<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998
REGISTRATION NO .333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NORTON MCNAUGHTON, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 5137
(State or Other Jurisdiction of (Primary Standard Industrial
Incorporation or Organization) Classification Code Number)
13-3747173
(I.R.S. Employer Identification No.)
NORTON MCNAUGHTON OF SQUIRE, INC. MISS ERIKA, INC.
(Exact Name of Co-Registrant (Exact Name of Co-Registrant
as Specified in its Charter) as Specified in its Charter)
NEW YORK DELAWARE
(State or Other Jurisdiction of (State or Other Jurisdiction of
Incorporation or Organization) Incorporation or Organization)
13-3050179 13-3959402
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
JERI-JO KNITWEAR, INC. NORTY'S, INC.
(Exact Name of Co-Registrant (Exact Name of Co-Registrant
as Specified in its Charter) as Specified in its Charter)
DELAWARE DELAWARE
(State or Other Jurisdiction of (State or Other Jurisdiction of
Incorporation or Organization) Incorporation or Organization)
52-2080607 13-3463814
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
463 SEVENTH AVENUE
9TH FLOOR
NEW YORK, NEW YORK, 10018
(212) 947-2960
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
PETER BONEPARTH
PRESIDENT
463 SEVENTH AVENUE
9TH FLOOR
NEW YORK, NEW YORK, 10018
(212) 947-2960
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copies to:
BRADLEY P. COST, ESQ.
HAYTHE & CURLEY
237 PARK AVENUE
NEW YORK, NEW YORK 10017
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
<TABLE>
<CAPTION>
================================================================================================
Proposed
Proposed Maximum Aggregate
Title of each Class of Maximum Offering Aggregate Amount of
Securities to be Amount to be Price Amount of Registration
Registered(1) Registered Per Note Offering Price Fee
================================================================================================
<S> <C> <C> <C> <C>
12 1/2% Senior Notes due 2005 $125,000,000 100% $125,000,000 $36,875.00
- ------------------------------------------------------------------------------------------------
Guarantees of 12 1/2% Senior (2) (2) (2) (2)
Notes due 2005
=============================================================================================
</TABLE>
(1) The issuer of the Notes registered hereby is Norton McNaughton, Inc. The
Guarantees registered hereby are made by Norton McNaughton of Squire, Inc.,
Miss Erika, Inc., Jeri-Jo Knitwear, Inc. and Norty's, Inc.
(2) No additional consideration will be received for the guarantees of the Notes
registered hereby.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST __, 1998
PRELIMINARY PROSPECTUS
$125,000,000
EXCHANGE OFFER
NORTON MCNAUGHTON, INC.
OFFER TO EXCHANGE ITS 12 1/2% SENIOR NOTES
DUE 2005 THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 FOR ANY AND ALL OF ITS OUTSTANDING 12 1/2% SENIOR NOTES DUE 2005
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON _____________, 1998, UNLESS EXTENDED
Norton McNaughton, Inc. a Delaware corporation (the "Company"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus (as
the same may be amended or supplemented from time to time, this "Prospectus")
and in the accompanying Letter of Transmittal (the "Exchange Offer"), to
exchange its 12 1/2% Senior Notes due 2005 (the "Exchange Notes") for a like
aggregate principal amount of its outstanding 12 1/2% Senior Notes due 2005 (the
"Outstanding Notes"), of which an aggregate principal amount of $125,000,000 is
outstanding as of the date hereof. The form and the terms of the Exchange Notes
will be the same in all material respects as the form and terms of each of the
Outstanding Notes, except that (i) the Exchange Notes will be registered under
the Securities Act of 1933, as amended (the "Securities Act"), and hence will
not bear legends restricting the transfer thereof and (ii) holders of the
Exchange Notes will not be entitled to certain rights of holders of Outstanding
Notes under the Exchange and Registration Rights Agreement dated June 18, 1998
(the "Registration Rights Agreement"). See "The Exchange Offer -- Purpose and
Effect of the Exchange Offer." The Exchange Notes will be initially issued as a
single, permanent global certificate. See "Description of Exchange Notes."
The Outstanding Notes were issued and sold in a transaction exempt from the
registration requirements of the Securities Act and may not be offered or sold
in the United States unless so registered or pursuant to an applicable exemption
under the Securities Act. The Exchange Notes are being offered herewith in
order to satisfy certain obligations of the Company contained in the
Registration Rights Agreement. Based on no-action letters issued by the staff
of the Securities and Exchange Commission (the "Commission") to third parties
with respect to similar transactions, the Company believes that the Exchange
Notes to be issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by holders thereof (other than (i) a broker-
dealer who purchases such Exchange Notes from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act, or (ii) a
person that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holders' business and
such holders have no arrangement with any person to participate in the
distribution of such Exchange Notes. However, the Company has not sought a no-
action letter with respect to the Exchange Offer and there can be no assurance
the staff of the Commission would make a similar determination with respect to
the Exchange Offer. Eligible holders wishing to accept the Exchange Offer must
represent to the Company that such conditions have been met. Each broker-dealer
that receives Exchange Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any resale
of such Exchange Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an underwriter within the meaning of the Securities Act. A
broker-dealer may nonetheless be deemed to be an "underwriter" under the
Securities Act notwithstanding such disclaimer. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Outstanding
Notes where such Outstanding Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. The Company has
agreed that, for a period of 180 days after the Expiration Date (as defined
herein), it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
Holders of Outstanding Notes whose Outstanding Notes are not tendered and
accepted in the Exchange Offer will continue to hold such Outstanding Notes and
will be entitled to all the rights and preferences and will be subject to the
limitations applicable thereto under the indenture governing the Outstanding
Notes and the Exchange Notes. Following consummation of the Exchange Offer, the
holders of Outstanding Notes will continue to be subject to the existing
restrictions upon transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the Securities
Act of the Outstanding Notes held by them. The Exchange Notes will evidence the
same debt as the Outstanding Notes and will be entitled to the benefits of the
indenture (the "Indenture"), dated June 18, 1998, governing the Outstanding
Notes and the Exchange Notes. The Outstanding Notes and the Exchange Notes are
sometimes referred to herein collectively as the "Notes."
Interest on the Notes will be payable semiannually on June 1 and December 1 of
each year commencing on December 1, 1998 at the rate of 12 1/2%. The Notes will
mature on June 1, 2005. Except as described herein, the Company may not redeem
the Notes prior to June 1, 2003. On or after such date, the Company may redeem
the Notes, in whole or in part, at any time, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, thereon to the redemption
date. In addition, at any time prior to June 1, 2001, the Company may redeem up
to 35% of the aggregate principal amount of Notes originally issued under the
Indenture at a redemption price of 112.50% of the principal amount thereof, plus
accrued and unpaid interest, if any, thereon to the redemption date, with the
net cash proceeds of one or more offerings of Equity Interests (as defined) of
the Company, provided that at least 65% of the aggregate principal amount of
Notes originally issued under the Indenture remains outstanding immediately
after the occurrence of each such redemption. The Notes will not be subject to
any sinking fund requirement. Upon the occurrence of a Change of Control (as
defined), the Company will be required to make an offer to each holder of Notes
to repurchase the Notes at a repurchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, thereon to the date of
repurchase. See "Risk Factors--Change of Control" and "Description of Notes."
The Outstanding Notes are, and the Exchange Notes will be, senior unsecured
obligations of the Company and will be unconditionally guaranteed on a senior,
unsecured basis (the "Subsidiary Guarantees") by the Subsidiary Guarantors (as
defined herein). The Outstanding Notes and the Exchange Notes and each
Subsidiary Guarantee will rank pari passu in right of payment with all other
unsecured and unsubordinated indebtedness of the Company and the applicable
Subsidiary Guarantors, respectively, and senior to all subordinated indebtedness
of the Company and the applicable Subsidiary Guarantors, respectively, but will
be effectively subordinated to secured indebtedness of the Company and the
respective Subsidiary Guarantors. On June 18, 1998, the Company and the
Subsidiary Guarantors entered into a secured revolving credit and letter of
credit facility (the "Current Credit Agreement"). See "Description of Other
Indebtedness."
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Outstanding Notes being tendered for exchange. The Company will
accept for exchange any and all validly tendered Outstanding Notes not withdrawn
prior to 5:00 p.m., New York City time, on _______ __, 1998 unless extended by
the Company, (the "Expiration Date"). Tenders of Outstanding Notes may be
withdrawn at any time prior to the Expiration Date. The Exchange Offer is
subject to certain customary conditions. See "The Exchange Offer --
Conditions." The Company has agreed to pay all expenses incident to the Exchange
Offer. The Company will not receive any proceeds from the Exchange Offer.
The Outstanding Notes, which have been designated for trading on the PORTAL
Market, constitute securities for which there is no established trading market.
Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding. The Company does not currently intend to list the Exchange
Notes on any securities exchange. To the extent that any Outstanding Notes are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Outstanding Notes could be adversely affected. No assurances can be
given as to the liquidity of the trading market for either the Outstanding Notes
or the Exchange Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OUTSTANDING NOTES IN ANY JURISDICTION
IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
_________
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR OUTSTANDING NOTES IN THE
EXCHANGE OFFER.
The date of this Prospectus is ________ __, 1998.
<PAGE>
SPECIAL CAUTIONARY NOTICE REGARDING
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Those statements include, among other things, the discussions of the Company's
business strategy and expectations concerning market position, future
operations, margins, profitability, liquidity and capital resources, and
statements concerning the integration of the operations acquired pursuant to the
Acquisitions (as defined herein) and achievement of certain benefits in
connection therewith. Forward-looking statements are included in the sections
captioned "Prospectus Summary," "Risk Factors," "Unaudited Pro Forma Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Result of Operations," "Business" and elsewhere in this Prospectus. Although the
Company believes that the expectations reflected in these forward-looking
statements are reasonable, it can give no assurance that the expectations will
prove to be correct. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies, projected or anticipated benefits from acquisitions made by
or to be made by the Company (including the Acquisitions, as herein defined) or
projections involving anticipated revenues, expenses, earnings, levels of
capital expenditures or other aspects of operating results.
The Company's operations are subject to a number of uncertainties, risks and
other influences, many of which are outside the Company's control and any one of
which, or a combination of which could materially affect the Company's results
of operations, financial condition and whether the forward-looking statements
ultimately prove to be accurate. Important factors that could cause actual
results to differ materially from the Company's expectations include (i) a
deterioration in retailing conditions in women's apparel, (ii) an increase in
pricing pressures and other competitive factors, any of which could result in an
unanticipated decrease in gross profit margin, (iii) the unanticipated loss of a
major customer, (iv) the unanticipated loss of a major contractor or supplier,
(v) unanticipated problems arising out of the integration of Miss Erika's (as
hereinafter defined) and Jeri-Jo's (as hereinafter defined) businesses with that
of the Company and (vi) the other factors disclosed under the caption "Risk
Factors" below.
AVAILABLE INFORMATION
The Company and the Subsidiary Guarantors have filed with the Commission a
registration statement on Form S-4 (herein, together with all amendments and
exhibits, referred to as the "Registration Statement") under the Securities Act
with respect to the Exchange Notes offered hereby. This Prospectus, which forms
a part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits thereto, certain parts
of which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company, the Subsidiary
Guarantors and the Exchange Notes offered hereby, reference is made to the
Registration Statement. Any statements made in this Prospectus concerning the
provisions of certain documents are not necessarily complete and, in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement otherwise filed with the Commission.
The Company is subject to the information requirements of the Exchange Act,
and the rules and regulations thereunder, and in accordance therewith files
periodic reports, proxy and information statements, and other information with
the Commission. All reports, proxy and information statements, and other
information filed by the Company with the Commission may be inspected at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains a web site (http://www.sec.gov) that contains reports,
proxy and information statements regarding registrants, such as the Company,
that file electronically with the Commission.
In addition, the Company has agreed that, whether or not it is required by the
rules and regulations of the Commission, so long as any Notes are outstanding,
it will furnish to the holders of the Notes, and file with the Commission
(unless the Commission will not accept such a filing), (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Company were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations," in each case, that describes the financial
condition and results of operations of the Company and its subsidiaries and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants, and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports. In addition, for so long as any Notes remain
outstanding, the Company will agree to make available to any prospective
purchaser of the Notes, or any beneficial owner of the Notes in connection with
any sale thereof, the information required by Rule 144A(d)(4) under the
Securities Act.
ii
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus. The following summary is qualified in its entirety by reference to,
and should be read in conjunction with, the more detailed information and
financial data, including the historical and pro forma financial statements and
the notes thereto, appearing elsewhere in this Prospectus. Unless the context
otherwise requires, the discussion herein assumes the consummation of (i) the
acquisition by a wholly owned subsidiary of the Company of substantially all of
the assets of Miss Erika, Inc. (the "Miss Erika Acquisition"), which occurred on
September 30, 1997, (ii) the acquisition by a wholly owned subsidiary of the
Company of substantially all of the assets of Jeri-Jo Knitwear Inc. and Jamie
Scott, Inc. (together, the "Jeri-Jo Companies")(the "Jeri-Jo Acquisition" and,
together with the Miss Erika Acquisition, the "Acquisitions"), which occurred on
June 18, 1998, (iii) the initial borrowings under the Current Credit Agreement
(the "Current Credit Agreement Transaction"), which occurred on June 18, 1998,
and (iv) the offering of the Outstanding Notes and the application of the net
proceeds therefrom (the "Outstanding Notes Offering"), which occurred on June
18, 1998 (the Acquisitions, Current Credit Agreement Transaction and the
Outstanding Note Offering, collectively, the "Transactions"). Also, unless the
context otherwise requires, references to (a) the "Company" shall mean Norton
McNaughton, Inc., a Delaware corporation, and its consolidated subsidiaries on a
pro forma combined basis after consummation of the Transactions, (b) "Norton"
shall mean Norton McNaughton of Squire, Inc., a New York corporation and wholly
owned subsidiary of the Company, (c) "Miss Erika" shall mean Miss Erika, Inc., a
Delaware corporation and wholly owned subsidiary of the Company and the
purchaser of substantially all of the assets of Miss Erika, Inc., (d) "Jeri-Jo"
shall mean Jeri-Jo Knitwear, Inc., a Delaware corporation, a wholly owned
subsidiary of the Company and the purchaser of substantially all of the assets
of the Jeri-Jo Companies, and (e) "Subsidiaries" or "Subsidiary Guarantors"
shall mean, collectively, Norton, Miss Erika, Jeri-Jo and Norty's, Inc., a
Delaware corporation and a wholly owned subsidiary of Norton. References herein
to the Company's "fiscal year" shall mean the fiscal year which ends on October
31, if such date falls on a Saturday, or the first Saturday following October
31. See "Unaudited Pro Forma Financial Information" for the assumptions
reflected in the pro forma financial information included herein. Careful
consideration should be given to the matters set forth under the caption "Risk
Factors."
THE COMPANY
Norton McNaughton, Inc. is one of the leading women's and juniors' branded
apparel companies in the United States. The Company designs, sources, markets
and distributes moderately-priced casual separates and collections of career and
casual clothing under such brand names as Norton McNaughton(R), Erika(R) and
Energie(R). The Company's primary design and merchandising strategies rely
largely on interpretation of popular designer fashions, avoiding fashion-forward
designs that are subject to rapidly changing trends. The Company believes that
its primary brands enjoy a long-established market position and reputation for
design, value and quality among retailers and consumers. The Company estimates
that its products are sold nationwide in over 8,000 individual stores, operated
by over 1,500 department stores, national chains, mass merchants, off-price
retail chains and specialty retailers, including The May Department Stores
Company (consisting of Hechts, Foley's, Robinson-May, Kaufmann's, Famous Barr
and Meier & Frank), J.C. Penney Company, Inc., Federated Department Stores, Inc.
(consisting of Macy's, Rich's, Burdines, Bon Marche and Stern's), Sears, Roebuck
and Co., T.J. Maxx and Mervyn's. The Company contracts for the manufacture of
all of its products, principally through an established network of foreign
manufacturers and agents, thereby avoiding significant capital expenditures for
manufacturing facilities and the costs of a large production work force.
The Company conducts its business through three subsidiaries, Jeri-Jo, Norton
and Miss Erika.
. Jeri-Jo. Jeri-Jo is a designer and merchandiser of moderately-priced,
updated sportswear, knitwear and casual wear for juniors and misses (ages 12 to
35), a category which the Company believes presents significant growth
opportunities based upon the demographics and buying patterns of this segment.
First introduced in 1975, Jeri-Jo's products are sold under its brand names
Energie(R), Currants(R) and Jamie Scott(R) and under private labels to national
chains, department stores, off-price retail chains, and mass merchants. The
acquisition of the Jeri-Jo Companies diversified and expanded the Company's
product offerings, distribution channels and sourcing relationships, and added
further strength and depth to the Company's management team.
. Norton. Norton designs, sources and markets moderately-priced separates
and collections of career and casual clothing for women aged 25 to 55. The
Norton product lines were first introduced in 1981, and are sold under Norton's
brand names, including Norton McNaughton(R), Maggie McNaughton(R) and Norton
Studio(R) primarily to department stores and national chains. Norton believes
that it has a loyal customer base, a reputation for design, value and quality
and, based upon industry data, that its Norton McNaughton(R) product line is one
of the top five national brands in the moderately-priced women's segment of the
apparel industry.
<PAGE>
. Miss Erika. Miss Erika designs, sources and distributes women's
moderately-priced casual separates. Miss Erika's target customer is a middle
income, budget-minded but fashionable woman ranging in age from 15 to 50 years
old. First introduced in 1968, Miss Erika sells its products under its brand
names Erika(R), Sugar Blues(R) and Ricki(R) and under private labels to national
chains, department stores, off-price retail chains, and specialty stores. The
acquisition of Miss Erika diversified and expanded the Company's product
offerings, distribution channels and sourcing relationships, and provided the
Company with access to management having long-standing business, merchandising
and sourcing experience in the moderately-priced women's apparel industry. The
Company believes that Miss Erika will benefit from the increased preference for
and acceptance of casual wear generally, and specifically, in the workplace.
INDUSTRY OVERVIEW
The Company competes in the moderately-priced women's and juniors' segments of
the apparel market. According to industry data, sales of moderately-priced
women's apparel accounted for in excess of $17 billion or approximately 20% of
total retail women's apparel sales in 1997. Juniors apparel is marketed to
teenagers and young women. According to the U.S. Census Bureau, the so-called
Generation Y (ages 10 to 24 years) number more than 56 million people and is
expected to grow 10% to approximately 62 million people by 2005. An independent
consumer research firm has estimated that the teenaged segment of the Generation
Y consumer (ages 12 to 19 years) accounted for approximately $122 billion of
retail sales in 1997 and estimated that approximately 37% of teenaged girls
would choose to spend their discretionary cash on clothes, the largest category
of any discretionary spending by that group. The Company's products are sold at
retail for prices ranging from $10 to $80, which is consistent with pricing in
the moderate women's and juniors' segments. The Company believes that the
popularity of moderately-priced women's and juniors' clothing, especially in
career and casual clothing, has resulted from an increased consumer preference
for comfortable, yet value-priced and fashionable, apparel selections and a
trend toward more flexible dress codes, including greater acceptance of casual
wear in the workplace.
The apparel industry is highly fragmented but is increasingly moving toward
consolidation. Due to a similar consolidation in the retail industry, major
retailers are now purchasing for a larger number of stores. As a result, it has
become more efficient for these retailers to centralize their buying with a more
select group of larger, established vendors, who are better positioned to
accommodate their needs. These include the vendor's ability to fill larger
orders, comply with more intensive quality control standards and accommodate the
retailers' information system and distribution requirements. The Company
believes that it is in a position to capitalize on this ongoing consolidation
trend due to its extensive production and sourcing network, advanced
distribution capabilities, sophisticated management information systems and
access to capital.
KEY STRENGTHS
The Company intends to enhance its industry position by capitalizing on what
it believes are its competitive advantages:
. ESTABLISHED MARKET POSITION. The Company's primary brands enjoy long-
established market positions, having been sold to major apparel retailers
nationwide for periods ranging between 15 and 30 years. The Company believes
that its primary brand names, Norton McNaughton(R), Erika(R) and Energie(R),
are well-recognized and enjoy a long-standing reputation for design, value and
quality. Based upon the latest available industry data compiled by NPD
American Shoppers Panel, the Company's Norton McNaughton(R) product line is
one of the top five national brands in the moderately-priced women's apparel
segment.
. LOW COST PRODUCT SOURCING WITH MINIMAL CAPITAL EXPENDITURES. The Company
contracts for the manufacture of all its products principally through its
established network of over 100 contractors and buying agents in over 25
countries. Contract manufacturing allows the Company to avoid significant
capital expenditures for manufacturing facilities and the fixed costs of
maintaining a large production work force. The Company continues to increase
its proportion of foreign contract manufacturing, which is expected to reach
approximately 95% for fiscal 1998 on a pro forma basis. The Company believes
that foreign sourcing for moderately-priced merchandise allows it to avail
itself of a well-equipped and skilled labor force thereby enabling it to
produce higher quality, better-valued products for its customers. The Company
offsets the longer lead-time necessary for foreign sourced fabrics and
manufacturing by early and timely attention to production planning.
. LOW FASHION RISK WITH BROAD CONSUMER APPEAL. The Company interprets popular
designer fashions at moderate prices. The Company does not seek to dictate
fashion trends; rather, it offers current styles while avoiding fashion-
forward designs that are subject to rapidly changing trends. In addition, the
Company believes that its wide assortment of fashionable women's and juniors'
career and casual clothing appeals to a large cross section of the moderately-
priced women's and juniors' apparel market.
. REDUCED SEASONALITY. Often, apparel manufacturers experience their highest
sales at the end of the calendar year. As a result of the Acquisitions, the
Company anticipates that it will enjoy substantially equal sales volume in the
first half and second half of its fiscal year. At present, Miss Erika
experiences its highest sales in the Spring season (the second fiscal quarter)
and Jeri-Jo and Norton experience their highest sales in the Fall season (the
fourth fiscal quarter). This should enable the Company to better manage its
working capital needs.
2
<PAGE>
. LONG-STANDING RELATIONSHIPS WITH RETAILERS. Each of Norton, Jeri-Jo and
Miss Erika enjoy long-standing relationships with a large and diverse number
of retailers, many of which have been customers for over 15 years. In
addition, the Company has established itself as an accepted vendor with the
corporate buying offices of its department store and national chain store
customers. The Company believes that these corporate relationships are
difficult to attain and provide significant barriers to entry while creating a
stable base from which to pursue future business.
. ABILITY TO MEET THE NEEDS OF LARGE RETAILERS. The Company's branded product
lines provide retailers with a single source for a variety of moderately-
priced women's and juniors' apparel. The Company believes that its buying
power with its suppliers provides it with the capability to meet large orders
and control quality, and that it has in place the necessary distribution and
management information systems to meet retailers' logistical requirements. The
Company believes that these strengths will permit it to benefit from the
consolidation in the retail segment of the apparel industry.
STRATEGIC INITIATIVES AT NORTON
Beginning in late fiscal 1996, Norton undertook a number of strategic
initiatives to address a flattening of its sales and a decline in profitability.
The Company believes that these initiatives will better position Norton for
future growth. The Company strengthened its management team with the addition of
a new President and Chief Operating Officer, a Vice President of Merchandise
Planning at Norton, a Director of Design at Norton, and a Director of Production
at Norton. In addition, Norton also implemented the following merchandising,
sourcing and cost saving initiatives designed to increase its sales and improve
profitability:
. discontinued five unprofitable product lines;
. closed its retail outlet division;
. reduced headcount by over 100 employees or approximately 33% and reduced
corporate overhead by terminating certain lease obligations and reducing
executive compensation;
. increased proportion of foreign contract manufacturing from approximately
40% in fiscal 1996 to an estimated 90% in fiscal 1998 to take advantage of
lower costs and higher quality production;
. lowered prices commencing in the first quarter of fiscal 1998 to improve
sell-through at retail, without a reduction in quality; and
. streamlined merchandise assortment through the reduction of SKU count by
approximately 30%.
In connection with these actions, the Company incurred approximately $9.4
million of special charges in fiscal 1997 and significantly reduced its ongoing
operating expenses.
BUSINESS STRATEGIES
The Company's business strategies are to focus on improving operating
efficiencies, increasing sales and improving profitability. In order to
implement these strategies, the Company is pursuing the following:
. FOCUS ON OPERATING EFFICIENCIES AND COST REDUCTION. The Company will
continue to focus on achieving enhanced operating efficiencies and lower
costs. The Company believes that, over time, its acquisition strategy will
allow it to realize economies of scale associated with sourcing,
manufacturing, marketing, distribution and administration. As part of this
strategy, the Company is presently investigating the feasibility of
relocating Norton's and Miss Erika's warehousing and distribution
activities to the southeastern United States, where it will perform these
operations "in-house." The Company believes that this will allow it to
achieve higher operating efficiencies and enjoy tax and other cost
advantages in a lower-tax and lower-cost state.
. ENHANCE MERCHANDISING. Norton is implementing new merchandising programs
designed to increase sales and expand retail personnel and consumer
awareness of its brands. For example, Norton is developing "in-store shops"
for certain of its brand name products in a select number of stores of its
major retail customers. Norton is also implementing other initiatives such
as the development of merchandising plans to assist retailers in marketing
Norton's products and the redesign of product logos and labels.
. PURSUE SELECTED ACQUISITIONS OF COMPLEMENTARY BUSINESSES AND BRANDS. The
Company believes that it is well-positioned to continue to participate in
the further consolidation of the apparel industry. The Company has adopted
a disciplined acquisition strategy focused on acquiring businesses that
meet its criteria for attractive acquisition candidates,
3
<PAGE>
which may include such criteria as (i) diversifying and expanding the
Company's product offerings, distribution channels and sourcing
relationships, (ii) gaining access to the talents of key management,
merchandising, design and sourcing personnel, (iii) acquisition prices
which, coupled with the target company's existing results of operations,
yield an immediate accretion to the Company's earnings, (iv) acquisitions
structured to include future earn-out payments payable at the Company's
option in the Company's common stock and/or cash and (v) achieving
potential synergies resulting from improvements in finance, management
information systems and other corporate overhead items, and consolidation
and improvement in warehousing and shipping operations.
. CONTINUE TO DIVERSIFY PRODUCT LINES AND DISTRIBUTION CHANNELS. With the
Acquisitions, the Company has diversified its product offerings to include
juniors' apparel and an expanded line of casual separates. In addition, the
Acquisitions have allowed it to increase sales to its existing customers
and to expand its distribution channels to include off-price retail chains,
discounters and specialty retailers. The Company believes that this
strategy will allow it to cover a larger portion of the retail market while
reducing its exposure to any one market segment or customer. In addition,
the Company believes that the expansion will provide opportunities for
cross-marketing its product lines among its expanded customer base.
THE ACQUISITIONS
Jeri-Jo. On June 18, 1998, pursuant to an Agreement of Purchase and Sale
with the Jeri-Jo Companies (as amended on May 27 and June 18, 1998, the "Jeri-Jo
Purchase Agreement"), Jeri-Jo acquired substantially all of the assets and
assumed substantially all of the liabilities of the Jeri-Jo Companies.
The purchase price paid in the Jeri-Jo Acquisition was (i) $55.0 million in
cash at the closing of the acquisition, (ii) the assumption of funded
indebtedness of $10.9 million and certain other contractual obligations. In
addition, the Company has agreed to pay an additional contingent payment in cash
and its common stock, $.01 par value (the "Common Stock"), in the event that
certain earnings targets are achieved by Jeri-Jo for the two years subsequent to
the closing of the Jeri-Jo Acquisition. The Jeri-Jo Purchase Agreement requires
that the Company pay at least 50% of any required contingent payment in cash.
The aggregate contingent payment, if any, payable by the Company is equal to the
excess of (1) the sum of (A) five times Jeri-Jo's average EBITDA (as defined in
the Jeri-Jo Purchase Agreement) for the two years ending June 30, 2000, plus (B)
0.50 times any such average EBITDA between $17.0 million and $20.0 million, plus
(C) one times any such average EBITDA over $20.0 million, over (2) $55.0 million
(the initial closing purchase price under the Jeri-Jo Purchase Agreement). Under
certain circumstances, the sellers under the Jeri-Jo Purchase Agreement will
have the option to accelerate the Company's contingent payment obligation. In
such event, the accelerated contingent payment obligation would be payable in
cash. See "The Acquisitions."
Miss Erika. On September 30, 1997, the Company, through a wholly owned
subsidiary, acquired substantially all of the assets and assumed substantially
all of the liabilities of Miss Erika, Inc. pursuant to an Agreement of Purchase
and Sale (the "Miss Erika Purchase Agreement").
The purchase price for the Miss Erika Acquisition consisted of (i) $24.0
million in cash paid at closing and (ii) the assumption of funded indebtedness
(approximately $2.5 million) and of certain other contractual obligations. In
addition, the Company has agreed to pay an additional contingent payment in cash
and/or Common Stock, in the event that certain earnings targets are achieved by
Miss Erika for the two fiscal years ending November 6, 1999. The aggregate
contingent payment, if any, payable by the Company is equal to the amount by
which (i) four times Miss Erika's average EBITDA (as defined in the Miss Erika
Purchase Agreement) for the two fiscal years ending November 6, 1999, exceeds
(ii) $24.0 million. At the Company's option, the Company may, subject to a
maximum number of shares, pay all or any portion of the contingent payment in
shares of Common Stock valued over a period of 30 consecutive business days
prior to the payment date. See "The Acquisitions."
THE COMPANY
The Company is a Delaware corporation with executive offices located at 463
Seventh Avenue, New York, New York 10018 and its telephone number is (212) 947-
2960.
4
<PAGE>
THE EXCHANGE OFFER
Issuer............... Norton McNaughton, Inc.
Outstanding Notes.... The Outstanding Notes were sold by the Company on June
18, 1998 to NatWest Capital Markets Limited and ING
Baring (U.S.) Securities, Inc. (collectively, the
"Initial Purchasers") pursuant to a Purchase Agreement,
dated June 18, 1998 (the "Purchase Agreement"). The
Initial Purchasers subsequently resold the Outstanding
Notes to qualified institutional buyers pursuant to
Rule 144A under the Securities Act or institutional
"accredited investors" (as defined in Rule 501(a)(1),
(2), (3) or (7) of Regulation D under the Securities
Act) or outside the United States in compliance with
Regulation S under the Securities Act.
Registration Rights
Agreement........... Pursuant to the Purchase Agreement, the Company and the
Initial Purchasers entered into the Registration Rights
Agreement, which grants the holders of the Outstanding
Notes certain exchange and registration rights. The
Exchange Offer is intended to satisfy such exchange and
registration rights which terminate upon the
consummation of the Exchange Offer.
Securities Offered... $125,000,000 aggregate principal amount of 12 1/2%
Senior Notes due 2005.
The Exchange Offer... The Company is offering to exchange $1,000 principal
amount of Exchange Notes for each $1,000 principal
amount of Outstanding Notes that are properly tendered
and accepted. The Company will issue Exchange Notes on
or promptly after the Expiration Date. As of the date
hereof, there is $125,000,000 aggregate principal
amount of Outstanding Notes outstanding. The terms of
the Exchange Notes are the same in all material
respects as the terms of the Outstanding Notes for
which they may be exchanged pursuant to the Exchange
Offer, except that the Exchange Notes are freely
transferable by holders thereof (other than as provided
herein), and are not subject to any covenant
restricting transfer absent registration under the
Securities Act. See "The Exchange Offer". The
Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Outstanding Notes being
tendered for exchange.
Based on no-action letters issued by the staff of the
Commission to third parties with respect to similar
transactions, the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer in exchange
for Outstanding Notes may be offered for resale, resold
and otherwise transferred by holders thereof (other
than (i) a broker-dealer who purchases such Exchange
Notes from the Company to resell pursuant to Rule 144A
or any other available exemption under the Securities
Act, or (ii) a person that is an "affiliate" of the
Company within the meaning of Rule 405 of the
Securities Act) without compliance with the
registration and prospectus delivery requirements of
the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holders'
business and such holders are not engaged in, have no
arrangement or understanding with any person to
participate in, and do not intend to engage in, any
distribution of the Exchange Notes. However, the
Company has not sought a no-action letter with respect
to the Exchange Offer and there can be no assurance
that the staff of the Commission would make a similar
determination with respect to the Exchange Offer. Each
holder of Exchange Notes, other than a broker-dealer,
must represent that such conditions have been met. In
addition, each broker-dealer that receives Exchange
Notes for its own account pursuant to the Exchange
Offer must
5
<PAGE>
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
The Letter of Transmittal accompanying this Prospectus
states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the
Securities Act. A broker-dealer may nonetheless be
deemed to be an "underwriter" under the Securities Act
notwithstanding such disclaimer. This Prospectus, as
it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with
resales of Exchange Notes received in exchange for
Outstanding Notes where such Outstanding Notes were
acquired by such broker-dealer as a result of market-
making activities or other trading activities.
Pursuant to the Registration Rights Agreements, the
Company has agreed that, for a period of 180 days after
the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection
with any such resale. See "The Exchange Offer --
Purpose and Effect of the Exchange Offer" and "Plan of
Distribution."
Any holder who tenders in the Exchange Offer with the
intention to participate, or for the purpose of
participating, in a distribution of the Exchange Notes
could not rely on the position of the staff of the
Commission enunciated in no-action letters and, in the
absence of an applicable exemption, must comply with
the registration and prospectus delivery requirements
of the Securities Act in connection with any resale
transaction. Failure to comply with such requirements
in such instance may result in such holder incurring
liability under the Securities Act for which the holder
is not indemnified by the Company.
Expiration Date...... 5:00 p.m., New York City time, on ______ __, 1998,
unless the Exchange Offer is extended, in which case
the term "Expiration Date" means the latest date and
time to which the Exchange Offer is extended. See "The
Exchange Offer -- Expiration Date; Extensions;
Amendments".
Accrued Interest on
the Exchange Notes.. Each Exchange Note will bear interest from the most
recent date to which interest has been paid on the
Outstanding Notes or, if no interest has been paid on
such Outstanding Notes, from June 18, 1998.
Exchange Date........ As soon as practicable after the close of the Exchange
Offer, the Company will accept for exchange all
Outstanding Notes properly tendered and not validly
withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. See "The Exchange Offer --
Withdrawal of Tenders."
Conditions to the
Exchange Offer...... The Exchange Offer is subject to customary conditions,
certain of which may be waived by the Company. The
Company reserves the right to terminate or amend the
Exchange Offer at any time prior to the Expiration Date
upon the occurrence of any such condition. The
Exchange Offer is not conditioned on any minimum
aggregate principal amount of Outstanding Notes being
tendered for exchange. See "The Exchange Offer --
Conditions."
Consequences of Failure
to Exchange......... Any Outstanding Notes not tendered pursuant to the
Exchange Offer will remain outstanding and continue to
accrue interest. Such Outstanding Notes will remain
"restricted securities" under the Securities Act,
subject to the transfer restrictions described herein.
As a result, the liquidity of the market for such
Outstanding Notes could be adversely affected upon
completion of the Exchange Offer. See
6
<PAGE>
"Risk Factors -- Consequences of Failure to Exchange"
and "The Exchange Offer -- Consequences of Failure to
Exchange."
Certain Federal Income
Tax Considerations.. The exchange of the Outstanding Notes for Exchange
Notes by tendering holders should not be a taxable
exchange for U.S. Federal income tax purposes, and such
holders should not recognize any taxable gain or loss
for U.S. Federal income tax purposes as a result of
such exchange. Holders of Exchange Notes will continue
to be required to include interest on such Exchange
Notes in gross income in accordance with their method
of accounting for U.S. Federal income tax purposes.
Holders should review the information set forth under
"Certain U.S. Federal Income Tax Consequences" for a
discussion of certain U.S. Federal income tax
consequences relating to the Outstanding Notes and the
Exchange Notes prior to tendering the Outstanding Notes
in the Exchange Offer.
Use of Proceeds...... There will be no cash proceeds to the Company from the
Exchange Offer. See "Use of Proceeds."
7
<PAGE>
PROCEDURES FOR TENDERING OUTSTANDING NOTES
Tendering Outstanding
Notes.............. Each beneficial owner owning interests in Outstanding
Notes ("Beneficial Owner") through a DTC Participant
(as defined) must instruct such DTC Participant to
cause Outstanding Notes to be tendered in accordance
with the procedures set forth in this Prospectus and in
the applicable Letter of Transmittal. See "The Exchange
Offer -- Procedures for Tendering -- Outstanding Notes
held through DTC."
Each participant (a "DTC Participant") in the
Depository Trust Company ("DTC") holding Outstanding
Notes through DTC must (i) electronically transmit its
acceptance to DTC through the DTC Automated Tender
Offer Program ("ATOP"), for which the transaction will
be eligible, and DTC will then verify the acceptance,
execute a book-entry delivery to the Exchange Agent's
(as defined herein) account at DTC and send an Agent's
Message (as defined herein) to the Exchange Agent for
its acceptance, or (ii) comply with the guaranteed
delivery procedures set forth in this Prospectus and in
the Letter of Transmittal. By tendering through ATOP,
DTC Participants will expressly acknowledge receipt of
the accompanying Letter of Transmittal and agree to be
bound by its terms and the Company will be able to
enforce such agreement against such DTC Participants.
See "The Exchange Offer -- Procedures for Tendering --
Outstanding Notes held through DTC" and "-- Guaranteed
Delivery Procedures --Outstanding Notes held through
DTC."
Each Holder must (i) complete and sign a Letter of
Transmittal, and mail or deliver such Letter of
Transmittal, and all other documents required by the
Letter of Transmittal, together with certificate(s)
representing all tendered Outstanding Notes, to the
Exchange Agent at its address set forth in this
Prospectus and in the Letter of Transmittal, or (ii)
comply with the guaranteed delivery procedures set
forth in this Prospectus. See "The Exchange Offer --
Procedures for Tendering," "--Exchange Agent" and "--
Guaranteed Delivery Procedures --Outstanding Notes held
by Holders."
By tendering, each holder will represent to the Company
that, among other things, (i) it is not an affiliate of
the Company, (ii) it is not a broker-dealer tendering
Outstanding Notes acquired directly from the Company
for its own account, (iii) the Exchange Notes acquired
pursuant to the Exchange Offer are being obtained in
the ordinary course of business of such holder and (iv)
it has no arrangements or understandings with any
person to participate in the Exchange Offer for the
purpose of distributing the Exchange Notes. See "The
Exchange Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures.......... DTC Participants holding Outstanding Notes through DTC
who wish to cause their Outstanding Notes to be
tendered, but who cannot transmit their acceptances
through ATOP prior to the Expiration Date, may effect a
tender in accordance with the procedures set forth in
this Prospectus and in the Letter of Transmittal. See
"The Exchange Offer -- Guaranteed Delivery Procedures."
Holders who wish to tender their Outstanding Notes but
(i) whose Outstanding Notes are not immediately
available and will not be available for tendering prior
to the Expiration Date, or (ii) who cannot deliver
their Outstanding Notes, the Letter of Transmittal or
any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender in
accordance with the procedures set forth in this
Prospectus. See "The Exchange Offer --Guaranteed
Delivery Procedures."
8
<PAGE>
Withdrawal Rights... The tender of Outstanding Notes pursuant to the
Exchange Offer may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date,
in accordance with the procedures set forth in this
Prospectus. See "The Exchange Offer -- Withdrawal of
Tenders."
Exchange Agent...... United States Trust Company of New York is serving as
Exchange Agent (the "Exchange Agent") in connection
with the Exchange Offer. See "The Exchange Offer --
Exchange Agent."
Shelf Registration
Statement........... Under certain circumstances described in the
Registration Rights Agreement, certain holders of
Outstanding Notes (including holders who are not
permitted to participate in the Exchange Offer or who
may not freely resell Exchange Notes received in the
Exchange Offer) may require the Company to file and use
its best efforts to cause to become effective, a shelf
registration statement under the Securities Act, which
would cover resales of Outstanding Notes by such
holders. See "The Exchange Offer -- Purpose and Effect
of the Exchange Offer."
9
<PAGE>
THE EXCHANGE NOTES
Securities Offered.. $125,000,000 aggregate principal amount of 12 1/2%
Senior Notes due 2005 that have been registered under
the Securities Act. The form and terms of the Exchange
Notes are the same in all material respects as the
terms of the Outstanding Notes for which they may be
exchanged pursuant to the Exchange Offer, except for
certain transfer restrictions and registration rights
relating to the Outstanding Notes and except for
certain provisions providing for an increase in the
interest rate on the Outstanding Notes under
circumstances relating to the Exchange Offer. See
"Description of Exchange Notes."
Maturity Date....... June 1, 2005.
Interest Payment
Dates.............. June 1 and December 1 of each year, commencing on
December 1, 1998.
Optional
Redemption.......... Except as described below and under "Change of
Control", the Company may not redeem the Notes prior to
June 1, 2003. On or after such date, the Company may
redeem the Notes, in whole or in part, at any time at
the redemption prices set forth herein, together with
accrued and unpaid interest, if any, to the date of
redemption. In addition, at any time and from time to
time on or prior to June 1, 2001, the Company may,
subject to certain requirements, redeem up to 35% of
the aggregate principal amount of the Notes with the
cash proceeds received from one or more Equity
Offerings at a redemption price equal to 112.5% of the
principal amount to be redeemed, together with accrued
and unpaid interest, if any, to the date of redemption,
provided that at least 65% of the original aggregate
principal amount of the Notes remains outstanding
immediately after each such redemption. See
"Description of Exchange Notes--Optional Redemption."
Ranking............. The Outstanding Notes are, and the Exchange Notes will
be, senior unsecured obligations of the Company and
will rank pari passu in right of payment with all other
unsecured and unsubordinated indebtedness of the
Company and senior to all subordinated indebtedness of
the Company (including the Outstanding Notes), but will
be effectively subordinated to secured indebtedness of
the Company.
Subsidiary Guarantees The Outstanding Notes are, and the Exchange Notes will
be, unconditionally guaranteed, jointly and severally,
by each of the Subsidiary Guarantors. The Subsidiary
Guarantees will be senior unsecured obligations of the
Subsidiary Guarantors and will rank pari passu in right
of payment with all other existing and future unsecured
and unsubordinated indebtedness of the respective
Subsidiary Guarantors and senior in right of payment to
all future subordinated indebtedness of the respective
Subsidiary Guarantors and may be released upon the
occurrence of certain events. The Subsidiary Guarantees
will be effectively subordinated to the obligations
under any secured debt of the Subsidiary Guarantors
(including under the Current Credit Agreement) to the
extent of assets serving as security therefor. See
"Description of Notes--Subsidiary Guarantees."
Change of Control... Upon the occurrence of a Change of Control (as
defined), the Company will be required to make an offer
to repurchase the Notes at a price equal to 101% of the
principal amount thereof, together with accrued and
unpaid interest, if any, to the date of repurchase.
There can be no assurance that, in the event of a
Change of Control, the Company will have, or be able to
obtain, sufficient funds to repurchase the Notes. See
"Risk Factors--Change of Control" and "Description of
Notes--Repurchase at the Option of Holders--Change of
Control."
10
<PAGE>
Restrictive Covenants......... The Indenture under which the Outstanding
Notes were, and the Exchange Notes will be,
issued contains certain covenants that, among
other things, will limit (i) the incurrence
of additional indebtedness by the Company and
its subsidiaries, (ii) the payment of
dividends on, and redemption of, capital
stock of the Company and the redemption of
certain subordinated Obligations of the
Company, (iii) investments, (iv) sales of
assets and subsidiary stock, (v) transactions
with affiliates and (vi) consolidations,
mergers and transfers of all or substantially
all the assets of the Company. The Indenture
will also prohibit certain restrictions on
distributions from subsidiaries. However, all
of these limitations and prohibitions are
subject to a number of important
qualifications and exceptions. See
"Description of Notes--Certain Covenants."
Exchange Offer;
Absence of a Public
Market for the Notes.......... The Exchange Notes will generally be freely
transferable (subject to the restrictions
discussed elsewhere herein) but will be new
securities for which there will not initially
be a market. Accordingly, there can be no
assurance as to the development or liquidity
of any market for the Exchange Notes. The
Outstanding Notes have been designated for
trading in the PORTAL market. The Company
does not intend to apply for a listing of the
Exchange Notes, on a securities exchange or
on any automated dealer quotation system.
For more complete information regarding the Notes, see "Description of Exchange
Notes" and "Description of Outstanding Notes."
RISK FACTORS
Prospective acquirors of the Exchange Notes should consider carefully
all of the information set forth in this Prospectus and, in particular, should
evaluate the specific factors set forth under "Risk Factors" for risks involved
with an acquisition of the Exchange Notes.
11
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA INFORMATION
The following summary historical and consolidated pro forma financial
information for fiscal years 1995 through 1997 has been derived from the audited
financial statements of Norton McNaughton, Inc. The information presented for
the twenty-six weeks ended May 3, 1997 and May 2, 1998 was derived from the
unaudited financial statements of the Company. The Norton McNaughton, Inc.
statement of operations data for fiscal 1997 includes the results of operations
of Miss Erika from its date of acquisition, September 30, 1997. The unaudited
consolidated pro forma financial information for fiscal 1997 gives effect to (i)
the Miss Erika Acquisition, (ii) the Jeri-Jo Acquisition, (iii) borrowings under
the Current Credit Agreement and (iv) the Offering and the application of the
net proceeds therefrom as if each had occurred at the beginning of fiscal 1997,
in the case of the statement of operations data, and on May 2, 1998 in the case
of balance sheet data. The summary historical financial information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements of the Company
and the notes thereto included and incorporated by reference herein. See
"Unaudited Pro Forma Financial Information" for additional assumptions reflected
in the pro forma financial information included in the following table.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1) TWENTY-SIX WEEKS ENDED
(UNAUDITED)
----------------------------------------------------- ----------------------------------------------
NORTON MCNAUGHTON, INC. NORTON MCNAUGHTON, INC.
------------------------------------- PRO FORMA -----------------------
NOV. 1, PRO FORMA
NOV. 4, NOV. 2, NOV. 1, 1997 MAY 3, MAY 2, MAY 2,
1995 1996 1997 (UNAUDITED) 1997 1998(2) 1998(3)
-------- -------- -------- ---------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.................... $227,530 $220,823 $218,782 $404,710 $147,624 $94,469 $187,739
Gross profit................. 55,750 44,760 39,226 87,362 29,433 18,258 41,178
Selling, general and
administrative
expenses.............. 37,456 39,317 44,015 (4) 69,833 23,963 23,410 29,286
Depreciation and amortization 481 662 984 3,778 751 477 1,882
-------- -------- -------- -------- -------- ------- --------
Income (loss) from operations 17,813 4,781 (5,773)(4) 13,751 4,719 (5,629) 10,010
Interest expense............. 1,440 2,294 2,500 17,886 3,815 716 9,519
Other expense (income), net.. (218) (164) (168) (174) (82) (84) (138)
-------- -------- -------- -------- -------- ------- --------
Income (loss) before income
taxes................. 16,591 2,651 (8,105)(4) (3,961) 986 (6,261) 629
Provision (benefit) for
income taxes................. 6,888 1,127 (3,400)(4) (1,624) 515 (2,753) 258
-------- -------- -------- -------- -------- ------- --------
Net income (loss)............ $ 9,703 $ 1,524 $ (4,705)(4) $ (2,337) $ 471 $(3,508) $ 371
======== ======== ======== ======== ======== ======= ========
OTHER DATA:
EBITDA(5).................... $ 18,294 $ 5,443 $ (4,789) $ 17,529 $ 5,470 $(5,152) $ 11,892
Capital expenditures......... 1,599 1,841 1,571 2,026 1,077 974 1,110
</TABLE>
<TABLE>
<CAPTION>
AS OF MAY 2, 1998
-----------------
(unaudited)
NORTON PRO
MCNAUGHTON, FORMA
INC. (2) COMBINED
----------- ---------
(Dollars in thousands)
<S> <C> <C>
Working capital.................................................................................... $ 36,897 $103,870
Total assets....................................................................................... 130,879 196,878
Total debt......................................................................................... 71,015 134,788
Stockholders' equity............................................................................... 42,646 41,440
</TABLE>
12
<PAGE>
(1) The Company operates on a 52 or 53-week fiscal year. The Company's fiscal
year ends on October 31, if such date falls on a Saturday, or the first
Saturday following October 31. Closing its fiscal year on a Saturday enables
the Company to report the results of its operations in a manner that is more
consistent with both retail/apparel industry practice and the close of its
actual business cycle. Data for fiscal years 1995 through 1997 for the
Company include the results of operations for 52 weeks.
(2) Norton McNaughton, Inc.'s historical financial statements for the twenty-six
weeks ended May 2, 1998 included herein combine the data for Norton
McNaughton, Inc. and Miss Erika for this period. See "Consolidated Financial
Statements--Norton McNaughton, Inc."
(3) The pro forma operating results for the twenty-six weeks ended May 2, 1998
may not be indicative of the results that are expected for the fiscal year
1998.
(4) Loss from operations for fiscal year 1997 includes special charges of
approximately $9.4 million consisting of approximately $5.7 million and $3.7
million recorded in the second and fourth quarters of fiscal 1997,
respectively. Approximately $3.4 million of such special charges caused a
reduction in gross profit and the remainder of approximately $6.0 million
was recorded in selling, general and administrative expenses. On an after-
tax basis, these special charges aggregated approximately $5.5 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(5) EBITDA represents earnings before interest expense, interest income,
provision for income taxes, and depreciation and amortization." EBITDA is a
widely accepted financial indicator of a company's ability to service and/or
incur debt. EBITDA is not a measurement of operating performance calculated
in accordance with generally accepted accounting principles and should not
be considered as a substitute for operating income, net income, cash flows
from operations, or other consolidated income or cash flow data prepared in
accordance with generally accepted accounting principles, or as a measure of
a Company's profitability or liquidity. EBITDA has been reduced by the
special charges of $5.7 million and $3.7 million recorded by Norton in the
second and fourth quarters of fiscal 1997, respectively. In addition,
EBITDA is not adjusted for reductions in compensation expense resulting from
personnel reductions at Norton during fiscal 1997 ($2.8 million), the
elimination of rental expense resulting from the termination of lease
obligations by Norton and the reduction in distribution expenses at Norton
during fiscal 1997 ($0.8 million), charges taken by Miss Erika during fiscal
1997 in anticipation of the cancellation of lease obligations and other
contingencies ($0.9 million) or the elimination of certain professional fees
and other expenses at Jeri-Jo following the Jeri-Jo Acquisition ($0.3
million).
Cash flow provided by (used for) operations for Norton McNaughton, Inc. for
the fiscal years ended November 2, 1996 and November 1, 1997 was $5.4
million and a use of $(26.5) million, respectively. Cash flow used for
operations in the fiscal year ended November 1, 1997 reflects the
reclassification of short-term advances from due from factor to revolving
credit loans. Excluding the effects of such reclassification, cash flow used
by operations for fiscal 1997 would have been a use of $(4.0) million. Cash
flow provided by operations for Miss Erika, Inc. for the fiscal years ended
January 31, 1996 and 1997 was $5.0 million and $5.5 million, respectively.
Cash flow provided by operations for the Jeri-Jo Companies for the fiscal
years ended December 31, 1996 and 1997 was $20.1 million and $17.0 million,
respectively.
13
<PAGE>
RISK FACTORS
In addition to the other information set forth herein, prospective
investors should carefully consider the following information in evaluating the
Company and its business before making an acquisition of the Exchange Notes.
The information contained contains forward-looking statements that involve a
number of risks and uncertainties. A number of factors, including those
discussed below, could cause results to differ materially from those anticipated
by such forward-looking statements. See "Special Cautionary Notice Regarding
Forward-Looking Statements."
SUBSTANTIAL LEVERAGE
The Company is highly leveraged. On May 2, 1998, after giving pro forma effect
to the Transactions, the Company would have had consolidated funded indebtedness
totalling approximately $134.8 million ($9.8 million of which would have
consisted of loans under the Current Credit Agreement and $125.0 million which
would have consisted of the Notes), obligations under undrawn letters of credit
in the aggregate face amount of approximately $107.9 million and stockholders'
equity of approximately $41.4 million. The Company and its Subsidiaries will be
permitted to incur substantial additional indebtedness in the future. See
"Capitalization," "Selected Financial Data," "Unaudited Pro Forma Financial
Information," and "Description of Other Indebtedness."
The Company's ability to make scheduled payments of principal of, or to pay
the interest, if any, on, or to refinance, its indebtedness (including the
Notes), or to fund planned capital expenditures will depend on its future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond its control. Based upon the current level of operations, management
believes that cash flow from operations and available cash, together with
available borrowings under the Current Credit Agreement, will be adequate to
meet the Company's liquidity needs for the foreseeable future. The Company may,
however, need to refinance all or a portion of the principal amount of the Notes
on or prior to maturity. There can be no assurance that the Company's business
will generate sufficient cash flow from operations or that future borrowings
will be available under the Current Credit Agreement in an amount sufficient to
enable the Company to service its indebtedness, including the Notes, or to fund
its other liquidity needs. In addition, there can be no assurance that the
Company will be able to effect any such refinancing on commercially reasonable
terms or at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
The degree to which the Company will be leveraged following the Exchange Offer
could have important consequences to holders of the Notes, including, but not
limited to: (i) making it more difficult for the Company to satisfy its
obligations with respect to the Notes; (ii) increasing the Company's
vulnerability to general adverse economic and industry conditions; (iii)
limiting the Company's ability to obtain additional financing to fund its growth
strategy, future working capital, capital expenditures and other general
corporate requirements; (iv) requiring the dedication of a substantial portion
of the Company's cash flow from operations to the payment of principal of, and
interest on, its indebtedness, thereby reducing the availability of such cash
flow to fund its growth strategy, working capital, capital expenditures or other
general corporate requirements; (v) limiting the Company's flexibility in
planning for, or reacting to, changes in its business and the industry; and (vi)
placing the Company at a competitive disadvantage vis-a-vis less leveraged
competitors. In addition, the Indenture and the Current Credit Agreement contain
financial and other restrictive covenants that limit the ability of the Company
to, among other things, borrow additional funds. Failure by the Company to
comply with such covenants could result in an event of default which, if not
cured or waived, would have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
HOLDING COMPANY STRUCTURE
The Company holds substantially all of its assets and conducts all of its
operations through its subsidiaries. Therefore, the Company derives all of its
operating income and cash flow from its subsidiaries and must rely upon
earnings, cash flow, distributions, advances or other inter-company transfers
from its subsidiaries to generate the funds necessary to meet its obligations,
including the payment of principal and premium, if any, and interest on the
Notes. The Indenture generally prohibits the Company from permitting its
subsidiaries to restrict their ability to pay dividends and other amounts to the
Company. Any such restrictions could materially and adversely affect the ability
of the Company to service and repay its existing debt, including the Notes.
14
<PAGE>
RANKING; SUBSIDIARY GUARANTEES
The Notes are senior, unsecured obligations of the Company and are
unconditionally guaranteed on a senior, unsecured basis by the Subsidiary
Guarantors. The Notes and each Subsidiary Guarantee rank pari passu in right of
payment with all other unsecured and unsubordinated indebtedness of the Company
and the applicable Subsidiary Guarantors, respectively, and senior to all
subordinated indebtedness of the Company and the applicable Subsidiary
Guarantors, respectively, but are effectively subordinated to secured
indebtedness of the Company and the respective Subsidiary Guarantors. As of May
2, 1998, on a pro forma basis after giving effect to the Transactions, the
Company and the Subsidiary Guarantors would have had (i) approximately $9.8
million of secured funded indebtedness outstanding and (ii) no unsecured and
unsubordinated funded indebtedness outstanding other than the Notes. In
addition, the Company would have had the ability to incur approximately $19.6
million of secured indebtedness funded under the Current Credit Agreement.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Outstanding Notes have not been registered under the Securities Act or any
state securities laws, and therefore, may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions, including the right
of the Company and the Trustee (as defined) in certain cases to require the
delivery of opinions of counsel, certifications and other information prior to
any such transfer. Outstanding Notes that remain outstanding after the
consummation of the Exchange Offer will continue to bear a legend reflecting
such restrictions on transfer. In addition, upon consummation of the Exchange
Offer, holders of Outstanding Notes that remain outstanding will not be entitled
to any rights to have such Outstanding Notes registered under the Securities Act
or to any similar rights under the Registration Rights Agreement (subject to
certain limited exceptions). The Company currently intends to register under
the Securities Act Outstanding Notes that remain outstanding after consummation
of the Exchange Offer only if such Outstanding Notes are held by Initial
Purchasers or persons ineligible to participate in the Exchange Offer (other
than due solely to the status of such holder as an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act). If Outstanding Notes
are tendered and accepted in the Exchange Offer, the market for untendered
Outstanding Notes is likely to diminish; accordingly, holders who do not tender
their Outstanding Notes may encounter difficulties in selling such notes
following the Exchange Offer. The Exchange Notes and any Outstanding Notes that
remain outstanding after consummation of the Exchange Offer will constitute a
single series of debt securities under the Indenture and, accordingly, will vote
together as a single class for purposes of determining whether holders of the
requisite percentage in outstanding principal amount of the Notes have taken
certain actions or exercised certain rights under the Indenture.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture governing the terms of the Notes contains certain covenants
limiting, subject to certain exceptions, the incurrence of additional
indebtedness, the payment of dividends, the redemption of capital stock, the
making of certain investments, the issuance of capital stock of subsidiaries,
the creation of liens and other restrictions affecting the Company's
subsidiaries, the issuance of guarantees, transactions with affiliates, asset
sales and certain mergers and consolidations. A breach of any of these covenants
could result in an event of default under the Indenture. In addition, the
Current Credit Agreement contains similar and other restrictive covenants and
requires the Company to satisfy certain financial tests. The Company's ability
to comply with these covenants and to satisfy these financial tests may be
affected by events beyond its control. A breach of any of these covenants could
result in an event of default under the Current Credit Agreement and under the
Indenture. In the event of a default under the Current Credit Agreement, the
lenders thereunder could elect to declare all amounts borrowed, together with
accrued interest, to be immediately due and payable, and the lenders under the
Current Credit Agreement could terminate all commitments thereunder. In
addition, a default under the Current Credit Agreement would constitute a cross-
default under the Indenture, and a default under the Indenture would constitute
a cross-default under the Current Credit Agreement.
15
<PAGE>
ASSET ENCUMBRANCES IN FAVOR OF CURRENT CREDIT AGREEMENT
The Company's obligations under the Current Credit Agreement are secured by
liens on substantially all of the current and future assets of the Company and
its subsidiaries (including the Subsidiary Guarantors) (including a pledge of
all of the issued and outstanding shares of capital stock of the Company's
subsidiaries). In the event of a default on secured indebtedness (whether as a
result of the failure to comply with a payment or other covenant, a cross-
default, or otherwise), the parties granted such security interests will have a
prior secured claim on the assets of the Company and its subsidiaries (including
the Subsidiary Guarantors). Moreover, if these parties should attempt to
foreclose on their collateral, it is possible that there would be insufficient
assets remaining after satisfaction in full of all such indebtedness to satisfy
in full the claims of the holders of the Notes and the Company's financial
condition and the value of the Notes would be materially adversely affected.
SUBSTANTIAL COMPETITION AND CHANGING FASHION TRENDS
Competition is intense in the women's and juniors' apparel business. The
Company must remain competitive in the areas of style, quality, price, comfort
and customer service. The Company's competitors include numerous manufacturers,
importers and distributors, some of which have certain resources not available
to the Company. The Company competes with distributors that import women's
apparel, domestic companies that have foreign manufacturing relationships and
companies that produce women's apparel domestically. Any failure by the Company
to identify and respond to emerging fashion trends could adversely affect
consumer acceptance of the Company's brand names and product lines, which in
turn could adversely affect the Company's financial condition and results of
operations.
DEPENDENCE ON MAJOR RETAILERS
In fiscal 1997, after giving effect to the Acquisitions, pro forma net sales
to May Company, J.C. Penney and Federated would have accounted for approximately
18%, 13% and 12%, respectively, of the Company's net sales. As a result of the
Company's dependence on these retailers, they may have the ability to influence
the Company's business decisions. The Company expects that sales to its top
retailers will continue to account for a significant percentage of its net
sales. The Company does not have any long-term agreements with any of such
retailers. The loss of or significant decrease in business from any of its major
retailers would have a material adverse effect on the Company's financial
condition and results of operations.
OWNERSHIP CHANGES IN THE RETAIL INDUSTRY
In recent years, the retail industry has experienced consolidation and other
ownership changes. In addition, some of the Company's customers have operated
under the protection of the federal bankruptcy laws. In the future, retailers in
the United States and in foreign markets may consolidate, undergo restructurings
or reorganizations, or realign their affiliations, any of which could decrease
the number of stores which carry the Company's products or increase the
ownership concentration within the retail industry. While such changes in the
retail industry to date have not had a material adverse effect on the Company's
financial condition and results of operations, there can be no assurance as to
the future effect of any such changes.
ECONOMIC CYCLICALITY AND THE APPAREL INDUSTRY; SEASONAL FLUCTUATION
The apparel industry historically has been subject to substantial cyclical
variation, with purchase of apparel and related goods tending to decline during
recessionary periods when disposable income is low. This cyclical variation
could have a material adverse effect on the Company's financial condition and
results of operations.
Historically, the Company has achieved its highest sales in the fourth quarter
and, to a lesser extent, the second quarter of each fiscal year. This may result
in shipments to customers occurring before or after a particular fiscal quarter,
thereby affecting both fiscal quarter to quarter comparisons and quarter to
quarter results during a fiscal year. Correspondingly, sales, gross profit and
gross profit margins may be affected by the timing of shipping cycles or the
delivery of finished goods. As a result of the Acquisitions, the Company
anticipates that it will experience
16
<PAGE>
its highest sales in the second and fourth quarters somewhat equally. There can
be no assurances that the Acquisitions will give greater balance to the
Company's sales throughout the year.
RISKS RELATING TO THE ACQUISITIONS
The Acquisitions have significantly increased the size of the Company's
operations and have substantially increased the demands placed upon the
Company's management, including demands resulting from the need to integrate the
accounting systems, management information systems and other operations of the
acquired companies with those of the Company. Successful integration of Miss
Erika's and the Jeri-Jo Companies' operations will depend on the Company's
ability to manage effectively their operations and to eliminate redundancies and
excess costs. The success of the Company's integration of Miss Erika and the
Jeri-Jo Companies will depend on the retention of certain current management of
those companies. The Company has employment agreements with certain of these
individuals, however, there can be no assurance that they will remain with the
Company following the Acquisitions. The integration of Miss Erika and the Jeri-
Jo Companies may result in unforeseen difficulties that require a
disproportionate amount of management's attention and the Company's resources.
There can be no assurance that the Company will be able to integrate effectively
those operations. Failure to integrate effectively the operations of the
acquired businesses with those of the Company would have a material adverse
effect on the Company's financial condition and results of operations.
Additionally, the Company's strategy includes pursuing additional strategic
acquisitions that enhance or complement the Company's existing product
offerings. Any such acquisition will also involve risks, including the possible
increase in the Company's indebtedness, the possible inability to integrate the
operations of the acquired business, the expenses incurred in connection with
such acquisition, the diversion of management's attention from other business
concerns and the potential loss of key employees of the acquired business. There
can be no assurance that the Company will be able to make any such acquisitions
or, if made, that the Company will be able to integrate effectively the
operations of the acquired business, that it will achieve any anticipated cost
savings as a result of such integration or that the costs of such integration
will not exceed anticipated amounts.
Finally, the Current Credit Agreement and the Indenture contain restrictions
on the ability of the Company to make acquisitions. There can be no assurance
that the Company will obtain any necessary consents under the Current Credit
Agreement or the Indenture in order to consummate future acquisitions.
IMPACT OF FOREIGN MANUFACTURING RELATIONSHIPS; ASIAN INSTABILITY
The Company contracts for the manufacture of all its products principally
through its established network of over 100 contractors and buying agents in
over 25 countries. The Company's future results of operations will partly depend
on maintaining its close working relationships with its principal contract
apparel manufacturers, both directly and through the Company's buying agents.
To date, instability in the overseas political and economic environment has
not had a material adverse effect on the Company's financial condition or
results of operations. The Company cannot predict, however, the effect that the
current conditions affecting various Asian economies or future changes in
economic or political conditions abroad could have on the economics of doing
business with its foreign contract apparel manufacturers. For example, in the
event that bank failures or a tightening of credit availability results from the
current conditions affecting these Asian economies, some of the Company's
foreign manufacturers may be forced out of business or may seek advances or
other financing from the Company to continue in operation. The failure of key
manufacturers would have a material adverse effect on the Company until
alternative sources could be secured. Any required expenditures to support key
manufacturers would reduce credit available to the Company for other purposes.
In addition, the inability of a supplier to ship its products to the Company in
a timely manner or to meet the Company's quality standards would adversely
affect its ability to meet customer delivery requirements.
As is typical in the industry, the Company generally does not enter into long-
term contracts with its suppliers. The failure of any key supplier to perform or
the loss of any key supplier would have a material adverse effect on the
Company's results of operations. In addition, the establishment of new contract
apparel manufacturing relationships would involve various uncertainties, and the
loss of a substantial portion of its foreign manufactured
17
<PAGE>
inventory supply before such alternative contract apparel manufacturing
relationships could be fully developed would have a material adverse effect on
the Company's financial condition and results of operations.
In addition, the Company's business is subject to other risks of doing
business abroad, such as fluctuations in exchange rates, the imposition of
additional regulations relating to imports, and other risks relating to
political instability and changes in local government administrations and
policies and resulting changes in business customs and practices. The Company
cannot predict whether additional United States or foreign restrictions will be
imposed upon the importation of its non-domestically produced products in the
future or what effect such actions could have on its financial condition or
results of operations.
IMPORTS AND IMPORT RESTRICTIONS
Substantially all of the Company's import operations are subject to the terms
of bilateral textile agreements between the United States and a number of
countries, which agreements impose quotas on the amount and type of goods that
can be imported into the United States from these countries. These agreements
allow the United States to impose restraints at any time on the importation of
certain categories of merchandise. The Company's imported products are also
subject to United States customs duties, which in fiscal 1997 represented
approximately 9% of the Company's cost of sales on a pro forma basis. The United
States and the countries in which the Company's products are manufactured may
from time to time impose new quotas, duties, tariffs or other restrictions or
adversely adjust presently prevailing quotas, duties or tariffs. In addition,
the United States may impose penalties on imported products that are found to
have been manufactured by convict, forced, indentured or under-aged labor and
may withdraw the "most favored nation" status of certain countries, which could
result in the imposition of reduced quotas and/or higher tariffs on products
imported from such countries. Any such penalties or new or adjusted restrictions
could have a material adverse effect on the Company's financial condition and
results of operations.
GOVERNMENTAL INVESTIGATION OF THE NEW YORK CITY GARMENT INDUSTRY
According to the U.S. Attorney for the Southern District of New York, there
exists a widespread pattern of racketeering and extortion of businesses in the
garment manufacturing and delivery industries in the greater New York City
metropolitan area. This pattern of racketeering has been, and continues to be,
the subject of Federal and state investigations which have led to the indictment
and conviction of a number of individuals. For example, in February 1992, these
investigations led to the governmental monitoring and forced sale of certain
delivery and trucking concerns, and most recently, in April 1998, to the
indictment of a number of individuals for extortion, conspiracy and other
alleged criminal activity involving garment companies in the New York City
metropolitan area. There is no allegation in either published reports or in
these indictments that the alleged criminal activities involved, directly or
indirectly, the Company.
Norton has exclusive, long-term agreements with two independent contractors
which provide it with finished goods distribution services (Railroad
Enterprises, Inc.) and domestic cutting services (Cutting Edge Services, Inc.,
formerly Toni-Linda Productions, Inc.). In fiscal 1997, Norton's distribution
contractor was responsible for distributing approximately 32% of the Company's
units (representing 100% of Norton's units), representing 52% of the Company's
sales, in each case on a pro forma basis after giving effect to the
Acquisitions. Norton's principal contact and the operations manager of both the
distribution and cutting contractor was an employee of Norton during 1994-1996.
According to published reports, a person allegedly affiliated with these
contractors, other than the foregoing operations manager, has a criminal record
and is one of the individuals recently indicted on charges of racketeering and
extortion involving the garment industry. There is no allegation in either the
published reports or the indictment that the alleged criminal activities
involved, directly or indirectly, the Company or that either of the distribution
or cutting contractors has engaged in criminal activities.
Since Norton currently intends to relocate its warehouse and perform its own
distribution function and given the increasing amount of manufacturing it
sources overseas, Norton notified its distribution and cutting contractors in
March 1998 that it does not intend to renew its agreements with them in June
2000 and 2001, respectively. Although Norton currently intends to continue to
utilize the services of these contractors until 2000 and 2001, respectively, the
loss or disruption of Norton's distribution services would have an adverse
effect on the Company's financial condition and results of operations until
alternative arrangements could be secured.
18
<PAGE>
In April 1998, in response to Norton's notice of an intention not to renew its
agreements with its distribution and cutting contractors, Norton received a
letter from their attorney alleging that Norton has breached its agreements and,
as a result, alleging that such contractors had incurred substantial damages.
Norton does not believe that it has breached any of its agreements with these
contractors. Under the terms of the agreements with these contractors, claims
against Norton are to be resolved through arbitration proceedings. There can be
no assurance that Norton would be successful in defending any proceeding, if
commenced, or that any arbitration award would not have a material adverse
effect on the financial condition and results of operations of the Company. See
"Business--Sourcing and Manufacturing" and "Business--Legal Proceedings."
On July 15, 1998, the distribution and cutting contractors filed an action
entitled Cutting Edge Services, Inc. and Railroad Enterprises, Inc. v. Miss
------------------------------------------------------------------
Erika, Inc., Jeri-Jo Knitwear, Inc. and Jamie Scott, Inc. in the New York State
- ---------------------------------------------------------
Supreme Court, New York County, for breach of contract for failure to use their
services. That action seeks substantial damages and related declaratory relief.
Miss Erika and Jeri-Jo believe the claims are meritless and intend to defend
this action vigorously. There can be no assurance that Miss Erika and Jeri-Jo
will be successful in defending this action, or that any determination rendered
would not have a material adverse effect on the business, financial condition
and results of operations of the Company. See "Business--Legal Proceedings."
DEPENDENCE ON MANAGEMENT
The Company and its subsidiaries, including Miss Erika and Jeri-Jo, are
dependent upon the services of their respective executive officers. The loss or
interruption of the continued full-time services of certain of these executives
could have a material adverse effect on the Company, and there can be no
assurance that the Company would be able to find replacements with equivalent
skills or experience.
TRADEMARKS
The Company believes that its trademarks and other proprietary rights are
important to its success and its competitive position. Accordingly, the Company
devotes substantial resources to the establishment of its trademarks. There can
be no assurance that others will not assert rights in, or ownership of,
trademarks and other proprietary rights of the Company or that the Company will
be able to successfully resolve such conflicts. The loss of such trademarks and
other proprietary rights, or the loss of the exclusive use of its trademarks and
other proprietary rights could have a material adverse effect on the financial
condition and results of operations of the Company.
YEAR 2000
The Company has implemented a Year 2000 program to ensure that the Company's
computer systems and applications will function properly beyond 1999. The
Company believes that it has allocated adequate resources for this purpose and
expects its Year 2000 date conversion program to be successfully completed on a
timely basis. There can, however, be no assurance that this will be the case.
The Company does not expect to incur significant expenditures to address this
issue. The ability of third parties with whom the Company transacts business to
address their Year 2000 issues adequately is outside of the Company's control.
There can be no assurance that the failure of the Company or such third parties
to address their respective Year 2000 issues adequately will not have a material
adverse effect on the Company's financial condition and results of operations.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes may require
the Company to purchase all or a portion of such holder's Notes at a purchase
price of 101% of the principal amount of the Notes, together with accrued and
unpaid interest, if any, to the date of purchase. In such circumstances, the
Company may be required to (i) repay all or a portion of the outstanding
principal of, and pay any accrued interest on, its senior debt, including
indebtedness under the Current Credit Agreement or (ii) obtain any requisite
consent from its lenders to permit the repurchase of the Notes. If the Company
is unable to repay all of such indebtedness or is unable to obtain the necessary
consents, the Company may be unable to offer to repurchase the Notes, which
would constitute an event of default under the Indenture. There can be no
assurance that the Company will have sufficient funds
19
<PAGE>
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) as described above or that the Company would be
able to refinance its outstanding indebtedness in order to permit it to
repurchase the Notes or, if such refinancing were to occur, that such financing
would be on terms favorable to the Company.
The events that constitute a Change of Control under the Indenture may also be
events of default under the Current Credit Agreement. Such events may permit the
holders under such debt instruments to reduce the borrowing base thereunder or
accelerate the debt and, if the debt is not paid, to enforce security interests
on, or commence litigation that could ultimately result in a sale of,
substantially all the assets of the Company and its subsidiaries, thereby
limiting the Company's ability to raise cash to repurchase the Notes and thereby
limiting or eliminating the benefit of the Change of Control provisions to the
holders of the Notes.
FRAUDULENT CONVEYANCE
The obligations of the Company under the Notes, and the application of the net
proceeds therefrom in connection with the Jeri-Jo Acquisition, and related
transactions, may be subject to review under various laws for the protection of
creditors, including federal and state fraudulent conveyance and fraudulent
transfer laws, if a bankruptcy case or other lawsuit (including in circumstances
where bankruptcy is not involved) is commenced by or on behalf of any creditor
of the Company or a representative of any of the Company's creditors. If a court
in such case or lawsuit were to find that, at the time the Company issued the
Notes or at the time of the Jeri-Jo Acquisition and related transactions, the
Company (i) intended to hinder, delay or defraud any existing or future creditor
or (ii) did not receive fair consideration or reasonably equivalent value for
issuing the Notes or in connection with the Jeri-Jo Acquisition and related
transactions, and the Company either (A) was insolvent or rendered insolvent by
reason thereof, (B) was engaged or was about to engage in a business or
transaction for which its remaining unencumbered assets constituted unreasonably
small capital or (C) intended to or believed that it would incur debts beyond
its ability to pay such debts as they matured or became due, such court could
void the Company's obligations under the Notes, subordinate the Notes to other
indebtedness of the Company, direct that holders of the Notes return any amounts
paid thereunder to the Company or to a fund for the benefit of its creditors or
take other action detrimental to the holders of the Notes.
Similarly, indebtedness under the Subsidiary Guarantees may also be subject to
review under relevant federal and state fraudulent conveyances laws in any
bankruptcy of a Subsidiary Guarantor or in a lawsuit brought by or on behalf of
creditors of a Subsidiary Guarantor under the same legal standards described
above. A legal challenge of a Subsidiary Guarantee on fraudulent conveyance
grounds could, among other things, focus on the benefits, if any, realized by a
Subsidiary Guarantor as a result of the issuance by the Company of the Notes.
Pursuant to the terms of the Subsidiary Guarantees, the liability of each
Subsidiary Guarantor is limited to the maximum amount of indebtedness permitted,
at the time of the grant of such Subsidiary Guarantee, to be incurred in
compliance with fraudulent conveyance or similar laws.
To the extent any Subsidiary Guarantee was voided as a fraudulent conveyance,
limited as described above, or held unenforceable for any other reason, holders
of Notes would, to such extent, cease to have a claim in respect of such
Subsidiary Guarantee and, to such extent, would be creditors solely of the
Company and any Subsidiary Guarantor whose Subsidiary Guarantee was not voided,
limited or held unenforceable. In such event, the claims of the holders of the
Notes against the issuer of a voided, limited or unenforceable Subsidiary
Guarantee would be subject to the prior payment of all liabilities of such
Subsidiary Guarantor. There can be no assurance that, after providing for all
prior claims, there would be sufficient assets to satisfy the claims of the
holders of the Notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction being applied. Generally, however, a company
will be considered insolvent at a particular time if the sum of its debts,
including contingent liabilities, at that time is greater than the then fair
value of its assets or if the fair saleable value of its assets at that time is
less than the amount that would be required to pay its probable liability on its
existing debts as they become absolute and matured. There can be no assurance,
however, as to what standard a court would apply to evaluate the parties' intent
or to determine whether the Company was insolvent at the time of, or rendered
insolvent upon consummation of, the Offering or the Jeri-Jo Acquisition or that,
regardless of the standard, a court would not determine that the Company was
insolvent at the time of, or rendered insolvent upon consummation of, the
Offering or the Jeri-Jo Acquisition.
20
<PAGE>
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Outstanding Notes were issued to, and the Company believes are currently
owned by, a relatively small number of beneficial owners. The Outstanding Notes
have not been registered under the Securities Act and will be subject to
restrictions on transferability to the extent that they are not exchanged for
Exchange Notes. See " --Consequences of Failure to Exchange." Although the
Exchange Notes will generally be permitted to be resold or otherwise transferred
by the holders (who are not affiliates of the Company) without compliance with
the registration and prospectus delivery requirements under the Securities Act,
they will constitute a new issue of securities with no established trading
market. If the Exchange Notes are traded after their initial issuance, they may
trade at a discount from their initial offering price, depending upon prevailing
interest rates, the market for similar securities and other factors including
general economic conditions and the results of operations and financial
condition of the Company. The Company does not intend to apply for a listing or
quotation of the Exchange Notes on any securities exchange or stock market.
Accordingly, there can be no assurance as to the development or liquidity of any
market for the Exchange Notes. The liquidity of, and trading market for, the
Notes also may be adversely affected by general declines in the market for
similar securities. Such a decline may adversely affect such liquidity and
trading markets independent of the financial performance of, and prospects for,
the Company.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. Subject to certain provisions set forth in the Registration
Rights Agreement, the Company has agreed that, for a period of up to 180 days
after the consummation of the Exchange Offer, it will make this Prospectus
available to any Participating Broker-Dealer for use in connection with any such
resale. However, under certain circumstance, the Company has the right to
require that Participating Broker-Dealers suspend the resale of Exchange Notes
pursuant to this Prospectus. Notwithstanding that the Company may cause the
resale of Exchange Notes pursuant to this Prospectus to be suspended, the
Company has no obligation to extend the 180-day period referred to above during
which Participating Broker-Dealers are entitled to use this Prospectus in
connection with such resales. See "The Exchange Offer -- Resale of the Exchange
Notes."
EXCHANGE OFFER ELIGIBILITY AND PROCEDURES
Any holder of the Outstanding Notes who is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act or any broker-dealer who
purchased Outstanding Notes from the Company to resell pursuant to Rule 144A or
any other available exemption under the Securities Act will not be permitted or
entitled to tender such Outstanding Notes in the Exchange Offer and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any sale or other transfer of such Outstanding Notes unless
such sale or transfer is made pursuant to an exemption from such requirements.
See "The Exchange Offer -- Resale of the Exchange Notes."
Each holder of Outstanding Notes who wishes to exchange its Outstanding Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company set forth in "The Exchange Offer -- Purpose and
Effect of the Exchange Offer."
Issuance of the Exchange Notes in exchange for the Outstanding Notes pursuant
to the Exchange Offer will be made only after timely receipt by the Exchange
Agent of the required documents. Therefore, holders of the Outstanding Notes
desiring to tender such Outstanding Notes in exchange for Exchange Notes should
allow sufficient time to ensure timely delivery. The Company is under no duty to
give notification of defects or irregularities with respect to tenders of
Outstanding Notes for exchange. See "The Exchange Offer -- Procedures for
Tendering."
21
<PAGE>
THE ACQUISITIONS
THE JERI-JO ACQUISITION
On June 18, 1998, pursuant to the Jeri-Jo Purchase Agreement, Jeri-Jo, a
wholly-owned subsidiary of the Company, acquired substantially all of the assets
and assumed substantially all of the liabilities of the Jeri-Jo Companies. The
Jeri-Jo Acquisition expanded and diversified the Company's product offerings to
include moderately-priced casual apparel for juniors and misses and further
diversified the Company's channels of distribution. In addition to years of
experience in the design and merchandising of casual apparel, Jeri-Jo's
management also brings to the Company significant experience and long-standing
relationships with foreign sources of supply. The Company believes these
attributes will further strengthen the Company's ability to source and
merchandise quality and fashionable women's and juniors' apparel.
Jeri-Jo is a designer and marketer of updated sportswear, knitwear and casual
wear for juniors and misses. The target consumers are teenaged girls and women
aged 12 to 35 years old. First introduced in 1975, Jeri-Jo's products are sold
under its proprietary brand names Energie(R), Currants(R) and Jamie Scott(R) and
under various private labels to national chains, department stores, off-price
retail chains and mass merchant stores.
The purchase price paid in the Jeri-Jo Acquisition was (i) $55.0 million in
cash at the closing of the acquisition and (ii) the assumption of funded
indebtedness of $10.9 million and certain other contractual obligations (see
"Use of Proceeds"). In addition, the Company has agreed to pay an additional
contingent payment in cash and Common Stock in the event that certain earnings
targets are achieved by Jeri-Jo for the two years subsequent to the closing of
the Jeri-Jo Acquisition. The Jeri-Jo Purchase Agreement requires that the
Company pay at least 50% of any required contingent payment in cash. The
aggregate contingent payment, if any, payable by the Company is equal to the
excess of (1) the sum of (A) five times Jeri-Jo's average EBITDA (as defined in
the Jeri-Jo Purchase Agreement) for the two years ending June 30, 2000, plus (B)
0.50 times any such average EBITDA between $17.0 million and $20.0 million, plus
(C) one times any such average EBITDA over $20.0 million, over (2) $55.0 million
(the initial closing purchase price under the Jeri-Jo Purchase Agreement). Under
the terms of the Jeri-Jo Purchase Agreement, all of the shares of Common Stock
and all of the cash payable as the contingent payment are payable on or before
September 30, 2000. The Company has agreed to secure any obligation to pay the
cash portion of the contingent payment by delivery of a stand-by letter of
credit in the face amount of $30.0 million, which letter of credit may be drawn
upon, in whole or in part, in certain circumstances, including in the event of a
default under the cash contingent payment obligation, if any. The shares of
Common Stock payable as part of the contingent payment amount are to be valued
over a period of 30 consecutive business days prior to the payment date. The
Company has agreed to cause offers and sales by the holders of any shares of
Common Stock issued as a contingent payment to be registered under the
Securities Act, including, if requested, in an underwritten offering. The
Company has also agreed to provide the holders of any such shares of Common
Stock with "piggy-back" registration rights under certain circumstances. The
Company intends to pay the cash portion of the contingent payment, if any, from
internally generated funds and from borrowings under the Current Credit
Agreement.
The Jeri-Jo Purchase Agreement provides that in certain events, the sellers
under the Jeri-Jo Purchase Agreement will have the option to accelerate the
Company's contingent payment obligation. In such events, the accelerated
contingent payment obligation would be payable in cash in an amount equal to the
amount by which (i) five times the greater of $17.0 million or an amount equal
to Jeri-Jo's annualized EBITDA (as defined in the Jeri-Jo Purchase Agreement) at
the time of such event exceeds (ii) $55.0 million.
As part of the Jeri-Jo Acquisition, Jeri-Jo entered into employment agreements
with key managers of Jeri-Jo. Adding the Jeri-Jo executives and employees to its
management team will strengthen the Company's management depth and permit the
Company to further enhance its market position. See "Management and Board of
Directors--Employment Agreements."
THE MISS ERIKA ACQUISITION
On September 30, 1997, the Company, through a wholly owned subsidiary,
acquired substantially all of the assets and assumed substantially all of the
liabilities of Miss Erika, Inc. The Company views the Miss Erika Acquisition as
a complementary product line expansion which has also added significant
managerial talents and
22
<PAGE>
experience. Additionally, the Miss Erika Acquisition has furthered the Company's
goal to broaden its customer base and strengthen the appeal of its product
offerings to existing retailers.
The Erika(R) product line was introduced in 1967 and consists of women's
moderately-priced casual separates, including knit tops and bottoms, sweaters,
dresses and jackets, and more casual apparel such as shorts, skirts, tank tops
and jumpers. The target consumer is a middle income, budget-minded but
fashionable woman ranging in age from 15 to 50 years old. Miss Erika sells its
products under its proprietary brand names Erika(R), Sugar Blues(R) and Ricki(R)
and under various private labels to national chains, department stores, off-
price retail chains and specialty stores.
The purchase price for the Miss Erika Acquisition consisted of (i) $24.0
million in cash paid at closing and (ii) the assumption of indebtedness for
borrowed money (approximately $2.5) and of certain other contractual
obligations. In addition, the Company has agreed to pay an additional contingent
payment in cash and/or Common Stock in the event that certain earnings targets
are achieved by Miss Erika for the two fiscal years ending November 6, 1999. The
aggregate contingent payment, if any, payable by the Company is equal to the
amount by which (i) four times Miss Erika's average EBITDA (as defined in the
Miss Erika Purchase Agreement) for the two fiscal years ending November 6, 1999,
exceeds (ii) $24.0 million. At the Company's option, the Company may, subject to
a maximum number of shares, pay all or any portion of the contingent payment in
shares of Common Stock valued over a period of 30 consecutive business days
prior to the payment date. The Miss Erika Purchase Agreement limits the number
of shares of Common Stock payable by the Company to a number of shares which,
after giving effect to their issuance, does not exceed 12% of the aggregate
number of outstanding shares of Common Stock at the time of payment. The Company
has agreed to cause any shares of Common Stock issued as a contingent payment to
be registered under the Securities Act. The Company has also agreed to provide
the holders of such shares of Common Stock with "piggy-back" registration rights
under certain circumstances. The Company intends to pay any cash portion of the
foregoing contingent consideration from internally generated funds and from
borrowings under the Current Credit Agreement.
The Miss Erika Purchase Agreement permits the sellers to require the Company,
under certain circumstances, at the Company's option, to either (i) pay the
sellers an amount not in excess of $5.0 million as a credit against the above-
described contingent payment, or (ii) arrange for a stand-by letter of credit to
secure the future payment of the foregoing amount. The circumstances under which
the foregoing may be required by the sellers consist of the achievement by Miss
Erika of an EBITDA target for the fiscal year ending October 31, 1998 and the
decrease in the market capitalization of the Company's Common Stock below $30.0
million. The Company cannot predict whether Miss Erika will achieve the
foregoing EBITDA target or what its market capitalization will be. In the
absence of an event of default under the Current Credit Agreement which results
in the termination of the lenders' commitment to provide credit, the Current
Credit Agreement provides for stand-by letters of credit in amounts sufficient
to satisfy the above obligations.
As part of the Miss Erika Acquisition, Miss Erika has entered into
employment agreements and bonus arrangements with key managers of Miss Erika.
These persons have added significant design, merchandising and sourcing
experience in the moderately-priced women's apparel industry to the Company's
management. See "Management and Board of Directors--Employment Agreements."
23
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. Of the
approximately $119.3 million in net proceeds received by the Company from the
issuance of the Outstanding Notes (after deduction of the Initial Purchasers'
discount and estimated expenses), approximately $64.9 million was used to fund
the purchase price in the Jeri-Jo Acquisition (including the repayment of
approximately $10.9 million of assumed funded debt), approximately $13.0 million
was used to repay the Company's term debt under its then existing credit
agreement (the "Prior Credit Agreement") and approximately $41.4 million was
used to repay a portion of the Company's revolving credit loans under the Prior
Credit Agreement.
24
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company as of May 2, 1998 (i) on a historical basis and (ii) as adjusted to
give effect to the Jeri-Jo Acquisition and the Outstanding Notes Offering and
the application of the net proceeds therefrom. This information should be read
in conjunction with "Unaudited Pro Forma Financial Information" and the notes
thereto and the consolidated financial statements of Norton, Miss Erika and the
Jeri-Jo Companies, and the notes thereto included and incorporated by reference
herein.
<TABLE>
<CAPTION>
AS OF MAY 2, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Prior Credit Agreement(1)........... $ 71,015 $ --
Current Credit Agreement(1)......... -- 9,788
12 1/2% Senior Notes due 2005....... -- 125,000
-------- --------
Total debt...................... 71,015 134,788
Total stockholders' equity(2)... 42,646 41,440
-------- --------
Total capitalization............ $113,661 $176,228
======== ========
</TABLE>
- --------------
(1) On June 18, 1998, the Company entered into a new secured financing
arrangement (the Current Credit Agreement) with CIT, NationsBanc and Fleet,
pursuant to which credit is made available to the Company as follows:
revolving credit advances not to exceed $60.0 million, documentary letters
of credit not to exceed $130.0 million and standby letters of credit not to
exceed $45.0 million (including the $30.0 million standby letter of credit
necessary to secure the Company's cash contingent payment obligation in
connection with the Jeri-Jo Acquisition (see "Acquisitions--The Jeri-Jo
Acquisition")), with the aggregate credit available to the Company equal to
the lesser of (i) $175.0 million or (ii) the sum of 85% of eligible accounts
receivable and 60% of eligible inventory. Initial borrowings under the
Current Credit Agreement were used to refinance the outstanding borrowings
under the Prior Credit Agreement remaining after application of the net
proceeds of the Outstanding Notes Offering. See "Use of Proceeds" and
"Description of Other Indebtedness."
(2) After the write-off of deferred financing costs on the Prior Credit
Agreement, net of taxes.
25
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information presented herein gives effect to
(i) the Miss Erika Acquisition, (ii) the Jeri-Jo Acquisition, (iii) borrowings
under the Current Credit Agreement and (iv) the Outstanding Note Offering and
the application of the net proceeds therefrom to finance the Jeri-Jo Acquisition
and repay amounts outstanding under the Prior Credit Agreement after giving
effect to the application of the net proceeds from the Outstanding Note Offering
as described in "Use of Proceeds." The pro forma financial information is based
on the historical financial statements of Norton McNaughton, Inc., Miss Erika,
Inc. and the Jeri-Jo Companies. 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 Acquisitions by the Company, Miss Erika, Inc.'s fiscal year ended
on January 31 and the Jeri-Jo Companies' fiscal year ended on December 31.
The Acquisitions have 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 tax rates.
The unaudited pro forma condensed combined statement of operations for the
fiscal year ended November 1, 1997 gives effect to the Acquisitions as if they
had been consummated at the beginning of the Company's fiscal year on November
3, 1996. This pro forma statement of operations combines the historical
consolidated statement of operations for the fiscal year ended November 1, 1997
for Norton McNaughton, Inc., the historical statement of operations for the
eleven months ended September 30, 1997 for Miss Erika, Inc. and the historical
statement of operations for the fiscal year ended December 31, 1997 for the
Jeri-Jo Companies.
The unaudited pro forma condensed combined statement of operations for the
twenty-six weeks ended May 2, 1998 gives effect to the Jeri-Jo Acquisition as if
it had been consummated at the beginning of the Company's fiscal year on
November 2, 1997. This pro forma statement of operations combines the unaudited
historical consolidated statement of operations for the twenty-six weeks ended
May 2, 1998 for the Company and the unaudited historical statement of operations
for the twenty-six weeks ended March 31, 1998 for the Jeri-Jo Companies.
The unaudited pro forma condensed combined balance sheet as of May 2, 1998
gives effect to the Jeri-Jo Acquisition as if it had been consummated on May 2,
1998. This pro forma balance sheet combines the unaudited historical
consolidated balance sheet at May 2, 1998 for the Company and the historical
balance sheet at March 31, 1998 for the Jeri-Jo Companies.
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 Acquisitions
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 operations do not
reflect any adjustments for synergies that management expects to realize. 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 Acquisitions, 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
Acquisitions, 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 and Jeri-Jo's
businesses or the integration of Miss Erika's and Jeri-Jo's businesses 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 Acquisitions,
to ship on a timely basis. Accordingly, there can be no assurance that the
Company, following the Acquisitions, will achieve its anticipated operating
results.
26
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 1, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NORTON
MCNAUGHTON, MISS ERIKA, JERI-JO PRO FORMA PRO FORMA
INC. INC. COMPANIES ADJUSTMENTS COMBINED
----------- ----------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales............................. $218,782 $90,848 $95,080 $ -- $404,710
Cost of goods sold.................... 179,556 70,373 67,419 -- 317,348
-------- ------- ------- ---------- --------
Gross profit.......................... 39,226 20,475 27,661 87,362
Selling, general and administrative
expenses............................. 44,015 16,107 10,453 (271)(1) 69,833
(471)(2)
Depreciation and amortization......... 984 397 287 2,110 (4) 3,778
-------- ------- ------- ---------- --------
Income (loss) from operations......... (5,773) 3,971 16,921 (1,368) 13,751
Other expense (income):
Interest expense.................... 2,500 844 131 14,411 (3) 17,886
Interest income..................... (168) (6) (235) 235 (5) (174)
-------- ------- ------- ---------- --------
Income (loss) before provision
(benefit) for income taxes........... (8,105) 3,133 17,025 (16,014) (3,961)
Provision (benefit) for income
taxes................................ (3,400) 1,253 839 (316)(6) (1,624)
-------- ------- ------- ---------- --------
Net income (loss)..................... $ (4,705) $ 1,880 $16,186 $ (15,698) $ (2,337)
======== ======= ======= ========== ========
Other data:
EBITDA(7)........................... $ (4,789) $ 4,368 $17,208 $ 742 $ 17,529
Depreciation and
amortization...................... 984 397 287 2,110 3,778
Capital expenditures................ 1,571 328 127 -- 2,026
</TABLE>
See accompanying notes to unaudited pro forma condensed combined statements of
operations.
27
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE TWENTY-SIX WEEKS ENDED
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 2,
1998 MARCH 31,
NORTON 1998
MCNAUGHTON, JERI-JO PRO FORMA PRO FORMA
INC. COMPANIES ADJUSTMENTS COMBINED
------------ ---------- --------------- ----------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Net sales...................................... $147,624 $40,115 $ -- $187,739
Cost of goods sold............................. 118,191 28,370 -- 146,561
-------- ------- ------- --------
Gross profit................................... 29,433 11,745 41,178
Selling, general and administrative expenses... 23,963 5,382 (59)(1) 29,286
Depreciation and amortization.................. 751 131 1,000 (4) 1,882
-------- ------- ------- --------
Income (loss) from operations.................. 4,719 6,232 (941) 10,010
Other expense (income):
Interest expense.............................. 3,815 81 5,623 (3) 9,519
Interest income............................... (82) (141) 85 (5) (138)
-------- ------- ------- --------
Income (loss) before provision (benefit) for
income taxes.................................. 986 6,292 (6,649) 629
Provision (benefit) for income taxes........... 515 299 (556)(6) 258
-------- ------- ------- --------
Net income (loss).............................. $ 471 $ 5,993 $(6,093) $ 371
======== ======= ======= ========
Other data:
EBITDA(7).................................... $ 5,470 $ 6,363 $ 59 $ 11,892
Depreciation and amortization................ 751 131 1,000 1,882
Capital expenditures......................... 1,077 33 -- 1,110
</TABLE>
See accompanying notes to unaudited pro forma condensed combined statements of
operations.
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the
For the Twenty-Six
Year Ended Weeks Ended
November 1, May 2,
1997 1998
------------ ------------
<S> <C> <C>
(1) Net increase (decrease) to selling, general and administration expenses is as
follows:
Factoring fees under Current Credit Agreement, net of amounts recorded under
Prior Credit Agreement ............................................................. $ 339 $ (27)
Elimination of Miss Erika's historical management fee .................................. (550) --
Adjustment of compensation and benefits to current contractual levels .................. (78) --
Other .................................................................................. 18 (32)
------- -------
Net increase (decrease) ................................................................ $ (271) $ (59)
======= =======
(2) Reclassification of Miss Erika letter of credit fees from selling, general and
administrative expenses to interest expense to conform to the Company's accounting
policies.
(3) Net increase to interest expense as follows:
Interest on Notes at a rate of 12.5% ................................................... $15,625 $ 7,812
Interest on borrowings under the Current Credit Agreement with assumed................... -- 321
average annual interest rates of 7.75% .
Amortization of new financing costs (over term of Notes and Current Credit
Agreement) ......................................................................... 1,249 624
Letter of credit fees, including reclassification of fees of Miss Erika (see
note(2)) ........................................................................... 1,084 840
Interest income ........................................................................ (72) (78)
Elimination of historical interest expense ............................................. (3,475) (3,896)
------- -------
Net increase ........................................................................... $14,411 $ 5,623
======= =======
(4) Amortization expense as follows:
Goodwill resulting from the Acquisitions (amortization over 20 years) .................. $ 2,192 $ 1,000
Elimination of amortization of prior Miss Erika financing costs ........................ (82) --
------- -------
Net increase ........................................................................... $ 2,110 $ 1,000
======= =======
</TABLE>
(5) To eliminate the Jeri-Jo Companies' interest income on amounts not retained
in the business.
(6) To record the net tax effect of the pro forma adjustments at an assumed
effective combined tax rate of 41%. In addition, such amount includes an
incremental tax provision to cause the total estimated provision for income
taxes for the Jeri-Jo Companies to be 41%. The Jeri-Jo Companies are
subject to taxation under subchapter S of the Internal Revenue Code of
1986, as amended, for federal income tax purposes only.
(7) EBITDA represents earnings before interest expense, interest income,
provision for income taxes, depreciation and amortization. EBITDA is a
widely accepted financial indicator of a company's ability to service
and/or incur debt. EBITDA is not a measurement of operating performance
calculated in accordance with generally accepted accounting principles and
should not be considered as a substitute for operating income, net income,
cash flows from operations, or other consolidated income or cash flow data
prepared in accordance with generally accepted accounting principles, or as
a measure of a Company's profitability or liquidity. EBITDA has been
reduced by the special charges of $5,737,000 and $3,664,000 recorded by
Norton in the second and
29
<PAGE>
fourth quarters of fiscal 1997, respectively. In addition, EBITDA is not
adjusted for reductions in compensation expense resulting from personnel
reductions at Norton during fiscal 1997 ($2,817,000), the elimination of
rental expense resulting from the termination of lease obligations by
Norton and the reduction in distribution expenses at Norton during fiscal
1997 ($833,000), charges taken by Miss Erika during fiscal 1997 in
anticipation of the cancellation of lease obligations and other
contingencies ($900,000) or the elimination of certain professional fees
and other expenses at Jeri-Jo following the Jeri-Jo Acquisition ($269,000).
Cash flow provided by (used for) operations for Norton McNaughton, Inc. for
the fiscal years ended November 2, 1996 and November 1, 1997 was $5.4
million and a use of $(26.5) million, respectively. Cash flow used for
operations in the fiscal year ended November 1, 1997 reflects the
reclassification of short-term advances from due from factor to revolving
credit loans. Excluding the effects of such reclassification, cash flow
used by operations for fiscal 1997 would have been a use of $(4.0) million.
Cash flow provided by operations for Miss Erika, Inc. for the fiscal years
ended January 31, 1996 and 1997 was $5.0 million and $5.5 million,
respectively. Cash flow provided by operations for the Jeri-Jo Companies
for the fiscal years ended December 31, 1996 and 1997 was $20.1 million and
$17.0 million, respectively.
30
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
Jeri-Jo
Norton Companies
McNaughton, as of
Inc. as of March 31, Pro Forma Pro Forma
May 2, 1998 1998 Adjustments Combined
----------- --------- ----------- ---------
(Dollars in thousands)
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash............................................ $ 160 $ 6,012 $ (3,795)(1) $ -
(2,377)(4)
Due from factor................................. 69,264 - 10,008 (5) 79,272
Accounts receivable, net........................ - 10,008 (10,008)(5) -
Inventory....................................... 35,583 10,092 - 45,675
Income taxes receivable......................... 2,514 - 838 (7) 3,352
Prepaid expenses and other current assets....... 5,379 250 (1,350)(3) 4,279
-------- ------- -------- ---------
Total current assets......................... 112,900 26,362 (6,684) 132,578
Fixed assets, net................................. 6,339 1,328 - 7,667
Deferred financing costs.......................... 2,044 - 5,700 (2) 6,650
950 (2)
(2,044)(7)
Goodwill.......................................... 3,858 - 40,350 (3) 44,208
Notes receivable from management stockholders..... 2,655 - - 2,655
Other assets...................................... 3,083 37 - 3,120
-------- ------- ------- ---------
Total assets................................. $130,879 $27,727 $ 38,272 $ 196,878
======== ======= ======== =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable........................... $ 11,549 $ 3,081 $ - $ 14,630
Revolving credit loans..................... 57,515 - (47,752)(2) 9,788
(3,098)(2)
3,123 (4)
Term loan payable............................... 3,000 - (3,000)(2) -
Accrued expenses and other current
liabilities................................... 3,939 5,851 (5,500)(4) 4,290
-------- ------- -------- --------
Total current liabilities.................... 76,003 8,932 (56,227) 28,708
Term loan payable................................. 10,500 - (10,500)(2) -
Long-term obligations............................. - - 125,000 (2) 125,000
Other long term liabilities....................... 1,730 - - 1,730
-------- ------- -------- --------
Total liabilities............................ 88,233 8,932 58,273 155,438
Stockholders' equity.............................. 42,646 18,795 (3,795)(1) 41,440
(15,000)(3)
(1,206)(7)
-------- ------- -------- --------
Total liabilities and stockholders' equity... $130,879 $27,727 $ 38,272 $196,878
======== ======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined balance sheet.
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
(1) Reflects adjustments to the Jeri-Jo Companies' cash and stockholders' equity
in accordance with required book value to be delivered upon closing of the
Jeri-Jo Acquisition. Adjustments assume that excess net book value above the
required amount was paid out prior to the closing of the Acquisition in the
form of cash dividends.
(2) Reflects the consummation of the Transactions at May 2, 1998 as follows (see
"Use of Proceeds"):
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Portion of purchase price funded by Outstanding Note Offering proceeds
in the Jeri-Jo Acquisition....................................................... $ 54,000(8)
Estimated Outstanding Note Offering expenses....................................... 5,700
Repayment of outstanding indebtedness of the Jeri-Jo Companies..................... 3,098(6)
Repayment of the Company's term debt............................................... 13,500
Repayment of the Company's revolving credit loans.................................. 47,752
Closing fees for Current Credit Agreement.......................................... 950
--------
Proceeds from Outstanding Note Offering............................................ $125,000
========
</TABLE>
(3) The excess of purchase price paid over the fair value of the assets acquired
and the liabilities assumed represents goodwill. Allocation of the purchase
price for the Jeri-Jo Acquisition and the calculation of goodwill is as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Closing cash purchase price in the Jeri-Jo Acquisition... $55,000(8)
Less: Net assets of the Jeri-Jo Companies................ 15,000
-------
Goodwill................................................. 40,000
Add: Jeri-Jo Acquisition expenses........................ 350
-------
Total goodwill........................................... $40,350
=======
</TABLE>
(4) Reflects payment of the Jeri-Jo Companies' dividends payable on dividends
declared prior to March 31, 1998.
(5) Reflection of assignment of Jeri-Jo Companies' accounts receivable to the
factor under the Company's new factoring agreement.
(6) As of June 18, 1998, the Jeri-Jo Companies had outstanding indebtedness of
approximately $10.9 million (see "Use of Proceeds"). The effect of this
change on the pro forma combined balance sheet would be an increase of $7.8
million in revolving credit loans.
(7) To write-off deferred financing costs on the Prior Credit Agreement, net of
taxes.
(8) Total cash purchase price of $55.0 million of the Jeri-Jo Acquisition was
funded by $54.0 million of proceeds from the Outstanding Note Offering and
$1.0 million from monies previously placed in escrow.
32
<PAGE>
SELECTED FINANCIAL DATA
The following selected historical financial information as of and for the
fiscal years 1993 through 1997 has been derived from the audited financial
statements of Norton McNaughton, Inc. The information presented for the twenty-
six weeks ended May 3, 1997 and May 2, 1998 was derived from the unaudited
financial statements of Norton McNaughton, Inc. The statement of operations data
for fiscal 1997 includes the results of operations of Miss Erika from its date
of acquisition, September 30, 1997. The selected financial information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements of Norton
McNaughton, Inc. and the notes thereto included and incorporated by reference
herein.
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
ENDED
FISCAL YEAR ENDED(1) (UNAUDITED)
------------------------------------------------------------------ ---------------------
Nov. 5, Nov. 4, Nov. 4, Nov. 2, Nov. 1, May 3, May 2,
1993 1994 1995 1996 1997 1997 1998
--------- ------------- --------- --------- -------------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ........................... $133,329 $168,621 $227,530 $220,823 $ 218,782 $94,469 $147,624
Gross profit ......................... 35,217 46,412 55,750 44,760 39,226 (3) 18,258 29,433
Selling, general and administrative
expenses ............................ 27,286 28,443 37,456 39,317 44,015 (3) 23,410 23,963
Depreciation and amortization ........ 513 482 481 662 984 477 751
-------- -------- -------- -------- ---------- ------- --------
Income (loss) from operations ........ 7,418 17,487 17,813 4,781 (5,773)(3) (5,629) 4,719
Interest expense ..................... 2,639 1,341 1,440 2,294 2,500 716 3,815
Other expense (income), net .......... 287 (87) (218) (164) (168) (84) (82)
-------- -------- -------- -------- ---------- ------- --------
Income (loss) before income
taxes ............................... 4,492 16,233(2) 16,591 2,651 (8,105)(3) (6,261) 986
Provision (benefit) for income
1,800 7,011(2) 6,888 1,127 (3,400)(3) (2,753) 515
taxes ............................... -------- -------- -------- -------- ---------- ------- --------
Net income (loss) ................... $ 2,692 $ 8,821(2) $ 9,703 $ 1,524 $ (4,705)(3) $(3,508) $ 471
======== ======== ======== ======== ========== ======= ========
Other Data:
EBITDA(4) ............................ $ 7,931 $ 17,969 $ 18,294 $ 5,443 $ (4,789) $(5,152) $ 5,470
Capital expenditures ................. 1,727 1,042 1,599 1,841 1,571 974 1,077
Ratio of earnings to fixed
charges(5) .......................... 2.5x 9.7x 9.1x 1.9x -- (6) -- (6) 1.2x
Net income (loss) per common
share .............................. $ 0.43 (7) $ 1.22 (2)(7)$ 1.20 $ 0.20 $ (0.63) (3) $ (0.46) $ 0.06
======== ======== ======== ======== ========== ========== =========
Weighted average shares and common
share equivalents outstanding ....... 5,086 7,084 8,056 7,781 7,488 7,563 7,412
======== ======== ======== ======== ========== ========== =========
<CAPTION>
AS OF
-----------------------------------------------------------------------------------------
NOV. 5, NOV. 4, NOV. 4, NOV. 2, NOV. 1, MAY 3, MAY 2,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- ---------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ...................... $ 6,651 $ 34,586 $ 43,502 $ 40,057 $ 39,312 $35,494 $ 36,897
Total assets ......................... 35,226 55,331 73,524 61,109 118,762 60,919 130,879
Total debt ........................... 14,280 -- -- -- 59,473 -- 71,015
Stockholders' equity
(deficiency) ........................ (5,352) 40,300 50,469 48,286 42,163 43,472 42,646
</TABLE>
33
<PAGE>
- -----------
(1) The Company operates on a 52 or 53-week fiscal year. The Company's fiscal
year ends on October 31, if such date fell on a Saturday, or the first
Saturday following October 31. In fiscal years 1994 and prior, the Company's
fiscal year ended on October 31, if such date fell on a Friday, or the first
Friday following October 31. Closing its fiscal year on a Saturday enables
the Company to report the results of its operations in a manner that is more
consistent with both retail/apparel industry practice and the close of its
actual business cycle. Data for all fiscal years shown include the results
of operations for 52 weeks.
(2) Net income is shown after extraordinary item of $401,000, or $0.06 per
share. As a result of the repayment of long-term indebtedness in March 1994,
the Company wrote off the remaining unamortized balance of deferred
financing costs of $704,000. This write-off was reflected as an
extraordinary item, net of tax of $303,000, in the consolidated statement of
income for the fiscal year ended November 4, 1994. Income before income
taxes and provision for income taxes are shown before the extraordinary
item.
(3) Loss from operations for fiscal year 1997 includes special charges of
approximately $9.4 million, consisting of approximately $5.7 million and
$3.7 million recorded in the second and fourth quarters of fiscal 1997,
respectively. Approximately $3.4 million of such special charges caused a
reduction in gross profit and the remainder of approximately $6.0 million
was recorded in selling, general and administrative expenses. On an after-
tax basis, these special charges aggregated approximately $5.5 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(4) EBITDA represents earnings before interest expense, interest income,
provision for income taxes, depreciation and amortization. EBITDA is a
widely accepted financial indicator of a company's ability to service and/or
incur debt. EBITDA and EBITDA, as defined, are not measurements of operating
performance calculated in accordance with generally accepted accounting
principles and should not be considered as substitutes for operating income,
net income, cash flows from operations, or other consolidated income or cash
flow data prepared in accordance with generally accepted accounting
principles, or as measures of a company's profitability or liquidity.
EBITDA has been reduced by the special charges of $5.7 million and $3.7
million recorded by Norton in the second and fourth quarters of fiscal 1997,
respectively. In addition, EBITDA is not adjusted for reductions in
compensation expense resulting from personnel reductions at Norton during
fiscal 1997 ($2.8 million), the elimination of rental expense resulting from
the termination of lease obligations by Norton and the reduction in
distribution expenses at Norton during fiscal 1997 ($0.8 million), charges
taken by Miss Erika during fiscal 1997 in anticipation of the cancellation
of lease obligations and other contingencies ($0.9 million) or the
elimination of certain professional fees and other expenses at Jeri-Jo
following the Jeri-Jo Acquisition ($0.3 million).
Cash flow provided by (used for) operations for Norton McNaughton, Inc. for
the fiscal years ended November 2, 1996 and November 1, 1997 was $5.4
million and a use of $(26.5) million, respectively. Cash flow used for
operations in the fiscal year ended November 1, 1997 reflects the
reclassification of short-term advances from due from factor to revolving
credit loans. Excluding the effects of such reclassification, cash flow used
by operations for fiscal 1997 would have been a use of $(4.0) million. Cash
flow provided by operations for Miss Erika, Inc. for the fiscal years ended
January 31, 1996 and 1997 was $5.0 million and $5.5 million, respectively.
Cash flow provided by operations for the Jeri-Jo Companies for the fiscal
years ended December 31, 1996 and 1997 was $20.1 million and $17.0 million,
respectively.
(5) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income before provision for income taxes, plus fixed charges.
Fixed charges consist of interest expense plus that portion of rental
payments on operating leases deemed representative of the interest factor.
(6) The deficiency of earnings to fixed charges in the fiscal year ended
November 1, 1997 and the twenty-six weeks ended May 3, 1997 were $8.1
million and $6.3 million, respectively.
(7) Reflects new income available to holders of Common Stock after payment of
dividends on Class B Preferred Stock redeemable of $480,000 and $168,000 in
fiscal 1993 and 1994, respectively. This stock was redeemed by the Company
in March 1994.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
On June 18, 1998, the Company completed the acquisition of substantially all
of the assets of the Jeri-Jo Companies and assumed substantially all the
liabilities of the privately-held apparel importers of moderately-priced
juniors' and misses' updated sportswear. Jeri-Jo will operate as a separate
subsidiary under the direction of current management. The purchase price paid
in the Jeri-Jo Acquisition was (i) $55.0 million in cash at the closing of the
acquisition, (ii) the assumption of funded indebtedness of $10.9 million and
certain other contractual obligations. In addition, the Company agreed to pay
an additional contingent payment in cash and its Common Stock, $0.01 par value,
in the event that certain earnings targets are achieved by Jeri-Jo for the two
years subsequent to the closing of the Jeri-Jo Acquisition. The Jeri-Jo
Purchase Agreement requires that the Company pay at least 50% of the required
contingent payment in cash. The aggregate contingent payment, if any, payable
by the Company is equal to the excess of (1) the sum of (A) five times Jeri-Jo's
average EBITDA (as defined in the Jeri-Jo Purchase Agreement) for the two years
ending June 30, 2000, plus (B) 0.50 times any such average EBITDA between $17.0
million and $20.0 million, plus (C) one times any such average EBITDA over $20.0
million, over (2) $55.0 million. Any additional consideration paid for Jeri-Jo
will be accounted for as additional purchase price and will be reflected in
goodwill. The Company intends to pay the cash portion of the contingent
consideration from internally generated funds and borrowings under the Current
Credit Agreement. The Company cannot predict whether Jeri-Jo will achieve the
necessary EBITDA targets to qualify for additional consideration.
Concurrent with the closing of the acquisition, the Company entered into a
$175.0 million secured revolving credit and letter of credit facility with
NationsBanc Commercial Corporation, The CIT Group/Commercial Services, Inc. and
Fleet Bank N.A., (the "Current Credit Agreement"). The facility will be used to
finance ongoing working capital requirements of the combined entity. The
Current Credit Agreement is a three-year secured revolving credit and letter of
credit facility, with interest on outstanding borrowings determined, at the
Company's option, based upon stated margins below the prime rate or in excess of
LIBOR rates. Initially, the interest rate under the Current Credit Agreement is
75 basis points below the prime rate (based upon the current prime rate, the
interest rate under the New Financing Agreement will be 7.75% per annum).
Available credit under the Current Credit Agreement is as follows: revolving
credit advances not to exceed $60.0 million, documentary letters of credit not
to exceed $130.0 million and stand-by letters of credit not to exceed $45.0
million (including $30.0 million of stand-by letters of credit necessary to
secure the Company's cash contingent payment obligation in connection with the
Jeri-Jo Acquisition), with the aggregate credit available to the Company equal
to the lesser of (i) $175.0 million or (ii) the sum of 85% of eligible accounts
receivable and 60% of eligible inventory.
The Current Credit Agreement contains a number of restrictive covenants,
including covenants which limit incurrence of liens and indebtedness, limit
transactions with affiliates, acquisitions, sales of assets, investments and
other restricted payments, and require that the Company maintain certain fixed
charge coverage, cash flow coverage and leverage ratios and meet specified
minimum levels of working capital and net worth.
On June 18, 1998, the Company also closed the sale of $125.0 million of 12
1/2% Senior Notes due 2005 (the "Outstanding Notes"). The proceeds of the sale
were used to finance the Jeri-Jo Acquisition and to refinance then existing
indebtedness of the Company and Jeri-Jo. The Outstanding Notes have not been
registered under the Securities Act of 1933, as amended, and may not be offered
and sold in the United States absent registration under such act or an
applicable exemption from registration. The Company's obligations under the
Outstanding Notes are guaranteed by all of the Company's subsidiaries.
The Company has recently adopted and implemented a new business strategy to
expand its branded product lines, broaden its customer base and further develop
its global product sourcing capabilities. A key component of this new business
strategy involves the selective acquisition of complementary businesses and
brands. In connection therewith, the Company completed the Miss Erika
Acquisition and the Jeri-Jo Acquisition, at prices the Company believes are
attractive. As a result of the Acquisitions, the following discussion of the
Company's historical financial condition and results of operations is not
necessarily indicative of future results.
The Company's continuing focus on improving profitability has also led the
Company to undertake certain initiatives to improve gross profit and gross
profit margins. These include the implementation of certain merchandising
changes, as well as the closure of underperforming divisions.
35
<PAGE>
In the merchandising area, the Company has recently reduced the number of
products (i.e., reduced the number of SKU's) offered in any particular
collection of its Norton McNaughton(R) product line in an effort to minimize the
number of unrelated items unsold by retailers at the end of a selling period and
to reduce any related sales allowances. In addition, by taking advantage of
product sourcing opportunities, the Company has been able to offer higher
quality and more diverse products to retailers at lower price points in an
effort to further enhance sales of the Company's products and to further reduce
sales allowances. As a result of these initiatives, the Company anticipates that
revenue levels in its Norton-McNaughton(R) division in fiscal 1998 will decrease
from those in fiscal 1997.
The Company continually monitors the success, in terms of sales, profitability
and customer acceptance, of its product lines. In the event that one or more of
its product lines does not meet the Company's expectations, the Company will
discontinue their production. During the third quarter of fiscal 1997, the
Company began selling merchandise under its existing product lines to Sears,
including Norton McNaughton(R) and Norton Studio(R) and, correspondingly,
discontinued the Modiano(R) product line produced for Sears. In addition, in the
first quarter of fiscal 1998, the Company discontinued the Lauren Alexandra(R)
private label product line produced for Federated and the catalog division and,
in the second quarter of fiscal 1998, the Company discontinued the Pant-her(R)
private label product line produced for May Company.
In addition, during the second quarter of fiscal 1997, the Company decided to
close its retail outlet stores due to this division's inability to meet the
Company's profitability targets. The Company utilized these retail outlets to
liquidate excess inventory, including end-of-stock, out-of-season and other
miscellaneous merchandise. Due to the Company's new merchandising strategy, the
Company believes that it will reduce its need to liquidate excess inventory. To
the extent that the Company is required to dispose of excess merchandise in the
future, the Company believes that it can do so on a more cost-effective basis
through off-price retail chains and other retailers.
In fiscal 1997, the aforementioned closed divisions and product lines
contributed approximately $33.4 million to net sales and experienced
approximately breakeven operating results. The Company recorded special charges
in the fourth quarter of fiscal 1997 of approximately $3.7 million in connection
with the closure of these divisions.
The Company implemented several other significant initiatives in fiscal 1997.
In the second quarter of fiscal 1997, the Company appointed a new President and
Chief Operating Officer, and the Company's former President and a consultant
terminated their relationship with the Company. In addition, the Company
terminated certain lease obligations, and made the determination to close its
retail outlet stores as discussed above. In connection with these changes, the
Company recorded special charges of approximately $5.7 million in the second
quarter of fiscal 1997.
During the fourth quarter of fiscal 1997, in an effort to further streamline
operations and in conjunction with the Company's decision to discontinue the
various divisions discussed earlier, the Company reduced its workforce by
approximately 33%. Other cost savings measures implemented included
merchandising changes, which will enable the Company to produce fewer samples,
and reductions in executive compensation and ancillary expenses.
As is the norm in the apparel industry, the Company engages in promotional
activity with its customers which affects the Company's sales, gross profit and
gross profit margins. Norton accomplishes this by granting its customers sales
allowances, while Miss Erika sells merchandise at promotional prices.
Accordingly, the Company's sales, gross profit and gross profit margins vary
from quarter to quarter and year to year. In addition, the Company generally
ships its products in accordance with normal apparel industry shipping cycles.
This may result in shipments to customers occurring before or after a particular
fiscal quarter end, thereby affecting both fiscal quarter to quarter comparisons
and quarter to quarter results during a fiscal year. Correspondingly, sales,
gross profit and gross profit margins may be affected by the timing of shipping
cycles or the delivery of finished goods.
The Company contracts for the manufacture of all of its products and continues
to increase the proportion of its products produced overseas. Contract
manufacturing allows the Company to avoid significant capital expenditures for
manufacturing facilities and the fixed costs of maintaining a large production
work force. Foreign contract manufacturing allows it to take advantage of lower
manufacturing costs, thereby allowing it to reduce prices to its customers. The
Company believes that foreign sourcing for moderately-priced merchandise also
allows it to avail itself of a well equipped and skilled labor force, thereby
allowing it to produce a higher quality, better-valued product for its
customers. The Company offsets the longer lead-time necessary for foreign
sourced fabrics and manufacturing by early and timely attention to production
planning.
36
<PAGE>
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto included
herein. The following table is derived from the Company's Consolidated
Statements of Operations and sets forth, for the periods indicated, selected
operating data as a percentage of net sales.
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
FISCAL YEAR ENDED ENDED
------------------------------ ------------------
NOV. 4, NOV. 2, NOV. 1, MAY 3, MAY 2,
1995 1996 1997 1997 1998
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Sales .................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ........................................... 75.5 79.7 82.1 80.7 80.1
----- ----- ----- ----- -----
Gross profit ................................................. 24.5 20.3 17.9 19.3 19.9
Selling, general and administrative expenses ................. 16.5 17.8 20.1 24.8 16.2
Depreciation and amortization ................................ 0.2 0.3 0.5 0.5 0.5
----- ----- ----- ----- -----
Income (loss) from operations ................................ 7.8 2.2 (2.7) (6.0) 3.2
Interest expense and amortization of deferred financing
costs ....................................................... 0.6 1.1 1.1 0.7 2.6
Other income, net ............................................ (0.1) (0.1) (0.1) (0.1) (0.1)
----- ----- ----- ----- -----
Income (loss) before provision (benefit) for income taxes .... 7.3 1.2 (3.7) (6.6) 0.7
Provision (benefit) for income taxes ......................... 3.0 0.5 (1.6) (2.9) 0.4
----- ----- ----- ----- -----
Net income (loss) ............................................ 4.3% 0.7% (2.1)% (3.7)% 0.3%
===== ===== ===== ===== =====
</TABLE>
TWENTY-SIX WEEKS ENDED MAY 2, 1998 COMPARED TO TWENTY-SIX WEEKS ENDED MAY 3,
1997
Net Sales. Net sales were $147.6 million for the first half of fiscal 1998
compared to $94.5 million for the first half of fiscal 1997. The increase in
net sales of $53.1 million was primarily attributable to the addition of net
sales of the Erika(R) product line of $71.1 million, following the acquisition
of Miss Erika on September 30, 1997, increased net sales in the in the Norton
Studio(R) product line of $5.1 million and increased net sales in the D.P.S.(R)
product line of $1.8 million. These increases were offset in part by a decrease
in net sales of $10.0 million in the Norton McNaughton(R) product lines, and
decreases in net sales of $14.1 million, in the aggregate, due to the
discontinuation of the Modiano(R), Lauren Alexandra(R) and Pant-her(R) product
lines.
Gross Profit. The gross profit margin was 19.9% for the first half of fiscal
1998 compared to 19.3% for the first half of fiscal 1997. Gross profit margin
in the second quarter of fiscal 1998 was negatively impacted by sales allowances
of approximately $3.3 million granted to certain customers of discontinued
divisions in order to encourage those customers to continue to do business with
the Company's remaining divisions. Had these sales allowances not been granted,
gross profit margin for the second quarter of fiscal 1998 would have been 21.7%.
The increase in gross profit margin was primarily due to the addition of gross
profit from the Erika(R) product line, following the acquisition of Miss Erika
on September 30, 1997, which represented higher gross profit margins than those
experienced in the Norton McNaughton(R) product lines.
SG&A Expenses. Selling, general and administrative expenses ("SG&A" expenses)
were $24.0 million, or 16.2% of net sales, in the first half of fiscal 1998
compared to $23.4 million, or 24.8% of net sales, in the first half of fiscal
1997. SG&A expenses for the first half of fiscal 1997 included special charges
of $5.7 million for severance payments resulting from management changes, the
termination of certain lease obligations and the establishment of reserves for
certain contingencies, including the closing of the Company's retail outlet
stores. Excluding the special charge, SG&A expenses for the first half of
fiscal 1997 would have been $17.7 million, or 18.7% of net sales. The increase
of $6.3 million, excluding the special charge, resulted primarily from Miss
Erika whose SG&A for the first half of fiscal 1998 was $9.8 million. This
increase was offset in part by savings experienced by Norton in the first half
of fiscal 1998 due to cost savings measures implemented in fiscal 1997,
including a significant reduction in Norton's workforce and a decrease in
variable distribution and freight expenses due to a decrease in the volume of
products shipped in the first half of fiscal 1998 for Norton.
Interest Expense. Interest expense increased to $3.8 million in the first
half of fiscal 1998 from $716,000 in the first half of fiscal 1997. The
increase was primarily attributable to incremental interest expense and
amortization of deferred financing costs associated with borrowings used to
effect the acquisition of Miss Erika on September 30, 1997.
37
<PAGE>
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales decreased by $2.0 million, or 1.0%, to $218.8 million
in fiscal 1997 from $220.8 million in fiscal 1996. This decrease in net sales
resulted primarily from a decrease in net sales of $13.6 million in the Norton
McNaughton(R) product lines, a decrease in net sales of $5.2 million in the
Modiano(R) product line, a decrease in net sales of $3.8 million in the Pant-
her(R) product line, a decrease in net sales of $2.1 million in the Lauren
Alexandra(R) product line and a decrease in net sales of $3.0 million resulting
from the discontinuation of the Kate McNaughton(R) product line in May 1996.
These decreases were offset in part by an increase in net sales of $10.2 million
in the Norton Studio(R) product line, an increase in net sales of $2.8 million
in the D.P.S.(R) product line and one month of net sales of Erika(R) product
lines of $10.4 million, following the Miss Erika Acquisition on September 30,
1997.
Gross Profit. Gross profit and gross profit margin in fiscal 1997 was $39.2
million and 17.9%, respectively, as compared to gross profit and gross profit
margin of $44.8 million and 20.3%, respectively, in fiscal 1996. The gross
profit in fiscal 1997 reflects special charges taken in the fourth quarter of
fiscal 1997 of approximately $3.4 million, including sales allowances and
inventory close-outs related to the closure of certain underperforming
divisions. These charges included approximately $1.0 million, $1.0 million and
$600,000 of sales allowances for the Modiano(R), Lauren Alexandra(R) and Pant-
her(R) product lines, respectively, losses from close-outs of inventory for
closed divisions and product lines of approximately $700,000. Excluding the
special charges of $3.4 million, gross profit and gross profit margin for fiscal
1997 would have been $42.6 million and 19.5%, respectively. The decrease
resulted primarily from sales of Norton McNaughton(R) holiday merchandise at
lower gross profit margins than those experienced on such merchandise in fiscal
1996.
SG&A Expenses. SG&A expenses were $45.0 million in fiscal 1997, or 20.6% of
net sales, as compared to $40.0 million in fiscal 1996, or 18.1% of net sales.
SG&A expenses in fiscal 1997 included special charges recorded in the second
quarter of fiscal 1997 of approximately $5.7 million. These charges included
approximately $3.3 million related to the terminations of the Company's
President and a consultant. Approximately $900,000 related to the termination of
lease obligations of the Company's production, design and administrative
facilities no longer deemed necessary due to restructuring initiatives
implemented in fiscal 1996. This amount also included the establishment of
approximately $650,000 of reserves related to the closure of the Company's
retail outlet stores. SG&A expenses in fiscal 1997 also included special charges
recorded in the fourth quarter of fiscal 1997 of approximately $300,000 of
severance payments related to the closure of other divisions, including the
Company's catalog division. Excluding these special charges aggregating
approximately $6.0 million, SG&A expenses for fiscal 1997 would have been $39.0
million, or 17.8% of net sales. The net decrease of approximately $1.0 million,
excluding the special charges, resulted primarily from the implementation of
certain cost saving measures at the end of the third and fourth quarters of
fiscal 1996. These included a significant reduction in the Company's workforce
due to a further centralization of its production functions, resulting in
savings of approximately $1.3 million, the elimination of its in-store
specialist program which resulted in savings of approximately $600,000, a
reduction in rent expense due to the termination of certain lease obligations of
approximately $500,000, and a reduction in professional fees of $300,000 due
primarily to the termination in the second quarter of a consulting agreement.
These decreases were offset in part by the addition of approximately $1.7
million in overhead relating to Miss Erika, following the Miss Erika Acquisition
on September 30, 1997.
Operating Loss. Operating loss for fiscal 1997 was $5.8 million as compared
to operating income for fiscal 1996 of $4.8 million. Excluding the special
charges of approximately $9.4 million, the Company would have had operating
income of approximately $3.6 million. The reduction in fiscal 1997 operating
income of approximately $1.2 million, after adjusting for the special charges,
resulted primarily from the lower gross profit margins discussed above.
Interest Expense. Interest expense increased to $2.5 million in fiscal 1997
from $2.3 million in fiscal 1996. The increase is primarily attributable to
incremental interest expense associated with the Miss Erika acquisition on
September 30, 1997.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales decreased by $6.7 million, or 2.9%, to $220.8 million
in fiscal 1996 from $227.5 million in fiscal 1995. This decrease in net sales
resulted primarily from a decrease in net sales of $19.5 million in the Norton
McNaughton(R) product lines and a decrease in net sales of $8.2 million
resulting from the discontinuation of the Kate McNaughton(R) suit division in
May 1996. The decrease in net sales in the Norton McNaughton(R) product lines
resulted primarily from (i) the reallocation by retailers of purchases from
Norton McNaughton(R) to Norton Studio(R) in fiscal 1996, (ii) a planned decrease
38
<PAGE>
in sales volume as the Company began to minimize the production of merchandise
which it did not anticipate could be sold at a profit and (iii) the grant to
customers of higher sales allowances in fiscal 1996 as compared to fiscal 1995
due to competitive pressures. These decreases were offset by an increase in net
sales of $10.8 million resulting from the commencement of shipments of the
Norton Studio(R) product line in January 1996, an increase in net sales of $8.1
million, in the aggregate, resulting from shipments of the Lauren Alexandra(R)
and Danielle Paige(R) product lines, which commenced shipments in June 1995 and
August 1995, respectively, and an increase in net sales of $2.6 million, or
19.3%, in the Pant-her(R) product line.
Gross Profit. Gross profit and gross profit margin in fiscal 1996 was $44.8
million and 20.3%, respectively, as compared to gross profit and gross profit
margin of $55.8 million and 24.5%, respectively, in fiscal 1995. The decrease
was primarily attributable to lower gross profit and gross profit margin
experienced in the Norton McNaughton(R) product line in fiscal 1996 as compared
to fiscal 1995 due to the sale of certain inventory at break-even or below cost,
a higher level of sales allowances granted to customers in all divisions in
fiscal 1996 as compared to fiscal 1995, and the liquidation of the Kate
McNaughton(R) inventory in conjunction with the discontinuation of that product
line in the second quarter of fiscal 1996.
SG&A Expenses. SG&A expenses were $40.0 million in fiscal 1996, or 18.1% of
net sales, as compared to $37.9 million in fiscal 1995, or 16.7% of net sales.
The increase in dollar amount of $2.1 million was primarily attributable to an
increase in personnel costs resulting from the hiring of additional production,
design, and selling staff necessitated by the introduction of the Danielle
Paige(R) product line in August 1995 and the Norton Studio(R) product line in
January 1996, and an increase in personnel costs, professional fees and other
various expenses related to the Company's implementation of new management
information systems. The increase in SG&A expenses as a percentage of net sales
resulted from the spreading of the increased SG&A dollars over lower net sales
in fiscal 1996.
Operating Income. Operating income decreased to $4.8 million in fiscal 1996
from $17.8 million in fiscal 1995. The decrease in operating income resulted
from the decrease in gross profit and the increase in SG&A expenses in fiscal
1996 as compared to fiscal 1995.
Interest Expense. Interest expense increased to $2.3 million in fiscal 1996
from $1.4 million in fiscal 1995. The increase was caused by higher working
capital requirements associated with the build-up of inventory to support the
introduction of the Lauren Alexandra(R), Danielle Paige(R) and Norton Studio(R)
product lines, the earlier placement of goods into production in fiscal 1996 as
compared to fiscal 1995 and the purchase of Common Stock under the Company's
previously announced stock repurchase program.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
The Company is highly leveraged. On May 2, 1998, after giving pro forma effect
to the Transactions, the Company would have had consolidated funded indebtedness
totalling approximately $134.7 million ($9.7 million of which would have
consisted of loans under the Current Credit Agreement and $125.0 million of
which would have consisted of the Notes), obligations under undrawn letters of
credit in the aggregate face amount of approximately $107.9 million and
stockholders' equity of approximately $41.4 million. The Company and its
Subsidiaries will be permitted to incur substantial additional indebtedness in
the future. See "Capitalization," "Selected Financial Data" and "Unaudited Pro
Forma Financial Information."
The Company's ability to make scheduled payments of principal of, or to pay
the interest, if any, on, or to refinance its indebtedness (including the
Notes), or to fund planned capital expenditures will depend on its future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond its control. Based upon the current level of operations, management
believes that cash flow from operations and available cash, together with
available borrowings under the Current Credit Agreement, will be adequate to
meet the Company's liquidity needs for the foreseeable future. The Company may,
however, need to refinance all or a portion of the principal of the Notes on or
prior to maturity. There can be no assurance that the Company's business will
generate sufficient cash flow from operations or that future borrowings will be
available under the Current Credit Agreement in an amount sufficient to enable
the Company to service its indebtedness, including the Notes, or to fund its
other liquidity needs. In addition, there can be no assurance that the Company
will be able to effect any such refinancing on commercially reasonable terms or
at all. See "Risk Factors--Substantial Leverage."
The Company's liquidity requirements arise from the funding of the Company's
working capital needs, primarily inventory and accounts receivable. The
Company's primary sources of working capital are cash flow from operations and,
39
<PAGE>
prior to the closing of the Prior Credit Agreement on September 30, 1997,
advances under the Company's factoring agreements for its trade accounts
receivable. The Company's borrowing requirements for working capital purposes
are seasonal, with peak working capital needs generally arising at the end of
the first and third fiscal quarters and extending through the second and fourth
fiscal quarters. The Company had working capital of $36.9 million at May 2,
1998 as compared to $39.3 million at November 1, 1997. The decrease was caused
primarily by payments on the Company's term loan, fixed asset purchases and
monies placed into escrow in connection with the Jeri-Jo Acquisition.
The Company sells its accounts receivable to a factor without recourse, up to
a maximum established by the factor for each customer. Receivables sold in
excess of these limitations are subject to recourse in the event of nonpayment
by the customer. The factor receives a commission for all purchased accounts
receivable which is calculated based on the net amount of gross sales less sales
discounts. Factor commissions for the fiscal years ended November 1, 1997,
November 2, 1996 and November 4, 1995 were approximately $1.0 million, $1.0
million and $1.0 million, respectively.
Prior to entering into the Prior Credit Agreement on September 30, 1997, the
Company borrowed up to 90% of the net balance due on eligible accounts
receivable, up to $10.0 million of additional advances and up to $20.0 million
in letter of credit financing. Interest on factor advances was payable monthly
at 0.75% below the NationsBank of Georgia, N.A. prime rate (the "Nations Prime
Rate") for amounts advanced which were less than the purchase price of eligible
accounts receivable, and 1.25% above the Nations Prime Rate for amounts advanced
in excess of the purchase price of eligible accounts receivable.
The Company entered into the Prior Credit Agreement, a $140.0 million secured
term loan and revolving credit facility with CIT and NationsBanc on September
30, 1997 in connection with the Miss Erika Acquisition. The proceeds were used
to finance the Miss Erika Acquisition and for ongoing working capital
requirements of the combined entity. Pursuant to this financing arrangement,
Norton continued to factor its accounts receivable, as well as the accounts
receivable of Miss Erika.
On June 18, 1998, the Company entered into the Current Credit Agreement and
prepaid the term loans and repaid the revolving credit loans outstanding under
the Prior Credit Agreement. The Current Credit Agreement is a three-year
secured revolving credit and letter of credit facility, with interest on
outstanding borrowing determined, at the Company's option, based on stated
margins below the prime rate or in excess of LIBOR rates. Initially, the
interest rate under the Current Credit Agreement, is 75 basis points below the
prime rate (based upon the current prime rate, the interest rate to the Current
Credit Agreement is 7.75% per annum) for the first six months, and thereafter
will be determined by grid pricing based upon certain financial ratios set forth
in the Current Credit Agreement. Available credit under the Current Credit
Agreement is limited to the lesser of (i) $175.0 million or (ii) the sum of 85%
of eligible accounts receivable and 60% of eligible inventory, with revolving
credit advances not to exceed $60.0 million and letters of credit not to exceed
$160.0 million. The Company will continue to factor the accounts receivable of
Norton, Miss Erika and Jeri-Jo pursuant to factoring arrangements. See
"Description of Other Indebtedness."
The Company anticipates that in the remainder of fiscal 1998 it will incur
capital expenditures of approximately $1.3 million to $1.5 million, principally
in connection with the upgrade of its management information systems, which
includes the Company's migration to a new financial reporting system during
fiscal 1998 for which it expects to incur approximately $600,000. See "The Year
2000 Issue." The Company expects to finance these capital expenditures from
internally generated funds and advances under the Current Credit Agreement.
Additional expenditures will be required to modify portions of the Company's
software so that it will function properly in the year 2000 and will not have a
material impact on the Company's business, operations or its financial
condition. Maintenance or modification costs will be expensed as incurred,
while the costs of new software will be capitalized and amortized over the
software's useful life.
From time to time, the Company may grant stock options to eligible individuals
to purchase Common Stock. The Company believes that the issuance of options
rather than current cash compensation enhances future performance by employees
as well as aligning the employees' interests with those of the Company's
stockholders. The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("FASB 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized. The Black-
Scholes option valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Given that
the
40
<PAGE>
Company's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options. Compensation expense relating to these grants in
fiscal 1997 and fiscal 1996 would have been approximately $1.3 million and
approximately $350,000, respectively, had the Company adopted the fair value
accounting method of expense recognition under FASB 123.
The Company's Board of Directors has authorized a stock repurchase program,
under which the Company may repurchase up to $7.5 million of the Company's
Common Stock. The Company expects that the shares may be purchased from time to
time in the open market and in block transactions. In fiscal 1996, the Company
purchased 396,000 shares of its stock in the open market at an aggregate cost of
approximately $3.8 million. In fiscal 1997, the Company purchased 235,000 shares
of its stock in the open market at an aggregate cost of approximately $1.5
million. As of May 2, 1998, the Company has purchased a total of 651,000 shares
at an aggregate cost of approximately $5.5 million. The Company's ability to
repurchase shares of Common Stock is restricted by the Indenture and the Current
Credit Agreement.
Management believes that cash generated from operations and advances under the
Current Credit Agreement will provide sufficient cash resources to finance the
Company's working capital and capital expenditure requirements for the
foreseeable future.
The moderate rate of inflation over the past few years has not had a
significant impact on the Company's sales or profitability. Inflation is not
expected to have a significant impact on the Company's business.
SEASONALITY
Historically, the Company has achieved its highest sales in the fourth quarter
and, to a lesser extent, the second quarter of each fiscal year. As a result of
the Acquisitions, the Company anticipates that it will experience its highest
sales in the second and fourth quarters equally. This pattern results primarily
from the timing of shipments for each season, although the timing of shipments
can vary from quarter to quarter and season to season. Spring season merchandise
is generally shipped in the Company's second fiscal quarter between February and
April, and fall season merchandise is generally shipped in the Company's fourth
fiscal quarter between August and October.
THE YEAR 2000 ISSUE
The nationwide issue which has arisen given the approach of the year 2000 is
the result of computer programs being written using two digits rather than four
digits to define the applicable year. Any of the Company's computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company has assessed that additional expenditures will be required to
modify certain portions of the Company's existing software so that it will
function properly in the year 2000. Preliminary estimates of the total costs to
be incurred on existing software prior to the year 2000 will not have a material
impact on the Company's business, operations or its financial condition.
However, in connection with the Company's year 2000 compliance program, it
intends to migrate to a new financial reporting system during fiscal 1998 and
fiscal 1999 and expects to incur approximately $600,000, in the aggregate, in
connection therewith.
The Company has initiated communications with all of its significant
suppliers and customers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remedy their own year
2000 issues. The Company's total year 2000 project cost and estimates to
complete include the estimated costs and time associated with the impact of
third party year 2000 issues based on presently available information. However,
there can be no assurance that the systems of other companies on which the
Company's systems rely will be timely converted and would not have a material
adverse effect on the Company's systems.
41
<PAGE>
BUSINESS
GENERAL
Norton McNaughton, Inc. is one of the leading women's and juniors' branded
apparel companies in the United States. The Company designs, sources, markets
and distributes moderately-priced separates and collections of career and casual
clothing under such well-recognized brand names as Norton McNaughton(R),
Erika(R) and Energie(R). The Company's primary design and merchandising
strategies rely largely on interpretations of popular designer fashions,
avoiding fashion-forward designs that are subject to rapidly changing trends.
The Company believes that its primary brands enjoy long-established market
positions and reputation for design, value and quality among retailers and
consumers. The Company's products are sold nationwide in over 8,000 individual
stores, operated by over 1,500 department stores, national chains, mass
merchants, off-price retail chains and specialty retailers, including May
Company, J.C. Penney, Federated, Sears, T.J. Maxx and Mervyn's. The Company
contracts for the manufacture of all of its products, principally through an
established network of foreign manufacturers and agents, thereby avoiding
significant capital expenditures for manufacturing facilities and the costs of a
large production work force.
The Company conducts its business through three subsidiaries, Jeri-Jo, Norton
and Miss Erika:
. Jeri-Jo. Jeri-Jo is a designer and merchandiser of moderately-priced,
updated sportswear, knitwear and casual wear for juniors and misses (ages 12 to
35), a category which the Company believes presents significant growth
opportunities based upon the demographics and buying patterns of this segment.
First introduced in 1975, Jeri-Jo's products are sold under its brand names
Energie(R), Currants(R) and Jamie Scott(R) and under private labels to national
chains, department stores, off-price retail chains, and mass merchants. The
acquisition of the Jeri-Jo Companies diversified and expanded the Company's
product offerings, distribution channels and sourcing relationships, and added
further strength and depth to the Company's management team.
. Norton. Norton designs, sources and markets moderately-priced separates and
collections of career and casual clothing for women aged 25 to 55. The Norton
product lines were first introduced in 1981, and are sold under Norton's brand
names, including Norton McNaughton(R), Maggie McNaughton(R) and Norton Studio(R)
primarily to department stores and national chains. Norton believes that it has
a loyal customer base, a reputation for design, value and quality and, based
upon industry data, that its Norton McNaughton(R) product line is one of the top
five national brands in the moderately-priced women's segment of the apparel
industry.
. Miss Erika. Miss Erika designs, sources and distributes women's moderately-
priced casual separates. Miss Erika's target customer is a middle income,
budget-minded but fashionable woman ranging in age from 15 to 50 years old.
First introduced in 1968, Miss Erika sells its products under its brand names
Erika(R), Sugar Blues(R) and Ricki(R) and under private labels to national
chains, department stores, off-price retail chains, and specialty stores. The
acquisition of Miss Erika diversified and expanded the Company's product
offerings, distribution channels and sourcing relationships, and provided the
Company with access to management having long-standing business, merchandising
and sourcing experience in the moderately-priced women's apparel industry. The
Company believes that Miss Erika will benefit from the increased preference for
and acceptance of casual wear generally, and specifically, in the workplace.
INDUSTRY OVERVIEW
The Company competes in the moderately-priced women's and juniors' segments of
the apparel market. According to industry data, women's apparel accounted for in
excess of $17 billion or approximately 20% of total retail women's apparel sales
in 1997. Juniors apparel is marketed to teenagers and young women. According to
the U.S. Census Bureau, the so-called Generation Y (ages 10 to 24 years) number
more than 56 million people and is expected to grow 10% to approximately 62
million people by 2005. An independent consumer research firm has estimated that
the teenaged segment of the Generation Y consumer (ages 12 to 19 years)
accounted for approximately $122 billion of retail sales in 1997 and estimated
that approximately 37% of teenaged girls would choose to spend their
discretionary cash on clothes, the largest category of any discretionary
spending by that group. The Company's products are sold at retail for prices
ranging from $10 to $80 which is consistent with pricing in the moderate women's
and juniors' segments. The Company believes that the popularity of moderately-
priced women's and juniors' clothing, especially in career and casual clothing,
has resulted from an increased consumer preference for comfortable, yet value-
priced and fashionable, apparel selections and a trend toward more flexible
dress codes, including greater acceptance of casual wear in the workplace.
42
<PAGE>
The apparel industry is highly fragmented but is increasingly moving toward
consolidation. Due to a similar consolidation in the retail industry, major
retailers are now purchasing for a larger number of stores. As a result, it has
become more efficient for these retailers to centralize their buying with a more
select group of larger, established vendors, who are better positioned to
accommodate their needs. These include the vendor's ability to fill larger
orders, comply with more intensive quality control standards and accommodate the
retailers' information system and distribution requirements. The Company
believes that it is in a position to capitalize on this ongoing consolidation
trend due to its extensive production and sourcing network, advanced
distribution capabilities, sophisticated management information systems and
access to capital.
KEY STRENGTHS
The Company intends to enhance its industry position by capitalizing on what
it believes are its competitive advantages:
. ESTABLISHED MARKET POSITION. The Company's primary brands enjoy long-
established market positions, having been sold to major apparel retailers
nationwide for periods ranging between 15 and 30 years. The Company believes
that its primary brand names, Norton McNaughton(R), Erika(R) and Energie(R),
are well-recognized and enjoy a long-standing reputation for design, value
and quality. Based upon the latest available industry data compiled by NPD
American Shoppers Panel, the Company's Norton McNaughton(R) product line is
one of the top five national brands in the moderately-priced women's apparel
segment.
. LOW COST PRODUCT SOURCING WITH MINIMAL CAPITAL EXPENDITURES. The Company
contracts for the manufacture of all its products principally through its
established network of over 100 contractors and buying agents in over 25
countries. Contract manufacturing allows the Company to avoid significant
capital expenditures for manufacturing facilities and the fixed costs of
maintaining a large production work force. The Company continues to increase
its proportion of foreign contract manufacturing, which is expected to reach
approximately 95% for fiscal 1998 on a pro forma basis. The Company believes
that foreign sourcing for moderately-priced merchandise allows it to avail
itself of a well-equipped and skilled labor force thereby enabling it to
produce higher quality, better-valued products for its customers. The
Company offsets the longer lead-time necessary for foreign sourced fabrics
and manufacturing by early and timely attention to production planning.
. LOW FASHION RISK WITH BROAD CONSUMER APPEAL. The Company interprets popular
designer fashions at moderate prices. The Company does not seek to dictate
fashion trends; rather, it offers current styles while avoiding fashion-
forward designs that are subject to rapidly changing trends. In addition,
the Company believes that its wide assortment of fashionable women's and
juniors' career and casual clothing appeals to a large cross section of the
moderately-priced women's and juniors' apparel market.
. REDUCED SEASONALITY. Often, apparel manufacturers experience their highest
sales at the end of the calendar year. As a result of the Acquisitions, the
Company anticipates that it will enjoy substantially equal sales volume in
the first half and second half of its fiscal year. At present, Miss Erika
experiences its highest sales in the Spring season (the second fiscal
quarter) and Jeri-Jo and Norton experience their highest sales in the Fall
season (the fourth fiscal quarter). This reduced seasonality should enable
the Company to better manage its working capital needs.
. LONG-STANDING RELATIONSHIPS WITH RETAILERS. Each of Norton, Jeri-Jo and Miss
Erika enjoy long-standing relationships with a large and diverse number of
retailers many of which have been customers for over 15 years. In addition,
the Company has established itself as an accepted vendor with the corporate
buying offices of its department store and national chain store customers.
The Company believes that these corporate relationships are difficult to
obtain and provide significant barriers to entry while creating a stable
base from which to pursue future business.
. ABILITY TO MEET THE NEEDS OF LARGE RETAILERS. The Company's branded product
lines provide retailers with a single source for a variety of moderately-
priced women's and juniors' apparel. The Company believes that its buying
power with its suppliers provides it with the capability to meet large
orders and control quality, and that it has in place the necessary
distribution and management information systems to meet retailers'
logistical requirements. The Company believes that these strengths will
permit it to benefit from the consolidation in the retail segment of the
apparel industry.
STRATEGIC INITIATIVES AT NORTON
43
<PAGE>
Beginning in late fiscal 1996, Norton undertook a number of strategic
initiatives to address a flattening of its sales and a decline in profitability.
The Company believes that these initiatives will better position Norton for
future growth. The Company strengthened its management team with the addition of
a new President and Chief Operating Officer, a Vice President of Merchandise
Planning at Norton, a Director of Design at Norton, and a Director of Production
at Norton. In addition, Norton also implemented the following merchandising,
sourcing and cost saving initiatives designed to increase its sales and improve
profitability:
. discontinued five unprofitable product lines;
. closed its retail outlet division;
. reduced headcount by over 100 employees or approximately 33% and reduced
corporate overhead by terminating certain lease obligations and reducing
executive compensation;
. increased proportion of foreign contract manufacturing from approximately
40% in fiscal 1996 to an estimated 90% in fiscal 1998 to take advantage of
lower costs and higher quality production;
. lowered prices commencing in the first quarter of fiscal 1998 to improve
sell-through at retail, without a reduction in quality; and
. streamlined merchandise assortment through the reduction of SKU count by
approximately 30%.
In connection with these actions, the Company incurred approximately $9.4
million of special charges in fiscal 1997 and significantly reduced its ongoing
operating expenses.
BUSINESS STRATEGIES
The Company's business strategies are to focus on improving operating
efficiencies, increasing sales and improving profitability. In order to
implement these strategies, the Company is pursuing the following:
. FOCUS ON OPERATING EFFICIENCIES AND COST REDUCTION. The Company will
continue to focus on achieving enhanced operating efficiencies and lower
costs. The Company believes that, over time, its acquisition strategy will
allow it to realize economies of scale associated with sourcing,
manufacturing, marketing, distribution and administration. As part of this
strategy, the Company is presently investigating the feasibility of
relocating Norton's and Miss Erika's warehousing and distribution activities
to the southeastern United States, where it will perform these operations
"in-house." The Company believes that this will allow it to achieve higher
operating efficiencies and enjoy tax and other cost advantages in a lower-
tax and lower-cost state.
. ENHANCE MERCHANDISING. Norton is implementing new merchandising programs
designed to increase sales and expand retail personnel and consumer
awareness of its brands. For example, Norton is developing "in-store shops"
for certain of its brand name products in a select number of stores of its
major retail customers. Norton is also implementing other initiatives such
as the development of merchandising plans to assist retailers in marketing
Norton's products and the redesign of product logos and labels.
. PURSUE SELECTED ACQUISITIONS OF COMPLEMENTARY BUSINESSES AND BRANDS. The
Company believes that it is well-positioned to continue to participate in
the further consolidation of the apparel industry. The Company has adopted a
disciplined acquisition strategy focused on acquiring businesses that meet
its criteria for attractive acquisition candidates, which may include such
criteria as (i) diversifying and expanding the Company's product offerings,
distribution channels and sourcing relationships, (ii) gaining access to the
talents of key management, merchandising, design and sourcing personnel,
(iii) acquisition prices which, coupled with the target company's existing
results of operations, yield an immediate accretion to the Company's
earnings, (iv) acquisitions structured to include future earn-out payments
payable at the Company's option in the Company's common stock and/or cash
and (v) achieving potential synergies resulting from improvements in
finance, management information systems and other corporate overhead items,
and consolidation and improvement in warehousing and shipping operations.
. CONTINUE TO DIVERSIFY PRODUCT LINES AND DISTRIBUTION CHANNELS. With the
Acquisitions, the Company has diversified its product offerings to include
juniors' apparel and an expanded line of casual separates. In addition, the
44
<PAGE>
Acquisitions have allowed it to increase sales to its existing customers and
to expand its distribution channels to include off-price retail chains,
discounters and specialty retailers. The Company believes that this strategy
will allow it to cover a larger portion of the retail market while reducing
its exposure to any one market segment or customer. In addition, the Company
believes that the expansion will provide opportunities for cross-marketing its
product lines among its expanded customer base.
PRODUCTS
The Company's clothing collections are moderately-priced and are designed for
both career and casual women's and juniors' needs. All of the Company's products
are fabricated from natural and synthetic fibers and blends, and many are
manufactured in petite and large sizes, in addition to misses. The introduction
of different collections in each season is staggered to ensure that consumers
are introduced to fresh full-priced merchandise on a monthly basis.
The Company's Norton McNaughton(R) and Norton Studio(R) product lines are
marketed primarily as collections of related separates of updated jackets,
skirts, pants, shorts, blouses and knit products, which, while sold as
separates, are coordinated as to styles, colors and fabrics and are designed to
be merchandised and worn together. New collections of coordinated separates are
introduced in six principal selling seasons--spring, summer, transition, fall,
winter and holiday. Products sold under the Erika(R), Energie(R), Currants(R),
Jamie Scott(R) and D.P.S.(R) labels are marketed primarily as separates, and are
introduced in four key selling seasons, namely, spring, transition, fall and
holiday.
45
<PAGE>
The following table sets forth information concerning the Company's product
lines:
<TABLE>
<CAPTION>
JERI-JO NORTON MCNAUGHTON MISS ERIKA
<S> <C> <C> <C>
BRANDS Energie(R) Norton McNaughton(R) Erika
Currants(R) Maggie McNaughton(R)
Jamie Scott(R) Norton McNaughton Petite(R)
Norton Studio(R)
D.P.S.(R)
PRODUCTS Moderately priced Moderately priced Moderately priced
sportswear and women's career and women's casual separates
knitwear for juniors and misses casual related separates
AGE CATEGORY 12 to 35 25 to 55 15 to 50
PRICE POINTS $10 to $40 $20 to $80 $10 to $50
DISTRIBUTION CHANNELS National Chains Department Stores National Chains
Department Stores National Chains Departments Stores
Off-Price Retail Chains Off-Price Retail Chains
Mass Merchants Specialty Retailers
SEASONAL MIX 40% First Half 40% First Half 60% First Half
60% Second Half 60% Second Half 40% Second Half
</TABLE>
Energie(R), Currants(R) and Jamie Scott(R)
The Jeri-Jo product lines (primarily comprised of Energie(R), Currants(R) and
Jamie Scott(R)) were first introduced in 1975, and consist of juniors' and
misses, moderately-priced separates, including updated sportswear, knitwear and
other casual wear. The target consumers are teenaged girls and women aged 12 to
35 years old. The product line is distributed through a variety of distribution
channels, including national chains, department stores, off-price retailers and
mass merchants.
Norton McNaughton(R)
The Norton McNaughton(R) product line was introduced in 1981, and features
moderately-priced color and style coordinated jackets, skirts, pants, shorts,
blouses and sweaters for the career woman. The product lines are sold in misses,
petite and large sizes under the Norton McNaughton(R), Norton McNaughton
Petite(R), and Maggie McNaughton(R) labels to department stores and national
chains. The target consumers for these product lines are working women aged 25
to 55 with annual income of $20,000 to $50,000.
Norton Studio(R)
The Norton Studio(R) product line was introduced in early 1996 and consists of
moderately-priced women's career and casual knitwear collections offered in
misses, petite and large sizes. The line is designed for the same target
consumer as the Norton McNaughton(R) product line and is sold in department
stores and national chains.
D.P.S.(R)
The D.P.S.(R) product line was introduced in 1995 and offers a line of
moderately-priced weekend wear in misses and large sizes. The lines consist of
casual separates, including jumpers, sport dresses, pants, shirts, skirts,
shorts and jackets.
46
<PAGE>
The lines are designed for the same target consumers as the Norton McNaughton(R)
product line and are sold to department stores, national chains and mass
merchants.
Erika(R)
The Erika(R) product line was first introduced in 1968 and consists of women's
moderately-priced separates, including knit tops and bottoms, sweaters, dresses
and jackets, and more casual apparel such as shorts, skirts, tank tops, jumpers
and other weekend wear. The target consumers are middle income, budget-minded
but fashionable women ranging in age from 15 to 50 years old. The product line
is distributed in a variety of retail channels, including national chains and
department stores.
Private label
In addition to products sold under Miss Erika's and Jeri-Jo's brand names,
Miss Erika and Jeri-Jo consult with retailers to develop product lines sold
under private labels. Sales of private label merchandise constitute less than
10% of the Company's sales on a pro forma basis. Miss Erika and Jeri-Jo
coordinate with buyers to design and manufacture private label products in
specified colors, fabrics and styles. These buyers may provide samples, select
styles already offered by Miss Erika or Jeri-Jo or, together with Miss Erika's
or Jeri-Jo's designers, create their own variations.
CUSTOMERS
After giving effect to the Acquisitions, the Company estimates that its
products are sold nationwide in over 8,000 individual stores operated by over
1,500 department stores, national chains, mass merchants, off-price retail
chains and specialty retailers. The following table sets forth approximate
percentages of the Company's pro forma net sales to the three largest customers
in fiscal 1997 and Norton's historical net sales to its three largest customers
in fiscal 1997, fiscal 1996 and fiscal 1995:
<TABLE>
<CAPTION>
PRO FORMA
FISCAL FISCAL FISCAL FISCAL
NAME 1995 1996 1997 1997
- ---------------------- ------- ------- ------- ----------
<S> <C> <C> <C> <C>
May Company(1)... 36% 34% 29% 18%
J.C. Penney...... 7 12 11 13
Federated(2)..... 19 20 17 12
---- ---- ---- ----
Total.......... 62% 66% 57% 43%
</TABLE>
- --------------
(1) Included in the May Company group are Hechts, Foley's, Robinsons-May,
Kaufmann's, Filene's, Famous Barr and Meier & Frank.
(2) Included in the Federated group are Macy's, Rich's, Burdines, Bon Marche and
Stern's.
SALES AND MERCHANDISING
The Norton, Miss Erika and Jeri-Jo noncommission sales forces of approximately
21, 11 and 12 individuals are located in their respective New York City
showrooms. Members of senior management of the Company and its subsidiaries are
also actively involved in the Company's marketing and selling efforts. The
Company does not employ independent sales representatives and does not maintain
any regional showrooms. The Company emphasizes the development of long-term
customer relationships by consulting with retailers concerning the style and
coordination of clothing purchased by the store, optimal delivery schedules,
floor presentation, pricing and other merchandising considerations. Frequent
communication between the Company's senior management and other sales personnel
and their counterparts at various levels in the buying organizations of the
Company's retailers is an important element of the Company's marketing and sales
efforts. These contacts allow the Company to monitor retail sales volume and to
adjust product mix and pricing in an attempt to maximize sales at acceptable
profit margins for both the Company and retailers. The Company's marketing
efforts attempt to build upon the success of prior selling seasons to encourage
existing retailers to devote greater selling space to the Company's product
47
<PAGE>
lines, to penetrate different buying groups at large retailers, and to obtain
additional retailers. The Company does not advertise, although its products are
frequently featured by retailers in their advertisements.
Norton has recently implemented significant merchandising initiatives which it
believes will help it achieve stronger sales to consumers with improved gross
margin levels in its Norton McNaughton(R) product lines. By capitalizing on
product sourcing opportunities, Norton has adopted a new pricing strategy
emphasizing lower retail prices, and a new product strategy by offering narrower
product assortments in its fashion groups. See
"--Business Strategies."
DESIGN
The Company's design philosophy is to interpret popular designer fashions at
moderate prices. Each of the Company's design teams is responsible for the
creation, development and coordination of product lines which mirror existing
fashion trends in better women's apparel. In the case of its related separates
groups, the design team also seeks to enhance consumer appeal by combining
functional fabrics in creative looks and color schemes to encourage the
coordination of outfits, resulting in the purchase of more than one garment.
Through its design and marketing staff, the Company actively monitors the sales
of its products to assess changes in consumer preferences, fashion trends and
the marketplace at large.
The design process begins with the development of fashion concepts, color
schemes and fabric selections approximately six to twelve months before final
designs are produced. Once color schemes, fabric selections and other concepts
are developed, designs are finalized, fabric swatches and silhouettes are
selected, and finally, samples are produced. Approximately three to nine months
prior to a product line's release, previews are held with the Company's major
retailers to exchange ideas and to review colors, patterns, fabrics, styling and
price points. These previews allow the Company to redesign and refocus the
components of its collections before significant fabric and production
commitments are made.
The Company maintains an in-house art department for its print design process
to service its Norton McNaughton(R), Norton Studio(R) and D.P.S.(R) product
lines. Rather than buying all of its printed fabrics from suppliers' open lines
of fabrics, the Company's design staff starts with "art work" which the Company
purchases from over 25 art studios worldwide. Working with the art departments
at mills, converters and other fabric suppliers, the Company's art department
redesigns the "art work" by altering colors, backgrounds, graphics, shapes and
other items to make it suitable for printed fabrics which it believes will fit
the fashion tastes of the Company's target retail consumers.
SOURCING AND MANUFACTURING
The Company contracts for the manufacture of all of its products. The Company
believes that contract manufacturing allows it to maximize production
flexibility, while avoiding significant capital expenditures for manufacturing
facilities and the fixed costs of managing a large production work force.
The Company sources its products both domestically and abroad, and has
continued to place a greater percentage of its production overseas over the last
five years. During fiscal 1997 and fiscal 1996, approximately 63% and 43%,
respectively, of the Company's Norton McNaughton(R) products were manufactured
outside of the United States. After giving effect to the Acquisitions, during
1997, approximately 90% of the Company's products were produced outside of the
United States. During fiscal 1998, the Company anticipates that approximately
95% of its contract manufacturing will be conducted outside of the United
States.
The Company attributes the increase in overseas production of its Norton
McNaughton(R) products during the past few years and Miss Erika's and Jeri-Jo's
use of foreign production sources to lower manufacturing costs resulting in more
competitive pricing, the availability of a skilled and well-equipped labor
force, higher quality standards and changes in its product lines (e.g., toward
more knitwear) as dictated by fashion trends, including the increase in casual
dressing in the work place. While domestic contract manufacturing provides
shorter lead times between order and delivery, the Company believes that this
benefit is more than offset by the cost, diversity and quality considerations of
overseas production. The Company offsets the longer lead-time necessary for
foreign sourced production by early and timely attention to production planning.
See "Risk Factors--Impact of Foreign Manufacturing Relationships; Asian
Instability" and "Risk Factors--Imports and Import Restrictions."
48
<PAGE>
In fiscal 1997, the Company engaged the services of approximately 45 sewing
and knitting contractors in the United States and 55 overseas contractors in the
Caribbean basin, Central America, the Far East, the Middle East, Africa and
Europe. These contractors may in turn subcontract work to other sewing or
knitting contractors. The Company does not have any long-term supply agreements
with any of its sewing or knitting contractors. In fiscal 1997, no single sewing
or knitting contractor accounted for more than 10% of the Company's domestic or
foreign manufacturing, including after giving effect to the Acquisitions.
Miss Erika and Jeri-Jo contract for the production of their garments through a
network of independent agents located overseas. Although no long-term
contractual obligations exist with any of these agents, both Miss Erika and
Jeri-Jo have consistently ordered merchandise through these same agents, in
several cases, for over ten years. In addition, Miss Erika and Jeri-Jo are the
principal sources of income for substantially all of their agents. Although the
agents facilitate the procurement process, Miss Erika and Jeri-Jo also maintain
relationships with many factories. The development and maintenance of these
relationships has provided Miss Erika and Jeri-Jo with what the Company believes
to be a competitive advantage in the pricing, scheduling, delivery and quality
of the garments produced for these companies. The knit and sweater components of
the Norton McNaughton(R) and D.P.S.(R) product lines, as well as the Norton
Studio(R) product lines, are also produced almost exclusively abroad through a
network of agents. The Company believes that the number and geographical
diversity of its agents and manufacturers minimize the risk of adverse
consequences that would result from the termination of a particular agent or
manufacturer and that replacements could be developed in a timely manner if
necessary.
In the case of production through agents and factories, the process begins
with the development of detailed design specifications regarding fabric, fit and
styling. Based upon these specifications, the factory creates the pattern and
develops a first prototype. Upon approval of the prototype, the factory
purchases all necessary fabric and other materials from various suppliers. As
the garments are being manufactured, the agent obtains the necessary quota
allocations and customs clearances, monitors production to ensure quality,
compliance with the Company's specifications and timely delivery of finished
goods and issues inspection certificates. Depending upon the size of the order,
the time for this process ranges from four to eight months.
The woven components of the Norton McNaughton(R) and D.P.S.(R) product lines
are sourced primarily through import programs, largely in China. Generally, the
production process starts with the design and selection of the fabric for the
garments to be produced. The Company will source and develop the fabric with a
local mill or converter. This portion of the process requires lead time of two
to four months. Upon approval of the fabric, the Company will designate the
fabric supplier to be used by the factory, including the quantities necessary to
be purchased to satisfy the Company's purchase order. In most programs, the
fabrics are purchased directly by the factory. In addition, the Company is
responsible for the development of the patterns and markers, which the factory
will use to cut the fabric for the garments. The time from fabric purchase
commitment by the factory to finished goods receipt is generally an additional
four to six months, creating total cycle time of six to ten months in the case
of Far Eastern, Middle Eastern, African and European sourced manufacturing.
The Company also sources a large portion of its woven products in the
Caribbean basin and Mexico, utilizing favorable "807" customs regulations. In
general, these regulations provide that articles assembled abroad from United
States components may be exempt from United States duties on the value of these
components. The remainder of the Company's woven product sourcing occurs
domestically. The domestic and "807" manufacturing process begins with the
receipt in the Company's warehouse of fabrics from mills, converters and other
fabric suppliers. Over the next one to four weeks, fabrics are cut to the
Company's design specifications. The cut goods are then shipped to various
outside contractors for sewing. The sewing process generally takes one to two
months for domestic contractors, and two to four months in the case of Caribbean
and Mexican contractors.
Norton has long-term agreements with its finished goods distribution
contractor (Railroad Enterprises, Inc.) and its domestic cutting contractor
(Cutting Edge Services, Inc., formerly Toni-Linda Productions, Inc.) who perform
their functions in the contractors' leased cutting and warehouse facilities in
New Jersey. These agreements do not cover the manufacturing or distribution
activities of Miss Erika or Jeri-Jo. In addition, Norton has guaranteed the
distribution contractor's obligations under its lease in an amount up to
$500,000 and has guaranteed the cutting contractor's obligations under its lease
in an amount up to approximately $250,000. Pursuant to the terms of these
agreements, Norton is required to utilize the services of the contractors
exclusively unless a contractor experiences limitations which prevent it from
performing services for Norton. The agreements also require the contractors to
provide their services exclusively to Norton. The agreements have terms ending
on June 30, 2005 (distribution) and June 30, 2006 (cutting), respectively, and
may be terminated by Norton upon notice and lapse of cure periods in the event
that the contractors are not performing or cannot perform services under the
agreements, including in accordance with procedures required by Norton. In
addition, Norton may terminate either of
49
<PAGE>
the agreements, effective June 30 of any year commencing in 2000 (distribution)
and 2001 (cutting), in the event that it no longer requires the services of an
outside contractor or it elects to perform "in-house" the services provided by
the applicable contractor. In such event, Norton would be obligated to pay the
terminated contractor a fee equal to $0.10 for each garment distributed or $0.15
for each garment cut, as applicable, during the year preceding the date on which
Norton terminates the agreement, but not less than $750,000 in the case of the
distribution contractor, or $1,500,000, in the case of the cutting contractor.
Based upon distribution and cutting activities for fiscal 1997, if the
agreements were terminated as of January 1, 1998, Norton would have been
required to pay the distribution contractor approximately $1,450,000 and to pay
the cutting contractor $1,500,000. In addition, under certain circumstances,
Norton would be required to assume certain continuing obligations of the
terminated contractor arising under equipment leases and equipment purchase
contracts, in either case, for equipment utilized solely in rendering services
to Norton.
In March 1998, Norton notified these contractors that it does not intend to
renew the agreements. Norton has taken this step for a variety of reasons. In
the case of distribution, Norton believes that by performing the distribution
function "in-house" it will achieve higher operating efficiencies, particularly
when Norton combines its distribution activities with those of Miss Erika, and
that it would enjoy tax and other cost advantages if it were to relocate its
distribution activities to a lower-tax and lower-cost State. In the case of the
cutting function, Norton is increasingly purchasing a significant portion of its
garments from overseas manufacturers as finished goods and not as piece goods
which require cutting, sewing and other manufacturing activities. Accordingly,
the cutting function, and the attendant need for a long-term cutting agreement,
has significantly diminished and will continue to do so. In addition to these
factors, as the Company continues to carry out its strategy of acquiring
complimentary businesses and brands, it believes that the consolidation of
warehousing, distribution, sourcing and manufacturing functions will be a long-
term source of potential cost savings. Finally, published reports concerning the
alleged affiliations of these contractors have led Norton to question the long-
term contractual relationship between Norton and these contractors.
Following the eventual termination of its distribution agreement, in order to
provide for its distribution needs, Norton is presently investigating the
feasibility of relocating its distribution activities to the southeastern United
States, where it will perform this operation "in-house." Norton has engaged a
consultant to outline the steps to be taken and the associated costs in
connection with this relocation. Norton presently envisions an arrangement
pursuant to which it will enter into a long-term lease, at prevailing market
rates, of a warehouse and distribution center built to accommodate Norton's
requirements. Preliminarily, Norton estimates that this process will take
approximately 18 months and intends to initially house Norton's distribution
activities and, eventually, Miss Erika's distribution activities in the new
leased facility. Norton also believes that, if required, it could replace its
current distribution function on an interim basis within 60 days and could
promptly replace its domestic cutting function. See "Risk Factors--Governmental
Investigation of the New York City Garment Industry" and "--Legal Proceedings"
below.
QUALITY CONTROL AND DISTRIBUTION
The Company's quality control personnel monitor the manufacturing processes at
the Company's contractors domestically and abroad in order to ensure that they
meet the Company's quality standards. Substantially all of the Company's fabrics
for domestic and "807" production are inspected upon receipt in the Company's
warehouse. In addition, the Company's quality control program includes on-site
inspections of work-in-process and finished goods during the production process
and inspection of finished goods upon receipt.
Finished goods are received into the Company's three distribution centers
located in New Jersey, where incoming merchandise is checked against the
purchase order, entered into the Company's management information system,
undergoes quality assurance procedures and is stored on racks by style number
and color. Over the next one to six weeks, shipments are made to retailers in
quantities, at locations and in packaging as specified by these retailers. Miss
Erika ships to its retailers daily, principally through a local trucking company
whose primary customer is Miss Erika and whose headquarters are in the Miss
Erika warehouse. Miss Erika represents more than 95% of the trucking company's
revenues and is therefore able to negotiate favorable rates and scheduling. The
owner/manager of the trucking company is an employee of Miss Erika.
MANAGEMENT INFORMATION SYSTEMS
The Company maintains and is continually upgrading management information
systems to control its purchasing, shipping, production and financial functions,
as well as a system to facilitate communications between the Company and its
major retailers regarding customer specific requirements, purchase orders,
invoices and shipping notices.
50
<PAGE>
The Company has expanded its Electronic Data Interchange (EDI) program to
include the majority of its major retailers and allow the Company to comply with
retailers' specific requirements. This technology allows the electronic exchange
of purchase orders, invoices and advanced shipping notices. In addition, the
Company bar codes all merchandise to allow retailers to track sales at store
registers, monitor inventory levels and provide timely feedback.
The Company operates separate management information systems for Norton, Miss
Erika, and after the closing, Jeri-Jo. Norton's recently upgraded management
information systems address the purchasing, shipping, production and financial
functions in a fully integrated application. Miss Erika's and Jeri-Jo's stand-
alone management information systems have similar capabilities to those of
Norton. During fiscal 1997, Norton automated its design and production areas by
implementing a CAD-based design specification system. Norton will continue to
improve and upgrade its management information systems in fiscal 1998, and, over
time, will integrate Miss Erika's and Jeri-Jo's management information systems
with Norton's. New systems developments will include the implementation of a
pattern making, marking and grading system to automate these currently manual
production functions. The estimated cost to be incurred to modify portions of
the Company's software so that it will function properly in the year 2000 is not
deemed to be material. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000."
BACKLOG
After giving effect to the Acquisitions at May 2, 1998, the Company had a
total of approximately $152.6 million of unfilled customer orders compared to
approximately $98.9 million for Norton McNaughton, Inc. at May 3, 1997. The
increase is due to the acquisition of Miss Erika and Jeri-Jo whose unfilled
orders were $34.6 million and $33.0 million, respectively, at May 2, 1998.
Norton's unfilled customer orders decreased approximately $13.9 million at May
2, 1998 compared to May 3, 1997 due to the closure of certain unprofitable
divisions during fiscal 1997 and the first and second quarters of fiscal 1998.
These orders are generally scheduled for delivery within one to two months after
confirmation. The amount of unfilled orders at a particular time is affected by
a number of factors, including the scheduling of the manufacturing and shipping
of the products which, in many instances, depends on retailers' demands.
Accordingly, a comparison of orders from period to period is not necessarily
meaningful and may not be indicative of eventual actual shipments. There can be
no assurance that cancellations, rejections and returns will not reduce the
amount of sales realized from the backlog of orders.
COMPETITION
There is intense competition in the women's and juniors' apparel industry. The
Company competes with numerous other manufacturers and distributors, many of
which are larger and have substantially greater resources than the Company. The
Company believes that it competes favorably on the basis of the style, quality
and value of its products, production and sourcing strengths, and the long-term
customer relationships which it has developed.
EMPLOYEES
After giving effect to the Acquisitions, the Company has approximately 440
full-time employees, including 17 in executive positions, approximately 327 in
production, design, marketing and sales positions and approximately 96 in
administrative and accounting positions. None of the Company's employees are
subject to a collective bargaining agreement. The Company considers its
relations with its employees to be good.
51
<PAGE>
PROPERTIES
The Company conducts its business from the following leased facilities:
<TABLE>
<CAPTION>
LEASE APPROXIMATE
EXPIRATION NUMBER OF
FACILITY LOCATION DATE SQUARE FEET
- ------------------------------- --------------------- ----------------- -----------
<S> <C> <C> <C>
Executive, production and 463 Seventh Avenue July 31, 2008 40,000
design offices 9th and 10th Floors
New York, NY
Showrooms 1407 Broadway January 31, 2000 10,300
New York, NY
4th Floor
(Miss Erika)
26th Floor January 31, 2004 11,600
(Norton)
28th and 29th Floors January 31, 2004 12,100
(Jeri-Jo)
Fabric warehouse(1) 3349 Whelan Road, December 31, 2003 25,000
East Rutherford, NJ
(Norton)
Administrative offices and 333 North Street, December 31, 2007 220,000
finished goods warehouse Teterboro, NJ
(Miss Erika)
Finished goods warehouse 80 Carter Drive, June 30, 2003 93,000
Edison, NJ
(Jeri-Jo)
</TABLE>
- --------------
(1) This warehouse space is leased from the Company's cutting contractor. See
"--Sourcing and Manufacturing."
The Company believes that its existing facilities are well-maintained, in good
operating condition and will be adequate for its operations for the foreseeable
future.
LEGAL PROCEEDINGS
In April 1998, in response to Norton's notice of an intention not to renew its
agreements with its distribution and cutting contractors, Norton received a
letter from their attorney alleging that Norton had breached its agreements and,
as a result, alleging that such contractors had incurred substantial damages.
Norton does not believe that it has breached any of its agreements with these
contractors, believes that it has meritorious defenses to any claim, and will
vigorously defend any proceeding. Under the terms of the agreements with these
contractors, claims against Norton are to be resolved through arbitration
proceedings. There can be no assurance that Norton would be successful in
defending any such claim, if made, or that any determination rendered would not
have a material adverse effect on the business, financial condition and results
of operations of the Company. Subsequent to the receipt of the above-mentioned
letter, in preliminary discussions between attorneys for the contractors and
Norton, the contractors offered to sell the contractors' operations to Norton.
Consistent with Norton's business strategy of relocating its distribution
function to the southeastern United States, Norton has declined the offer to
purchase the distribution and cutting activities of these contractors.
On July 15, 1998, the distribution and cutting contractors filed an action
entitled Cutting Edge Services, Inc. and Railroad Enterprises, Inc. v. Miss
------------------------------------------------------------------
Erika, Inc., Jeri-Jo Knitwear, Inc. and Jamie Scott, Inc. in the New York State
- ---------------------------------------------------------
Supreme
52
<PAGE>
Court, New York County, for breach of contract for failure to use their
services. That action seeks substantial damages and related declaratory relief.
Miss Erika and Jeri-Jo believe the claims are meritless and intend to defend
this action vigorously. There can be no assurance that Miss Erika and Jeri-Jo
will be successful in defending this action, or that any determination rendered
would not have a material adverse effect on the business, financial condition
and results of operations of the Company. See "Risk Factors--Governmental
Investigation of the New York City Garment Industry" and "--Sourcing and
Manufacturing."
The Company is involved in certain other legal actions and claims arising in
the ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without material adverse effect on the
Company's financial position, results of operations and cash flow.
53
<PAGE>
MANAGEMENT AND BOARD OF DIRECTORS
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME: AGE: POSITION:
- ----- ---- ---------
<S> <C> <C>
Sanford Greenberg ....... 57 Chairman of the Board and Chief Executive Officer
Peter Boneparth ........ 39 President, Chief Operating Officer and Director
Amanda J. Bokman ....... 34 Chief Financial Officer, Vice President, Secretary,
Treasurer and Director
Howard Greenberg ....... 34 Vice President
Stuart Bregman ......... 61 Director and Chief Executive Officer of Miss Erika
David M. Blumberg ...... 39 Director
Bradley P. Cost ........ 45 Director
Jerald S. Politzer ...... 53 Director
</TABLE>
Certain information concerning the directors and executive officers of the
Company is set forth below:
SANFORD GREENBERG has been Chairman of the Board, Chief Executive Officer and
a director of the Company since its founding in 1981.
PETER BONEPARTH has been President and Chief Operating Officer of the Company
since April 1997. Prior to that time, Mr. Boneparth was Executive Vice President
and Senior Managing Director of Investment Banking for Rodman & Renshaw, Inc.,
an investment banking firm, from March 1995 to April 1997, and Managing Director
of Investment Banking for Mabon Securities Corp., a financial services firm,
from May 1989 to March 1995, in each case, providing financing and strategic
support of apparel manufacturing and retail companies. Mr. Boneparth has been a
Director of the Company since March 1997.
AMANDA J. BOKMAN has been Vice President and Chief Financial Officer of the
Company since June 1992, Secretary since March 1995, Treasurer since February
1996 and a director since January 1994. From 1987 to 1992, Ms. Bokman was
employed by Tishman Speyer Properties as an associate in acquisitions and
finance. From 1985 to 1987, Ms. Bokman was an audit professional with Arthur
Andersen, LLP. Ms. Bokman has been a Certified Public Accountant since 1987.
HOWARD GREENBERG has been a Vice President of the Company and Vice President
of Sales of Norton since 1992. Mr. Greenberg has been employed by the Company in
various positions since 1987.
STUART BREGMAN has been Chief Executive Officer of Miss Erika, Inc., a wholly
owned subsidiary of the Company, since October 1997. Mr. Bregman served as
Chairman of the Board and Chief Executive Officer of Miss Erika, Inc. prior to
its acquisition by the Company since January 1991 and as President since January
1978. Mr. Bregman has been a Director of the Company since October 1997.
DAVID M. BLUMBERG has been Director of Wit Capital Group and Senior Investment
Banker of Wit Capital Corporation, an investment banking firm, since May 1996.
Prior to that time, Mr. Blumberg was President of Blumberg Associates, Inc., an
investment advisory firm, since 1992. From 1991 to 1992, Mr. Blumberg was a
Managing Director of Merrill Lynch & Co., and from 1988 to 1992, he was a Senior
Vice President of Merrill Lynch Interfunding Inc. Mr. Blumberg has been a
director of the Company since January 1994.
54
<PAGE>
BRADLEY P. COST has been a partner in the law firm of Haythe & Curley, New
York, New York, since January 1988. Mr. Cost has been a director of the Company
since December 1995.
JERALD S. POLITZER has been Chief Executive Officer of Salant Corporation, an
apparel manufacturer, since April 1997. Prior to that time Mr. Politzer was
employed by Melville Corporation, a retail holding company, from June 1989 to
November 1996. He held various positions at Melville Corporation, including
Executive Vice President and Group Vice President and was a director and member
of the Executive Committee and Operating Committee. Mr. Politzer was Chief
Executive Officer of G. Fox, a division of May Company, from 1986 to 1989. From
1969 to 1986, he served in various executive positions with the Hecht Company,
also a division of May Company. Mr. Politzer has been a director of the Company
since January 1996.
Executive officers serve at the discretion of the Board of Directors. Mr. H.
Greenberg is the son of Mr. S. Greenberg.
COMPENSATION OF DIRECTORS
The Company's policy is to pay directors who are not employees of the Company
an annual fee of $20,000, payable quarterly, and to reimburse each such director
for out-of-pocket expenses incurred in attending meetings of the Board of
Directors and committees of the Board. On February 2, 1998, the Board of
Directors of the Company adopted the Norton McNaughton, Inc. Stock Option Plan
for Non-Employee Directors (the "Non-Employee Directors' Plan"), which plan was
approved by the stockholders of the Company on April 6, 1998. A maximum of
100,000 shares of Common Stock may be issued under the Non-Employee Directors'
Plan. Pursuant to the Non-Employee Directors' Plan, each member of the Board of
Directors who is not a full-time or part-time employee of the Company or its
parent or subsidiary corporations and was not such an employee at any time
during the 12 months immediately preceding his first election to the Board of
Directors will be automatically granted an option to acquire 5,000 shares of
Common Stock on April 15th of each year, beginning April 15, 1998.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid or
awarded to the Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company for the fiscal years ended
November 1, 1997, November 2, 1996 and November 4, 1995:
55
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL ALL OTHER
NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS COMPENSATION
------------------------------ ------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
Sanford Greenberg............................. 1997 $898,693(2) $ -- $ 53,488(3)
Chairman of the Board and CEO 1996 872,693(2) -- 49,109(3)
1995 638,693 -- 57,061(3)
Peter Boneparth............................... 1997 $250,000 $ -- $250,000(4)
President and COO 1996 -- -- --
1995 -- -- --
Andrew Miller(5).............................. 1997 $447,387 $ -- $ --
Vice President 1996 446,674 -- --
1995 435,472 10,000 --
Howard Greenberg.............................. 1997 $447,287 $ -- $ --
Vice President 1996 446,674 -- --
1995 435,472 -- --
Amanda J. Bokman.............................. 1997 $293,842 $ -- $ --
Chief Financial Officer, Vice President, 1996 291,563 -- --
Secretary and Treasurer 1995 267,612 -- --
</TABLE>
- --------------
(1) Effective January 31, 1996, Mr. J. Greenberg retired from his positions as
Executive Vice President, Treasurer and director of the Company. Effective
April 30, 1997, Norton Sperling retired from his positions as President and
director of the Company. See "--Employment Agreements."
(2) Amount includes a bonus paid in connection with Mr. S. Greenberg's agreement
to extend the term of his employment agreement with the Company. See "--
Employment Agreements."
(3) Amount includes the current dollar value of the benefit to such executive
officer of premiums paid by the Company with respect to the split-dollar
insurance arrangement, which benefit was determined by calculating the time
value of money (using the applicable federal rate) of the premiums paid by
the Company in the fiscal years ended November 1, 1997, November 2, 1996 and
November 4, 1995 for the period from the date on which premiums were paid
until March 2015 (which is the earliest date on which the split-dollar
arrangement could terminate and premiums paid could be refunded to the
Company).
(4) Signing bonus paid to Mr. Boneparth in connection with the execution of his
employment agreement with the Company in April 1997. See "--Employment
Agreements."
(5) On November 4, 1997, Mr. Miller's Employment Agreement with the Company
expired by its terms. Effective December 17, 1997, Mr. Miller resigned his
position as a Vice President of the Company. See "--Employment Agreements."
The following table sets forth the grants of stock options to the executive
officers named in the Summary Compensation Table during the fiscal year ended
November 1, 1997. The amounts shown for each of the named executive officers as
grant date values are determined by the Black Scholes option pricing model.
Actual gains, if any, on option exercises and holdings of Common Stock are
dependent on the future performance of the Common Stock and overall stock market
conditions.
56
<PAGE>
STOCK OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
% OF TOTAL OPTIONS
GRANTED TO GRANT
OPTIONS EMPLOYEES IN EXERCISE OF BASE EXPIRATION DATE PRESENT
NAME GRANTED FISCAL 1997 PRICE ($/SH) DATE VALUE (2)
- ----------------------- ---------- ------------------ ----------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Sanford Greenberg ...... -- -- -- -- --
Peter Boneparth ........ 700,000 53.69% $ 5.50 4/30/07 $2,129,400
10,000 $ 6.125 3/31/07 $ 34,010
Andrew Miller .......... 20,000 3.02% $ 6.00 10/22/07 $ 65,192
20,000(1) $ 6.50 10/22/07 $ 62,684
Howard Greenberg ....... 20,000 3.02% $ 6.00 10/22/07 $ 70,826
20,000(1) $ 6.50 10/22/07 $ 62,684
Amanda J. Bokman ....... 5,000 6.81% $ 6.00 10/22/07 $ 16,298
85,000(1) $ 6.50 10/22/07 $ 266,407
</TABLE>
- --------------
(1) On October 22, 1997, the Board of Directors of the Company approved an
option repricing offer to holders of options to purchase Common Stock with
exercise prices of $13.25 and $14.00 per share. In connection with such
repricing, holders of options to purchase Common Stock in the table above
elected to cancel their options with exercise prices of $13.25 and $14.00
per share in exchange for new options to purchase the same number of shares
of Common Stock at a new exercise price of $6.50 (the fair market value of
the Common Stock on October 22, 1997 was $6.00) and on a longer vesting
schedule.
(2) The Company used the Black-Scholes option pricing model in determining grant
date present value. However, options will have no realizable value unless,
and then only to the extent that, the Common Stock price appreciates from
the grant date to the exercise date. The following key assumptions used in
the valuation are based upon historical experience and are not a forecast of
future stock price performance or volatility or of future dividend policy:
Grant Dates: March 31, 1997, April 30, 1997 and October 22, 1997
Dividend Yield: N/A
Volatility: 0.56
Average Risk-Free Rate of Return: 6.474%
Expected Exercise Period: Five years
57
<PAGE>
The following table sets forth the number and value of options and warrants
held by the executive officers of the Company named in the Summary Compensation
Table at November 1, 1997. None of such executive officers exercised options or
warrants during the fiscal year ended November 1, 1997.
FISCAL YEAR END OPTION AND WARRANT VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AND WARRANTS OPTIONS AND WARRANTS
AT 1997 FISCAL YEAR END(#) AT 1997 FISCAL YEAR END(1)
------------------------------- --------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Sanford Greenberg 32,500 7,500 (2) (2)
Peter Boneparth 105,000 605,000 $62,500(3) $ 375,000(4)
Andrew Miller 10,000 40,000 (2) $ 2,500(5)
Howard Greenberg 10,000 40,000 (2) $ 2,500(5)
Amanda J. Bokman 10,000 90,000 (2) $ 625(6)
</TABLE>
_____________________
(1) In-the-money options and warrants are those where the fair market value of
the underlying Common Stock exceeds the exercise price of the option or
warrant. The value of in-the-money options and warrants is determined in
accordance with regulations of the Securities and Exchange Commission by
subtracting the aggregate exercise price of the option or warrant from the
aggregate year-end value of the underlying Common Stock.
(2) These options were not in-the-money as of November 1, 1997, as the fair
market value of the Common Stock was below the exercise price.
(3) Of the exercisable options, 100,000 are in-the-money.
(4) Of the unexercisable options 600,000 are in-the-money.
(5) Of the unexercisable options 20,000 are in-the-money.
(6) Of the unexercisable options 5,000 are in-the-money.
In accordance with applicable Securities and Exchange Commission
regulations, the following table sets forth information as to the repricing of
options held by executive officers of the Company during the past ten fiscal
years:
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
MARKET PRICE EXERCISE OPTION TERM
NUMBER OF OF STOCK AT PRICE AT TIME REMAINING AT
OPTIONS TIME OF OF REPRICING DATE OF
REPRICED OR REPRICING OR OR NEW EXERCISE REPRICING OR
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT(1)
---- ---- ------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Andrew Miller(2) 10/22/97 20,000 $6.00 $13.25 $6.50 7 years
Howard Greenberg 10/22/97 20,000 $6.00 $13.25 $6.50 7 years
Amanda J. Bokman 10/22/97 20,000 $6.00 $13.25 $6.50 7 years
65,000 $6.00 $14.00 $6.50 6 years
</TABLE>
_____________________
58
<PAGE>
(1) In connection with the repricing, the newly granted options are exercisable
in cumulative annual installments of 20% of the shares covered thereby
commencing October 22, 1998, and will terminate on the tenth anniversary of
the date of grant if not exercised on or prior to such date.
(2) Effective December 17, 1997, Mr. Miller resigned from his position as Vice
President of the Company.
COMPENSATION OF DIRECTORS
The Company's policy is to pay directors who are not employees of the
Company an annual fee of $20,000, payable quarterly, and to reimburse each such
director for out-of-pocket expenses incurred in attending meetings of the Board
of Directors and committees of the Board.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company made loans, as of November 5, 1993, in the principal amount of
$920,000 to each of Messrs. S. Greenberg and other officers of the Company at
the time and $120,000 to each of Mr. H. Greenberg and another officer of the
Company at the time. Each loan is evidenced by a limited recourse promissory
note with interest accruing at the rate of 5.84% per annum and a maturity date
of November 5, 2003. Recourse on the promissory notes is limited to a pledge to
the Company of each of the officer's Common Stock. Each of the promissory notes
provides that in the event of any sale or other transfer of shares of Common
Stock by any of the officers, such person is required to repay his note in an
amount equal to the principal amount owing under the note on March 27, 1995
multiplied by a fraction, the numerator of which is the number of shares of
Common Stock which are being sold or transferred, and the denominator of which
is the number of shares owned by such officer on March 27, 1995. At January 31,
1998, the outstanding principal amounts of these promissory notes totalled
$887,700, $887,700, $793,503, $62,966 and $22,811, respectively, and were
secured by pledge of an aggregate of 250,000, 250,000, 250,000, 33,000 and
18,755 shares of Common Stock, respectively.
EMPLOYMENT AGREEMENTS
Norton has Employment Agreements with the following executive officers:
Sanford Greenberg, Peter Boneparth, Howard Greenberg and Amanda J. Bokman. Miss
Erika, a wholly owned subsidiary of the Company, has Employment Agreements with
Stuart Bregman and Howard Zwilling and four other officers of Miss Erika. Jeri-
Jo, a wholly owned subsidiary of the Company, has Employment Agreements with
Susan Schneider, Leslie Schneider and Scott Schneider.
Effective November 4, 1995, Norton entered into an Amended and Restated
Employment Agreement with Mr. S. Greenberg, the Company's Chairman of the Board
and Chief Executive Officer. The Amended and Restated Employment Agreement
terminates on November 5, 1999 (a two-year extension over the prior Employment
Agreement) and provides that Mr. S. Greenberg will receive a base salary of
$750,000 and is eligible to receive annual bonuses as determined by the
Compensation Committee of the Board of Directors. In addition, the Amended and
Restated Employment Agreement provides for an extension bonus of approximately
$600,000 payable in monthly increments over the term of the Agreement.
Effective April 30, 1997, Norton entered into an Employment Agreement with Mr.
Boneparth to serve as the President and Chief Operating Officer of the Company,
providing for a base salary of $500,000 per annum and a signing bonus of
$250,000. The Employment Agreement terminates on November 4, 2000. As provided
in the Employment Agreement, the Company granted options to Mr. Boneparth to
purchase an aggregate of 700,000 shares of Common Stock at an exercise price of
$5.50 per share, which was the fair market value of the Common Stock on the date
of grant. These options vest over the term of the Employment Agreement, with an
acceleration of the vesting if certain target stock prices are attained. Under
the Employment Agreement, 100,000 options vested on April 30, 1997; an
additional 250,000 options are to vest on the earlier to occur of (i) December
10, 1998 or (ii) the date on which the Company's stock price equals or exceeds
$10.00 per share for 20 consecutive trading days; an additional 250,000 options
are to vest on the earlier to occur of (i) December 10, 1999 or (ii) the date on
which the Company's stock price equals or exceeds $13.00 per share for 20
consecutive trading days; and the remaining 100,000 options are to vest on the
earlier to occur of (i) November 4, 2000 or (ii) the date on which the Company's
stock price equals or exceeds $20.00 per share for 20 consecutive trading days.
The Employment Agreement also
59
<PAGE>
provides that in the event of a change in control involving the Company, all
outstanding options will become vested and exercisable in full.
Norton is a party to Employment Agreements with each of Ms. Bokman and Mr. H.
Greenberg, Chief Financial Officer, Vice President, Secretary and Treasurer, and
Vice President, of the Company, respectively. The Employment Agreements were
amended on October 22, 1997 to extend the respective termination dates from
November 4, 1997 to November 6, 1999 and to provide that Ms. Bokman and Mr. H.
Greenberg will receive annual base salaries of $300,000 and $320,000,
respectively. Under the terms of their existing Employment Agreements, both Ms.
Bokman and Mr. H. Greenberg will be eligible to receive annual bonuses as
determined by the Compensation Committee of the Board of Directors.
All of the above Employment Agreements provide for participation in all
employee benefit plans and programs offered by the Company to employees of
comparable seniority, including any bonus plan. The Employment Agreements
provide that if the employee dies, becomes disabled (i.e., unable to perform his
or her normal duties for a cumulative period of six months in any consecutive
12-month period), or is terminated by the Company for "due cause," the Company
will pay to such employee or the employee's legal representative the base salary
(and, in the case of Mr. S. Greenberg, the unpaid portion of the extension
bonus) and, except in the case of termination for due cause, to the extent
approved by the Compensation Committee of the Board of Directors, bonus amounts,
in all cases, accrued and unpaid to the date of such death, disability or
termination. If the Company terminates the employee's employment without due
cause, it will be required to pay salary and bonuses until the earlier to occur
of the expiration date of the Employment Agreement or the death of the employee.
Pursuant to the Employment Agreements, each executive officer has agreed that he
or she will not compete with the Company so long as he or she is employed by
Norton and for a period ranging from six months to three years thereafter,
depending upon the circumstances.
Effective October 1, 1997, Miss Erika entered into Employment Agreements with
Mr. Stuart Bregman (Chief Executive Officer of Miss Erika) and Mr. Howard
Zwilling (President of Miss Erika), providing for base salaries of $425,000 and
$425,000, respectively, per annum subject to increase if certain earnings
targets are achieved for any fiscal year during the term of the Employment
Agreements. The Employment Agreements terminate on November 6, 1999 if certain
earnings targets, averaged during fiscal years 1998 and 1999, are not achieved,
or, if these averaged earnings targets are achieved, on October 31, 2001. In
addition, the Employment Agreements provide for the participation of Messrs.
Bregman and Zwilling in the Miss Erika Bonus Plan (as defined below) in effect
during the term of the Employment Agreements. As provided in the Employment
Agreements, the Company has granted to each of Messrs. Bregman and Zwilling
currently exercisable options to purchase an aggregate of 50,000 shares of
Common Stock of the Company at an exercise price of $5.44 per share, which was
the fair market value of the Common Stock on the date of grant.
The Employment Agreements of Messrs. Bregman and Zwilling provide for
participation in all employee benefit plans and programs offered by the Company
to employees of comparable seniority. The Employment Agreements provide that if
the employee dies, becomes disabled (i.e., unable to perform his normal duties
for a cumulative period of six months in any consecutive 12-month period), or is
terminated by the Company for "due cause," the Company will pay to such employee
or the employee's legal representative the base salary and, except in the case
of termination for due cause, to the extent approved by the Compensation
Committee of the Board of Directors, bonus amounts, in all cases, accrued and
unpaid to the date of such death or disability. If the Company terminates the
employee's employment without due cause, it will be required to pay salary and
bonuses during the period ending one year following the end of the then current
term of the Employment Agreement. Pursuant to the Employment Agreements, each of
Messrs. Bregman and Zwilling has agreed that he will not compete with the
Company so long as he is employed by Miss Erika and for a period ranging from
one year to one year plus the unexpired term of the Employment Agreement,
depending upon the circumstances.
Miss Erika maintains a senior executive bonus plan (the "Miss Erika Bonus
Plan") for Messrs. Bregman, Zwilling and other officers of Miss Erika. The Miss
Erika Bonus Plan provides for the establishment of an annual cash Bonus Pool in
the event that certain annual earnings targets have been attained by Miss Erika.
In addition, the Miss Erika Bonus Plan provides for the establishment of an
annual Option Pool of options to purchase an aggregate of 28,000 shares of
Common Stock for each $500,000 earned by Miss Erika in excess of an annual
earnings target. Each participant in the Miss Erika Bonus Plan is allocated a
percentage of the Bonus Pool and Option Pool pursuant to that participant's
Employment Agreement.
60
<PAGE>
Jeri-Jo entered into Employment Agreements with Susan Schneider and Leslie
Schneider, each to serve as Co-Chief Executive Officer and Co-President, and
Scott Schneider to serve as Executive Vice President of Jeri-Jo, and providing
for base salaries of $400,000, $400,000 and $250,000, respectively, per annum.
The Employment Agreements will terminate in June 2000. As provided in the
Employment Agreements, the Company granted to these executives ten-year options
to purchase an aggregate of 546,429 shares of Common Stock at an exercise price
equal to $6.38 per share. These options are currently exercisable with respect
to 100,000 of such options and will become exercisable upon the earlier of (i)
the date which is nine years and six months from the date of grant and (ii) (A)
with respect to 350,000 of such options, the date of delivery of a statement of
operations of Jeri-Jo for the twelve-month period ending June 30, 1999, which
statement of operations indicates that Jeri-Jo has achieved an EBITDA (as
defined in the Employment Agreements) of at least $11.0 million for such twelve-
month period and (B) with respect to 96,429 of such options, the date of
delivery of a statement of operations of Jeri-Jo for the twelve-month period
ending June 30, 1999, which statement of operations indicates that Jeri-Jo has
achieved an EBITDA (as defined in the Employment Agreements) of at least $15.0
million for such twelve-month period. The Employment Agreements provide for the
grant of options to purchase an aggregate of 50,000 shares of Common Stock in
the event that EBITDA (as defined in the Jeri-Jo Purchase Agreement) attained by
Jeri-Jo in either of the first two years following the closing of the Jeri-Jo
Acquisition is equal to or in excess of $17.0 million and an aggregate of 30,000
shares of Common Stock for each $1.0 million of EBITDA in excess of $17.0
million attained by Jeri-Jo in either of the first two years following the
closing of the Jeri-Jo Acquisition. Additionally, the Employment Agreements
provide for participation in all employee benefit plans and programs offered by
the Company to employees of comparable seniority. The Employment Agreements also
provide that if the employee dies, becomes disabled (i.e., unable to perform his
or her normal duties for a cumulative period of six months in any consecutive
12-month period), or is terminated by the Company for "due cause," the Company
will pay to such employee or the employee's legal representative the base salary
and, except in the case of termination for due cause a pro rata bonus amount and
bonus options. If the Company terminates the employee's employment without due
cause, it will be required to continue to pay salary until the expiration date
of the Employment Agreement. Pursuant to the Employment Agreements, each
executive officer agrees that she or he will not compete with the Company so
long as she or he is employed by the Company and for a period of two years
thereafter.
The Company maintains a key-executive option plan (the "Jeri-Jo Bonus Plan").
Under the Jeri-Jo Bonus Plan options to purchase an aggregate of 50,000 shares
of Common Stock have been granted to executive employees of Jeri-Jo. In
addition, in keeping with historical practices, Jeri-Jo will continue to provide
for a cash bonus pool for its key executives and employees. Additionally, all
employees of Jeri-Jo will be eligible to participate in the Company's stock
option plans and stock purchase plans. The number of options awarded to any
employee in any year will be determined upon the recommendation of the senior
management of Jeri-Jo, subject to the approval of the Stock Option Committee of
the Board of Directors of the Company. Any options awarded to Jeri-Jo employees
in any year, including under the 1998 LT Plan (as defined below), will be based
upon a percentage of operating income contributed by Jeri-Jo to the consolidated
operating income of the Company for such fiscal year.
1998 LONG TERM INCENTIVE PLAN
On February 2, 1998, the Board of Directors of the Company adopted the Norton
McNaughton, Inc. 1998 Long Term Incentive Plan (the "1998 LT Plan"), which plan
was approved by the stockholders of the Company on April 6, 1998. A maximum of
300,000 shares of Common Stock may be issued under the 1998 LT Plan. A wide
range of awards, including stock options, stock appreciation rights, restricted
stock, performance awards and other stock-based awards, may be made under the
1998 LT Plan to senior executives, directors and other employees of the Company
and its subsidiaries (including Jeri-Jo, Norton and Miss Erika) or affiliated
companies.
61
<PAGE>
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The stockholders (including any "group," as that term is used in Section
13(d)(3) of the Exchange Act), who, to the knowledge of the Board of Directors
of the Company, owned beneficially more than five percent of the Common Stock as
of July 15, 1998, each director, each executive officer of the Company named in
the Summary Compensation Table who owned beneficially shares of Common Stock,
and all directors and executive officers as a group, and their respective
shareholdings as of such date (based upon information obtained from such
persons) are set forth in the following table. Except as indicated in the
footnotes to the table, all of such shares are owned with sole voting and
investment power.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED PERCENT
NAME BENEFICIALLY OF CLASS
---- ------------ --------
<S> <C> <C>
Princeton Services, Inc. ............................................. 759,600(1) 10.25%
Brinson Partners, Inc. ............................................... 512,900(2) 6.92%
Lighthouse Capital Management, Inc. .................................. 499,650(3) 6.74%
Dimensional Fund Advisors, Inc. ...................................... 498,900(4) 6.73%
Sanford Greenberg ..................................................... 798,117(5) 10.72%
Norton Sperling ....................................................... 696,516(6) 9.35%
Jay Greenberg ......................................................... 561,717(7) 7.58%
Peter Boneparth ....................................................... 105,100(8) 1.40%
Amanda J. Bokman ...................................................... 10,000(9) *
Stuart Bregman ........................................................ 50,000(10) *
David M. Blumberg ..................................................... 32,000(11) *
Howard Greenberg ...................................................... 28,755(12) *
Bradley P. Cost ....................................................... 25,000(13) *
Jerald S. Politzer .................................................... 15,000(14) *
All Directors and Executive Officers as a Group (eight persons) ....... 1,063,972(15) 13.85%
</TABLE>
- --------------
* Less than 1%.
(1) Information as to the holdings of Princeton Services, Inc. ("PS"), Fund
Asset Management, L.P. ("FAM") and Merrill Lynch Special Value Fund, Inc.
("SVF") is based upon a report on Schedule 13G filed with the Commission.
Such report indicates that PS owns 759,600 shares with shared voting power
and shared dispositive power, FAM owns 700,500 shares with shared voting and
shared dispositive power and SVF owns 700,500 shares with shared voting
power and shared dispositive power. Such report indicates that PS is a
parent holding company as defined in the Exchange Act, FAM is an investment
adviser registered under the Investment Advisers Act of 1940 and SVF is an
investment company registered under the Investment Company Act of 1940. PS
disclaims any beneficial ownership interest in such shares. The address for
PS, FAM and SVF is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
(2) Information as to the holdings of Brinson Partners, Inc. ("BPI"), Brinson
Holdings, Inc. ("BH"), SBC Holding (USA), Inc. ("SBC Holding") and Swiss
Bank Corporation ("Swiss Bank") is based upon a report on Schedule 13G filed
with the Commission. Such report indicates that each of BPI, BH, SBC Holding
and Swiss Bank owns 512,900 shares with shared voting power and shared
dispositive power. Such report indicates that BPI is an investment adviser
registered under the Investment Advisers Act of 1940, and BH, SBC Holding
and Swiss Bank are parent holding companies as defined in the Exchange Act.
The address for BPI and BH is 209 South LaSalle, Chicago, Illinois 60604.
The address for SBC Holding is 222 Broadway, New York, New York 10038. The
address for Swiss Bank is Aeschenplatz 6 CH-4002, Basel, Switzerland.
(3) Information as to the holdings of Lighthouse Capital Management, Inc.
("Lighthouse") and its affiliates is based upon a report on Schedule 13G
filed with the Commission. Such report indicates that 499,650 shares are
owned by Lighthouse and its affiliates with sole voting power and sole
dispositive power. Such report indicates that Lighthouse is an investment
adviser registered under the Investment Advisers Act of 1940. The address
for Lighthouse is 10000 Memorial Drive, Suite 660, Houston, Texas 77024.
62
<PAGE>
(4) Information as to the holdings of Dimensional Fund Advisors Inc. ("DFA")
and its affiliates is based upon a report on Schedule 13G filed with the
Securities and Exchange Commission. Such report indicates that 498,900
shares are owned by DFA and its affiliates with sole voting power and sole
dispositive power (of which shares an aggregate of 174,300 are voted by
officers of DFA in their capacities as officers of affiliates of DFA). Such
report indicates that DFA is an investment adviser registered under the
Investment Advisers Act of 1940. The address for DFA is 1299 Ocean Avenue,
11th Floor, Santa Monica, California 90401.
(5) Includes 32,500 shares issuable upon exercise of currently exercisable non-
qualified stock options held by Mr. S. Greenberg.
(6) Includes 35,000 shares issuable upon exercise of currently exercisable non-
qualified stock options held by Mr. Sperling. The address for Mr. Sperling
is c/o Norton McNaughton, Inc., 463 Seventh Avenue, New York, New York
10018.
(7) The address for Mr. J. Greenberg is c/o Norton McNaughton, Inc., 463
Seventh Avenue, New York, New York 10018.
(8) Includes 105,000 shares issuable upon exercise of currently exercisable
non-qualified stock options held by Mr. Boneparth. See "Management and
Board of Directors--Employment Agreements."
(9) Consists of 10,000 shares issuable upon exercise of currently exercisable
non-qualified stock options held by Ms. Bokman.
(10) Consists of 50,000 shares issuable upon exercise of currently exercisable
non-qualified stock options held by Mr. Bregman.
(11) Includes 25,000 shares issuable upon exercise of currently exercisable non-
qualified stock options held by Mr. Blumberg.
(12) Includes 10,000 shares issuable upon exercise of currently exercisable non-
qualified stock options held by Mr. H. Greenberg.
(13) Includes 20,000 shares issuable upon exercise of currently exercisable non-
qualified stock options held by Mr. Cost.
(14) Consists of 15,000 shares issuable upon exercise of currently exercisable
non-qualified stock options held by Mr. Politzer.
(15) Includes for all Directors and Executive Officers an aggregate of 267,500
shares issuable upon exercise of currently exercisable non-qualified stock
options. The address for all directors and executive officers of the
Company is 463 Seventh Avenue, New York, New York 10018.
To the Company's knowledge, there have been no significant changes in stock
ownership or control of the Company since July 15, 1998.
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of July 15, 1998, the Company had a total of 7,414,429 shares of Common
Stock outstanding. As of July 15, 1998, the Company had outstanding options
(including options outstanding under the Company's stock option plans) entitling
the holders thereof to acquire an aggregate of 2,106,429 shares of Common Stock,
of which options 645,500 shares are currently exercisable. Various holders of
Common Stock and options have "piggyback" and demand registration rights to
register such Common Stock and shares issuable upon exercise of such options for
public sale under the Securities Act. See "Description of Capital Stock." The
preparation and filing of any registration statements filed in connection with
the exercise of registration rights will be at the expense of the Company.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is a Delaware corporation and its affairs are governed by its
Certificate of Incorporation and Bylaws and by the Delaware General Corporation
Law. The following description of the Company's capital stock is qualified in
its entirety by reference to the provisions of the Company's Certificate of
Incorporation and Bylaws. The authorized capital stock of the Company consists
of 20,000,000 shares of common stock, $.01 par value per share ("Common Stock"),
and 1,000,000 shares of preferred stock, $1.00 par value per share (the
"Preferred Stock"). As of July 15, 1998, there were 7,414,429 shares of Common
Stock issued and outstanding, which were held of record by 78 shareholders, and
there were no shares of Preferred Stock issued and outstanding. In addition,
2,836,429 shares of Common Stock have been reserved for issuance by the Company
upon exercise of stock options.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and do not have cumulative voting rights.
Subject to the rights of holders of outstanding shares of Preferred Stock, if
any, the holders of Common Stock are entitled to share ratably in dividends, if
any, as may be declared from time to time by the Board of Directors in its
discretion from funds legally available therefor. In the event of the
liquidation, dissolution, or winding up of the Company, subject to the rights of
holders of outstanding Preferred Stock, if any, the holders of Common Stock are
entitled to share ratably in all assets available for distribution to the
shareholders after payment of the Company's liabilities. The Common Stock has
no preemptive or other subscription rights, and there are no conversion rights
or redemption or sinking fund provisions with respect to such shares. All of
the outstanding shares of Common Stock are fully paid and nonassessable. The
transfer agent and registrar for the Common Stock is American Stock Transfer and
Trust Company of New York, New York.
PREFERRED STOCK
The Board of Directors, without any vote or action of the shareholders, has
the authority to issue up to 1,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges, qualifications,
limitations and restrictions thereof, including dividend rights, conversion and
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series or the designation of such
series. The issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of the Company. Further, the
issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. The Company has no present plans to issue any shares
of Preferred Stock.
OTHER SECURITIES
Options. The Company has issued options to purchase an aggregate of 2,106,429
shares of Common Stock, with exercise prices ranging from $5.38 to $17.25 per
share and various expiration dates through June 18, 2008. In connection with the
contingent payments, if any, pursuant to the Miss Erika Purchase Agreement and
the Jeri-Jo Purchase Agreement, the Company may issue to the sellers in each of
the Miss Erika Acquisition and the Jeri-Jo Acquisition a number of Common Stock
representing all or a portion of such contingent payments, if any, in
64
<PAGE>
accordance with the terms and conditions contained in the Miss Erika Purchase
Agreement and the Jeri-Jo Purchase Agreement, respectively.
Each of the foregoing options provide, among other things, for the adjustment
of the price per share and number of shares issuable upon exercise of such
options or warrants upon a merger or consolidation of the Company,
reclassification of the Company's securities, or a stock split, subdivision or
combination of the Company's securities. No optionee has any stockholder rights
with respect to the shares issuable upon exercise of the options held by such
holder until such options are exercised and the purchase price is paid for the
shares.
Registration Rights. Pursuant to agreements by and among the Company and
certain holders of Common Stock and options to purchase Common Stock (the
"Holders"), the Holders may request that the Company file a registration
statement under the Securities Act and, upon such request and subject to certain
conditions, the Company generally will be required to use its best efforts to
effect any such registration. In addition, if the Company proposes to register
any of its securities, either for its own account or for the account of other
stockholders, the Company is required, with certain exceptions, to notify the
Holders and, subject to certain conditions and limitations, to include in such
registration all of the shares of Common Stock requested to be included by the
Holders.
65
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
On June 18, 1998, the Company entered into the Current Credit Agreement (a
secured revolving credit and letter of credit facility) and prepaid the term
loans and the revolving credit loans then outstanding under the Prior Credit
Agreement. Norton continues to factor its accounts receivable, as well as the
accounts receivable of Miss Erika and Jeri-Jo, pursuant to factoring
arrangements.
The Current Credit Agreement is a three-year secured revolving credit and
letter of credit facility, with interest on outstanding borrowings determined,
at the Company's option, based upon stated margins below the prime rate or in
excess of LIBOR rates. Initially, the interest rate under the Current Credit
Agreement is 75 basis points below the prime rate (based upon the current prime
rate, the interest rate under the Current Credit Agreement will be 7.75% per
annum). Available credit under the Current Credit Agreement is as follows:
revolving credit advances not to exceed $60.0 million, documentary letters of
credit not to exceed $130.0 million and standby letters of credit not to exceed
$45.0 million (including the $30.0 million standby letter of credit necessary to
secure the Company's cash contingent payment obligation in connection with the
Jeri-Jo Acquisition (see "Acquisitions--The Jeri-Jo Acquisition")), with the
aggregate credit available to the Company equal to the lesser of (i) $175.0
million or (ii) the sum of 85% of eligible accounts receivables and 60% of
eligible inventory.
Borrowings under the Current Credit Agreement are secured by a security
interest on substantially all of the assets of the Company and its subsidiaries.
As such, borrowings under the Current Credit Agreement will be effectively
senior to the Notes and the Subsidiary Guarantees to the extent of the assets
serving as security therefor. The initial borrowing under the Current Credit
Agreement were used to refinance the remaining outstanding borrowings under the
Prior Credit Agreement after giving effect to the application of the net
proceeds of the Outstanding Notes Offering and, in the future, borrowings
thereunder will be used for the ongoing working capital requirements of the
Company and its subsidiaries.
The Current Credit Agreement contains a number of restrictive covenants,
including covenants which limit incurrence of liens and indebtedness, limit
transactions with affiliates, acquisitions, sales of assets, investments and
other restricted payments, and require that the Company maintain certain fixed
charge coverage, cash flow coverage and leverage ratios and meet specified
minimum levels of working capital and tangible net worth. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
66
<PAGE>
DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Outstanding Notes were, and the Exchange Notes will be, issued pursuant to
the Indenture among the Company, the Subsidiary Guarantors and United States
Trust Company of New York, as trustee (the "Trustee"). The Exchange Notes and
the Outstanding Notes will constitute a single series of debt securities under
the Indenture. The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(the "Trust Indenture Act"). The Notes are subject to all such terms, and
Holders of Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of the material provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to such agreement, including the definitions therein of certain terms
used below. Copies of the proposed form of such agreement are available as set
forth below under "--Additional Information." The definitions of certain terms
used in the following summary are set forth below under "--Certain Definitions."
For purposes of this summary, the term "Company" refers only to Norton
McNaughton, Inc. and not to any of its Subsidiaries.
The Notes are senior, unsecured obligations of the Company, ranking pari passu
in right of payment with all other senior indebtedness of the Company and senior
in right of payment with any subordinated indebtedness incurred by the Company
in the future. As of May 2, 1998, after giving pro forma effect to the
Transactions, the Company would have had approximately $134.8 million of funded
indebtedness outstanding ($9.8 million of which would have consisted of loans
under the Current Credit Agreement and $125 million of which would have
consisted of the Notes). The Notes are effectively subordinated to all secured
indebtedness of the Company, including borrowings under the Current Credit
Agreement, to the extent of the assets securing such indebtedness. As of May 2,
1998, after giving pro forma effect to the Transactions, the Company would have
had $9.8 million of secured indebtedness outstanding under the Current Credit
Agreement, approximately $107.9 million in undrawn letters of credit under the
Current Credit Agreement and approximately $19.6 million of borrowing
availability under the revolving credit facility in the Current Credit
Agreement. The Indenture permits the Company and its Subsidiaries to incur
additional indebtedness, including additional secured indebtedness, in the
future, subject to certain restrictions. See "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock."
As of the date of this Prospectus, all of the Company's Subsidiaries are
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture. See "--Certain Covenants--
Restricted Payments."
For each Outstanding Note accepted for exchange, the holder of such
Outstanding Note will receive an Exchange Note having a principal amount equal
to that of the surrendered Outstanding Note.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $125.0 million. The
Notes will mature on June 1, 2005. Interest on the Notes accrues at the rate of
12 1/2% per annum and is payable semi-annually in arrears on June 1 and December
1 of each year, commencing on December 1, 1998, to Holders of record on the
immediately preceding May 15 and November 15. Interest on the Notes accrues from
the most recent date to which interest has been paid or, if no interest has been
paid, from the date of original issuance. Interest is computed on the basis of a
360-day year comprised of twelve 30-day months. Principal of and premium and
interest, if any, on the Notes are payable at the office or agency of the
Company maintained for such purpose or, at the option of the Company, payment of
interest may be made by check mailed to the Holders of the Notes at their
respective addresses set forth in the register of Holders of Notes; provided
that all payments of principal, premium and interest with respect to Notes the
Holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Until otherwise designated by the
Company, the Company's office or agency will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of $1,000
and integral multiples thereof.
67
<PAGE>
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are jointly and severally
guaranteed (the "Subsidiary Guarantees") by all of the Company's existing and
future Restricted Subsidiaries. The Indenture provides that in the event of (i)
a sale or other disposition of all of the assets of any Subsidiary Guarantor, by
way of merger, consolidation or otherwise, (ii) a sale or other disposition of
all of the Capital Stock of any Subsidiary Guarantor or (iii) the designation of
a Subsidiary Guarantor as an Unrestricted Subsidiary as described under "--
Certain Covenants--Restricted Payments," then such Subsidiary Guarantor, or the
corporation acquiring the property (in the event of a sale or other disposition
of all of the assets of such Subsidiary Guarantor), will be released and
relieved of any obligations under its Subsidiary Guarantee.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to June 1,
2003. Thereafter, the Notes will be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest, if any, thereon to
the applicable redemption date, if redeemed during the twelve-month period
beginning on June 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
----- ----------
<S> <C>
2003.............................. 107.000%
2004.............................. 103.500%
</TABLE>
Notwithstanding the foregoing, on or prior to June 1, 2001, the Company may
redeem up to 35% of the aggregate principal amount of Notes originally issued
under the Indenture at a redemption price of 112.50% of the principal amount
thereof, plus accrued and unpaid interest, if any, thereon to the redemption
date, with the net cash proceeds of one or more offerings of Equity Interests
(other than Disqualified Stock) of the Company; provided that (i) at least 65%
of the aggregate principal amount of Notes originally issued under the Indenture
remains outstanding immediately after the occurrence of such redemption
(excluding Notes held by the Company and its Subsidiaries) and (ii) each such
redemption shall occur within 90 days of the date of the closing of each such
offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. Notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
68
<PAGE>
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, the Company will be required to
make an offer to each Holder of Notes to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the date of purchase (the "Change of Control
Payment"). Within 30 days following any Change of Control, the Company will mail
a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Notes on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice. The Company will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent lawful,
(i) accept for payment all Notes or portions thereof properly tendered pursuant
to the Change of Control Offer, (ii) deposit with the Paying Agent an amount
equal to the Change of Control Payment in respect of all Notes or portions
thereof so tendered and (iii) deliver or cause to be delivered to the Trustee
the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
A Change of Control could constitute a default under the Current Credit
Agreement, and future credit agreements and other agreements relating to
indebtedness to which the Company becomes a party may contain similar
provisions, which could give the holders of such indebtedness the right to
accelerate such indebtedness. There can be no assurances that, upon a Change of
Control, the Company will have sufficient resources to repay or refinance all
indebtedness that may be accelerated and to purchase all Notes tendered in a
Change of Control Offer. See "Risk Factors--Change of Control."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Restricted Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of Notes to require
the Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Restricted Subsidiaries taken as a whole to another Person or group may
be uncertain.
69
<PAGE>
Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
or such Restricted Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash;
provided that the amount of (a) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet) of the Company or such
Restricted Subsidiary (other than contingent liabilities and liabilities that
are by their terms subordinated to the Notes or any guarantee thereof) that are
assumed by the transferee of any such assets pursuant to a customary novation
agreement that releases the Company or such Restricted Subsidiary from further
liability and (b) any securities, notes or other obligations received by the
Company or such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted by the
Company or such Restricted Subsidiary into cash (to the extent of the cash
received) shall, in each case, be deemed to be cash for purposes of this
provision.
Within 180 days after the receipt of any Net Proceeds from an Asset Sale, the
Company may either (i) apply such Net Proceeds to the acquisition of a majority
of the assets of, or all of the capital stock of, another business, the making
of a capital expenditure or the acquisition of other long-term assets that are
used or useful in the business of the Company or any of its Restricted
Subsidiaries or (ii) repay Indebtedness under Credit Facilities (and to
correspondingly reduce commitments with respect thereto in the case of revolving
credit borrowings). Pending the final application of any such Net Proceeds, the
Company may temporarily reduce revolving credit borrowings or otherwise invest
such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied or invested as provided in the
first sentence of this paragraph will be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company
will be required to make an offer to all Holders of Notes (an "Asset Sale
Offer") to purchase the maximum principal amount of Notes that may be purchased
out of the Excess Proceeds at an offer price in cash in an amount equal to 100%
of the principal amount thereof, plus accrued and unpaid interest thereon, if
any, to the date of purchase, in accordance with the procedures set forth in the
Indenture. To the extent that any Excess Proceeds remain after consummation of
an Asset Sale Offer, the Company may use such Excess Proceeds for any purpose
not otherwise prohibited by the Indenture. If the aggregate principal amount of
Notes tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds,
the Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation involving
the Company or any of its Subsidiaries) or to the direct or indirect holders of
the Company's or any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or other than dividends
or distributions payable to the Company or a Restricted Subsidiary of the
Company); (ii) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company (other than any such
Equity Interests owned by the Company or any Restricted Subsidiary of the
Company); (iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the Notes, except a payment of interest or a payment of
principal at Stated Maturity; (iv) make any Earn-out Payment, other than any
such payment in the form of Equity Interests (other than Disqualified Stock) of
the Company; or (v) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (v) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
70
<PAGE>
(a) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described under
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by the Company and its Restricted Subsidiaries after
the Closing Date (excluding (x) in the case of a determination of whether any
Restricted Payment may be made, Restricted Payments permitted by clauses (ii),
(iii) and (iv) of the next succeeding paragraph and (y) in the case of a
determination of whether a Restricted Payment which is an Earn-out Payment may
be made, clause (vi) of the next succeeding paragraph), is less than the sum,
without duplication, of (1) 50% of the Consolidated Net Income of the Company
for the period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the Indenture to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus (2) 100% of the aggregate net cash proceeds received by the
Company since the Closing Date (A) as a contribution to its common equity
capital, (B) from the issue or sale of Equity Interests of the Company (other
than Disqualified Stock) or (C) from the issue or sale of Disqualified Stock or
debt securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or convertible
debt securities) sold to a Subsidiary of the Company), plus (3) to the extent
that any Restricted Investment that was made after the Closing Date is sold for
cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the cost of
disposition, if any) and (B) the initial amount of such Restricted Investment.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of subordinated Indebtedness or Equity Interests of the Company in
exchange for, or out of the net cash proceeds of the substantially concurrent
sale (other than to a Subsidiary of the Company) of, other Equity Interests of
the Company (other than Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from clause (c)(2)
of the preceding paragraph; (iii) the defeasance, redemption, repurchase or
other acquisition of subordinated Indebtedness with the net cash proceeds from
an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any
dividend by a Restricted Subsidiary of the Company to the holders of its common
Equity Interests on a pro rata basis; (v) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company held
by any member of the Company's (or any of its Subsidiaries') management;
provided that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $1.0 million in any two-
year period and no Default or Event of Default shall have occurred and be
continuing immediately after such transaction; and (vi) the payment of (1) any
Existing Cash Earn-out Obligation and (2) any other Earn-out Payment in
connection with the Miss Erika Acquisition provided that the aggregate amount of
such other Earn-out Payment does not exceed $10.0 million in the aggregate and
at the time of each such payment it would be permitted under clause (b) of the
preceding paragraph.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the Board
of Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $2.5 million. Not later than 30 days following the end
of any fiscal quarter of the Company in which the Company or any of its
Restricted Subsidiaries have made any Restricted Payments, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payments were permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, together with a
copy of any fairness opinion or appraisal required by the Indenture.
71
<PAGE>
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
greatest of (i) the net book value of such Investments at the time of such
designation, (ii) the fair market value of such Investments at the time of such
designation and (iii) the original fair market value of such Investments at the
time they were made. Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions. If, at any time, any
Unrestricted Subsidiary would fail to meet the definition of an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock," the Company shall be in default of such covenant).
The Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted under
the covenant described under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference period,
and (ii) no Default or Event of Default would be in existence immediately
following such designation.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that (i) the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and (ii) the Company will not permit any of its Subsidiaries to
issue any shares of preferred stock; provided, however, that the Company (but
not its Subsidiaries) may incur Indebtedness (including Acquired Debt) or issue
Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred would have been at least 2.0 to 1, in each case
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if such additional Indebtedness had been incurred, and
such Disqualified Stock had been issued, and such application of net proceeds
had occurred at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness pursuant to Credit Facilities in an aggregate amount not to exceed
the greater of: (a) $175.0 million, provided that the amount of such
Indebtedness that is represented by Indebtedness for borrowed money shall not
exceed $60.0 million; and (b) the sum of 65% of the Company's Eligible Inventory
plus 90% of the Company's Eligible Accounts Receivable;
(ii) the incurrence by the Company and its Restricted Subsidiaries of Existing
Indebtedness;
(iii) the incurrence by the Company and the Subsidiary Guarantors of
Indebtedness represented by the Notes, the Exchange Notes and the Subsidiary
Guarantees;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which
are used to refund, refinance or replace Indebtedness (other than intercompany
Indebtedness) that was permitted by the Indenture to be incurred under the first
paragraph hereof or clauses (ii), (iii), (vi), (viii) or (ix) of this paragraph;
72
<PAGE>
(v) the incurrence by the Company or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Restricted
Subsidiaries; provided, however, that (a) any subsequent issuance or transfer of
Equity Interests that results in any such Indebtedness being held by a Person
other than the Company or a Restricted Subsidiary of the Company and (b) any
sale or other transfer of any such Indebtedness to a Person that is not either
the Company or a Restricted Subsidiary of the Company shall be deemed, in each
case, to constitute an incurrence of such Indebtedness by the Company or such
Subsidiary, as the case may be, that was not permitted by this clause (v);
(vi) the incurrence by the Company or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
currency exchange risk or interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of this Indenture to be outstanding;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate amount not to exceed $15.0 million at
any one time outstanding;
(viii) the guarantee by the Company or any of its Restricted Subsidiaries of
Indebtedness of the Company or a Restricted Subsidiary of the Company that was
permitted to be incurred by another provision of this covenant;
(ix) the incurrence of obligations (other than for borrowed money) under
factoring arrangements entered into in the ordinary course of business; and
(x) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse
Debt, provided, however, that if any such Indebtedness ceases to be Non-Recourse
Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an
incurrence of Indebtedness by a Restricted Subsidiary of the Company that was
not permitted by this clause (x).
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (x) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Company shall, in
its sole discretion, classify such item of Indebtedness in any manner that
complies with this covenant. Accrual of interest, accretion or amortization of
original issue discount and the payment of interest on any Indebtedness in the
form of additional Indebtedness with the same terms will not be deemed to be an
incurrence of Indebtedness for purposes of this covenant; provided, in each such
case, that the amount thereof is included in Fixed Charges of the Company as
accrued.
Liens
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired, or any
income or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any indebtedness owed to the Company or any
of its Restricted Subsidiaries, (ii) make loans or advances to the Company or
any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries; provided, however,
that the foregoing restrictions will not apply to encumbrances or restrictions
existing under or by reason of (A) Existing Indebtedness as in effect on the
Closing Date, (B) the Current Credit Agreement as in effect as of the Closing
Date, and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof or any other
Credit Facility, provided that such amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacement, refinancings or other
Credit Facilities are no more restrictive, taken as a
73
<PAGE>
whole, with respect to such dividend and other payment restrictions than those
contained in the Current Credit Agreement as in effect on the Closing Date, (C)
the Indenture and the Notes, (D) applicable law, (E) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (F) customary non-assignment provisions in leases entered into in
the ordinary course of business, (G) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, (H) any
agreement for the sale of a Restricted Subsidiary or other assets that restricts
distributions by such Restricted Subsidiary or other assets pending sale, (I)
Permitted Refinancing Indebtedness, provided that the restrictions contained in
the agreements governing such Permitted Refinancing Indebtedness are no more
restrictive, taken as a whole, than those contained in the agreements governing
the Indebtedness being refinanced, (J) secured Indebtedness otherwise permitted
to be incurred pursuant to the provisions of the covenant described under the
caption "--Liens" that limits the right of the debtor to dispose of the assets
securing such Indebtedness, (K) provisions with respect to the disposition or
distribution of assets or property in joint venture agreements and other similar
agreements entered into in the ordinary course of business, (L) restrictions on
cash or other deposits or net worth imposed by customers under contracts entered
into in the ordinary course of business and (M) customary restrictions imposed
on copyrighted, trademarked or patented materials.
Merger, Consolidation or Sale of Assets
The Indenture provides that neither the Company nor any Subsidiary Guarantor
may consolidate or merge with or into (whether or not the Company or such
Subsidiary Guarantor is the surviving corporation), or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its properties
or assets in one or more related transactions, to another corporation, Person or
entity unless (i) the Company or such Subsidiary Guarantor is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company or such Subsidiary Guarantor)
or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation organized or existing under
the laws of the United States, any state thereof or the District of Columbia;
(ii) the entity or Person formed by or surviving any such consolidation or
merger (if other than the Company or such Subsidiary Guarantor) or the entity or
Person to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company or
such Subsidiary Guarantor under the Notes, the Indenture and the Registration
Rights Agreement pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no Default
or Event of Default exists; and (iv) except in the case of a merger of the
Company with or into a Wholly Owned Subsidiary of the Company, the Company or
the entity or Person formed by or surviving any such consolidation or merger (if
other than the Company or such Subsidiary Guarantor), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (a) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the consolidated net worth of the Company immediately
preceding the transaction and (b) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or such Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any
74
<PAGE>
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5.0
million, an opinion as to the fairness to the Company of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing. Notwithstanding the foregoing, the
following items shall not be deemed to be Affiliate Transactions: (i) any
employment or consulting agreement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business (and any amendment
thereto); (ii) transactions between or among the Company and its Restricted
Subsidiaries; (iii) reasonable director, officer and employee compensation and
other benefits and indemnification provisions approved by the Board of Directors
or the compensation committee of such Board of Directors; (iv) Affiliate
Transactions existing on the Closing Date; and (v) Restricted Payments that are
permitted by the provisions of the Indenture described above under the caption
"--Restricted Payments."
Additional Subsidiary Guarantees
The Indenture provides that if (i) the Company or any of its Restricted
Subsidiaries shall acquire or create another Restricted Subsidiary or (ii) an
Unrestricted Subsidiary of the Company is redesignated as a Restricted
Subsidiary or otherwise ceases to be an Unrestricted Subsidiary, then such newly
acquired, created or redesignated Restricted Subsidiary shall execute a
supplemental indenture becoming a Subsidiary Guarantor in accordance with the
terms of the Indenture.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that describes the financial condition and results of
operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in the
footnotes thereto and in Management's Discussion and Analysis of Financial
Condition and Results of Operations, the financial condition and results of
operations of the Company and its Restricted Subsidiaries separate from the
financial information and results of operations of the Unrestricted Subsidiaries
of the Company) and, with respect to the annual information only, a report
thereon by the Company's certified independent accountants and (ii) all current
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. In addition, whether or not
required by the rules and regulations of the Commission, the Company will file a
copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Company and the Subsidiary Guarantors will agree that,
for so long as any Notes remain outstanding, they will furnish to Holders of the
Notes and to securities analysts and prospective investors, upon their request,
the information required to be delivered pursuant to Rule 144A(d)(4) under the
Act.
Payments for Consent
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid or is paid to all Holders of the Notes that consent, waive
or agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
75
<PAGE>
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Notes; (ii) default in payment when due of the principal of or premium, if any,
on the Notes; (iii) failure by the Company or any of its Restricted Subsidiaries
to comply with the provisions described under the captions "--Repurchase at the
Option of Holders--Change of Control" "--Repurchase at the Option of Holders--
Asset Sales," "--Certain Covenants--Restricted Payments," "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock" or "--Certain
Covenants--Merger, Consolidation or Sale of Assets; (iv) failure by the Company
or any of its Restricted Subsidiaries for 30 days after notice to comply with
any of its other agreements in the Indenture or the Notes; (v) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the date of the
Indenture, which default (a) is caused by a failure to pay principal of or
premium or interest on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness on the date of such default (a "Payment
Default") or (b) results in the acceleration of such Indebtedness prior to its
express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.0 million or more; (vi) failure by the Company or
any of its Restricted Subsidiaries to pay final judgments aggregating in excess
of $5.0 million, which judgments are not paid, discharged or stayed for a period
of 60 days; (vii) default by any Subsidiary Guarantor in the performance of any
covenant set forth in its Subsidiary Guarantee, repudiation by any Subsidiary
Guarantor of its obligations under its Subsidiary Guarantee, or the
unenforceability of any Subsidiary Guarantee against a Subsidiary Guarantor for
any reason; and (viii) certain events of bankruptcy or insolvency with respect
to the Company, any Significant Subsidiary of the Company or any group of
Restricted Subsidiaries of the Company that, taken together, constitute a
Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Significant Subsidiary or any group
of Restricted Subsidiaries that, taken together, would constitute a Significant
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had to
pay if the Company then had elected to redeem the Notes pursuant to the optional
redemption provisions of the Indenture, an equivalent premium shall also become
and be immediately due and payable to the extent permitted by law upon the
acceleration of the Notes. If an Event of Default occurs prior to June 1, 2003
by reason of any willful action (or inaction) taken (or not taken) by or on
behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to such date, then the premium specified in the
Indenture shall also become immediately due and payable to the extent permitted
by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
principal of or interest on the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
76
<PAGE>
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company, as
such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of and premium and interest, if
any, on the Notes when such payments are due from the trust referred to below,
(ii) the Company's obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and the Company's obligations in connection therewith
and (iv) the Legal Defeasance provisions of the Indenture. In addition, the
Company may, at its option and at any time, elect to have the obligations of the
Company released with respect to certain covenants that are described in the
Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default and Remedies" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of and premium and interest, if any, on the outstanding
Notes on the stated maturity or on the applicable redemption date, as the case
may be, and the Company must specify whether the Notes are being defeased to
maturity or to a particular redemption date; (ii) in the case of Legal
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that (a) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (b) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
(and related incurrence of Liens) to be applied to such deposit) or insofar as
Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Indenture) to which the Company or any of its Subsidiaries is a party
or by which the Company or any of its Subsidiaries is bound; (vi) the Company
must have delivered to the Trustee an opinion of counsel to the effect that
after the 91st day following the deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally; (vii) the Company must deliver to
the Trustee an Officers' Certificate stating that the deposit was not made by
the Company with the intent of preferring the Holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel,
77
<PAGE>
each stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture. The
Registrar and the Trustee may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and the Company may require a
Holder to pay any taxes and fees required by law or permitted by the Indenture.
The Company is not required to transfer or exchange any Note selected for
redemption. Also, the Company is not required to transfer or exchange any Note
for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture and
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver; (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described under the caption "--Repurchase
at the Option of Holders"); (iii) reduce the rate of or change the time for
payment of interest on any Note; (iv) waive a Default or Event of Default in the
payment of principal of or premium, if any, or interest on the Notes (except a
rescission of acceleration of the Notes by the Holders of at least a majority in
aggregate principal amount of the Notes and a waiver of the payment default that
resulted from such acceleration); (v) make any Note payable in money other than
that stated in the Notes; (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of Notes
to receive payments of principal of or premium or interest on the Notes; (vii)
waive a redemption payment with respect to any Note (other than a payment
required by one of the covenants described under the caption "--Repurchase at
the Option of Holders"); or (viii) make any change in the foregoing amendment
and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes, the
Company and the Trustee may amend or supplement the Indenture or the Notes to
cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes
in addition to or in place of certificated Notes, to provide for the assumption
of the Company's or a Subsidiary Guarantor's obligations to Holders of Notes in
the case of a merger or consolidation or sale of all or substantially all of the
Company's or such Subsidiary Guarantor's assets, to make any change that would
provide any additional rights or benefits to the Holders of Notes or that does
not adversely affect the legal rights under the Indenture of any such Holder, or
to comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject
78
<PAGE>
to certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain copies of the form of Indenture
without charge by writing to Norton McNaughton, Inc., 463 Seventh Avenue, New
York, New York 10018, Attention: Secretary.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference is
made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i) Indebtedness
of any other Person existing at the time such other Person is merged with or
into or became a Restricted Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of any
assets or rights (including, without limitation, by way of a sale and
leaseback), other than sales of inventory in the ordinary course of business
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole will be governed by the provisions of the Indenture described
above under the caption "--Repurchase at the Option of Holders--Change of
Control" and/or the provisions described above under the caption "--Certain
Covenants--Merger, Consolidation or Sale of Assets" and not by the provisions of
the Asset Sale covenant), and (ii) the sale by the Company or the issuance or
sale by any of its Restricted Subsidiaries of Equity Interests of any of the
Company's Restricted Subsidiaries, in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $1.0 million or (b) for net proceeds in
excess of $1.0 million. Notwithstanding the foregoing, the following items shall
not be deemed to be Asset Sales: (i) a transfer of assets by the Company to a
Wholly Owned Restricted Subsidiary or by a Restricted Subsidiary to the Company
or to a Wholly Owned Restricted Subsidiary of the Company; (ii) an issuance of
Equity Interests by a Restricted Subsidiary to the Company or to a Wholly Owned
Restricted Subsidiary of the Company; (iii) a Restricted Payment that is
permitted by the covenant described above under the caption "--Certain
Covenants--Restricted Payments;" (iv) transfers of damaged, worn-out or obsolete
equipment or other assets no longer used or useful in the business of the
Company or its Restricted Subsidiaries; (v) transfers of accounts receivable,
and all instruments, contract rights, chattel paper, documents and general
intangibles related thereto, pursuant to a bona fide factoring arrangement; and
(vi) licensing of intellectual property.
"Capital Lease Obligation" means, at the time any determination thereof is to
be made, the amount of the liability in respect of a capital lease that would at
such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock, (ii)
in the case of an association or business entity, any and all shares, interests,
participations, rights or other equivalents (however designated) of corporate
stock, (iii) in the case of a partnership or limited liability company,
partnership or membership interests
79
<PAGE>
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued or
directly and fully guaranteed or insured by the United States government or any
agency or instrumentality thereof (provided that the full faith and credit of
the United States is pledged in support thereof) having maturities of not more
than six months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500 million and a Thompson Bank Watch Rating
of "B" or better, (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above, (v) commercial paper having the highest rating
obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation
and in each case maturing within six months after the date of acquisition and
(vi) money market funds substantially all of the assets of which constitute Cash
Equivalents of the kinds described in clauses (i) through (v) of this
definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act); (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company; (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that any "person" (as defined above) becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that
a person shall be deemed to have "beneficial ownership" of all securities that
such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 35% of the Voting Stock of the
Company (measured by voting power rather than number of shares); or (iv) the
first day during any consecutive two-year period on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors.
"Closing Date" means the first date on which Notes were issued under the
Indenture (i.e. June 18, 1998).
"Consolidated Cash Flow" means, with respect to any Person for any period, the
Consolidated Net Income of such Person for such period plus, to the extent
deducted in computing such Consolidated Net Income: (i) an amount equal to any
extraordinary loss plus any net loss realized in connection with an Asset Sale;
(ii) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries; (iii) consolidated interest expense of such Person and
its Restricted Subsidiaries, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance costs
and original issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers' acceptance
financings, net payments (if any) pursuant to Hedging Obligations and
commissions, discounts and other fees and charges incurred in respect of bona
fide factoring arrangements); (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
expenses (excluding any such non-cash expense to the extent that it represents
an accrual of or reserve for cash expenses in any future period or amortization
of a prepaid cash expense that was paid in a prior period) of such Person and
its Restricted Subsidiaries; less the amount of non-cash items increasing such
Consolidated Net Income for such period, in each case, on a consolidated basis
and determined in accordance with GAAP. Notwithstanding the foregoing, (a) the
provision for taxes on the income or profits of, and the depreciation and
amortization and other non-cash expenses of, a Restricted Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent that a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Restricted Subsidiary without prior governmental approval (that has not been
obtained), and without direct or indirect restriction pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Restricted
Subsidiary or its stockholders, and (b) the Net Income of any Unrestricted
Subsidiary shall be excluded, whether or not distributed to the Company or one
of its Restricted Subsidiaries.
80
<PAGE>
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar distributions
by such Restricted Subsidiary of such Net Income is not at the date of
determination permitted without any prior governmental approval (that has not
been obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of the Board of
Directors on the Closing Date or (ii) was nominated for election or elected to
the Board of Directors with the approval of a majority of the Continuing
Directors who were members of the Board of Directors at the time of such
nomination or election.
"Credit Facilities" means, with respect to the Company and its Restricted
Subsidiaries, one or more debt facilities (including, without limitation, the
Current Credit Agreement) or commercial paper facilities with banks or other
institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables), letters of credit, bankers acceptances or other extensions of
credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time. Indebtedness under
Credit Facilities outstanding on the date on which Notes are first issued and
authenticated under the Indenture shall be deemed to have been incurred on such
date in reliance on the exception provided by clause (i) of the definition of
Permitted Debt.
"Current Credit Agreement" means that certain amended and restated Credit
Agreement, dated as of the Closing Date, by and among the Company, the
Subsidiary Guarantors, CIT, NationsBanc, Fleet and the other lenders parties
thereto from time to time, initially providing for up to $175.0 million of
revolving credit borrowings and letters of credit, including any related notes,
guarantees, security and other collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended, modified,
renewed, refunded, replaced or refinanced from time to time.
"Default" means any event that is or with the passage of time or the giving of
notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require the Company to repurchase such Capital Stock upon the occurrence of a
Change of Control or an Asset Sale shall not constitute Disqualified Stock.
"Earn-out Payment" means any contingent consideration based on future
operating performance of the acquired entity or assets payable following the
consummation of an acquisition based on criteria set forth in the documentation
governing or relating to such acquisition.
"Eligible Accounts Receivable" means eligible accounts receivable or similar
terms as defined in the documentation governing the Credit Facilities.
"Eligible Inventory" means eligible inventory or similar terms as defined in
the documentation governing the Credit Facilities.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
81
<PAGE>
"Existing Cash Earn-out Obligation" means the amount of the Company's and the
applicable Subsidiary Guarantor's obligations to make an Earn-out Payment that,
on the Closing Date, is contractually required to be paid in cash under (i) the
Agreement of Purchase and Sale dated as of August 29, 1997, as amended, by and
among the Company, Miss Erika, Inc., f/k/a ME Acquisition Corp., Old ME Corp.,
f/k/a Miss Erika, Inc., and the stockholders of Old ME Corp. and (ii) the
Agreement of Purchase and Sale dated as of April 15, 1998, as amended, by and
among the Company, JJ Acquisition Corp., Jeri-Jo Knitwear Inc., Jamie Scott,
Inc., and the stockholders of Jamie Scott, Inc.
"Existing Indebtedness" means Indebtedness of the Company and its Restricted
Subsidiaries (other than Indebtedness under the Current Credit Agreement and
Indebtedness being repaid with the net proceeds of the Offering) in existence on
the Closing Date, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), (ii) the consolidated
interest of such Person and its Restricted Subsidiaries that was capitalized
during such period, (iii) any interest expense on Indebtedness of another Person
that is guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of such Person or one of its Restricted Subsidiaries
(whether or not such guarantee or Lien is called upon) and (iv) the product of
(a) all dividend payments, whether or not in cash, on any series of preferred
stock of such Person or any of its Restricted Subsidiaries, other than dividend
payments on Equity Interests payable solely in Equity Interests of the Company
(other than Disqualified Stock) or to the Company or a Restricted Subsidiary of
the Company, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal, in each case,
on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any period,
the ratio of the Consolidated Cash Flow of such Person for such period to the
Fixed Charges of such Person for such period; provided, however, that (i) in the
event that the referent Person or any of its Restricted Subsidiaries incurs,
assumes, guarantees or redeems any Indebtedness (other than revolving credit
borrowings and other than the opening of letters of credit) or issues or redeems
preferred stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period and (ii) for purposes of making the computation referred to above, (a)
acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the definition
of Consolidated Net Income, (b) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(c) the Fixed Charges attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Government Securities" means direct obligations of, or obligations guaranteed
by, the United States of America for the payment of which obligations or
guarantee the full faith and credit of the United States of America is pledged.
82
<PAGE>
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest or
currency exchange rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or,
without duplication, reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any property or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance sheet
of such Person prepared in accordance with GAAP, as well as all Indebtedness of
others secured by a Lien on any asset of such Person (whether or not such
Indebtedness is assumed by such Person) and, to the extent not otherwise
included, the guarantee by such Person of any Indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be (i) the
accreted value thereof, in the case of any Indebtedness issued with original
issue discount, and (ii) the principal amount thereof, together with any
interest thereon that is more than 30 days past due, in the case of any other
Indebtedness. Notwithstanding anything to the contrary set forth in this
definition of "Indebtedness," an Earn-out Payment shall not constitute
Indebtedness if at the time such payment is required to be made and such payment
is prohibited by the covenant described under the caption "--Certain Covenants--
Restricted Payments," such payment is required to be made in common Equity
Interests of the Company.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding entertainment, commission, travel,
relocation and similar advances to directors, officers and employees made in the
ordinary course of business), purchases or other acquisitions for consideration
of Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any Restricted Subsidiary of the Company
sells or otherwise disposes of any Equity Interests of any direct or indirect
Restricted Subsidiary of the Company such that, after giving effect to any such
sale or disposition, such Person is no longer a Restricted Subsidiary of the
Company, the Company shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Restricted Subsidiary not sold or disposed of in an amount
determined as provided in the final paragraph of the covenant described under
the caption "--Certain Covenants--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"Miss Erika Acquisition" means the acquisition by Miss Erika, Inc., f/k/a ME
Acquisition Corp., of substantially all the assets and assumption of
substantially all the liabilities of Old ME Corp., f/k/a Miss Erika, Inc.,
pursuant to the Agreement of Purchase and Sale dated as of August 29, 1997, as
amended, by and among the Company, Miss Erika, Inc., Old ME Corp. and the
stockholders of Old ME Corp.
"Net Income" means, with respect to any Person, the net income (loss) of such
Person, determined in accordance with GAAP and before any reduction in respect
of preferred stock dividends, excluding, however, (i) any gain (but not loss),
together with any related provision for taxes on such gain (but not loss),
realized in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (b) the disposition
of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain (but not
loss).
83
<PAGE>
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the (i) direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, (ii) taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements), (iii) any reserve for adjustment in respect of the sale
price of such asset or assets established in accordance with GAAP and (iv) any
payments to Persons having a Lien (which Lien secures obligations in respect of
borrowed money) on the assets sold or required by such Persons to provide any
required consent or approval to such Asset Sale.
"Non-Recourse Debt" means Indebtedness: (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a Subsidiary Guarantor
or otherwise) or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the Notes and other than under a Credit Facility) of the Company or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investments" means (i) any Investment in the Company or in a
Restricted Subsidiary of the Company; (ii) any Investment in Cash Equivalents;
(iii) any Investment or series of related Investments by the Company or any
Restricted Subsidiary of the Company in a Person if, as a result of such
Investment or series of related Investments, (a) such Person becomes a
Restricted Subsidiary of the Company or (b) such Person is merged, consolidated
or amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary of the
Company; (iv) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described under the caption "--Repurchase at the Option of
Holders--Asset Sales;" (v) loans and advances to employees, officers and
directors not to exceed $1.0 million at any time outstanding; (vi) Investments
made in exchange for Equity Interests of the Company (other than Disqualified
Stock); (vii) Investments acquired by the Company or any Restricted Subsidiary
of the Company in the ordinary course of business (a) in exchange for any other
Investment or account receivable held by the Company or any Restricted
Subsidiary of the Company in connection with or as a result of a bankruptcy,
reorganization, workout or recapitalization of the issuer of such other
Investment or the obligor with respect to such account receivable or (b) as a
result of the foreclosure by the Company or any Restricted Subsidiary of the
Company with respect to any secured Investment or other transfer of title with
respect to any such secured Investment which is then in default; (viii) Hedging
Obligations otherwise permitted to be incurred under the Indenture; (ix) one or
more Investments in or to contractors, suppliers, purchasing agents or similar
persons having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause (ix)
that are at the time outstanding, not to exceed $5.0 million; and (x)
Investments existing on the Closing Date.
"Permitted Liens" means (i) Liens in favor of the Company or any of its Wholly
Owned Restricted Subsidiaries; (ii) Liens securing borrowings, letter of credit
reimbursement obligations and other obligations under the Credit Facilities,
provided that such borrowings and obligations were permitted by the Indenture to
be incurred; (iii) Liens on property of a Person existing at the time such
Person's capital stock is acquired or such Person is merged into or consolidated
with the Company or any Restricted Subsidiary of the Company; provided that such
Liens were in existence prior to the contemplation of such acquisition or merger
or consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing at
the time of acquisition thereof by the Company or any Restricted Subsidiary of
the Company, provided that such Liens were in existence prior to the
contemplation of such acquisition; (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vi)
Liens existing on the date of the Indenture; (vii) Liens for taxes, assessments
or governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
84
<PAGE>
as shall be required in conformity with GAAP shall have been made therefor;
(viii) Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $5.0 million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary; (ix) Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens
imposed by law incurred in the ordinary course of business for sums not yet
delinquent or being contested in good faith, if such reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been made
in respect thereof; (x) Liens incurred or deposits made in the ordinary course
of business in connection with workers' compensation, unemployment insurance and
other types of social security, including any Lien securing letters of credit
issued in the ordinary course of business in connection therewith, or to secure
the performance of tenders, statutory obligations, surety and appeal bonds,
bids, leases, government contracts, performance and return-of-money bonds and
other similar obligations (exclusive of obligations for the payment of borrowed
money); (xi) judgment Liens not giving rise to an Event of Default; (xii)
easements, rights-of-way, zoning restrictions and other similar charges or
encumbrances in respect of real property not interfering in any material respect
with the ordinary conduct of the business of the Company or any of its
Restricted Subsidiaries; (xiii) any interest or title of a lessor under any
Capital Lease Obligations; (xiv) purchase money Liens to finance property or
assets of the Company or any Restricted Subsidiary of the Company acquired in
the ordinary course of business; (xv) Liens upon specific items of inventory or
other goods and proceeds of any Person securing such Person's obligations in
respect of bankers' acceptances issued or created for the account of such Person
to facilitate the purchase, shipment or storage of such inventory or other
goods; (xvi) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to such
letters of credit and products and proceeds thereof; (xvii) Liens securing
Hedging Obligations that are otherwise permitted to be incurred under the
Indenture; (xviii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its Restricted
Subsidiaries; (xix) Liens arising from filing Uniform Commercial Code financing
statements regarding leases; and (xx) Liens arising under factoring arrangements
entered into in the ordinary course of business.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or such Restricted Subsidiary (other than
intercompany Indebtedness); provided that: (i) the principal amount (or accreted
value, if applicable) of such Permitted Refinancing Indebtedness does not exceed
the principal amount of (or accreted value, if applicable), plus accrued
interest on, the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus the amount of reasonable expenses incurred in
connection therewith); (ii) such Permitted Refinancing Indebtedness has a final
maturity date no earlier than the final maturity date, and a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity,
of the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness is subordinated in right of payment to
the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred by the Company and/or by the Restricted Subsidiary who are the
obligor(s) on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Restricted Investment" means an Investment other than a Permitted Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the Closing Date.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any
85
<PAGE>
such interest or principal prior to the date originally scheduled for the
payment thereof; provided , that any amendment to the original documentation
governing such Indebtedness that extends the final maturity date of such
Indebtedness but makes no other amendments or alterations to such original
documentation shall be deemed to be part of the original documentation governing
such Indebtedness.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution,
but only to the extent that such Subsidiary: (a) has no Indebtedness other than
Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (c) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (1) to
subscribe for additional Equity Interests or (2) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries; and (e) has at least one director on its board of
directors that is not a director or executive officer of the Company or any of
its Restricted Subsidiaries and has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness at
any date, the number of years obtained by dividing (i) the sum of the products
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person and its other Wholly Owned Restricted
Subsidiaries.
86
<PAGE>
DESCRIPTION OF OUTSTANDING NOTES
The terms of the Outstanding Notes are identical in all material respects
to the Exchange Notes, except that the Outstanding Notes have not been
registered under the Securities Act, are subject to certain restrictions on
transfer and are entitled to certain registration rights under the Registration
Rights Agreement (which rights terminate upon the consummation of the Exchange
Offer, except under limited circumstances). In addition, the Registration
Rights Agreement provides that if (i) within 60 days of the Issue Date (as
defined herein) or a Notes Shelf Request (as defined herein), neither an
exchange offer registration statement nor a resale shelf registration statement
has been filed, (ii) within 150 days of the Issue Date or a Shelf Request,
neither an exchange offer registration statement nor a resale shelf registration
statement has been declared effective, (iii) within 180 days of the Issue Date,
an exchange offer has not been consummated or (iv) either the exchange offer
registration statement or the resale shelf registration statement has been
declared effective and such registration statement ceases to be effective or
usable (subject to certain exceptions) in connection with resales of Outstanding
Notes during periods specified in the Registration Rights Agreement (each such
event referred to in clauses (i) through (iv), a "Registration Default"),
interest ("Additional Interest") will accrue on the Outstanding Notes (in
addition to the stated interest on the Outstanding Notes) from and including the
date on which any such Registration Default shall occur to but excluding the
date on which all Registration Defaults have been cured. Additional Interest
will accrue at a rate of 0.50% per annum during the 30-day period immediately
following the occurrence of any Registration Default and shall increase by 0.50%
per annum with respect to each subsequent 30-day period, but in no event shall
such rate exceed 2.0% per annum. The Exchange Notes are not entitled to any
such Additional Interest (subject to certain limited exceptions). The
Outstanding Notes and the Exchange Notes will constitute a single series of debt
securities under the Indenture. See "Description of Exchange Notes."
87
<PAGE>
EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were originally sold by the Company on June 18, 1998 to
the Initial Purchasers pursuant to the Purchase Agreement among the Company, the
Subsidiary Guarantors and the Initial Purchasers. The Initial Purchasers
subsequently resold the Outstanding Notes to qualified institutional buyers
pursuant to Rule 144A under the Securities Act, or institutional "accredited
investors" (as defined in Rule 501(a) (1), (2), (3) or (7) of Regulation D under
the Securities Act) or outside the United States in compliance with Regulation S
under the Securities Act.
The Company and the Initial Purchasers entered into an exchange and
registration rights agreement on June 18, 1998, the original issue date of the
Outstanding Notes (the "Registration Rights Agreement") pursuant to which the
Company agreed, for the benefit of the holders of the Outstanding Notes, that it
will, at its own cost, (i) within 60 days after the original issue date (the
"Issue Date"), file a registration statement (the "Notes Exchange Offer
Registration Statement") with the Commission with respect to the Exchange Offer
for the Exchange Notes, (ii) use its best efforts to cause the Notes Exchange
Offer Registration Statement to be declared effective under the Securities Act
within 150 days after the Issue Date and (iii) use its best efforts to
consummate the Notes Exchange Offer within 180 days after the Issue Date. Upon
the Notes Exchange Offer Registration Statement being declared effective, the
Company will offer the Exchange Notes (and the related guarantees) in exchange
for surrender of the Notes (and the related guarantees). The Company will keep
the Notes Exchange Offer open for not less than 20 business days (or longer if
required by applicable law) after the date notice of the Notes Exchange Offer is
mailed to the holders of the Notes. For each of the Outstanding Notes
surrendered pursuant to the Notes Exchange Offer, the holder who surrendered
such Outstanding Note will receive an Exchange Note having a principal amount
equal to that of the surrendered Outstanding Note. Interest on each Exchange
Note will accrue from the last interest payment date on which interest was paid
on the Outstanding Note surrendered in exchange therefor or, if no interest has
been paid on such Outstanding Note, from the Issue Date. Under existing
Commission interpretations, the Exchange Notes would be freely transferable by
holders thereof (other than affiliates of the Company and the Subsidiary
Guarantors) after the Notes Exchange Offer without further registration under
the Securities Act if the holder of the Exchange Notes represents that it is
acquiring the Exchange Notes in the ordinary course of business, that it has no
arrangement or understanding with any person to participate in the distribution
(within the meaning of the Securities Act) of the Exchange Notes and that it is
not an affiliate of the Company or the Subsidiary Guarantors, as such terms are
interpreted by the Commission; provided that broker-dealers ("Participating
Broker-Dealers") receiving Exchange Notes in the Notes Exchange Offer will have
a prospectus delivery requirement with respect to resales of such Exchange
Notes. The Commission has taken the position that the Participating Broker-
Dealers may fulfill their prospectus delivery requirements with respect to the
Exchange Notes (other than a resale of an unsold allotment from the original
sale of the Notes) with the prospectus contained in the Notes Exchange Offer
Registration Statement. The Company and the Subsidiary Guarantors have agreed
for a period of 180 days after consummation of the Notes Exchange Offer to make
available a prospectus meeting requirements of the Securities Act to
Participating Broker-Dealers and other persons, if any, with similar prospectus
delivery requirements for use in connection with any resale of such Exchange
Notes.
For each Outstanding Note properly tendered and accepted pursuant to the
Exchange Offer, the holder of such Outstanding Note will receive an Exchange
Note having a principal amount equal to that of the Outstanding Note tendered.
Interest on each Exchange Note will accrue from the last respective interest
date on which interest was paid on the Outstanding Note tendered in exchange
therefor or, if no interest has been paid on such Outstanding Note, from the
Issue Date.
Each holder who wishes to exchange its Outstanding Notes for Exchange Notes in
the Notes Exchange Offer will be required to represent that any Exchange Notes
to be received by it will be acquired in the ordinary course of its business and
that at the time of the commencement of the Notes Exchange Offer it has no
arrangement or understanding with any person to participate in the distribution
(within the meaning of the Securities Act) of the Exchange Notes and that it is
not an affiliate of the Company.
If the holder is not a broker-dealer, it will be required to represent that it
is not engaged in, and does not intend to engage in, the distribution of the
applicable Exchange Notes. If the holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Notes that were acquired as a
result of market making activities
88
<PAGE>
or other trading activities, it will be required to acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
In the event that applicable interpretations of the staff of the Commission do
not permit the Company to effect such Notes Exchange Offer, or if for any other
reason the Notes Exchange Offer is not consummated within 180 days after the
Issue Date, or, under certain circumstances, if the Initial Purchasers or any
holder of Notes (other than the Initial Purchasers) who is not eligible to
participate in the Notes Exchange Offer shall so request (each a "Notes Shelf
Request"), the Company will at its cost, (a) within 60 days of such Notes Shelf
Request, file a shelf registration resales of the Notes (a "Notes Shelf
Registration Statement"), (b) use its best efforts to cause such Notes Shelf
Registration Statement to be declared effective under the Securities Act no
later than 150 days following a Notes Shelf Request and (c) use its best efforts
to keep effective such Notes Shelf Registration Statement until the earlier of
two years after the Issue Date and such time as all of the applicable Notes have
been sold thereunder. The Company will, in the event of the filing of a Notes
Shelf Registration Statement, provide to each holder of the Notes, copies of the
prospectus which is a part of such Notes Shelf Registration Statement, notify
each such holder when such Notes Shelf Registration Statement has become
effective and take certain other actions as are required to permit unrestricted
resales of the Notes. A holder that sells its Notes pursuant to a Notes Shelf
Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Notes Exchange and Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations).
If the Company or the Subsidiary Guarantors fail to comply with the above
provisions or if such registration statement fails to become effective, then, as
liquidated damages, additional interest (the "Notes Additional Interest") shall
become payable with respect to the Outstanding Notes as follows:
(i) if the Notes Exchange Offer Registration Statement or Notes Shelf
Registration Statement is not filed within, in the case of the Notes Exchange
Offer Registration Statement, 60 days following the Issue Date or, in the case
of the Notes Shelf Registration Statement, 60 days following a Notes Shelf
Request, Notes Additional Interest shall accrue over and above the stated
interest at a rate of 0.50% per annum for the first 30 days commencing on the
61st day after the Issue Date or the Notes Shelf Request, respectively, such
Notes Additional Interest rate increasing by an additional 0.50% per annum at
the beginning of each subsequent 30-day period;
(ii) if the Notes Exchange Offer Registration Statement or Notes Shelf
Registration Statement is not declared effective within, in the case of the
Notes Exchange Offer Registration Statement, 150 days following the Issue Date
or, in the case of the Notes Shelf Registration Statement, 150 days following a
Notes Shelf Request, Notes Additional Interest shall accrue over and above the
stated interest at a rate of 0.50% per annum for the first 30 days commencing on
the 151st day after the Issue Date or the Notes Shelf Request, respectively,
such Notes Additional Interest rate increasing by an additional 0.50% per annum
at the beginning of each subsequent 30-day period; or
(iii) if (A) the Company has not exchanged all Notes validly tendered in
accordance with the terms of the Notes Exchange Offer on or prior to 180 days
after the Issue Date or (B) the Notes Exchange Offer Registration Statement
ceases to be effective at any time prior to the time that the Notes Exchange
Offer is consummated or (C) if applicable, the Notes Shelf Registration
Statement has been declared effective and such Notes Shelf Registration
Statement ceases to be effective at any time prior to the second anniversary of
the Issue Date (unless all the Notes have been sold thereunder), then Notes
Additional Interest shall accrue on the Outstanding Notes over and above the
stated interest at a rate of 0.50% per annum for the first 30 days commencing on
(x) the 181st day after the Issue Date with respect to the Notes validly
tendered and not exchanged by the Company, in the case of (A) above, or (y) the
day the Notes Exchange Offer Registration Statement ceases to be effective or
usable for its intended purpose in the case of (B) above, or (z) the day such
Notes Shelf Registration Statement ceases to be effective in the case of (C)
above, such Notes Additional Interest rate increasing by an additional 0.50% per
annum at the beginning of each subsequent 30-day period; provided, however, that
the Notes Additional Interest rate under clauses (i), (ii) or (iii) above, may
not exceed in the aggregate 2.0% per annum; and provided further, that (1) upon
the filing of the Notes Exchange Offer Registration Statement or Notes Shelf
Registration Statement (in the case of clause (i) above), (2) upon the
effectiveness of the Notes Exchange Offer Registration Statement or Notes Shelf
Registration Statement (in the case of (ii) above), or (3) upon the exchange of
Exchange Notes for all Outstanding Notes tendered (in the case of clause
(iii)(A) above), or upon the effectiveness of the Notes Exchange Offer
Registration Statement which had ceased to remain effective (in the case of
clause (iii)(B) above), or upon the
89
<PAGE>
effectiveness of the Notes Shelf Registration Statement which had ceased to
remain effective (in the case of clause (iii)(C) above), Notes Additional
Interest as a result of such clause (or the relevant subclause thereof), as the
case may be, shall cease to accrue.
Any amounts of Notes Additional Interest due pursuant to clauses (i), (ii) or
(iii) above will be payable in cash, on the same original interest payment dates
as the Outstanding Notes. The amount of Notes Additional Interest will be
determined by multiplying the applicable Notes Additional Interest rate by the
principal amount of the Outstanding Notes multiplied by a fraction, the
numerator of which is the number of days such Notes Additional Interest rate was
applicable during such period (determined on the basis of a 360-day year
comprised of twelve 30-day months), and the denominator of which is 360.
The summary herein of certain provisions of the Registration Rights Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by, all the provisions of the Notes Exchange and Registration Rights
Agreement, a copy of which will be available upon request to the Company.
Following the consummation of the Exchange Offer, holders of the Outstanding
Notes who were eligible to participate in the Exchange Offer but who did not
tender their Outstanding Notes will not have any further exchange or
registration rights and such Outstanding Notes will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
such Outstanding Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus and
in the Letter of Transmittal, the Company will accept any and all Outstanding
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time,
on the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of Outstanding Notes
accepted in the Exchange Offer. Holders may tender some or all of their
Outstanding Notes pursuant to the Exchange Offer. However, Outstanding Notes
may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms of
the Outstanding Notes except that the Exchange Notes have been registered under
the Securities Act and hence will not bear legends restricting the transfer
thereof. The Exchange Notes will evidence the same debt as the Outstanding
Notes and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus $125,000,000 aggregate principal amount of
Outstanding Notes are outstanding. The Company has fixed the close of business
_________ __, 1998 as the record date for the Exchange Offer for purposes of
determining the person to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of the Outstanding Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of Delaware or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Outstanding
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders for the purpose of receiving the Outstanding Notes from the Company.
If any tendered Outstanding Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Outstanding Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions of
the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than the transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "-- Fee and Expenses."
90
<PAGE>
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
______, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, (i) to delay accepting any Outstanding Notes,
to extend the Exchange Offer or to terminate the Exchange Offer if any of the
conditions set forth below under "-- Conditions" shall not have been satisfied,
by giving oral or written notice of such delay, extension or termination to the
Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders.
PROCEDURES FOR TENDERING
The tender of Outstanding Notes pursuant to any of the procedures set forth in
this Prospectus and in the Letter of Transmittal will constitute a binding
agreement between the tendering Holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal. The tender of Outstanding Notes will constitute an agreement to
deliver good and marketable title to all tendered Outstanding Notes prior to the
Expiration Date free and clear of all liens, charges, claims, encumbrances,
interests and restrictions of any kind. Holders must follow the procedures set
forth in this Prospectus in order to properly and effectively tender Outstanding
Notes.
EXCEPT AS PROVIDED IN "-- GUARANTEED DELIVERY PROCEDURES," UNLESS OUTSTANDING
NOTES BEING TENDERED ARE DEPOSITED BY THE HOLDER WITH THE EXCHANGE AGENT PRIOR
TO THE EXPIRATION DATE (ACCOMPANIED BY A PROPERLY COMPLETED AND DULY EXECUTED
LETTER OF TRANSMITTAL), THE COMPANY MAY, AT ITS OPTION, REJECT SUCH TENDER.
ISSUANCE OF OUTSTANDING NOTES WILL BE MADE ONLY AGAINST DEPOSIT OF TENDERED
OUTSTANDING NOTES AND DELIVERY OF ALL OTHER REQUIRED DOCUMENTS. NOTWITHSTANDING
THE FOREGOING, DTC PARTICIPANTS TENDERING THROUGH ATOP WILL BE DEEMED TO HAVE
MADE VALID DELIVERY WHERE THE EXCHANGE AGENT RECEIVES AN AGENT'S MESSAGE
(DEFINED BELOW) PRIOR TO THE EXPIRATION DATE.
Outstanding Notes held through DTC. Each Beneficial Owner holding Outstanding
Notes through a DTC Participant must instruct such DTC Participant to cause its
Outstanding Notes to be tendered in accordance with the procedures set forth in
the Prospectus.
Pursuant to an authorization given by DTC to the DTC Participants, each DTC
Participant holding Outstanding Notes through DTC must (i) electronically
transmit its acceptance through ATOP, and DTC will then verify the acceptance,
execute a book-entry delivery to the Exchange Agent's account at DTC and send an
Agent's Message to the Exchange Agent for its acceptance, or (ii) comply with
the guaranteed delivery procedures set forth below and in the Notice of
Guaranteed Delivery. See "-- Guaranteed Delivery Procedures."
The Exchange Agent will (promptly after the date of this Prospectus) establish
accounts at DTC for purposes of the Exchange Offer with respect to Outstanding
Notes held through DTC, and any financial institution that is a DTC Participant
may make book-entry delivery of interests in Outstanding Notes into the Exchange
Agent's account through ATOP. However, although delivery of interests in the
Outstanding Notes may be effected through book-entry transfer into the Exchange
Agent's account through ATOP, an Agent's Message in connection with such book-
entry transfer, and any other required documents, must be transmitted to and
received by the Exchange Agent at its address set forth under "-- Exchange
Agent," or the guaranteed delivery procedures set forth below must be complied
with, in each case, prior to the Expiration Date. Delivery of documents to DTC
does not constitute delivery to the Exchange Agent. The confirmation of a book-
entry transfer into the Exchange Agent's account at DTC as described above is
referred to herein as a "Book-Entry Confirmation."
91
<PAGE>
The term "Agent's Message" means a message transmitted by DTC to, and received
by, the Exchange Agent and forming a part of the Book-Entry Confirmation, which
states that DTC has received an express acknowledgment from each DTC Participant
tendering through ATOP that such DTC Participants have received a Letter of
Transmittal and agree to be bound by the terms of the Letter of Transmittal and
that the Company may enforce such agreement against such DTC Participants.
Cede & Co., as the Holder of the global certificates representing the
Outstanding Notes (a "Global Security"), will tender a portion of each Global
Security equal to the aggregate principal amount due at the stated maturity or
number of shares for which instructions to tender are given by DTC Participants.
Outstanding Notes held by Holders. Each Holder must (i) complete and sign and
mail or deliver the accompanying Letter of Transmittal, and any other documents
required by the Letter of Transmittal, together with certificate(s) representing
all tendered Outstanding Notes, to the Exchange Agent at its address set forth
under "--Exchange Agent," or (ii) comply with the guaranteed delivery procedures
set forth below and in the Notice of Guaranteed Delivery. See "-- Guaranteed
Delivery Procedures."
All signatures on a Letter of Transmittal must be guaranteed by any member
firm of a registered national securities exchange or of the National Association
of Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor" institution
within the meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible
Institution"); provided, however, that signatures on a Letter of Transmittal
need not be guaranteed if such Outstanding Notes are tendered for the account of
an Eligible Institution including (as such terms are defined in Rule 17Ad-15):
(i) a bank; (ii) a broker, dealer, municipal securities dealer, municipal
securities broker, government securities dealer or government securities broker;
(iii) a credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings institution that is a
participant in a Securities Transfer Association recognized program.
If a Letter of Transmittal or any Outstanding Note is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, agent, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person must so indicate when signing, and proper evidence satisfactory to
the Company of the authority of such person so to act must be submitted.
Holders should indicate in the applicable box in the Letter of Transmittal the
name and address to which substitute certificates evidencing Outstanding Notes
for amounts not tendered are to be issued or sent, if different from the name
and address of the person signing the Letter of Transmittal. In the case of
issuance in a different name, the employer identification or social security
number of the person named must also be indicated. If no instructions are
given, such Outstanding Notes not tendered, as the case may be, will be returned
to the person signing the Letter of Transmittal.
By tendering, each Holder and each DTC Participant will make to the Company
the representations set forth in the third paragraph under the heading --
Purpose and Effect of the Exchange Offer."
No alternative, conditional, irregular or contingent tenders will be accepted
(unless waived). By executing a Letter of Transmittal or transmitting an
acceptance through ATOP, as the case may be, each Tendering Holder waives any
right to receive any notice of the acceptance for purchase of its Outstanding
Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Outstanding Notes will be resolved by the
Company, whose determination will be final and binding. The Company reserves
the absolute right to reject any or all tenders that are not in proper form or
the acceptance of which may, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the absolute right to waive any condition
to the Exchange Offer and any irregularities or conditions of tender as to
particular Outstanding Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding. Unless waived, any irregularities in
connection with tenders must be cured within such time as the Company shall
determine. The Company and the Exchange Agent shall not be under any duty to
give notification of defects in such tenders and shall not incur liabilities for
failure to give such notification. Tenders of Outstanding Notes will not be
deemed to have been made until such irregularities have been cured or waived.
Any Outstanding Notes received by the Exchange Agent that are not properly
tendered and as to which the irregularities have not been cured or waived will
be returned by the Exchange Agent to the tendering Holder, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
92
<PAGE>
LETTERS OF TRANSMITTAL AND OUTSTANDING NOTES MUST BE SENT ONLY TO THE EXCHANGE
AGENT. DO NOT SEND LETTERS OF TRANSMITTAL OR OUTSTANDING NOTES TO THE COMPANY
OR DTC.
The method of delivery of Outstanding Notes and Letters of Transmittal, any
required signature guarantees and all other required documents, including
delivery through DTC and any acceptance through ATOP, is at the election and
risk of the persons tendering and delivering acceptances or Letters of
Transmittal and, except as otherwise provided in the applicable Letter of
Transmittal. Delivery will be deemed made only when actually received by the
Exchange Agent. If delivery is by mail, it is suggested that the Holder use
properly insured, registered mail with return receipt requested, and that the
mailing be made sufficiently in advance of the Expiration Date to permit
delivery to the Exchange Agent prior to the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Outstanding Notes held through DTC. DTC Participants holding Outstanding
Notes through DTC who wish to cause their Outstanding Notes to be tendered, but
who cannot transmit their acceptances through ATOP prior to the Expiration Date,
may cause a tender to be effected if:
(a) guaranteed delivery is made by or through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by mail, hand delivery,
facsimile transmission or overnight courier) substantially in the form
provided by the Company herewith; and
(c) Book-Entry Confirmation and an Agent's Message in connection therewith (as
described above) are received by the Exchange Agent within three New York
Stock Exchange ("NYSE") trading days after the date of the execution of the
Notice of Guaranteed Delivery.
Outstanding Notes held by Holders. Holders who wish to tender their
Outstanding Notes and (i) whose Outstanding Notes are not immediately available,
(ii) who cannot deliver their Outstanding Notes, the Letter of Transmittal or
any other required documents to the Exchange Agent or (iii) who cannot complete
the procedures for book-entry transfer, prior to the Expiration Date. may
effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by facsimile transmission,
mail or hand delivery) setting forth the name and address of the holder,
the certificate number(s) of such Outstanding Notes and the principal
amount of Outstanding Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within three NYSE trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof) together
with the certificate(s) representing the Outstanding Notes (or a
confirmation of book-entry transfer of such Outstanding Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility), and any
other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered
Outstanding Notes in proper form for transfer (or a confirmation or book-
entry transfer of such Outstanding Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility), and all other documents required by
the Letter of Transmittal are received by the Exchange Agent upon three
NYSE trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.
93
<PAGE>
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
Outstanding Notes held through DTC. DTC Participants holding Outstanding
Notes who have transmitted their acceptances through ATOP may, prior to 5:00
p.m., New York City time, on the Expiration Date, withdraw the instruction given
thereby by delivering to the Exchange Agent, at its address set forth under "--
Exchange Agent," a written, telegraphic or facsimile notice of withdrawal of
such instruction. Such notice of withdrawal must contain the name and number of
the DTC Participant, the principal amount due at the Stated Maturity date of the
Outstanding Notes to which such withdrawal related and the signature of the DTC
Participant. Withdrawal of such an instruction will be effective upon receipt
of such written notice of withdrawal by the Exchange Agent.
Outstanding Notes held by Holders. Holders may withdraw a tender of
Outstanding Notes in the Exchange Offer, by a telegram, telex, letter or
facsimile transmission notice of withdrawal received by the Exchange Agent at
its address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Outstanding Notes to be withdrawn (the "Depositor"),
(ii) identify the Outstanding Notes to be withdrawn (including the certificate
number(s) and principal amount due at the Stated Maturity of such Outstanding
Notes, or, in the case of Outstanding Notes transferred by book-entry transfer,
the name and number of the account at the Book-Entry Transfer Facility to be
credited), (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Outstanding Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
Outstanding Notes register the transfer of such Outstanding Notes into the name
of the person withdrawing the tender and (iv) specify the name in which any such
Outstanding Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, whose determination
shall be final and binding on all parties. Any Outstanding Notes so withdrawn
will be deemed not to have been validly tendered for purposes of the Exchange
Offer and no Exchange Notes will be issued with respect thereto unless the
Outstanding Notes so withdrawn are validly retendered. Any Outstanding Notes
which have been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Outstanding Notes may be retendered by following one
of the procedures described above under "--Procedures for Tendering" at any time
prior to the Expiration Date.
All signatures on a notice of withdrawal must be guaranteed by an Eligible
Institution; provided, however, that signatures on the notice of withdrawal need
not be guaranteed if the Outstanding Notes being withdrawn are held for the
account of an Eligible Institution.
A withdrawal of an instruction or a withdrawal of a tender must be executed by
a DTC Participant or a Holder, as the case may be, in the same manner as the
person's name appears on its transmission through ATOP or Letter of Transmittal,
as the case may be, to which such withdrawal relates. If a notice of withdrawal
is signed by a trustee, partner, executor, administrator, guardian, attorney-in-
fact, agent, officer of a corporation or other person acting in a fiduciary or
representative capacity, such person must so indicate when signing and must
submit with the revocation appropriate evidence of authority to execute the
notice of withdrawal. A DTC Participant or a Holder may withdraw an instruction
or a tender, as the case may be, only if such withdrawal complies with the
provisions of this Prospectus.
A withdrawal of a tender of Outstanding Notes by a DTC Participant or Holder,
as the case may be, may be rescinded only by a new transmission of an acceptance
through ATOP or execution and delivery of a new Letter of Transmittal, as the
case may be, in accordance with the procedures described herein.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not be
required to accept for exchange, or exchange securities for, any Outstanding
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Outstanding Notes, if:
94
<PAGE>
(a) any action or proceeding is instituted or threatened in any court or by or
before any governmental agency with respect to the Exchange Offer which, in
the judgment of the Company upon written advice of counsel, could
reasonably be expected to materially impair the ability of the Company to
proceed with the Exchange Offer or any material adverse development has
occurred in any existing action or proceeding with respect to the Company
or any of the subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of the
Commission is proposed, adopted or enacted, which, in the judgment of the
company and based on written advice of counsel, could reasonably be
expected to materially impair the ability of the Company to proceed with
the Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its discretion and based on written advice of counsel,
deem necessary for the consummation of the Exchange Offer as contemplated
hereby.
If any of the conditions are not satisfied, the Company may (i) refuse to
accept any Outstanding Notes and return all tendered Outstanding Notes to the
tendering holders, (ii) extend the Exchange Offer and retain all Outstanding
Notes tendered prior to the expiration of the Exchange Offer, subject, however,
to the rights of holders to withdraw such Outstanding Notes (see "-- Withdrawal
of Tenders") or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all properly tendered Outstanding Notes which have not
been withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
United States Trust Company of New York
114 West 47th Street, 25th Floor
New York, NY 10036-1532
Attention: Margaret Ciesmelewski
Delivery to an address other than as set forth above, or transmission of
instructions via a facsimile number other than the one set forth above, will not
constitute a valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse it for
its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will be
paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes, as reflected in the Company's accounting records on the date
of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company.
95
<PAGE>
CONSEQUENCES OF FAILURE TO EXCHANGE
The Outstanding Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Outstanding Notes may be resold only (i) to the Company (upon redemption thereof
or otherwise), (ii) so long as the Outstanding Notes are eligible for resale
pursuant to Rule 144A, to a person inside the United States whom the seller
reasonably believes is a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act in a transaction meeting the requirements of
Rule 144A, in accordance with Rule 144 under the Securities Act, or pursuant to
another exemption from the registration requirements of the Securities Act (and
based upon an opinion of counsel reasonably acceptable to the Company), (iii)
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, or (iv) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United
States.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
the Company believes that a holder or other person who receives Exchange Notes
in the ordinary course of business, whether or not such person is the holder
(other than (i) a broker-dealer who purchases such Exchange Notes from the
Company to resell pursuant to Rule 144A or any other available exemption under
the Securities Act or (ii) a person that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act) who receives Exchange Notes in
exchange for Outstanding Notes, and who is not participating, does not intend to
participate, and has no arrangement or understanding with person to participate,
in the distribution of the Exchange Notes, will be allowed to resell the
Exchange Notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the Exchange Notes a prospectus
that satisfies the requirements of Section 10 of the Securities Act. However,
if any holder acquires Exchange Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the Exchange Notes, such
holder cannot rely on the position of the staff of the Commission enunciated in
such no-action letters or any similar interpretive letters, and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for Exchange Notes, where such
Securities were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a Prospectus in connection with any resale of such Exchange Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Exchange Notes are to be
acquired by the holder or the person receiving such Exchange Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, and (v) the holder or any such other person acknowledges that if
such holder or other person participates in the Exchange Offer for the purpose
of distributing the Exchange Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the Exchange Notes and cannot rely on those no-action letters. As
indicated above, each Participating Broker-Dealer that receives Exchange Notes
for its own account in exchange for Outstanding Notes must acknowledge that it
will deliver a Prospectus in connection with any resale of such Exchange Notes.
For a description of the procedures for such resales by Participating Broker-
Dealers. See "Plan of Distribution."
96
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
U.S. FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATING IN THE EXCHANGE OFFER AND
OWNING AND DISPOSING OF OUTSTANDING NOTES OR EXCHANGE NOTES
The following is a general discussion of the material U.S. Federal income
tax considerations applicable to a holder that exchanges Outstanding Notes for
Exchange Notes pursuant to the Exchange Offer, but does not purport to be a
complete analysis of all the potential tax considerations relating thereto. This
summary is based upon current provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), final, temporary, and proposed regulations of the
Treasury Department, administrative rulings and pronouncements of the Internal
Revenue Service (the "IRS") and judicial decisions currently in effect, all of
which are subject to different interpretations and to change, possibly with
retroactive effect. The discussion does not deal with all aspects of U.S.Federal
income taxation that may be relevant to particular investors in light of their
personal investment circumstances (for example, to persons holding Outstanding
Notes or Exchange Notes as part of a "conversion" transaction or as a part of a
"hedge" or "hedging" transaction, "integrated" transaction, or as a position in
a "straddle" for U.S. Federal income tax purposes), nor does it discuss U.S.
Federal income tax considerations applicable to certain types of investors
subject to special treatment under the U.S. Federal income tax laws (for
example, insurance companies, tax-exempt organizations, financial institutions,
traders or dealers in securities or currencies or persons that have a
"functional currency" other than the U.S. dollar, and taxpayers subject to the
alternative minimum tax). In addition, the discussion does not consider the
effect of any foreign, state, local, gift, estate or other tax laws that maybe
applicable to a particular investor. The Company has not sought any ruling from
the IRS with respect to the statements made and the conclusions reached in the
following summary, and there can be no assurance that the IRS will agree with
such statements and conclusions. The discussion assumes that investors hold
Outstanding Notes and will hold Exchange Notes as capital assets within the
meaning of Section 1221 of the Code.
EACH INVESTOR CONSIDERING THE EXCHANGE OF OUTSTANDING NOTES FOR EXCHANGE
NOTES PURSUANT TO THE EXCHANGE OFFER SHOULD CONSULT ITS TAX ADVISOR REGARDING
THE PARTICULAR TAX CONSEQUENCES OF PARTICIPATING IN THE EXCHANGE OFFER AND
OWNING AND DISPOSING OF THE EXCHANGE NOTES, AND THE EFFECT THAT ITS PARTICULAR
CIRCUMSTANCES MAY HAVE ON SUCH CONSEQUENCES, INCLUDING THE APPLICABILITY AND
EFFECT OF STATE, LOCAL, GIFT, ESTATE, AND FOREIGN TAX LAWS.
U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Outstanding Notes and Exchange Notes that
is (i) a citizen or resident (as defined in Section 7701(b)(1) of the Code) of
the United States or any state thereof, (ii) a corporation or partnership
created or organized under the laws of the United States or any political
subdivision thereof (including the District of Columbia) (including any other
partnership treated as a United States person under any applicable U.S. Treasury
regulations, but excluding a partnership that meets the definition contained in
this clause (ii) but is not treated as a United States person under any such
U.S. Treasury regulations), (iii) an estate or trust described in Section
7701(a)(30) of the Code, or (iv) a person whose worldwide income or gain is
otherwise subject to U.S. Federal income taxation on a net income basis (a
"U.S.Holder").
OUTSTANDING NOTES AND EXCHANGE NOTES
The Exchange Offer. The exchange of Outstanding Notes for Exchange Notes
pursuant to the Exchange Offer should not constitute a significant modification
of the terms of the Outstanding Notes and, accordingly, such exchange should not
be treated as a taxable event for U.S. Federal income tax purposes. Therefore,
such exchange should have no U.S. Federal income tax consequences to U.S.Holders
of Outstanding Notes, and each U.S. Holder of Exchange Notes will continue to be
required to include interest on the Exchange Notes in its gross income in
accordance with its method of accounting for U.S. Federal income tax purposes.
Payment of Interest and Additional Interest. Interest on an Outstanding
Note or Exchange Note generally will be includible in the income of a U.S.Holder
as ordinary income at the time such interest is received or accrued, in
accordance with such U.S. Holder's method of accounting for U.S. Federal income
tax purposes. The
97
<PAGE>
Outstanding Notes were treated by the Company as issued without original issue
discount ("OID") within the meaning of the Code. Additional Interest will
accrue on the Outstanding Notes upon the occurrence of certain events described
under "The Exchange Offer -- Purpose and Effect of the Exchange Offer." Because
the Company determined that, when the Outstanding Notes were issued, there was
only a remote possibility that such events would occur, the Company determined
that Additional Interest should not be taken into account in concluding that the
Outstanding Notes were issued without OID.
AMORTIZABLE BOND PREMIUM
Generally, the excess of a U.S. Holder's tax basis in an Outstanding Note
or Exchange Note over the amount payable at maturity is bond premium that the
U.S. Holder may elect to amortize under Section 171 of the Code on a yield to
maturity basis over the period from the U.S. Holder's acquisition date to the
maturity date of the Outstanding Note or Exchange Note. The amortizable bond
premium is treated as an offset to interest income on the Outstanding Note or
Exchange Note for United States Federal income tax purposes. A U.S. Holder who
elects to amortize bond premium must reduce its tax basis in the Outstanding
Note or Exchange Note by the deductions allowable for amortizable bond premium.
An election to amortize bond premium is revocable only with the consent of the
IRS and applies to all obligations owned or acquired by the U.S. Holder on or
after the first day of the taxable year to which the election applies.
An Outstanding Note or Exchange Note may be called or submitted for
redemption at a premium prior to maturity. See "Description of Exchange Notes --
Optional Redemption." An earlier call date is treated as the maturity date of
the Outstanding Note or Exchange Note and the amount of bond premium is
determined by treating the amount payable on such call date as the amount
payable at maturity, if such a calculation produces a smaller bond premium than
the method described in the preceding paragraph. If a U.S. Holder is required
to amortize and deduct the bond premium by reference to a certain call date, the
Outstanding Note or Exchange Note will be treated as maturing on that date for
the amount then payable. If the Outstanding Note or Exchange Note is not
redeemed on that call date, the Outstanding Note or Exchange Note will be
treated as reissued on that date for the amount of the call price on that date.
If an Outstanding Note or Exchange Note purchased at a premium is redeemed prior
to its maturity, a U.S. Holder who has elected to deduct the bond premium may be
permitted to deduct any remaining unamortized bond premium as an ordinary loss
in the taxable year of the redemption.
MARKET DISCOUNT
The resale of Outstanding Notes or Exchange Notes may be affected by the
market discount provisions of the Code. A U.S. Holder has market discount if an
Outstanding Note or Exchange Note is purchased (other than at original issue) at
an amount below the stated redemption price at maturity of the Outstanding Note
or Exchange Note. A de minimis amount of market discount is ignored. A U.S.
Holder of an Outstanding Note or Exchange Note with market discount must either
elect to include market discount in income as it accrues or treat a portion of
the gain recognized on the disposition or retirement of the Outstanding Note or
Exchange Note as ordinary income. The amount of gain treated as ordinary income
would equal the lesser of (i) the gain recognized (or the appreciation, in the
case of a nontaxable transaction such as a gift) or (ii) the portion of the
market discount that accrued on a ratable basis (or, if elected, on a constant
interest rate basis) while the Outstanding Note or Exchange Note was held by the
U.S. Holder.
A U.S. Holder who acquires an Outstanding Note or Exchange Note at a market
discount also may be required to defer a portion of any interest expense that
otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry such Outstanding Note or Exchange Note until the U.S. Holder
disposes of the Outstanding Note or Exchange Note in a taxable transaction.
Moreover, to the extent of any accrued market discount on such Outstanding Note
or Exchange Note, (i) any partial principal payment received with respect to an
Outstanding Note or Exchange Note will be includible as ordinary income and (ii)
the fair market value of the Outstanding Note or Exchange Note on certain
otherwise non-taxable transfers (such as gifts) will be includible as ordinary
income.
A U.S. Holder of Outstanding Notes or Exchange Notes acquired at a market
discount may elect for United States Federal income tax purposes to include
market discount in gross income as the discount accrues, either on a straight-
line basis or on a constant interest rate basis. This current inclusion
election, once made, applies to all market discount obligations acquired by the
U.S. Holder on or after the first day of the first taxable year to which the
election applies, and may not be revoked without the consent of the IRS. If a
U.S. Holder of Outstanding Notes
98
<PAGE>
or Exchange Notes makes such an election, the foregoing rules with respect to
the recognition of ordinary income on sales and other dispositions of such debt
instruments and on any partial principal payment with respect to the Outstanding
Notes or Exchange Notes, and the deferral of interest deductions on indebtedness
incurred or maintained to purchase or carry such debt instruments, would not
apply.
SALE, EXCHANGE OR REDEMPTION OF THE OUTSTANDING NOTES OR EXCHANGE NOTES
Subject to the discussion of the Exchange Offer above, upon the sale,
exchange or redemption of an Outstanding Note or Exchange Note, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
(i) the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (except to the extent such amount
is attributable to accrued interest income or market discount not previously
included in income which is taxable as ordinary income) and (ii) such
U.S.Holder's adjusted tax basis in the Outstanding Note or Exchange Note. A U.S.
Holder's adjusted tax basis in an Outstanding Note or Exchange Note generally
will equal the cost of the Outstanding Note or Exchange Note to such U.S. Holder
increased by the amount of interest income on the Outstanding Note or Exchange
Note previously taken into income by the U.S. Holder but not yet received by the
U.S. Holder and by the amount of any market discount previously taken into
income by the U.S. Holder and reduced by the amount of any bond premium
amortized by the U.S. Holder with respect to the Outstanding Notes or Exchange
Notes and by any principal payments on an Outstanding Note or Exchange Note.
Gain or loss realized by a U.S. Holder on the sale, exchange, redemption or
other disposition of an Outstanding Note or Exchange Note generally will be
capital gain or loss. Such capital gain will be taxed at a reduced rate for a
U.S. Holder who is not a corporation and who holds an Outstanding Note or
Exchange Note for greater than one year.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Outstanding Notes and Exchange Notes who is
not a U.S. Holder (a "Non-U.S. Holder").
Interest on Outstanding Notes or Exchange Notes. Payments of interest on
the Outstanding Notes or the Exchange Notes by the Company or any agent of the
Company to any Non-U.S. Holder will not be subject to U.S. Federal withholding
tax, provided that such interest income is not effectively connected with the
conduct of a United States trade or business of the Non-U.S. Holder and provided
that (i) the Non-U.S. Holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of the Company
entitled to vote; (ii) the Non-U.S. Holder is not a controlled foreign
corporation that is related to the Company through stock ownership; (iii) either
(A) the beneficial owner of the Outstanding Notes or the Exchange Notes
certifies (by submitting to the Company or its agent a Form W-8 (or a suitable
substitute form)) in compliance with applicable laws and regulations to the
Company or its agent, under penalties of perjury, that it is not a "United
States person" as defined in the Code and provides its name and address or (B) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution"), holds the Outstanding Notes or the Exchange Notes on
behalf of the beneficial owner and provides a statement to the Company or its
agent in which it certifies that a Form W-8 (or a suitable substitute form) has
been received from the beneficial owner by it or by a financial institution
between it and the beneficial owner and furnishes the payor with a copy thereof;
and (iv) the Non-U.S. Holder is not a bank which acquired the Outstanding Notes
or the Exchange Notes in consideration for an extension of credit made pursuant
to a loan agreement entered into in the ordinary course of business. Recently
promulgated Treasury regulations that will be effective January 1, 2000 (the
"2000 Regulations"), provide alternative methods for establishing exemptions
from withholding on payments to foreign persons. Under the 2000 Regulations,
the furnishing of the names of the beneficial owners of Outstanding Notes or
Exchange Notes and a copy of such beneficial owner's Form W-8 by a financial
institution with respect to beneficial owners, described in clause (iii)(B)
above, will not be required where the financial institution is a "qualified
intermediary" which has entered into a withholding agreement with the IRS
pursuant to such regulations. A Non-U.S. Holder that is not exempt from tax
under these rules will be subject to U.S. Federal income tax withholding at a
rate of 30% unless the interest is effectively connected with the conduct of a
United States trade or business, in which case the interest will be subject to
the U.S. Federal income tax on net income that applies to United States persons
generally. Non-U.S. Holders should consult applicable income tax treaties,
which may provide different rules, subject to compliance with certain
requirements, to document entitlement to treaty benefits.
99
<PAGE>
Prior to the effective date of the 2000 Regulations, payments of interest
to a Non-U.S. Holder that is a foreign partnership are subject to the rules
described in the prior paragraph. The 2000 Regulations will require, in the
case of Outstanding Notes or Exchange Notes held by a foreign partnership, that
the certification described in clause (iii) of the preceding paragraph be
provided by the partners rather than by the foreign partnership unless the
foreign partnership has entered into a withholding agreement with the United
States as a"withholding foreign partnership." A look-through rule will apply in
the case of tiered partnerships.
Except to the extent that an applicable treaty otherwise provides, a Non-
U.S. Holder generally will be taxed in the same manner as a U.S. Holder with
respect to interest if the interest income is effectively connected with the
conduct of a United States trade or business of the Non-U.S. Holder. Effectively
connected interest received by a corporate Non-U.S. Holder may also, under
certain circumstances, be subject to an additional "branch profits tax" at a 30%
rate (or, if applicable, a lower treaty rate). Even though such effectively
connected interest is subject to income tax, and may be subject to the branch
profits tax, it is not subject to withholding tax if the Non-U.S. Holder
delivers to the payor a withholding certificate stating that the income is
effectively connected with a U.S. trade or business.
Sale of Outstanding Notes or Exchange Notes. A Non-U.S. Holder generally
will not be subject to U.S. Federal income tax on gain recognized, if any, upon
the sale or exchange of Outstanding Notes or Exchange Notes unless (i) the gain
is effectively connected with the conduct of a trade or business within the
United States by the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who
is a non-resident alien individual and holds the Outstanding Notes or Exchange
Notes as a capital asset, such Non-U.S. Holder is present in the United States
for 183 or more days in the taxable year and certain other circumstances are
present, or (iii) the Non-U.S. Holder is subject to tax pursuant to the
provisions of the Code applicable to certain United States expatriates.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Information reporting and backup withholding may apply to certain
noncorporate holders with respect to (i) principal and interest payments on an
Outstanding Note or Exchange Note or (ii) proceeds of a sale of an Outstanding
Note or Exchange Note. Such payments generally will be subject to backup
withholding at a rate of 31% unless the payee of such payments supplies the
payor or its agent with a taxpayer identification number, certified under
penalties of perjury, and certain other information, or otherwise establishes,
in the manner prescribed by law, an exemption from backup withholding.
The 2000 Regulations would modify certain of the rules discussed above
generally with respect to payments on the Outstanding Notes and Exchange Notes
made after December 31, 1999. In particular, in the case of payments to foreign
partnerships (other than payments to foreign partnerships that qualify as
"withholding foreign partnerships" within the meaning of such Treasury
regulations and payments to foreign partnerships that are effectively connected
with the conduct of a trade or business in the United States), the partners of
such partnership will be required to provide the certification discussed above
in order to provide an exemption from backup withholding tax and information
reporting requirements.
Any amount withheld under such backup withholding rules from a payment to a
holder will be allowed as a credit against the holder's U.S. Federal income tax,
provided that the holder furnishes the required information to the IRS. In
addition, certain penalties may be imposed by the IRS on a holder who is
required to supply information but does not do so in the proper manner.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PARTICIPANT IN THE EXCHANGE OFFER SHOULD CONSULT WITH ITS OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PARTICIPANT OF
PARTICIPATING IN THE EXCHANGE OFFER AND OWNING AND DISPOSING OF THE EXCHANGE
NOTES, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME
AND OTHER TAX LAWS.
100
<PAGE>
PLAN OF DISTRIBUTION
Based on interpretations of the staff of the Division of Corporation
Finance of the SEC set forth in no-action letters issued to third parties, the
Company believes that, except as described below, Exchange Notes issued pursuant
to the Exchange Offer may be offered for resale, resold and otherwise
transferred by the respective holders thereof without further compliance with
the registration and prospectus delivery requirements of the Securities Act,
provided that (i) such Exchange Notes are acquired in the ordinary course of
such holder's business and (ii) such holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
of the Exchange Notes. A holder of Outstanding Notes that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act or that is a
broker-dealer that purchased Outstanding Notes from the Company to resell
pursuant to an exemption from registration under the Securities Act (a) cannot
rely on such interpretations by the staff of the Division of Corporation Finance
of the SEC, (b) will not be permitted or entitled to tender such Outstanding
Notes in the Exchange Offer and (c) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or other transfer of such Outstanding Notes unless such sale or transfer is
made pursuant to an exemption from such requirements. In addition, any holder
who tenders Outstanding Notes in the Exchange Offer with the intention or for
the purpose of participating in a distribution of the Exchange Notes cannot rely
on such interpretations by the staff of the Division of Corporation Finance of
the SEC and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with the secondary resale
transaction. Unless an exemption from registration is otherwise available, any
such resale transaction should be covered by an effective registration statement
containing selling security holders information required by Item 507 of
Regulation S-K under the Securities Act. To date, the staff of the Division of
Corporation Finance of the SEC has taken the position that a broker-dealer that
has acquired securities in exchange for securities that were acquired by such
broker-dealer as a result of market-making activities or other trading
activities may fulfill the prospectus delivery requirements with the prospectus
contained in an exchange offer registration statement.
Each holder of Outstanding Notes who wishes to exchange its Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company set forth in "The Exchange Offer -- Purpose and
Effect of the Exchange Offer."
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. This Prospectus may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for
Outstanding Notes where such Outstanding Notes were acquired as a result of
market-making activities or other trading activities. Subject to certain
provisions set forth in the Registration Rights Agreement, the Company has
agreed that, for a period of up to 180 days after the consummation of the
Exchange Offer, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Risk Factors -- Absence of Public
Market" and "The Exchange Offer -- Resale of the Exchange Notes."
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any broker-
dealer that resells Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit from any such resale of
Exchange Notes and any commissions or concessions received by any such person
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
Subject to certain provisions set forth in the Registration Rights
Agreement, for a period of 180 days after the date the Exchange Offer is
consummated, the Company will promptly send additional copies of this Prospectus
and any amendment or supplement to this Prospectus to any Participating Broker-
Dealer that requests such documents in the Letter of Transmittal. The Company
has agreed to pay the expenses incident to the Exchange
101
<PAGE>
Offer, other than any discounts or commissions incurred upon the sale of the
Exchange Notes. The Company will indemnify each Participating Broker-Dealer
selling Exchange Notes against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes issued pursuant to the Exchange Offer will
be passed upon for the Company by Haythe & Curley, New York, New York. Bradley
P. Cost, a member of that firm, is a director of the Company and beneficially
owns 25,000 shares of Common Stock. See "Management and Board of Directors" and
"Principal Stockholders."
EXPERTS
The consolidated financial statements of Norton McNaughton, Inc. appearing
herein have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon included herein. Such consolidated financial
statements are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of Miss Erika, Inc. as of January 31, 1997 and 1996
and for each of the three years ended January 31, 1997 included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
such firm as experts in auditing and accounting.
The combined financial statements of Jeri-Jo Companies as of and for the year
ended December 31, 1997 appearing herein have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included herein. Such
combined financial statements are included herein by reference in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The combined financial statements of Jeri-Jo Companies as of December 31, 1996
and for the years ended December 31, 1996 and 1995 included herein have been
audited by Friedman, Alpren & Green LLP, independent auditors, as set forth in
their report thereon included herein. Such combined financial statements are
included herein in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
102
<PAGE>
INDEX TO FINANCIAL STATEMENTS
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors ....................................................................... F-2
Consolidated Balance Sheets as of November 1, 1997 and November 2, 1996............................... F-3
Consolidated Statements of Operations for the Years Ended November 1, 1997, November 2, 1996 and
November 4, 1995.................................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended November 1, 1997, November 2,
1996 and November 4, 1995........................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended November 1, 1997, November 2, 1996 and
November 4, 1995.................................................................................... F-6
Notes to Consolidated Financial Statements............................................................ F-7
Consolidated Balance Sheet as of May 2, 1998 (Unaudited).............................................. F-21
Consolidated Statements of Operations for the Twenty-Six Weeks Ended May 2, 1998 and May 3, 1997
(Unaudited)......................................................................................... F-22
Consolidated Statements of Stockholders' Equity for the Twenty-Six Weeks Ended May 2, 1998
(Unaudited)......................................................................................... F-23
Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended May 2, 1998 and May 3, 1997
(Unaudited)......................................................................................... F-24
Notes to Consolidated Financial Statements (Unaudited)................................................ F-25
MISS ERIKA, INC.
Report of Independent Auditors........................................................................ F-31
Balance Sheets at January 31, 1997 and 1996........................................................... F-32
Statements of Operations and Retained Earnings (Deficit) for the Years Ended January 31, 1997, 1996
and 1995............................................................................................ F-33
Statements of Cash Flows for the Years Ended January 31, 1997, 1996 and 1995.......................... F-34
Notes to Financial Statements......................................................................... F-35
Condensed Balance Sheet at July 31, 1997 (Unaudited).................................................. F-44
Condensed Statements of Income and Retained Earnings for the Six Months Ended July 31, 1997 and
1996 (Unaudited).................................................................................... F-45
Condensed Statements of Cash Flows for the Six Months Ended July 31, 1997 and 1996 (Unaudited)........ F-46
Notes to Condensed Financial Statements............................................................... F-47
JERI-JO KNITWEAR, INC. AND AFFILIATE
Reports of Independent Auditors....................................................................... F-48
Combined Balance Sheets as of December 31, 1997 and 1996.............................................. F-50
Combined Statements of Income and Retained Earnings for the Years Ended December 31, 1997, 1996
and 1995............................................................................................ F-51
Combined Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995................ F-52
Notes to Combined Financial Statements................................................................ F-53
Combined Balance Sheet as of March 31, 1998 (unaudited)............................................... F-56
Combined Statements of Income and Retained Earnings for the Three Months Ended March 31, 1998 and
1997 (unaudited).................................................................................... F-57
Combined Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997
(unaudited)......................................................................................... F-58
Notes to Combined Financial Statements................................................................ F-59
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Norton McNaughton, Inc.
We have audited the accompanying consolidated balance sheets of Norton
McNaughton, Inc. and Subsidiaries (the "Company") as of November 1, 1997 and
November 2, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended November 1, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Norton McNaughton, Inc. and Subsidiaries at November 1, 1997 and November 2,
1996 and the consolidated results of their operations, changes in their
stockholders' equity and their cash flows for each of the three years in the
period ended November 1, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
Ernst & Young LLP
New York, New York
January 30, 1998
F-2
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 1, NOVEMBER 2,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash......................................................................... $ 529 $ 333
Due from factor........................................................... 64,644 30,794
Inventory................................................................. 28,590 17,939
Income taxes receivable................................................... 3,201 99
Prepaid expenses and other current assets................................. 5,227 2,880
-------- -------
Total current assets.................................................. 102,191 52,045
Fixed assets, net............................................................ 5,899 5,077
Notes receivable from management stockholders................................ 2,655 2,655
Goodwill..................................................................... 3,853 --
Deferred financing costs..................................................... 2,481 --
Other assets................................................................. 1,683 1,332
-------- -------
Total assets.......................................................... $118,762 $61,109
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 10,420 $11,334
Revolving credit loan..................................................... 44,473 --
Term loan payable......................................................... 3,000 --
Accrued expenses and other current liabilities............................ 4,986 654
-------- -------
Total current liabilities............................................. 62,879 11,988
Term loan payable......................................................... 12,000 --
Other long-term liabilities............................................... 1,720 835
-------- -------
Total liabilities..................................................... 76,599 12,823
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, authorized 20,000,000 shares, 8,060,640 and
8,052,718 shares issued, respectively, and 7,409,640 and 7,636,718 shares
outstanding, respectively................................................... 81 80
Capital in excess of par..................................................... 23,903 23,865
Retained earnings............................................................ 23,714 28,419
Treasury stock, at cost, 651,000 shares and 416,000 shares, respectively..... (5,535) (4,078)
-------- -------
Total stockholders' equity................................................... 42,163 48,286
-------- -------
Total liabilities and stockholders' equity............................ $118,762 $61,109
======== =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended
------------------------------------------
November 1, November 2, November 4,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales....................................................... $218,782 $220,823 $227,530
Cost of goods sold.............................................. 179,556 176,063 171,780
-------- -------- --------
Gross profit.................................................... 39,226 44,760 55,750
Selling, general and administrative expenses.................... 44,015 39,317 37,456
Depreciation and amortization................................... 984 662 481
-------- -------- --------
Income (loss) from operations................................... (5,773) 4,781 17,813
Interest expense and amortization of deferred financing costs... 2,500 2,294 1,440
Other income, net............................................... (168) (164) (218)
-------- -------- --------
Income (loss) before provision (benefit) for income taxes....... (8,105) 2,651 16,591
Provision (benefit) for income taxes............................ (3,400) 1,127 6,888
-------- -------- --------
Net income (loss)............................................... $ (4,705) $ 1,524 $ 9,703
======== ======== ========
BASIC EARNINGS PER SHARE:
Net income (loss)............................................... $ (0.63) $ 0.20 $ 1.21
======== ======== ========
Weighted average number of common shares outstanding............ 7,488 7,767 8,000
======== ======== ========
DILUTED EARNINGS PER SHARE:
Net income (loss)............................................... $ (0.63) $ 0.20 $ 1.20
======== ======== ========
Weighted average number of common shares outstanding assuming
dilution..................................................... 7,488 7,781 8,056
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 1, 1997, NOVEMBER 2, 1996, AND NOVEMBER 4, 1995
<TABLE>
<CAPTION>
COMMON STOCK
--------------- CAPITAL IN RETAINED TREASURY
SHARES AMOUNT EXCESS OF PAR EARNINGS STOCK TOTAL
------ ------ ------------- -------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at November 4, 1994............................. 7,999 $80 $23,028 $17,192 $ -- $40,300
Net income for the year................................ -- -- -- 9,703 -- 9,703
Treasury stock acquired, 20,000 shares, at cost........ -- -- -- -- (326) (326)
Issuance of common stock through stock purchase plan... 4 -- 57 -- -- 57
Issuance of common stock through stock option plan..... 44 -- 609 -- -- 609
Tax benefit from issuance of common stock through
stock option plan................................... -- -- 126 -- -- 126
----- ----- ------- ------- ------- ------
Balance at November 4, 1995............................. 8,047 80 23,820 26,895 (326) 50,469
Net income for the year................................ -- -- -- 1,524 -- 1,524
Treasury stock acquired, 396,000 shares, at cost....... -- -- -- -- (3,752) (3,752)
Issuance of common stock through stock purchase plan... 6 -- 45 -- -- 45
----- ----- ------- ------- ------- ------
Balance at November 2, 1996............................. 8,053 80 23,865 28,419 (4,078) 48,286
Net loss for the year.................................. -- -- -- (4,705) -- (4,705)
Treasury stock acquired, 235,000 shares, at cost....... -- -- -- -- (1,457) (1,457)
Issuance of common stock through stock purchase plan... 8 1 38 -- -- 39
----- ----- ------- ------- ------- -------
Balance at November 1, 1997............................. 8,061 $81 $23,903 $23,714 $(5,535) $42,163
===== ===== ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 4,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss).................................................... $ (4,705) $ 1,524 $ 9,703
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization of fixed assets........................ 931 628 447
Write off of leasehold improvements.................................. 492 -- --
Write off of fixed assets............................................ 135 -- --
Amortization of intangibles.......................................... 131 34 34
Changes in operating assets and liabilities:
Due from factor.................................................... (19,014) 5,016 (5,171)
Inventory.......................................................... 4,084 9,577 (10,876)
Trade credits receivable........................................... (1,872) -- --
Income taxes receivable............................................ (3,102) 291 (7,393)
Prepaid expenses and other current assets.......................... (73) (1,111) (100)
Other assets....................................................... (333) (295) (564)
Accounts payable................................................... (2,598) (10,305) 8,629
Accrued expenses and other current liabilities..................... (736) (134) 6,212
Other long-term liabilities........................................ 170 207 186
-------- -------- --------
Net cash (used for) provided by operating activities................. (26,490) 5,432 1,107
-------- -------- --------
INVESTING ACTIVITIES
Purchase of fixed assets............................................. (1,571) (1,841) (1,599)
Purchase of net assets of Miss Erika, net of cash of $70............. (24,553) -- --
Notes receivable from management stockholders........................ -- 5 243
-------- -------- --------
Net cash used for investing activities............................... (26,124) (1,836) (1,356)
-------- -------- --------
FINANCING ACTIVITIES
Purchase of treasury stock........................................... (1,457) (3,752) (326)
Net advances under revolving credit agreement........................ 44,287 -- --
Repayment of acquired company's debt................................. (2,500) -- --
Deferred financing costs............................................. (2,559) -- --
Proceeds from issuance of common stock, net.......................... 39 45 792
Proceeds from term loan payable...................................... 15,000 -- --
-------- -------- --------
Net cash provided by (used for) financing activities................. 52,810 (3,707) 466
-------- -------- --------
Increase (decrease) in cash.......................................... 196 (111) 217
Cash at beginning of year............................................ 333 444 227
-------- -------- --------
Cash at end of year.................................................. $ 529 $ 333 $ 444
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid.................................................... $ 361 $ 529 $ 8,429
Interest paid........................................................ $ 1,999 $ 2,272 $ 1,440
</TABLE>
See accompanying notes.
F-6
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Principles of Consolidation
Norton McNaughton, Inc. (the "Company") was incorporated in Delaware on
December 30, 1993. On January 14, 1994, in a reorganization effected in order to
form a Delaware holding company, the Company became the owner of all of the
issued and outstanding stock of Norton McNaughton of Squire, Inc., a New York
corporation.
On September 30, 1997, the Company completed the acquisition of substantially
all the assets and the assumption of substantially all the liabilities of Miss
Erika, Inc. ("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 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.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries (the "Company"). All material intercompany
balances and transactions have been eliminated in consolidation.
Principal Business Activity
The Company designs, contracts for the manufacture of and markets a broad line
of brand name, moderately priced women's career and casual clothing. The
Company's customer base consists principally of department stores, national
chains, mass merchandisers and specialty retailers.
Fiscal Year
The Company's fiscal year ends on October 31, if such date falls on a
Saturday, or the first Saturday following October 31. Data for each of the
fiscal years ended November 1, 1997, November 2, 1996 and November 4, 1995
includes the results of operations for 52 weeks. Data for the fiscal year ended
November 1, 1997 reflects the acquisition of Miss Erika on September 30, 1997.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market.
Fixed Assets
Fixed assets are stated at cost. Depreciation of fixed assets is provided for
by the straight-line method over the estimated useful lives of the assets
ranging from five to seven years for financial reporting purposes and by
accelerated methods for income tax purposes. Leasehold improvements are
amortized using the straight-line method over the term of the related lease.
F-7
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Financing Costs
Deferred financing costs were incurred in fiscal 1997 in connection with
obtaining the credit facility described in Note 8. Financing costs are amortized
on a straight-line basis over the three year term of the related credit
facility.
Revenue Recognition
Revenues are recorded at the time of shipment of merchandise. The Company
establishes reserves for sales discounts, returns and allowances. Sales
discounts represent customary trade discounts which may be negotiated with the
Company's customers as a payment term of the sale. Sales allowances represent
sales rebates which may be granted to customers and other miscellaneous
deductions from accounts receivable. The Company records sales discounts granted
as a reduction of sales at the time of shipment. Sales returns and allowances
are reserved for as a reduction of sales based upon estimated future returns and
allowances related to current sales.
Goodwill
Goodwill resulting from the acquisition of Miss Erika is being amortized by
the straight-line method over twenty years.
Deferred Rent
Rent expense on leases is recorded by the straight-line method over the lease
period. The excess of rent expense over the actual cash paid has been recorded
as other long-term liabilities.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which
requires adoption for both interim and annual financial statements for periods
ending after December 15, 1997. The Company changed the method previously used
to compute earnings per share and has restated all prior periods. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options is excluded.
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the periods presented. Diluted earnings per
share is computed based on the weighted average number of common shares
outstanding during the period and the effect of dilutive options outstanding
during the period using the treasury stock method. For the fiscal year ended
November 1, 1997, the dilutive effect of options outstanding during the period
were excluded from the net loss per share computation of dilutive earnings per
share because they were antidilutive. For the fiscal years ended November 2,
1996 and November 4, 1995, the dilutive effect of options outstanding during the
period using the treasury stock method was 14,000 shares and 56,000 shares,
respectively.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents
include all liquid debt instruments with a maturity of three months or less when
purchased.
F-8
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit Risk
In connection with the purchase of Miss Erika, the Company transferred Miss
Erika's outstanding accounts receivable on the date of purchase to the Company's
factor with recourse. The Company did not receive any cash from the factor at
the time of transfer, but received cash as the receivables were collected. At
November 1, 1997 the amount due from factor of $64.6 million included $5.6
million of Miss Erika's accounts receivables with recourse.
Other financial instruments which potentially subject the Company to
concentration of credit risk consist principally of temporary cash investments.
The Company places its temporary cash investments with high quality financial
institutions and limits the amount of credit exposure at any one financial
institution.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities"
During fiscal 1997, the Company adopted Statement 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
Statement 125 is required to be applied to transfers of assets occurring after
January 1, 1997. The effect of adopting the new standard in fiscal 1997 was
immaterial.
Accounting for Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25.
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for Stock-
Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. In the year of adoption, the effects of applying FASB
Statement No. 123 for pro forma disclosures may not be representative of the
effects on pro forma net income for future years.
SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information"
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130.
This new standard requires reclassification of financial statements for earlier
periods provided for comparative purposes, and will be effective beginning with
the Company's fiscal year ending October 31, 1998. The Company has determined
that the effect of adopting the new standard will be immaterial.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131.
This new standard will be effective for financial statement periods beginning
after December 15, 1997. This Statement significantly changes the way that
public business enterprises report information about operating segments in
financial statements. The Company has not yet determined the impact of Statement
131 on disclosures in its financial statements.
F-9
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. ACQUISITION
On September 30, 1997, 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 moderately priced apparel. The
Company will, through a wholly-owned subsidiary, continue Miss Erika's business.
The purchase price for Miss Erika consisted of $24.0 million in cash paid at the
closing, the assumption of $2.5 million of indebtedness for borrowed money and
certain other contractual obligations. In addition, the Company has agreed to
pay an additional contingent payment in cash and/or Company Common Stock in the
event that certain earnings targets are achieved by Miss Erika for the two
fiscal years ending November 6, 1999. The aggregate contingent payment, if any,
payable by the Company is equal to the amount by which four times the average of
Miss Erika's earnings before income taxes, depreciation and amortization, as
defined in the Miss Erika purchase agreement ("EBITDA"), for the two fiscal
years ending November 6, 1999, exceeds $24.0 million. Any additional
consideration paid for Miss Erika will be accounted for as additional purchase
price and will be reflected in goodwill. At the Company's discretion, the
Company may, subject to a maximum number of shares, pay all or any portion of
the contingent payment in shares of Common Stock. The Miss Erika purchase
agreement limits the number of shares of Common Stock payable by the Company to
a number of shares which, after giving effect to their issuance, does not exceed
12% of the aggregate number of outstanding shares of Common Stock at the time of
payment. The Company intends to pay the cash portion, if any, of the contingent
consideration from internally generated funds and borrowings under the Company's
revolving credit facility. The Company cannot predict whether Miss Erika will
achieve the necessary EBITDA targets to qualify for additional consideration.
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.
The aggregate purchase price, as adjusted, of approximately $24.6 million was
allocated to Miss Erika's assets and liabilities, based on their fair values, as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------
<S> <C>
Current assets........... $30,043
Fixed assets............. 809
Other assets............. 52
Goodwill................. 3,872
Current liabilities(a)... (6,938)
Long-term debt(a)........ (2,500)
Other liabilities........ (715)
-------
$24,623
=======
</TABLE>
- --------------
(a) Approximately $3.9 million was funded at closing for the repayment of
assumed long-term debt of $2.5 million and other assumed current liabilities
of $1.4 million.
The acquisition was accounted for as a purchase, and Miss Erika's results are
included in the consolidated results of operations beginning September 30, 1997.
The following unaudited pro forma information indicates what net sales and
income (loss) from operations and income (loss) from operations per share, would
have been had the acquisition of Miss Erika been completed on November 2, 1996
and November 3, 1995, respectively.
The pro forma adjustments are based upon available information and assumptions
that management believes are reasonable at the time made. The unaudited pro
forma financial information does not purport to present the
F-10
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
financial position or results of operations of the Company had the acquisition
of Miss Erika occurred on the dates specified, nor is it necessarily indicative
of the financial position or results of operations that may be achieved in the
future. The unaudited pro forma financial information does not reflect any
adjustments for synergies that management expects to realize. No assurances can
be made as to the amount of cost savings or revenue enhancements, if any, that
may be realized.
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
NOVEMBER 1, 1997 NOVEMBER 2, 1996
-------------------- -------------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales........... $309,630 $315,566
Net income (loss)... $ (4,237) $ 3,351
Per share:
Net income (loss)... $ (0.57) $ (0.43)
</TABLE>
3. SALES TO MAJOR CUSTOMERS
For the years ended November 1, 1997 and November 2, 1996, net sales made to
three customers were approximately 29%, 17% and 11%, and, approximately 34%, 20%
and 12%, respectively. For the year ended November 4, 1995 net sales made to two
customers were approximately 36% and 19%.
4. DUE FROM FACTOR
The Company sells its accounts receivable to a factor without recourse, up to
a maximum established by the factor for each customer. Receivables sold in
excess of these limitations are subject to recourse in the event of nonpayment
by the customer. The factor receives a commission for all purchased accounts
receivable. Factor commissions for the fiscal years ended November 1, 1997,
November 2, 1996 and November 4, 1995 were approximately $1.0 million, $1.0
million and $1.0 million, respectively.
Prior to the Company's new revolving credit facility on September 30, 1997
(see Note 8), the Company's working capital requirements were funded by
borrowings pursuant to its factoring agreement. Thereunder, the Company was able
to borrow up to 90% of the net balance due on eligible accounts receivable, up
to $10.0 million of additional advances and up to $20.0 million in letter of
credit financing. Interest on factor advances was payable monthly at 0.75% below
the NationsBank of Georgia, N.A. prime rate (the "Nations Prime Rate") for
amounts advanced which were less than the purchase price of eligible accounts
receivable, and 1.25% above the Nations Prime Rate for amounts advanced in
excess of the purchase price of eligible accounts receivable. As of November 2,
1996, due from factor was shown net of outstanding advances of approximately
$25.1 million.
5. INVENTORIES
Inventories consist of the following:
F-11
<PAGE>
<TABLE>
<CAPTION>
NOVEMBER 1, NOVEMBER 2,
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.................................. $ 2,979 $ 5,530
Work-in-process................................ 2,258 3,337
Finished goods................................ 23,353 9,072
------- -------
$28,590 $17,939
======= =======
</TABLE>
6. FIXED ASSETS
Fixed assets are summarized as follows:
<TABLE>
<CAPTION>
NOVEMBER 1, NOVEMBER 2,
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment.......................... $ 872 $ 693
Furniture and fixtures........................... 448 404
Computer equipment............................... 4,032 2,531
Leasehold improvements........................... 2,863 2,991
------ ------
Total........................................ 8,215 6,619
Less accumulated depreciation and amortization... 2,316 1,542
------ ------
$5,899 $5,077
====== ======
</TABLE>
7. NOTES RECEIVABLE FROM MANAGEMENT STOCKHOLDERS
In 1993, the Company loaned certain management stockholders $3,000,000 in the
aggregate. Each loan is evidenced by a limited recourse promissory note with
interest accruing at 5.84% per annum. The Company's recourse on the promissory
notes is limited to the management stockholders' pledges of a portion of their
Common Stock of the Company.
In the event of any sale or transfer of shares of Common Stock by any of the
management stockholders, such person is required to apply a portion of the net
proceeds of the sale or transfer to the principal repayment of his loan from the
Company. No other principal payments are required under the loans except for the
payment at maturity. The loans mature on November 5, 2003 at which time full
payment is to be made by the management stockholders for the balance of their
respective loans. As of the end of the fourth quarter of fiscal 1997, all
necessary payments have been made under the terms of the loans by the management
stockholders.
As of November 1, 1997, the fair market value of the Company's Common Stock
pledged by the management stockholders as security for the loans was $4,910,749,
and the aggregate principal balance of all loans to management stockholders was
$2,654,680. The loan balance set forth above reflects the required principal
payments of $345,320 resulting from sales of Common Stock by management
stockholders. Interest income relating to these loans for the years ended
November 1, 1997, November 2, 1996 and November 4, 1995 amounted to
approximately $155,000, $155,000 and $158,000, respectively.
F-12
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. BANK BORROWINGS
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. as of September 30, 1997 (the "Financing Agreement"). The
Financing Agreement provides for a $15 million term loan and $125 million
revolving credit and letter of credit facility (the "RCF"). The Financing
Agreement has an initial expiration date of October 2, 2000. Prior thereto, the
Company's working capital requirements were funded by borrowings pursuant to its
factoring agreement (see Note 4).
Pursuant to the RCF, the Company has available credit of up to $125 million
for working capital loans and letters of credit based upon a borrowing base of
85% and 60% of Eligible Accounts Receivable and Eligible Inventory,
respectively, as defined in the Financing Agreement, and overadvances above the
borrowing base of $10 million at month end and up to $15 million permitted at
mid-month ($20 million in the months of August, September and October), provided
that for any two consecutive month end periods, the combined overadvance amount
is zero. The RCF provides for maximum sublimits of $70 million for letters of
credit and $70 million for working capital loans.
The Financing Agreement provides for interest to be paid monthly in arrears on
revolving credit loan balances at an annual rate equal to, at the Company's
option, the prime rate at NationsBank, N.A. less 0.25%, or the LIBOR rate plus
2.75%. The rates of interest decrease by 0.25% after the term loan is repaid.
Under the letter of credit facility, the Company is required to pay a fee of
1.25% per annum of the stated amount of letters of credit upon opening, in
addition to lender administrative fees. In addition, the Financing Agreement
provides for a Co-agent fee of $150,000 per annum.
At November 1, 1997, borrowings and letters of credit outstanding under the
RCF were $44.5 million and $57.1 million, respectively. The Company had total
additional available credit of $8.4 million under the Financing Agreement as of
that date, pursuant to the borrowing base formula set forth above.
Long-term debt as of November 1, 1997 consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Term Loan................. $15,000
Less current portion... 3,000
-------
$12,000
=======
</TABLE>
The Financing Agreement provides for interest to be paid monthly in arrears on
the term loan at an annual rate equal to, at the Company's option, the prime
rate at NationsBank, N.A. plus (i) 0.25% on and before September 27, 1999 and
(ii) 0.75% thereafter, or the LIBOR rate plus (i) 3.25% on and before September
27, 1999 and (ii) 3.75% thereafter. The term loan requires monthly principal
payments of $250,000 on the first day of each month and a final installment of
$6,250,000 on October 2, 2000. The Financing Agreement also provides for excess
cash flow principal payments, as defined therein.
The weighted average interest rates on the term loan and the revolving credit
facility were 8.75% and 8.25%, respectively, for fiscal 1997.
The Financing Agreement contains a number of restrictive covenants, including
covenants which limit incurrence of liens, indebtedness and capital expenditures
and payment of dividends, and requires that the Company maintain certain
financial ratios and meet specified minimum levels of working capital and
tangible net worth. The Company was in compliance with these covenants at
November 1, 1997. The Financing Agreement imposes decreasing prepayment
penalties in certain circumstances. The Company's assets are subject to lien or
security interest under the Agreement.
F-13
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future maturities of long-term debt at November 1, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
- ----------- --------------
<S> <C>
1998................................ $ 3,000
1999................................ 3,000
2000................................ 9,000
-------
$15,000
=======
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company operates principally in leased premises and leases other assets
under operating leases expiring through 2008. Some of the leases contain
escalation clauses and renewal options. The future minimum rental commitments
under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
- ----------- --------------
<S> <C>
1998................................ $ 3,147
1999................................ 3,074
2000................................ 2,760
2001................................ 2,645
2002................................ 2,494
Thereafter.......................... 10,830
-------
$24,950
=======
</TABLE>
Rent expense for the years ended November 1, 1997, November 2, 1996 and
November 4, 1995 amounted to approximately $2.1 million, $2.2 million and $1.8
million, respectively.
Employment Agreements
In the second quarter of fiscal 1997, the Company appointed a new President
and Chief Operating Officer. In connection therewith, the Company entered into
an employment agreement with this individual providing for a base salary of
$500,000 per annum and a signing bonus of $250,000. The employment agreement
terminates on November 4, 2000 (see Note 11).
The Company has entered into employment agreements with certain executive
officers which provide for aggregate minimum annual compensation of
approximately $3.6 million through November 1999 and $0.5 million through
November 2000. Such amounts reflect the retirement or resignation of two of its
executive officers who had been serving pursuant to employment agreements with
the Company. All employment agreements provide that the payment of bonuses will
be determined at the discretion of the Compensation Committee of the Board of
Directors. Other than the signing bonus described above and the annual contract
term extension bonus paid to the Chief Executive Officer in fiscal 1997 and
fiscal 1996, no bonuses were paid for the years ended November 1, 1997, November
2, 1996 and November 4, 1995.
The Company entered into a Separation Agreement in the second quarter of
fiscal 1997 with its former President which provided for a separation payment of
$2.5 million and the termination of his employment agreement. This agreement
also provides for a consulting arrangement through December 31, 2007.
F-14
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Contractor Agreements
The Company has entered into agreements with a distribution contractor and a
cutting contractor. The agreements have initial terms ending on June 30, 2000
and June 30, 2001, respectively, and may be terminated by the Company upon
notice and lapse of cure periods in the event that the contractors are not
performing their services under the agreements. In addition, after the years
2000 and 2001, respectively, the Company may terminate either agreement on June
30 of any year in the event that it elects to perform "in-house" the services
provided by the applicable contractor, for minimum termination fees of $750,000
for the distribution agreement and $1,500,000 for the cutting agreement. In
addition, each of the agreements provides that in the event that the agreement
is terminated under such circumstances, the Company must assume certain
obligations of the terminated contractor arising under real estate leases and
equipment purchase contracts for property utilized to render services to the
Company. At this time, the Company cannot determine the amount of these
obligations. The Company guarantees its distribution contractor's obligation
under its lease in an amount up to $500,000 in the aggregate. The Company
subleases warehouse space from its cutting contractor and guarantees the
contractor's obligations under its lease in an amount up to approximately
$250,000 in the aggregate. For the years ended November 1, 1997, November 2,
1996 and November 4, 1995, the Company paid approximately $7.8 million, $8.6
million and $7.6 million, respectively, to its distribution contractor and
approximately $3.9 million, $5.8 million and $7.7 million, respectively, to its
cutting contractor.
Miss Erika has an agreement for inland shipping services with a company owned
by a Miss Erika employee. Shipping costs under this agreement are approximately
$700,000 per annum.
Stock Repurchase
The Company's Board of Directors has authorized a stock repurchase program,
under which the Company may repurchase up to $7.5 million of the Company's
Common Stock. The Company expects that the shares may be purchased from time to
time in the open market and in block transactions. In fiscal 1996, the Company
purchased 396,000 shares of its stock in the open market at an aggregate cost of
approximately $3.8 million. In fiscal 1997, the Company purchased 235,000 shares
of its stock in the open market at an aggregate cost of approximately $1.5
million. As of January 30, 1998, the Company has purchased a total of 651,000
shares at an aggregate cost of approximately $5.5 million.
Litigation
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without material effect on the Company's
financial position, results of operations and cash flow.
10. INCOME TAXES
Income taxes are provided using the liability method prescribed by Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
the liability method, deferred income taxes reflect tax carryforwards and the
net tax effects of temporary differences between the carrying amount of assets
and liabilities for financial statement and income tax purposes, as determined
under enacted tax laws and rates. The financial effect of changes in tax laws or
rates is accounted for in the period of enactment. Provision for income taxes
for the fiscal years ended November 1, 1997, November 2, 1996 and November 4,
1995 is comprised of the following:
F-15
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 4,
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Current:
Federal.............. $(2,788) $ 530 $5,779
State and local...... 65 180 1,545
------- ------ ------
(2,723) 710 7,324
Deferred:
Federal.............. 360 326 (342)
State and local ..... (1,037) 91 (94)
------- ------ ------
(677) 417 (436)
------- ------ ------
$(3,400) $1,127 $6,888
======= ====== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities relating to research and
development, fixed assets, inventory, and capitalized rent. At November 1, 1997,
November 2, 1996 and November 4, 1995, there were net deferred tax assets of
$741,000, $183,000 and $592,000, respectively, related primarily to uniform
capitalization of inventory costs, the reporting of rent expense using the
straight-line method and state net operating loss carryforwards.
Reconciliation of the statutory federal tax rate and the effective rate for
the fiscal years ended November 1, 1997, November 2, 1996 and November 4, 1995
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ----------------------- -----
AMOUNT % AMOUNT % AMOUNT %
--------- --- ------- --- ------- -----
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Federal statutory tax rate ................................ $(2,768) 34% $ 928 34% $5,807 35%
State and local taxes, net of federal income tax benefit .. (632) 8 176 7 995 6
Other, net ................................................ -- - 23 2 86 1
------- -- ------ -- ------ ----
Provision for income taxes ................................ $(3,400) 42% $1,127 43% $6,888 42%
======= == ====== == ====== ====
</TABLE>
The Company has ongoing federal and state tax audits. The Company believes any
adjustments that may arise as a result of these audits will not be material to
the Company's financial position, results of operations and cash flow.
11. EMPLOYEE BENEFIT PLANS
Stock Option Plans
Pursuant to the Company's 1994 Stock Option Plan, as amended, the Company may
grant stock options to eligible individuals to purchase up to 850,000 shares of
its Common Stock. The exercise price for stock options may not be less than 100%
(110% for holders of 10% or more of the Company's outstanding stock) of the fair
market value of the stock on the date of grant and the options will vest at the
discretion of the Stock Option Committee of the Board of Directors. All options
granted have 10 year terms.
The Company granted stock options in fiscal 1997 to its newly appointed
President and Chief Operating Officer, to purchase an aggregate of 700,000
shares of Common Stock of the Company at an exercise price of $5.50 per share,
which was the fair market value of the Common Stock on the date of grant. Such
options vest over the term of his Employment Agreement, with an acceleration of
the vesting if certain target stock prices are attained. The Employment
Agreement provides for 100,000 vested options on April 30, 1997; an additional
250,000 options to vest on the earlier to occur of (i) December 10, 1998 or (ii)
the date on which the stock price equals or exceeds $10.00 per share for twenty
consecutive trading days; an additional 250,000 options to vest on the earlier
to occur
F-16
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of (i) December 10, 1999 or (ii) the date on which the stock price equals or
exceeds $13.00 per share for twenty consecutive trading days; and the remaining
100,000 options to vest on the earlier to occur of (i) November 4, 2000 or (ii)
the date on which the stock price equals or exceeds $20.00 per share for twenty
consecutive trading days. The Employment Agreement also provides that commencing
on November 1, 1997, in the event of a change in control involving the Company,
all outstanding options shall become vested and exercisable in full. Options
granted have 10 year terms.
The Company granted stock options to certain Miss Erika executives and
employees in fiscal 1997 to purchase an aggregate of 140,000 shares of Common
Stock of the Company at an exercise price of $5.44 per share, which was the fair
market value of the Common Stock on the date of grant. Such options vested on
the date of grant. All options granted have 10 year terms. In addition, the Miss
Erika Bonus Plan provides for the annual grant of options in the event certain
earnings targets for Miss Erika are exceeded.
In fiscal 1997, the Stock Option Committee of the Board of Directors
authorized, at the employees' discretion, the canceling and regranting, with new
vesting schedules, of all stock options under the Company's 1994 Stock Option
Plan with exercise prices of $13.25 and $14.00. As a result, 235,500 options
were canceled and regranted, with new vesting schedules, at an exercise price of
$6.50 per share when the fair market value on the date of grant was $6.00 per
share.
The change in outstanding options under the Company's stock option plans for
each of the three years in the period ended November 1, 1997, expressed in
number of shares, is as follows:
<TABLE>
<CAPTION>
RANGE OF EXERCISE
NUMBER OF SHARES PRICE PER SHARE
----------------- -----------------
<S> <C> <C>
Outstanding at November 4, 1994... 243,000 $14.00-$17.25
Granted........................ 207,000 $ 13.25
Canceled....................... -- --
Exercised...................... (43,500) $ 14.00
---------
Outstanding at November 4, 1995... 406,500 $13.25-$17.25
Granted........................ 274,500 $ 6.00-$13.25
Canceled....................... (61,000) $ 7.38-$14.00
Exercised...................... -- --
---------
Outstanding at November 2, 1996... 620,000 $ 6.00-$17.25
Granted........................ 1,322,500 $ 5.44-$8.19
Canceled....................... (306,000) $ 7.38-$14.00
Exercised...................... -- --
---------
Outstanding at November 1, 1997... 1,636,500 $ 5.44-$17.25
=========
</TABLE>
Options outstanding at November 1, 1997 are as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING WEIGHTED
RANGE OF EXERCISE NUMBER OF SHARES CONTRACTUAL LIFE AVERAGE EXERCISE SHARES
PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE
- -------------------- ---------------- ----------------- ---------------- -----------
<S> <C> <C> <C> <C>
$5.44-$5.50 885,000 9.6 $ 5.49 275,000
6.00-8.19 658,500 7.9 6.75 25,000
13.25-17.25 93,000 6.5 14.45 84,000
--------- --------
1,636,500 8.7 6.51 384,000
========= ========
</TABLE>
As of November 1, 1997, 87 individuals held options, 10,000 shares were
available for future grants under the Company's 1994 Stock Option Plan and
500,000 shares were available for future grants to Miss Erika employees under
the Miss Erika Bonus Plan.
F-17
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals or exceeds the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required
by FASB Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1997 and fiscal 1996: risk-free interest rates of 6.2%
for both fiscal years; zero dividend yields; volatility factor of the expected
market price of the Company's Common Stock of 0.56 for both fiscal years; a
weighted average expected life of the option of 5 years for both fiscal years.
Based on the assumptions set forth above, the weighted average fair value of the
options granted in fiscal 1997 was $3.10 per share on the date of grant.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except for earnings per share
information):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
NOVEMBER 1, NOVEMBER 2,
1997 1996
----------- -----------
<S> <C> <C>
Net income:
As reported..................... $(4,705) $1,524
Pro forma....................... $(5,458) $1,322
Earnings per share:
As reported..................... $ (0.63) $ 0.20
Pro forma....................... $ (0.73) $ 0.17
</TABLE>
Stock Purchase Plan
Pursuant to a Stock Purchase Plan adopted on January 7, 1994, an aggregate of
100,000 shares of Common Stock was made available for purchase to eligible
employees. The purchase price of the Common Stock under the plan is 85% of the
stock price, as defined. Participating employees may authorize the Company to
withhold a portion of their compensation, subject to certain deemed limitations,
to purchase the shares. As of November 1, 1997, 18,280 shares of Common Stock
have been issued under this plan.
Savings Plan
Effective January 1, 1995, the Company began sponsoring an employee savings
plan under Section 401(k) of the Internal Revenue Code for all full-time
employees with six months of continuous service. Eligible employees may make
pre-tax contributions of up to 15% of their annual compensation subject to the
maximum allowable
F-18
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contribution. Employee contributions of up to 6% of compensation are matched by
the Company at a rate of 35%. Employees are 100% vested in their pre-tax
contributions immediately, and become vested in the employer matching
contributions as follows: 25% vested after two years of service, 50% vested
after three years of service, 75% vested after four years of service and 100%
vested after five years of service. The Company's matching contributions for the
years ended November 1, 1997, November 2, 1996 and November 4, 1995 were
$193,220, $192,687 and $146,524, respectively.
Profit Sharing Plan
The Company sponsors a profit sharing plan covering Miss Erika 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 plan provides for an
accrual of up to 15% of each employee's gross compensation plus bonus, up to a
maximum contribution of approximately $22,500 per employee. From the acquisition
date of September 30, 1997 to November 1, 1997, the accrual amounted to $46,815.
Profit sharing plan assets consist primarily of stocks, bonds and U.S.
Government securities.
12. SPECIAL CHARGES
The gross profit in fiscal 1997 reflects special charges taken in the fourth
quarter of fiscal 1997 of approximately $3.7 million for sales allowances and
inventory close-outs related to the closure of certain underperforming
divisions. These charges included approximately $1.0 million, $1.0 million and
$600,000 of sales allowances for the Modiano, Lauren Alexandra and Pant-her
product lines, respectively, losses from close-outs of inventory for closed
divisions and reserves for the liquidation of remaining inventory of the closed
divisions totalling approximately $700,000 and approximately $300,000 of
severance payments related to the closure of other divisions, including the
Company's catalog division.
Selling, general and administrative expenses in fiscal 1997 included special
charges recorded in the second quarter of fiscal 1997 of approximately $5.7
million. These charges included approximately $3.3 million related to the
terminations of the Company's former President and a consultant. Approximately
$900,000 related to the termination of lease obligations at the Company's
production, design and administrative offices for facilities no longer deemed
necessary due to restructuring initiatives implemented in fiscal 1996. This
amount also included the establishment of approximately $650,000 of reserves
related to the closure of the Company's retail outlet stores.
As of November 1, 1997, the remaining accrual for special charges was
approximately $900,000 and related to remaining reserves for the closure of the
retail outlet stores and reserves for the liquidation of remaining inventory of
the closed divisions. All other special charges were incurred and utilized at
the time they were recorded and no changes in estimates were required.
13. SHAREHOLDER RIGHTS PLAN
On January 19, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan in which shareholders of record on February 8, 1996 received a
dividend distribution of one common share purchase right for each outstanding
share of the Company's Common Stock held. Each right entitles the holder to
purchase from the Company Common Stock at an initial exercise price of $32.00.
The rights are not exercisable or transferable apart from the Common Stock
until the earlier to occur of (i) ten days following a public announcement that
a person or group of affiliated or associated persons have acquired beneficial
ownership of 20% or more of the outstanding Common Stock of the Company, or (ii)
ten business days following the commencement of, or announcement of, an
intention to make a tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a person or group of 20% or more of
such outstanding Common Stock.
F-19
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The rights are redeemable by the Company's Board of Directors at a price of
$0.01 per right at any time prior to the acquisition by a person or group of
beneficial ownership of 20% or more of the Company's Common Stock.
If a person or group acquires 20% or more of the Company's outstanding Common
Stock, each right will entitle the holder to purchase, at the right's exercise
price, a number of shares of the Company's Common Stock having a market value at
that time of twice the right's exercise price. If the Company is acquired in a
merger or other business combination transaction, each right will entitle its
holder to purchase, at the right's exercise price, a number of the acquiring
company's common shares having a market value at that time of twice the right's
exercise price.
F-20
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS May 2, 1998
------------
<S> <C>
Current assets:
Cash ..................................................................... $ 160
Due from factor .......................................................... 69,264
Inventory ................................................................ 35,583
Income taxes receivable .................................................. 2,514
Prepaid expenses and other current assets ................................ 5,379
---------
Total current assets .................................................. 112,900
Fixed assets, net of accumulated depreciation of $2,951 .................... 6,339
Notes receivable from management stockholders .............................. 2,655
Goodwill ................................................................... 3,858
Deferred financing costs ................................................... 2,044
Other assets ............................................................... 3,083
---------
Total assets .......................................................... $ 130,879
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 11,549
Revolving credit loan .................................................... 57,515
Term loan payable ........................................................ 3,000
Accrued expenses and other current liabilities ........................... 3,939
---------
Total current liabilities ............................................. 76,003
Term loan payable .......................................................... 10,500
Other long-term liabilities ................................................ 1,730
---------
Total liabilities ..................................................... 88,233
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, authorized 20,000,000 shares and 8,063,613
shares issued and 7,412,613 shares outstanding ......................... 81
Capital in excess of par ................................................. 23,915
Retained earnings ........................................................ 24,185
Treasury stock, at cost, 651,000 shares .................................. (5,535)
---------
Total stockholders' equity ............................................ 42,646
---------
Total liabilities and stockholders' equity ............................ $ 130,879
=========
</TABLE>
See accompanying notes.
F-21
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTEEN WEEKS TWENTY-SIX WEEKS
ENDED ENDED
--------------- ---------------
MAY 2, MAY 3, MAY 2, MAY 3,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ................................................... $94,116 $52,873 $147,624 $94,469
Cost of goods sold .......................................... 76,080 43,914 118,191 76,211
------- ------- -------- -------
Gross profit ................................................ 18,036 8,959 29,433 18,258
Selling, general and administrative expenses ................ 13,290 14,646 23,963 23,410
Depreciation and amortization................................. 402 238 751 477
------- ------- -------- -------
Income (loss) from operations ............................... 4,344 (5,925) 4,719 (5,629)
Other expense (income):
Interest expense ....................................... 2,114 453 3,815 716
Interest income ........................................ (41) (42) (82) (84)
------- ------- -------- -------
Income (loss) before provision (benefit) for income taxes ... 2,271 (6,336) 986 (6,261)
Provision (benefit) for income taxes ........................ 955 (2,785) 515 (2,753)
------- ------- -------- -------
Net income (loss) ........................................... $ 1,316 $(3,551) $ 471 $(3,508)
======= ======= ======== =======
BASIC EARNINGS PER SHARE:
Net income (loss) ........................................... $ 0.18 $ (0.47) $ 0.06 $ (0.46)
======= ======= ======== =======
Weighted average number of common shares outstanding ........ 7,413 7,489 7,412 7,563
======= ======= ======== =======
DILUTED EARNINGS PER SHARE:
Net income (loss) ........................................... $ 0.18 $ (0.47) $ 0.06 $ (0.46)
======= ======= ======== =======
Weighted average number of common shares outstanding
assuming dilution ......................................... 7,423 7,489 7,427 7,563
======= ======= ======== =======
</TABLE>
See accompanying notes.
F-22
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE TWENTY-SIX WEEKS ENDED MAY 2, 1998
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN RETAINED TREASURY
---------------
SHARES AMOUNT EXCESS OF PAR EARNINGS STOCK TOTAL
------ ------ ------------- -------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at November 1, 1997 ...................... 8,061 $81 $23,903 $23,714 $(5,535) $42,163
Net income for the twenty-six weeks ended May 2,
1998 ............................................ -- -- -- 471 -- 471
Issuance of 2,973 shares of common stock through
the employee stock purchase plan ................ 3 -- 12 -- -- 12
----- --- ------- ------- ------- -------
Balance at May 2, 1998 ........................... 8,064 $81 $23,915 $24,185 $(5,535) $42,646
===== === ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-23
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
----------------------
MAY 2, MAY 3,
1998 1997
------ ------
<S> <C> <C>
Net income (loss)............................................................... $ 471 $(3,508)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization of fixed assets................................... 637 460
Amortization of intangibles..................................................... 582 17
Write-off of leasehold improvements............................................. -- 492
Changes in operating assets and liabilities:
Due from factor, net.......................................................... (4,620) 12,296
Inventory..................................................................... (6,993) (4,277)
Refundable income taxes....................................................... 687 --
Prepaid expenses and other current assets..................................... (152) (3,640)
Other assets.................................................................. (1,417) 146
Accounts payable.............................................................. 1,129 509
Accrued expenses and other current liabilities................................ (1,047) 4,005
Other long-term liabilities................................................... 10 110
-------- -------
Net cash (used for) provided by operating activities............................ (10,713) 6,610
-------- -------
INVESTING ACTIVITIES
Additional purchase price....................................................... (133) --
Purchase of fixed assets........................................................ (1,077) (974)
-------- -------
Net cash used for investing activities.......................................... (1,210) (974)
-------- -------
FINANCING ACTIVITIES
Net advances under revolving credit agreement................................... 13,042 --
Payment on term loan............................................................ (1,500) --
Proceeds from issuance of common stock.......................................... 12 20
Net (repayments) advances under factoring agreement............................. -- (4,443)
Purchase of Treasury Stock...................................................... -- (1,326)
-------- -------
Net cash provided by (used for) financing activities............................ 11,554 (5,749)
-------- -------
Decrease in cash................................................................ (369) (113)
Cash at beginning of period..................................................... 529 333
-------- -------
Cash at end of period........................................................... $ 160 $ 220
======== =======
SUPPLEMENTAL DISCLOSURES
Income taxes paid............................................................. $ 50 $ 279
Interest paid................................................................. $ 3,367 $ 691
</TABLE>
See accompanying notes.
F-24
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Norton
McNaughton, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
statements. Accordingly, they 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 Company's
financial position at May 2, 1998 and the results of operations for the thirteen
weeks and twenty-six weeks ended May 2, 1998 and May 3, 1997 and cash flows for
the twenty-six weeks ended May 2, 1998 and May 3, 1997 have been included. These
statements should be read in conjunction with the audited consolidated financial
statements included herein. Operating results for the thirteen and twenty-six
weeks ended May 2, 1998 are not necessarily indicative of the results that may
be expected for the fiscal year ending October 31, 1998.
The consolidated financial statements include the accounts of Norton
McNaughton, Inc. and its wholly-owned subsidiaries. All material balances and
transactions have been eliminated in consolidation. Data for the thirteen and
twenty-six weeks ended May 2, 1998 reflects the acquisition of Miss Erika, Inc.
("Miss Erika"), a wholly-owned subsidiary, on September 30, 1997.
The Company operates on a 52-53 week accounting period. The Company's fiscal
year ends on October 31, if such date falls on a Saturday, or the first Saturday
following October 31.
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.
DEFERRED FINANCING COSTS
Deferred financing costs were incurred in fiscal 1997 in connection with
obtaining the Company's credit facility. Financing costs are amortized on a
straight line basis over the three year term of the related credit facility.
GOODWILL
Goodwill resulting from the acquisition of Miss Erika is being amortized by
the straight-line method over twenty years.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which
requires adoption for both interim and annual financial statements for periods
ending after December 15, 1997. In the first quarter of fiscal 1998, the Company
changed the method previously used to compute earnings per share and has
restated all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options is excluded.
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the period presented. Diluted earnings per
share is computed based on the weighted average number of common shares
outstanding during the period and the effect of dilutive options outstanding
during the period using the treasury stock method. For the thirteen and twenty-
six weeks ended May 2, 1998, the dilutive effect of options outstanding during
the period using the treasury stock method was 10,000 shares and 15,000 shares,
respectively. For the thirteen and twenty-six weeks ended May 3, 1997, options
outstanding during the period using the treasury stock method were excluded from
the net loss per share computation of dilutive earnings per share because they
were antidilutive.
F-25
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash and cash equivalents
include all liquid debt instruments with a maturity of three months or less when
purchased.
ACCOUNTING FOR STOCK OPTIONS
The Company has elected to follow Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB No. 25, because the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
SFAS NO.130, "REPORTING COMPREHENSIVE INCOME" AND SFAS NO. 131, "DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
The Financial Accounting Standards Board issued SFAS No. 130, which requires
reclassification of financial statements for earlier periods provided for
comparative purposes, and is effective for fiscal years beginning after December
15, 1997. The Company believes that the effect of adopting the new standard will
be immaterial.
The Financial Accounting Standards Board issued SFAS No. 131, which is
effective for fiscal years beginning after December 15, 1997. This statement
changes the way that companies report information about operating segments in
financial statements. The Company has not yet determined the impact of SFAS No.
131 on disclosures in its financial statements.
2. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out basis) or market.
Inventories consist of the following:
<TABLE>
<CAPTION>
MAY 2,
1998
------
(IN THOUSANDS)
<S> <C>
Raw materials $ 5,633
Work in process 5,703
Finished Goods 24,247
-------
$35,583
=======
</TABLE>
3. STOCK REPURCHASE
The Company's Board of Directors has authorized a stock repurchase program,
under which the Company may repurchase up to $7.5 million of the Company's
Common Stock. The Company expects that the shares may be purchased from time to
time in the open market and in block transactions. As of May 2, 1998, the
Company has purchased a total of 651,000 shares at an aggregate cost of
approximately $5.5 million.
F-26
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. NOTES RECEIVABLE FROM MANAGEMENT STOCKHOLDERS
In 1993, the Company loaned certain management stockholders $3,000,000 in the
aggregate. Each loan is evidenced by a limited recourse promissory note with
interest accruing at 5.84% per annum. The Company's recourse on the promissory
notes is limited to the management stockholders' pledges of a portion of their
Common Stock of the Company.
In the event of any sale or transfer of shares of Common Stock by any of the
management stockholders, such person is required to apply a portion of the net
proceeds of the sale or transfer to the principal repayment of his loan from the
Company. No other principal payments are required under the loans except for the
payment at maturity. The loans mature on November 5, 2003 at which time full
payment is to be made by the management stockholders for the balance of their
respective loans. As of the end of the fourth quarter of fiscal 1997, all
necessary payments have been made under the terms of the loans by the management
stockholders.
As of May 2, 1998, the fair market value of the Company's Common Stock pledged
by the management stockholders as security for the loans was $5,161,699, and the
aggregate principal balance of all loans to management stockholders was
$2,654,680. The loan balance set forth above reflects the required principal
payments of $345,320 resulting from sales of Common Stock by management
stockholders.
5. ACQUISITION OF MISS ERIKA
On September 30, 1997, 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 moderately priced apparel. The
Company will, through a wholly-owned subsidiary, continue Miss Erika's business.
The purchase price of Miss Erika consisted of $24.0 million in cash paid at the
closing, the assumption of $2.5 million of indebtedness for borrowed money and
certain other contractual obligations. In addition, the Company has agreed to
pay an additional contingent payment in cash and/or Company Common Stock in the
event that certain earnings targets are achieved by Miss Erika for the two
fiscal years ending November 6, 1999. The aggregate contingent payment, if any,
payable by the Company is equal to the amount by which four times the average of
Miss Erika's earnings before income taxes, depreciation and amortization, as
defined in the Miss Erika purchase agreement ("EBITDA"), for the two fiscal
years ending November 6, 1999, exceeds $24.0 million. Any additional
consideration paid for Miss Erika will be accounted for as additional purchase
price and will be reflected in goodwill. At the Company's discretion, the
Company may, subject to a maximum number of shares, pay all or any portion of
the contingent payment in shares of Common Stock. The Miss Erika purchase
agreement limits the number of shares of Common Stock payable by the Company to
a number of shares which, after giving effect to their issuance, does not exceed
12% of the aggregate number of outstanding shares of Common Stock at the time of
payment. The Company intends to pay the cash portion, if any, of the contingent
consideration from internally generated funds and borrowings under the Company's
revolving credit facility. The Company cannot predict whether Miss Erika will
achieve the necessary EBITDA targets to qualify for additional consideration.
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 for ongoing working capital requirements of the
combined entity. Pursuant to the financing arrangement, the Company continued to
factor its accounts receivable, as well as the accounts receivable of Miss
Erika.
The acquisition was accounted for as a purchase, and Miss Erika's results are
included in the consolidated statements of operations beginning September 30,
1997. The following unaudited pro forma information indicates what net sales,
income (loss) from operations, net loss and net loss per share would have been
had the acquisition of Miss Erika been completed on November 2, 1996.
F-27
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
MAY 3, 1997 MAY 3, 1997
------------------------- ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales............................. $52,873 $94,061 $94,469 $149,491
Income (loss) from operations......... $(5,925) $ 174 $(5,629) $ (619)
Net loss.............................. $(3,551) $ (763) $(3,508) $ (1,828)
Net loss per share:
Basic.............................. $ (0.47) $ (0.10) $ (0.46) $ (0.24)
Diluted............................ $ (0.47) $ (0.10) $ (0.46) $ (0.24)
</TABLE>
The pro forma adjustments are based upon available information and assumptions
that management believes are reasonable at the time made. The unaudited pro
forma financial information does not purport to present the results of
operations of the Company had the acquisition of Miss Erika occurred on the date
specified, nor is it necessarily indicative of the financial position or results
of operations that may be achieved in the future. The unaudited pro forma
financial information does not reflect any adjustments for synergies that
management expects to realize. No assurances can be made as to the amount of
cost savings or revenue enhancements, if any, that may be realized.
6. SHAREHOLDER RIGHTS PLAN
On January 19, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan in which shareholders of record on February 8, 1996 received a
dividend distribution of one common share purchase right for each outstanding
share of the Company's Common Stock held. Each right entitles the holder to
purchase from the Company Common Stock at an initial exercise price of $32.00.
The rights are not exercisable or transferable apart from the Common Stock
until the earlier to occur of (i) ten days following a public announcement that
a person or group of affiliated or associated persons have acquired beneficial
ownership of 20% or more of the outstanding Common Stock of the Company, or (ii)
ten business days following the commencement of, or announcement of, an
intention to make a tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a person or group of 20% or more of
such outstanding Common Stock.
The rights are redeemable by the Company's Board of Directors at a price of
$0.01 per right at any time prior to the acquisition by a person or group of
beneficial ownership of 20% or more of the Company's Common Stock.
If a person or group acquires 20% or more of the Company's outstanding Common
Stock, each right will entitle the holder to purchase, at the right's exercise
price, a number of shares of the Company's Common Stock having a market value at
that time of twice the right's exercise price. If the Company is acquired in a
merger or other business combination transaction, each right will entitle its
holder to purchase, at the right's exercise price, a number of the acquiring
company's common shares having a market value at that time of twice the right's
exercise price.
7. SUBSEQUENT EVENTS
On June 18, 1998, the Company completed the acquisition of Jeri-Jo Knitwear
Inc. and Jamie Scott, Inc. (collectively "Jeri-Jo"), acquiring substantially all
the assets and assuming substantially all the liabilities of the privately-held
apparel importers of moderately-priced juniors' and misses' updated sportswear.
Jeri-Jo will operate as a separate subsidiary under the direction of current
management. The purchase price paid in the Jeri-Jo acquisition was (i) $55.0
million in cash at the closing of the acquisition, (ii) the assumption of
indebtedness of $10.9 million for borrowed money and certain other contractual
obligations. In addition, the Company agreed to pay an additional contingent
payment in cash and its Common Stock, $0.01 par value, in the event that certain
earnings targets are achieved by Jeri-Jo for the two years subsequent to the
closing of the Jeri-Jo acquisition. The Jeri-Jo purchase agreement requires that
the Company pay at least 50% of the required contingent payment in cash.
F-28
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The aggregate contingent payment, if any, payable by the Company is equal to the
excess of (1) the sum of (A) five times Jeri-Jo's average EBITDA (as defined in
the Jeri-Jo purchase agreement) for the two years ending June 30, 2000, plus (B)
0.50 times any such average EBITDA between $17.0 million and $20.0 million, plus
(C) one times any such average EBITDA over $20.0 million, over (2) $55.0
million. Any additional consideration paid for Jeri-Jo will be accounted for as
additional purchase price and will be reflected in goodwill. The Company intends
to pay the cash portion of the contingent consideration from internally
generated funds and borrowings under the Company's revolving credit facility.
The Company cannot predict whether Jeri Jo will achieve the necessary EBITDA
targets to qualify for additional consideration.
Concurrent with the closing of the acquisition, the Company entered into a $
175 million secured revolving credit and letter of credit facility with
NationsBanc Commercial Corporation, The CIT Group/Commercial Services, Inc. and
Fleet Bank N.A. (the "New Financing Agreement"). The facility will be used to
finance ongoing working capital requirements of the combined entity. The New
Financing Agreement is a three-year secured revolving credit and letter of
credit facility, with interest on outstanding borrowings determined, at the
Company's option, based upon stated margins below the prime rate or in excess of
LIBOR rates. Initially, the interest rate under the New Financing Agreement is
75 basis points below the prime rate (based upon the current prime rate, the
interest rate under the New Financing Agreement will be 7.75% per annum).
Available credit under the New Financing Agreement is as follows: revolving
credit advances not to exceed $60.0 million, documentary letters of credit not
to exceed $ 130.0 million and stand-by letters of credit not to exceed $45.0
million (including $30.0 million of stand-by letters of credit necessary to
secure the Company's cash contingent payment obligation in connection with the
Jeri-Jo acquisition), with the aggregate credit available to the Company equal
to the lesser of (i) $ 175.0 million or (ii) the sum of 85% of eligible accounts
receivable and 60% of eligible inventory. The New Financing Agreement contains a
number of restrictive covenants, including covenants which limit incurrence of
liens and indebtedness, limit transactions with affiliates, acquisitions, sales
of assets, investments and other restricted payments, and require that the
Company maintain certain fixed charge coverage, cash flow coverage and leverage
ratios and meet specified minimum levels of working capital and net worth.
On June 18, 1998, the Company also closed the sale of $125.0 million of 12
1/2% Senior Notes due 2005 (the "Senior Notes"). The proceeds of the sale were
used to finance the Jeri-Jo acquisition and to refinance existing indebtedness
of the Company and Jeri-Jo. The Senior Notes have not been registered under the
Securities Act of 1933, as amended, and may not be offered and sold in the
United States absent registration under such act or an applicable exemption from
registration. The Company's obligations under the Senior Notes are guaranteed by
all of the Company's subsidiaries.
8. LEGAL PROCEEDINGS
In April 1988, in response to Norton's notice of an intention not to renew its
agreements with its distribution and cutting contractors, Norton received a
letter from their attorney alleging that Norton had breached its agreements and,
as a result, alleging that such contractors had incurred substantial damages.
Norton does not believe that it has breached any of its agreements with these
contractors, believes that it has meritorious defenses to any claim, and will
vigorously defend any proceeding. Under the terms of the agreements with these
contractors, claims against Norton are to be resolved through arbitration
proceedings. There can be no assurance that Norton would be successful in
defending any such claim, if made, or that any determination rendered would not
have a material adverse effect on the business, financial condition and results
of operations of the company. Subsequent to the receipt of the above-mentioned
letter, in preliminary discussions between attorneys for the contractors and
Norton, the contractors offered to sell the contractors' operations to Norton.
Norton has declined the offer to purchase the distribution and cutting
activities of these contractors.
On July 15, 1998, the distribution and cutting contractors filed an action
entitled Cutting Edge Services, Inc. and Railroad Enterprises, Inc. v. Miss
------------------------------------------------------------------
Erika, Inc., Jeri-Jo Knitwear, Inc. and Jamie Scott, Inc. in the New york State
- ---------------------------------------------------------
Supreme Court, New York County, for breach of contract for failure to use their
services. That action seeks substantial damages and related declaratory relief.
Miss Erika and Jeri-Jo believe the claims are meritless and intend to defend
this action vigorously. There can be no assurance that Miss Erika and Jeri-Jo
will be successful in defending this action, or that any determination rendered
would not have a material adverse effect on the business, financial condition
and results of operations of the Company.
F-29
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company is involved in certain other legal actions and claims arising in
the ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without material adverse effect on the
Company's financial position, results of operations and cash flow.
F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
and Stockholders of
Miss Erika, Inc.
In our opinion, the accompanying balance sheets 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.
Price Waterhouse LLP
New York, New York
April 16, 1997
F-31
<PAGE>
MISS ERIKA, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................ $ 123 $ 246
Accounts receivable, less allowance for doubtful accounts of $500 in
1997 and 1996.................................................................. 9,602 8,520
Inventories..................................................................... 29,976 28,773
Prepaid expenses and other current assets....................................... 229 160
Prepaid income taxes............................................................ -- 366
Deferred tax assets............................................................. 198 199
------- -------
Total current assets....................................................... 40,128 38,264
Fixed assets, net.................................................................... 843 771
Deferred charges, net of accumulated amortization of $2,526 in 1997 and $2,075 in --
1996................................................................................ 451
Deferred tax assets--noncurrent...................................................... 311 267
Other assets......................................................................... 48 43
------- -------
Total assets............................................................... $41,330 $39,796
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued drafts payable.......................................................... $ 6,857 $ 4,807
Notes payable -- banks -- current portion....................................... -- 3,500
Other payables and accrued expenses............................................. 4,639 4,007
Income taxes payable............................................................ 468 --
------- -------
Total current liabilities.................................................. 11,964 12,314
Notes payable--banks................................................................. 5,700 --
Subordinated notes payable to related entities....................................... 2,800 2,800
Other subordinated liabilities payable to certain stockholders....................... 420 420
Other liabilities.................................................................... 163 165
------- -------
Total liabilities.......................................................... 21,047 15,699
------- -------
Stockholders' equity:
Preferred stock..................................................................... 14,484 21,000
Other preferred interests........................................................... 2,172 3,150
Common stock........................................................................ 10 10
Additional paid-in capital.......................................................... 990 990
Retained earnings (deficit)......................................................... 2,633 (1,053)
Treasury stock...................................................................... (6) --
------- -------
Total stockholders' equity......................................................... 20,283 24,097
------- -------
Total liabilities and stockholders' equity......................................... $41,330 $39,796
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-32
<PAGE>
MISS ERIKA, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
JANUARY 31, JANUARY 31, JANUARY 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................................... $94,744 $86,069 $91,583
Cost of sales........................................................... 81,322 77,841 78,977
------- ------- -------
Gross profit............................................................ 13,422 8,228 12,606
------- ------- -------
Selling, general and administrative expenses............................ 6,060 6,350 6,306
Amortization of intangible assets....................................... 451 492 1,734
Depreciation of fixed assets............................................ 288 232 229
------- ------- -------
Operating expenses...................................................... 6,799 7,074 8,269
------- ------- -------
Income from operations.................................................. 6,623 1,154 4,337
Interest expense, net of interest income of $35 in 1997, $13 in 1996
and $11 in 1995...................................................... 1,026 1,596 1,880
------- ------- -------
Income (loss) before provision (benefit) for income taxes............... 5,597 (442) 2,457
Provision (benefit) for income taxes.................................... 1,911 (154) 969
------- ------- -------
Income (loss) before effect of a change in accounting principle......... 3,686 (288) 1,488
Effect of a change in accounting principle, net of tax benefit of $63... -- (95) --
------- ------- -------
Net income (loss)....................................................... 3,686 (383) 1,488
Accumulated deficit, beginning of period................................ (1,053) (670) (2,158)
------- ------- -------
Retained earnings (deficit), end of period.............................. $ 2,633 $(1,053) $ (670)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE>
MISS ERIKA, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
JANUARY 31, JANUARY 31, JANUARY 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ................................................... $ 3,686 $ (383) $ 1,488
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ..................................... 739 724 1,963
Effect of a change in accounting principle ........................ -- 95 --
Changes in:
Accounts receivable ............................................. (1,082) 1,642 (3,037)
Inventories ..................................................... (1,202) 6,057 (2,266)
Prepaid expenses and other current assets ....................... (69) (134) 182
Prepaid income taxes ............................................ 366 (366) --
Deferred tax assets ............................................. (44) (52) (70)
Other assets .................................................... (5) (2) --
Accrued drafts payable .......................................... 2,050 (1,031) 551
Other payables and accrued expenses ............................. 632 (1,119) 963
Income taxes payable ............................................ 468 (475) 331
Other liabilities ............................................... (2) 70 --
------- ------- -------
Net cash provided by operating activities ........................... 5,537 5,026 105
------- ------- -------
Cash flows from investing activities
Capital expenditures ................................................ (360) (155) (505)
------- ------- -------
Net cash used in investing activities ............................... (360) (155) (505)
------- ------- -------
Cash flows from financing activities
Net borrowing (repayments) of notes payable--banks .................. 2,200 (4,800) 5,300
Redemptions of preferred stock ...................................... (6,516) -- --
Redemptions of other preferred interests ............................ (978) -- --
Repurchase of treasury stock ........................................ (6) -- --
Repayment of subordinated notes payable ............................. -- -- (4,200)
Repayment of other subordinated liabilities ......................... -- -- (630)
------- ------- -------
Net cash (used in) provided by financing activities ................. (5,300) (4,800) 470
------- ------- -------
Net (decrease) increase in cash ..................................... (123) 71 70
Cash at beginning of period ......................................... 246 175 105
------- ------- -------
Cash at end of period ............................................... $ 123 $ 246 $ 175
======= ======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest ............................................................ $ 1,065 $ 1,599 $ 1,966
Income taxes ........................................................ 1,121 674 752
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-34
<PAGE>
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.
F-35
<PAGE>
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
3. FIXED ASSETS
Fixed assets consist of the following:
F-36
<PAGE>
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
JANUARY 31,
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements ................................. $1,224 $1,040
Office and warehouse equipment, furniture and fixtures . 541 424
Computer equipment ..................................... 279 220
------ ------
2,044 1,684
Less -- Accumulated depreciation and amortization ...... 1,201 913
------ ------
$ 843 $ 771
====== ======
</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.
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.
F-37
<PAGE>
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. CAPITALIZATION
Capital stock consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
1997 1996
-------- -------
(IN THOUSANDS)
<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 $21,000
Common stock, $.01 par value; authorized and issued--1,000,000 shares at
January 31, 1997 and 1996 .............................................. 10 10
Treasury stock--2,247 shares, at cost ...................................... (6) --
------- -------
$14,488 $21,010
======= =======
</TABLE>
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.
F-38
<PAGE>
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The provision (benefit) for income taxes for the fiscal years ended January 31
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal
Current .... $1,548 $ (91) $ 905
Deferred ... (36) (43) (57)
------ ----- -----
1,512 (134) 848
State and local
Current .... 407 (11) 134
Deferred ... (8) (9) (13)
------ ----- -----
399 (20) 121
------ ----- -----
$1,911 $(154) $ 969
====== ===== =====
</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.
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.
F-39
<PAGE>
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company funds pension costs as they accrue.
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1997 1996 1995
-------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period .. $ 125 $ 118 $ 162
Interest cost on projected benefit obligation .... 102 92 97
Actual return on plan assets ..................... (225) (253) (18)
Net amortization and deferral .................... 131 187 (56)
----- ----- -----
Net periodic pension cost ........................ $ 133 $ 144 $ 185
===== ===== =====
</TABLE>
The following table sets forth the Plan's funded status at:
<TABLE>
<CAPTION>
JANUARY 31,
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, vested ....................... $1,208 $1,087
------ ------
Projected benefit obligation .................................... 1,606 1,455
Plan assets at market value ..................................... 1,591 1,269
------ ------
Excess of projected benefit obligation over Plan assets ......... 15 186
Unrecognized prior service cost ................................. (64) (68)
Unrecognized net gain (loss) .................................... 433 285
Unrecognized net obligation being amortized over 21.48 years .... (164) (176)
------ ------
Accrued pension cost recognized in the Balance Sheet ............ $ 220 $ 227
====== ======
</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.
F-40
<PAGE>
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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
------ -----
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retiree ............................................................ $ 122 $ 132
Other active employee .............................................. 34 39
----- -----
Accumulated postretirement benefit obligation ......................... 156 171
Unrecognized net gain ................................................. 18 --
----- -----
Accrued postretirement benefit cost included in the balance sheet ..... $ 174 $ 171
===== =====
</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.
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.
F-41
<PAGE>
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-42
<PAGE>
MISS ERIKA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Minimum annual rentals under non-cancelable operating leases are payable as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JANUARY 31: (IN THOUSANDS)
- ------------------------------ --------------
<S> <C>
1998 .................... $ 1,688
1999 .................... 1,688
2000 .................... 1,714
2001 .................... 1,404
2002 .................... 1,411
2003 and thereafter ..... 8,103
-------
$16,008
=======
</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.
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 AUDITORS'
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.
F-43
<PAGE>
MISS ERIKA, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, 1997
--------------
<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.
F-44
<PAGE>
MISS ERIKA, INC.
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
1997 1996
------- --------
<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.
F-45
<PAGE>
MISS ERIKA, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JULY 31,
1997 1996
-------- --------
<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)
Inventories ..................................................................... 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.
F-46
<PAGE>
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 herein.
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.
F-47
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Jeri-Jo Knitwear, Inc. and Affiliate
We have audited the accompanying combined balance sheet of Jeri-Jo Knitwear,
Inc. and Affiliate as of December 31, 1997, and the related combined statements
of income and retained earnings and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Jeri-Jo Knitwear,
Inc. and Affiliate as of December 31, 1997, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
Ernst & Young LLP
New York, New York
February 27, 1998
F-48
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Shareholders of
Jeri-Jo Knitwear, Inc. and Affiliate
We have audited the accompanying combined balance sheet of Jeri-Jo Knitwear,
Inc. and Affiliate as of December 31, 1996, and the related combined statements
of income and retained earnings and cash flows for each of the two years in the
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Jeri-Jo Knitwear,
Inc. and Affiliate as of December 31, 1996, and the results of their operations
and their cash flows for the years ended December 31, 1996 and 1995 in
conformity with generally accepted accounting principles.
Friedman Alpren & Green LLP
New York, New York
February 14, 1997
F-49
<PAGE>
JERI-JO KNITWEAR, INC. AND AFFILIATE
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $12,713 $17,672
Accounts receivable, less allowance for doubtful accounts of $31 in 1997 and
$35 in 1996 .................................................................... 5,485 7,398
Inventories ...................................................................... 9,265 10,227
Prepaid expenses and other current assets ........................................ 297 425
------- -------
Total current assets .......................................................... 27,760 35,722
Property and equipment at-cost less accumulated depreciation and amortization ...... 1,359 1,519
Other assets ....................................................................... 43 45
------- -------
$29,162 $37,286
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable (including commissions payable) ................................. $ 5,758 $ 8,373
Accrued expenses and other current liabilities ................................... 1,190 1,027
Dividends payable ................................................................ 4,000 9,000
------- -------
Total current liabilities ..................................................... 10,948 18,400
------- -------
Commitments
Shareholder's equity:
Common stock ..................................................................... 121 121
Additional paid-in capital ....................................................... 204 204
Retained earnings ................................................................ 18,127 18,799
------- -------
18,452 19,124
Less treasury stock, at cost ..................................................... 238 238
------- -------
Total shareholder's equity ....................................................... 18,214 18,886
------- -------
Total liabilities and shareholder's equity ....................................... $29,162 $37,286
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
JERI-JO KNITWEAR, INC. AND AFFILIATE
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales ................................................................. $ 95,080 $ 89,400 $120,918
Cost of sales ............................................................. 67,419 62,586 88,559
-------- -------- --------
Gross profit .............................................................. 27,661 26,814 32,359
Operating expenses:
Employee compensation ................................................... 5,525 5,264 5,952
Selling and shipping .................................................... 2,247 2,347 2,752
General and administrative .............................................. 2,967 2,909 3,528
-------- -------- --------
Total operating expenses ............................................. 10,739 10,520 12,232
-------- -------- --------
Income from operations .................................................... 16,922 16,294 20,127
Interest and financing, net of interest income of $235, $482 and
$507 ..................................................................... (104) (382) (345)
-------- -------- --------
Income before income taxes ................................................ 17,026 16,676 20,472
Income taxes .............................................................. 839 831 1,049
-------- -------- --------
Net income ................................................................ 16,187 15,845 19,423
Retained earnings, beginning of year ...................................... 18,799 30,001 32,409
Dividends ................................................................. (16,859) (27,047) (21,831)
-------- -------- --------
Retained earnings, end of year ............................................ $ 18,127 $ 18,799 $ 30,001
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
JERI-JO KNITWEAR, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................ $ 16,187 $ 15,845 $ 19,423
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ....................................... 287 306 376
Provision for doubtful accounts ..................................... 141 9 271
Changes in assets and liabilities:
Account receivable ................................................. 1,772 2,230 5,186
Inventories ........................................................ 962 (2,474) 22,495
Prepaid expenses and other current assets .......................... 128 73 450
Other assets ....................................................... 2 2 81
Accounts payable ................................................... (2,615) 3,839 (5,337)
Accrued expenses and other current liabilities ..................... 163 247 (97)
-------- -------- --------
Net cash provided by operating activities ............................... 17,027 20,077 42,848
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment--net .............................. (127) (124) (851)
Loan receivable, shareholder .......................................... -- -- 3,576
-------- -------- --------
Net cash provided by (used in) investing activities ..................... (127) (124) 2,725
Cash flows from financing activities:
Proceeds from sale of treasury stock .................................. -- -- 4,076
Dividends paid ........................................................ (21,859) (20,247) (30,631)
Distribution charged to additional paid-in capital .................... -- (1,051) (2,291)
-------- -------- --------
Net cash used in financing activities ................................... (21,859) (21,298) (28,846)
Net increase (decrease) in cash and cash equivalents .................... (4,959) (1,345) 16,727
Cash and cash equivalents, beginning of year ............................ 17,672 19,017 2,290
-------- -------- --------
Cash and cash equivalents, end of year .................................. $ 12,713 $ 17,672 $ 19,017
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid ......................................................... $ 26 $ 1 $ 41
Income taxes paid ..................................................... 657 707 924
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
JERI-JO KNITWEAR, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The accompanying combined financial statements include the accounts of Jeri-Jo
Knitwear, Inc. (the "Company") and Jamie Scott, Inc., a company affiliated
through common ownership (collectively, the "Companies"). All significant
intercompany transaction and balances have been eliminated.
Use of Estimates
Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of assets and
liabilities. The disclosure of contingent assets and liabilities, and the
reported revenues and expenses.
Inventories
Inventories which are comprised of finished goods, are valued at the lower of
cost (first-in, first-out) or market.
Depreciation and Amortization
Property and equipment are recorded at cost. Depreciation is calculated using
straight-line and accelerated methods over the estimated useful lives of the
assets. Leasehold improvements are amortized over the term of the lease.
Income Taxes
Jeri-Jo Knitwear, Inc. has elected S Corporation status for Federal income tax
purposes only. Under this election, taxable income is reportable by the
shareholder on his individual income tax return, and no provision is made for
Federal income tax. Provisions are made for New Jersey corporation business tax,
New York State franchise tax and New York City general corporation tax.
Jamie Scott, Inc. has elected S Corporation status for Federal New Jersey and
New York State income tax purposes. Under these elections, its taxable income is
reportable by the shareholders on their individual income tax returns, and no
provision is made for Federal income tax. Provisions are made for New Jersey S
Corporation business tax, New York State S Corporation franchise tax and New
York City general corporation tax.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents.
F-53
<PAGE>
JERI-JO KNITWEAR, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Furniture and equipment .......................... $1,555,913 $1,498,306
Automobiles ...................................... 95,913 102,792
Leasehold improvements ........................... 842,872 842,872
---------- ----------
2,494,698 2,443,970
Less accumulated depreciation and amortization ... 1,135,611 925,238
---------- ----------
$1,359,087 $1,518,732
========== ==========
</TABLE>
3. LINE OF CREDIT
The Companies have a line of credit with two banks for $50,000,000, which
includes direct borrowing, acceptance financing and letters of credit. Interest
is charged at 1% over the prevailing Federal funds rate. The line of credit is
collateralized by a security interest in the Companies' accounts receivable and
all inventories. At December 31, 1997, 1996 and 1995, there were no outstanding
balances.
Interest expense under the line of credit for the years ended December 31,
1997 and 1995 were $18,859 and $26,988, respectively. There were no borrowings
and no interest expense for the year ended December 31, 1996.
4. COMMON STOCK AND TREASURY STOCK
Common stock at December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Jeri-Jo Knitwear, Inc., no par value; 200 shares authorized, 10 shares issued . $ 21,000
Jamie Scott, Inc., no par value; 200 shares authorized, 30 shares issued ...... 100,000
--------
$121,000
========
</TABLE>
Treasury stock at December 31, 1997 and 1996 consists of 2 1/2 shares of the
common stock of Jeri-Jo Knitwear, Inc., with a cost of $238,250.
On March 1, 1995, twelve shares of common stock of Jamie Scott, Inc.
previously held in the treasury were sold for $4,075,616. Additional paid-in
capital was credited for $3,475,616, the excess of the sales price over cost of
the treasury stock.
5. MAJOR CUSTOMER
Sales to one customer for the year ended December 31, 1997 accounted for
approximately 11.1% of the Companies' net sales. There were no major customers
for the years ended December 31, 1996 and 1995.
6. PENSION PLAN
The Company has a savings and investment plan which qualifies under Section
401(k) of the Internal Revenue Code (the "Code"). The Plan allows eligible
employees to voluntarily contribute up to 15% of compensation limited to the
maximum allowed under the Code. The Company contributes 3% of all eligible
employees' compensation to the plan and matches employee contributions up to 50%
of the first 5% of compensation. In addition, the
F-54
<PAGE>
JERI-JO KNITWEAR, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Company may contribute additional amounts, as determined by the Board of
Directors. Pension plan expense for the years ended December 31, 1997, 1996 and
1995 was $216,000, $190,390 and $195,026, respectively.
7. COMMITMENTS
Lease Commitments
The Company occupies warehouse, distribution and office space in Edison, New
Jersey. The premises are owned by a partnership whose partners are shareholders
of the Companies. The Partnership's obligation of $1,440,000 at December 31,
1997, incurred in the purchase of the property, is guaranteed by the Company.
The Company entered into a lease agreement with the partnership expiring June
30, 2003, with a five-year renewal option. The operating lease requires the
Company to pay all costs and expenses related to the property, in addition to
the minimum rentals. The minimum annual rental payments are $396,000.
The Company also has executed noncancelable operating leases for its New York
City showroom which expire on May 31, 1998. The Company anticipates entering
into a new lease for the same premises. At December 31, 1997, approximate future
minimum rentals through May 31, 1998, exclusive of required payments for
increases in real estate taxes and operating expenses, are $177,000.
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$832,696, $829,186 and $967,545, respectively, of which $395,884 in each year is
for the property leased from the related partnership.
Letters of Credit
At December 31, 1997, open letters of credit totaled approximately
$20,211,000.
8. CONCENTRATIONS OF CREDIT RISK
The Companies import ladies' apparel, predominantly from the Far East and
Europe. Their customers include a cross section of retailers throughout the
United States.
The Company's total cash includes $10,233,149, $16,676,979 and $18,636,773
held in an uninsured money market fund at December 31, 1997, 1996 and 1995,
respectively. In addition, the Companies had $2,480,771, $995,578 and $379,066
in four banks at December 31, 1997, 1996 and 1995, respectively. Accounts at
each bank are insured by the Federal Deposit Insurance Corporation for up to
$100,000.
F-55
<PAGE>
JERI-JO KNITWEAR, INC. AND AFFILIATE
COMBINED BALANCE SHEET
MARCH 31, 1998
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
ASSETS
------
Current assets
Cash and cash equivalents $ 6,011,562
Accounts receivable, net 10,008,369
Inventories 10,092,138
Prepaid expenses and other current assets 249,458
-----------
Total current assets 26,361,527
Property and equipment, net 1,328,234
Other assets 37,000
-----------
$27,726,761
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable $ 3,080,948
Dividends payable 5,500,000
Accrued expenses and other current liabilities 350,647
----------
Total current liabilities 8,931,595
-----------
Shareholders' equity
Common stock 121,000
Additional paid-in capital 204,068
Retained earnings 18,708,348
-----------
19,033,416
Less - Treasury stock, at cost (238,250)
-----------
18,795,166
-----------
$27,726,761
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-56
<PAGE>
JERI-JO KNITWEAR, INC. AND AFFILIATE
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net sales $18,508,780 $21,882,545
Cost of sales 11,994,606 15,035,520
----------- -----------
Gross profit 6,514,174 6,847,025
----------- -----------
Operating expenses:
Employee
compensation 1,246,392 1,292,443
Selling and shipping 465,609 621,383
General and
administrative 1,133,032 864,138
Interest and
financing, net (29,193) (48,038)
----------- -----------
2,815,840 2,729,926
----------- -----------
Income before
income taxes 3,698,334 4,117,099
Income taxes 160,000 205,000
----------- -----------
Net income 3,538,334 3,912,099
Retained earnings,
beginning of period 18,127,014 18,799,064
Dividends paid (2,957,000) (3,777,475)
----------- -----------
Retained earnings,
end of period $18,708,348 $18,933,688
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-57
<PAGE>
JERI-JO KNITWEAR, INC. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Cash flows from operating activities
Net income $ 3,538,334
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation and amortization 60,296
Provision for doubtful accounts 53,861
Changes in assets and liabilities
Accounts receivable (4,577,001)
Inventories (826,641)
Prepaid expenses and other current assets 46,185
Other assets 5,913
Accounts payable (2,677,455)
Accrued expenses and other current liabilities (839,407)
-----------
Net cash used in operating activities (5,215,915)
Cash flows from investing activities
Additions to property and equipment (29,443)
Cash flows from financing activities
Dividends paid (1,457,000)
-----------
Net decrease in cash and cash equivalents (6,702,358)
Cash and cash equivalents, beginning of year 12,713,920
-----------
Cash and cash equivalents, end of year $ 6,011,562
===========
Supplemental cash flow disclosures
Income taxes paid $ 223,000
===========
</TABLE>
F-58
<PAGE>
JERI-JO KNITWEAR, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The accompanying combined financial statements include the accounts of
Jeri-Jo Knitwear, Inc. (the "Company") and Jamie Scott, Inc., a company
affiliated through common ownership (collectively, the "Companies"). All
significant intercompany transactions and balances have been eliminated.
Use of Estimates
Management uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses.
Inventories
Inventories, which are comprised of finished goods, are valued at the lower
of cost (first-in, first-out) or market.
Depreciation and Amortization
Property and equipment are recorded at cost. Depreciation is calculated
using straight-line and accelerated methods over the estimated useful lives of
the assets. Leasehold improvements are amortized over the term of the lease.
Income Taxes
Jeri-Jo Knitwear, Inc. has elected S Corporation status for Federal income
tax purposes only. Under this election, taxable income is reportable by the
shareholder on his individual income tax return, and no provision is made for
Federal income tax. Provisions are made for New Jersey corporation business
tax, New York State franchise tax and New York City general corporation tax.
Jamie Scott, Inc. has elected S Corporation status for Federal, New Jersey
and New York State income tax purposes. Under these elections, its taxable
income is reportable by the shareholders on their individual income tax
returns, and no provision is made for Federal income tax. Provisions are made
for New Jersey S Corporation business tax, New York State S Corporation
franchise tax and New York City general corporation tax.
F-59
<PAGE>
JERI-JO KNITWEAR, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
2 - PROPERTY AND EQUIPMENT
Property and equipment consists of:
Furniture and equipment $1,590,356
Automobiles 90,913
Leasehold improvements 842,872
----------
2,524,141
Less - Accumulated depreciation
and amortization 1,195,907
----------
$1,328,234
==========
3 - LINE OF CREDIT
The Companies have a line of credit with two banks for $50,000,000, which
includes direct borrowing, acceptance financing and letters of credit.
Interest is charged at 1% over the prevailing Federal funds rate. The line of
credit is collateralized by a security interest in the Companies' accounts
receivable and inventories. At March 31, 1998 and 1997, there were no
outstanding balances.
There was no borrowings and no interest expense for the three months ended
March 31, 1998 and 1997, respectively.
F-60
<PAGE>
JERI-JO KNITWEAR, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
4 -- COMMON STOCK AND TREASURY STOCK
Common stock consists of the following:
Jeri-Jo Knitwear, Inc., no par value;
200 shares authorized, 10 shares issued $ 21,000
Jamie Scott, Inc., no par value;
200 shares authorized, 30 shares issued 100,000
--------
$121,000
========
Treasury stock at March 31, 1998 consists of 2-1/2 shares of the common
stock of Jeri-Jo Knitwear, Inc., with a cost of $238,250.
5 - MAJOR CUSTOMERS
Sales to one customer for the three months ended March 31, 1998 accounted
for approximately 26.3% of the Companies' net sales. Sales to two customers
for the three months ended March 31, 1997 accounted for approximately 19.1% of
the Companies' net sales.
6 - PENSION PLAN
The Company has a savings and investment plan which qualifies under Section
401(k) of the Internal Revenue Code (the "Code"). The plan allows eligible
employees to voluntarily contribute up to 15% of compensation, limited to the
maximum allowed under the Code. The Company contributes 3% of all eligible
employees' compensation to the plan and matches employee contributions up to
50% of the first 5% of compensation. In addition, the Company may contribute
additional amounts, as determined by the Board of Directors. Pension plan
expense for the three months ended March 31, 1998 and 1997 was $42,000 and
$54,000, respectively.
7 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company occupies warehouse, distribution and office space in Edison,
New Jersey. The premises are owned by a partnership whose partners are
shareholders
F-61
<PAGE>
of the Companies. The partnership's obligation of $1,260,000 at March 31,
1998, incurred in the purchase of the property, is guaranteed by the Company.
The Company entered into a lease agreement with the partnership expiring
December 31, 2001, with a five-year renewal option. The operating lease
requires the Company to pay all costs and expenses related to the property, in
addition to the minimum rentals. Minimum annual rental payments are $396,000.
The Company has also entered into noncancelable operating leases for its
New York City showroom which expire on May 31, 1998. The Company anticipates
entering into a new lease for the same premises. At March 31, 1998,
approximate future minimum rentals through May 31, 1998, exclusive of required
payments for increases in real estate taxes and operating expenses, are
$177,000.
Rent expense for the three months ended March 31, 1998 and 1997 was
$208,817 and $204,605, respectively, of which $98,971 in each period is for
the property leased from the related partnership.
Letters of Credit
At March 31, 1998, open letters of credit totaled approximately
$33,591,000.
8 - CONCENTRATIONS OF CREDIT RISK
The Companies import ladies' apparel, predominantly from the Far East and
Europe. Their customers include a cross section of retailers throughout the
United States.
The Company's total cash includes $4,187,604 held in an uninsured money
market fund at March 31, 1998. In addition, the Companies had $1,823,958 in
four banks at March 31, 1998. Accounts at each bank are insured by the Federal
Deposit Insurance Corporation for up to $100,000.
F-62
<PAGE>
===============================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE SUCH DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES COVERED
BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................................. 1
Risk Factors....................................................... 14
The Acquisitions................................................... 22
Use of Proceeds.................................................... 24
Capitalization..................................................... 25
Unaudited Pro Forma
Financial Information............................................. 26
Selected Financial Data............................................ 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................................................... 35
Business........................................................... 42
Management and Board of Directors.................................. 54
Principal Stockholders............................................. 62
Shares Eligible For Future Sale.................................... 64
Description of Capital Stock....................................... 64
Description of Other Indebtedness.................................. 66
Description of Exchange Notes...................................... 67
Description of Outstanding Notes................................... 87
Exchange Offer..................................................... 88
Certain United States Federal Tax
Considerations................................................... 97
Plan of Distribution.............................................. 101
Legal Matters..................................................... 102
Experts........................................................... 102
Index to Consolidated Financial Statements........................ F-1
</TABLE>
================================================================================
$125,000,000
EXCHANGE OFFER
NORTON MCNAUGHTON, INC.
12 1/2% SENIOR NOTES DUE 2005
------------
PROSPECTUS
------------
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, as amended, the
Registrant has the power to indemnify directors and officers under certain
prescribed circumstances and subject to certain limitations against certain
costs and expenses, including attorney's fees, actually and reasonably incurred
in connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which any of them is a party by reason of
such person's being a director or officer of the Registrant if it is determined
that such person acted in accordance with the applicable standard of conduct set
forth in such statutory provisions.
The Registrant's Certificate of Incorporation contains a provision which
eliminates the personal liability of a director of the Registrant to the
Registrant or to any of its stockholders for monetary damages for a breach of
his fiduciary duty as a director, except in the case where the director breached
his duty of loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment of a dividend or
approved a stock repurchase in violation of Delaware corporate law, or obtained
an improper personal benefit.
The Registrant has entered into indemnification agreements with its directors
and executive officers. These agreements provide that the directors and
executive officers will be indemnified to the fullest possible extent permitted
by Delaware law against all expenses (including attorneys' fees), judgments,
fines, penalties, taxes and settlement amounts paid or incurred by them in any
action or proceeding (including any action by or in the right of the Registrant
or any of its subsidiaries or affiliates), on account of their service as
directors, officers, employees, fiduciaries or agents of the Registrant or any
of its subsidiaries or affiliates, and their service at the request of the
Registrant or any of its subsidiaries or affiliates, as directors, officers,
employees, fiduciaries or agents of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise.
The Registrant maintains liability insurance for its officers and directors,
insuring them against certain losses arising from claims or charges made against
them while acting in their capacities as officers or directors of the
Registrant.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A list of Exhibits required to be filed as part of this Registration Statement
on Form S-4 is listed in the attached Index to Exhibits and is incorporated
herein by reference.
ITEM 22. UNDERTAKINGS.
(A) The undersigned Co-Registrants hereby undertake as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(B) The Co-Registrants undertake that every prospectus: (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a) (3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(C) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Co-Registrants pursuant to the provisions of the Certificate of
Incorporation of the Co-Registrants or the laws of the State of Delaware or
otherwise, the Co-Registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Co-Registrants of expenses incurred or paid by a director, officer or
controlling person of the Co-Registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Co-Registrants
will, unless in the opinion of its counsel the matter has been settled by
II-1
<PAGE>
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(D) The undersigned Co-Registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Co-Registrants pursuant to Rule 424(b) ( l ) or (4) or
497 (h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(E) The undersigned Co-Registrants hereby undertake to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request' and to send the incorporated documents by first class mail or
other equally prompt means. This includes the information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(F) The undersigned Co-Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE>
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby appoints
the agent for service named in the Registration Statement, Sanford Greenberg and
Peter Boneparth as attorneys-in-fact with full power of substitution, severally,
to execute in their respective names and on behalf of the Registrant and each
such person individually and in each capacity stated below, one or more
amendments (including post-effective amendments) to this Registration Statement
as the attorney-in-fact acting in the premises deems appropriate and to file any
such amendment to this Registration Statement with the Securities and Exchange
Commission.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK THE 5TH DAY OF AUGUST, 1998.
NORTON MCNAUGHTON, INC.
By: /s/ Sanford Greenberg
----------------------------
(Sanford Greenberg
Chairman of the Board and
Principal Executive Officer)
NORTON MCNAUGHTON OF SQUIRE, INC.
By: /s/ Sanford Greenberg
----------------------------
(Sanford Greenberg
Chairman of the Board and
Principal Executive Officer)
MISS ERIKA, INC.
By: /s/ Sanford Greenberg
----------------------------
(Sanford Greenberg
Chairman of the Board)
JERI-JO KNITWEAR, INC.
By: /s/ Sanford Greenberg
----------------------------
(Sanford Greenberg
Chairman of the Board)
NORTY'S, INC.
By: /s/ Sanford Greenberg
----------------------------
(Sanford Greenberg
Chairman of the Board and
Principal Executive Officer)
II-3
<PAGE>
NORTON MCNAUGHTON, INC.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Date Signature/Title
- ---- ---------------
Dated: August 5, 1998 /s/ Sanford Greenberg
---------------------------------------------
Sanford Greenberg
Director, Chairman of the Board and Principal
Executive Officer
Dated: August 5, 1998 /s/ Amanda J. Bokman
---------------------------------------------
Amanda J. Bokman
Director and Principal Financial Officer
Dated: August 5, 1998 /s/ Laura Lentini
---------------------------------------------
Laura Lentini
Principal Accounting Officer
Dated: August 5, 1998 /s/ Peter Boneparth
---------------------------------------------
Peter Boneparth
Director
Dated: August 5, 1998 /s/ David M. Blumberg
---------------------------------------------
David M. Blumberg
Director
Dated: August 5, 1998 /s/ Stuart Bregman
---------------------------------------------
Stuart Bregman
Director
Dated: August 5, 1998 /s/ Bradley P. Cost
---------------------------------------------
Bradley P. Cost
Director
Dated: August 5, 1998 /s/ Jerald S. Politzer
---------------------------------------------
Jerald S. Politzer
Director
II-4
<PAGE>
NORTON MCNAUGHTON OF SQUIRE, INC.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Date Signature/Title
- ---- ---------------
Dated: August 5, 1998 /s/ Sanford Greenberg
---------------------------------------------
Sanford Greenberg
Director, Chairman of the Board and Principal
Executive Officer
Dated: August 5, 1998 /s/ Amanda J. Bokman
---------------------------------------------
Amanda J. Bokman
Director and Principal Financial Officer
Dated: August 5, 1998 /s/ Laura Lentini
---------------------------------------------
Laura Lentini
Principal Accounting Officer
Dated: August 5, 1998 /s/ Peter Boneparth
---------------------------------------------
Peter Boneparth
Director
Dated: August 5, 1998 /s/ David M. Blumberg
---------------------------------------------
David M. Blumberg
Director
Dated: August 5, 1998 /s/ Stuart Bregman
---------------------------------------------
Stuart Bregman
Director
Dated: August 5, 1998 /s/ Bradley P. Cost
---------------------------------------------
Bradley P. Cost
Director
Dated: August 5, 1998 /s/ Jerald S. Politzer
---------------------------------------------
Jerald S. Politzer
Director
II-5
<PAGE>
MISS ERIKA, INC.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Date Signature/Title
- ---- ---------------
Dated: August 5, 1998 /s/ Sanford Greenberg
---------------------------------------------
Sanford Greenberg
Director and Chairman of the Board
Dated: August 5, 1998 /s/ Stuart Bregman
---------------------------------------------
Stuart Bregman
Director and Principal Executive Officer
Dated: August 5, 1998 /s/ Amanda J. Bokman
---------------------------------------------
Amanda J. Bokman
Director and Principal Financial Officer
Dated: August 5, 1998 /s/ Laura Lentini
---------------------------------------------
Laura Lentini
Principal Accounting Officer
Dated: August 5, 1998 /s/ Peter Boneparth
---------------------------------------------
Peter Boneparth
Director
Dated: August 5, 1998 /s/ David M. Blumberg
---------------------------------------------
David M. Blumberg
Director
Dated: August 5, 1998 /s/ Bradley P. Cost
---------------------------------------------
Bradley P. Cost
Director
Dated: August 5, 1998 /s/ Jerald S. Politzer
---------------------------------------------
Jerald S. Politzer
Director
II-6
<PAGE>
JERI-JO KNITWEAR, INC.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Date Signature/Title
- ---- ---------------
Dated: August 5, 1998 /s/ Sanford Greenberg
---------------------------------------------
Sanford Greenberg
Director and Chairman of the Board
Dated: August 5, 1998 /s/ Peter Boneparth
---------------------------------------------
Peter Boneparth
Director, Vice Chairman of the Board and Principal
Executive Officer
Dated: August 5, 1998 /s/ Amanda J. Bokman
---------------------------------------------
Amanda J. Bokman
Director and Principal Financial Officer
Dated: August 5, 1998 /s/ Laura Lentini
---------------------------------------------
Laura Lentini
Principal Accounting Officer
Dated: August 5, 1998 /s/ David M. Blumberg
---------------------------------------------
David M. Blumberg
Director
Dated: August 5, 1998 /s/ Stuart Bregman
---------------------------------------------
Stuart Bregman
Director
Dated: August 5, 1998 /s/ Bradley P. Cost
---------------------------------------------
Bradley P. Cost
Director
Dated: August 5, 1998 /s/ Jerald S. Politzer
---------------------------------------------
Jerald S. Politzer
Director
II-7
<PAGE>
NORTY'S, INC.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Date Signature/Title
- ---- ---------------
Dated: August 5, 1998 /s/ Sanford Greenberg
---------------------------------------------
Sanford Greenberg
Director, Chairman of the Board and Principal
Executive Officer
Dated: August 5, 1998 /s/ Amanda J. Bokman
---------------------------------------------
Amanda J. Bokman
Director and Principal Financial Officer
Dated: August 5, 1998 /s/ Laura Lentini
---------------------------------------------
Laura Lentini
Principal Accounting Officer
Dated: August 5, 1998 /s/ Peter Boneparth
---------------------------------------------
Peter Boneparth
Director
Dated: August 5, 1998 /s/ David M. Blumberg
---------------------------------------------
David M. Blumberg
Director
Dated: August 5, 1998 /s/ Stuart Bregman
---------------------------------------------
Stuart Bregman
Director
Dated: August 5, 1998 /s/ Bradley P. Cost
---------------------------------------------
Bradley P. Cost
Director
Dated: August 5, 1998 /s/ Jerald S. Politzer
---------------------------------------------
Jerald S. Politzer
Director
II-8
<PAGE>
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
EXHIBITS
to
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-------------------
NORTON MCNAUGHTON, INC.
- --------------------------------------------------------------------------------
<PAGE>
NORTON MCNAUGHTON, INC.
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1x Agreement of Purchase and Sale made as of the 29th day of August,
1997 by and among Miss Erika, Inc., a Delaware corporation;
Terbem Limited, a British Virgin Islands corporation, Bobst
Investment Corp., a British Virgin Islands corporation, TCRI
Offshore Partners C.V., a Netherlands Antilles corporation and
TCR International Partners L.P., a Delaware limited partnership,
Triumph Capital, L.P. II, a Delaware limited partnership, Stuart
Bregman, Howard Zwilling, Sidney Goldstein, Christian Baillet, ME
Acquisition Corp., a Delaware corporation, and Norton McNaughton,
Inc., a Delaware corporation. Schedules to this Agreement have
been omitted and the Company shall furnish to the Securities and
Exchange Commission a copy of any omitted schedule as
supplemental information upon request.
2.2 Agreement of Purchase and Sale by and among Jeri-Jo Knitwear
Inc., Jamie Scott, Inc., the Stockholders of Jamie Scott, Inc.,
JJ Acquisition Corp. and Norton McNaughton, Inc. dated as of
April 15, 1998 (incorporated herein by reference to Exhibit 2.1
to Registrant's Current Report on Form 8-K filed April 22, 1998).
Schedules to this Agreement have been omitted and the Company
shall furnish to the Securities and Exchange Commission a copy of
any omitted schedule as supplemental information upon request.
3.1 Certificate of Incorporation of Norton McNaughton, Inc., as
amended (incorporated herein by reference to Exhibit 3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
May 5, 1995).
3.2* By-Laws of the Company.
4.1* Specimen form of Common Stock Certificate.
4.2 Rights Agreement between Norton McNaughton, Inc. and American
Stock Transfer and Trust Company dated as of January 19, 1996
(incorporated herein by reference to Exhibit 4.1 to Registrant's
Current Report on Form 8-K filed January 26, 1996).
4.3 Indenture dated as of June 18, 1998 between Norton McNaughton,
Inc., the Subsidiary Guarantors named therein and United States
</TABLE>
1
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
Trust Company of New York, as Trustee (incorporated herein by
reference to Exhibit 4.1 to Registrant's Current Report on Form
8-K filed July 2, 1998).
4.4 Exchange and Registration Rights Agreement dated as of June 18,
1998 among Norton McNaughton, Inc., NatWest Capital Markets
Limited and ING Baring (U.S.) Securities, Inc. (incorporated
herein by reference to Exhibit 4.2 to Registrant's Current Report
on Form 8-K filed July 2, 1998).
5++ Opinion of Haythe & Curley.
10.1***** 1994 Stock Option Plan.
10.1(a) Amended Norton McNaughton, Inc. 1994 Stock Option Plan
(incorporated herein by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
May 4,1996).
10.2** 1994 Employee Stock Purchase Plan.
10.3**** Amended and Restated Employment Agreement dated as of November 4,
1995 between Sanford Greenberg and Norton McNaughton of Squire,
Inc.
10.3(a)+ Amendment dated September 22, 1997 to Amended and Restated
Employment Agreement dated November 4, 1995 between Sanford
Greenberg and Norton McNaughton of Squire, Inc.
10.4**** Amended and Restated Employment Agreement dated as of November 4,
1995 between Norton Sperling and Norton McNaughton of Squire, Inc.
10.4(a) Separation Agreement between Norton McNaughton of Squire, Inc.
and Norton Sperling dated May 3, 1997 (incorporated herein by
reference to Exhibit 10.1 to the Registrant's Current Report on
Form 8-K filed May 9, 1997).
10.4(b)xx Amendment dated November 25, 1997 to Separation Agreement dated
May 3, 1997 between Norton McNaughton of Squire, Inc. and Norton
Sperling.
10.5 Letter Agreement dated January 31, 1996 terminating Jay
</TABLE>
2
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
Greenberg's Employment Agreement with Norton McNaughton of
Squire, Inc. dated as of November 5, 1993 (incorporated herein by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended February 3, 1996).
10.5(a) Consulting Agreement dated January 19, 1996 between Norton
McNaughton of Squire, Inc. and Jay Greenberg (incorporated herein
by reference to Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended February 3, 1996).
10.5(b) Separation Agreement between Jay Greenberg and Norton McNaughton
of Squire, Inc. dated May 2, 1997 (incorporated herein by
reference to Exhibit 10 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended May 3, 1997).
10.6* Amended and Restated Employment Agreement dated as of November 5,
1993 between Andrew Miller and Norton McNaughton of Squire, Inc.
10.6(a)+ Separation Agreement between Andrew Miller and Norton McNaughton
of Squire, Inc. dated December 17, 1997.
10.7* Amended and Restated Employment Agreement dated as of November 4,
1993 between Howard Greenberg and Norton McNaughton of Squire,
Inc.
10.7(a)xx 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.
10.8* Employment Agreement dated as of November 4, 1993 between Amanda
J. Bokman and Norton McNaughton of Squire, Inc.
10.8(a) Amendment dated April 1, 1995 to Employment Agreement as of
November 4, 1993, between Amanda J. Bokman and Norton McNaughton
of Squire, Inc. (incorporated herein by reference to Exhibit 10
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended May 5, 1995).
10.8(b)xx Amendment dated October 22, 1997 to the Employment Agreement
dated November 4, 1993 between Norton McNaughton of Squire, Inc.
and Amanda J. Bokman.
</TABLE>
3
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.9 Employment Agreement dated April 30, 1997 between Norton
McNaughton of Squire, Inc. and Peter Boneparth (incorporated
herein by reference to Exhibit 10 to the Registrant's Current
Report on Form 8-K filed May 9, 1997).
10.10 Guaranty dated as of April 15, 1998 made by Norton McNaughton,
Inc. in favor of Jeri-Jo Knitwear Inc., Jamie Scott, Inc., Susan
Schneider, Leslie Schneider and Scott Schneider (incorporated
herein by reference to Exhibit 10.1 to Registrant's Current
Report on Form 8-K filed April 22, 1998).
10.11x Financing Agreement dated as of September 25, 1997 by and among
Norton McNaughton, Inc., Norton McNaughton of Squire, Inc., Miss
Erika, Inc., the Financial Institutions from time to time party
thereto, NationsBanc Commercial Corporation and The CIT
Group/Commercial Services, Inc.
10.11(a) First Amendment dated as of November 21, 1997 to Financing
Agreement dated as of September 25, 1997 among Norton McNaughton,
Inc., Norton McNaughton of Squire, Inc., Miss Erika, Inc., the
Lenders from time to time party thereto, NationsBanc Commercial
Corporation, as collateral agent for the Lenders, and The CIT
Group/Commercial Services, Inc., as administrative agent for the
Lenders (incorporated herein by reference to Exhibit 10.3 to
Registrant's Current Report on Form 8-K filed July 2, 1998).
10.11(b) Second Amendment dated as of January 30, 1998 to Financing
Agreement dated as of September 25, 1997 among Norton McNaughton,
Inc., Norton McNaughton of Squire, Inc., Miss Erika, Inc., the
Lenders from time to time party thereto, NationsBanc Commercial
Corporation, as collateral agent for the Lenders, and The CIT
Group/Commercial Services, Inc., as administrative agent for the
Lenders (incorporated herein by reference to Exhibit 10.4 to
Registrant's Current Report on Form 8-K filed July 2, 1998).
10.11(c) Third Amendment, dated as of June 12, 1998, to the Financing
Agreement, dated as of September 25, 1997, as amended, by and
among Norton McNaughton, Inc., Norton McNaughton of Squire, Inc.,
Miss Erika, Inc., the Lenders from tine to time party thereto,
NationsBanc Commercial Corporation and The CIT Group/Commercial
Services, Inc. (incorporated herein by
</TABLE>
4
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended May 2,1998).
10.11(d) Fourth Amendment dated as of June 18, 1998 to Financing Agreement
dated as of September 25, 1997 among Norton McNaughton, Inc.,
Squire, Miss Erika, the Lenders from time to time party thereto,
., Norton McNaughton of Squire, Inc., Miss Erika, Inc., the
Lenders from time to time party thereto, NationsBanc Commercial
Corporation, as collateral agent for the Lenders, and The CIT
Group/Commercial Services, Inc., as administrative agent for the
Lenders (incorporated herein by reference to Exhibit 10.5 to
Registrant's Current Report on Form 8-K filed July 2, 1998).
10.12x Factoring Agreement entered into between Miss Erika, Inc. and
Nationsbanc Commercial Corporation dated September 25, 1997.
10.13x Amended and Restated Factoring Agreement entered into between
Norton McNaughton of Squire, Inc. and NationsBanc Commercial
Corporation dated September 25, 1997.
10.14* Pledge Agreement dated as of January 14, 1994 made by Sanford
Greenberg in favor of Norton McNaughton of Squire, Inc.
10.14(a)*** First Amendment to Pledge Agreement dated July 15, 1994, amending
and supplementing the Pledge Agreement dated as of January 14,
1994 made by Sanford Greenberg in favor of Norton McNaughton of
Squire, Inc.
10.14(b) Second Amendment to Pledge Agreement dated March 27, 1995,
amending and supplementing the Pledge Agreement dated as of
January 14, 1994 made by Sanford Greenberg in favor of Norton
McNaughton of Squire, Inc. (incorporated herein by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended May 5, 1995).
10.15* Pledge Agreement dated as of January 14, 1994 made by Norton
Sperling in favor of Norton McNaughton of Squire, Inc.
10.16*** First Amendment to Pledge Agreement dated July 15, 1994, amending
and supplementing the Pledge Agreement dated as of January 14,
1994 made by Norton Sperling in favor of Norton McNaughton of
Squire, Inc.
</TABLE>
5
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.16(a) Second Amendment to Pledge Agreement dated March 27, 1995,
amending and supplementing the Pledge Agreement dated as of
January 14, 1994 made by Norton Sperling in favor of Norton
McNaughton of Squire, Inc. (incorporated herein by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended May 5, 1995).
10.17* Pledge Agreement dated as of January 14, 1994 made by Jay
Greenberg in favor of Norton McNaughton of Squire, Inc.
10.17(a)*** First Amendment to Pledge Agreement dated July 15, 1994, amending
and supplementing the Pledge Agreement dated as of January 14,
1994 made by Jay Greenberg in favor of Norton McNaughton of
Squire, Inc.
10.17(b) Second Amendment to Pledge Agreement dated March 27, 1995,
amending and supplementing the Pledge Agreement dated as of
January 14, 1994 made by Jay Greenberg in favor of Norton
McNaughton of Squire, Inc. (incorporated herein by reference to
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended May 5, 1995).
10.18* Pledge Agreement dated as of January 14, 1994 made by Andrew
Miller in favor of Norton McNaughton of Squire, Inc.
10.18(a)*** First Amendment to Pledge Agreement dated July 15, 1994, amending
and supplementing the Pledge Agreement dated as of January 14,
1994 made by Andrew Miller in favor of Norton McNaughton of Squire,
Inc.
10.18(b) Second Amendment to Pledge Agreement dated March 27, 1995,
amending and supplementing the Pledge Agreement dated as of
January 14, 1994 made by Andrew Miller in favor of Norton
McNaughton of Squire, Inc. (incorporated herein by reference to
Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended May 5, 1995.
10.19* Pledge Agreement dated as of January 14, 1994 made by Howard
Greenberg in favor of Norton McNaughton of Squire, Inc.
10.19(a)*** First Amendment to Pledge Agreement dated July 15, 1994, amending
and supplementing the Pledge Agreement dated as of
</TABLE>
6
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
January 14, 1994 made by Howard Greenberg in favor of Norton
McNaughton of Squire, Inc.
10.19(b) Second Amendment to Pledge Agreement dated March 27, 1995,
amending and supplementing the Pledge Agreement dated as of
January 14, 1994 made by Howard Greenberg in favor of Norton
McNaughton of Squire, Inc. (incorporated herein by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended May 5, 1995).
10.20* Amended and Restated Non-Negotiable Limited Recourse Promissory
Note of Sanford Greenberg dated as of November 5, 1993 payable to
Norton McNaughton of Squire, Inc. in the principal amount of
$920,000.
10.20(a)*** Second Amended and Restated Non-Negotiable Limited Recourse
Promissory Note dated July 15, 1994, amending the Amended and
Restated Non-Negotiable Limited Recourse Promissory Note of
Sanford Greenberg dated as of November 5, 1993 payable to Norton
McNaughton of Squire, Inc. in the principal amount of $920,000.
10.20(b) Third Amended and Restated Non-Negotiable Limited Recourse
Promissory Note dated March 27, 1995 amending the Amended and
Restated Non-Negotiable Limited Recourse Promissory Note of
Sanford Greenberg dated as of November 5, 1993 payable to Norton
McNaughton of Squire, Inc. in the principal amount of $920,000
(incorporated herein by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
May 5, 1995).
10.21* Amended and Restated Non-Negotiable Limited Recourse Promissory
Note of Norton Sperling dated as of November 5, 1993 payable to
Norton McNaughton of Squire, Inc. in the principal amount of
$920,000.
10.21(a)*** Second Amended and Restated Non-Negotiable Limited Recourse
Promissory Note dated July 15, 1994, amending the Amended and
Restated Non-Negotiable Limited Recourse Promissory Note of
Norton Sperling dated as of November 5, 1993 payable to Norton
McNaughton of Squire, Inc. in the principal amount of $920,000
(incorporated herein by reference to Exhibit 10.7 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
</TABLE>
7
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
May 5, 1995).
10.22* Amended and Restated Non-Negotiable Limited Recourse Promissory
Note of Jay Greenberg dated as of November 5, 1993 payable to
Norton McNaughton of Squire, Inc. in the principal amount of
$920,000.
10.22(a)*** Second Amended and Restated Non-Negotiable Limited Recourse
Promissory Note dated July 15, 1994, amending the Amended and
Restated Non-Negotiable Limited Recourse Promissory Note of Jay
Greenberg dated as of November 5, 1993 payable to Norton
McNaughton of Squire, Inc. in the principal amount of $920,000.
10.22(b) Third Amended and Restated Non-Negotiable Limited Recourse
Promissory Note dated March 27, 1995 amending the Amended and
Restated Non-Negotiable Limited Recourse Promissory Note of Jay
Greenberg dated as of November 5, 1993 payable to Norton
McNaughton of Squire, Inc. in the principal amount of $920,000
(incorporated herein by reference to Exhibit 10.8 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
May 5, 1995).
10.23* Amended and Restated Non-Negotiable Limited Recourse Promissory
Note of Andrew Miller dated as of November 5, 1993 payable to
Norton McNaughton of Squire, Inc. in the principal amount of
$120,000.
10.23(a)*** Second Amended and Restated Non-Negotiable Limited Recourse
Promissory Note dated July 15, 1994, amending the Amended and
Restated Non-Negotiable Limited Recourse Promissory Note of
Andrew Miller dated as of November 5, 1993 payable to Norton
McNaughton of Squire, Inc. in the principal amount of $120,000.
10.23(b) Third Amended and Restated Non-Negotiable Limited Recourse
Promissory Note dated March 27, 1995 amending the Amended and
Restated Non-Negotiable Limited Recourse Promissory Note of
Andrew Miller dated as of November 5, 1993 payable to Norton
McNaughton of Squire, Inc. in the principal amount of $120,000
(incorporated herein by reference to Exhibit 10.9 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
May 5, 1995).
10.24* Amended and Restated Non-Negotiable Limited Recourse
</TABLE>
8
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
Promissory Note of Howard Greenberg dated as of November 5, 1993
payable to Norton McNaughton of Squire, Inc. in the principal
amount of $120,000.
10.24(a)*** Second Amended and Restated Non-Negotiable Limited Recourse
Promissory Note dated July 15, 1994, amending the Amended and
Restated Non-Negotiable Limited Recourse Promissory Note of
Howard Greenberg dated as of November 5, 1993 payable to Norton
McNaughton of Squire, Inc. in the principal amount of $120,000.
10.24(b) Third Amended and Restated Non-Negotiable Limited Recourse
Promissory Note dated March 27, 1995 amending the Amended and
Restated Non-Negotiable Limited Recourse Promissory Note of
Howard Greenberg dated as of November 5, 1993 payable to Norton
McNaughton of Squire, Inc. in the principal amount of $120,000
(incorporated herein by reference to Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
May 5, 1995).
10.25* Form of Indemnification Agreement with Directors and Executive
Officers.
10.26* Agreement dated March 17, 1993 between Norton McNaughton of
Squire, Inc. and Toni-Linda Productions, Inc., as amended
December 15, 1993.
10.26(a)**** Amendment dated November 7, 1995 to Agreement dated March 17,
1993 between Norton McNaughton of Squire, Inc. and Toni-Linda
Productions, Inc., now known as Cutting Edge Services, Inc.
10.27* Sublease Agreement dated January 17, 1994 between Norton
McNaughton of Squire, Inc. and Toni-Linda Productions, Inc.
10.27(a)**** Amendment dated November 7, 1995 to Sublease Agreement dated
January 17, 1994 between Norton McNaughton of Squire, Inc. and
Toni-Linda Productions, Inc., now known as Cutting Edge Services,
Inc.
10.28* Limited Guaranty dated December 30, 1993 made by Norton
McNaughton of Squire, Inc. in favor of Braun Management Inc.
10.28(a)**** Amendment dated November 7, 1995 to Limited Guaranty dated
</TABLE>
9
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
December 30, 1993 made by Norton McNaughton of Squire, Inc. in
favor of Braun Management Inc.
10.29* Agreement dated January 7, 1993 between Norton McNaughton of
Squire, Inc. and Railroad Enterprises, Inc.
10.30 6.00% Promissory Note of Railroad Enterprises, Inc. dated May 1,
1996 payable to Norton McNaughton of Squire, Inc., in the
principal amount of $300,000 (incorporated herein by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended May 4, 1996).
10.31* Guaranty dated May 19, 1992 made by Norton McNaughton of Squire,
Inc. in favor of 5 Empire Boulevard Associates.
10.32* Agreement dated February 1, 1993 between Norton McNaughton of
Squire, Inc. and May Company.
10.33* Lease Agreement dated December 7, 1993 between Gettinger
Associates and Norton McNaughton of Squire, Inc.
10.34* Lease Agreement dated October 4, 1991 between 1400 Broadway
Associates and McNaughton Affiliates Inc.
10.35* Lease Agreement dated April 30, 1993 between The Arsenal Company
and Norton McNaughton of Squire, Inc.
10.36 Lease Agreement dated February 1, 1995 between Norton McNaughton
of Squire, Inc. and The Arsenal Company (incorporated herein by
reference to Exhibit 10 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended February 3, 1995).
10.36(a) Cancellation Agreement between The Arsenal Company, LLC and
Norton McNaughton of Squire, Inc. dated April 30, 1997
(incorporated herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
May 3, 1997).
10.37**** Split Dollar Agreement dated March 8, 1994 between Norton
McNaughton, Inc. and Northwestern Mutual Life Insurance Company
for Sanford Greenberg.
</TABLE>
10
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.38**** Split Dollar Agreement dated March 8, 1994 between Norton
McNaughton, Inc. and Northwestern Mutual Life Insurance Company
for Norton Sperling.
10.39**** Split Dollar Agreement dated March 8, 1994 between Norton
McNaughton, Inc. and Northwestern Mutual Life Insurance Company
for Jay Greenberg.
10.40 5.96% Non-Negotiable Promissory Note between Jay Greenberg and
Norton McNaughton of Squire, Inc. dated December 1, 1996 in the
principal amount of $50,000 (incorporated herein by reference to
Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended February 1, 1997).
10.41xxx ME Acquisition Corp. Bonus Plan for Senior Executives.
10.42xxx Employment Agreement dated August 29, 1997 between ME Acquisition
Corp. and Stuart Bregman.
10.43xxx Employment Agreement dated August 29, 1997 between ME Acquisition
Corp. and Howard Zwilling.
10.44xxx Employment Agreement dated August 29, 1997 between ME Acquisition
Corp. and Roberta Ciacci.
10.45xxx Employment Agreement dated August 29, 1997 between ME Acquisition
Corp and Samuel Glaser.
10.46xxx Employment Agreement dated August 29, 1997 between ME Acquisition
Corp. and Elizabeth Moser.
10.47xxx Employment Agreement dated August 29, 1997 between ME Acquisition
Corp. and Kenny Tse.
10.48+ Agency Agreement dated October 9, 1997 between The Ozer Group LLC
and Norty's, Inc.
10.49+ Consulting Agreement dated November 7, 1997 between DJM Asset
Management, Inc. and Norton McNaughton of Squire, Inc.
10.50xxxx Norton McNaughton, Inc. Executive Stock Option Plan.
10.51+ Lease Agreement dated December 16, 1993 between Gettinger
</TABLE>
11
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
Associates, LP and Miss Erika, Inc.
10.52+ Lease Agreement dated April 1, 1975 between Empire Carpet
Corporation and Miss Erika, Inc.
10.52(a)+ Amendment dated January 17, 1978 to Lease Agreement dated April
1, 1975 between Empire Carpet Corporation and Miss Erika, Inc.
10.52(b)+ Second Amendment dated February 17, 1981 to Lease Agreement dated
April 1, 1975 between Empire Carpet Corporation and Miss Erika,
Inc.
10.52(c)+ Third Amendment dated March 5, 1982 to Lease Agreement dated
April 1, 1975 between Empire Carpet Corporation and Miss Erika,
Inc.
10.52(d)+ Fourth Amendment dated August 15, 1983 to Lease Agreement dated
April 1, 1975 between Empire Carpet Corporation and Miss Erika,
Inc.
10.52(e)+ Lease Modification and Extension Agreement dated January 24, 1985
between Teterboro Associates and Miss Erika, Inc. to Lease
Agreement dated April 1, 1975.
10.52(f)+ Amendment to Lease dated August 8, 1985 to Lease Modification and
Extension Agreement dated January 24, 1985 between Teterboro
Associates and Miss Erika, Inc.
10.52(g)+ Second Lease Modification and Extension Agreement dated December
18, 1986 to the Amended Lease Modification and Extension
Agreement dated August 8, 1985 between Teterboro Associates and
Miss Erika, Inc.
10.52(h)+ Third Lease Modification and Extension Agreement dated January
18, 1989 to the Amended Lease Modification and Extension
Agreement dated August 8, 1985 between Teterboro Associates and
Miss Erika, Inc.
10.52(i)+ Fourth Lease Modification and Extension Agreement dated June,
1991 to the Amended Lease Modification and Extension Agreement
dated August 8, 1985 between Teterboro Associates and Miss Erika,
Inc.
</TABLE>
12
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.52(j)+ Fifth Lease Modification and Extension Agreement dated May 30,
1995 to the Amended Lease Modification and Extension Agreement
dated August 8, 1985 between Teterboro Associates and Miss Erika,
Inc.
10.52(k)+ Sixth Lease Modification and Extension Agreement dated March 5,
1997 to the Amended Lease Modification and Extension Agreement
dated August 8, 1985 between Teterboro Associates and Miss Erika,
Inc.
10.53(a) Form of Employment Agreement between JJ Acquisition Corp. and
Susan Schneider (incorporated herein by reference to Exhibit 10.2
to Registrant's Current Report on Form 8-K filed April 22, 1998).
10.53(b) Form of Employment Agreement between JJ Acquisition Corp. and
Leslie Schneider (incorporated herein by reference to Exhibit
10.2 to Registrant's Current Report on Form 8-K filed April 22,
1998).
10.53(c) Form of Employment Agreement between JJ Acquisition Corp. and
Scott Schneider (incorporated herein by reference to Exhibit 10.2
to Registrant's Current Report on Form 8-K filed April 22, 1998).
10.54 Lease dated June 18, 1998 between 80 Carter Drive Associates and
Jeri-Jo Knitwear, Inc. (incorporated herein by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K filed
July 2, 1998).
10.55 Guaranty of Lease dated June 18, 1998 by Norton McNaughton, Inc.
in favor of 80 Carter Drive Associates (incorporated herein by
reference to Exhibit 10.2 to Registrant's Current Report on Form
8-K filed July 2, 1998).
10.56 Amended and Restated Financing Agreement dated as of June 18,
1998 among Norton McNaughton, Inc., Norton McNaughton of Squire,
Inc., Miss Erika, Inc., Jeri-Jo Knitwear, Inc., the Lenders from
time to time party thereto, NationsBanc Commercial Corporation,
as collateral agent for the Lenders, and The CIT Group/Commercial
Services, Inc., as administrative agent for the Lenders and Fleet
Bank N.A., as documentation agent for the
</TABLE>
13
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
Lenders (incorporated herein by reference to Exhibit 10.6 to
Registrant's Current Report on Form 8-K filed July 2, 1998).
10.57 Norton McNaughton, Inc. 1998 Long Term Incentive Plan
(incorporated herein by reference to the Registrant's
Registration Statement on Form S-8 No. 333-60881).
10.58 Norton McNaughton, Inc. Stock Option Plan for Non-employee
Directors (incorporated herein by reference to the Registrant's
Registration Statement on Form S-8 No. 333-60881).
10.59 Norton McNaughton, Inc. Option Bonus Plan for Senior Executives
of JJ Acquisition Corp. (incorporated herein by reference to the
Registrant's Registration Statement on Form S-8 No. 333-60881).
10.60 Lease dated June 1, 1998 by and between Gettinger Associates and
Jeri-Jo Knitwear, Inc. (incorporated herein by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K/A filed
August 6, 1998).
12.1++ Statement re: Computation of Ratio of Earnings to Fixed Charges.
21++ Subsidiaries of the Registrant.
23.1++ Consent of Ernst & Young LLP.
23.2++ Consent of Ernst & Young LLP.
23.3++ Consent of PricewaterhouseCoopers LLP.
23.4++ Consent of Friedman Alpren & Green LLP.
23.5 Consent of Haythe & Curley (contained in Exhibit 5 hereto)
27++ Financial Data Schedule (For SEC use only).
99++ Form of Letter of Transmittal.
</TABLE>
14
<PAGE>
Norton McNaughton, Inc.
Exhibit Index (continued)
* Incorporated herein by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 No. 33-74200.
** Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 No. 33-80370.
*** Incorporated herein by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the period ended November 4, 1994.
**** Incorporated herein by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the period ended November 4, 1995.
***** Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 No. 33-92252.
x Incorporated herein by reference to the Registrant's Current Report on
Form 8-K filed October 15, 1997.
xx Incorporated herein by reference to the Registrant's Current Report on
Form 8-K/A filed December 15, 1997.
xxx Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 No. 333-39049.
xxxx Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 No. 333-29195.
+ Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended November 1, 1997 filed February 17, 1998.
++ Filed herewith.
Exhibits have been included in copies of this Report filed with the
Securities and Exchange Commission. Stockholders of the Registrant will be
provided with copies of these exhibits upon written request to the
Registrant.
15
<PAGE>
Exhibit 5
[Letterhead of Haythe & Curley]
August 5, 1998
Norton McNaughton, Inc.
463 Seventh Avenue, 9th Floor
New York, New York 10018
Norton McNaughton of Squire, Inc.
c/o Norton McNaughton, Inc.
463 Seventh Avenue, 9th Floor
New York, New York 10018
Miss Erika, Inc.
c/o Norton McNaughton, Inc.
463 Seventh Avenue, 9th Floor
New York, New York 10018
Jeri-Jo Knitwear, Inc.
c/o Norton McNaughton, Inc.
463 Seventh Avenue, 9th Floor
New York, New York 10018
Norty's, Inc.
c/o Norton McNaughton, Inc.
463 Seventh Avenue, 9th Floor
New York, New York 10018
Ladies and Gentlemen:
Reference is made to the Registration Statement on Form S-4 (the
"Registration Statement") filed by Norton McNaughton, Inc. (the "Company") and
Norton McNaughton of Squire, Miss Erika, Inc. (f/k/a ME Acquisition Corp.),
Jeri-Jo Knitwear, Inc. (f/k/a JJ Acquisition Corp.) and Norty's, Inc.
(collectively, the "Subsidiary Guarantors") under the Securities Act of 1933, as
amended (the "Securities Act"), in connection with the Company's offer to
exchange (the "Exchange Offer") up to $125,000,000 aggregate principal amount of
its 12 1/2% Senior Notes due 2005 ("Exchange Notes") for an equal principal
amount of its outstanding 12 1/2% Senior Notes due 2005 ("Outstanding Notes")
and the guarantee by the Subsidiary Guarantors of the Exchange Notes. The
Outstanding Notes were issued, and the Exchange Notes are issuable, pursuant to
an Indenture, dated as of June 18, 1998, among the Company, the Subsidiary
Guarantors and United States Trust Company of New York, as Trustee (the
"Indenture"). We have examined the Indenture, the Outstanding Notes, the
<PAGE>
form of the Exchange Notes and such other documents and matters of law as we
have deemed necessary for purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. The Exchange Notes, when executed by the Company and authenticated by
the Trustee in accordance with the provisions of the Indenture, and when issued
in exchange for Outstanding Notes as contemplated in the Registration Statement,
will constitute valid and binding obligations of the Company and will be
entitled to the benefits of the Indenture, subject to applicable bankruptcy,
insolvency, fraudulent transfer or conveyance, moratorium, reorganization or
similar laws affecting the enforcement of creditors' rights generally and
subject to general principles of equity (whether considered in a proceeding at
law or in equity).
2. The guarantees by the Subsidiary Guarantors of the Exchange Notes, when
executed by the Subsidiary Guarantors in accordance with the provisions of the
Indenture and when issued as contemplated in the Registration Statement, will
constitute valid and binding obligations of the Subsidiary Guarantors,
respectively, and will be entitled to the benefits of the Indenture, subject to
applicable bankruptcy, insolvency, fraudulent transfer or conveyance,
moratorium, reorganization or similar laws affecting the enforcement of
creditors' rights generally and subject to general principles of equity (whether
considered in a proceeding at law or in equity).
3. Under existing law, the exchange of the Exchange Notes for the
Outstanding Notes pursuant to the Exchange Offer will not be treated as an
"exchange," or otherwise as a taxable event, for federal income tax purposes.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the prospectus contained therein.
Respectfully submitted,
/s/ Haythe & Curley
<PAGE>
EXHIBIT 12.1
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED
($ IN THOUSANDS) ($ IN THOUSANDS)
------------------------------------ -----------------------------------------------------------------
MAY 2, MAY 2, MAY 3, NOV 1, NOV 1, NOV 2, NOV 4, NOV 4, NOV 5,
1998 1998 1997 1997 1997 1996 1995 1994 1993
(PRO FORMA) (PRO FORMA)
---------- -------- -------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest $ 9,519 $3,815 $ 716 $15,191 $ 2,500 $2,294 $ 1,440 $ 1,341 $2,639
Interest portion of
rent expense 701 562 360 1,506 703 733 597 524 443
------- ------ ------- ------- ------- ------ ------- ------- ------
Fixed Charges $10,220 $4,377 $ 1,076 $16,697 $ 3,203 $3,027 $ 2,037 $ 1,865 $3,082
======= ====== ======= ======= ======= ====== ======= ======= ======
Consolidated pretax income
(loss) from continuing
operations $ 629 $ 986 $(6,261) $(1,267) $(8,105) $2,651 $16,591 $16,233 $4,492
Fixed charges per above 10,220 4,377 1,076 16,697 3,203 3,027 2,037 1,865 3,082
------- ------ ------- ------- ------- ------ ------- ------- ------
Earnings (deficit) (1) $10,849 $5,363 $(5,185) $15,430 $(4,902) $5,678 $18,628 $18,098 $7,574
======= ====== ======= ======= ======= ====== ======= ======= ======
Ratio of Earnings to
Fixed Charges (1) 1.1x 1.2x -- -- -- 1.9x 9.1x 9.7x 2.5x
======= ====== ======= ======= ======= ====== ======= ======= ======
</TABLE>
______________________
(1) The ratio of earnings to fixed charges is not meaningful for periods that
result in a deficit. The deficiency of earnings to fixed charges for the
twenty-six weeks ended May 3, 1997, the pro forma fiscal year ended
November 1, 1997 and the fiscal year ended November 1, 1997 were $6,261,
$1,267 and $8,105, respectively.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Norton McNaughton of Squire, Inc., a New York corporation ("Squire"), is a
wholly-owned subsidiary of the Registrant. Norty's Inc., a Delaware
corporation, is a wholly-owned subsidiary of Squire. Miss Erika, Inc., a
Delaware corporation, is a wholly-owned subsidiary of the Registrant. Jeri-Jo
Knitwear, Inc., a Delaware corporation, is a wholly-owned subsidiary of the
Registrant.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 30, 1998, in the Registration Statement
(Form S-4) and related Prospectus of Norton McNaughton, Inc. for the
registration of $125,000,000 of 12 1/2% senior notes due 2005.
/s/ Ernst & Young LLP
New York, New York
August 5, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 27, 1998, with respect to the combined
financial statements of Jeri-Jo Knitwear Inc. and Affiliate included in the
Registration Statement (Form S-4) and related Prospectus of Norton McNaughton,
Inc. for the registration of $125,000,000 of 12 1/2% senior notes due 2005.
/s/ Ernst & Young LLP
New York, New York
August 5, 1998
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Norton McNaughton, Inc. of our report
dated April 16, 1997, relating to the financial statements of Miss Erika, Inc.,
which appears in such Prospectus. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
New York, New York
August 5, 1998
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 14, 1997, with respect to the combined
financial statements of Jeri-Jo Knitwear Inc. and Affiliate included in the
Registration Statement (Form S-4) and related Prospectus of Norton McNaughton,
Inc. for the registration of $125,000,000 of 12 1/2% senior notes due 2005.
/s/ Friedman, Alpren & Green LLP
New York, New York
August 5, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM S-4
AND IS QUALIFIED IN ITS ENTIRETY BY FEFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> NOV-01-1997 OCT-31-1998
<PERIOD-START> NOV-02-1996 NOV-02-1997
<PERIOD-END> NOV-01-1997 MAY-02-1998
<EXCHANGE-RATE> 1 1
<CASH> 529 160
<SECURITIES> 0 0
<RECEIVABLES> 64,644 69,264
<ALLOWANCES> 0 0
<INVENTORY> 28,590 35,583
<CURRENT-ASSETS> 102,191 112,900
<PP&E> 8,215 9,290
<DEPRECIATION> 2,316 2,951
<TOTAL-ASSETS> 118,762 130,879
<CURRENT-LIABILITIES> 62,879 76,003
<BONDS> 0 0
0 0
0 0
<COMMON> 81 81
<OTHER-SE> 42,082 42,565
<TOTAL-LIABILITY-AND-EQUITY> 118,762 130,879
<SALES> 218,782 147,624
<TOTAL-REVENUES> 218,782 147,624
<CGS> 179,556 118,191
<TOTAL-COSTS> 44,999 24,714
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,500 3,815
<INCOME-PRETAX> (8,105) 986
<INCOME-TAX> (3,400) 515
<INCOME-CONTINUING> (4,705) 471
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,705) 471
<EPS-PRIMARY> (0.63) 0.06
<EPS-DILUTED> (0.63) 0.06
</TABLE>
<PAGE>
Exhibit 99
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
12 1/2% SENIOR NOTES DUE 2005
OF
NORTON MCNAUGHTON, INC.
PURSUANT TO
PROSPECTUS DATED AUGUST , 1998
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON ,
1998, UNLESS EXTENDED. TENDERS OF 12 1/2% SENIOR NOTES DUE 2005 MAY ONLY BE
WITHDRAWN UNDER THE CIRCUMSTANCES DESCRIBED IN THE
PROSPECTUS AND HEREIN.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<CAPTION>
<S> <C>
By Registered or Certified Mail: By Overnight Courier:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 843 Cooper Station 770 Broadway, 13th Floor
New York, New York 10276 New York, New York 10003
Attention: Corporate Trust Services Attention: Corporate Trust Department
By Hand before 4:30 P.M.: By Facsimile:
United States Trust Company of New York United States Trust Company of New York
111 Broadway (212) 780-0592
New York, New York 10006 Attention: Customer Service
Attention: Lower Level Corporate Trust Confirm by Telephone to: (800) 548-6565
Window
</TABLE>
<PAGE>
2
- --------------------------------------------------------------------------------
NAMES(S) AND ADDRESS(ES) OF HOLDER(S)
(PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) APPEAR(S) ON OUTSTANDING NOTES
TENDERED OUTSTANDING NOTES (ATTACH ADDITIONAL SCHEDULE, IF NECESSARY)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
(1) (2) (3)
CERTIFICATE TOTAL PRINCIPAL
NUMBER(S) AMOUNT
(IF ENCLOSING OF OUTSTANDING
CERTIFICATES) NOTES TENDERED
-------------- --------------
-------------- --------------
-------------- --------------
-------------- --------------
-------------- --------------
</TABLE>
THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF THE PROSPECTUS, DATED AUGUST __, 1998
(THE "PROSPECTUS"), OF NORTON MCNAUGHTON, INC., A DELAWARE CORPORATION (THE
"COMPANY"), RELATING TO THE OFFER (THE "EXCHANGE OFFER") OF THE COMPANY, UPON
THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH IN THE PROSPECTUS AND HEREIN
AND THE INSTRUCTIONS HERETO, TO EXCHANGE $1,000 PRINCIPAL AMOUNT OF ITS 12 1/2%
SENIOR NOTES DUE 2005 (THE "EXCHANGE NOTES") FOR EACH $1,000 PRINCIPAL AMOUNT OF
ITS OUTSTANDING 12 1/2% SENIOR NOTES DUE 2005 (THE "OUTSTANDING NOTES"), OF
WHICH $125.0 MILLION AGGREGATE PRINCIPAL AMOUNT IS OUTSTANDING. THE MINIMUM
PERMITTED TENDER IS $1,000 PRINCIPAL AMOUNT OF OUTSTANDING NOTES, AND ALL OTHER
TENDERS MUST BE IN INTEGRAL MULTIPLES OF $1,000.
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION BY
FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
<PAGE>
3
The Exchange Offer will expire at 5:00 p.m., New York City time, on ______
__, 1998 (the "Expiration Date"), unless extended.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE EXCHANGE NOTES PURSUANT TO THE
EXCHANGE OFFER MUST VALIDLY TENDER THEIR OUTSTANDING NOTES TO THE EXCHANGE AGENT
PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE.
This Letter of Transmittal should be used only to exchange the Outstanding
Notes, pursuant to the Exchange Offer as set forth in the Prospectus. This
Letter of Transmittal is to be used (a) if Outstanding Notes are to be
physically delivered to the Exchange Agent or (b) if delivery of Outstanding
Notes is to be made by book-entry transfer to the account maintained by the
Exchange Agent at The Depository Trust Company ("DTC" or the "Book-Entry
Transfer Facility") pursuant to the procedures set forth in the Prospectus under
the caption "The Exchange Offer -- Procedures for Tendering." Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
Holders whose Outstanding Notes are not available or who cannot deliver their
Outstanding Notes and all other documents required hereby to the Exchange Agent
by 5:00 p.m. on the Expiration Date nevertheless may tender their Outstanding
Notes in accordance with the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer - Guaranteed Delivery
Procedures." See Instruction 1.
THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL THE SURRENDER OF
OUTSTANDING NOTES FOR EXCHANGE BE ACCEPTED FROM OR ON BEHALF OF) HOLDERS IN ANY
JURISDICTION IN WHICH THE MAKING OR ACCEPTANCE OF THE EXCHANGE OFFER WOULD NOT
BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION.
All capitalized terms used herein and not defined herein shall have the
meanings ascribed to them in the Prospectus.
HOLDERS WHO WISH TO EXCHANGE THEIR OUTSTANDING NOTES MUST COMPLETE COLUMNS(1)
THROUGH (3) IN THE BOX ENTITLED "DESCRIPTION OF OUTSTANDING NOTES TENDERED" ON
THE PRIOR PAGE, COMPLETE THE BOX BELOW ENTITLED "METHOD OF DELIVERY" AND SIGN
WHERE INDICATED BELOW.
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OUTSTANDING
NOTES TENDERED" AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE
TENDERED THE OUTSTANDING NOTES AND MADE CERTAIN REPRESENTATIONS DESCRIBED IN THE
PROSPECTUS AND HEREIN.
<PAGE>
METHOD OF DELIVERY
[ ] CHECK HERE IF CERTIFICATES FOR TENDERED OUTSTANDING NOTES
ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING
DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT
MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:_______________________________________________
Account Number:__________ Transaction Code Number:___________________________
- --------------------------------------------------------------------------------
[ ] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING
DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY
PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING (SEE INSTRUCTIONS 1 AND 4):
Name(s) of Registered Holder(s):_____________________________________________
Window Ticket Number (if any):_______________________________________________
Date of Execution of Notice of Guaranteed Delivery:__________________________
Name of Eligible Institution which Guaranteed Delivery:______________________
IF DELIVERED BY THE BOOK-ENTRY TRANSFER FACILITY,
PROVIDE THE FOLLOWING INFORMATION:
[ ] The Depository Trust Company
Account Number:_________ Transaction Code Number:____________________________
- --------------------------------------------------------------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE
TEN ADDITIONAL COPIES OF THE PROSPECTUS AND COPIES OF ANY
AMENDMENTS OR SUPPLEMENTS THERETO.
Name:________________________________________________________________________
Address:_____________________________________________________________________
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the principal amount of Outstanding
Notes indicated in the box entitled "Description of Outstanding Notes Tendered."
Subject to, and effective upon, the acceptance for exchange of the Outstanding
Notes tendered hereby, the undersigned hereby irrevocably sells, assigns and
transfers to or upon the order of the Company all right, title and interest in
and to such Outstanding Notes, and hereby irrevocably constitutes and appoints
the Exchange Agent the true and lawful agent and attorney-in-fact of the
undersigned (with full knowledge that said Exchange Agent also acts as the agent
of the Company and as Trustee under the indenture governing the Outstanding
Notes and the Exchange Notes) with respect to such Outstanding Notes, with full
power of substitution (such power of attorney being deemed to be an irrevocable
power coupled with an interest) to (a) deliver certificates representing such
Outstanding Notes, and to deliver all accompanying evidences of transfer and
authenticity to or upon the order of the Company upon receipt by the Exchange
Agent, as the undersigned's agent, of the Exchange Notes to which the
undersigned is entitled upon the acceptance by the Company of such Outstanding
Notes for exchange pursuant to the Exchange Offer, (b) receive all benefits and
otherwise to exercise all rights of beneficial ownership of such Outstanding
Notes, all in accordance with the terms of the Exchange Offer, and (c) present
such Outstanding Notes for transfer on the register for such Outstanding Notes.
The undersigned acknowledges that prior to this Exchange Offer, there has
been no public market for the Outstanding Notes or the Exchange Notes. If a
market for the Exchange Notes should develop, the Exchange Notes could trade at
a discount from their principal amount. The undersigned is aware that the
Company does not intend to list the Exchange Notes on a national securities
exchange and that there can be no assurance that an active market for the
Exchange Notes will develop.
If the undersigned is not a broker-dealer, the undersigned represents that it
is not engaged in, and does not intend to engage in, a distribution of Exchange
Notes. If the undersigned is a broker-dealer that will receive Exchange Notes,
it represents that the Outstanding Notes to be exchanged for Exchange Notes were
acquired as a result of market-making activities or other trading activities and
it acknowledges that it will deliver a prospectus in connection with any resale
of such Exchange Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL TENDERS BE ACCEPTED FROM OR
ON BEHALF OF, HOLDERS OF THE OUTSTANDING NOTES IN ANY JURISDICTION IN WHICH THE
MAKING OF THE OFFER OR ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
LAWS OF SUCH JURISDICTION OR WOULD OTHERWISE NOT BE IN COMPLIANCE WITH ANY
PROVISION OF ANY APPLICABLE SECURITY LAW.
The undersigned represents that (a) it is not an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company or any of the Subsidiary
Guarantors (as defined in the Prospectus), (b) it is not engaged in, and does
not intend to engage in, and has no arrangement or understanding with any person
to participate in, a distribution of the Exchange Notes, and (c) it is acquiring
the Exchange Notes in the ordinary course of business.
The undersigned understands and acknowledges that the Company reserves the
right, in its sole discretion, to purchase or make offers for any Outstanding
Notes that remain outstanding subsequent to the Expiration Date or to terminate
the Exchange Offer and, to the
<PAGE>
2
extent permitted by applicable law, purchase Outstanding Notes in the open
market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers will differ from the terms of the Exchange Offer.
The undersigned hereby represents and warrants that (a) the undersigned
accepts the terms and conditions of the Exchange Offer, (b) the undersigned has
a net long position within the meaning of Rule 14e-4 under the Exchange
Act("Rule 14e-4") equal to or greater than the principal amount of Outstanding
Notes tendered hereby, (c) the tender of such Outstanding Notes complies with
Rule 14e-4 (to the extent that Rule 14e-4 is applicable to such exchange),
(d) the undersigned has full power and authority to tender, exchange, assign and
transfer the Outstanding Notes tendered hereby, and (e) when the same are
accepted for exchange by the Company, the Company will acquire good and
unencumbered title thereto, free and clear of all liens, restrictions, charges
and encumbrances and not subject to any adverse claim or right. The undersigned
will, upon request, execute and deliver any additional documents deemed by the
Exchange Agent or the Company to be necessary or desirable to complete the sale,
assignment and transfer of the Outstanding Notes tendered hereby.
The undersigned agrees that all authority conferred or agreed to be conferred
by this Letter of Transmittal and every obligation of the undersigned hereunder
shall be binding upon the successors, assigns, heirs, executors, administrators,
trustees in bankruptcy and legal representatives of the undersigned and shall
not be affected by, and shall survive, the death or incapacity of the
undersigned.
The undersigned also agrees that, except as stated in the Prospectus, the
Outstanding Notes tendered hereby cannot be withdrawn. The undersigned
understands that tenders of the Outstanding Notes pursuant to any one of the
procedures described in the Prospectus under the caption "The Exchange Offer --
Procedures for Tendering" and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company in accordance with the
terms and subject to the conditions of the Exchange Offer.
The undersigned understands that by tendering Outstanding Notes pursuant to
one of the procedures described in the Prospectus and the instructions there to,
the tendering holder will be deemed to have waived the right to receive any
payment in respect of interest on the Outstanding Notes accrued up to the date
of issuance of the Exchange Notes.
The undersigned recognizes that, under certain circumstances set forth in the
Prospectus, the Company may not be required to accept for exchange any of the
Outstanding Notes tendered. Outstanding Notes not accepted for exchange or
withdrawn will be returned to the undersigned at the address set forth below
unless otherwise indicated under "Special Delivery Instructions" below.
Unless otherwise indicated herein under the box entitled "Special Issuance
Instructions" below, Exchange Notes, and Outstanding Notes not validly tendered
or accepted for exchange, will be issued in the name of the undersigned.
Similarly, unless otherwise indicated under the box entitled "Special Delivery
Instructions" below, Exchange Notes, and Outstanding Notes not validly tendered
or accepted for exchange, will be delivered to the undersigned at the address
shown below the signature of the undersigned. The undersigned recognizes that
the Company has no obligation pursuant to the "Special Issuance Instructions" to
transfer any Outstanding Notes from the name of the registered holder thereof if
the Company does not accept for exchange any of the principal amount of such
Outstanding Notes so tendered.
<PAGE>
3
All questions as to the validity, form, eligibility (including time of
receipt), and withdrawal of the tendered Outstanding Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all
Outstanding Notes not properly tendered or any Outstanding Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any irregularities or
conditions of tender as to particular Outstanding Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in this Letter of Transmittal) will be final and binding. Unless
waived, any defects or irregularities in connection with tenders of Outstanding
Notes must be cured within such time as the Company shall determine. Neither the
Company, the Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Outstanding
Notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of Outstanding Notes will not be deemed to have been made
until such irregularities have been cured or waived. Any Outstanding Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
without cost to such holder by the Exchange Agent to the tendering holders of
Outstanding Notes, unless otherwise provided in this Letter of Transmittal, as
soon as practicable following the Expiration Date.
<PAGE>
4
SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
X
- --------------------------------------------------------------------------------
X
- --------------------------------------------------------------------------------
(SIGNATURE(S) OF HOLDER(S) OR AUTHORIZED SIGNATORY)
Must be signed by the registered holder(s) of Outstanding Notes exactly as
their name(s) appear(s) on certificate(s) for the Outstanding Notes or by
person(s) authorized to become registered holder(s) by endorsements and
documents transmitted with this Letter of Transmittal. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation, agent or other person acting in a fiduciary or representative
capacity, please provide the following information. See Instruction 3.
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT)
Capacity (full title):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
(INCLUDING ZIP CODE)
Area Code and Telephone No.:
- --------------------------------------------------------------------------------
SIGNATURE GUARANTEE
(SEE INSTRUCTION 3)
- --------------------------------------------------------------------------------
(NAME OF ELIGIBLE INSTITUTION GUARANTEEING SIGNATURE(S))
- --------------------------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NO., INCLUDING AREA CODE, OF FIRM)
- --------------------------------------------------------------------------------
(AUTHORIZED SIGNATURE)
- --------------------------------------------------------------------------------
(PRINTED NAME)
- --------------------------------------------------------------------------------
(TITLE)
Date: , 1998
- ------------------------------------
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================
<S> <C>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3, 4 AND 6) (SEE INSTRUCTIONS 3, 4 AND 6)
To be completed ONLY if certificates for To be completed ONLY if certificates for
Outstanding Notes in a principal amount not Outstanding Notes in a principal amount not
exchanged and/or certificates for Exchange exchanged and/or certificates for Exchange
Notes are to be issued in the name of someone Notes are to be sent to someone other than
other than the undersigned, or if Outstanding other than the undersigned at an address
Notes are to be returned by credit to an other than shown above.
account maintained by the Book-Entry Transfer
Facility. Deliver (check appropriate box)
[ ] Exchange Notes to:
Issue (check appropriate box) [ ] Outstanding Notes to:
[ ] Exchange Notes to:
[ ] Outstanding Notes to: Name:
--------------------------------------------
(PLEASE PRINT)
Name:
- -------------------------------------------------- Address:
(PLEASE PRINT) --------------------------------------------
--------------------------------------------
Address:
- --------------------------------------------------
- -------------------------------------------------- --------------------------------------------
ZIP CODE TAXPAYER IDENTIFICATION NUMBER
- --------------------------------------------------
TAXPAYER IDENTIFICATION NUMBER (YOU MUST ALSO COMPLETE
SUBSTITUTE FORM W-9 BELOW.)
(YOU MUST ALSO COMPLETE
SUBSTITUTE FORM W-9 BELOW.)
Credit unaccepted Outstanding Notes tendered by
book-entry transfer to:
[ ] The Depository Trust Company account set
forth below
- --------------------------------------------------
(DTC ACCOUNT NUMBER)
=================================================================================================
</TABLE>
<PAGE>
INSTRUCTIONS FORMING PART OF THE TERMS
AND CONDITIONS OF THE OFFER
AND THE SOLICITATION
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED
DELIVERY PROCEDURES. To be effectively tendered pursuant to the Exchange Offer,
the Outstanding Notes, together with a properly completed Letter of Transmittal
(or facsimile thereof), duly executed by the registered holder thereof, and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent at one of its addresses set forth on the first page of this
Letter of Transmittal. If the beneficial owner of any Outstanding Notes is not
the registered holder, then such person may validly tender his or her
Outstanding Notes only by obtaining and submitting to the Exchange Agent a
properly completed Letter of Transmittal from the registered holder.
OUTSTANDING NOTES SHOULD BE DELIVERED ONLY TO THE EXCHANGE AGENT AND NOT TO
THE COMPANY OR TO ANY OTHER PERSON.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND ALL OTHER REQUIRED DOCUMENTS
TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER.
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE
AGENT BY 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
If a holder desires to tender Outstanding Notes and such holder's Outstanding
Notes are not immediately available or time will not permit such holder's Letter
of Transmittal, Outstanding Notes or other required documents to reach the
Exchange Agent on or before the Expiration Date, such holder's tender may be
effected if:
(a) the tender is made through an Eligible Institution (as defined);
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the holder of the Outstanding Notes, the certificate number
or numbers of such Outstanding Notes and the principal amount of Outstanding
Notes tendered, stating that the tender is being made thereby, and guaranteeing
that, within three business days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s) representing
the Outstanding Notes to be tendered in proper form for transfer or a Book-Entry
Confirmation, as the case may be, and any other documents required by the Letter
of Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) such properly completed and executed Letter of Transmittal (or facsimile
thereof) together with the certificate(s) representing all tendered Outstanding
Notes in proper form for transfer and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within three business days
after the Expiration Date.
2. WITHDRAWAL OF TENDERS. Tendered Outstanding Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date, unless
previously accepted for exchange.
To be effective, a written or facsimile transmission notice of withdrawal
must (a) be received by the Exchange Agent at one of its addresses set forth on
the first page of this Letter of Transmittal prior to 5:00 p.m., New York City
time, on the Expiration Date, unless previously accepted for exchange, (b)
specify the name of the person who tendered the Outstanding Notes, (c) contain
the description of the Outstanding Notes to be withdrawn, the certificate
numbers shown on the particular certificates evidencing such Outstanding Notes
and the aggregate principal amount represented by such Outstanding Notes and (d)
be signed by the holder of such Outstanding Notes in the same manner as the
original signature appears on this Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence sufficient to have the
Trustee with respect to the Outstanding Notes register the transfer of such
Outstanding Notes into the name of the holder withdrawing the tender. The
signature(s) on the notice of withdrawal must be guaranteed by an Eligible
Institution unless such Outstanding Notes have been tendered (a) by a registered
holder of Outstanding Notes who has not completed either the box
entitled"Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" on this Letter of Transmittal or (b) for the account of an
Eligible Institution. All questions as to the validity, form and
eligibility(including time of receipt) of such withdrawal notices shall be
determined by the Company, whose determination shall be final and binding on all
parties. If the Outstanding
<PAGE>
2
Notes to be withdrawn have been delivered or otherwise identified to the
Exchange Agent, a signed notice of withdrawal is effective immediately upon
receipt by the Exchange Agent of a written or facsimile transmission notice of
withdrawal even if physical release is not yet effected. In addition, such
notice must specify, in the case of Outstanding Notes tendered by delivery of
certificates for such Outstanding Notes, the name of the registered holder (if
different from that of the tendering holder) to be credited with the withdrawn
Outstanding Notes. Withdrawals may not be rescinded, and any Outstanding Notes
withdrawn will thereafter be deemed not validly tendered for purposes of the
Exchange Offer. However, properly withdrawn Outstanding Notes may be retendered
by following one of the procedures described under "The Exchange Offer --
Procedures for Tendering" in the Prospectus at any time on or prior to the
applicable Expiration Date.
3. SIGNATURES ON THIS LETTER OF TRANSMITTAL, BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the
registered holder(s) of the Outstanding Notes tendered hereby, the signature
must correspond exactly with the name(s) as written on the face of the
certificates without any change whatsoever.
If any Outstanding Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any Outstanding Notes tendered hereby are registered in different names on
several certificates, it will be necessary to complete, sign and submit as many
separate copies of this Letter of Transmittal as there are different
registrations of certificates.
When this Letter of Transmittal is signed by the registered holder or holders
specified herein and tendered hereby, no endorsements of certificates or
separate bond powers are required unless Exchange Notes are to be issued, or
certificates for any untendered principal amount of Outstanding Notes are to be
reissued, to a person other than the registered holder.
If this Letter of Transmittal is signed by a person other than the registered
holder(s) of any certificate(s) specified herein, such certificates(s) must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name(s) of the registered holder(s) appear(s) on the
certificate(s).
If this Letter of Transmittal or a Notice of Guaranteed Delivery or any
certificates or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and unless waived by the Company, evidence satisfactory to the Company
of their authority so to act must be submitted with this Letter of Transmittal.
Except as described below, signatures on this Letter of Transmittal or a
notice of withdrawal, as the case may be, must be guaranteed by an Eligible
Institution. Signatures on this Letter of Transmittal or a notice of
withdrawal, as the case may be, need not be guaranteed if the Outstanding Notes
tendered pursuant hereto are tendered (a) by a registered holder of Outstanding
Notes who has not completed either the box entitled "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" on this Letter
of Transmittal or (b) for the account of an Eligible Institution. In the event
that signatures on this Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by a firm
which is a member of a registered national securities exchange or a member of
the National Association of Securities Dealers, Inc. or by a commercial bank or
trust company having an office or correspondent in the United States (each as
"Eligible Institutions").
Endorsements on certificates for Outstanding Notes or signatures on bond
powers required by this Instruction 3 must be guaranteed by an Eligible
Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders should
indicate in the applicable box the name and address to which certificates for
Exchange Notes and/or substitute certificates evidencing Outstanding Notes for
the principal amounts not exchanged are to be issued or sent, if different from
the name and address of the person signing this Letter of Transmittal. In the
case of issuance in a different name, the employer identification or social
security number of the person named must also be indicated. If no
<PAGE>
3
such instructions are given, any Outstanding Notes not exchanged will be
returned to the name and address of the person signing this Letter of
Transmittal.
5. TAX IDENTIFICATION NUMBER WITHHOLDING. Federal income tax law of the
United States requires that a holder of Outstanding Notes whose Outstanding
Notes are accepted for exchange provide the Company with the holder's correct
taxpayer identification number, which, in the case of a holder who is an
individual, is his or her social security number, or otherwise establish an
exemption from backup withholding. If the Company is not provided with the
correct taxpayer identification number, the exchanging holder of Outstanding
Notes may be subject to a $50 penalty imposed by the Internal Revenue Service
(the "IRS"). In addition, interest on the Exchange Notes acquired pursuant to
the Exchange Offer may be subject to backup withholding in an amount equal to
31% of any interest payment. If withholding occurs and results in an
overpayment of taxes, a refund may be obtained.
To prevent backup withholding, an exchanging holder of Outstanding Notes must
provide his correct taxpayer identification number by completing the Substitute
Form W-9 provided in this Letter of Transmittal, certifying that the taxpayer
identification number provided is correct (or that the exchanging holder of
Outstanding Notes is awaiting a taxpayer identification number) and that either
(a) the exchanging holder has not yet been notified by the IRS that such holder
is subject to backup withholding as a result of failure to report all interest
or dividends or (b) the IRS has notified the exchanging holder that such holder
is no longer subject to backup withholding.
Certain exchanging holders of Outstanding Notes (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding requirements. A foreign individual and other exempt holders other
than foreign individuals (e.g., corporations) should certify, in accordance with
the enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9," to such exempt status on the Substitute Form W-9 provided
in this Letter of Transmittal. Foreign individuals should complete and provide
Form W-8 to indicate their foreign status.
6. TRANSFER TAXES. Holders tendering pursuant to the Exchange Offer will not
be obligated to pay brokerage commissions or fees or to pay transfer taxes with
respect to their exchange under the Exchange Offer unless the box entitled
"Special Issuance Instructions" in this Letter of Transmittal has been
completed, or unless the Exchange Notes are to be issued to any person other
than the holder of the Outstanding Notes tendered for exchange. The Company will
pay all other charges or expenses in connection with the Exchange Offer. If
holders tender Outstanding Notes for exchange and the Exchange Offer is not
consummated, certificates representing the Outstanding Notes will be returned to
the holders at the Company's expense.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the certificate(s) specified in this Letter
of Transmittal.
7. INADEQUATE SPACE. If the space provided herein is inadequate, the
aggregate principal amount of the Outstanding Notes being tendered and the
certificate numbers (if available) should be listed on a separate schedule
attached hereto and separately signed by all parties required to sign this
Letter of Transmittal.
8. PARTIAL TENDERS. Tenders of Outstanding Notes will be accepted only in
integral multiples of $1,000. If tenders are to be made with respect to less
than the entire principal amount of any Outstanding Notes, fill in the principal
amount of Outstanding Notes which are tendered in column (3) in the box on the
cover entitled "Description of Outstanding Notes Tendered." In the case of
partial tenders, new certificates representing the Outstanding Notes in fully
registered form for the remainder of the principal amount of the Outstanding
Notes will be sent to the person(s) signing this Letter of Transmittal, unless
otherwise indicated in the appropriate place on this Letter of Transmittal, as
promptly as practicable after the expiration or termination of the Exchange
Offer.
9. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. Any holder whose Outstanding
Notes have been mutilated, lost, stolen or destroyed should contact the Exchange
Agent at the address indicated above for further instructions.
<PAGE>
4
10. REQUEST FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance or
additional copies of the Prospectus or this Letter of Transmittal may be
obtained from the Exchange Agent at its telephone number set forth on the first
page of this Letter of Transmittal.
<PAGE>
5
- --------------------------------------------------------------------------------
PAYER'S NAME:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================================================
<S> <C> <C>
SUBSTITUTE Part 1--PLEASE PROVIDE YOUR TIN IN ______________________
FORM W-9 THE BOX AT RIGHT AND CERTIFY BY Social Security Number
DEPARTMENT OF THE TREASURY INTERNAL SIGNING AND DATING BELOW. OR
REVENUE SERVICE PAYER'S REQUEST FOR ______________________________
TAXPAYER IDENTIFICATION NUMBER ("TIN") Employer Identification Number
================================================================================================================
</TABLE>
CERTIFICATION -- UNDER PENALTIES OF PERJURY, I CERTIFY THAT:
(1) The number shown on this form is my correct Taxpayer Identification Number
(or I am waiting for a number to be issued to me) and
(2) I am not subject to backup withholding either because: (a) I am exempt from
backup withholding; or (b) I have not been notified by the Internal Revenue
Service (the "IRS") that I am subject to backup withholding as a result of
failure to report all interest or dividends, or (c) the IRS has notified me
that I am no longer subject to backup withholding.
<TABLE>
<CAPTION>
================================================================================================================
<S> <C> <C>
PART II -- AWAITING TIN [ ] PART III -- EXEMPT [ ]
================================================================================================================
</TABLE>
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have
been notified by the IRS that you are subject to backup withholding because of
under-reporting interest or dividends on your tax return. However, if after
being notified by the IRS that you were subject to backup withholding you
received another notification from the IRS stating that you are no longer
subject to backup withholding, do not cross out item (2). If you are exempt
from backup withholding, check the box in Part III.
Signature______________________________________ Date_________________
- --------------------------------------------------------------------------------
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN)
Please fill out your name and address below:
- --------------------------------------------------------------------------------
Name
- --------------------------------------------------------------------------------
Address (Number and street)
- --------------------------------------------------------------------------------
City, State and Zip Code
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU
PURSUANT TO THE OFFER AND THE SOLICITATION. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER OF SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU
CHECKED THE BOX IN PART II OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number to the payer by the time of payment,
31% of all reportable payments made to me will be withheld until I provide a
number and that, if I do not provide my taxpayer identification number within 60
days, such retained amounts shall be remitted to the IRS as backup withholding.
Signature_______________________________ Date_____________
<PAGE>
NOTICE OF GUARANTEED DELIVERY
TO TENDER FOR EXCHANGE
12 1/2% SENIOR NOTES DUE 2005
OF
NORTON MCNAUGHTON, INC.
PURSUANT TO
PROSPECTUS DATED AUGUST __, 1998
This Notice of Guaranteed Delivery or a form substantially equivalent thereto
must be used to accept the offer (the "Exchange Offer") of Norton McNaughton,
Inc., a Delaware corporation (the "Company"), to exchange $1,000 principal
amount of its 12 1/2% Senior Notes due 2005 for each $1,000 principal amount of
its outstanding 12 1/2% Senior Notes due 2005 (the "Outstanding Notes") if (a)
certificates representing the Outstanding Notes are not immediately available or
(b) time will not permit the Outstanding Notes and all other required documents
to reach the Exchange Agent on or prior to the Expiration Date. This form may
be delivered by an Eligible Institution (as defined) by mail or hand delivery,
or transmitted via facsimile, telegram or telex, to the Exchange Agent as set
forth below. All capitalized terms used herein but not defined herein shall
have the meanings ascribed to them in the Prospectus dated August __, 1998 (the
"Prospectus").
THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL THE SURRENDER OF
OUTSTANDING NOTES BE ACCEPTED FROM OR ON BEHALF OF) HOLDERS OF OUTSTANDING NOTES
IN ANY JURISDICTION IN WHICH THE MAKING OR ACCEPTANCE OF THE EXCHANGE OFFER
WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON _______ __,
1998, UNLESS EXTENDED. TENDERS OF 12 1/2% SENIOR NOTES DUE 2005 MAY ONLY BE
WITHDRAWN UNDER THE CIRCUMSTANCES DESCRIBED IN THE PROSPECTUS AND THE LETTER OF
TRANSMITTAL.
<PAGE>
The Exchange Agent for the Exchange Offer:
UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<S> <C>
By Registered or Certified Mail: By Overnight Courier:
United States Trust Company of New York P.O. United States Trust Company of New
Box 843 Cooper Station York
New York, New York 10276
Attention: Corporate Trust Services 770 Broadway, 13th Floor
New York, New York 10003
United States Trust Company of New York Attention: Corporate Trust
111 Broadway Department
New York, New York 10006
Attention: Lower Level Corporate Trust Window By Facsimile:
United States Trust Company of New
York
(212) 780-0592
Attention: Customer Service
Confirm by Telephone to: (800)
548-6565
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR TRANSMISSION
VIA FACSIMILE, TELEGRAM OR TELEX, OTHER THAN AS SET FORTH ABOVE, WILL NOT
CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company, upon the terms and subject
to the conditions set forth in the Prospectus, receipt of which is hereby
acknowledged, the principal amount of Outstanding Notes set forth below,
pursuant to the guaranteed delivery procedures set forth in the Prospectus under
the caption "The Exchange Offer-Guaranteed Delivery Procedures."
Subject to and effective upon acceptance for exchange of the Outstanding
Notes tendered herewith, the undersigned hereby sells, assigns and transfers to
or upon the order of the Company all right, title and interest in and to, and
any and all claims in respect of or arising or having arisen as a result of the
undersigned's status as a holder of, all Outstanding Notes tendered hereby. In
the event of a termination of the Exchange Offer, the Outstanding Notes tendered
pursuant thereto will be returned promptly to the tendering Outstanding
Noteholder.
The undersigned hereby represents and warrants that the undersigned accepts
the terms and conditions of the Prospectus and the Letter of Transmittal, has
full power and authority to tender, sell, assign and transfer the Outstanding
Notes tendered hereby and that the Company will acquire good and unencumbered
title thereto, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The undersigned will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable to complete the sale,
assignment and transfer of the Outstanding Notes tendered.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned and
every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
PLEASE SIGN AND COMPLETE
<TABLE>
<S> <C>
Signature(s) of Registered Holder(s) Address(es):________________________________________________
or Authorized Signatory: ____________________________________________________________
____________________________________________________________ ____________________________________________________________
____________________________________________________________ ____________________________________________________________
Name(s) of Registered Holder(s): Area Code and Telephone No.:
____________________________________________________________ ____________________________________________________________
Certificate No(s). of Outstanding Notes (if available): If Outstanding Notes will be delivered by a
book-entry
transfer, provide the following information:
Transaction Code No.:_______________________________________
Depository Account No.:_____________________________________
</TABLE>
This Notice of Guaranteed Delivery must be signed by the registered holder(s)
of Outstanding Notes exactly as their name(s) appear(s) on the Outstanding Notes
or by person(s) authorized to become registered holder(s) by endorsements and
documents transmitted with this Notice of Guaranteed Delivery. If signature is
by a trustee, guardian, attorney-in-fact, officer of a corporation, executor,
administrator, agent or other representative, such person must provide the
following information:
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
________________________________________________________________________________
Capacity:
________________________________________________________________________________
Address(es):
________________________________________________________________________________
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc. or a commercial
bank or trust company having an office or correspondent in the United States
(each, an "Eligible Institution"), hereby guarantees that, within three business
days from the date of this Notice of Guaranteed Delivery, a properly completed
and validly executed Letter of Transmittal (or a facsimile thereof), together
with Outstanding Notes tendered hereby in proper form for transfer (or
confirmation of the book-entry transfer of such Outstanding Notes into the
Exchange Agent's account at a Book-Entry Transfer Facility) and all other
required documents will be deposited by the undersigned with the Exchange Agent
at one of its addresses set forth above.
<TABLE>
<S> <C>
Name of Firm: ________________________________ _____________________________________
Authorized Signature
Address: _____________________________________
______________________________________________ Name: _______________________________
Title: ______________________________
Area Code and Telephone No.: _________________ Date: _______________________________
</TABLE>
DO NOT SEND OUTSTANDING NOTES WITH THIS FORM. ACTUAL SURRENDER OF OUTSTANDING
NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND
VALIDLY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
<PAGE>
NORTON MCNAUGHTON, INC.
OFFER TO EXCHANGE
12 1/2% SENIOR NOTES DUE 2005
FOR ANY AND ALL OUTSTANDING
12 1/2% SENIOR NOTES DUE 2005
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON _________ __,
1998, UNLESS EXTENDED. TENDERS OF 12 1/2% SENIOR NOTES DUE 2005 MAY ONLY BE
WITHDRAWN UNDER THE CIRCUMSTANCES DESCRIBED IN THE PROSPECTUS AND THE LETTER OF
TRANSMITTAL.
__________ __ , 1998
To Our Clients:
Enclosed for your consideration is the Prospectus dated August __, 1998 (the
"Prospectus") and the related Letter of Transmittal and instructions thereto
(the "Letter of Transmittal") in connection with the offer (the"Exchange Offer")
of Norton McNaughton, Inc., a Delaware corporation ("the Company"), to exchange
$1,000 principal amount of its 12 1/2% Senior Notes due 2005 (the "Exchange
Notes") for each $1,000 principal amount of its outstanding 12 1/2% Senior Notes
due 2005 (the "Outstanding Notes").
Consummation of the Exchange Offer is subject to certain conditions described
in the Prospectus. Capitalized terms used herein but not defined shall have the
meanings ascribed to them in the Prospectus.
WE ARE THE REGISTERED HOLDER OF OUTSTANDING NOTES HELD BY US FOR YOUR
ACCOUNT. A TENDER OF ANY SUCH OUTSTANDING NOTES CAN BE MADE ONLY BY US AS THE
REGISTERED HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL
IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO
TENDER OUTSTANDING NOTES HELD BY US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish us to tender any
or all such Outstanding Notes held by us for your account pursuant to the terms
and conditions set forth in the Prospectus and the Letter of Transmittal. We
urge you to read carefully the Prospectus and the Letter of Transmittal before
instructing us to tender your Outstanding Notes.
Your instructions to us should be forwarded as promptly as possible in order
to permit us to tender Outstanding Notes on your behalf in accordance with the
provisions of the Exchange Offer. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON _______ __, 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED.
Outstanding Notes tendered pursuant to the Exchange Offer may only be
withdrawn under the circumstances described in the Prospectus and the Letter of
Transmittal.
Your attention is directed to the following:
1. The Exchange Offer is for the entire aggregate principal amount of
outstanding Outstanding Notes.
2. Consummation of the Exchange Offer is conditioned upon the conditions set
forth in the Prospectus under the caption "The Exchange Offer --
Conditions."
3. Tendering holders may withdraw their tender at any time until the
Expiration Date.
4. Any transfer taxes incident to the transfer of Outstanding Notes from the
tendering holder to the Company will be paid by the Company, except as
provided in the Prospectus and the instructions to the Letter of
Transmittal.
5. The Exchange Offer is not being made to (nor will the surrender of
Outstanding Notes for exchange be accepted from or on behalf of) holders
of Outstanding Notes in any jurisdiction in which the making or acceptance
of the Exchange Offer would not be in compliance with the laws of such
jurisdiction.
6. The acceptance for exchange of Outstanding Notes validly tendered and not
validly withdrawn and the issuance of Exchange Notes will be made as
promptly as practicable after the Expiration Date. However, subject to
rules promulgated pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company expressly reserves the right to
delay acceptance of any of the Outstanding Notes or to terminate the
Exchange Offer and not accept for purchase any Outstanding Notes not
theretofore accepted if any of the conditions set forth in the Prospectus
under the caption "The Exchange Offer -- Conditions" shall not have been
satisfied or waived by the Company.
7. The Company expressly reserves the right, in its sole discretion, (i) to
delay accepting any Outstanding Notes, (ii) to extend the Exchange Offer,
(iii) to amend the terms of the Exchange Offer or (iv) to terminate the
Exchange Offer. Any delay, extension, amendment or termination will be
followed as promptly as practicable by oral or written notice to the
Exchange Agent, and the Company will mail to the registered holders an
announcement thereof, each prior to 9:00 a.m., New York City time, on the
next business day after the
<PAGE>
2
previously scheduled Expiration Date. Except as otherwise provided in the
Prospectus, withdrawal rights with respect to Outstanding Notes tendered
pursuant to the Exchange Offer will not be extended or reinstated as a
result of an extension or amendment of the Exchange Offer.
8. Consummation of the Exchange Offer may have adverse consequences to non-
tendering Outstanding Note holders, including that the reduced amount of
outstanding Outstanding Notes as a result of the Exchange Offer may
adversely affect the trading market, liquidity and market price of the
Outstanding Notes.
If you wish to have us tender any or all of the Outstanding Notes held by us
for your account, please so instruct us by completing, executing and returning
to us the instruction form that follows.
<PAGE>
NORTON MCNAUGHTON, INC.
INSTRUCTIONS REGARDING THE EXCHANGE OFFER
WITH RESPECT TO THE
12 1/2% SENIOR NOTES DUE 2005
THE UNDERSIGNED ACKNOWLEDGE(S) RECEIPT OF YOUR LETTER AND THE ENCLOSED
DOCUMENTS REFERRED TO THEREIN RELATING TO THE EXCHANGE OFFER OF THE COMPANY.
THIS WILL INSTRUCT YOU WHETHER TO TENDER THE PRINCIPAL AMOUNT OF OUTSTANDING
NOTES INDICATED BELOW HELD BY YOU FOR THE ACCOUNT OF THE UNDERSIGNED PURSUANT TO
THE TERMS OF AND CONDITIONS SET FORTH IN THE PROSPECTUS AND THE LETTER OF
TRANSMITTAL.
Box 1 [ ] Please tender the Outstanding Notes held by you for my account, as
indicated below.
Box 2 [ ] Please do not tender any Outstanding Notes held by you for my
account.
<TABLE>
<S> <C>
Date:__________ __, 1998 ---------------------------------------------------------
---------------------------------------------------------
Principal Amount of Outstanding Notes to be Tendered: Signature(s)
(must be in the principal amount of $1,000 or an integral ---------------------------------------------------------
multiple thereof) ---------------------------------------------------------
Please print name(s) here
--------------------------------------------------------
--------------------------------------------------------
Please type or print address
--------------------------------------------------------
Area Code and Telephone Number
--------------------------------------------------------
Taxpayer Identification or Social Security Number
--------------------------------------------------------
--------------------------------------------------------
My Account Number with You
</TABLE>
* UNLESS OTHERWISE INDICATED, SIGNATURE(S) HEREON BY BENEFICIAL OWNER(S) SHALL
CONSTITUTE AN INSTRUCTION TO THE NOMINEE TO TENDER ALL OUTSTANDING NOTES OF
SUCH BENEFICIAL OWNER(S).
<PAGE>
UNITED STATES TRUST COMPANY OF NEW YORK
114 WEST 47TH STREET, 25TH FLOOR
NEW YORK, NEW YORK 10036-1532
NORTON MCNAUGHTON, INC.
OFFER TO EXCHANGE
12 1/2% SENIOR NOTES DUE 2005
FOR ANY AND ALL OUTSTANDING
12 1/2% SENIOR NOTES DUE 2005
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON _______ __,
1998, UNLESS EXTENDED. TENDERS OF 12 1/2% SENIOR NOTES DUE 2005 MAY ONLY BE
WITHDRAWN UNDER THE CIRCUMSTANCES DESCRIBED IN THE PROSPECTUS AND THE LETTER OF
TRANSMITTAL.
To Brokers, Dealers, Commercial Banks, Trust Companies and other Nominees:
We have been appointed by Norton McNaughton, Inc., a Delaware corporation
(the "Company"), to act as the Exchange Agent in connection with the offer (the
"Exchange Offer") of the Company to exchange $1,000 principal amount of its 12
1/2% Exchange Senior Notes due 2005 for each $1,000 principal amount of its 12
1/2% Senior Notes due 2005 (the "Outstanding Notes"), upon the terms and subject
to the conditions set forth in the Prospectus dated August __, 1998 (the
"Prospectus") and in the related Letter of Transmittal and the instructions
thereto (the "Letter of Transmittal").
Enclosed herewith are copies of the following documents:
1. The Prospectus;
2. The Letter of Transmittal for your use and for the information of your
clients, together with guidelines of the Internal Revenue Service for
Certification of Taxpayer Identification Number on Substitute Form W-9
providing information relating to backup federal income tax withholding;
3. Notice of Guaranteed Delivery to be used to accept the Exchange Offer if
the Notes and all other required documents cannot be delivered to the
Exchange Agent on or prior to the Expiration Date (as defined);
4. A form of letter which may be sent to your clients for whose account you
hold the Notes in your name or in the name of a nominee, with space
provided for obtaining such clients' instructions with regard to the
Exchange Offer; and
5. A return envelope addressed to the Exchange Agent.
PLEASE NOTE THAT THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME ON _________ __, 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED. WE URGE
YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE.
The Company will not pay any fees or commission to any broker or dealer or
other person (other than to the Exchange Agent) for soliciting tenders of the
Notes pursuant to the Exchange Offer. You will be reimbursed for customary
mailing and handling expenses incurred by you in forwarding the enclosed
materials to your clients.
Additional copies of the enclosed materials may be obtained by contacting the
Exchange Agent as provided in the enclosed Letter of Transmittal.
Very truly yours,
United States Trust Company of New York
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY OTHER PERSON THE AGENT OF THE COMPANY OR THE EXCHANGE AGENT OR AUTHORIZE YOU
OR ANY OTHER PERSON TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF
OF ANY OF THEM WITH RESPECT TO THE EXCHANGE OFFER NOT CONTAINED IN THE
PROSPECTUS OR THE LETTER OF TRANSMITTAL.
================================================================================
