Product Design & Development Agreement DTD. 8/5/97

EXHIBIT 10.5


PRODUCT DESIGN AND DEVELOPMENT AGREEMENT


THIS PRODUCT DESIGN AND DEVELOPMENT AGREEMENT (this "Agreement") is entered into effective the 5th day of August, 1997 among the following parties: ST. JOHN KNITS, INC., a California corporation ("St. John"), AMEN WARDY, SR., an individual ("Amen Wardy") and AMEN WARDY, JR., an individual (For purposes of Sections 6.1, 6.2, 6.3, 6.4, 6.5, 7.1, 7.2, 7.3 and 7.4 hereof the term "Amen Wardy" shall refer to Amen Wardy, Sr. and Amen Wardy, Jr. Amen Wardy, Jr. is a party only to Sections 6.1, 6.2, 6.3, 6.4, 6.5, 7.1, 7.2, 7.3 and 7.4 hereof).


RECITALS


A. St. John designs, manufactures and distributes a high fashion line of women's clothing and accessories.


B. Amen Wardy is an individual who owns and operates a high-end home furnishing retail store in Aspen, Colorado.


C. St. John desires to develop, market and distribute its own line of home furnishing products and gifts as more fully defined in Schedule C attached hereto ("Home Furnishing Products and Gifts") under the name "St. John Home by Amen Wardy."


D. St. John and Amen Wardy each desire that Amen Wardy provide to St. John certain design and development services relating to the development of a line of Home Furnishing Products and Gifts and assign and consent to St. John the right to use the name "Amen Wardy" on the terms and conditions set forth in this Agreement.


NOW, THEREFORE, with reference to the foregoing Recitals, and in exchange for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto covenant and agree as follows:


1. DESIGN AND DEVELOPMENT PROGRAM


1.1 Amen Wardy's Responsibilities. During the term of this Agreement, Amen
----------------------------- Wardy agrees to perform the functions necessary to design and develop a line of Home Furnishing Products and Gifts (such Home Furnishing Products and Gifts designed and/or developed by Amen Wardy or sold by St. John under the Product Trademark (as defined in Section 6.1 hereof) pursuant to Section 8.5 hereof shall be referred to in this Agreement as the "Products"), including, without limitation, the activities set forth in the subparts of this Section 1.1 (the "Work"):


1.1.1 Prepare and recommend a schedule and plan for the development of Products;


1.1.2 Obtain and/or design and/or develop samples of Products and make presentations of such samples to St. John at its offices in Irvine, California;


1.1.3 Design and create packaging for the Products;


1.1.4 If applicable, purchase Products from third parties;


1.1.5 Make personal appearances on behalf of St. John and the Products as St. John may reasonably request from time to time; and


1.1.6 Perform any other services from time to time in connection with the Products as St. John reasonably requests.


1.2 St. John Approval. All matters relating to the development of the
----------------- Products, including, but not limited to, the designs, samples, budgets, plans and schedules prepared by Amen Wardy pursuant to this Agreement, are subject to St. John's express written prior approval. After any matter has been approved by St. John, Amen Wardy shall not depart therefrom in any material respect without the express prior approval of St. John.


1.3 Negotiation of Contracts. All contracts to be negotiated hereunder by
------------------------ Amen Wardy on behalf of St. John are subject to St. John's prior written approval and execution. Amen Wardy shall have no authority to enter into any agreements on behalf of St. John nor shall Amen Wardy approve on behalf of St. John plans and designs, change orders, budgets, revisions to budgets, or similar matters contemplated hereby, except with St. John's prior authorization. As soon as practicable from the date of this Agreement, Amen Wardy shall submit his initial purchasing request setting forth requested expenditures for his initial purchasing trip. Such expenditures shall be subject to the prior approval of St. John. Prior to any subsequent purchasing trips, Amen Wardy shall submit similar purchasing requests for St. John's approval.


1.4 Best Efforts. Amen Wardy shall devote his best efforts and business
------------ judgment to serving St. John as the designer and developer of the Products, and shall perform his duties hereunder in a diligent and careful manner so as to develop the Products in accordance with the plans, schedules and budgets approved by St. John. St. John shall devote its best efforts to market and distribute the Products.


1.5 Exclusivity. St. John agrees that Amen Wardy will be the exclusive
----------- designer and developer of the St. John line of Home Furnishing Products and Gifts during the term of this Agreement. Amen Wardy agrees that he shall design and develop Home Furnishing Products and Gifts exclusively for St. John during the term of this Agreement; provided, however that Amen Wardy may design and develop Home Furnishing Products and Gifts (i) for Amen Wardy Home Stores, LLC, a Delaware limited liability company ("Amen Wardy Home Stores"), and (ii) for sale solely in Aspen, Colorado and then only in the Amen Wardy home furnishing store as currently operated in all material respects in Aspen, Colorado (the "Aspen Store").


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1.6 Books and Records. Amen Wardy agrees to keep accurate books of account
----------------- and records, covering all transactions relating to this Agreement, and St. John and its duly authorized representatives shall have the right, upon five (5) days prior written notice and during regular business hours, to examine the books of account and records and all other documents and material in the possession or under the control of Amen Wardy that relate to the design and development of the Products.


2. DESIGN FEE PROVISIONS.


2.1 Design Fee Payable to Amen Wardy. In consideration of Amen Wardy's
-------------------------------- design and development efforts in connection with this Agreement, St. John shall pay to Amen Wardy a design fee of two percent (2%) of the Net Sales of the Products sold by St. John. The design fee shall commence on the first commercial sale of the Products. Except as set forth in Section 8.5 hereof, the obligation to pay the design fee shall terminate for all purposes upon the termination of this Agreement, except that St. John shall pay any unpaid design fee on Products sold by St. John prior to the termination of this Agreement. Net Sales means the price charged to its customers for the Products, less customary trade discounts, return rebates and federal excise taxes.


2.2 Payments and Records. St. John shall keep complete and accurate
-------------------- records in accordance with generally accepted accounting principles on sales of the Products by St. John. On or before the sixtieth (60th) day after the end of each fiscal quarter of St. John in which a commercial sale of the Products by St. John occurs, St. John shall furnish Amen Wardy with a written report setting forth the Net Sales of the Products during such fiscal quarter, together with a calculation of the design fee due on reported sales. Such report shall be accompanied by any design fee payment shown thereon to be due. St. John shall provide Amen Wardy such records as Amen Wardy shall reasonably request to enable him to review the calculation of Net Sales.


2.3 Right to Audit. If Amen Wardy fails to notify St. John in writing,
-------------- within thirty (30) business days following the delivery of the written report setting forth the calculation of the design fee due, of any objections to such calculation, Amen Wardy's failure to so object shall constitute approval of such calculations. If Amen Wardy timely objects, Amen Wardy and St. John shall use their best efforts to resolve any differences with respect to such calculations. In the event St. John and Amen Wardy are unable to reach an agreement, Amen Wardy shall have the right to cause an independent accounting firm mutually acceptable to both parties (the "Reviewer") to perform a review (the "Review") of the calculations and resolve such dispute. Amen Wardy may cause only one Review in each of St. John's fiscal years during the term of this Agreement; provided, however that any one such Review may address the calculations of the design fee (i) which have been set forth in the written reports delivered by St. John to Amen Wardy during the twelve months preceding the date of such Review and (ii) which have not been subject to a prior Review. Such firm shall act as arbitrator, and its conclusions shall be conclusive hereunder, absent fraud or manifest error. Any upward adjustment to the design fee due pursuant to this Section 2.3 shall be paid promptly by St. John to Amen Wardy and any downward adjustment to such


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design fee shall be paid promptly by Amen Wardy to St. John. Amen Wardy shall pay all of the fees and expenses in connection with the Review, unless the design fee due to Amen Wardy is adjusted upward by at least 5% as a result of the Review, in which case St. John shall pay all such fees and expenses.


2.4 Reimbursement of Reasonable Expenses. St. John shall reimburse Amen
------------------------------------ Wardy for all reasonable out-of-pocket costs, charges, fees and expenses paid by Amen Wardy in the performance of his duties hereunder.


3. Indemnification


Amen Wardy will defend, indemnify and hold St. John harmless from and against all losses, damages, liabilities, expenses and costs, including reasonable attorney's fees, rising out of: (i) willful or intentional misconduct, knowingly fraudulent or deliberately dishonest acts or omissions, or the negligent acts or omissions of Amen Wardy, Amen Wardy's employees, agents or independent contractors and (ii) any action or claim alleging infringement of any third party rights including without limitation rights under copyright, trademark, patent, trade secret or any other proprietary right. This indemnification shall survive the expiration or termination of the Agreement. Notwithstanding the foregoing, no payments pursuant to this Section 3 shall be made by Amen Wardy to indemnify St. John for any losses, damages, liabilities, expenses and costs, including reasonable attorney's fees, rising out of the negligent acts or omissions of Amen Wardy, Amen Wardy's employees, agents or independent contractors to the extent payment is actually made to and received by St. John for such losses, damages, liabilities, expenses and costs under a valid and collectible insurance policy and St. John hereby waives and relinquishes any and all rights which it may have against Amen Wardy pursuant to this Section 3 on account of such losses, damages, liabilities, expenses and costs suffered by it rising out of the negligent acts or omissions of Amen Wardy, Amen Wardy's employees, agents or independent contractors to the extent such losses, damages, liabilities, expenses and costs are covered by a valid and collectible insurance policy and as to which St. John is fully reimbursed by an insurer. St. John hereby agrees to maintain reasonable and customary liability insurance coverage, as St. John shall determine in its sole discretion, during the term of this Agreement.


4. Confidentiality.


4.1 Confidential Information. Amen Wardy acknowledges that Amen Wardy
------------------------ shall have access to, and that there shall be disclosed to Amen Wardy, information of a confidential nature that has value to St. John ("Confidential Information"), including, without limitation, information, ideas, concepts, know-how, methods, techniques, material and data relating to the business, financial condition, work-in-progress, designs and artistic creations of St. John, whether or not such information is patentable or copyrightable. St. John acknowledges that, except for Amen Wardy's engagement by St. John, Amen Wardy would not otherwise have access to such information. During the term of this Agreement or any time thereafter, Amen Wardy shall keep all Confidential Information in confidence and shall not directly disclose any Confidential Information to any person, except (i) to Amen Wardy's


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employees who agree in writing to be bound by this Agreement (the "Permitted Employees"), (ii) to St. John's personnel on a "need-to-know" basis and to other persons as designated in writing by St. John, (iii) if and to the extent such Confidential Information hereafter becomes lawfully and without breach of this Agreement within the public domain, or (iv) to the extent such duty as to confidentiality is waived in writing by St. John. Without the express consent of St. John, Amen Wardy and his Permitted Employees shall not use or permit to be used any Confidential Information for the gain or benefit of any party other than St. John or for personal gain or benefit outside the scope of Amen Wardy's engagement by St. John.


4.2 Remedies. Amen Wardy acknowledges that such Confidential Information
-------- constitutes trade secrets, disclosure of which would cause irreparable harm to St. John; therefore, St. John is entitled to injunctive relief in a court of law to prevent the disclosure of any Confidential Information or trade secrets, or to seek damages resulting therefrom, and shall not be required to resolve any such dispute through arbitration.


5. Right to Products, Designs, Ideas and Inventions.


5.1 Products. The Products, together with the combinations of designs,
-------- colors and ornamentations that make up the Products, shall be the sole property of St. John and any use thereof shall be controlled by St. John in its sole discretion.


5.2 Ideas and Inventions. Amen Wardy agrees to promptly disclose and
-------------------- assign to St. John all of Amen Wardy's ideas, concepts, know-how, techniques, processes, methods, inventions, discoveries, developments, innovations and improvements ("Inventions") conceived or made by Amen Wardy, whether alone or with others, during the term of this Agreement, and which either: (a) involve or are reasonably related to St. John's actual or demonstrably anticipated research or development; or (b) incorporate or are based on, in whole or in part, any of the Confidential Information. Amen Wardy agrees to provide all assistance reasonably requested by St. John in the preservation of its interests in the Inventions, such as by executing documents, testifying, and all similar activity, such assistance to be provided at St. John's expense but without any additional compensation to Amen Wardy. Amen Wardy shall, at the expense of St. John, assist St. John or its nominees to obtain patents for such Inventions in any countries throughout the world. Such Inventions shall be the property of St. John or its nominees, whether patented or not. Amen Wardy hereby irrevocably appoints St. John, and its duly authorized officers and agents, as Amen Wardy's agent and attorney-in-fact to act for and in behalf of Amen Wardy in filing all patent applications, applications for copyright protection and registration amendments, renewals, and all other appropriate documents in any way related to the Inventions. For the purposes of this Agreement, an Invention is deemed to have been made during the term of Amen Wardy's engagement to perform the Work if the Invention was conceived or first actually reduced to practice during the term of such engagement, and Amen Wardy agrees that any disclosures of an Invention or any patent application made within one (1) year after termination of Amen Wardy's engagement shall be presumed to relate to an Invention which


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was made during the term of Amen Wardy's engagement unless Amen Wardy provides satisfactory and compelling evidence to the contrary.


5.3 Copyrights. Amen Wardy agrees that any Work prepared by Amen Wardy for
---------- St. John which is eligible for copyright protection in the United States or elsewhere shall be a work made for hire. If any such Work is deemed for any reason not to be a work made for hire, Amen Wardy assigns all right, title and interest in the copyright in such Work, and all extensions and renewals thereof, to the St. John, and agrees to provide all assistance reasonably requested by St. John in the establishment, preservation and enforcement of its copyright in such Work, such assistance to be provided at St. John's expense but without any additional compensation to Amen Wardy. Amen Wardy agrees to waive all moral rights relating to the Work developed or produced, including, without limitation, any and all rights of identification of authorship and any and all rights of approval, restriction or limitation on use or subsequent modifications.


5.4 Conflicting Obligations And Rights. Prior to commencing any Work for
---------------------------------- St. John, Amen Wardy shall inform St. John in writing of any apparent or potential conflict between Amen Wardy's Work for St. John and (a) any obligations Amen Wardy may have to preserve the confidentiality of the proprietary information or materials of any other party, or (b) any rights Amen Wardy claims to any patents, copyrights, trade secrets, or other discoveries, inventions, ideas, know-how, techniques, methods, processes or other proprietary information or materials relating to Home Furnishing Products and Gifts. Otherwise, St. John may conclude that no such conflict exists and Amen Wardy agrees thereafter to make no such claim against St. John. St. John shall receive such disclosures in confidence.


5.5 Assistance of Amen Wardy. Amen Wardy agrees to provide all assistance
------------------------ reasonably requested by St. John in the preservation of St. John's interests in the Inventions, such assistance to be provided without any additional compensation to Amen Wardy; provided, however that Amen Wardy shall not incur any material cost in providing such assistance.


6. PRODUCT TRADEMARK.


6.1 Name of Products. St. John shall market and distribute the Products
---------------- under the trademark "St. John Home by Amen Wardy," or such other trademarks that include the words "Amen", "Wardy", both, or any combination of such names, with or without initials, that also include the words "St. John" as St. John shall determine in its sole discretion (the "Product Trademark").


6.2 No Ownership Rights. Amen Wardy acknowledges and agrees that Amen
------------------- Wardy shall acquire no ownership rights to the Product Trademark by virtue of this Agreement or otherwise and that all uses by Amen Wardy of the Product Trademark and any and all goodwill related thereto shall inure to the benefit of St. John. Amen Wardy shall not, at any time, do or suffer to be done any act or thing which may in any way adversely affect the


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validity of the Product Trademark, any rights of St. John in and to the Product Trademark or any registrations thereof or which, directly or indirectly, may reduce the value of the Product Trademark or detract from its reputation.


6.3 Consent to Use Name. Subject to (i) the rights of Amen Wardy Home
------------------- Stores pursuant to that certain Limited Liability Company Agreement, dated the date hereof, by and among Amen Wardy, Amen Wardy Home Stores, St. John and certain others and (ii) the provisions of Section 8.5 hereof, Amen Wardy hereby (x) immediately and irrevocably sells, assigns, conveys and grants to St. John all the right and title to the use of the name "Amen Wardy", "Amen", "A. Wardy", "Wardy", "A. Wardy, Jr.", "A. Wardy, Sr." or any combination of such name and/or initials (the "Amen Wardy Name") as part of the Product Trademark and (y) consents to the registration of the Amen Wardy Name as part of the Product Trademark in accordance with the Assignments and/or Consents attached hereto as Exhibits A-1, A-2, B-1 and B-2. Amen Wardy agrees that Amen Wardy shall not use the Amen Wardy Name for any purpose related to Home Furni ...