<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report(Date of earliest event reported) SEPTEMBER 30, 1997
------------------
NORTON MCNAUGHTON, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-23440 13-3747173
--------------------------------- --------------------------------------- ------------------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
463 SEVENTH AVENUE
NEW YORK, N.Y. 10018
- -------------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (212) 947-2960
<PAGE> 2
The undersigned registrant hereby amends Item 7, sections (a) and
(b), of its Current Report on Form 8-K reporting the acquisition of
substantially all of the assets of Miss Erika, Inc. ("Miss Erika") on September
30, 1997, to include financial statements and pro forma financial data
information as set forth herein.
Item 2. Acquisition or Disposition of Assets
On September 30, 1997, Norton McNaughton, Inc. (the
"Company") completed the acquisition of substantially all
the assets and the assumption of substantially all the
liabilities of Miss Erika, a privately-held manufacturer
of women's moderate apparel. The Company will, through a
wholly owned subsidiary, continue Miss Erika's business.
The terms of the negotiated transaction provided for the
payment of approximately $24 million in cash, with
additional consideration payable at the Company's option
in cash or Company common stock based on the profitability
of Miss Erika in fiscal years 1998 and 1999.
In connection with the acquisition, the Company entered
into a $140 million secured term loan and revolving credit
facility with NationsBanc Commercial Corporation and The
CIT Group/Commercial Services, Inc. The proceeds were used
to finance the acquisition and will be for ongoing working
capital requirements of the combined entity. Pursuant to
the new financing arrangement, the Company will continue
to factor its accounts receivable, as well as the accounts
receivable of Miss Erika.
<TABLE>
<CAPTION>
Item 7. Financial Statements and Exhibits. Page
----
<S> <C>
(a) Financial statements of business acquired.
Independent Auditor's Report 4
Miss Erika, Inc. Balance Sheets as of January 31,
1997 and 1996 5
Miss Erika, Inc. Statements of Operations and Retained
Earnings (Deficit) for the fiscal years ended January
31, 1997, 1996 and 1995 6
Miss Erika, Inc. Statements of Cash Flows for the fiscal
years ended January 31, 1997, 1996 and 1995 7
Miss Erika, Inc. Notes to Financial Statements 8-19
Miss Erika, Inc. Unaudited Condensed Balance Sheet as
of July 31, 1997 20
Miss Erika, Inc. Unaudited Condensed Statements
of Income and Retained Earnings for the six
months ended July 31, 1997 and 1996 21
Miss Erika, Inc. Unaudited Condensed Statements
of Cash Flows for the six months ended July 31,
1997 and 1996 22
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
Miss Erika, Inc. Notes to Unaudited Condensed Financial
Statements 23
(b) Pro forma financial information (introduction) 24
Unaudited Pro Forma Condensed Combined Balance Sheet
as of August 2, 1997 for Norton McNaughton, Inc. and
as of July 31, 1997 for Miss Erika, Inc. 25
Unaudited Pro Forma Condensed Combined Statement
of Operations for Norton McNaughton, Inc. for
the year ended November 2, 1996 and for Miss
Erika, Inc. for the year ended January 31, 1997 26
Unaudited Pro Forma Condensed Combined Statement
of Operations for Norton McNaughton, Inc. for
the nine months ended August 2, 1997 and for
Miss Erika, Inc. for the nine months ended July
31, 1997 27
Condensed Combined Pro Forma Adjustments 28-29
(c) Exhibits
</TABLE>
10.1 Amendment dated November 25, 1997 to
Separation Agreement dated May 3, 1997
between Norton McNaughton of Squire,
Inc. and Norton Sperling.
10.2 Amendment dated October 22, 1997 to
the Employment Agreement dated
November 4, 1993 between Norton
McNaughton of Squire, Inc. and Amanda
J. Bokman.
10.3 Amendment dated October 22,
1997 to the Amended and Restated
Employment Agreement dated November 4,
1993 between Norton McNaughton of
Squire, Inc and Howard Greenberg.
23.1 Consent of Price Waterhouse LLP
27 Financial Data Schedule (For SEC use
only)
3
<PAGE> 4
Report of Independent Accountants
April 16, 1997
To the Board of Directors
and Stockholders of
Miss Erika, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and retained earnings (deficit) and of cash flows present fairly, in
all material respects, the financial position of Miss Erika, Inc. at January 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended January 31, 1997, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 8 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective February 1, 1995.
/s/ Price Waterhouse LLP
4
<PAGE> 5
MISS ERIKA, INC.
<TABLE>
<CAPTION>
BALANCE SHEET
- -----------------------------------------------------------------------------------------------------------------------------------
January 31, January 31,
ASSETS 1997 1996
<S> <C> <C>
Current assets
Cash $ 123,313 $ 246,045
Accounts receivable, less allowance for doubtful
accounts of $500,000 in 1997 and 1996 9,601,764 8,519,932
Inventories 29,975,456 28,773,400
Prepaid expenses and other current assets 229,333 159,934
Prepaid income taxes - 366,279
Deferred tax assets 198,401 198,725
-------------- -------------
TOTAL CURRENT ASSETS 40,128,267 38,264,315
Fixed assets, net 842,482 770,576
Deferred charges, net of accumulated amortization of
$2,526,215 in 1997 and $2,075,048 in 1996 - 451,167
Deferred tax assets - noncurrent 311,280 267,309
Other assets 47,663 43,024
-------------- -------------
TOTAL ASSETS $41,329,692 $39,796,391
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accrued drafts payable $ 6,857,279 $ 4,807,189
Notes payable - banks - current portion - 3,500,000
Other payables and accrued expenses 4,639,272 4,007,058
Income taxes payable 468,040 -
-------------- --------------
TOTAL CURRENT LIABILITIES 11,964,591 12,314,247
Notes payable - banks 5,700,000 -
Subordinated notes payable to related entities 2,800,000 2,800,000
Other subordinated liabilities payable to certain
stockholders 420,000 420,000
Other liabilities 162,500 165,050
-------------- -------------
TOTAL LIABILITIES 21,047,091 15,699,297
-------------- -------------
Stockholders' equity
Preferred stock 14,484,508 21,000,000
Other preferred interests 2,171,739 3,150,000
Common stock 10,000 10,000
Additional paid-in capital 990,000 990,000
Retained earnings (deficit) 2,632,601 (1,052,906)
Treasury stock (6,247) -
-------------- ------------
TOTAL STOCKHOLDERS' EQUITY 20,282,601 24,097,094
-------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,329,692 $ 39,796,391
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
MISS ERIKA, INC.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended
-------------------------------------------------------------------
January 31, January 31, January 31,
1997 1996 1995
<S> <C> <C> <C>
Net sales $94,743,902 $86,069,213 $91,582,603
Cost of sales 81,321,474 77,841,440 78,976,790
----------- ----------- -----------
GROSS PROFIT 13,422,428 8,227,773 12,605,813
Selling, general and
administrative expenses 6,060,458 6,349,654 6,306,132
Amortization of intangible assets 451,167 492,183 1,734,360
Depreciation of fixed assets 287,957 231,960 228,835
----------- ----------- -----------
OPERATING EXPENSES 6,799,582 7,073,797 8,269,327
----------- ----------- -----------
INCOME FROM OPERATIONS 6,622,846 1,153,976 4,336,486
Interest expense, net of interest income
of $35,119 in 1997, $13,466 in 1996
and $10,829 in 1995 1,026,167 1,595,926 1,879,546
----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 5,596,679 (441,950) 2,456,940
Provision (benefit) for income taxes 1,911,172 (154,341) 969,350
----------- ----------- -----------
Income (loss) before effect of a change
in accounting principle 3,685,507 (287,609) 1,487,590
Effect of a change in accounting
principle, net of tax benefit
of $62,694 - (95,047) -
----------- ----------- -----------
NET INCOME (LOSS) 3,685,507 (382,656) 1,487,590
Accumulated deficit, beginning of period (1,052,906) (670,250) (2,157,840)
----------- ----------- -----------
Retained earnings (deficit), end of period $ 2,632,601 $(1,052,906) $ (670,250)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
MISS ERIKA, INC.
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 3,685,507 $ (382,656) $ 1,487,590
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization 739,124 724,143 1,963,195
Effect of a change in accounting principle - 95,047 -
Changes in:
Accounts receivable (1,081,832) 1,641,832 (3,037,266)
Inventory (1,202,056) 6,057,231 (2,266,081)
Prepaid expenses and other current assets (69,399) (134,160) 182,103
Prepaid income taxes 366,279 (366,279) -
Deferred tax assets (43,647) (52,168) (70,241)
Other assets (4,639) (1,876) (78)
Accrued drafts payable 2,050,090 (1,030,680) 550,795
Other payables and accrued expenses 632,214 (1,119,306) 963,111
Income taxes payable 468,040 (474,813) 331,472
Other liabilities (2,550) 70,003 -
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,537,131 5,026,318 104,600
----------- ----------- -----------
Cash flows from investing activities
Capital expenditures (359,863) (155,308) (504,705)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (359,863) (155,308) (504,705)
----------- ----------- -----------
Cash flows from financing activities
Net borrowing (repayments) of notes
payable - banks 2,200,000 (4,800,000) 5,300,000
Redemptions of preferred stock (6,515,492) - -
Redemptions of other preferred interests (978,261) - -
Repurchase of treasury stock (6,247) - -
Repayment of subordinated notes payable - - (4,200,000)
Repayment of other subordinated liabilities - - (630,000)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (5,300,000) (4,800,000) 470,000
----------- ----------- -----------
Net (decrease) increase in cash (122,732) 71,010 69,895
Cash at beginning of period 246,045 175,035 105,140
=========== =========== ===========
Cash at end of period $ 123,313 $ 246,045 $ 175,035
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 1,064,500 $ 1,598,876 $ 1,966,342
Income taxes 1,120,500 673,848 752,238
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 8
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
Miss Erika, Inc. (the "Company") designs and imports women's apparel for
wholesale distribution to major department stores and other retailers in
the U.S. Miss Erika, Inc. is the successor to a former indirect subsidiary
of Sears Plc which was acquired by an investor group in 1991 (the
"Acquisition").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories, consisting primarily of finished goods, are stated at the
lower of cost or market. Cost is determined based on average cost. Average
cost includes all expenditures incurred to bring clothing to a saleable
condition and location, including certain warehousing and purchasing
costs. Approximately $4,186,000 and $3,853,000 of these costs are
capitalized in inventory at January 31, 1997 and 1996, respectively.
Charges to cost of sales resulting from the capitalization of these
warehousing and purchasing costs amounted to approximately $8,737,000,
$7,825,000 and $7,772,000 for the years ended January 31, 1997, 1996 and
1995, respectively.
FIXED ASSETS
The Company's equipment, furniture and fixtures are depreciated over their
estimated useful lives, generally five to seven years, using a
declining-balance method. Leasehold improvements are amortized over the
shorter of the life of the related lease or their estimated useful lives
using the straight-line method.
DEFERRED CHARGES
Deferred charges primarily represent financing costs incurred during 1991
in connection with obtaining the credit facility described in Note 4.
Financing costs were amortized on a straight-line basis over the original
five year term of the related revolving credit facility. These deferred
charges were fully amortized as of January 31, 1997.
OTHER PAYABLES AND ACCRUED EXPENSES
Under the Company's cash management system, checks issued but not
presented to banks frequently result in overdraft balances for accounting
purposes and are classified as other payables and accrued expenses in the
balance sheet. At January 31, 1997 and 1996, such overdrafts amounted to
$747,875 and $1,118,044, respectively.
ADVERTISING COSTS
Advertising costs included in selling, general and administrative expenses
are expensed as incurred and were approximately $62,000, $111,000 and
$70,000 for the years ended January 31, 1997, 1996 and 1995, respectively.
8
<PAGE> 9
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NONCOMPETE AGREEMENT
In connection with the Acquisition, the Company entered into an agreement
with Sears Plc prohibiting Sears Plc and any of its affiliates from
starting any business in the United States that directly competes with the
Company and from requesting customers, suppliers or purchasing agents of
the Company to cease doing business with the Company. The cost of $4
million relating to this agreement was being amortized on a straight-line
basis over the three-year term of the agreement which ended December 31,
1994.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value method of recording compensation
expense associated with stock option grants.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income
taxes are recorded for temporary differences between financial statement
carrying amounts and the tax bases of assets and liabilities. Deferred tax
assets and liabilities reflect the tax rates expected to be in effect for
the years in which the differences are expected to reverse.
SIGNIFICANT CUSTOMER
For the year ended January 31, 1997, 10% of the Company's total sales were
made to one customer. During the years ended January 31, 1996 and 1995,
there were no customers who made up 10% of the Company's total sales.
ACCOUNTING CHANGES
Effective February 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", as described in Note 8.
CASH FLOWS
The Company presents cash flows under the indirect method. Cash includes
demand deposits with banks and cash on hand.
ACCOUNTING ESTIMATES
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 those
estimates.
9
<PAGE> 10
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
1997 1996
<S> <C> <C>
Leasehold improvements $1,224,030 $1,039,409
Office and warehouse equipment,
furniture and fixtures 540,701 424,193
Computer equipment 279,112 220,378
========== ==========
2,043,843 1,683,980
Less - Accumulated depreciation
and amortization 1,201,361 913,404
---------- ----------
$ 842,482 $ 770,576
========== ==========
</TABLE>
4. NOTES PAYABLE - BANKS
At January 31, 1997, the Company had a $50 million senior revolving credit
and letter of credit facility ("credit agreement"), as amended, provided
by a syndicate of banks, which expires on January 31, 2000. This agreement
supersedes the original $60 million credit agreement which began on
December 31, 1991. Outstanding borrowings bear interest, payable monthly,
at the prime lending rate plus .5%, 1.5% and 1.5% at January 31, 1997,
1996 and 1995, respectively. Outstanding borrowings accrued interest at
rates of 8.75%, 10% and 10% as of January 31, 1997, 1996 and 1995,
respectively. As of September 1996, a commitment fee of one-quarter of 1%
on the unused portion of the facility is payable quarterly. Prior to
September 1996, the commitment fee was one-half of 1% on the unused
portion of the facility. Interest related to this facility, including
commitment fees, amounted to approximately $501,000, $1,041,000 and
$852,000 for the years ended January 31, 1997, 1996 and 1995,
respectively.
At January 31, 1997, direct borrowings and open letters of credit against
the Company's credit facility totaled $5,700,000 and $28,739,000,
respectively. With respect to the open letters of credit, $6,857,279
related to inventory in-transit to which the Company had taken title as of
January 31, 1997. The remaining balance of $21,881,721 related to
commitments for future inventory purchases.
At January 31, 1996, direct borrowings and open letters of credit against
the Company's credit facility totaled $3,500,000 and $29,850,726,
respectively. With respect to the open letters of credit, $4,807,189
related to inventory in-transit to which the Company had taken title as of
January 31, 1996. The remaining balance of $25,043,537 related to
commitments for future inventory purchases.
10
<PAGE> 11
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Pursuant to the financial covenants of the credit agreement, the Company
must maintain certain key ratios and meet certain limits (minimum tangible
net worth, leverage ratio, minimum net income, capital expenditures) which
vary throughout the life of the agreement. Further, restrictions imposed
by this credit agreement exist relating to dividend distributions to
common and preferred stockholders, as well as the Company's prepayment of
the subordinated debt (Note 10).
The agreement provides for direct debt sublimits and debt advance ratios
based on inventory and accounts receivable in varying amounts and
percentages set over the term of the agreement. A secured lien exists on
all assets of the Company.
As of January 31, 1997 and 1996, the Company was in compliance with all
financial covenants, as amended.
At January 31, 1997 and 1996, the Company had issued standby irrevocable
letters of credit for $825,000 and $750,000, respectively, relating to an
operating lease.
5. CAPITALIZATION
Capital stock consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
1997 1996
<S> <C> <C>
Preferred stock, $.01 par value; authorized -
1,000,000 shares; issued and outstanding -
689,441 shares at January 31, 1997 and
1,000,000 shares at January 31, 1996 $ 14,484,508 $ 21,000,000
Common stock, $.01 par value; authorized
and issued - 1,000,000 shares at
January 31, 1997 and 1996 10,000 10,000
Treasury stock - 2,247 shares, at cost (6,247) -
------------ ------------
$ 14,488,261 $ 21,010,000
============ ============
</TABLE>
11
<PAGE> 12
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The preferred and common stock were issued at the time of the Acquisition.
The $.01 par value common stock was issued for $1 per share resulting in
additional paid-in capital of $990,000. The preferred stock carries a 10%
cumulative dividend per annum, payable quarterly, at the option of the
Board of Directors and subject to certain financial covenants. In
September 1996, the Company redeemed 310,559 shares of its preferred
stock. All accumulated and unpaid dividends associated with the redeemed
shares were forgiven by the shareholders. At January 31, 1997, accumulated
dividends on the remaining outstanding shares amounted to approximately
$7,242,000. The liquidation value of the preferred stock is $14,484,508
plus all dividends accumulated and unpaid thereon.
In September 1996, the Company repurchased 2,247 shares of its common
stock at a cost of $2.78 per share. The treasury stock is being held for
purposes of future exercises under the Company's stock option plan (see
Note 9).
In connection with the Acquisition, the Company entered into two executive
compensation agreements (the "agreements") effective December 31, 1991.
Pursuant to the agreements, the two executives will each receive 7.5% of
the principal amounts of the subordinated notes and the preferred stock
when redeemed by the Company or upon the sale or other disposition by the
holders. In September 1996, the Company paid $489,000 to each executive
related to the redemption of the preferred shares in accordance with these
agreements. The Company's remaining obligation under these agreements is
recorded at a historical cost of $2,591,739 and $3,750,000 as of January
31, 1997 and 1996, respectively. The remaining portion of the obligation
which relates to the subordinated notes is $420,000 and is classified as
other subordinated liabilities payable to certain stockholders in the
accompanying balance sheet as of January 31, 1997 and 1996. That portion
relating to the preferred stock is $2,171,739 and $3,150,000 at January
31, 1997 and 1996, respectively, and is classified as other preferred
interests since the interests of the two executives pursuant to the
agreements are similar to those of the preferred stockholders.
When interest or dividends are paid in cash to the holders of the
subordinated notes and preferred stock, each executive receives from the
Company a payment equivalent to 5% of interest and dividends paid.
Additional executive compensation related to the subordinated note
interest payments during each of the years ended January 31, 1997, 1996
and 1995 amounted to $56,000, $56,000 and $103,833, respectively, and is
included in selling, general and administrative expenses. Payments
relating to the preferred stock dividends will be accrued as dividends
when declared. Such obligation, which was accumulated and unpaid, amounted
to $724,200 as of January 31, 1997.
12
<PAGE> 13
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
6. INCOME TAXES
The provision (benefit) for income taxes for the fiscal years ended
January 31, 1997, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal
Current $ 1,548,077 $ (91,578) $ 905,558
Deferred (35,598) (42,586) (57,340)
----------- ----------- -----------
1,512,479 (134,164) 848,218
----------- ----------- -----------
State and local
Current 406,742 (10,595) 134,033
Deferred (8,049) (9,582) (12,901)
----------- ----------- -----------
398,693 (20,177) 121,132
----------- ----------- -----------
$ 1,911,172 $ (154,341) $ 969,350
=========== =========== ===========
</TABLE>
Deferred tax assets principally reflect the net tax effects of temporary
differences between the carrying amounts of assets for financial reporting
purposes and the amounts used for income tax purposes attributable to
postretirement benefits, allowance for doubtful accounts and the differing
amortization periods of leasehold improvements.
For the years ended January 31, 1997, 1996 and 1995, the Company's
effective tax rate differs from the federal statutory rate principally due
to the impact of state and local taxes and other provision adjustments.
For the year ended January 31, 1996 the Company adopted Statement of
Financial Accounting Standards No. 106 resulting in a tax benefit of
$62,694 which has been excluded from the tax benefit provided from
operations.
7. EXECUTIVE INCENTIVES
One of the executives of the Company is paid an executive incentive each
year in addition to his salary compensation. Effective December 31, 1991,
this executive had an employment contract, expiring in 5 years, under
which he is entitled to an incentive, calculated at a rate of 7.5% on
profit before interest on subordinated debt, executive bonus, taxes and
incentives less an adjustment for a specified percentage by which the
average of the subordinated notes and preferred stock exceeds an
established threshold. Under this arrangement, incentive compensation
amounted to approximately $390,000, $0 and $230,000 for the years ended
January 31, 1997, 1996 and 1995.
13
<PAGE> 14
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Additionally, certain senior executives are entitled to bonuses
calculated as a percentage of base salary. The percentage applied to base
salary is based upon certain predetermined financial performance measures
attained by the Company. Bonuses amounted to approximately $810,000, $0
and $485,000 for the years ended January 31, 1997, 1996 and 1995.
8. EMPLOYEE PENSION, POSTRETIREMENT BENEFITS AND PROFIT SHARING PLANS
PENSION PLAN
The Company maintains a noncontributory defined benefit pension plan
(the "Plan") covering substantially all employees. The Plan provides
pension benefits that are based on the employee's compensation and years
of service. Plan assets consist primarily of stocks, bonds and U.S.
Government securities.
The Company funds pension costs as they accrue.
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
1997 1996 1995
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 125,337 $ 118,507 $ 161,937
Interest cost on projected
benefit obligation 101,539 91,941 96,725
Actual return on plan assets (225,463) (253,356) (18,346)
Net amortization and deferral 131,485 186,994 (55,709)
--------- --------- ---------
NET PERIODIC PENSION COST $ 132,898 $ 144,086 $ 184,607
========= ========= =========
</TABLE>
14
<PAGE> 15
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following table sets forth the Plan's funded status at:
<TABLE>
<CAPTION>
JANUARY 31,
1997 1996
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, vested $1,208,308 $1,087,255
---------- ----------
Projected benefit obligation $1,605,498 $1,454,900
Plan assets at market value 1,590,602 1,269,082
---------- ----------
Excess of projected benefit obligation
over Plan assets 14,896 185,818
Unrecognized prior service cost (64,678) (67,507)
Unrecognized net gain (loss) 433,437 284,505
Unrecognized net obligation being
amortized over 21.48 years (163,936) (176,098)
---------- ----------
Accrued pension cost recognized in the
Balance Sheet $ 219,719 $ 226,718
========== ==========
</TABLE>
The discount rate and the rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligations
were 7.25% and 3.0%, respectively, for the year ended January 31, 1997, and 7.0%
and 3.0%, respectively, for the year ended January 31, 1996 and 7.0% and 4.0%,
respectively, for the year ended January 31, 1995. The expected long-term rate
of return on Plan assets was 7.5% for all periods presented.
POSTRETIREMENT BENEFITS
The Company provides medical insurance premium benefits for two executives
pursuant to the agreements (Note 5) during their employment and subsequent to
retirement. These benefits are not funded. Effective February 1, 1995, the
Company adopted Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106"). FAS 106
requires recognition of the cost of postretirement benefits during the
employee's period of service to the Company. Such costs were previously expensed
as paid.
The Company elected immediate recognition of the February 1, 1995 accumulated
postretirement benefit obligations of approximately $158,000, based on a
valuation date of January 1, 1995. The adoption of this standard resulted in a
charge of approximately $95,000 (net of a tax benefit of approximately $63,000),
which is reflected in the statement of operations for the year ended January 31,
1996.
15
<PAGE> 16
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Net periodic postretirement benefit cost approximated $12,000 and $13,000
for the years ended January 31, 1997 and 1996, respectively.
The following table sets forth the funded status at December 31, the
valuation date:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
Accumulated postretirement benefit obligation
Retiree $121,903 $131,927
Other active employee 34,558 38,943
-------- --------
Accumulated postretirement benefit obligation 156,461 170,870
Unrecognized net gain 17,607 -
-------- --------
Accrued postretirement benefit cost
included in the balance sheet $174,068 $170,870
======== ========
</TABLE>
The discount rate used in determining the accumulated benefit obligation
was 7.25% for the years ended January 31, 1997 and 1996. The annual rate
of increase in health care costs was assumed at 9% for the years ended
January 31, 1997 and 1996. The effect of a 1% increase in the assumed
health care cost trend rate would increase the December 31, 1996
accumulated postretirement benefit obligation by approximately $16,000 and
the net periodic postretirement benefit cost for the fiscal year ended
January 31, 1997 by approximately $1,000.
PROFIT SHARING PLAN
The Company sponsors a profit-sharing plan covering employees with more
than one year of continuous service. Vesting occurs at a rate of 25% per
year and employees are fully vested after four years. The Company
contributed 15% of each employee's gross compensation plus bonus, up to a
maximum contribution of approximately $22,500 per employee for the year
ended January 31, 1997, which amounted to approximately $680,000. The
Company did not make a profit sharing contribution during the year ended
January 31, 1996. The Company contributed 7.5% of each employee's gross
compensation plus bonus, up to a maximum contribution of approximately
$11,250 per employee, for the year ended January 31, 1995 which amounted
to approximately $294,000, in the aggregate. Profit sharing plan assets
consist primarily of stocks, bonds and U.S. Government securities.
16
<PAGE> 17
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
9. STOCK OPTIONS
The Company entered into stock option agreements, dated December 31, 1991
("1991 Option Plan"), with certain employees which provide for the
purchase of 110,000 shares of common stock of the Company for $1.00 per
share. These options are fully vested and expire on December 31, 2001.
Through January 31, 1997, none of these options were exercised. For the
Company to issue stock currently under the 1991 Option Plan, it must
purchase the number of shares to be delivered to the exercising option
holders from the current shareholders on a pro rata basis for $1.00 per
share. If at December 31, 2001 stock options are unexercised, the Company
is obliged to purchase the equivalent number of shares at $1.00 per share
from the current stockholders, provided that such purchase and sale is not
and shall not cause a default or event of default to occur under the
credit agreement.
On November 30, 1996, the Company entered into additional stock option
agreements with certain employees which provide for the purchase of 65,071
shares and 21,690 shares of common stock of the Company for $1.00 per
share and $2.78 per share, respectively. These options vest over a three
year period and have a term of 10 years. Through January 31, 1997, none of
these options were exercised.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation," which requires companies to establish a fair value based
method of accounting for stock-based compensation plans. However, the
statement permits the continued application of the intrinsic value method
prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," with pro forma disclosure of
net income as if the fair value based accounting method had been used to
account for stock-based compensation cost. The Company adopted the
disclosure-only provisions of new standard for the options granted in the
year ended January 31, 1997. Pro forma disclosure has not been provided as
the effect on net income for the year ended January 31, 1997 was not
material.
10. RELATED PARTY TRANSACTIONS
Subordinated notes payable to stockholders bear interest, which is payable
quarterly on a calendar basis, at a rate of 20%. These notes, 55% of which
are payable directly to holders of preferred and common stock with the
remaining balance payable to an entity that is affiliated with preferred
and common stockholders, were issued to finance a portion of the
Acquisition and are subordinated to the bank indebtedness. These notes
mature on June 30, 2000.
Interest expense related to these notes amounted to $560,000 for each of
the years ended January 31, 1997 and 1996 and $1,038,334 for the year
ended January 31, 1995. As described in Note 5, additional executive
compensation of $56,000 was incurred during each of the years ended
January 31, 1997 and 1996 and $103,833 during the year ended January 31,
1995 related to the subordinated note interest. At January 31, 1997 and
1996, interest payable related to these notes amounted to approximately
$46,700.
17
<PAGE> 18
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
For the years ended January 31, 1997, 1996 and 1995, the Company was
charged approximately $478,000, $481,000 and $258,000, respectively,
primarily for business management and consulting services provided by
certain holders and their affiliates of the Company's preferred and common
stock. The two executives referred to in Note 5 each receive a payment
from the Company equivalent to 5% of the annual management fees which are
included in the amounts above. During each of the years ending January 31,
1997, 1996 and 1995, additional executive compensation relating to the
payment of management fees was approximately $44,500, $44,500 and $19,000,
respectively.
The Company has an agreement for inland shipping services with a company
owned by an employee. Shipping costs under this agreement amounted to
approximately $697,000, $697,000 and $645,000 for the years ended January
31, 1997, 1996 and 1995, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company leases office, showroom and warehouse space under separate
operating lease agreements expiring through December 2007. These operating
leases consist of basic annual rents plus escalation charges, as defined
in the lease agreements.
Minimum annual rentals under non-cancelable operating leases are payable
as follows:
<TABLE>
<CAPTION>
Fiscal Year ending January 31
<S> <C>
1998 $1,687,931
1999 1,688,309
2000 1,713,635
2001 1,404,456
2002 1,410,789
2003 and thereafter 8,102,556
-----------
$16,007,676
===========
</TABLE>
Rent expense amounted to approximately $1,602,746, $1,512,337 and
$1,373,270 for the years ended January 31, 1997, 1996 and 1995,
respectively.
18
<PAGE> 19
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
CONTINGENT EARN-OUT
In addition to the cash paid at closing, Sears Plc is entitled to earn-out
payments for the twelve month periods ended December 31, 1992 through
December 31, 1996 of up to $750,000 in the aggregate provided that certain
operating income targets have been attained. For the twelve month periods
ended December 31, 1996, 1995 and 1994, the Company's operating income did
not exceed the 1996, 1995 and 1994 operating income targets, respectively,
as defined in the related agreement.
12. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITOR'S
REPORT
On September 30, 1997, Norton McNaughton, Inc. completed the acquisition
of substantially all of the assets and the assumption of substantially all
of the liabilities of the Company.
19
<PAGE> 20
MISS ERIKA, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
July 31,
1997
----------------
(In thousands)
<S> <C>
ASSETS
Current assets
Cash $ 401
Accounts receivable, net 12,204
Inventories 23,759
Prepaid expenses and other current assets 284
Deferred tax assets 198
--------
TOTAL CURRENT ASSETS 36,846
Fixed assets, net 852
Deferred tax assets - noncurrent 311
Other assets 52
--------
TOTAL ASSETS $ 38,061
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accrued drafts payable $ 4,111
Other payables and accrued expenses 4,668
Income taxes payable 1,391
--------
TOTAL CURRENT LIABILITIES 10,170
Notes payable - banks 750
Subordinated notes payable to related entities 2,800
Other subordinated liabilities payable to certain
stockholders 420
Other liabilities 163
--------
TOTAL LIABILITIES 14,303
--------
Stockholders' equity
Preferred stock 14,484
Other preferred interests 2,172
Common stock 10
Additional paid-in capital 990
Retained earnings 6,108
Treasury stock (6)
--------
TOTAL STOCKHOLDERS' EQUITY 23,758
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,061
========
</TABLE>
See accompanying notes.
20
<PAGE> 21
MISS ERIKA, INC.
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
July 31, July 31,
1997 1996
---------------- ----------------
(In Thousands)
<S> <C> <C>
Net sales $ 62,835 $ 54,017
Cost of sales 52,277 45,543
-------- --------
GROSS PROFIT 10,558 8,474
Selling, general and administrative expenses 3,984 3,196
Amortization of intangible assets - 246
Depreciation of fixed assets 150 129
-------- --------
OPERATING EXPENSES 4,134 3,571
-------- --------
INCOME FROM OPERATIONS 6,424 4,903
Interest expense, net 631 623
-------- --------
INCOME BEFORE PROVISION
FOR INCOME TAXES 5,793 4,280
Provision for income taxes 2,317 1,462
-------- --------
NET INCOME 3,476 2,818
Accumulated retained earnings (deficit),
beginning of period 2,632 (1,053)
-------- --------
Retained earnings, end of period $ 6,108 $ 1,765
======== ========
</TABLE>
See accompanying notes.
21
<PAGE> 22
MISS ERIKA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
July 31, July 31,
1997 1996
---------------- ----------------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,476 $ 2,818
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 150 375
Changes in:
Accounts receivable (2,602) (2,757)
Inventory 6,217 4,967
Prepaid expenses and other current assets (55) (10)
Prepaid income taxes - 366
Other assets (4) (2)
Accrued drafts payable (2,747) 971
Other payables and accrued expenses 29 (441)
Income taxes payable 923 800
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,387 7,087
------- -------
Cash flows from investing activities
Capital expenditures (159) (180)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (159) (180)
------- -------
Cash flows from financing activities
Net repayments of notes
payable - banks (4,950) (3,500)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (4,950) (3,500)
------- -------
Net increase in cash 278 3,407
Cash at beginning of period 123 246
------- -------
Cash at end of period $ 401 $ 3,653
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 674 $ 643
Income taxes 1,347 492
</TABLE>
See accompanying notes.
22
<PAGE> 23
MISS ERIKA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of Miss Erika, Inc.
("Miss Erika") do not include all of the information and footnotes necessary for
a fair presentation of financial position, results of operations and cash flows
in conformity with generally accepted accounting principles. In the opinion of
management, all normal and recurring adjustments and accruals considered
necessary for a fair presentation of the Miss Erika's financial position at July
31, 1997 and the results of operations and cash flows for the six months ended
July 31, 1997 and July 31, 1996 have been included. Operating results for the
six months ended July 31, 1997 are not necessarily indicative of the results
that may be expected for the full fiscal year. These statements should be read
in conjunction with the Miss Erika audited annual financial statements and
footnotes thereto included in this Form 8-K/A.
On September 30, 1997, the Norton McNaughton, Inc. ("Norton") completed the
acquisition of substantially all the assets and the assumption of substantially
all the liabilities of Miss Erika. The transaction provided for the payment of
approximately $24 million in cash, with additional consideration payable at the
Norton's option in cash or Norton's common stock based on the profitability of
Miss Erika in fiscal years 1998 and 1999. The accompanying financial statements
do not give effect to the sale.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out basis) or market.
At July 31, 1997, inventory consisted solely of finished goods.
23
<PAGE> 24
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA FINANCIAL INFORMATION
On September 30, 1997, Norton McNaughton, Inc. (the "Company"), through a wholly
owned subsidiary, acquired substantially all of the assets and assumed
substantially all the liabilities of Miss Erika, Inc. ("Miss Erika") for $24
million in cash, with additional consideration payable at the Company's option
in cash or Company common stock based on the profitability of Miss Erika in
fiscal years 1998 and 1999.
The unaudited pro forma condensed combined financial information presented
herein gives effect to the Company's acquisition of substantially all of the
assets and assumption of substantially all the liabilities of Miss Erika, which
was completed on September 30, 1997. The pro forma financial information is
based on the historical financial statements of the Company and Miss Erika. The
Company's fiscal year end is October 31, if such date falls on a Saturday, or
the first Saturday following October 31 and, prior to the acquisition by the
Company, Miss Erika's fiscal year ended on January 31.
The acquisition of Miss Erika has been accounted for using the purchase method
of accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair values, which are subject to further
adjustment, based upon appraisals and other analyses, with appropriate
recognition given to the effect of the Company's borrowing rates and income
taxes.
The unaudited pro forma condensed combined balance sheet as of August 2, 1997
gives effect to the acquisition of Miss Erika as if it had been consummated on
August 2, 1997. This pro forma balance sheet combines the unaudited historical
consolidated balance sheet at August 2, 1997 for the Company and the unaudited
historical balance sheet at July 31, 1997 for Miss Erika.
The unaudited pro forma condensed combined income statements for the fiscal
years ended November 2, 1996 and January 31, 1997, for the Company and Miss
Erika, respectively, give effect to the acquisition of Miss Erika as if it had
been consummated at the beginning of the Company's fiscal year on November 4,
1995. This pro forma income statement combines the historical consolidated
income statement for the fiscal year ended November 2, 1996 of the Company and
the income statement for the fiscal year ended January 31, 1997 of Miss Erika.
The unaudited pro forma condensed combined income statements for the nine months
ended August 2, 1997 and July 31, 1997, for the Company and Miss Erika,
respectively, give effect to the acquisition of Miss Erika as if it had been
consummated at the beginning of the Company's fiscal year on November 3, 1996.
This pro forma income statement combines the unaudited historical consolidated
income statement for the nine months ended August 2, 1997 of the Company and the
unaudited historical income statement for the nine months ended July 31, 1997 of
Miss Erika.
The pro forma adjustments are based upon available information and assumptions
that management believes are reasonable at the time made. The unaudited pro
forma condensed combined financial statements do not purport to present the
financial position or results of operations of the Company had the acquisition
of Miss Erika occurred on the dates specified, nor are they necessarily
indicative of the financial position or results of operations that may be
achieved in the future. The unaudited pro forma condensed combined statements of
income do not reflect any adjustments for synergies that management expects to
realize commencing upon consummation of the acquisition. No assurances can be
made as to the amount of cost savings or revenue enhancements, if any, that may
be realized.
The Company's ability, including following the acquisition of Miss Erika, to
achieve its projected results, is dependent on many factors which are outside of
management's control. Some of the most significant factors, including following
the acquisition of Miss Erika, would be a further deterioration in retailing
conditions for women's apparel, a further increase in price pressures and other
competitive factors, any of which could result in an unanticipated decrease in
gross profit margins, unanticipated problems arising with Miss Erika's business
or the integration of Miss Erika's business with that of the Company, the
unanticipated loss of a major customer, the unanticipated loss of a major
contractor or supplier, and weather conditions which could impact retail traffic
and the Company's ability, including following the acquisition of Miss Erika, to
ship on a timely basis. Accordingly, there can be no assurance that the Company,
including following the acquisition of Miss Erika, will achieve its anticipated
operating results.
24
<PAGE> 25
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
Norton McNaughton, Inc. Miss Erika, Inc.
August 2, 1997 July 31, 1997
----------------------- ----------------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 197 $ 401
Due from factor, net 8,635 -
Accounts receivable, net - 12,204
Inventory 33,088 23,759
Deferred tax assets - 198
Prepaid expenses and other current assets 8,120 284
------- -------
Total current assets 50,040 36,846
Fixed assets, net 5,270 852
Deferred tax assets - 311
Goodwill
Notes receivable from management 2,655 -
Other assets 1,034 52
------- -------
Total assets $58,999 $38,061
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $12,796 $ -
Accrued draft payable - 4,111
Income taxes payable - 1,391
Revolving credit loan payable
Term loan payable
Accrued expenses and other current liabilities 1,131 4,668
------- -------
Total current liabilities 13,927 10,170
Notes payable-banks - 750
Subordinated notes payable to related entities - 2,800
Other subordinated notes payable to certain stockholders - 420
Term loan payable
Other liabilities 1,000 163
------- -------
Total liabilities 14,927 14,303
Commitments and contingencies
Stockholders' equity 44,072 23,758
------- -------
Total liabilities and stockholders' equity $58,999 $38,061
======= =======
</TABLE>
<TABLE>
<CAPTION>
Pro forma Adjustments
Debit (Credit) Combined
--------------------- ----------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash $ (598) (2) $ -
Due from factor, net 12,204 (3) 20,839
Accounts receivable, net (12,204) (3) -
Inventory (4,186) (5) 52,661
Deferred tax assets (198) (4) -
Prepaid expenses and other current assets 8,404
-------- -------
Total current assets (4,982) 81,904
Fixed assets, net 6,122
Deferred tax assets (311) (4) -
Goodwill 2,137 (2) 2,137
Notes receivable from management 2,655
Other assets 2,534 (2) 3,620
-------- -------
Total assets $ (622) $96,438
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ - $12,796
Accrued draft payable 4,111
Income taxes payable 1,391 (2) -
Revolving credit loan payable (13,219) (1) 13,219
Term loan payable (3,000) (1) 3,000
Accrued expenses and other current liabilities (278) (2) 6,077
-------- -------
Total current liabilities (15,106) 39,203
Notes payable-banks 750 (2) -
Subordinated notes payable to related entities 2,800 (4) -
Other subordinated liabilities payable to
certain stockholders 420 (4) -
Term loan payable (12,000) (1) 12,000
Other liabilities - 1,163
-------- -------
Total liabilities (23,136) 52,366
Commitments and contingencies
Stockholders' equity 23,758 (4) 44,072
-------- -------
Total liabilities and stockholders' equity $ 622 $96,438
======== =======
</TABLE>
See accompanying condensed combined pro forma adjustments.
25
<PAGE> 26
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the year ended
---------------------------------------------------
November 2, January 31,
1996 1997
Norton McNaughton, Inc. Miss Erika, Inc.
----------------------- -----------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C>
Net sales $220,823 $94,743
Cost of goods sold 176,063 81,321
-------- -------
Gross profit 44,760 13,422
Amortization of intangible assets - 451
Selling, general and administrative expenses 39,979 6,348
-------- -------
Income (loss) from operations 4,781 6,623
Other expense (income):
Interest expense 2,294 1,061
Interest income (164) (35)
-------- -------
Income (loss) before provision (benefit) for 2,651 5,597
income taxes
Provision (benefit) for income taxes 1,127 1,911
-------- -------
Net income (loss) $ 1,524 $ 3,686
======== =======
PER SHARE DATA:
Net income $ 0.20
========
Weighted average number of common shares and
common stock equivalents outstanding 7,781
========
</TABLE>
<TABLE>
<CAPTION>
Pro forma
Adjustments Combined
-------------- ------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C>
Net sales $ - $315,566
Cost of goods sold (8,737) (9) 248,647
-------- --------
Gross profit 8,737 66,919
Amortization of intangible assets (344) (7) 107
Selling, general and administrative expenses 9,038 (9) 55,296
(448) (10)
379 (8)
--------- --------
Income (loss) from operations 112 11,516
Other expense (income):
Interest expense 2,595 (6) 5,950
Interest income - (199)
--------- --------
Income (loss) before provision (benefit) for (2,483) 5,765
income taxes
Provision (benefit) for income taxes (674) (11) 2,364
--------- --------
Net income (loss) $ (1,809) $ 3,401
========= ========
PER SHARE DATA:
Net income $ 0.44
========
Weighted average number of common shares and
common stock equivalents outstanding 7,781
========
</TABLE>
See accompanying condensed combined pro forma adjustments.
26
<PAGE> 27
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended
-----------------------------------
August 2, 1997 July 31, 1997
Norton Miss Erika, Pro forma
McNaughton, Inc. Inc. Adjustments Combined
----------------- ------------- ----------- ----------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Net sales $142,708 $76,669 - $219,377
Cost of goods sold 113,672 67,058 (8,820) (9) 171,910
-------- ------- ------- --------
Gross profit 29,036 9,611 8,820 47,467
Amortization of intangible assets - 82 (2) (7) (80)
Selling, general and administrative expenses 32,894 4,041 9,046 (9) 45,929
(336) (10)
284 (8)
-------- ------- ------- --------
Income (loss) from operations (3,858) 5,488 (172) 1,458
Other expense (income):
Interest expense 1,292 793 1,945 (6) 4,030
Interest income (127) - - (127)
-------- ------- ------- --------
Income (loss) before provision (benefit) for
income taxes (5,023) 4,695 (2,117) (2,445)
Provision (benefit) for income taxes (2,227) 1,942 (717) (11) (1,002)
-------- ------- ------- --------
Net income (loss) $ (2,796) $ 2,753 $(1,400) $ (1,443)
======== ======= ======= ========
PER SHARE DATA:
Net income (loss) $ (0.37) $ (0.19)
======== ========
Weighted average number of common shares and
common stock equivalents outstanding 7,520 7,520
======== ========
</TABLE>
See accompanying condensed combined pro forma adjustments.
27
<PAGE> 28
NORTON MCPHERSON, INC. AND SUBSIDIARIES
CONDENSED COMBINED PRO FORMA ADJUSTMENTS
(UNAUDITED)
Condensed Combined Balance Sheet
(1) Borrowings of $15,000,000 term loan and $13,219,000 in revolving
credit loans, pursuant to the Company's new financing agreement.
(2) Use of proceeds of the debt (see (1) above) and cash on hand for payment
of income taxes of $1,391,000; notes payable to banks of $750,000;
deferred financing costs of $2,534,000, net of $278,000 payable; expenses
of $420,000 in connection with the acquisition and the purchase price of
$24,000,000. The excess of these payments over the fair value of the
assets acquired and the liabilities assumed represents goodwill.
Allocation of purchase price and calculation of goodwill is as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Purchase price $24,000
-------
Net assets of Miss Erika 23,758
Decrease in inventory (4,186)
Net decrease in deferred tax assets (509)
Decrease in subordinated liabilities 3,220
-------
Net value of assets acquired 22,283
-------
Goodwill 1,717
Plus acquisition expenses 420
-------
Total goodwill $ 2,137
=======
</TABLE>
(3) Reflection of assignment of Miss Erika's accounts receivable to the
factor under the Company's new factoring agreement.
(4) Elimination of assets and liabilities not assumed and stockholders'
equity of Miss Erika as of the acquisition date.
(5) Reduction of Miss Erika inventory cost reflecting the write-off of certain
warehousing and purchasing costs to conform with the treatment of such
costs by the Company.
Condensed Combined Income Statements
<TABLE>
<CAPTION>
For the nine
For the year ended months ended
(6) Net increase to interest expense as follows: November 2, 1996 August 2, 1997
---------------- --------------
(In thousands)
<S> <C> <C>
Interest on borrowing related to the acquisition, including
a $15 million term loan and $13 million in borrowings under
a revolving credit facility, with assumed average annual
interest rates of 8.75% and 8.25%, respectively $ 2,326 $ 1,744
Amortization of new financing costs (over term of
financing agreement) 931 698
Elimination of Miss Erika historical interest expense
on subordinated debt (662) (497)
------- -------
Net increase $ 2,595 $ 1,945
======= =======
</TABLE>
28
<PAGE> 29
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONDENSED COMBINED PRO FORMA ADJUSTMENTS
(UNAUDITED)
<TABLE>
For the Nine
For the Year Ended Months Ended
November 2, 1996 August 2, 1997
------------------- --------------
(In Thousands)
<S> <C> <C>
(7) Net decrease in amortization expense as follows:
Goodwill resulting from acquisition
(amortization over 20 years) $ 107 $ 80
Elimination of amortization of prior
Miss Erika financing costs (451) (82)
---------- ---------
Net decrease $ (344) $ (2)
========= =========
</TABLE>
(8) To record Miss Erika factoring fees.
(9) Reclassification of certain Miss Erika warehousing and purchasing
costs from cost of sales to selling, general and administrative
expense to conform with the Company's classification.
(10) To eliminate Miss Erika's historical management fee.
(11) To record the net tax effect of the pro forma adjustments at an
assumed rate of 41%.
29
<PAGE> 30
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 thereunto duly authorized.
(Registrant)
Date: December 15, 1997 By /s/Sanford Greenberg
---------------------
SANFORD GREENBERG
Chairman of the Board and
Chief Executive Officer
(Principal Executive and
Operating Officer)
Date: December 15, 1997 By /s/Amanda J. Bokman
--------------------
AMANDA J. BOKMAN
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
30
<PAGE> 31
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
10.1 Amendment dated November 25, 1997 to Separation Agreement
dated May 3, 1997 between Norton McNaughton of Squire,
Inc. and Norton Sperling.
10.2 Amendment dated October 22, 1997 to the Employment
Agreement dated November 4, 1993 between Norton McNaughton
of Squire, Inc. and Amanda J. Bokman. Amendment dated
October 22, 1997 to the Amended and Restated
Employment Agreement dated November 4, 1993
10.3 between Norton McNaughton of Squire, Inc and Howard
Greenberg.
23.1 Consent of Price Waterhouse LLP
27 Financial Data Schedule (For SEC use only)
<PAGE> 1
Exhibit 10.1
AMENDMENT TO SEPARATION AGREEMENT
Amendment to Separation Agreement made as of November 25, 1997 by and
between NORTON MCNAUGHTON OF SQUIRE, INC., a New York corporation (the
"Company"), and NORTON SPERLING ("Sperling").
W I T N E S S E T H
WHEREAS, Sperling and the Company are parties to the Separation
Agreement dated as of May 3, 1997 (the "Separation Agreement"), all capitalized
terms not otherwise defined herein shall have the meanings ascribed to such
terms in the Separation Agreement; and
WHEREAS, the parties have agreed to amend the Separation Agreement on
the terms and conditions set forth herein and to provide for certain other
matters.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. The first sentence of Section 7 of the Separation Agreement is
hereby amended to read in its entirety as follows:
"From the date hereof until September 30, 1998, (i) the Company
shall provide Sperling with the use of the automobile currently
being used by Sperling and Sperling shall promptly pay the Company
one-half (1/2) of the monthly lease payments in respect of such
automobile upon the presentation of an invoice from the Company and
(ii) from and after January 1, 1998, Sperling shall pay the costs of
operating and maintaining such automobile and the costs of any car
phone used in such automobile. From July 2, 1998 through September
30, 1998 Sperling shall pay the costs of insuring such automobile."
2. In consideration of the agreements and covenants set forth in this
Amendment, and set forth in the Separation Agreement (including the Enhanced
Separation Payment), Sperling for himself and his heirs, administrators,
successors and assigns, on the one hand, and the Company, the Parent and each of
the Releasees, on the other hand, hereby reaffirm the provisions of Section 11
of the Separation Agreement as set forth in their entirety, provided that each
of the foregoing persons hereby agrees that (i) the references to "the date of
this Agreement" in Sections 11.2 and 11.5 of the Separation Agreement shall be
replaced with "November 25, 1997" and (ii) the exception set forth in Sections
11.2 and 11.5 shall be amended to add a new clause as follows:
"and (iii) any liability arising out of the Amendment to the
Separation Agreement, dated as of November 17, 1997."
<PAGE> 2
Exhibit 10.1
3. Section 13 of the Separation Agreement is hereby amended (i) to
delete Clause (a) of such Section in its entirety and (ii) to replace the
reference in such Section to "for a period of eighteen (18) months commencing on
the Termination Date" with the phrase "until May 31, 1999."
4. Except as amended hereby, the parties hereto reaffirm the terms
and conditions of the Separation Agreement in their entirety, which terms and
conditions shall remain in full force and effect.
5. Effective as of the date hereof, Sperling hereby resigns his
positions as the Vice Chairman of the Board of Norton McNaughton, Inc., a
Delaware corporation ("Norton"), and of each of its subsidiaries, and resigns
his positions as a director of Norton and of each of its subsidiaries.
6. Sperling hereby agrees that the following options to purchase
shares of common stock, $.01 par value the ("Common Stock"), of Norton granted
to him under the Norton 1994 Stock Option Plan, are hereby terminated and
cancelled, and shall be of no further force or effect:
(i) options to purchase 25,000 shares of Common Stock granted
to Sperling on January 19, 1996; and
(ii) options to purchase 15,000 shares of Common Stock granted
to Sperling on August 5, 1996.
Sperling hereby agrees promptly to deliver to Norton for cancellation all stock
option certificates representing the foregoing options, and hereby agrees that
all such stock option certificates are hereby terminated and shall be of no
further force or effect.
7. This Amendment shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the State of New
York applicable to contracts to be performed entirely within such State. This
Amendment may be executed in counterparts (including by fax), each of which
shall be deemed an original, but all of which taken together shall constitute
one and the same instrument.
* * *
<PAGE> 3
Exhibit 10.1
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the date first above written.
/s/ Norton Sperling
-------------------------------
Norton Sperling
NORTON MCNAUGHTON OF SQUIRE, INC.
/s/ Peter Boneparth
-------------------------------
Title: President
<PAGE> 1
Exhibit 10.2
AMENDMENT TO EMPLOYMENT AGREEMENT
AMENDMENT dated as of the 22nd day of October, 1997 to EMPLOYMENT
AGREEMENT dated as of November 4, 1993 by and between NORTON MCNAUGHTON OF
SQUIRE, INC., a New York corporation (the "Company") and AMANDA J. BOKMAN (the
"Employee").
W I T N E S S E T H:
WHEREAS, the Employee and the Company have heretofore entered into an
Employment Agreement dated as of November 4, 1993 (the "Employment Agreement");
and
WHEREAS, the parties desire to amend the Employment Agreement as
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Section 1.2 of the Employment Agreement is hereby amended by
deleting Section 1.2 in its entirety and substituting therefor a new Section 1.2
to read as follows:
"The term of the Employee's employment under this Agreement (the
"Term") shall commence on the date hereof and shall terminate on
November 6, 1999, unless sooner terminated in accordance with this
agreement."
2. Section 2 of the Employment Agreement is hereby amended by
deleting the second sentence thereof in its entirety and substituting therefor a
new second sentence to read as follows:
"The Employee shall perform, faithfully and diligently, such
duties, and shall have such responsibilities, appropriate to such
position, as shall be assigned to her from time to time by the Chief
Executive Officer, President and Board of Directors of the Company."
3. Section 3.1(a) of the Employment Agreement is hereby amended by
deleting Section 3.1(a) in its entirety and substituting therefor a new Section
1.2 to read as follows:
"During the Term, in consideration of the performance by the
Employee of the services set forth in Section 2 and his observance
of the other covenants set forth herein, the Company shall pay the
Employee, and the Employee shall accept, a base salary at the rate
of $300,000 per annum, payable in accordance with the standard
payroll practices of the Company."
4. Section 3.1(b) of the Employment Agreement is hereby amended by
deleting Section 3.1(b) in its entirety.
5. Section 6.5 of the Employment Agreement is hereby amended by
deleting Section 6.5 in its entirety and substituting therefor a new Section 6.5
to read as follows:
"Upon the termination of employment of the Employee by the Company
in accordance with the terms hereof, the Employee shall be deemed
hereby automatically to have resigned (effective on the date of such
termination) all positions as an officer and director of the
Company, of any and all of the Company's subsidiaries, and of the
Company's corporate parent."
<PAGE> 2
Exhibit 10.2
6. The address for notices to the Employee set forth in Section 15
of the Employment Agreement is hereby amended to read as follows:
"Amanda J. Bokman
200 East 62nd Street
Apartment 14A
New York, New York 10021"
7. Section 21 of the Employment Agreement is hereby deleted in its
entirety.
8. Except as hereby amended, the Employment Agreement continues in
full force and effect and is hereby ratified and affirmed.
* * *
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the date first above written.
NORTON MCNAUGHTON OF SQUIRE, INC.
By: /s/ Peter Boneparth
----------------------
Title: President
/s/ Amanda J. Bokman
----------------------
Amanda J. Bokman
<PAGE> 1
Exhibit 10.3
AMENDMENT TO AMENDED AND
RESTATED EMPLOYMENT AGREEMENT
AMENDMENT dated as of the 22nd day of October, 1997 to AMENDED AND
RESTATED EMPLOYMENT AGREEMENT dated as of November 4, 1993 by and between NORTON
MCNAUGHTON OF SQUIRE, INC., a New York corporation (the "Company") and HOWARD
GREENBERG (the "Employee").
W I T N E S S E T H:
WHEREAS, the Employee and the Company have heretofore entered into
an Amended and Restated Employment Agreement dated as of November 4, 1993 (the
"Employment Agreement"); and
WHEREAS, the parties desire to amend the Employment Agreement as
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Section 1.2 of the Employment Agreement is hereby amended by
deleting Section 1.2 in its entirety and substituting therefor a new Section 1.2
to read as follows:
"The term of the Employee's employment under this Agreement (the
"Term") shall commence on the date hereof and shall terminate on
November 6, 1999, unless sooner terminated in accordance with this
agreement."
2. Section 2 of the Employment Agreement is hereby amended by
deleting the second sentence thereof in its entirety and substituting therefor a
new second sentence to read as follows:
"The Employee shall perform, faithfully and diligently, such
duties, and shall have such responsibilities, appropriate to such
position, as shall be assigned to him from time to time by the
Chief Executive Officer, President and Board of Directors of the
Company."
3. Section 3.1(a) of the Employment Agreement is hereby amended by
deleting Section 3.1(a) in its entirety and substituting therefor a new Section
1.2 to read as follows:
"During the Term, in consideration of the performance by the
Employee of the services set forth in Section 2 and his observance
of the other covenants set forth herein, the Company shall pay the
Employee, and the Employee shall accept, a base salary at the rate
of $320,000 per annum, payable in accordance with the standard
payroll practices of the Company."
4. Section 3.1(b) of the Employment Agreement is hereby amended by
deleting Section 3.1(b) in its entirety.
5. Section 6.5 of the Employment Agreement is hereby amended by
deleting Section 6.5 in its entirety and substituting therefor a new Section 6.5
to read as follows:
"Upon the termination of employment of the Employee by the Company
in accordance with the terms hereof, the Employee shall be deemed
hereby automatically to have resigned (effective on the date of
such termination) all positions as an officer and director of the
Company, of any and all of the Company's subsidiaries, and of the
Company's corporate parent."
<PAGE> 2
Exhibit 10.3
6. The address for notices to the Employee set forth in Section 15
of the Employment Agreement is hereby amended to read as follows:
"Howard Greenberg
27 Whig Road
Scarsdale, New York 10583"
7. Section 21 of the Employment Agreement is hereby deleted in its
entirety.
8. Except as hereby amended, the Employment Agreement continues in
full force and effect and is hereby ratified and affirmed.
* * *
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the date first above written.
NORTON MCNAUGHTON OF SQUIRE, INC.
By: /s/ Peter Boneparth
--------------------------
Title: President
/s/ Howard Greenberg
--------------------------
Howard Greenberg
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-39049, 333-29195, 33-92252 and 33-80370) of
Norton McNaughton, Inc. of our report dated April 16, 1997 relating to the
financial statements of Miss Erika, Inc., which appears in the Current Report on
Form 8-K/A of Norton McNaughton, Inc. dated December 15, 1997.
/s/PRICE WATERHOUSE LLP
New York, New York
December 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information for Miss Erika, Inc.
included in Form 8-K/A filed by Norton McNaughton, Inc. on December 15, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1997
<PERIOD-START> FEB-01-1997 FEB-01-1996
<PERIOD-END> JUL-01-1997 JAN-31-1997
<CASH> 401 123
<SECURITIES> 0 0
<RECEIVABLES> 12,204 9,602
<ALLOWANCES> 0 0
<INVENTORY> 23,759 29,975
<CURRENT-ASSETS> 36,846 40,128
<PP&E> 2,203 2,044
<DEPRECIATION> 1,351 1,202
<TOTAL-ASSETS> 38,061 41,330
<CURRENT-LIABILITIES> 10,170 11,965
<BONDS> 0 0
0 0
14,484 14,484
<COMMON> 10 10
<OTHER-SE> 9,264 5,789
<TOTAL-LIABILITY-AND-EQUITY> 38,061 41,330
<SALES> 62,835 94,743
<TOTAL-REVENUES> 62,835 94,743
<CGS> 52,277 81,321
<TOTAL-COSTS> 4,134 6,800
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 631 1,026
<INCOME-PRETAX> 5,793 5,597
<INCOME-TAX> 2,317 1,911
<INCOME-CONTINUING> 3,476 3,686
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,476 3,686
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
