirs, legal representatives, successors and assigns. Bank's interests in and rights under this Guaranty and other Loan Documents are freely assignable, in whole or in part, by Bank. Any assignment shall not release Guarantor from the Guaranteed Obligations. (b) Applicable Law; Conflict Between Documents. This Guaranty and other Loan Documents shall be governed by and construed under the laws of the state in which office of Bank first shown above is located without regard to that state's conflict of laws principles. If the terms of this Guaranty should conflict with the terms of any commitment letter that survives closing, the terms of this Guaranty shall control. (c) Jurisdiction. Guarantor irrevocably agrees to non-exclusive personal jurisdiction in the state in which the office of Bank first shown above is located. (d) Severability. If any provision of this Guaranty or of the other Loan Documents shall be prohibited or invalid under applicable law, such provision shall be ineffective but only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty or other document. (e) Notices. Any notices to Guarantor shall be sufficiently given, if in writing and mailed or delivered to the Guarantor's address shown above or such other address as provided hereunder, and to Bank, if in writing and mailed or delivered to Bank's office address shown above or such other address as Bank may specify in writing from time to time. In the event that Guarantor changes Guarantor's address at any time prior to the date the Guaranteed Obligations are paid in full, Guarantor agrees to promptly give written notice of said change of address by registered or certified mail, return receipt requested, all charges prepaid. (f) Plural; Captions. All references in the Loan Documents to borrower, guarantor, person, document or other nouns of reference mean both the singular and plural form, as the case may be, and the term "person" shall mean any individual, person or entity. -19- The captions contained in the Loan Documents are inserted for convenience only and shall not affect the meaning or interpretation of the Loan Documents. (g) Binding Contract. Guarantor by execution of and Bank by acceptance of this Guaranty agree that each party is bound to all terms and provisions of this Guaranty. (h) Amendments, Waivers an& Remedies. No waivers, amendments or modifications of this Guaranty and other Loan Documents shall be valid unless in writing and signed by an officer of Bank. No waiver by Bank of any Default shall operate as a waiver of any other Default or the same Default on a future occasion. Neither the failure nor any delay on the part of Bank in exercising any right, power, or privilege granted pursuant to this Guaranty and other Loan Documents shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise or the exercise of any other right, power or privilege. All remedies available to Bank with respect to this Guaranty and other Loan Documents and remedies available at law or in equity shall be cumulative and may be pursued concurrently or successively. (i) Partnerships. If Guarantor is a partnership, the obligations, liabilities and agreements on the part of Guarantor shall remain in full force and effect and fully applicable notwithstanding any changes in the individuals comprising the partnership. The term "Guarantor" includes any altered or successive partnerships, and predecessor partnership(s) and the partners shall not be released from any obligations or liabilities hereunder. (j) Loan Documents. The term "Loan Documents" refers to all documents executed in connection with the Guaranteed Obligations and may include, without limitation, commitment letters that survive closing, loan agreements, other guaranty agreements, security agreements, instruments, financing statements, mortgages, deeds of trust, deeds to secure debt, letters of credit and any amendments or supplements (excluding swap agreements as defined in 11 U.S. Code Sec. 101). ARBITRATION. Upon demand of any party hereto, whether made before or after institution of any judicial proceeding, any dispute, claim or controversy arising out of, connected with or relating to this Guaranty and other Loan Documents ("Disputes") between or among parties to this Guaranty shall be resolved by binding arbitration as provided herein. Institution of a judicial proceeding by a party does not waive the right of that party to demand arbitration hereunder. Disputes may include, without limitation, tort claims, counterclaims, disputes as to whether a matter is subject to arbitration, claims brought as class actions, claims arising from Loan Documents executed in the future, or claims arising out of or connected with the transaction reflected by this Guaranty. Arbitration shall be conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA") and Title 9 of the U.S. Code. All arbitration hearings shall be conducted in the city in which the office of Bank first stated above is located. The expedited procedures set forth in Rule 51 et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000.00. All applicable statutes of limitation shall apply to any Dispute. A judgment upon the award may be entered in any court having jurisdiction. The panel from which all arbitrators are selected shall be comprised of licensed attorneys. The single arbitrator selected for expedited procedure shall be a retired judge from the highest court of general jurisdiction, state or federal, of the state where the hearing will be conducted or if such person is not available to serve, the single arbitrator may be a licensed attorney. Notwithstanding the foregoing, this arbitration provision does not apply to disputes under or related to swap agreements. -20- PRESERVATION AND LIMITATION OF REMEDIES. Notwithstanding the preceding binding arbitration provisions, Bank and Guarantor agree to preserve, without diminution, certain remedies that any party hereto may employ or exercise freely, independently or in connection with an arbitration proceeding or after an arbitration action is brought. Bank and Guarantor shall have the right to proceed in any court of proper jurisdiction or by self-help to exercise or prosecute the following remedies, as applicable: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale granted under Loan Documents or under applicable law or by judicial foreclosure and sale, including a proceeding to confirm the sale; (ii) all rights of self-help including peaceful occupation of real property and collection of rents, set-off, and peaceful possession of personal property; (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and filing an involuntary bankruptcy proceeding; and (iv) when applicable, a judgment by confession of judgment. Preservation of these remedies does not limit the power of an arbitrator to grant similar remedies that may be requested by a party in a Dispute. Guarantor and Bank agree that they shall not have a remedy of punitive or exemplary damages against the other in any Dispute and hereby waive any right or claim to punitive or exemplary damages they have now or which may arise in the future in connection with any Dispute whether the Dispute is resolved by arbitration or judicially. IN WITNESS WHEREOF, Guarantor, on the day and year first written above, has caused this Unconditional Guaranty to be executed under seal. Melru Corp. Taxpayer Identification Number: 23-2256563 By: /s/ Patrick M. Farrell Name: Patrick M. Farrell Title: V.P., Finance and Administration Jones Investment, Inc. Taxpayer Identification Number: 51-0335604 By: /s/ Wesley R. Card Name: Wesley R. Card Title: President Jones International, Ltd. Taxpayer Identification Number: Not applicable By: /s/ Wesley R. Card Name: Weslev R. Card Title: Director Jones Holding Corporation Taxpayer Identification Number: 51-0335605 By: /s/ Wesley R. Card Name: Weslev R. Card Title: Director -21- EXHIBIT 11 JONES APPAREL GROUP, INC. AND SUBSIDIARIES Computation of Basic and Diluted Earnings per Share (In thousands except per share amounts) For the Year Ended December 31, ------------------------------- 1997 1996 1995 ------- ------- ------- Basic Earnings per Share: - ------------------------- Net income........................... $121,725 $80,874 $63,485 ======== ======= ======= Weighted average number of shares outstanding.......................... 51,899 52,333 52,130 ======== ======= ======= Basic earnings per share............. $2.35 $1.55 $1.22 ======== ======= ======= Diluted Earnings per Share: - --------------------------- Net income........................... $121,725 $80,874 $63,485 ======== ======= ======= Weighted average number of shares outstanding.......................... 51,899 52,333 52,130 Assumed issuances under exercise of stock options..................... 2,006 1,318 894 -------- ------- ------- 53,905 53,651 53,024 ======== ======= ======= Diluted earnings per share........... $2.26 $1.51 $1.20 ======== ======= ======= Adjusted for 2-for-1 stock split effective October 2, 1996. EXHIBIT 21 SUBSIDIARIES OF JONES APPAREL GROUP, INC. State or County Percentage of Voting Name of Incorporation Securities Owned * - --------------- ---------------- -------------------- Melru Corporation New Jersey 100% Jones Apparel Group Canada Inc. Canada 100% Jones Investment Co., Inc. Delaware 100% Jones Holding Corporation Delaware 100% Jones International Limited Hong Kong 100% Bongal Company Limited Hong Kong 100% Jones Apparel Group (HK) Ltd. Hong Kong 100% Jones Far East Ltd. Hong Kong 100% Vestamex S.A. De C.V. Mexico 100% Camisas de Juarez S.A. De C.V. Mexico 100% * Directly or Indirectly EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Jones Apparel Group, Inc. New York, New York We hereby consent to the incorporation by reference in the Prospectus constituting a part of the Registration Statement on Form S-8 filed May 15, 1996 of our reports dated February 6, 1998, relating to the consolidated financial statements and schedule of Jones Apparel Group, Inc. and subsidiaries appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO Seidman, LLP BDO Seidman, LLP New York, New York March 26, 1998 EXHIBIT 27 PERIOD-TYPE YEAR FISCAL-YEAR-END DEC-31-1997 PERIOD-END DEC-31-1997 CASH 40,134 SECURITIES 0 RECEIVABLES 94,514 ALLOWANCES 2,767 INVENTORY 255,055 CURRENT-ASSETS 440,771 PP&E 126,123 DEPRECIATION 44,189 TOTAL-ASSETS 580,767 CURRENT-LIABILITIES 110,202 BONDS 0 PREFERRED-MANDATORY 0 PREFERRED 0 COMMON 545 OTHER-SE 435,087 TOTAL-LIABILITY-AND-EQUITY 580,767 SALES 1,372,458 TOTAL-REVENUES 1,387,471 CGS 940,149 TOTAL-COSTS 940,149 OTHER-EXPENSES 250,685 LOSS-PROVISION 1,870 INTEREST-EXPENSE 3,584 INCOME-PRETAX 194,609 INCOME-TAX 72,884 INCOME-CONTINUING 121,725 DISCONTINUED 0 EXTRAORDINARY 0 CHANGES 0 NET-INCOME 121,725 EPS-PRIMARY 2.35 EPS-DILUTED 2.26
EXHIBIT 27.1 PERIOD-TYPE YEAR YEAR FISCAL-YEAR-END DEC-31-1996 DEC-31-1995 PERIOD-END DEC-31-1996 DEC-31-1995 CASH 30,085 16,864 SECURITIES 0 0 RECEIVABLES 114,941 94,404 ALLOWANCES 2,263 2,257 INVENTORY 214,437 176,626 CURRENT-ASSETS 389,830 331,465 PP&E 94,823 62,042 DEPRECIATION 33,127 25,385 TOTAL-ASSETS 488,109 400,959 CURRENT-LIABILITIES 95,860 70,612 BONDS 0 0 PREFERRED-MANDATORY 0 0 PREFERRED 0 0 COMMON 536 263 OTHER-SE 376,193 314,712 TOTAL-LIABILITY-AND-EQUITY 488,109 400,959 SALES 1,021,042 776,365 TOTAL-REVENUES 1,034,078 786,679 CGS 717,250 546,413 TOTAL-COSTS 717,250 546,413 OTHER-EXPENSES 186,572 139,135 LOSS-PROVISION 800 (464) INTEREST-EXPENSE 3,040 1,908 INCOME-PRETAX 127,763 99,668 INCOME-TAX 46,889 36,183 INCOME-CONTINUING 80,874 63,485 DISCONTINUED 0 0 EXTRAORDINARY 0 0 CHANGES 0 0 NET-INCOME 80,874 63,485 EPS-PRIMARY 1.55 1.22 EPS-DILUTED 1.51 1.20
EXHIBIT 27.2 PERIOD-TYPE 3-MOS 6-MOS 9-MOS FISCAL-YEAR-END DEC-31-1997 DEC-31-1997 DEC-31-1997 PERIOD-END MAR-30-1997 JUN-29-1997 SEP-28-1997 CASH 20,529 30,010 12,315 SECURITIES 0 0 0 RECEIVABLES 189,986 108,116 214,827 ALLOWANCES 3,757 3,533 3,757 INVENTORY 221,032 274,067 277,003 CURRENT-ASSETS 462,817 452,848 543,386 PP&E 100,324 108,140 116,032 DEPRECIATION 35,740 38,567 41,379 TOTAL-ASSETS 563,946 568,693 665,729 CURRENT-LIABILITIES 140,119 124,619 181,273 BONDS 0 0 0 PREFERRED-MANDATORY 0 0 0 PREFERRED 0 0 0 COMMON 538 541 543 OTHER-SE 408,685 421,149 462,658 TOTAL-LIABILITY-AND-EQUITY 563,946 568,693 665,729 SALES 317,990 580,978 1,026,950 TOTAL-REVENUES 321,455 587,744 1,038,252 CGS 214,884 393,426 696,733 TOTAL-COSTS 214,884 393,426 696,733 OTHER-EXPENSES 59,096 115,729 183,547 LOSS-PROVISION 1,556 1,783 2,009 INTEREST-EXPENSE 362 629 1,710 INCOME-PRETAX 47,113 77,960 156,262 INCOME-TAX 17,573 29,141 58,504 INCOME-CONTINUING 29,540 48,819 97,758 DISCONTINUED 0 0 0 EXTRAORDINARY 0 0 0 CHANGES 0 0 0 NET-INCOME 29,540 48,819 97,758 EPS-PRIMARY 0.57 0.94 1.88 EPS-DILUTED 0.55 0.90 1.81
EXHIBIT 27.3 PERIOD-TYPE 3-MOS 6-MOS 9-MOS FISCAL-YEAR-END DEC-31-1996 DEC-31-1996 DEC-31-1996 PERIOD-END MAR-31-1996 JUN-30-1996 SEP-29-1996 CASH 8,316 13,288 9,650 SECURITIES 0 0 0 RECEIVABLES 169,324 96,513 174,664 ALLOWANCES 2,472 2,503 2,425 INVENTORY 198,505 238,002 222,765 CURRENT-ASSETS 420,256 396,882 443,444 PP&E 65,908 72,051 81,812 DEPRECIATION 26,987 28,932 30,764 TOTAL-ASSETS 491,790 474,712 530,945 CURRENT-LIABILITIES 144,086 111,438 143,132 BONDS 0 0 0 PREFERRED-MANDATORY 0 0 0 PREFERRED 0 0 0 COMMON 265 267 267 OTHER-SE 333,105 345,306 371,032 TOTAL-LIABILITY-AND-EQUITY 491,790 474,712 530,945 SALES 260,351 453,626 762,645 TOTAL-REVENUES 262,927 458,861 772,089 CGS 187,557 319,800 533,322 TOTAL-COSTS 187,557 319,800 533,322 OTHER-EXPENSES 42,718 84,874 134,792 LOSS-PROVISION 222 460 683 INTEREST-EXPENSE 521 984 1,991 INCOME-PRETAX 32,131 53,203 101,984 INCOME-TAX 11,792 19,526 37,428 INCOME-CONTINUING 20,339 33,677 64,556 DISCONTINUED 0 0 0 EXTRAORDINARY 0 0 0 CHANGES 0 0 0 NET-INCOME 20,339 33,677 64,556 EPS-PRIMARY 0.39 0.64 1.23 EPS-DILUTED 0.38 0.63 1.21
EX-99.2 3 FORM 10-Q EXHIBIT 99.2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 27, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-10746 JONES APPAREL GROUP, INC. (Exact name of registrant as specified in its charter) Pennsylvania 06-0935166 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 250 Rittenhouse Circle Bristol, Pennsylvania 19007 (Address of principal (Zip Code) executive offices) (215) 785-4000 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class of Common Stock Outstanding at November 6, 1998 $.01 par value 104,859,946 JONES APPAREL GROUP, INC. Index PART I. FINANCIAL INFORMATION Page No. -------- Financial Statements: Consolidated Balance Sheets September 27, 1998 and December 31, 1997............ 3 Consolidated Statements of Income Thirteen and Thirty-nine Weeks ended September 27, 1998 and September 28, 1998....................... 4 Consolidated Statement of Stockholders' Equity Thirty-nine Weeks ended September 27, 1998.......... 5 Consolidated Statements of Cash Flows Thirty-nine Weeks ended September 27, 1998 and September 28, 1997................................ 6 Notes to Consolidated Financial Statements................. 7 - 9 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 10 - 15 PART II. OTHER INFORMATION...................................... 16 - 17 - 2 - JONES APPAREL GROUP, INC. CONSOLIDATED BALANCE SHEETS
September 27, December 31, 1998 1997 ------------ ----------- (Unaudited) ASSETS CURRENT: Cash and cash equivalents............................................................. $ 14,956 $ 40,134 Accounts receivable, net of allowance of $3,337 and $2,767 for doubtful accounts...... 255,978 91,747 Inventories........................................................................... 226,971 255,055 Receivable from and advances to contractors........................................... 17,571 7,833 Prepaid and refundable income taxes................................................... - 5,993 Deferred taxes........................................................................ 25,304 26,269 Prepaid expenses and other current assets............................................. 11,142 13,740 ------- ------- TOTAL CURRENT ASSETS................................................................ 551,922 440,771 PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and amortization of $47,009 and $44,189.................................. 129,646 81,934 CASH RESTRICTED FOR CAPITAL ADDITIONS................................................... - 11,193 INTANGIBLES, less accumulated amortization of $8,618 and $7,687......................... 29,006 30,604 OTHER ASSETS............................................................................ 25,495 16,265 ------- ------- $736,069 $580,767 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings................................................................. $ 37,929 $ - Current portion of long-term debt and capital lease obligations....................... 5,825 4,199 Accounts payable...................................................................... 81,881 90,429 Taxes payable......................................................................... 30,329 - Accrued expenses and other current liabilities........................................ 25,132 15,574 ------- ------- TOTAL CURRENT LIABILITIES........................................................... 181,096 110,202 ------- ------- NONCURRENT LIABILITIES: Obligations under capital leases...................................................... 35,851 18,457 Long-term debt........................................................................ 12,338 8,833 Other................................................................................. 6,107 6,107 ------- ------- TOTAL NONCURRENT LIABILITIES........................................................ 54,296 33,397 ------- ------- TOTAL LIABILITIES................................................................... 235,392 143,599 ------- ------- EXCESS OF NET ASSETS ACQUIRED OVER COST................................................. 154 1,536 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value - shares authorized 1,000; none issued................ - - Common stock, $.01 par value - shares authorized 200,000; issued 109,963 and 108,955........................................................... 1,100 545 Additional paid in capital............................................................ 136,956 122,582 Retained earnings..................................................................... 561,663 438,917 Accumulated other comprehensive income................................................ (2,059) (1,524) ------- ------- 697,660 560,520 Less treasury stock, 10,037 and 6,767 shares, at cost................................. (197,137) (124,888) ------- ------- TOTAL STOCKHOLDERS' EQUITY.......................................................... 500,523 435,632 ------- ------- $736,069 $580,767 ======= ======= All amounts in thousands except per share data See notes to consolidated financial statements
- 3 - JONES APPAREL GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Thirteen weeks ended Thirty-nine weeks ended -------------------------- -------------------------- September 27, September 28, September 27, September 28, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net sales............................................... $495,727 $445,972 $1,181,240 $1,026,950 Licensing income........................................ 4,590 4,536 11,406 11,302 ------- ------- --------- --------- Total revenues.......................................... 500,317 450,508 1,192,646 1,038,252 Cost of goods sold...................................... 324,724 303,308 778,372 696,733 ------- ------- --------- --------- Gross profit............................................ 175,593 147,200 414,274 341,519 Selling, general and administrative expenses............ 78,342 67,818 211,942 183,547 ------- ------- --------- --------- Operating income........................................ 97,251 79,382 202,332 157,972 Net interest expense.................................... 1,156 1,081 2,745 1,710 ------- ------- --------- --------- Income before provision for income taxes................ 96,095 78,301 199,587 156,262 Provision for income taxes.............................. 36,997 29,363 76,841 58,504 ------- ------- --------- --------- Net income.............................................. $59,098 $48,938 $122,746 $97,758 ======= ======= ========= ========= Earnings per share Basic................................................. $0.59 $0.47 $1.22 $0.94 Diluted............................................... $0.57 $0.45 $1.17 $0.90 Weighted average common shares and share equivalents outstanding Basic................................................. 100,886 104,372 100,821 104,124 Diluted............................................... 104,426 108,634 104,613 108,184 All amounts in thousands except per share data See notes to consolidated financial statements
- 4 - JONES APPAREL GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated Total Additional other stockholders' Common paid-in Retained comprehensive Treasury equity stock capital earnings income stock ------------- ------- ----------- -------- ------------- --------- Balance, December 31, 1997...................... $435,632 $545 $122,582 $438,917 ($1,524) ($124,888) Thirty-nine weeks ended September 27, 1998: Comprehensive income Net income.................................... 122,746 - - 122,746 - - Foreign currency translation adjustments...... (535) - - - (535) - ------------- Total comprehensive income.................. 122,211 ------------- Amortization of deferred compensation in connection with executive stock options........ 158 - 158 - - - Exercise of stock options....................... 8,986 6 9,080 - - (100) Tax benefit derived from exercise of stock options................................... 5,685 - 5,685 - - - Effect of 2-for-1 stock split................... - 549 (549) - - - Treasury stock acquired......................... (72,149) - - - - (72,149) ------------- ------- ----------- -------- ------------- --------- Balance, September 27, 1998..................... $500,523 $1,100 $136,956 $561,663 ($2,059) ($197,137) ============= ======= =========== ======== ============= ========= All amounts in thousands See notes to consolidated financial statements
- 5 - JONES APPAREL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Thirty-nine weeks ended ------------------------------ September 27, September 28, 1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income.................................................................................. $122,746 $97,758 -------- ------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................................. 11,254 11,494 Provision for losses on accounts receivable............................................... 825 2,009 Deferred taxes............................................................................ (3,174) (14,676) Other..................................................................................... 362 154 (Increase) decrease in: Trade receivables....................................................................... (165,353) (100,454) Inventories............................................................................. 27,638 (62,623) Prepaid expenses and other current assets............................................... (7,293) 2,691 Other assets............................................................................ (5,828) (4,780) Increase (decrease) in: Accounts payable........................................................................ (8,473) 21,064 Taxes payable........................................................................... 42,761 20,253 Accrued expenses and other current liabilities.......................................... 9,850 5,045 ------- ------- Total adjustments..................................................................... (97,431) (119,823) ------- ------- Net cash provided by (used in) operating activities......................................... 25,315 (22,065) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................................................... (37,546) (21,743) Decrease (increase) in cash restricted for capital additions.............................. 11,193 (6,022) Other..................................................................................... (116) - ------- ------- Net cash used in investing activities....................................................... (26,469) (27,765) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in short-term borrowings......................................................... 37,929 45,104 Proceeds from capital lease............................................................... - 10,000 Repayment of capital leases and long-term debt............................................ (3,785) (2,738) Increase in long-term debt................................................................ 5,000 - Acquisition of treasury stock............................................................. (72,149) (30,636) Proceeds from exercise of stock options................................................... 8,986 10,291 ------- ------- Net cash provided by (used in) financing activities......................................... (24,019) 32,021 ------- ------- EFFECT OF EXCHANGE RATES ON CASH............................................................ (5) 39 ------- ------- NET DECREASE IN CASH AND CASH EQUIVALENTS................................................... (25,178) (17,770) CASH AND CASH EQUIVALENTS, beginning of period.............................................. 40,134 30,085 ------- ------- CASH AND CASH EQUIVALENTS, end of period.................................................... $14,956 $12,315 ======= ======= All amounts in thousands See notes to consolidated financial statements
- 6 - JONES APPAREL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The consolidated financial statements include the accounts of Jones Apparel Group, Inc. and its wholly-owned subsidiaries (collectively, the "Company"). The financial statements have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP") for interim financial information and in accordance with the requirements of Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the footnotes therein included within the Company's Annual Report on Form 10-K. In the opinion of management, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature. The foregoing interim results are not necessarily indicative of the results of operations for the full year ending December 31, 1998. The Company reports interim results in 13 week quarters; however, the annual reporting period is the calendar year. Certain reclassifications have been made to conform prior period data with the current presentation. 2. Inventories Inventories are summarized as follows (amounts in thousands): September 27, December 31, 1998 1997 ------------ ----------- Raw materials..................... $22,286 $27,045 Work in process................... 28,854 41,294 Finished goods.................... 175,831 186,716 -------- -------- $226,971 $255,055 ======== ======== - 7 - JONES APPAREL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Statement of Cash Flows Cash payments made for interest for the thirty-nine weeks ended September 27, 1998 and September 28, 1997 were $4,039,000 and $2,892,000, respectively. Cash payments made for income taxes for the thirty-nine weeks ended September 27, 1998 and September 28, 1997 were $49,518,000 and $52,892,000, respectively. Property and equipment acquired through capital lease financing during the thirty-nine weeks ended September 27, 1998 and September 28, 1997 amounted to $21,310,000 and $220,000, respectively. Reduction in income tax payments resulting from the exercise of employee stock options during the thirty-nine weeks ended September 27, 1998 and September 28, 1997 were $5,685,000 and $6,389,000, respectively. Under the provisions of the Company's 1991 Stock Option Plan, employees exercising stock options during the thirty-nine weeks ended September 27, 1998 exchanged 3,826 shares of the Company's Common Stock (valued at $100,000) for 8,332 newly issued shares and during the thirty-nine weeks ended September 28, 1997 exchanged 4,244 shares of the Company's Common Stock (valued at $100,000) for 17,926 newly issued shares. 4. New Accounting Standards In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise" and establishes new standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. SFAS No. 131 is effective for financial statement periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. The adoption of this standard is not expected to have a material effect on the Company's financial position or results of operations. The Company is currently reviewing SFAS No. 131 and has of yet been unable to fully evaluate the impact, if any, it may have on future financial statement disclosures. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" which requires entities to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal years beginning after June 15, 1999. The Company does not expect results of operations and financial position to be affected by implementation of this new standard. - 8 - JONES APPAREL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Capital Stock On May 6, 1998, the Company's Board of Directors authorized a two-for-one stock split of the Company's Common Stock in the form of a 100% stock dividend for shareholders of record as of June 4, 1998, with stock certificates issued on June 25, 1998. In connection with the Common Stock split, the Board of Directors approved an increase in the number of shares authorized to 200,000,000. On June 25, 1998, a total of 50,497,911 shares of Common Stock were issued in connection with the split. The stated par value of each share was not changed from $0.01. All share and per share amounts have been restated to retroactively reflect the stock split. 6. Subsequent Events On September 10, 1998, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") to acquire 100% of the equity of Sun Apparel, Inc. of El Paso, Texas ("Sun"). The acquisition was completed on October 2, 1998. Sun designs, manufactures and distributes jeanswear, sportswear and related apparel for men, women and children. Sun markets its products under the Polo Jeans Company brand, licensed from Polo Ralph Lauren, as well as other owned, licensed and private label brands. The Company purchased the equity of Sun for $216.6 million, comprised of $137.8 million in cash and 4.4 million shares of common stock. For accounting purposes, the common stock was valued at $18.00 per share (the closing price on September 10, 1998, the date the Merger Agreement was signed and announced). The Company also assumed Sun debt of $228.5 million, which was refinanced in conjunction with the closing of the transaction. The Merger Agreement also provides for potential additional future payments based on Sun's operating performance. The acquisition will be accounted for using the purchase method of accounting and the results of Sun will be included in the Company's financial records from the date of acquisition. Concurrently, the Company announced the issuance of $265 million of Senior Notes due 2001, and a new $550 million bank credit facility to finance the acquisition and the Company's working capital, general corporate and trade letter of credit requirements. - 9 - 7. Supplemental Pro Forma Condensed Financial Information On January 1, 1999, Jones Apparel Group, Inc. consummated a corporate reorganization under which two new wholly owned subsidiaries named Jones Apparel Group USA, Inc. ("Jones USA") and Jones Apparel Group Holdings, Inc. ("Jones Holdings") were created. On that date, the operating assets of Jones Apparel Group, Inc. were transferred to Jones USA and Jones USA assumed the role of obligor of the Senior Notes due 2001, with Jones Apparel Group, Inc. remaining and Jones Holdings becoming co-obligors of the Notes. The following condensed financial information represents, on a pro forma basis, the results of Jones USA had the reorganization occurred on January 1, 1997 (all amounts in thousands). Separate pro forma financial statements and other disclosures concerning Jones USA and Jones Holdings are not presented as such information is not considered material to the holders of the Senior Notes. September 28, 1997 September 27, 1998 ------------------ ------------------ Current assets $501,879 $510,381 Noncurrent assets 80,602 135,171 Current liabilities 337,401 403,689 Noncurrent liabilities 19,525 48,993 Excess of net assets acquired over cost 1,996 154 For the Nine Months Ended -------------------------------------- September 28, 1997 September 27, 1998 ------------------ ------------------ Total revenues $953,417 $1,101,289 Gross profit 290,273 357,162 Operating income 156,364 139,262 Net income 59,559 75,848 JONES APPAREL GROUP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion provides information and analysis of the Company's results of operations for the thirteen and thirty-nine week periods ended September 27, 1998 and September 28, 1997, respectively, and its liquidity and capital resources. The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements included elsewhere herein. Results of Operations Statements of Income Expressed as a Percentage of Total Revenues Thirteen weeks ended Thirty-nine weeks ended -------------------------- -------------------------- September 27, September 28, September 27, September 28, 1998 1997 1998 1997 -------- -------- -------- -------- Net sales 99.1% 99.0% 99.0% 98.9% Licensing income 0.9% 1.0% 1.0% 1.1% -------- -------- -------- -------- Total revenue 100.0% 100.0% 100.0% 100.0% Cost of goods sold 64.9% 67.3% 65.3% 67.1% -------- -------- -------- -------- Gross profit 35.1% 32.7% 34.7% 32.9% Selling, general and administrative expenses 15.7% 15.1% 17.8% 17.7% -------- -------- -------- -------- Operating income 19.4% 17.6% 17.0% 15.2% Net interest expense 0.2% 0.2% 0.2% 0.2% -------- -------- -------- -------- Income before provision for income taxes 19.2% 17.4% 16.7% 15.1% Provision for income taxes 7.4% 6.5% 6.4% 5.6% -------- -------- -------- -------- Net income 11.8% 10.9% 10.3% 9.4% ======== ======== ======== ======== Totals may not agree due to rounding. Quarter Ended September 27, 1998 Compared to Quarter Ended September 28, 1997 Net Sales. Net sales in the thirteen weeks ended September 27, 1998 (hereinafter referred to as the "third quarter of 1998") increased 11.1%, or $49.7 million, to $495.7 million, compared to $446.0 million in the thirteen weeks ended September 28, 1997 (hereinafter referred to as the "third quarter of 1997"). The increase was due primarily to an increase in the number of units shipped, as well as the impact of a higher average price per unit resulting from the mix of products shipped. The breakdown of net sales by category for both periods is as follows: - 10 - JONES APPAREL GROUP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Third Third Quarter Quarter Increase/ Percent (In millions) of 1998 of 1997 (Decrease) Change ------- ------- -------- ------- Career sportswear $197.3 $196.1 $1.2 0.6% Casual sportswear 108.5 108.1 0.4 0.4% Lifestyle collection 153.8 100.8 53.0 52.6% Men's collection 6.9 0.0 6.9 N/A Suits, dress, and other 29.2 41.0 (11.8) (28.8%) ------- ------- -------- ------- Net sales $495.7 $446.0 $49.7 11.1% ======= ======= ======== ======= The increase in Lifestyle collection was primarily due to a large increase in shipments under the Lauren by Ralph Lauren label. The Jones New York Men's collection was introduced with initial shipments beginning during the third quarter of 1998. The decrease in suits, dress, and other was mainly the result of a repositioning of the Saville Suit label. Licensing Income. Licensing income increased $0.1 million to $4.6 million in the third quarter of 1998 compared to $4.5 million in the third quarter of 1997. Income from licenses under the Jones New York label increased $0.5 million, while income from licenses under the Evan-Picone label decreased $0.4 million. Gross Profit. The gross profit margin was 35.1% in the third quarter of 1998 compared to 32.7% in the third quarter of 1997. The gross profit improvement was attributable to the significant increase in sales of the Lifestyle collection, which carries higher margins than the corporate average and lower overseas production costs due to the favorable impact of currency devaluations in Asia. SG&A Expenses. Selling, general and administrative expenses ("SG&A" expenses) of $78.3 million in the third quarter of 1998 represented an increase of $10.5 million over the third quarter of 1997. As a percentage of total revenues, SG&A expenses increased to 15.7% in the third quarter of 1998 from 15.1% for the comparable period in 1997. While royalties and operating expenses added significant expenses during the quarter, the effect was offset by the proportionately larger increase in sales and gross profit. Retail store operating expenses increased $2.6 million, reflecting the added cost of 18 more stores in operation at the end of the third quarter of 1998 compared to the end of the third quarter of 1997. Operating Income. The resulting third quarter of 1998 operating income of $97.3 million increased 22.5%, or $17.9 million, compared to $79.4 million during the third quarter of 1997. The operating margin increased to 19.4% for the third quarter of 1998 from the 17.6% achieved during the third quarter of 1997. Net Interest Expense. Net interest expense was $1.2 million in the third quarter of 1998 compared to $1.1 million in the comparable period of 1997. Provision for Income Taxes. The effective income tax rate was 38.5% for the third quarter of 1998 compared to 37.5% for the third quarter of 1997. The increase was primarily due to higher state income tax provisions for the third quarter of 1998. - 11 - JONES APPAREL GROUP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net Income. Net income increased 20.8% to $59.1 million in the third quarter of 1998, an increase of $10.2 million over the net income of $48.9 million earned in the third quarter of 1997. Net income as a percentage of total revenues was 11.8% in the third quarter of 1998 and 10.9% in the third quarter of 1997. Nine months Ended September 27, 1998 Compared to Nine months Ended September 28, 1997 Net Sales. Net sales in the thirty-nine weeks ended September 27, 1998 (hereinafter referred to as the "first nine months of 1998") increased 15.0%, or $0.2 billion, to $1.2 billion, compared to $1.0 billion in the thirty-nine weeks ended September 28, 1997 (hereinafter referred to as the "first nine months of 1997"). The increase was due primarily to an increase in the number of units shipped, as well as the impact of a higher average price per unit resulting from the mix of products shipped. The breakdown of net sales by category for both periods is as follows: First First Nine Months Nine Months Increase/ Percent (In millions) of 1998 of 1997 (Decrease) Change ---------- ---------- --------- ------- Career sportswear $505.3 $474.4 $30.9 6.5% Casual sportswear 261.9 247.1 14.8 6.0% Lifestyle collection 314.9 192.8 122.1 63.3% Men's collection 6.9 0.0 6.9 N/A Suits, dress, and other 92.2 112.7 (20.5) (18.2%) ---------- ---------- --------- ------- Net sales $1,181.2 $1,027.0 $154.2 15.0% ========== ========== ========= ======= The increase in Lifestyle collection was primarily due to a large increase in shipments under the Lauren by Ralph Lauren label. The Jones New York Men's collection was introduced with initial shipments beginning during the third quarter of 1998. The decrease in suits, dress, and other was the result of the termination of the Christian Dior suit license and a repositioning of the Saville Suit label. Licensing Income. Licensing income increased $0.1 million to $11.4 million in the first nine months of 1998 compared to $11.3 million in the first nine months of 1997. Income from licenses under the Jones New York label increased $0.8 million while income from licenses under the Evan-Picone label decreased $0.7 million. Gross Profit. The gross profit margin was 34.7% in the first nine months of 1998 compared to 32.9% in the first nine months of 1997. The gross profit improvement was attributable to the significant increase in sales of the Lifestyle collection, which carries higher margins than the corporate average and lower overseas production costs due to the favorable impact of currency devaluations in Asia. SG&A Expenses. Selling, general and administrative expenses of $211.9 million in the first nine months of 1998 represented an increase of $28.4 million over the first nine months of 1997. As a percentage of total revenues, SG&A expenses increased to 17.8% in the first nine months of 1998 from 17.7% for the comparable period in 1997. While advertising, royalties and operating expenses added significant expenses during the quarter, the effect was offset by the proportionately larger increase in sales and gross profit. Retail store operating expenses increased $7.3 million, reflecting the added cost of 18 more stores in operation at the end of the first nine months of 1998 compared to the end of the first nine months of 1997. - 12 - JONES APPAREL GROUP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Operating Income. The resulting first nine months of 1998 operating income of $202.3 million increased 28.1%, or $44.3 million, compared to $158.0 million during the first nine months of 1997. The operating margin increased to 17.0% for the first nine months of 1998 from the 15.2% achieved during the first nine months of 1997. Net Interest Expense. Net interest expense was $2.7 million in the first nine months of 1998 compared to $1.7 million in the comparable period of 1997. The change primarily reflects an increase in capital lease obligations and long- term debt associated with the construction of warehouse facilities. Provision for Income Taxes. The effective income tax rate was 38.5% for the first nine months of 1998 compared to 37.4% for the first nine months of 1997. The increase was primarily due to higher state income tax provisions for the first nine months of 1998. Net Income. Net income increased 25.6% to $122.7 million in the first nine months of 1998, an increase of $24.9 million over the net income of $97.8 million earned in the first nine months of 1997. Net income as a percentage of total revenues was 10.3% in the first nine months of 1998 and 9.4% in the first nine months of 1997. Liquidity and Capital Resources The Company's principal capital requirements have been to fund working capital needs, capital expenditures and to repurchase the Company's Common Stock on the open market. The Company has historically relied primarily on internally generated funds, trade credit and bank borrowings to finance its operations and expansion. Net cash provided by operations was $25.3 million in the first nine months of 1998, compared to net cash used in operations of $22.1 million in the first nine months of 1997. The change primarily reflects the effect of higher net income for the first nine months of 1998 and a $27.6 million decrease in inventories compared to a $62.6 increase in inventories in 1997. These amounts were offset by a larger increase in accounts receivables of $165.4 million in 1998 compared to $100.5 million in 1997. Net cash used in investing activities was $1.3 million lower in the first nine months of 1998 than in the first nine months of 1997, as additional capital improvements and replacements were offset by a decrease in restricted cash. Expenditures for capital improvements, replacements and property under capital leases for the full year 1998 are expected to approximate $55.0 million, of which $17 million represents the cost of completing an additional warehouse facility. Net cash used in financing activities was $24.0 million in the first nine months of 1998 compared to net cash provided by financing activities of $32.0 million in the first nine months of 1997. The principal reasons for the change were a smaller increase in the amounts of short-term borrowings to fund working capital requirements, the net decrease in proceeds from capital lease and long- term debt and transactions involving the Company's Common Stock. The Company repurchased $72.1 million and $30.6 million of its Common Stock on the open market for the nine months ended September 27, 1998 and September 28, 1997, respectively, under announced programs to acquire up to $200.0 million - 13 - JONES APPAREL GROUP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) of such shares. On September 16, 1998, the Board of Directors authorized an additional $100.0 million stock repurchase plan. The Company had repurchased $196.2 million of its shares as of September 27, 1998, since first announcing a stock repurchase program in December 1995. The Company may authorize additional share repurchases in the future depending on, among other things, market conditions and the Company's financial condition. Proceeds from the issuance of common stock to employees exercising stock options amounted to $9.1 million in the first nine months of 1998 compared to $10.3 million in the first nine months of 1997. Under the Company's credit agreements in place at the end of the third quarter of 1998, $124.8 million was utilized for letters of credit and $37.9 million of short-term borrowings were outstanding on September 27, 1998. In connection with the acquisition of Sun Apparel, Inc. ("Sun") on October 2, 1998, the Company replaced its existing credit agreements with $265.0 million of 6.25% three-year Senior Notes and entered into an agreement with First Union National Bank, as administrative agent, and other lending institutions to borrow an aggregate principal amount of up to $550.0 million under Senior Credit Facilities. These facilities consist of (i) a $150.0 million Three-Year Revolving Credit Facility, (ii) a $300.0 million 364-Day Revolving Credit Facility, the entire amount of which will be available for trade letters of credit or cash borrowings, and (iii) a $100.0 million Term Loan Facility. Upon the closing of the Sun acquisition, the Company drew down the Term Loan Facility in its entirety and the Three-Year Revolving Credit Facility in the amount of $125.0 million to finance a portion of the acquisition, the refinancing of Sun's debt, related transactions and for its short-term working capital needs. Upon the closing of the acquisition, approximately $141.8 million was outstanding under the 364-Day Revolving Credit Facility, which was comprised of both Sun's and the Company's letters of credit outstanding on that date. Borrowings under the Senior Credit Facilities may also be used for working capital and other general corporate purposes, including permitted acquisitions and stock repurchases. The Senior Credit Facilities are unsecured and require the Company to satisfy an earnings before interest, taxes, depreciation, amortization and rent to interest expense plus rents coverage ratio and a net worth maintenance covenant as well as other restrictions, including (subject to exceptions) limiting the Company's ability to incur additional indebtedness, prepay subordinated indebtedness, make acquisitions, enter into mergers, and pay dividends. The Company believes that funds generated by operations, the Senior Notes and the new Senior Credit Facilities will provide the financial resources sufficient to meet its foreseeable working capital, letter of credit, capital expenditure and stock repurchase requirements and its ongoing obligations to the former Sun shareholders. - 14 - JONES APPAREL GROUP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Year 2000 The Company uses various types of technology in the operations of its business. Some of this technology incorporates date identification functions; however, many of these date identification functions were developed to use only two digits to identify a year. These date identification functions, if not corrected, could cause their related technologies to fail or create erroneous results on or before January 1, 2000. The Company is continuing to assess, with both internal and external resources, the impact of Year 2000 issues on its information and non-information technology systems. As part of this process, the Company retained the services of an independent consultant that specializes in Year 2000 evaluation and remediation work. In addition, the Company has developed a plan with respect to the Year 2000 readiness of its internal technology systems. This plan involves (i) creating awareness inside the Company of Year 2000 issues, (ii) analyzing the Company's Year 2000 state of readiness, (iii) testing, correcting and updating systems and computer software as needed, and (iv) incorporating the corrected or updated systems and software into the Company's business. The Company is currently finalizing the assessment phase of this plan, and has moved into the testing and correcting phase with respect to those technology systems that have been identified as having Year 2000 issues. The Company anticipates substantially completing the implementation of this plan by early 1999; however, it may revise the estimated date of completion of this plan based upon any unforeseen delays or costs in implementing such plan. In a continuing effort to become more productive and competitive, the Company replaces portions of its software and hardware when warranted by significant business and/or technology changes. While these replacements are not specifically intended to resolve the Year 2000 issue, the new software and hardware is designed to function properly with respect to dates related to the Year 2000 and beyond. The Company also has initiated discussions with its significant suppliers, customers and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues when their systems interface with the Company's systems or may otherwise impact operations. The Company anticipates substantially completing the implementation of this plan by early 1999; however, there can be no assurances that such plan will be completed by the estimated date or that the systems and products of other companies on which the Company relies will not have an adverse effect on its business, operations or financial condition. As of September 27, 1998, the Company had incurred approximately $150,000 in costs related to the Year 2000 issue. The Company believes that additional costs related to the Year 2000 issue will not be material to its business, operations or financial condition. However, estimates of Year 2000 related costs are based on numerous assumptions and there is no certainty that estimates will be achieved and actual costs could be materially greater than anticipated. The Company anticipates that it will fund its additional Year 2000 costs from current working capital. - 15 - JONES APPAREL GROUP, INC. OTHER INFORMATION Part II. Item 5. Other information Statement Regarding Forward-looking Disclosure This Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended which represent the Company's expectations or beliefs concerning future events that involve risks and uncertainties, including those associated with the effect of national and regional economic conditions, the overall level of consumer spending, the performance of the Company's products within the prevailing retail environment, customer acceptance of both new designs and newly-introduced product lines, and financial difficulties encountered by customers. All statements, other than statements of historical facts included in this Quarterly Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed in this Report. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.53 License Agreement dated as of August 1, 1995 by and between PRL USA, Inc., as assignee of Polo Ralph Lauren Corporation, successor to Polo Ralph Lauren, L.P., and Sun Apparel, Inc., as amended to date Exhibit 10.54 Design Services Agreement dated as of August 1, 1995 by and between Polo Ralph Lauren Corporation, successor to Polo Ralph Lauren, L.P., and Sun Apparel, Inc., as amended to date Exhibit 11 Computation of earnings per share Exhibit 27 Financial data schedule dated September 27, 1998 (b) Reports on Form 8-K During the quarter ended September 27, 1998, a Current Report on Form 8-K, dated September 24, 1998, was filed with the Commission by the Company announcing the acquisition of Sun Apparel, Inc. - 16 - JONES APPAREL GROUP, INC. OTHER INFORMATION (CONTINUED) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. JONES APPAREL GROUP, INC. (Registrant) Date: November 10, 1998 By /s/ Sidney Kimmel ---------------------------- SIDNEY KIMMEL Chief Executive Officer By /s/ Wesley R. Card ---------------------------- WESLEY R. CARD Chief Financial Officer - 17 - Exhibit 10.53. (Polo Jeans Company - License) LICENSE AGREEMENT, dated as of August 1, 1995 by and between Polo Ralph Lauren, L.P. ("Licensor") , a Delaware limited partnership with a place of business at 650 Madison Avenue, New York, New York 10022, and Sun Apparel, Inc. ("Licensee"), a Texas corporation with a place of business at 11201 Armour Drive, El Paso, Texas 79935. WHEREAS, Licensor is engaged in the business of manufacturing, selling and promoting, and licensing others the right to manufacture, sell and promote, high quality apparel and related merchandise under certain Polo/Ralph Lauren trademarks and trade names; and WHEREAS, Licensee desires to obtain, and Licensor is willing to grant, a license pursuant to which Licensee shall have the right to use certain Polo/ Ralph Lauren trademarks in the United States on the terms set forth herein; NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants herein contained, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. As used herein, the term: 1.1. "License" shall mean the exclusive, non-assignable right to use the Trademark in connection with the manufacture and/or importation and sale of Licensed Products in the Territory. 1.2. "Licensed Products" shall mean those items set forth on Schedule A attached hereto and made a part hereof, and all bearing the Trademark. From time to time Licensor may authorize Licensee to manufacture and distribute products bearing the Trademark not expressly listed in Schedule A hereto. Absent an agreement with respect to such products signed by Licensor and Licensee, all such products shall be deemed Licensed Products for all purposes hereunder; provided, however, that Licensee's rights with respect to such products (i) shall be non-exclusive and (ii) may be terminated by Licensor upon 90 days written notice. 1.3. "Licensor" shall mean Polo Ralph Lauren, L.P., a limited partnership organized under the laws of the State of Delaware. 1.4. "Licensee" shall mean Sun Apparel, Inc., a corporation organized under the laws of Texas. - 1 - 1.5. "Net Sales Price" shall have the meaning set forth in paragraph 6.2 hereof. 1.6. "Territory" shall mean the United States of America, its territories and possessions. From time to time Licensor may authorize Licensee to sell certain Licensed Products to specific purchasers outside the Territory. Absent an agreement with respect to such sales signed by Licensor and Licensee, all such sales shall be made on all of the terms and conditions set forth in this Agreement; provided, however, that Licensee's right to make such sales shall be non-exclusive and may be terminated by Licensor immediately upon written notice to Licensee. Any such termination shall not apply to orders already taken by Licensee in accordance with Licensor's prior authorization. 1.7. "Trademark" shall mean the trademarks set forth on Schedule B hereto, and no other trademarks, regardless of whether such trademark is or includes "POLO" or "RALPH LAUREN", except as may be expressly authorized by Licensor in writing. Licensor shall have the sole right to determine the manner and use of the Trademark in connection with each particular Licensed Product. Each particular form or logo selected by Licensor to be used as part of or in connection with the Trademark shall be deemed within the definition of "Trademark" hereunder, and such particular forms already approved are annexed hereto as Schedule B. 2. Grant of License. 2.1. Subject to the terms and provisions hereof, Licensor hereby grants Licensee and Licensee hereby accepts the License. Licensor shall neither use nor authorize third parties to use the Trademark in connection with the manufacture, sale and/or importation of Licensed Products in the Territory during the term of this Agreement without Licensee's prior approval. To the extent it is legally permissible to do so, no license is granted hereunder for the manufacture, sale or distribution of Licensed Products to be used for publicity purposes, other than publicity of Licensed Products, in combination sales, as premiums or giveaways, or to be disposed of under or in connection with similar methods of merchandising. 2.2. It is understood and agreed that the License applies solely to the use of the Trademark on the Licensed Products, and that no rights are granted by Licensor hereunder with respect to the use of: (i) any trademark of Licensor or of any of Licensor's affiliates (including any trademark that uses "Polo" or the name "Ralph Lauren") other than the Trademark, on or in connection with any product (including, without limitation, jeanswear), or (ii) the use of the Trademark on any products other than Licensed Products. - 2 - Licensor reserves the right to use, and to grant to any other licensee the right to use, the Trademark, whether within or outside the Territory, in connection with any and all products and services, other than Licensed Products within the Territory. Notwithstanding the foregoing, Licensor shall not itself use or license the right to use any "Polo" or "Ralph Lauren" trademark, other than its "CHAPS" trademarks and derivatives thereof, in connection with men's denim jean pants or shorts or women's denim jean pants or shorts ("Denim Bottoms"); provided, however, that (i) Licensor or its affiliates (but not an unaffiliated, licensed third party) shall be entitled to include Denim Bottoms within Licensor's various "Polo" and "Ralph Lauren" lines so long as the wholesale prices of such Denim Bottoms are at least [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION] higher than the wholesale prices of the Denim Bottoms generally applied to the most comparable Licensed Products and (ii) Licensor and its affiliates shall also be entitled to continue to develop its "cutup" program of Denim Bottoms for Polo/Ralph Lauren outlet stores. Licensor shall be entitled to continue to include Denim Bottoms within Licensor's "RRL" line of products at the suggested retail price structure (or higher) at which such Denim Bottoms are currently offered. In the event that Licensor, during the term hereof, opens directly or indirectly one or more "Vertical RRL Stores" (as hereinafter defined) and desires to offer at such Vertical RRL Stores Denim Bottoms bearing the RRL mark at suggested retail prices below the prices at which such Denim Bottoms were generally offered prior to the effective date of this Agreement ("RRL Denim Bottoms"), Licensee shall have the right to act, during the term hereof, as the exclusive licensee of the RRL mark in connection with RRL Denim Bottoms for the purpose of supplying RRL Denim Bottoms, at wholesale, to such RRL Vertical Stores; provided, however, that (a) Licensee shall manufacture such RRL Denim Bottoms in accordance with all of Licensor's design and construction specifications and on commercially competitive wholesale prices and terms, which prices shall be no less than the wholesale prices of, and which terms shall be no less favorable than the terms for, any comparable Licensed Products,(b) the suggested retail price of such RRL Denim Bottoms shall be at least [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION] above the suggested retail price of the most comparable Licensed Products, (c) all sales of such RRL Denim Bottoms shall fall within the definition of Net Sales Price for the purpose of calculating Licensor's royalties on such sales pursuant to paragraph 6.2; provided, however, that the royalty rate applicable to sales of RRL Denim Bottoms shall be 7% of the Net Sales Price thereof, which amount shall be paid, in accordance with the terms hereof, to Licensor or such other entity or entities as Licensor may designate and (d) sales of RRL Denim Bottoms shall not be included within the definition of Net Sales Price with respect to the calculations to be performed under paragraph 4.6 hereof or paragraph 2 of Schedule C hereof. The term "Vertical RRL Stores" shall mean any stores or shops doing business under a service mark or tradename incorporating the RRL trademark, - 3 - the principal focus of which is the sale of products bearing the RRL trademark, and in which Licensor or any of its affiliates owns, directly or indirectly, an equity interest in excess of 25%. Licensee understands and agrees that Licensor may itself manufacture or authorize third parties to manufacture in the Territory, Licensed Products but solely for ultimate sale outside of the Territory. Subject to the terms of paragraph 17.4 hereof, Licensee may manufacture or cause to be manufactured the Licensed Products outside of the Territory, but solely for purposes of sale within the Territory pursuant to the terms of this Agreement. 2.3. Licensee shall not have the right to use Licensee's name on or in connection with the Licensed Products, except with the prior approval by Licensor of the use and placement of Licensee's name. Licensee shall, at the option of Licensor, include on its business materials and/or the Licensed Products an indication of the relationship of the parties hereto in a form approved by Licensor. 2.4. Licensee shall not use or permit or authorize another person or entity in its control to use the words "Polo" or "Ralph Lauren" as part of a corporate name or tradename without the express written consent of Licensor and Licensee shall not permit or authorize use of the Trademark in such a way so as to give the impression that the name "Ralph Lauren," or the Trademark, or any modifications thereof, are the property of Licensee. 2.5. Licensee (and its affiliates) shall not, directly or indirectly, by license or otherwise, sell, advertise or promote the sale of during the term of this Agreement any items which are comparable and/or competitive with Licensed Products and which bear the name of any fashion apparel designer other than Todd Oldham or Robert Stock. The foregoing shall not restrict Licensee's right to act solely as the manufacturer, contractor or supplier of or for merchandise comparable and/or competitive with Licensed Products to or for any third party; provided, however, that Licensee shall not during the term hereof, directly or indirectly, act as a manufacturer, contractor or supplier of or for merchandise comparable or competitive with Licensed Products bearing or associated with the following names: Tommy Hilfiger, Nautica, Calvin Klein, Donna Karan or Armani. 2.6. Licensor represents and warrants that it has full right, power and authority to enter into this Agreement, to perform all of its obligations hereunder, and to consummate all of the transactions contemplated herein and further that it is not aware of any claim or proceedings which would prevent it from performing its obligations hereunder. In the event that Licensee or Licensor is charged with infringement on account of Licensee's use of the - 4 - Trademark and, as a result, Licensor determines that the use by Licensee of the Trademark should be discontinued upon reasonable written notice to Licensee, this license under the Trademark shall be converted to a license under another "Ralph Lauren" trademark or label; in such event Licensee shall have the right to (i) accept the exclusive license to use such "Ralph Lauren" trademark in connection with the manufacture and sale of Licensed Products in the Territory subject to all other terms of this Agreement or (ii) terminate this Agreement. In either such event, Licensee shall immediately advise Licensor of its inventory of Licensed Products labelled with the Trademark and of its stock of business materials bearing the Trademark and Licensor shall, in its sole discretion and judgment, determine whether and to what extent such inventory and materials of Licensee may continue to be used by Licensee. 2.7. Licensee shall not purport to grant any right, permission or license hereunder to any third party, whether at common law or otherwise. Licensee shall not without Licensor's prior written approval sell any Licensed Products bearing the Trademark to any third party which Licensee knows or should have reason to know, directly or indirectly, sells or proposes to sell such Licensed Products outside the Territory. Licensee shall use its commercially reasonable efforts to prevent any such resale outside the Territory and shall, immediately upon learning or receiving notice from Licensor that a customer is selling Licensed Products outside the Territory, cease all sales and deliveries to such customer. 2.8. Each of Licensee and Licensor recognizes that there are many uncertainties in the business contemplated by this Agreement. Each of Licensee and Licensor agrees and acknowledges that other than those representations, warranties and guaranties explicitly contained in this Agreement, if any, no representations, warranties or guarantees of any kind have been made to either party by the other party, or by such other party's affiliates, or by anyone acting on their behalf. Without limitation, no representations concerning the value of the Licensed Products or the prospects for the level of their sales or prof its have been made and each of Licensee and Licensor has made its own independent business evaluation in deciding to enter into this License Agreement and conduct the business contemplated herein. 2.9. Licensee represents and warrants that it has full right, power and authority to enter this Agreement, to perform all of its obligations hereunder, and to consummate all of the transactions contemplated herein and further that it is not aware of any claim or proceeding which would prevent it from performing its obligations hereunder. - 5 - 2.10. In the event during the term hereof Licensor acquires the right and desires to license a third party to use the Trademark in the Territory in connection with the manufacture or sale of women's denim pants (and such related products as Licensor, in its sole discretion, may designate), Licensor shall, provided that Licensee is not in default of any of its obligations hereunder and this Agreement is in full force and effect, give Licensee notice of the terms upon which it proposes to grant a license with respect to the Trademark for such products. Upon receipt of such notice, Licensee shall have thirty (30) days during which it may propose modified terms to Licensor, and the terms initially proposed by Licensor, together with such modifications proposed by Licensee as Licensor may, in its sole discretion, agree to during such thirty-day period, shall, upon the expiration of such thirty-day period, be deemed the "Final Offer Terms". Licensee shall have a period of fifteen (15) days after the expiration such thirty-day period to accept or reject the Final Offer Terms in writing. If Licensee rejects the Final Offer Terms or if Licensee initially accepts the Final offer Terms but thereafter is unable to satisfy the Final offer Terms, then Licensor shall be free to make a substantially similar offer to any third party and, if such offer is accepted within twelve (12) months after the fifteen (15) day period set forth above ("Timely Third Party Acceptance"), Licensee shall have no further rights pursuant to this paragraph 2.10. If, prior to any Timely Third Party Acceptance, Licensor shall substantially change the Final Offer Terms, or if Licensor does not receive a Timely Third Party Acceptance, then, during the term hereof, Licensee's rights as provided hereinabove shall apply to such changed terms or any subsequent proposed grant of rights by Licensor pursuant to this paragraph 2.10. 3. Design Standards and Prestige of Licensed Products. 3.1. Licensee acknowledges that it has entered into a design services agreement ("Design Agreement"), of even date herewith, with Polo Ralph Lauren Enterprises, L.P. (the "Design Partnership"), which provides for the furnishing to Licensee by the Design Partnership of design concepts and other professional services so as to enable Licensee to manufacture or cause to be manufactured the Licensed Products in conformity with the established prestige and goodwill of the Trademark. Licensee shall manufacture, or cause to be manufactured, and sell only such Licensed Products as are made in accordance with the design and other information approved under, and in all other respects in strict conformity with the terms of, the Design Agreement. 3.2. Licensee acknowledges that the Ralph Lauren trademarks have established prestige and goodwill and are well recognized in the minds of the public, and that it is of great importance to each - 6 - party that in the manufacture and sale of various lines of Licensor's products, including the Licensed Products, the high standards and reputation that Licensor and Ralph Lauren have established be maintained. Accordingly, all items of Licensed Products manufactured or caused to be manufactured by Licensee hereunder shall be of high quality workmanship with strict adherence to all details and characteristics embodied in the designs furnished pursuant to the Design Agreement. Licensee shall supply Licensor with samples of the Licensed Products (including, if Licensor so requests, samples of labeling and packaging used in connection therewith) prior to production and from time to time during production, and shall, at all times during the term hereof, upon Licensor's request, make its manufacturing facilities available to Licensor, and shall use its commercially reasonable efforts to make available each subcontractor's manufacturing facilities for inspection by Licensor's representatives during usual working hours, which efforts shall include, without limitation, not placing future orders for Licensed Products with any subcontractor who fails to make such facilities available for inspection by Licensor's representatives. 3.3. In the event that any Licensed Product is, in the reasonable judgment of Licensor, not being manufactured, distributed or sold with first quality workmanship or in strict adherence to all details and characteristics furnished pursuant to the Design Agreement, Licensor shall notify Licensee thereof in writing and Licensee shall promptly repair or change such Licensed Product to conform thereto. If a Licensed Product as repaired or changed does not strictly conform after Licensor's request and such strict conformity cannot be obtained after at least one (1) resubmission, or if Licensee determines that a Licensed Product does not strictly conform, the Trademark shall be promptly removed from the item, at the option of Licensor, in which event the item may be sold by Licensee, provided (a) such miscut or damaged item does not contain any labels or other identification bearing the Trademark without Licensor's prior approval and (b) further provided that Licensor agrees Licensee will be permitted to sell Licensed Products as irregulars and seconds bearing the Trademark, so long as such products are clearly labelled as such in a manner reasonably approved by Licensor, are distributed in channels and to outlets approved by Licensor, and are produced only as by-products of the manufacture of first quality goods and only in reasonable quantities. Notwithstanding anything in this paragraph 3.3 to the contrary, Licensee's sales of all products of Licensor's or the Design Partnership's design, whether or not bearing the Trademark, shall nonetheless be subject to royalty payments pursuant to paragraph 6 hereof. 3.4. At the request of Licensor, Licensee shall cause to be - 7 - placed on all Licensed Products appropriate notice in accordance with applicable law designating Licensor or the Design Partnership as the copyright or design patent owner thereof, as the case may be. The manner of presentation of said notices shall be determined by Licensor. 3.5. Licensee agrees to maintain sound and ethical business practices and to promptly pay in accordance with the purchase terms therefor all amounts due for any Licensed Products or materials, trim, fabrics, packaging or services relating to Licensed Products purchased by Licensee from Licensor or any agent or licensee of Licensor or any other supplier of such items, all subject to good faith errors or disputes. 4. Marketing. 4.1. Except as set forth in paragraph 4.11 hereof, the distribution of the Licensed Products in the Territory shall be performed by Licensee exclusively. The Licensed Products shall be sold by Licensee only to those specialty shops, department stores and other retail outlets which deal in products similar in quality and prestige to products bearing Ralph Lauren trademarks other than the Trademark, whose operations are consistent with the quality and prestige of such trademarks and only to those customers expressly approved by Licensor. Whenever Licensee wishes to sell Licensed Products to a customer not previously approved by Licensor, Licensee shall submit a written list of its proposed customers to Licensor for Licensor's approval, which shall be given or withheld in Licensor's discretion based on whether the proposed customer shall enhance or not be inconsistent with the quality and prestige of the Trademark and the distribution channels therefor. Licensor shall have the right to withdraw its approval of a customer based on its evaluation of the criteria set forth in the preceding sentence, subject to orders for Licensed Products already accepted by Licensee. Licensee shall take such steps as may be reasonably necessary, including the implementation of an inventory marking system, to avoid any negative impact on the reputation and desirability of Licensor's products as a result of the unauthorized resale of Licensed Products through unauthorized distribution channels. Licensee shall not market or promote or seek customers for the Licensed Products outside of the Territory and Licensee shall not establish a branch, wholly owned subsidiary, distribution or warehouse with inventories of Licensed Products outside of the Territory; provided that upon prior written notice to Licensor, Licensee may directly or through a controlled affiliate own and operate a warehouse in Mexico for the purpose of storing and/or shipping Licensed Products to be distributed in the Territory. - 8 - 4.2. Licensee acknowledges that in order to preserve the good will attached to the Trademark, the Licensed Products are to be sold at prices and terms reflecting the prestigious nature of the Trademark, it being understood, however, that Licensor is not empowered to fix or regulate the prices at which the Licensed Products are to be sold, either at the wholesale or retail level. 4.3. Licensee shall maintain the high standards of the Trademark and the Licensed Products, in all advertising, packaging and promotion of the Licensed Products. Licensee shall not employ or otherwise release any of such advertising or packaging or other business materials relating to any Licensed Products or bearing the Trademark, unless and until Licensee shall have made a request, in writing, for approval by Licensor. As promptly as practicable, Licensor may, with respect to any advertising, packaging or business materials submitted by Licensee, make such suggestions as Licensor deems necessary or appropriate, or disapprove, in either event by notice to Licensee. Any approval granted hereunder shall be limited to use during the seasonal collection of Licensed Products to which such advertising relates and shall be further limited to the use (e.g. TV or print) for which approval by Licensor was granted. Licensee shall, at the option of Licensor, include on its business materials an indication of the relationship of the parties hereto in a form approved by Licensor. 4.4. Licensee shall use its commercially reasonable efforts to assure that all cooperative advertising, whereby Licensee provides a customer with a contribution toward the cost of an advertisement for Licensed Products, whether Licensee's contribution be in the form of an actual monetary contribution, a credit or otherwise, shall be subject to prior approval of Licensor under the same terms and conditions as apply to advertising and promotional materials prepared by or to be used by Licensee pursuant to paragraph 4.3 hereof; provided, however, that in the event that Licensee is not as a matter of practice given an opportunity to review the cooperative advertising due to time constraints, then Licensee shall notify Licensor, in advance, of those customers with whom it does cooperative Licensed Product advertising and/or promotion, and Licensee at Licensor's request shall notify the named customer of the terms of this Agreement which pertain to the said advertising or promotional materials. 4.5. Licensee, in connection with the conduct of its business hereunder, shall exercise its best efforts to safeguard the established prestige and goodwill of the names "Polo" and "Ralph Lauren," and the Ralph Lauren image, at the same level of prestige and goodwill as heretofore maintained. "Image" as used herein refers primarily to quality and style of packaging, advertising and promotion, creation and introduction of new products, type of - 9 - outlets with reference to quality of service provided by retail outlets and quality of presentation of Licensed Products in retail outlets. Licensee shall take all necessary steps, and all steps reasonably requested by Licensor, to prevent or avoid any misuse of the Trademark by any of its customers, contractors or other resources. 4.6. During each year of this Agreement, Licensee shall expend for the production and placement of national institutional and media advertising of Licensed Products ("Institutional Advertising"), an amount that is not less than the "Annual Advertising obligation", as hereinafter defined, for such year. Licensor shall consult in advance with Licensee regarding the creation, production and placement of Institutional Advertising, but all final decisions with respect thereto shall be made by Licensor in its sole discretion. The "Annual Advertising obligation" for each year during the term hereof shall be [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION] of the aggregate Net Sales Price of Licensed Products sold during such year, but the Annual Advertising Obligation for the period from the date hereof to December 31, 1997 shall be not less than [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION], of which approximately [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION] is intended to be spent during calendar year 1996. Licensee shall deliver to Licensor within sixty (60) days after the end of each year hereof an accounting statement in respect of amounts expended by Licensee on Institutional Advertising for the prior year. Each such accounting statement shall be signed, and certified as correct, by a duly authorized officer of Licensee. Prior to each year hereof, Licensee shall submit Licensee's advertising budget for the upcoming year, based on the aggregate Net Sales Price of Licensed Products during the year then ending and on sales projected for the upcoming year. Only actual advertising costs and expenses charged to Licensee or Licensor in connection with the advertising of Licensed Products under the Trademark shall be charged to Licensee's advertising budget hereunder, and Licensor shall make available to Licensee or credit to Licensee's budget any volume discounts for the advertising of Licensed Products Licensor is able to achieve as a result of the advertising of Licensed Products and other advertising placed by or for Licensor and/or its other licensees. The Annual Advertising Obligation for such upcoming year will initially be calculated and expended based upon such budget. If in any year during the term hereof an amount less than the Annual Advertising Obligation is expended on Institutional Advertising for any reason whatsoever (including an underestimate of the actual Net Sales Price for such year or because the actual cost of Institutional Advertising, if any, produced and placed during such year is less than the Annual Advertising Obligation), the entire amount not expended shall be added to the Annual Advertising obligation for the following year. 4.7. During the term of this Agreement, Licensee shall, in - 10 - consultation with Licensor, provide a budget for the design, construction, re-fits and seasonal changeovers of in-store shops and fixtures to be used exclusively for the presentation of Licensed Products, the design of which shall be subject to Licensor's prior approval. Licensee's budget for such purposes shall be adequate to present Licensed Products in a manner consistent with the high quality and prestige associated with Licensor's trademarks and the price structure of the Licensed Products. 4.8. To the extent permitted by applicable law Licensor may from time to time, and in writing, promulgate reasonable and nondiscriminatory rules and regulations to Licensee relating to the manner of use of the Trademark. Licensee shall comply with such rules and regulations. Any such rules or regulations shall not be inconsistent with or derogate from Licensee's rights under this Agreement. 4.9. Licensee agrees to make available for purchase and to sell on its customary price, credit and payment terms (subject to paragraph 4.11 hereof) all lines and styles of Licensed Products to retail stores in the Territory bearing a trademark of Licensor or its affiliates which are authorized to sell the Licensed Products within such retail stores. Notwithstanding anything to the contrary contained herein, to the extent that any such Licensed Products are not so made available by Licensee to such stores, such Licensed Products may be made available to such stores by Licensor (or its affiliates or other licensees). 4.10. In consideration of the License granted herein, in the event Licensor elects to offer Licensed Products for sale in mailorder catalogs or "vertical retail stores of Licensor or its affiliates" (as hereinafter defined), Licensee shall sell and timely ship Licensed Products to Licensor or its affiliate for such purposes at a price equal to [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION] less than the regular wholesale price therefor. All such sales shall be separately reported by Licensee in its accounting statements pursuant to paragraph 6.2 hereof, and such sales shall not be subject to the royalty or advertising obligations set forth herein, or to the compensation obligations set forth in the Design Agreement, but such sales shall be included within the definition of Net Sales Price for all purposes under paragraph 2 of Schedule C to this Agreement. The term "vertical retail stores of Licensor or its affiliates" shall mean a store or shop doing business under a service mark or tradename substantially similar to the Trademark, the principal focus of which is the sale of products bearing the Trademark, and in which Licensor or any of its affiliates owns, directly or indirectly, an equity interest in excess of 25%. - 11 - 4.11. Licensor shall respond to any requests for approvals or consents from Licensee hereunder as promptly as reasonably practicable consistent with the level of review required. 5. Trademark Protection. 5.1. All uses of the Trademark by Licensee, including, without limitation, use in any business documents, invoices, stationery, advertising, promotions, labels, packaging and otherwise shall require Licensor's prior written consent in accordance with paragraph 4 hereof. 5.2. All uses of the Trademark by Licensee in advertising, promotions, labels and packaging shall include, at Licensor's option, a notice to the effect that the Trademark is used by Licensee for the account and benefit of Licensor or that Licensee is a registered user thereof or both such statements. The use of the Trademark pursuant to this Agreement shall be for the benefit of Licensor and shall not vest in Licensee any title to or right or presumptive right to continue such use. For the purposes of trademark registration, sales by Licensee shall be deemed to have been made by Licensor. 5.3. Licensee shall cooperate fully and in good faith with Licensor for the purpose of securing and preserving Licensor's rights in and to the Trademark. Nothing contained in this Agreement shall be construed as an assignment or grant to Licensee of any right, title or interest in or to the Trademark, or any of Licensor's other trademarks, it being understood that all rights relating thereto are reserved by Licensor, except for the License hereunder to Licensee of the right to use the Trademark only as specifically and expressly provided herein. Licensee shall not file or prosecute a trademark or service mark application or applications to register the Trademark, for Licensed Products or otherwise. 5.4. Licensee shall not, during the term of this Agreement or thereafter, (a) attack Licensor's title or rights in or to any Ralph Lauren trademarks in any jurisdiction or attack the validity of this License or the Ralph Lauren trademarks or (b) contest the fact that Licensee's rights under this Agreement (i) are solely those of a licensee, manufacturer and distributor and (ii) subject to the provisions of paragraph 10 hereof, cease upon termination of this Agreement. The provisions of this paragraph 5.4 shall survive the termination of this Agreement. 5.5. Subject to the provisions of paragraph 2.7 of the Design Agreement, all right, title and interest in and to all samples, patterns, sketches, designs, artwork, logos and other materials - 12 - furnished by or to Licensor or the Design Partnership, whether created by Licensor, the Design Partnership or Licensee, are hereby assigned in perpetuity to, and shall be the sole property of, Licensor and/or the Design Partnership, as the case may be. Licensee shall assist Licensor to the extent necessary in the protection of or the procurement of any protection of Licensor's rights to the Trademark, designs, design patents and copyrights furnished hereunder and Licensor, if Licensor so desires, may commence or prosecute any claims or suits in Licensor's own name or in the name of Licensee or join Licensee as a party thereto. Licensee shall promptly notify Licensor in writing of any uses which may be infringements or imitations by others of the Trademark on articles similar to those covered by this Agreement which may come to Licensee's attention. Licensor shall have the sole right to determine whether or not any action shall be taken on account of any such infringements or imitations. Licensor shall bear one hundred percent (100%) of the costs of all actions or proceedings it undertakes, and shall be entitled to all recoveries in such actions. If Licensor declines to take action with respect to a particular infringer Licensee is not obligated to but may, with Licensor's prior written consent, undertake such action at Licensee's expense, and all recoveries in such actions shall first be applied to reimbursement of Licensee's actual legal and investigative fees, and then divided equally between Licensor and Licensee. 6. Royalties. 6.1. Commencing with the First Renewal Term (as hereinafter defined in Schedule C), if the term hereof is extended beyond the Initial Term (as hereinafter defined in paragraph 8), Licensee shall thereafter pay to Licensor minimum royalties for each year during the term of this Agreement as compensation for the License granted hereunder for the use of the Trademark in the manufacture and sale, and/or importation and sale, of Licensed Products in the Territory. The minimum royalty for each year commencing with the First Renewal Term shall be an amount equal to [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION] of the actual earned royalties due for the immediately preceding year; provided, however, that the minimum royalty obligation for each year of the First Renewal Term shall in no event be less than [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]; for each year of the Second Renewal Term no less than [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]; for each year of the Third -Renewal Term no less than [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]; for each year of the Forth Renewal Term no less than [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]; for each year of the Fifth Renewal Term no less than [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]; and for each year of the Sixth Renewal Term no less than [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION] (each such Term as defined in Schedule C). Minimum royalties for each year shall be paid on a quarterly basis, within thirty (30) days after the end of each quarter during the term hereof, commencing with the first quarter of the First Renewal Term. No - 13 - credit shall be permitted against minimum royalties payable for any year on account of actual or minimum royalties paid for any other year, and minimum royalties shall not be returnable. For the purposes of this Agreement, the term "year" shall mean a period of twelve (12) months commencing on each January 1 during the term of this Agreement; provided, however, that the term "first year" shall mean the 17-month period commencing on August 1, 1995 and ending on December 31, 1996. 6.2. Licensee shall pay to Licensor earned royalties based on the Net Sales Price of all Licensed Products manufactured or imported and sold by Licensee hereunder. Earned royalties shall [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION] of the Net Sales Price of all Licensed Products sold under this Agreement, including, without limitation, any sales made pursuant to the terms of paragraphs 3.2, 3.3 and 10.2 hereof. Licensee shall prepare or cause to be prepared statements containing the information set forth in paragraph 7.1 hereof for the period commencing on the date hereof and ending on March 31, 1996 and for each quarter ending the last day of March, June, September and December in each year hereof, which shall be furnished to Licensor together with the earned royalties due for each such quarter (less minimum royalties, when applicable, paid for such quarter) within thirty (30) days after the end of each such quarter. The term "Net Sales Price" shall mean the gross sales price to retailers of all Licensed Products sold under this Agreement or, with respect to Licensed Products that are not sold directly or indirectly to retailers, other ultimate consumers (as in the case of accommodation sales by Licensee to its employees or sales by Licensee in its own shops), less trade discounts, merchandise returns, sales tax (if separately identified and charged) and markdowns and/or chargebacks which, in accordance with generally accepted accounting principles, would normally be treated as deductions from gross sales, and which, in any event, do not include any chargebacks or the like for advertising, fixture or retail shop costs or contributions. Notwithstanding the foregoing, Licensor hereby waives its right to (i) receive royalties hereunder for, or (ii) include within the calculation of Net Sales Price for the purpose of calculating the Annual Advertising Obligation as set forth in paragraph 4.6 hereof, sales of units of Licensed Products sold at a discount of [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION] or more off the regular wholesale price ("Discounted Units"), provided that such waiver shall only apply to the extent that the aggregate Net Sales Price of Discounted Units for any year does not exceed [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION] of the Net Sales Price of all units of Licensed Products other than Discounted Units sold in such year. No other deductions shall be taken. Any merchandise returns shall be credited in the quarter in which the returns are actually made. For purposes of this Agreement, affiliates of Licensee shall mean all persons and business entities, whether corporations, partnerships, joint ventures or otherwise, which now or hereafter - 14 - control, or are owned or controlled, directly or indirectly by Licensee, or are under common control with Licensee. It is the intention of the parties that royalties will be based on the bona fide wholesale prices at which Licensee sells Licensed Products to independent retailers in arms' length transactions. In the event Licensee shall sell Licensed Products to its affiliates, royalties shall be calculated on the basis of such a bona fide wholesale price irrespective of Licensee's internal accounting treatment of such sale unless such products are sold by its affiliates directly to the end-user consumer, in which case royalties shall be calculated on the basis of the price paid by the end-user consumer, less applicable taxes. Licensee shall identify separately in the statements provided to Licensor pursuant to paragraph 7 hereof, all sales to affiliates. At least once annually and no later than 90 days after the close of Licensee's fiscal year, Licensee shall furnish to Licensor a statement of the Net Sales Price of all Licensed Products sold during the year just ended, which shall be certified by the independent auditor for Licensee as correct and in accordance with the terms of this Agreement. 6.3. If the payment of any installment of royalties is delayed for any reason, interest shall accrue on the unpaid principal amount of such installment from and after the date which is 10 days after the date the same became due pursuant to paragraphs 6.1 or 6.2 hereof at the lower of the highest rate permitted by law in New York and 2% per annum above the prime rate of interest in effect from time to time at Chemical Bank, New York, New York or any successor bank. 6.4. The obligation of Licensee to pay royalties hereunder shall be absolute notwithstanding any claim which Licensee may assert against Licensor or the Design Partnership. Licensee shall not have the right to set-off, compensate itself or any third party, or make any deduction from such royalty payments for any reason whatsoever. 7. Accounting. 7.1. Licensee shall at all times keep an accurate account of all operations within the scope of this Agreement. Licensee shall render a full statement in writing to Licensor in accordance with paragraph 6.2 hereof, which shall account separately for each different product category and shall include all aggregate gross sales, trade discounts, merchandise returns, sales tax, markdowns, chargebacks, unit sales, sales of Discounted Units, sales of miscuts and damaged merchandise and net sales price of all sales for the previous quarter. Such statements shall be in sufficient detail to be audited from the books of Licensee. Once annually, which may be in connection with the regular annual audit of - 15 - Licensee's books, Licensee shall furnish an annual statement of the aggregate gross sales, trade discounts, merchandise returns and Net Sales Price of all Licensed Products made or sold by Licensee certified by Licensee's independent accountant. Each quarterly statement furnished by Licensee shall be certified by the chief financial officer of Licensee. 7.2. Licensor and its duly authorized representatives, on reasonable notice, shall have the right, no more than once in each year during regular business hours, for the duration of the term of this Agreement and for three (3) years thereafter, to examine the books of account and records and all other documents, materials and inventory in the possession or under the control of Licensee and its successors with respect to the statements required, and Licensee's obligations, hereunder. All such books of account, records and documents shall be maintained and kept available by Licensee for at least the duration of this Agreement and for three (3) years thereafter. Licensor shall have free and full access thereto in the manner set forth above and shall have the right to make copies and/or extracts therefrom. If as a result of any examination of Licensee's books and records it is shown that Licensee's payments to Licensor hereunder with respect to any twelve (12) month period were less than or greater than the amount which should have been paid to Licensor by an amount equal to two percent (2%) of the amount which should have been paid during such twelve (12) month period, Licensee will, in addition to reimbursement of any underpayment, with interest from the date on which each payment was due at the rate set forth in paragraph 6.3 hereof, promptly reimburse Licensor for the cost of such examination. Licensor shall reimburse Licensee for any overpayment of royalties it discovers during such examination, after deducting from the amount of such overpayment all costs and expenses incurred in connection with such examination. 7.3. With respect to each notice Licensee may give to Licensor that it is exercising an option for a Renewal Term pursuant to paragraph 2 of Schedule C to this Agreement, Licensee shall provide to Licensor, simultaneously with such notice, a profit and loss statement, statement of cash flows and balance sheet covering Licensee's most recent fiscal year ("Financial Statement"), each of which shall be certified by the independent auditor for Licensee. In addition, if the term hereof remains in effect on April 1, 2010, Licensee shall provide Licensor on such date with Financial Statements covering Licensee's last three fiscal years, and thereafter with such updated and additional information and documentation as Licensor may reasonably request in considering whether to exercise the Buyout Option set forth in paragraph 4 of Schedule C to this Agreement. All Financial Statements required to be furnished herein shall be prepared in - 16 - accordance with generally accepted accounting principles and any officer's certificate relative thereto shall state that such statements are true, complete and correct in all material respects and present fairly the financial position of Licensee as of the respective date of the balance sheets and the results of operations for the respective periods covered. 8. Term. The initial term of this Agreement shall commence as of the date hereof and shall terminate on December 31, 2000 (the "Initial Term"). In addition, Licensee and Licensor shall have the respective option rights relating to the term set forth in Schedule C to this Agreement. It is expressly understood that only the company (which may be Licensee) whose licensed term covers the period subsequent to the expiration of this Agreement shall be entitled to receive designs for Licensed Products intended to be sold after the expiration of this Agreement, and to make presentations of such Licensed Products during the market presentation weeks that relate to such subsequent period, even if such market presentation occurs prior to the termination of this Agreement. Without limiting the generality of the foregoing, in the event the term hereof is not renewed or extended, the last season for which Licensee shall be entitled to receive designs and, during the term hereof, to manufacture and sell Licensed Products shall be the Cruise/Holiday season of the final year of either the Initial Term or the relevant Renewal Term (the "Final Season"), and Licensor shall be entitled to undertake, directly or through a successor licensee, all activities associated with the design, manufacture and sale Licensed Products commencing with the season immediately following the Final Season. 9. Default; Change of Control. 9.1. Each of the following shall constitute an event of default ("Event of Default") hereunder: (i) Any installment of royalty payments is not paid when due and such default continues for more than fifteen (15) days after written notice thereof to Licensee; (ii) Licensee shall fail to timely present for sale to the trade a broadly representative and fair collection of each seasonal collection of Licensed Products designed by the Design Partnership under the Design Agreement or Licensee shall fail to timely ship to its customers a material portion of the orders of Licensed Products it has accepted, and in either case such failure results in material injury to Licensee's or Licensor's reputation or causes reasonable - 17 - uncertainty regarding Licensee's ability to timely fulfill its obligations in the future; (iii) Licensee defaults in performing any of the other terms of this Agreement and continues in such default for a period of thirty (30) days after written notice thereof (unless the default cannot be cured within such thirty (30) day period and Licensee shall have in good faith advised Licensor that it has commenced to cure the default and thereafter diligently cures such default within an additional forty-five (45) day period); (iv) If Licensee shall knowingly use the Trademark in an unauthorized or improper manner and/or if Licensee shall knowingly make an unauthorized disclosure of confidential information or materials given or loaned to Licensee by Licensor and/or the Design Partnership; (v) Licensee institutes proceedings seeking relief under a bankruptcy act or any similar law, or consents to entry of any order for relief against it in any bankruptcy or insolvency proceeding or similar proceeding, or files a petition for or consent or answer consenting to reorganization or other relief under any bankruptcy act or other similar law, or consents to the filing against it of any petition for the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of it or of any substantial part of its property, or a proceeding seeking such an appointment shall have been commenced without Licensee's consent and shall continue undismissed for sixty (60) days or an order providing for such an appointment shall have been entered, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due or fails to pay its debts as they become due, or takes any action in furtherance of the foregoing; (vi) Licensee transfers or agrees to transfer substantially all of its property (other than as permitted in paragraph 17.4 hereof); (vii) The voluntary calling of a meeting of creditors, or the voluntary or involuntary appointment of a committee of creditors or liquidating agents, or offering a composition or extension to creditors by, for or of Licensee; (viii) There shall be a change in control of Licensee other than as permitted in paragraph 17.4 hereof or Licensee shall dissolve liquidate or wind-up its business; - 18 - (ix) An event of default occurs under the Design, or any other license agreement entered into between Licensor and Licensee or design agreement between Licensee and the Design Partnership; (x) Licensee shall fail to timely comply with the terms of paragraph 4 of Schedule C to this Agreement. 9.2. If any Event of Default described in paragraphs 9.1(i),(ii),(iii),(iv), (viii),(ix), or (x) shall occur, Licensor shall have the right, exercisable in its sole discretion, to terminate this Agreement and the License upon ten (10) days' written notice to Licensee of its intention to do so, and upon the expiration of such ten (10) day period, this Agreement and the License shall terminate and come to an end. If the Event of Default described in paragraphs 9.1 (v),(vi) or (vii) shall occur, this Agreement and the License shall thereupon forthwith terminate and come to an end without any need for notice to Licensee. This Agreement will terminate automatically upon the expiration or termination for any reason whatsoever of the Design Agreement. Any termination of this Agreement shall be without prejudice to any remedy of Licensor for the recovery of any monies then due it under this Agreement or in respect to any antecedent breach of this Agreement, and without prejudice to any other right of Licensor including, without limitation, damages for breach to the extent that the same may be recoverable and Licensee agrees to reimburse Licensor for any reasonable costs and expenses (including attorneys' fees) incurred by Licensor in enforcing its rights hereunder. No assignee for the benefit of creditors, receiver, liquidator, sequestrator, trustee in bankruptcy, sheriff or any other officer of the court or official charged with taking over custody of Licensee's assets or business shall have any right to continue the performance of this Agreement. 10. Disposal of Stock Upon Termination or Expiration. 10.1. Within ten (10) days following the termination of this Agreement for any reason whatsoever including the expiration of the term hereof, and on the last day of each month during the disposal period set forth in paragraph 10.2 hereof, Licensee shall furnish to Licensor a certificate of Licensee listing its inventories of Licensed Products (which defined term for purposes of this paragraph 10.1 shall include finished Licensed Products and all fabrics, trim, and packaging used in the manufacture and marketing of Licensed Products and bearing the Trademark) on hand or in process wherever situated. Licensor shall have the right to conduct a physical inventory of Licensed Products in Licensee's possession or under Licensee's control. Licensor or Licensor's designee shall have the option to purchase from Licensee all or any part of - 19 - Licensee's then existing inventory of Licensed Products; provided, however, that if (i) Licensee has exercised its option for a Third Renewal Term but has not exercised its Extension Option (all as set forth in Schedule C hereto) I and (ii) upon the expiration of the Third Renewal Term Licensor does not offer Licensee the right to extend the term of this Agreement, then Licensor shall have the obligation to purchase all of Licensee's then existing inventories of Licensed Products upon the expiration of the Third Renewal Term. Any purchase by Licensor of Licensee's inventory of Licensed Products pursuant to this paragraph 10 shall be upon the following terms and conditions: (i) If the purchase is taking place at Licensor's option, Licensor shall notify Licensee of its or its designee's intention to exercise the foregoing option within thirty (30) days of delivery of the certificate referred to above and shall specify the items of Licensed Products to be purchased. Prior to and during such period of thirty (30) days Licensee shall be entitled to continue distribution in the ordinary course subject to paragraph 10.2 hereof; (ii) The price for Licensed Products manufactured by or on behalf of Licensee on hand or in process shall be the lower of: (a) the fair market value of the inventory to be purchased or (b) Licensee's standard cost (the actual manufacturing cost) for each such Licensed Product. The "cost" for all Licensed Products which are not manufactured by Licensee shall be Licensee's landed costs therefor. Landed costs for the purposes hereof means the F.O.B. price of the Licensed Products together with customs, duties, brokerage charges, freight and insurance. (iii) Licensee shall ship the Licensed Products to be purchased by Licensor in "as is" condition within fifteen (15) days of receipt of the notice referred to in clause (i) above (other than those products sold and shipped between the date Licensee delivered the certificate of its inventories and the date it received such notice from Licensor). Payment of the purchase price for the Licensed Products so purchased by and shipped to Licensor or its designee shall be payable upon shipment thereof; provided, that Licensor shall be entitled to deduct from such purchase price any amounts owed by Licensee to Licensor, the Design Partnership or their respective affiliates (and/or to direct payment of any part of such merchandise to any supplier of Licensed Products in order to reduce an outstanding balance due to such supplier from Licensee). Licensor shall be responsible for the cost of freight for shipment of the products to Licensor from Licensee's warehouse facility in the United States of America. - 20 - 10.2. In the event that Licensee, pursuant to paragraph 10.1 hereof, Licensee timely provides the certificate of inventory and Licensor chooses not to exercise its option with respect to all or any portion of Licensed Products, for a period of ninety (90) days after termination of this Agreement for any reason whatsoever, except on account of breach of the provisions of paragraph 3, 4 or 6 hereof, Licensee may dispose of Licensed Products which are on hand or in the process of being manufactured at the time of termination of this Agreement, provided that (i) Licensee fully complies with the provisions of this Agreement, including specifically those contained in paragraphs 3, 4 and 6 hereof in connection with such disposal, and (ii) said disposal with respect to each shipment of Licensed Products received by Licensee takes place within sixty (60) days after such shipment is received; provided, however, that Licensee shall have no disposal rights with respect to any Licensed Products it may receive more than 120 days after the expiration or termination of this Agreement. 10.3. Notwithstanding anything to the contrary contained herein, in the event that upon the expiration or termination of the term hereof for any reason Licensee has not rendered to Licensor all accounting statements then due, and paid (i) all royalties and other amounts then due to Licensor, (ii) all compensation then due to the Design Partnership under the Design Agreement and (iii) all amounts then due to any affiliate of or supplier to Licensor or its affiliates (collectively, "Payments"), Licensee shall have no right whatsoever to dispose of any inventory of Licensed Products in any manner. In addition, if during any disposal period Licensee fails timely to render any accounting statements, or certificates of inventory required pursuant to paragraph 10.1 hereof, or to make all Payments when due, Licensee's disposal rights hereunder shall immediately terminate without notice. 11. Effect of Termination. 11.1. It is understood and agreed that except for the License to use the Trademark only as specifically provided for in this Agreement, Licensee shall have no right, title or interest in or to the Trademark. Upon and after the termination of this License, all rights granted to Licensee hereunder, together with any interest in and to the Trademark which Licensee may acquire, shall forthwith and without further act or instrument be assigned to and revert to Licensor. In addition, Licensee will execute any instruments requested by Licensor which are necessary to accomplish or confirm the foregoing. Any such assignment, transfer or conveyance shall be without consideration other than the mutual agreements contained herein. Licensor shall thereafter be free to license to others the right to use the Trademark in connection with the manufacture and sale of the Licensed Products covered hereby, and Licensee will - 21 - refrain from further use of the Trademark or any further reference to them, direct or indirect, or any other trademark, trade name or logo that is confusingly similar to the Trademark, or associated with the Trademark in any way, in connection with the manufacture, sale or distribution of Licensee's products, except as specifically provided in paragraph 10 hereof. It is expressly understood that under no circumstances shall Licensee be entitled, directly or indirectly, to any form of compensation or indemnity from Licensor, the Design Partnership or their affiliates, as a consequence to the termination of this Agreement, whether as a result of the passage of time, or as the result of any other cause of termination referred to in this Agreement. Without limiting the generality of the foregoing, by its execution of the present Agreement, Licensee hereby waives any claim which it has or which it may have in the future against Licensor, the Design Partnership or their affiliates, arising from any alleged goodwill created by Licensee for the benefit of any or all of the said parties or from the alleged creation or increase of a market for Licensed Products. 11.2. Licensee acknowledges and admits that there would be no adequate remedy at law for its failure (except as otherwise provided in paragraph 10 hereof) to cease the manufacture or sale of the Licensed Products covered by this Agreement at the termination of the License, and Licensee agrees that in the event of such failure Licensor shall be entitled to equitable relief by the way of temporary and permanent injunction and such other and further relief as any court with jurisdiction may deem just and proper. 12. Showroom. Licensee agrees to establish a separate showroom for the presentation and sale of the Licensed Products and to maintain, operate, decorate and staff the showroom in a manner consistent with that of the showrooms established for the presentation and sale of Licensor's other products and with the price structure of the Licensed Products. Licensor shall have a right of approval with respect to the location, design, layout and decoration of the showroom and all expenses incurred with respect to the design, construction, operation and maintenance of such showroom shall be borne by Licensee. Licensor and Licensee shall mutually agree to a budget for the construction of such showroom. Licensee shall admit Licensor's employees to its showroom and shall sell to such employees for their personal use (and not for resale) such Licensed Products as any such employee may reasonably request, at prices equal to the regular wholesale price less a discount equal to not less than thirty percent (30%) of such regular wholesale price. 13. Indemnity. - 22 - 13.1. Licensor shall indemnify and hold harmless Licensee and its affiliates, permitted assignees, directors, officers, agents and employees, from and against any and all liability, claims, causes of action, suits, damages and expenses (including reasonable attorneys' fees and expenses in actions involving third parties or between the parties hereto) ("Claims") which Licensee is or becomes liable for, or may incur solely by reason of its use within the Territory, in strict accordance with the terms and conditions of this Agreement and the Design Agreement, of the Trademark or the designs furnished to Licensee by Licensor or the Design Partnership, to the extent that any such Claims arise through infringement of another's design patent, trademark, copyright or other proprietary rights; provided, however, that Licensee gives Licensor prompt notice of, and full cooperation in the defense against, all such Claims. If any action or proceeding shall be brought or asserted against Licensee in respect of which indemnity may be sought from Licensor under this paragraph 13.1, Licensee shall promptly notify Licensor thereof in writing, and Licensor shall assume and direct the defense thereof. Licensee may thereafter, at its own expense, be represented by its own counsel in such action or proceeding. 13.2. To the extent not inconsistent with paragraph 13.1 hereof, Licensee shall indemnify and save and hold Licensor, the Design Partnership, Polo Ralph Lauren Corporation and Ralph Lauren, individually, and their assignees, directors, officers, agents and employees, harmless from and against any and all liability, claims, causes of action, suits, damages and expenses (including reasonable attorneys' fees and expenses in actions involving third parties or between the parties hereto), which they, or any of them, are or become liable for, or may incur, or be compelled to pay by reason of any acts, whether of omission or commission, that may be committed or suffered by Licensee or any of its servants, agents or employees in connection with Licensee's performance of this Agreement, including Licensee's use of Licensee's own designs, in connection with Licensed Products manufactured by or on behalf of Licensee or otherwise in connection with Licensee's business. If any action or proceeding shall be brought or asserted against Licensor in respect of which indemnity may be sought from Licensee under this paragraph 13.2, Licensor shall promptly notify Licensee thereof in writing, and Licensee shall assume and direct the defense thereof. Licensor may thereafter, at its own expense, be represented by its own counsel in such action or proceeding. 14. Insurance. Licensee shall carry product liability insurance with limits of liability in the minimum amount, in addition to defense costs, of $3,000,000 per occurrence and $3,000,000 per person and - 23 - Licensor, the Design Partnership, Polo Ralph Lauren Corporation and Ralph Lauren, individually, shall be named therein as insureds, as their interests may appear. The maximum deductible with respect to such insurance shall be $100,000. Licensee shall, promptly after the signing of this Agreement, deliver to Licensor a certificate of such insurance from the insurance carrier, setting forth the scope of coverage and the limits of liability and providing that the policy may not be canceled or amended without at least thirty (30) days prior written notice to Licensor, the Design Partnership, Polo Ralph Lauren Corporation and Ralph Lauren, individually. 15. Disclosure. 15.1. Licensor and Licensee, and their affiliates, employees, attorneys, accountants and bankers shall hold in confidence and not use or disclose, except as permitted by this Agreement, (i) confidential information of the other or (ii) the terms of this Agreement, except upon consent of the other or pursuant to, or as may be required by law, or in connection with regulatory or administrative proceedings and only then with reasonable advance notice of such disclosure to the other. Each of Licensee and Licensor shall take all reasonable precautions to protect the secrecy of the material used pursuant to this Agreement prior to the commercial distribution or the showing of samples for sale, and Licensee shall not sell any merchandise employing or adapted from any of said designs sketches, artwork, logos, and other materials or their use except under the Trademark. 15.2. Licensee agrees that all press releases and other public announcements related to Licensee's operations hereunder, shall be subject to approval by Licensor, and that each request for a statement, release or other inquiry shall be sent in writing to the advertising/publicity director of Licensor for response. 16. Key Personnel. 16.1. At all times during the term hereof, Licensee shall employ a divisional President, approved in advance by Licensor, whose sole responsibility shall be to manage all of Licensee's operations pursuant to this Agreement. Such individual shall report to the President of Licensee. 16.2. At all times during the term hereof, Licensee shall employ a Design Director, approved in advance by Licensor, those sole responsibility shall be to work with Licensor and the Design Partnership on the creation and implementation of designs for the Licensed Products and related activities under this Agreement. 17. Miscellaneous. - 24 - 17.1. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been properly given or sent (i) on the date when such notice, request, consent or communication is personally delivered or (ii) five (5) days after the same was sent, if sent by certified or registered mail, return receipt requested, or (iii) two (2) days after the same was sent, if sent by overnight courier delivery or confirmed telecopier, as follows: (a) if to Licensee, addressed as follows: Sun Apparel, Inc. 11201 Armour Drive El Paso, Texas 79935 Attention: Mr. Miles Rubin Telecopier: 915.592.1343 with a copy to: Sun Apparel, Inc. 111 West 40th Street New York, New York 10018 Attention: Mr. Eric Rothfeld Telecopier: 212.391.2780 (b) if to Licensor, addressed as follows: Polo Ralph Lauren, L.P. 650 Madison Avenue New York, New York 10022 Attention: Vice Chairman Telecopier: 212.318.7186 with a copy to: Victor Cohen, Esq. Eighth Floor 650 Madison Avenue New York, New York 10022 Telecopier: 212.318.7183 Anyone entitled to notice hereunder may change the address to which notices or other communications are to be sent to it by notice given in the manner contemplated hereby. 17.2. Nothing herein contained shall be construed to place the parties in the relationship of partners or joint venturers, and no party hereto shall have any power to obligate or bind any other party hereto in any manner whatsoever, except as otherwise provided - 25 - for herein. 17.3. None of the terms hereof can be waived or modified except by an express agreement in writing signed by the party to be charged or, in the case of the Licensee, its chairman or president. The failure of any party hereto to enforce, or the delay by any party in enforcing, any of its rights hereunder shall not be deemed a continuing waiver or a modification thereof and any party may, within the time provided by applicable law, commence appropriate legal proceedings to enforce any and all of such rights. All rights and remedies provided for herein shall be cumulative and in addition to any other rights or remedies such parties may have at law or in equity. Any party hereto may employ any of the remedies available to it with respect to any of its rights hereunder without prejudice to the use by it in the future of any other remedy with respect to any of such rights. No person, firm or corporation, other than the parties hereto and the Design Partnership (and, to the extent set forth in paragraphs 13.1 and 13.2 hereof, Polo Ralph Lauren Corporation and Ralph Lauren, individually), shall be deemed to have acquired any rights by reason of anything contained in this Agreement. 17.4. (a) This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto. Licensor may assign all or any portion of the royalties payable to Licensor hereunder, as designated by Licensor, and in addition, Licensor may assign all of its rights, duties and obligations hereunder to any entity to which the Trademark, or the right to use the Trademark, has been transferred, or to an affiliate of any such entity. The rights granted to Licensee hereunder are unique and personal in nature, and neither this Agreement nor the License may be assigned by Licensee without Licensor's prior written consent, which may be withheld in Licensor's sole discretion. Notwithstanding anything to the contrary contained in the prior sentence, Licensee may assign all of its rights, duties, and obligations hereunder to any affiliated entity, provided (i) such entity shall agree to be bound by the terms and provisions hereof, including, without limitation, the right of Licensor to approve or reject any successor to the individuals appointed by Licensee and approved by Licensor pursuant to paragraphs 16.1 and 16.2 hereof; (ii)[intentionally left blank](iii) such entity shall have the financial capacity to perform the obligations of Licensee hereunder and the assignment shall not be effectuated to avoid any provision of this Agreement; and (iv) such - 26 - assignment shall not relieve Licensee of its duties and obligations hereunder. Licensee shall reimburse Licensor for all reasonable costs and expenses (including attorney's fees) incurred by Licensor in connection with such assignment and Licensee shall give reasonable prior written notice to Licensor of its intent to make such an assignment, setting forth in its notice the name and address of such assignee, a description of its capitalization, and the names and addresses of its stockholders, directors, and officers, partners, and/or managers, as the case may be. Any event or change of control of Licensee such that clause (ii) of this paragraph 17.4(a) is no longer true with respect to Licensee (or any entity to which this Agreement is assigned) shall be considered an assignment in violation of this Agreement; provided, however, that a "change in control of the Licensee" shall be deemed not to have occurred as aforesaid if an applicable change in ownership is the result of (x) public offerings or sales to underwriters of capital stock in anticipation thereof by Licensee or any successor thereto or (y) any acquisition of Licensee through merger, purchase of assets or otherwise effected in whole or in part by issuance or reissuance of shares of capital stock, if clause (ii) of this paragraph 17.4(a) is true with respect to the surviving or controlling entity. Licensee agrees that it will not effectuate an initial public offering of its securities without Licensor's prior consent if Licensee's primary business (i.e., more than fifty (50%) percent of Licensee's sales or more than sixty-five (65%) percent of Licensee's net profits before taxes, in each case determined by Licensee's independent auditors for the latest fiscal year of Licensee preceding such offering) relates to Licensee's operations pursuant to this Agreement. Except as expressly permitted pursuant to this paragraph 17.4(a), any attempt by Licensee to transfer any of its rights or obligations under this Agreement, whether by assignment, sublicense or otherwise, without having received the prior written consent of Licensor, shall constitute an Event of Default, but shall otherwise be null and void. (b) Licensee may employ subcontractors with the prior approval of Licensor for the manufacture of the Licensed Products. Prior to each season Licensee shall advise Licensor of the names and addresses of the subcontractors it intends to use and the products each such subcontractor will be manufacturing. Licensor shall promptly advise Licensee if it withholds its approval to the use of any such subcontractor by Licensee but, irrespective of the grant of approval by Licensor, (i) the supervision of production of Licensed Products shall remain under the control of Licensee, (ii) Licensee shall maintain appropriate quality controls, (iii) such subcontractors shall comply with the quality and other requirements of Licensor consistent with the terms of this Agreement, including, but not limited to, the execution by subcontractor of the Trademark and Design Protection Agreement attached hereto as Schedule D and - 27 - made a part hereof. 17.5. Licensee shall comply with all laws, rules, regulations and requirements of any governmental body which may be applicable to the operations of Licensee contemplated hereby, including, without limitation, as they relate to the manufacture, distribution, sale or promotion of Licensed Products, notwithstanding the fact that Licensor may have approved such item or conduct. Licensee shall advise Licensor in the event any Final Prototype (as defined in the Design Agreement) does not comply with any such law, rule, regulation or requirement. 17.6. This Agreement shall be construed in accordance with and governed by the laws of the State of New York, applicable to contracts made and to be wholly performed therein without regard to its conflicts of law rules. 17.7. The parties hereby consent to the jurisdiction of the United States District Court for the Southern District of New York and of any of the courts of the Southern District of New York and of any of the courts of the State of New York located within the Southern District in any dispute arising under this Agreement and agree further that service of process or notice in any such action, suit or proceeding shall be effective if in writing and delivered as provided in paragraph 17.1 hereof. Notwithstanding anything to the contrary set forth herein, neither Polo Ralph Lauren Corporation nor any other general or limited partner of Licensor shall be liable for any claim based on, arising out of, or otherwise in respect of, this Agreement, and Licensee shall not have nor claim to have any recourse for any such claim against any general or limited partner of Licensor. 17.8. In the event either party hereto is delayed or hindered in or prevented from the performance of any act required hereunder by reason of war, revolution, insurrection, civil disorder, fire, flood, accident, explosion, strikes, embargo, prohibition or substantial limitation on import or export of (or unavailability from any source of) product or raw materials, governmental orders or regulations or any other similar cause which is beyond the control of such party hereto, the performance of such act shall be excused for the period during which the cause of failure of performance exists provided (i) such period shall in any event not extend beyond six (6) months and shall not affect the running of the term of this Agreement; (ii) that no such event shall excuse performance of a payment or other financial obligation hereunder; and (iii) the excused party shall promptly notify the other in writing advising of the cause for delay. 17.9. The provisions hereof are severable, and if any - 28 - provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such provision, or part thereof in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction, or any other provision in this Agreement in any jurisdiction. To the extent legally permissible, an arrangement which reflects the original intent of the parties shall be substituted for such invalid or unenforceable provision. 17.10. The paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Each party acknowledges and represents to the other that this Agreement has been reviewed by its counsel and the provisions hereof shall be construed without regard to which party prepared this Agreement. 17.11. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. - 29 - IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused the same to be executed by a duly authorized officer as of the day and year first above written. POLO RALPH LAUREN, L.P. By: Polo Ralph Lauren Corporation, General Partner By: /s/ Michael Newman SUN APPAREL, INC. By: /s/ Eric Rothfeld - 30 - Schedule A LICENSED PRODUCTS The term "Licensed Products" shall mean a men's jeans collection comprised of the following products: (i) jean pants, jean jackets, jean shorts and jean vests, (ii) coordinated outerwear, casual pants and shorts, t-shirts, woven and knit shirts, sweaters, and hats and caps and (iii) such additional men's products as may be designated by written agreement of Licensor and Licensee, in all cases bearing the Trademark. A women's jeans collection comprised of the following products: (i) jean pants, jean jackets, jean shorts and jean vests, (ii) coordinated outerwear, casual pants and shorts, t-shirts, woven and knit shirts, sweaters, hats and caps, denim dresses and skirts, and solid chanbray dresses and skirts, and (iii) such additional women's products as may be designated by written agreement of Licensor and Licensee, in all cases (a) bearing the Trademark and (b) offered as part of a women's jeans collection and not as individual or groups of items of "better" or "bridge" apparel. Without limiting the generality of the foregoing, not less than fifty percent (50%) of the SKUs of Licensed Products offered each season shall be made substantially of denim, and Licensee shall strive to achieve a retail presentation which is focused predominantly on the denim portion of the line. Schedule B - 31 - TRADEMARK POLO JEANS COMPANY BY RALPH LAUREN POLO JEANS CO. BY RALPH LAUREN POLO JEANS COMPANY RALPH LAUREN POLO JEANS CO. RALPH LAUREN Logos associated with the Trademark shall be added to this Schedule B as approved by Licensor. Licensor will apply to register the Trademark in at least one of the forms in which it is finally adopted. - 32 - Schedule C LICENSOR AND LICENSEE OPTIONS RELATING TO THE TERM OF THIS LICENSE AGREEMENT As set forth in paragraph 8 of this Agreement, this Schedule C to this Agreement sets forth the respective rights and obligations of Licensor and Licensee with respect to the extension of the term of this Agreement beyond the Initial Term. 1. Additional Definitions. The following words and phrases, unless the context otherwise requires shall have the following meanings: "Business" shall mean the entire business and assets which shall be owned and operated by Licensee with respect to the design, manufacture, advertising, promotion and sale of Licensed Products pursuant to the terms of this Agreement, including but not limited to the following: (a) All of the rights which Licensee has under this Agreement, including but not limited to the License; (b) Accounts receivable; (c) Inventory; (d) Furniture, fixtures, tools and equipment; (e) Expendables, including but not limited to office supplies, sales slips and other sales materials, bags and packaging materials, brochures, fliers and other advertising and promotional materials and copy; (f) Prepaid fees, dues or subscriptions and prepaid compensation; (g) All other assets relating to the design, manufacture, advertising, promotion and sale of Licensed Products pursuant to the terms of this Agreement, including without limitation all customer, mailing, telephone and marketing lists, vendor warranties and other business records; (h) Goodwill and other intangible rights, whether acquired from Licensor or from others (but excluding any value for the License in excess of the present value of the projected sales, earnings and cash flow relevant to the Going Concern value of the Business assuming the continuation of the License through December - 33 - 31, 2030). The Business shall also include all of the debts, liabilities, obligations or claims owed by or due from Licensee incurred in the ordinary course and which are necessary in connection with the Business, existing on the Closing Date (as hereinafter defined) or arising thereafter with respect to events occurring prior to the Closing Date, including but not limited to the following: (a) Trade and other accounts payable; (b) Accrued expenses, including but not limited to accrued rent., accrued compensation, pension plan liability, bonuses, retirement pay and other fees and costs; Liabilities included in the Business shall not include indebtedness to individuals, banks or financial institutions (whether long- or short-term) incurred other than in the ordinary course of Licensee's business hereunder, guarantees of third-party obligations incurred other than in the ordinary course of Licensee's business hereunder, any taxes owing or accrued prior to the Closing Date incurred other than in the ordinary course of Licensee's business hereunder or litigation claims. All of the liabilities included in the Business and disclosed in writing to Licensor (but not those not so included and disclosed) are hereinafter referred to as the "Liabilities." Licensee will be required to supply Licensor with a schedule of Liabilities within ten (10) days of receipt of a notice from Licensor that it is exercising the Buyout Option. "Purchase Price" shall mean an amount equal to eighty percent (80%) of the fair value of the Business as a going concern as it exists on the Closing Date ("Going Concern"), determined as set forth below. The fair value of the Business as a Going Concern shall be determined in the following manner: (a) Each of Licensor and Licensee shall, within ten (10) days after Licensor gives notice that it intends to exercise the Buyout Option, select a reputable investment banker having a national reputation and experienced in evaluating businesses as going concerns in connection with public and private financings, mergers and acquisitions and in representing companies engaged in national apparel manufacturing and sales businesses in such transactions; (b) Each such investment banker shall evaluate the Business as a going concern, assuming the License is to continue - 34 - ("Going Concern") taking into account all factors which it considers relevant to such an evaluation, including but not limited to the following: (i) Historical and projected sales and earnings; (ii) Historical and projected cash flow; (iii) The book value of the assets of the Business; (iv) The value of the assets of the Business on a Going Concern basis; (v) Multiples of sales and/or earnings used in evaluating companies engaged in similar businesses for purposes of public or private financings or for sale, acquisition or merger; (vi) Relevant financial ratios, including but not limited to debt- equity ratios, current ratios and return on investment; (vii) Known business and economic risks and contingencies. (viii) Liabilities to be assumed or not to be assumed. In evaluating the Business the investment bankers shall not ascribe any value over and above the Going Concern value of the Business to the License assuming the continuation of the License through December 31, 2030. No evaluation by an investment banker shall occur until Licensor shall have received from Licensee a schedule of Liabilities and shall have confirmed its undertaking to proceed with the purchase of the Business. (c) Such investment bankers shall, within sixty (60) days after their selection, attempt to agree as to the fair value of the Business as a Going Concern on the Closing Date. Licensee shall make its books, records, facilities and such other materials as may be necessary or desirable in connection with such evaluation available to such investment bankers for such purposes. In conducting their evaluation, such investment bankers shall exercise such reasonable judgment and apply such standards as are customary in the investment banking profession, recognizing that it is the desire of the parties hereto to reach an accommodation with the least cost, effort and time necessary. (d) If such investment bankers are unable to so agree - 35 - within such sixty (60) day period, then they shall, within fifteen (15) days after the expiration of such sixty (60) day period, mutually appoint a third investment banker of comparable stature and experience and each shall submit to such third investment banker their respective analysis and conclusions as to the fair value of the Business as a Going Concern. Within 30 days after such third investment banker is provided with such material, such third investment banker shall, based upon its own evaluation (following the standards set forth herein) as well as the analysis and conclusions of the other investment bankers, select one or the other of their evaluations, which evaluation shall thereafter be deemed to be the fair value of the Business as a Going Concern. Each of Licensor and Licensee shall be responsible for the costs associated with the evaluation by the investment banker it selects, and Licensor and Licensee shall share equally the costs associated with the evaluation of a third investment banker, if necessary. Eighty Percent (80%) of the fair value of the Business as a Going Concern as determined pursuant to clauses (c) or (d) of this definition on the Closing Date shall constitute the Purchase Price and shall be final and binding on the parties hereto for the purposes of this Agreement. 2. Licensee Renewal Options. a. Provided no Event of Default shall have occurred which is not timely cured or waived, and Licensee has achieved the First Minimum Renewal Volume (hereinafter defined) for the period January 1, 1999 to December 31, 1999, Licensee shall have the option, upon providing notice to Licensor on or before March 31, 2000, to renew this Agreement for an additional five (5) year period (the "First Renewal Term") so as to expire on December 31, 2005, on the terms and conditions set forth herein. The minimum aggregate Net Sales Price which Licensee must achieve in connection with sales of Licensed Products during the period from January 1, 1999 to December 31, 1999 (the "First Minimum Renewal Volume") in order to be entitled to renew this Agreement for the First Renewal Term as hereinabove provided shall be [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]. b. Provided no Event of Default shall have occurred which is not timely cured or waived, and Licensee has achieved the Second Minimum Renewal Volume (hereinafter defined) for the period January 1, 2004 to December 31, 2004, Licensee shall have the option, upon providing notice to Licensor on or before March 31, 2005, to renew this Agreement for an additional five (5) year period (the "Second Renewal Term") so as to expire on December 31, 2010, on the terms and conditions set forth herein. The minimum aggregate Net Sales Price which Licensee must achieve in connection with sales of Licensed Products during the period from January 1, 2004 to - 36 - December 31, 2004 (the "Second Minimum Renewal Volume") in order to be entitled to renew this Agreement for the Second Renewal Term as hereinabove provided shall be [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]. c. Subject to Licensor's Buyout Option as set forth in paragraph 4 of this Schedule C, provided (i) no Event of Default shall have occurred which is not timely cured or waived and (ii) Licensee has achieved the Third Minimum Renewal Volume (hereinafter defined) for the period January 1, 2009 to December 31, 2009, Licensee shall have the option (in addition to the Extension option set forth in paragraph 3 of this Schedule C), upon providing notice to Licensor on or before March 31, 2010, to renew this Agreement for an additional five (5) year period (the "Third Renewal Term") so as to expire on December 31, 2015, on the terms and conditions set forth herein; provided, however, that if Licensee does not exercise the Extension Option, Licensee shall have no right to renew the term of this Agreement beyond the Third Renewal Term. The minimum aggregate Net Sales Price which Licensee must achieve in connection with sales of Licensed Products during the period from January 1, 2009 to December 31, 2009 (the "Third Minimum Renewal Volume") in order to be entitled to renew this Agreement for the Third Renewal Term as hereinabove provided shall be [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]. d. Provided (i) no Event of Default shall have occurred which is not timely cured or waived, (ii) Licensee timely exercised its Extension Option as set forth in paragraph 3 of this Schedule C, and (iii) Licensee has achieved the Fourth Minimum Renewal Volume (hereinafter defined) for the period January 1, 2014 to December 31, 2014, Licensee shall have the option, upon providing notice to Licensor on or before March 31, 2015, to renew this Agreement for an additional five (5) year period (the "Fourth Renewal Term") so as to expire on December 31, 2020, on the terms and conditions set forth herein. The minimum aggregate Net Sales Price which Licensee must achieve in connection with sales of Licensed Products during the period from January 1, 2014 to December 31, 2014 (the "Fourth Minimum Renewal Volume") in order to be entitled to renew this Agreement for the Fourth Renewal Term as hereinabove provided shall be [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]. e. Provided (i) no Event of Default shall have occurred which is not timely cured or waived, (ii) Licensee timely exercised its Extension Option and (iii) Licensee -has achieved the Fifth Minimum Renewal Volume (hereinafter defined) for the period January 1, 2019 to December 31, 2019, Licensee shall have the option, upon providing notice to Licensor on or before March 31, 2020, to renew this Agreement for an additional five (5) year period (the "Fifth Renewal Term") so as to expire on December 31, 2025, on the terms and conditions set forth herein. The minimum aggregate Net Sales - 37 - Price which Licensee must achieve in connection with sales of Licensed Products during the period from January 1, 2019 to December 31, 2019 (the "Fifth Minimum Renewal Volume") in order to be entitled to renew this Agreement for the Fifth Renewal Term as hereinabove provided shall be [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]. f. Provided (i) no Event of Default shall have occurred which is not timely cured or waived, (ii) Licensee timely exercised its Extension Option and (iii) Licensee has achieved the Sixth Minimum Renewal Volume (hereinafter defined) for the period January 1, 2024 to December 31, 2024, Licensee shall have the option, upon providing notice to Licensor on or before March 31, 2025, to renew this Agreement for an additional five (5) year period (the "Sixth Renewal Term") so as to expire on December 31, 2030, on the terms and conditions set forth herein, except that Licensee shall have no further right of renewal. The minimum aggregate Net Sales Price which Licensee must achieve in connection with sales of Licensed Products during the period from January 1, 2024 to December 31, 2024 (the "Fifth Minimum Renewal Volume") in order to be entitled to renew this Agreement for the Sixth Renewal Term as hereinabove provided shall be [OMITTED; MATERIAL FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION]. g. As a condition to Licensee"s right to exercise each renewal option under this paragraph 2, Licensee must, in each notice to Licensor that any renewal option is being exercised, certify to Licensor that Licensee is not in material default under its loan agreements with its principal lender(s). 3. Licensee's Extension Option. Subject to Licensor's Buyout Option as set forth in paragraph 4 of this Schedule C, if (i) no Event of Default shall have occurred and not been cured or waived and (ii) Licensee has achieved the Third Minimum Renewal Volume, Licensee shall have the option to acquire the options set forth in paragraphs 2(d) through 2(f) of this Schedule C (the "Extension Option"). Licensee must give Licensor notice that it is exercising the Extension Option in the same notice by which it gives Licensor notice that Licensee is exercising its option to extend this Agreement f or the Third Renewal Term, which notice must be given on or before March 31, 2010. If Licensee does not, on or before March 31, 2010, give Licensor notice that is exercising its option to extend this Agreement for the Third Renewal Term, with or without exercising the Extension Option, the term of this Agreement and the Design Agreement shall expire on December 31, 2010, and the provisions of paragraphs 10 and 11 of this Agreement shall apply. If Licensee does exercise the Extension Option, in consideration of the additional rights it acquires thereby Licensee shall pay Licensor the Extension Option Price, as hereinafter defined, on December 31, 2010 (the "Closing Date"). At Licensee's option subject to the last sentence of clause (b) below, the "Extension - 38 - Option Price" shall be either: a. Twenty-Five Million Dollars ($25,000,000), payable by wire transfer, certified or bank check on the Closing Date; or b. A twenty percent (20%) equity interest in the Business. The term "twenty percent (20%) equity interest in the Business" shall mean, if at the time the Extension Option is exercised the Business is conducted in the form of a corporation engaged solely in the conduct of the Business, twenty percent (20%) of the issued and outstanding equity and voting shares of such corporation, on a fully-diluted basis. In such event, Licensee shall deliver to Licensor on the Closing Date stock certificates representing such shares, free and clear of all liens and encumbrances, with all necessary stock transfer tax stamps attached, accompanied by stock powers duly executed in blank, and otherwise in form acceptable for transfer on the books of such corporation. If at the time the Extension Option is exercised the Business is conducted in any form other than as a corporation engaged solely in the conduct of the Business, the term "twenty percent (20%) equity interest in the Business" shall mean, and Licensee shall deliver in a form reasonably acceptable to Licensor on the Closing Date, such other consideration (by way of example, shares of a parent corporation, shares of a limited partnership, etc.) ("Alternate Equity Interest") as the parties may mutually agree, within thirty (30) days after Licensee gives notice that it is exercising the Extension Option and intends to convey a twenty percent (20%) equity interest in the Business, as represents the equivalent of twenty percent (20%) of the issued and outstanding voting shares of a corporation engaged solely in the conduct of the Business. If the parties do not timely agree on an Alternate Equity Interest, the Extension Option Price shall be the amount set forth in clause (a) of this paragraph 3. 4. Licensor's Buyout Option. Notwithstanding anything to the contrary contained herein, Licensor shall have the option, by giving written notice to Licensee on or before June 1, 2010 and regardless of whether Licensee has given notice that it intends to exercise the Extension Option or the option to renew for the Third Renewal Term, to purchase the Business from Licensee (the "Buyout Option"). If Licensor exercises the Buyout Option, Licensee shall have no further rights or obligations with respect to the Extension Option. The Buyout Option shall be in addition to and shall not alter or affect Licensor's rights to terminate this Agreement as a result of any Event of Default, as otherwise provided in this Agreement. If Licensor gives notice that it will exercise the Buyout Option, Licensor (or its designee) shall purchase and Licensee shall sell the Business for the Purchase Price including assumption of the Liabilities. The closing date for the purchase - 39 - and sale of the Business shall be December 31, 2010 (or the last business day of the year 2010 if prior thereto) (the "Closing Date"), it being mutually agreed by Licensor and Licensee that time shall be of the essence. On the Closing Date, Licensor shall deliver the Purchase Price to Licensee by wire transfer or a certified or bank cashier's check, together with such instruments of assumption of the Liabilities as counsel to the parties shall mutually agree are appropriate to cause the Liabilities to be assumed by Licensor (or its designee), and Licensee shall deliver to Licensor such instruments of transfer as counsel to the parties shall mutually agree are appropriate to effect the purchase and sale of the Business and to give Licensor (or its designee) good title to all of the assets of the Business, free and clear of all liens and encumbrances. 5. Good Faith Obligation; Dispute Resolution; Indemnification. Licensor and Licensee shall act in good faith to consummate the transactions contemplated by either the Extension Option or the Buyout Option, if either such option is exercised, while minimizing any negative tax implications to either party. Any dispute arising out of either party's exercise of such option shall be submitted to binding arbitration pursuant to the rules of the American Arbitration Association. If the Buyout Option is exercised, Licensee shall indemnify and save and hold Licensor, the Design Partnership, Polo Ralph Lauren Corporation and Ralph Lauren, individually, and their assignees, directors, officers, servants, agents and employees, harmless from and against any and all liability, claims, causes of action, suits, damages and expenses (including reasonable attorneys' fees and expenses) arising out of or relating to the conduct of the Business up to and including the Closing Date (other than with respect to the disclosed Liabilities assumed), and Licensor shall indemnify and save and hold Licensee and its assignees, directors, officers, servants, agents and employees, harmless from and against any and all liability, claims, causes of action, suits, damages and expenses (including reasonable attorneys' fees) arising out of the conduct of the Business after the Closing Date. 6. Closing Procedures. In the event Licensee exercises the Extension Option and is conveying a twenty percent (20%) equity interest in the Business pursuant to paragraph 3(b) of this Schedule C, or in the event Licensor exercises the Buyout Option, at the closing on the Closing Date Licensee shall deliver to Licensor an absolute assignment of the relevant instruments of transfer and shall represent and warrant that as of the closing Date: (a) that the shares of Licensee or the Alternate Equity Interest is owned by the Licensee free and clear - 40 - of all pledges, security interests, liens, charges, encumbrances and claims of any nature whatsoever, except any encumbrances otherwise agreed to in writing by Licensor; (b) that Licensee has the full and complete right, power and authority to make the assignment and that such assignment does not violate any agreement or government order; (c) that no litigation exists or threat of litigation has been made with respect to the Business that has not been disclosed in writing to Licensor; and (d) that all financial information and materials delivered by Licensee in connection with any calculation of the Purchase Price or the Alternate Equity Interest were true and correct as of the date made. Licensee shall further deliver a letter from seller's counsel reasonably satisfactory to Licensor which contains such legal opinions as are customarily given in connection with the sale of a business such as the Business and subject to standard limitations and qualifications thereto. - 41 - Exhibit 10.54. (Polo Jeans Company - Design) DESIGN SERVICES AGREEMENT dated as of August 1, 1995, by and between Polo Ralph Lauren Enterprises, L.P. (the "Design Partnership"), a Delaware limited partnership with a place of business at 650 Madison Avenue, New York, New York 10022 and Sun Apparel, Inc. (the "Company") a Texas corporation with a place of business at 11201 Armour Drive, El Paso, Texas 79935. Ralph Lauren ("Lauren") is an internationally famous designer who has been twice inducted into the Coty Hall of Fame for his design of men's and women's fashions, is the recipient of the CFDA Lifetime Achievement Award, and is a creator of original designs for cosmetics, jewelry, home furnishings and other products. Polo Ralph Lauren, L.P., a Delaware limited partnership ("Polo"), holds the right and interest in and to certain trademarks and trade names, as same may be used in connection with the manufacture and sale of Licensed Products, as hereinafter defined, and on even date herewith, the Company has obtained the right to use certain trademarks (the "Trademark") in connection with the Licensed Products, pursuant to a license agreement ("License Agreement") of even date herewith by and between the Company and Polo. The value of the Trademark is largely derived from the reputation, skill and design talents of Lauren, and Lauren, directly and through his designees, provides design services through the Design Partnership. The company desires to obtain the services of the Design Partnership in connection with the creation and design of the Licensed Products. The Company desires, in order to exploit the rights granted to it under the License Agreement, to engage and retain the Design Partnership to create and provide to the Company the designs for its line of Licensed Products. The Design Partnership is willing to furnish such designs and render such services on the basis hereinafter set forth. As used herein, the term "Licensed Products" shall have the meaning set forth in the License Agreement. In consideration of the foregoing premises and of the mutual promises and covenants herein contained, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Designs; Assistance. 1.1 The parties understand and agree that the Company will be principally responsible for the development and presentation to the Design Partnership of designs for Licensed Products, which, designs will be reviewed by the Design Partnership and which the Design Partnership may approve, disapprove or modify in its sole discretion, in accordance with the terms and conditions set forth herein. 1.2 The Design Partnership shall provide the Company with a program of suggested, broad design themes and concepts with respect to the design of the Licensed Products ("Design Concepts") which shall be embodied in oral and/or written descriptions of design themes and concepts and such other detailed designs and sketches therefor, as the Design Partnership deems appropriate. The Design Partnership shall have full discretion with respect to the manner in which the Design Concepts shall be formulated and presented by the Design Partnership to the Company. The Company and the Design Partnership shall confer on Design Concepts and shall make such modifications as are required to meet the Design Partnership's approval. 1.3 The Design Partnership may, at its sole expense, engage such employees, agents, and consultants operating under the Design Partnership's creative supervision and control as it may deem necessary and appropriate. 1.4 From time to time while this Agreement is in effect, the Design Partnership may (a) develop or modify and implement designs from the Design Concepts or other designs furnished by the Design Partnership or (b) develop and implement new designs. 1.5 The Company shall prepare and present designs to the Design Partnership based on the Design Concepts. 1.6 The company understands that all or portions of the Design Concepts may be furnished to the Company through or in cooperation with other entities to which the Design Partnership has provided design services. The Company upon its prior written authorization shall pay all costs, including shipping and handling charges, for fabric swatches or mill chips, sketches, specifications, paper sample patterns and product samples furnished to the Company by the Design Partnership or such other entities. 1.7 Subject to paragraph 2.7 hereof, all patents and 2 copyrights on designs of the Licensed Products shall be Owned exclusively, and applied for, by the Design Partnership or its designee, at the Design Partnership's discretion and expense, and shall designate the Design Partnership or its designee as the patent or copyright owner, as the case may be, therefor. 1.8 The Company acknowledges that the Licensed Products contain elements which in concept, execution and/or presentation are unique. The Company agrees that it will not, during the term of the Agreement, use any designs used in the Licensed Products or any designs submitted or modified by the Design Partnership or any designs which are comparable and/or competitive with Licensed Products and which may be identified as Design Partnership designs. 2. Design Legends; Copyright Notice and License. 2.1 All designs, patterns, sketches, artwork, logos and other materials of Licensed Products and the use of such designs, artwork, sketches, logos and other materials created by the Design Partnership, or, subject to paragraph 2.7 hereof, created by or for the Company and reviewed and approved by the Design Partnership, or developed by or for the Company from Design Concepts or subsequent design concepts furnished or approved by the Design Partnership (all of which shall hereinafter constitute Design Concepts), shall be the property of the Design Partnership and shall be subject to the provisions of this paragraph 2. 2.2 All right, title and interest in and to the samples, sketches, design, artwork, logos and other materials furnished by or to Company or submitted to the Design Partnership, whether created by the Design Partnership or the Company, are hereby assigned to and shall be the sole property of the Design Partnership. The Company shall cause to be placed on all Licensed Products appropriate notice in accordance with applicable law designating the Design Partnership as the copyright or design patent owner thereof, as the case may be. The manner of presentation of said notices shall be reviewed and approved by the Design Partnership prior to use thereof by the Company. 2.3 The Design Partnership hereby grants to the Company the exclusive right, license and privilege ("License") to use the designs furnished hereunder and all copyrights, if any, and patents, if any therein; provided, however, that the License is limited to use in connection with Licensed Products manufactured and sold, or imported and sold, pursuant to the License Agreement, subject, however, to paragraph 3.2 hereof. All other rights in and to the designs furnished hereunder, including 3 without limitation all rights to use such designs in connection with products other than Licensed Products (as defined in the License Agreement) and in territories other than the Territory (as defined in the License Agreement) are expressly reserved by the Design Partnership. The License shall continue only for such period as this Agreement shall be effective. The Design Partnership shall execute and deliver to the Company all documents and instruments necessary to perfect or evidence the License. Upon termination of this Agreement, for any reason whatsoever, any and all of the Company's right, title and interest in and to the License shall forthwith and without further act or, instrument be assigned to, revert to and be the sole and exclusive property of the Design Partnership, and the Company shall have no further or continuing right or interest therein, except the limited right to complete the manufacture of and sell Licensed Products during any Disposal Period, as set forth in paragraph 6.3 hereof. In addition, the company shall thereupon (i) execute and deliver to the Design Partnership all documents and instruments necessary to perfect or evidence such reversion, (ii) refrain from further use of any of the Design Concepts and (iii) refrain from manufacturing, selling or distributing any products (whether or not they bear the Trademark) which are confusingly similar to or derived from the Licensed Products or Design Concepts. 2.4 Except as expressly permitted under paragraph 17.4 of the License Agreement, the Company shall not sublicense any of the rights granted hereunder without first obtaining the Design Partnership's prior written consent in connection therewith, which consent may be withheld by the Design Partnership in its sole discretion. 2.5 The Design Partnership represents and warrants to the Company that it has full right, power and authority to enter into this Agreement, to perform all of its obligations hereunder and to consummate all of the transactions contemplated herein. 2.6 The Company represents and warrants to the Design Partnership that the Company has full right, power and authority to enter into this Agreement, to perform all of its obligations hereunder and to consummate all the transactions contemplated herein. 2.7 Notwithstanding any provision to the contrary contained herein, each party recognizes that a distinction is drawn between (i) the appearance, packaging and marketing presentation of the Licensed Products, and (ii) the technology (including washes and finishing treatments) used in the making of denim Licensed Products. The term "Technology" as used herein shall mean the 4 chemistry, formulas, production processes and method and other technology actually used for making denim Licensed Products. "Technology" includes, but is not limited to, all information, samples, sketches, blueprints, plans and other data relating to the chemistry, formulas, processes or methods of production, technology, physical properties, or other inherent characteristics of Licensed Products, as well as design elements with respect to which Licensee gives Licensor written notice in advance that such design elements are original and proprietary to Licensee and need not be used by Licensee exclusively for Licensed Products. The parties agree that unless developed by the Design Partnership or at the direction of the Design Partnership, the Technology used by the Company to make denim Licensed Products shall not belong to the Design Partnership and may be used by the Company both during and after the term of this Agreement except as follows: even when developed by the Company, if a Technology has been used first for or introduced as an innovation for Licensed Products, then Company will not use such Technology for its other lines of products unless and until such Technology has become used in a commercially significant manner by its competitors for their products without violation of a proprietary right of the Company or the Design Partnership. The Design Partnership agrees to cooperate fully with the Company, at Company's expense, in the filing, prosecution, maintenance or protection of any patent applications which Company may wish to file on its Technology. Upon termination or expiration of this Agreement, should it so desire, the Design Partnership shall be entitled to produce or have third parties produce previously marketed products which might otherwise infringe upon the Company's Technology provided that such products are marketed solely under the Trademark and Company covenants not to make any claim against any party for manufacturing, advertising, promoting or selling such products under the Design Partnership's authority; provided, however, that if the Design Partnership does market products previously marketed by the Company which would in fact violate valid proprietary rights of the Company, the Design Partnership shall compensate the Company for the use of such Technology on commercially reasonable terms, and in any event on terms no less favorable than the terms on which the Company licenses the use of such Technology to any unrelated Third Party. Fabrics, finishes and silhouettes used in connection with Licensed Products may also be used by Licensee in connection with other products, if such fabrics, finishes and silhouettes do not violate proprietary rights of Licensor or its affiliates and are generally available in the marketplace. 3. Licensed Products. 3.1 The Company shall obtain the written approval of the 5 Design Partnership of all Licensed Products to be manufactured or caused to be manufactured by the Company, by submitting a Prototype, as hereinafter defined, of each different design or model of a Licensed Product, including, but not limited to, the type and quality of materials, colors and workmanship to be used in connection therewith, prior to any commercial production thereof. In the event that the Design Partnership rejects a particular Prototype or Prototypes, the Design Partnership shall so notify the Company and shall in certain cases where the Design Partnership desires to include the Prototype in the collection, provide the company with suggestions for modifying the particular Prototype or Prototypes which the Design Partnership is rejecting. The Company shall promptly correct said Prototype or prototypes, resubmit said Prototype or Prototypes to the Design Partnership and seek the Design Partnership's approval under- the same terms and conditions as set forth herein with respect to the first submission of Prototypes. As used herein, the term "Prototype" shall mean any and all models, or actual samples, of Products; and the term "Final Prototype" shall mean the actual final sample of a Licensed Product from which the first commercial production thereof will be made and which has been approved by the Design Partnership prior to the first commercial production thereof pursuant to this paragraph 3. 3.2 The written approval of the Design Partnership of the Prototypes for each seasonal collection shall be evidenced by a written list, signed on behalf of the Design Partnership setting forth those Prototypes which have been approved for inclusion in such collection. Prototypes so approved shall be deemed Final Prototypes in respect of such collection. Approval of any and all Prototypes as Final Prototypes shall be in the sole discretion of the Design Partnership. The Company shall present for sale, through the showing of each seasonal collection to the trade, all Final Prototypes so approved in respect of such collection. Approved Final Prototypes for Denim Bottoms (as defined in paragraph 2.2 of the License Agreement) may run from season-to-season without additional approval from the Design Partnership, but the Design Partnership, in consultation with the Company shall be entitled to withdraw such approval upon written notice given reasonably in advance of any season and, upon receipt of such notice, the Company shall not place any additional orders for such products, but may sell any such products previously approved and ordered. 3.3 The Licensed Products thereafter manufactured and sold by the company shall strictly adhere, in all respects, including, without limitation, with respect to materials, color, workmanship, designs, dimensions, styling, detail and quality, to the Final Prototypes approved by the Design Partnership, subject 6 however, in the case of denim products to minor variations which arise in the ordinary course from wash and other finishing treatments. 3.4 In the event that any Licensed Product is, in the reasonable judgment of the Design Partnership, not being manufactured or sold in strict adherence to the materials, color, workmanship, designs, dimensions, styling detail and quality, embodied in the Final Prototypes, or is otherwise not in accordance with the Final Prototypes, the Design Partnership shall notify the Company thereof in writing and the Company shall promptly repair or change such Licensed Product to conform strictly thereto. If an item of Licensed Product as repaired or changed does not strictly conform to the Final Prototypes and such strict conformity cannot be obtained after at least one (1) resubmission, or if the Company determines that a Licensed Product does not strictly conform, the Trademark shall be promptly removed from the item, at the option of the Design Partnership, in which event the item may be sold by the Company, provided (a) it is in no way identified as a Licensed Product and (b) further provided that the Company and the Design Partnership agree that the Company will be permitted to sell Licensed Products bearing the Trademark so long as such products are clearly labelled as such in a manner approved by the Design Partnership or Polo, are distributed in channels and outlets approved by Polo, and are produced only as by-products of the manufacture of first quality goods and only in reasonable quantities. Notwithstanding anything in this paragraph 3.4 to the contrary, sales of all products using the Design Concepts, whether or not bearing the Trademark, shall be subject to compensation payments pursuant to paragraph 4 hereof. 3.5 The Design Partnership and its duly authorized representative shall have the right, at its expense upon reasonable notice during normal business hours, to inspect all facilities utilized by the Company (and its contractors and suppliers) in connection with the preparation of Prototypes and the manufacture, sale, storage or distribution of Licensed Products pursuant hereto and to examine Licensed Products in process of manufacture and when offered for sale within the company's operations. The Company hereby consents to the Design Partnership's examination of Licensed Products held by its customers for resale provided the Company has such right of examination. The company shall take all necessary steps, and all steps reasonably requested by the Design Partnership, to prevent or avoid any misuse of the licensed designs by any of its customers, contractors or other resources. 3.6 Intentionally omitted. 7 3.7 The Company shall upon request make its personnel available, and shall use its commercially reasonable efforts to make the personnel of any of its contractors, suppliers and other resources available at their facilities, for consultation with the Design Partnership by appointment during normal business hours. The Company shall make available to the Design Partnership, upon reasonable notice, marketing plans, reports and information which the Company may have with respect to Licensed Products. 3.8 The Company may employ subcontractors for the manufacture of Licensed Products solely on the terms set forth in paragraph 17.4 of the License Agreement. 3.9 The Company shall include within each seasonal collection of Licensed Products a fully representative assortment of designs therefor designated by the Design Partnership for inclusion therein. Notwithstanding anything to the contrary contained herein or in the License Agreement, in the event the Company chooses not to or is unable to include within a seasonal collection of Licensed Products a particular Licensed Product which the Design Partnership has designed or designated for inclusion in such collection, the Design Partnership shall be entitled to authorize third parties to manufacture such Licensed Product(s) on behalf of the Company and the Company shall, at the Design Partnership's option, display, present and sell such Licensed Product(s) in the manner in which all other Licensed Products are displayed, presented and sold hereunder. 3.10 The Design Partnership shall respond to any requests for approvals or consents from the Company hereunder as promptly as reasonably practicable consistent with the level of review required and the timing of the collections to be presented each season. 4. Compensation: Accounting. 4.1 Commencing with the First Renewal Term (as defined in Schedule C to the License Agreement), if the term hereof is extended beyond the Initial Term (as defined in paragraph 8 of the License Agreement), Company shall pay to the Design Partnership minimum compensation for each year during the term of this Agreement. The minimum compensation for each year commencing with the First Renewal Term shall be an amount equal to [Omitted; Material Filed Separately With The Securities And Exchange Commission]% of the actual earned compensation due for the immediately preceding year; provided, however, that the minimum compensation obligation for each year of the First Renewal Term shall in no event be less than [Omitted; Material Filed Separately With The Securities And Exchange Commission]; for each year of the Second Renewal Term no less than [Omitted; Material Filed Separately With The Securities And Exchange Commission]; for each year of the Third 8 Renewal Term no less than [Omitted; Material Filed Separately With The Securities And Exchange Commission]; for each year of the Fourth Renewal Term no less than [Omitted; Material Filed Separately With The Securities And Exchange Commission]; for each year of the Fifth Renewal Term no less than [Omitted; Material Filed Separately With The Securities And Exchange Commission]; and for each year of the Sixth Renewal Term no less than [Omitted; Material Filed Separately With The Securities And Exchange Commission](each such term as defined in Schedule C to the License Agreement). Minimum compensation for each year shall be paid on a quarterly basis within thirty (30) days after the end of each quarter during the term hereof, commencing with the-first quarter of the First Renewal Term. No credit shall be permitted against minimum compensation payable for any year on account of actual or mini compensation paid for any other year, and minimum compensation shall not be returnable. For the purposes of this Agreement, the term "Year" shall mean a period of twelve (12) months commencing on each January 1 during the term of this Agreement; provided, however, that the term "first year" shall mean the 17-month period commencing on August 1, 1995 and ending on December 31, 1996. 4.2 The company shall pay to the Design Partnership earned compensation based on the Net Sales Price of Licensed Products manufactured or imported and sold by the Company hereunder. Earned compensation shall equal [Omitted; Material Filed Separately With The Securities And Exchange Commission] percent of the Net Sales Price of all Licensed Products sold under this Agreement, including, without limitation, sales made pursuant to paragraphs 3.4 and 6.3 hereof. The company shall prepare or cause to be prepared statements containing the information set forth in paragraph 4.5 hereof for the period commencing on the date hereof and ending on March 31, 1996 and for each three (3) month period ended the last day of March, June, September and December in each year hereof, which shall be furnished to the Design Partnership together with earned compensation due for each such period within thirty (30) days after the end of each such period. Any excess of earned compensation determined under this paragraph 4.2 over the minimum compensation provided in paragraph 4.1 hereof, shall be remitted to the Design Partnership within thirty (30) days after the end of each such three (3) month period. The term "Net Sales Price" shall mean the gross sales price of all Licensed Products sold under this Agreement to retailers or, with respect to Licensed Products that are not sold directly or indirectly to retailers, other ultimate consumers (as in the case of accommodation sales by Company to its employees or sales by company in its own stores), less trade discounts, merchandise returns, sales tax (if separately identified and charged) and markdowns and/or chargebacks which, in accordance with generally accepted accounting principles, would normally be treated as deductions from gross sales, and which, in any event, do not include any chargebacks or the like for advertising, fixture or retail shop costs or contributions. Notwithstanding the foregoing, the 9 Design Partnership hereby waives its right to receive compensation hereunder with respect to units of Licensed Products sold at a discount of 40% or more off the regular wholesale price ("Discounted Units"), provided that such waiver shall only apply to the extent that the aggregate Net Sales Price of Discounted Units for any year does not exceed 10% of the Net Sales Price of all units of Licensed Products other than Discounted Units sold in such year. No other deductions shall be taken. Any merchandise returns shall be credited in the three (3) month period in which the returns are actually made. For purposes of this Agreement, affiliates of the Company shall mean all persons and business entities, whether corporations, partnerships, joint ventures or otherwise, which now or hereafter control, or are owned or controlled, directly or indirectly by the Company, or, are under common control with the Company. It is the intention of the parties that compensation payments will be based on bona fide wholesale prices at which the Company sells Licensed Products to independent retailers in arms' length transactions. In the event the Company shall sell Licensed Products to its affiliates, compensation payments shall be calculated on the basis of such a bona fide wholesale price irrespective of the Company's internal accounting treatment of such sale, unless such products are sold by its affiliates directly to the end-user consumer, in which case royalties shall be calculated on the basis of the price paid by the end-user consumer, less applicable taxes. The Company shall identify separately in the statements provided to the Design Partnership pursuant to paragraph 4.5 hereof, all sales to its affiliates. At least once annually and no later than 90 days after the close of Company's fiscal year, Company shall furnish to the Design Partnership a statement of the Net Sales Price of all Licensed Products sold during the year just ended, which shall be certified by the independent auditor for Company as correct and in accordance with the terms of this Agreement. 4.3 The Company shall reimburse the Design Partnership for any travel and promotion expenses incurred by the Design Partnership or Polo in the performance of the Design Partnership's duties under this Agreement with the prior written approval of Licensee. Such amounts shall include first class travel and hotel accommodations. Amounts payable to the Design Partnership pursuant to this paragraph shall become due and payable monthly within thirty (30) days after the date of mailing of the invoices, accompanied by corresponding receipts, for such costs incurred during the preceding month. 4.4 If the payment of any installment of compensation is delayed for any reason, interest shall accrue on the unpaid principal amount of such installment from and after the date 10 which is 10 days after the date on which the same became due pursuant to paragraphs 4.1 or 4.2 hereof at the lower of the highest rate permitted by law in New York and two percent (2%) per annum above the prime rate of interest in effect from time to time at Chemical Bank, New York, New York or its successor. 4.5 The Company shall at all times keep an accurate account of all operations within the scope of this Agreement. The Company shall render a full statement in writing to the Design Partnership in accordance with paragraph 4.1 hereof, which shall account separately for each different product category and shall include all aggregate gross sales, trade discounts, merchandise returns, sales tax, markdowns, chargebacks, unit sales, sales of Discounted Units, sales of miscuts and damaged merchandise and net sales price of all sales for the preceding three (3) month period. Such statements shall be in sufficient detail to be audited from the books of the Company. Once annually, which may be in connection with the regular annual audit of the Company's books, the Company shall furnish an annual statement of the aggregate gross sales, trade and prompt payment discounts, merchandise returns and Net Sales Price of all Licensed Products made or sold by the Company, certified by Company's independent accountant. Each quarterly statement furnished by Company shall be certified by the chief financial officer of the Company or a certified public accountant who may be in the employ of the Company. The Design Partnership and its duly authorized representatives, on reasonable notice, shall have the right, no more than once in each year during regular business hours, for the duration of the term of this Agreement and for three (3) years thereafter, to examine the books of account and records and all other documents, materials and inventory in the possession or under the control of Licensee and its successors with respect to the statements required, and Licensee's obligations, hereunder. All such books of account, records and documents shall be maintained and kept available by the Company for at least the duration of this Agreement and for three (3) years thereafter. The Design Partnership shall have free and full access thereto in the manner set forth above and shall have the right to make copies and/or extracts therefrom. If as a result of any examination of the Company's books and records it is shown that the Company's payments to the Design Partnership hereunder with respect to any twelve (12) month period were less than or greater than the amount which should have been paid to the Design Partnership by an amount equal to two percent (2%) of the amount which should have been paid during such twelve (12) month period, the Company will, in addition to reimbursement of any underpayment, with interest from the date on which each payment was due at the rate set forth in paragraph 4.4 hereof, promptly reimburse the Design Partnership for the cost of such 11 examination. The Design Partnership shall reimburse the Company for any overpayment of compensation it discovers during such examination, after deducting from the amount of such overpayment all costs and expenses incurred in connection with such examination. 4.6 The obligation of the Company to pay compensation hereunder shall be absolute notwithstanding any claim which the Company may assert against Polo or the Design Partnership. The Company shall not have the right to set-off, compensate itself or any third party, or make any deduction from such compensation payments for any reason whatsoever. 5. Death or Incapacity of Lauren. The Design Partnership shall perform its obligations hereunder notwithstanding any death or incapacity of Lauren and the Company shall accept the services of the Design Partnership. 6. Term and Termination. 6.1 Unless sooner terminated in accordance with the terms and provisions hereof, this Agreement shall continue in effect f or so long as the License Agreement is in effect and shall terminate upon the expiration or termination of the License Agreement. 6.2 Each of the following shall constitute an event of default ("Event of Default") hereunder: (i) any compensation is not paid when due and such default continues for more than fifteen (15) days after written notice to the Company thereof; (ii) the Company defaults in performing any of the other terms of this Agreement and continues in such default for a period of thirty (30) days after written notice thereof to the Company (unless the default cannot be cured within such thirty (30) day period and the Company shall have in good faith advised the Design Partnership that it has commenced to cure the default and thereafter diligently cures such default within an additional forty-five (45) day period); (iii) an Event of Default (as defined in the License Agreement) shall occur under the License Agreement or any other design agreement entered into between the Company and the Design Partnership or license agreement between the Company and Polo; or (iv) the License Agreement shall be terminated as a result of an Event of Default thereunder. If any Event of Default other than that described in paragraph 6.2(iv) shall occur, the Design Partnership shall have the right, exercisable in its sole discretion, to terminate this Agreement upon ten (10) days' written notice to the Company of its intention to do so. Upon the expiration of such ten (10) day 12 period, this Agreement shall terminate and come to an end and, subject to paragraph 6.3 hereof, all rights of the Company in and to the designs furnished or used hereunder and all copyrights and designs patents therein and their contemplated use shall terminate. If the Event of Default described in paragraph 6.2(iv) shall occur, this Agreement and the License shall thereupon forthwith terminate and come to an end without any need for notice to the Company. Termination of this Agreement shall be without prejudice to any remedy of the Design Partnership for the recovery of any monies then due to it under this Agreement or in respect of any antecedent breach of this Agreement, and without prejudice to any other right of the Design Partnership, including without limitation, damages for breach to the extent that the same may be recoverable. 6.3 In the event Polo chooses not to exercise the option referred to in paragraph 10 of the License Agreement with respect to all or any portion of the Licensed Products (as therein defined), the Company may dispose of Licensed Products, to the extent permitted by and in the manner set forth in paragraph 10.2 of the License Agreement. Such sales shall be subject to the payment of earned compensation pursuant to paragraph 4.2 hereof. Upon the conclusion of the disposal period all rights and interests in and to the designs furnished or used hereunder and design patents therein and all copyrights licensed hereby shall belong to and be the property of the Design Partnership and the Company shall have no further or continuing right or interest therein. 6.4 The company acknowledges and admits that there would be no adequate remedy at law for its failure to cease the manufacture or sale of Licensed Products at the termination of this Agreement, by expiration or otherwise, and the Company agrees that in the event of such failure, the Design Partnership shall be entitled to relief by way of temporary or permanent injunction and such other and further relief as any court with jurisdiction may deem proper. 6.5 It is expressly understood that under no circumstances shall the Company be entitled, directly or indirectly, to any form of compensation or indemnity from the Design Partnership, Lauren, Polo or their affiliates as a consequence to the termination of this Agreement, whether as a result of the passage of time, or as the result of any other cause of termination referred to in this Agreement; provided, however, that nothing herein contained shall modify the Company's rights with respect to Polo under the License Agreement. Without limiting the generality of the foregoing, by its execution of the present Agreement, the Company hereby waives any claim which it has or 13 which it may have in the future against the Design Partnership, Lauren, Polo, Polo Ralph Lauren Corporation or their affiliates, arising from any alleged goodwill created by the Company for the benefit of any or all of the said parties or from the alleged creation or increase of a market for Licensed Products. 7. Indemnity. 7.1 The Company shall indemnify and save and hold the Design Partnership, Lauren, Polo and Polo Ralph Lauren Corporation, and their assignees, directors, officers, agents and employees, harmless from and against any and all liability, claims, causes of action, suits, damages and expenses (including reasonable attorney's fees and expenses in actions involving third parties or between the parties hereto) , which they, or any of them, are or become liable for, or may incur, or be compelled to pay by reason of any acts, whether of omission or commission, that may be committed or suffered by the company or any of its directors, officers, servants, agents or employees in connection with the Company's performance of this Agreement, in connection with Licensed Products manufactured by or on behalf of the Company or otherwise in connection with the Company's business; provided, however, that the Company shall not be responsible for any liability, claims, causes of action, suits, damages or expenses incurred or suffered by the Design Partnership, Lauren, Polo or Polo Ralph Lauren corporation, or their assignees, directors, officers, agents and employees in connection with any suit or proceeding for infringement of another's design patent, trademark, copyright or other proprietary rights brought against them as a result of the Company's use of the Trademark, or the Design Concepts furnished by the Design Partnership hereunder, in strict accordance with the terms and conditions of this Agreement and the License Agreement. 8. Disclosure. The Design Partnership and the Company, and their affiliates, employees, attorneys, bankers and accountants, shall hold in confidence and not use or disclose, except as permitted by this Agreement, (i) confidential information of the other or (ii) the terms of this Agreement, except upon consent of the other or pursuant to, or as may be required by law, or in connection with regulatory or administrative proceedings and only then with reasonable advance notice of such disclosure to the other. Each of Licensee and Licensor shall take all reasonable precautions to protect the secrecy of the materials, samples, sketches, designs, artwork, logos and other materials used pursuant to this Agreement prior to the commercial distribution or the showing or samples for sale, and Licensee shall not sell 14 any merchandise employing or adapted from any of said designs, sketches, artwork, logos, and other materials or their use except under the Trademark. 9. Miscellaneous. 9.1 All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been properly given or sent (i) on the date when such notice, request, consent or communication is personally delivered, or (ii) five (5) days after the same was sent, if sent by certified or registered mail, return receipt requested, or (iii) two (2) days after the same was sent, if sent by overnight courier delivery or confirmed telecopier, as follows: (a) if to the Company, addressed as follows: Sun Apparel, Inc. 11201 Armour Drive El Paso, Texas 79935 Attention: Mr. Miles Rubin Telecopier: 915.592.1343 with a copy to: Sun Apparel, Inc. 111 West 40th Street New York, New York 10018 Attention: Mr. Eric Rothfeld Telecopier: 212.391.2780 (b) if to the Design Partnership addressed as follows: Polo Ralph Lauren Enterprises, L.P. 650 Madison Avenue New York, New York 10022 Attention: President Telecopier: 212-318.7186 with a copy to: Victor Cohen, Esq. Eighth Floor 650 Madison Avenue New York, New York 10022 Telecopier: 212.318.7183 Anyone entitled to notice hereunder may change the address to 15 which notices or other communications are to be sent to it by notice given in the manner contemplated hereby. 9.2 Nothing herein contained shall be construed to place the parties in the relationship of partners or joint venturers, and neither the Design Partnership nor the Company shall have any power to obligate or bind the other in any manner whatsoever, except as otherwise provided for herein. 9.3 None of the terms hereof can be waived or modified except by an express agreement in writing signed by the party to be charged or, in the case of the Company, its chairman or president. The failure of any party hereto to enforce, or the delay by any party in enforcing, any of its rights hereunder shall not be deemed a continuing waiver or a modification thereof and any party may, within the time provided by applicable law, commence appropriate legal proceedings to enforce any and all of such rights. All rights and remedies provided for herein shall be cumulative and in addition to any other rights or remedies such parries may have at Law or in equity. Any party hereto may employ any of the remedies available to it with respect to any of its rights hereunder without prejudice to the use by it in the future of any other remedy with respect to any of such rights. No person, firm or corporation, other than the parties hereto and Polo, shall be deemed to have acquired any rights by reason of anything contained in this Agreement. 9.4 The Design Partnership may assign its right to receive all or any portion of its compensation under this Agreement and, in addition, this Agreement and all of the Design Partnership's rights, duties and obligations hereunder may be assigned by the Design Partnership to any entity to which the right to own or use the Trademark has been assigned, or to an affiliate of any such entity. The Company may only assign its rights and obligations hereunder under the same circumstances and on the same terms and conditions as set forth with respect to assignments of Licensee's rights and obligations under the License Agreement, and only to an entity to which Licensee is rightfully and simultaneously assigning its rights and obligations under the License Agreement. 9.5 The Company will comply with all laws, rules, regulations and requirements of any governmental body which may be applicable to the operations of the Company contemplated hereby, including, without limitation, as they relate to the manufacture, distribution, sale or promotion of Licensed Products, notwithstanding the fact that the Design Partnership may have approved such item or conduct. The Company shall advise the Design Partnership to the extent any Final Prototype does not comply with any such law, rule, regulation or requirement. 16 9.6 This Agreement shall be binding upon and inure to the benefit it of the successors, heirs and permitted assigns of tile parties hereto. 9.7 This Agreement shall be construed in accordance with and governed by the laws of the State of New York, applicable to contracts made and to be wholly performed therein without regard to its conflicts of law rules. 9.8 If any dispute between the parties leads to litigation, the parties agree that the courts of the State of New York in the City of New York, or the federal courts in that City, shall have the exclusive jurisdiction and venue over such litigation. All parties consent to personal jurisdiction in the State of New York, and agree to accept service of process outside of the State of New York as if service had been made in that state. Notwithstanding anything to the contrary set forth herein, neither Polo Ralph Lauren corporation nor any other general or limited partner of the Design Partnership shall be liable for any claim based on, arising out of, or otherwise in respect of, this Agreement, and the Company shall not have nor claim to have any recourse for any such claim against any general or limited partner of the Design Partnership. 9.9 In the event of a breach or threatened breach of this Agreement by the Company, the Design Partnership shall have the right, without the necessity of proving any actual damages, to obtain temporary or permanent injunctive or mandatory relief in a court of competent jurisdiction, it being the intention of the parties that this Agreement be specifically enforced to the maximum extent permitted by law. 9.10 In the event either party hereto is delayed or hindered in or prevented from the performance of any act required hereunder by reason of war, revolution, insurrection, civil disorder, fire, flood, accident, explosion, strikes, embargo, prohibition or substantial limitation on import or export of (or unavailability from any source of) product or raw materials, governmental orders or regulations or any other similar cause which is beyond the control of such party hereto, the performance of such act shall be excused for the period during which the cause of failure of performance exists provided (i) such period shall in any event not extend beyond six (6) months and shall not affect the running of the term of this Agreement; (ii) that no such event shall excuse performance of a payment or other financial obligation hereunder; and (iii) the excused party shall promptly notify the other in writing advising of the cause for delay. 9.11 Provisions of this Agreement are severable, and if any 17 provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such provision, or part thereof, in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction, or any other provision in this Agreement in any jurisdiction. To the extent legally permissible, an arrangement which reflects the original intent of the parties shall be substituted for such invalid or unenforceable provision. 9.12 The paragraph headings contained in this Agreement are for reference purposes only and shall not affect: in any way the, meaning or interpretation of this Agreement. Each party acknowledges and represents to the other that this Agreement has been reviewed by its counsel and the provisions hereof shall be construed without regard to which party prepared this Agreement. 9.13 This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused the same to be executed by a duly authorized officer as of the day and year first above written. POLO RALPH LAUREN ENTERPRISES, L.P. By: Polo Ralph Lauren Corporation, General Partner By: /s/ Michael Newman SUN APPAREL INC. By: /s/ Eric Rothfeld 18 EXHIBIT 11 JONES APPAREL GROUP, INC. Computation of Basic and Diluted Earnings per Share (In thousands except per share amounts) For the Quarter Ended For the Nine Months Ended -------------------------- -------------------------- September 27, September 28, September 27, September 28, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Basic Earnings per Share: Net income................ $59,098 $48,938 $122,746 $97,758 ======== ======= ======== ======= Weighted average number of shares outstanding........ 100,886 104,372 100,821 104,124 ======== ======= ======= ======= Basic earnings per share.. $0.59 $0.47 $1.22 $0.94 ======== ======= ======= ======= Diluted Earnings per Share: - --------------------------- Net income................ $59,098 $48,938 $122,746 $97,758 ======== ======= ======== ======= Weighted average number of shares outstanding........ 100,886 104,372 100,821 104,124 Assumed issuances under exercise of stock options. 3,540 4,262 3,792 4,060 -------- ------- ------- ------- 104,426 108,634 104,613 108,184 ======== ======= ======= ======= Diluted earnings per share $0.57 $0.45 $1.17 $0.90 ======== ======= ======= ======= Adjusted for 2-for-1 stock split effective June 28, 1998. EXHIBIT 27 PERIOD-TYPE 9-MOS FISCAL-YEAR-END DEC-31-1998 PERIOD-END SEP-27-1998 CASH 14,956 SECURITIES 0 RECEIVABLES 259,315 ALLOWANCES 3,337 INVENTORY 226,971 CURRENT-ASSETS 551,922 PP&E 176,655 DEPRECIATION 47,009 TOTAL-ASSETS 736,069 CURRENT-LIABILITIES 181,096 BONDS 0 PREFERRED-MANDATORY 0 PREFERRED 0 COMMON 1,100 OTHER-SE 499,423 TOTAL-LIABILITY-AND-EQUITY 736,069 SALES 1,181,240 TOTAL-REVENUES 1,192,646 CGS 778,372 TOTAL-COSTS 778,372 OTHER-EXPENSES 211,942 LOSS-PROVISION 825 INTEREST-EXPENSE 3,762 INCOME-PRETAX 199,587 INCOME-TAX 76,841 INCOME-CONTINUING 122,746 DISCONTINUED 0 EXTRAORDINARY 0 CHANGES 0 NET-INCOME 122,746 EPS-PRIMARY 1.22 EPS-DILUTED 1.17
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