<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 0-23440
NORTON MCNAUGHTON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3747173
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
463 SEVENTH AVENUE
NEW YORK, NY 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 947-2960
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of January 28, 1999, was approximately $24,132,285.
As of January 28, 1999, there were 7,428,435 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Registrant's definitive proxy statement for the annual
meeting of stockholders to be held March 15, 1999, which will be filed with the
Commission subsequent to the date hereof pursuant to Regulation 14A of the
Securities Exchange Act of 1934, are incorporated by reference into Part III of
this report.
<PAGE>
PART I
ITEM 1. BUSINESS
Norton McNaughton, Inc. (the "Company") is one of the leading women's and
juniors' branded apparel companies in the United States. Through its wholly-
owned subsidiaries, 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 J.C. Penney, May Company,
Federated, Sears and T.J. Maxx. 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's business is comprised of three groups of product offerings,
Jeri-Jo Knitwear, Inc. ("Jeri-Jo"), Norton McNaughton of Squire, Inc. ("Norton")
and Miss Erika, Inc. ("Miss Erika"); the Company acquired Miss Erika in
September 1997 and Jeri-Jo in June 1998.
. Jeri-Jo. Jeri-Jo designs, sources and distributes 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.
. Norton. Norton designs, sources and distributes 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), Norton
Studio(R) and D.P.S.(R), primarily to department stores and national chains.
. 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 Company will change its name to McNaughton Apparel Group Inc. in February
1999.
INDUSTRY OVERVIEW
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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) numbers 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.
2
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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 in the process of relocating Norton's warehousing and
distribution activities to the southeastern United States, where it will
perform these operations "in-house." The Company is also considering
relocating Miss Erika's warehouse and distribution functions following the
relocation of Norton's functions. 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 has implemented 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 has also implemented 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 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.
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 frequently to fresh full-priced merchandise.
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.
3
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The following table sets forth information concerning the Company's product
lines:
<TABLE>
<CAPTION>
JERI-JO NORTON MISS ERIKA
<S> <C> <C> <C>
BRANDS Energie(R) Norton McNaughton(R) Erika(R)
Currants(R) Maggie McNaughton(R)
Jamie Scott(R) Norton McNaughton(R)
Petite
Norton Studio(R)
D.P.S.(R)
PRODUCTS Moderately-priced Moderately priced Moderately priced
sportswear, women's career and women's casual separates
knitwear and casual wear for casual related separates
juniors' and misses
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 Department Stores
Off-Price Retail Chains Off-Price Retail Chains
Mass Merchants Specialty Stores
</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 lines are 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(R) Petite, 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 line consists of
casual separates, including jumpers, sport dresses, pants, shirts, skirts,
shorts and jackets. The line is designed for the same target consumers as the
Norton McNaughton(R) product line and is 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.
4
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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. 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
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After giving effect to the acquisitions of Miss Erika and Jeri-Jo, 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 net sales to its three largest
customers on a pro forma basis for fiscal 1998 (as if Jeri-Jo had been acquired
as of the beginning of fiscal 1998) and the Company's historical net sales to
its three largest customers in fiscal 1998, fiscal 1997 and fiscal 1996:
<TABLE>
<CAPTION>
PRO FORMA
FISCAL FISCAL FISCAL FISCAL
NAME 1998 1998/(3)/ 1997/(4)/ 1996
---- ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
J.C. Penney....................... 20% 17% 11% 12%
May Company(1).................... 17 16 29 34
Federated(2)...................... 16 15 17 20
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Total......................... 53% 48% 57% 66%
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</TABLE>
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(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.
(3) Reflects the acquisition of Jeri-Jo on June 18, 1998.
(4) Reflects the acquisition of Miss Erika on September 30, 1997.
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SALES AND MERCHANDISING
The Norton, Miss Erika and Jeri-Jo non-commission sales forces of 16, 11 and
11 individuals, respectively, are located in their 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 often times 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 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 merchandising initiatives which it believes
will help it achieve stronger sales to consumers with improved gross margin
levels in its Norton McNaughton 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 Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations-General".
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.
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 1998 and fiscal 1997, approximately 91% and 63%,
respectively, of Norton's product lines were manufactured outside of the United
States. After giving pro forma effect to the Jeri-Jo acquisition during 1998,
approximately 97% of the Company's products were produced outside of the United
States. During fiscal 1999, the Company anticipates that approximately 98% of
its production will be conducted outside of the United States.
The Company attributes the increase in overseas production of its Norton
product lines 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.
In fiscal 1998, the Company engaged the services of approximately 18 sewing
and knitting contractors, and agents in the United States and 68 overseas
contractors and agents in the Caribbean basin, Central America, the Far East,
the Middle East 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.
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The Company contracts for the production of a significant portion of its
merchandise through a network of independent agents located overseas. Although
no long-term contractual obligations exist with any of these agents, in several
cases, the Company has consistently ordered merchandise through these same
agents for over ten years. In addition, the Company is the principal source of
income for substantially all of its agents. Although the agents facilitate the
procurement process, the Company also maintains relationships with many
factories. The development and maintenance of these relationships has provided
the Company with what it believes to be a competitive advantage in the pricing,
scheduling, delivery and quality of the garments produced by these agents and
factories. The Company also sources a large portion of its products directly
with factories, primarily through import programs, largely in China. The total
lead time for production in Far East, Middle Eastern and European countries
ranges from four to ten months. 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.
The Company also sources a large portion of its 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 "807" manufacturing process begins with the receipt in the
Company's warehouse of fabrics from mills, converters and other fabric
suppliers. The fabrics are cut domestically and shipped to the Caribbean basin
and Mexico for assembly. The production process for Caribbean basin and Mexican
sourced products generally takes approximately two to four months.
The Company's quality control personnel monitor the manufacturing processes at
the Company's contractors 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.
DISTRIBUTION AND CUTTING
Finished goods are received into three distribution centers located in New
Jersey, where incoming merchandise undergoes quality assurance procedures and is
stored on racks by style number and color. Shipments are made to retailers in
quantities, at locations and in packaging as specified by these retailers.
Norton has long-term agreements with its distribution contractor (Railroad
Enterprises, Inc.) and its 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) 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 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 year in 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 1998, if the agreements were terminated as of January 1, 1999, Norton
would have been required to pay the distribution contractor approximately
$1,350,000 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 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. Norton's
distribution contractor and
7
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cutting contractor have commenced a lawsuit against the Company and Norton
alleging breach of contract and other claims. See Item 3, "Legal Proceedings."
Following the eventual termination of its distribution agreement, in order to
provide for its distribution needs, Norton is in the process of relocating its
distribution activities to the southeastern United States, where it will perform
this operation "in-house." The Company is also considering relocating Miss
Erika's warehouse and distribution functions following the relocation of
Norton's functions. Norton is currently negotiating a long-term lease for a
warehouse and distribution center which will be built to accommodate Norton's
requirements. Norton estimates that this process will take approximately 12 to
15 months and intends to commence shipments from this facility no earlier than
July 1, 2000. This new leased facility will initially house Norton's
distribution activities and, may eventually, house Miss Erika's distribution
activities. Norton 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.
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 its management information
systems to control its purchasing, shipping, production and financial functions.
The Company also maintains an Electronic Data Interchange (EDI) program, which
facilitates communications between the Company and the majority of its major
retailers, and enables the Company to comply with retailers' specific
requirements. This technology provides for the electronic exchange of purchase
orders, invoices and advanced shipping notices. In addition, the Company bar
codes all of its shipments and merchandise to allow retailers to track receipts
and sales at store registers, monitor inventory levels and provide timely
feedback.
The Company operates separate management information systems for Norton, Miss
Erika and Jeri-Jo. Norton's 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's. During fiscal 1998,
Norton automated its pattern-making, marking and grading areas by implementing
CAD-based application systems and began the implementation of a new client
server financial software package. The Company will continue to improve and
upgrade its management information systems in fiscal 1999, 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 warehouse
management systems and Internet commerce. 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 Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources and The Year 2000 Issue."
BACKLOG
At October 31, 1998, the Company had a total of approximately $135.2 million
of unfilled customer orders compared to approximately $120.9 million at November
1, 1997. The increase was due to the acquisition of Jeri-Jo whose unfilled
orders were $14.3 million at October 31, 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
The Company has approximately 340 full-time employees. None of the Company's
employees are subject to a collective bargaining agreement. The Company
considers its relations with its employees to be good.
8
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ITEM 2. PROPERTIES
The Company conducts its business from the following leased facilities:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
FACILITY LOCATION LEASE EXPIRATION 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
26th Floor January 31, 2004 11,600
28th and 29th Floors January 31, 2004 12,100
Fabric warehouse/(1)/ 3349 Whelan Road December 31, 2003 25,000
East Rutherford, NJ
Administrative offices and 333 North Street December 31, 2007 220,000
finished goods warehouses Teterboro, NJ
80 Carter Drive June 30, 2003 93,100
Edison, NJ
</TABLE>
____________
(1) This warehouse space is leased from the Company's cutting contractor. See
Item 1, "Business - Distribution and Cutting."
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.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On July 14, 1998, Norton's distribution and cutting contractors (collectively,
"Plaintiffs"), filed an action in the New York State Supreme Court for New York
County which, as amended, is entitled Cutting Edge Services, Inc. and Railroad
----------------------------------------
Enterprises, Inc. v. Norton McNaughton of Squire, Inc. and Norton McNaughton,
- -----------------------------------------------------------------------------
Inc. Plaintiffs claim that Norton breached its contracts with them because,
- ----
among other things, Miss Erika and Jeri-Jo failed to use Plaintiffs' services as
allegedly required under Norton's contracts with Plaintiffs. The Company
believes these contracts do not require Miss Erika or Jeri-Jo to utilize
Plaintiffs' services. This action seeks substantial compensatory and punitive
damages and related declaratory relief concerning rights under the contracts.
On December 30, 1998, the Company and Norton moved to dismiss most of
Plaintiffs' claims. The Company believes the claims are meritless and intends
to defend this matter vigorously. There can be no assurance that the Company
will be successful in defending the action or that any determination rendered
would not have a material adverse effect on the business, financial condition,
results of operations and cash flow of the Company.
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 business, financial condition, results of operations and cash flow.
In connection with the Cutting Edge Services, Inc. and Railroad Enterprises,
Inc. lawsuit, as well as other pending litigation during the fourth quarter of
fiscal 1998, the Company established a litigation reserve of $2.5 million. See
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and Notes 9 and 11 of the Company's consolidated
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation of
proxies or otherwise.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ Stock Market ("NASDAQ")
under the symbol NRTY. The table below sets forth the high and low sales prices
as reported by NASDAQ.
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
---------------------- ----------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1st quarter $6.75 $4.88 $9.88 $6.00
2nd quarter $6.50 $4.63 $6.75 $5.38
3rd quarter $8.25 $5.38 $5.88 $4.63
4th quarter $7.50 $3.25 $6.25 $4.63
</TABLE>
The closing sales price of the Company's Common Stock on January 28, 1999
was $4.50 per share.
The Company has never paid cash or other dividends on its Common Stock. The
payment of dividends is within the discretion of the Company's Board of
Directors; however, in view of working capital needs and in order to finance
future growth, it is unlikely that the Company will pay any cash dividends on
its Common Stock in the foreseeable future. Pursuant to the Company's revolving
credit agreement and the indenture governing its senior notes, it may not pay
cash dividends without the prior written consent of the secured lenders and
unsecured noteholders so long as any principal of or interest on loans, letters
of credit or notes issued thereunder shall remain unpaid.
On January 28, 1999, there were approximately 100 record holders of the
Company's Common Stock and, the Company estimates, approximately 500 beneficial
holders of the Company's Common Stock.
In February 1999, the Company will change its name to McNaughton Apparel
Group Inc., and, hereafter, its Common Stock will trade on NASDAQ under the
symbol MAGI.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Fiscal Year Ended/(1)/
------------------------------------------------------------------------------------------
October 31, November 1, November 2, November 4, November 4,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 344,604 $218,782 $220,823 $227,530 $ 168,621
Income (loss) from
operations 13,566/(2)/ (5,773)/(5)/ 4,781 17,813 17,487
Income (loss) before extraordinary
item 448/(2)(3)/ (4,705)/(5)/ 1,524 9,703 9,222/(6)/
Net income (loss) (713)/(2)(3)(4)/ (4,705)/(5)/ 1,524 9,703 8,821/(6)(7)/
BASIC EARNINGS PER SHARE:
Income (loss) before extraordinary
item $ 0.06/(2)(3)/ $ (0.63)/(5)/ $ 0.20 $ 1.21 $ 1.28/(6)/
========== ======== ======== ======== ========
Net income (loss) $ (0.10)/(2)(3)(4)/ $ (0.63)/(5)/ $ 0.20 $ 1.21 $ 1.22/(6)(7)/
========== ======== ======== ======== ========
Weighted average number of common
shares outstanding 7,413 7,488 7,767 8,000 7,084
========== ======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary
item $ 0.06/(2)(3)/ $ (0.63)/(5)/ $ 0.20 $ 1.20 $ 1.27/(6)/
========== ======== ======== ======== ========
Net income (loss) $ (0.10)/(2)(3)(4)/ $ (0.63)/(5)/ $ 0.20 $ 1.20 $ 1.21/(6)(7)/
========== ======== ======== ======== ========
Weighted average common shares
outstanding assuming dilution 7,432 7,488 7,781 8,056 7,123
========== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital $ 103,984 $ 39,312 $ 40,057 $ 43,502 $ 34,586
Total assets 201,589 118,762 61,109 73,524 55,331
Long-term debt, excluding
current portion 125,000 12,000 - - -
Stockholders' equity 41,470 42,163 48,286 50,469 40,300
</TABLE>
(Footnotes on following page)
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. Data for the fiscal year ended November 1,
1997 reflects the acquisition of Miss Erika on September 30, 1997. Data
for the fiscal year ended October 31, 1998 reflects the acquisition of
Jeri-Jo on June 18, 1998. Data for all fiscal years shown include the
results of operations for 52 weeks.
(2) Loss from operations for fiscal 1998 includes a pre-tax charge of $2.5
million, or $0.20 per share on an after-tax basis, representing a reserve
for litigation. (See Item 3, "Legal Proceedings").
(3) Net loss and loss before extraordinary item include an additional provision
for taxes of $600,000, or $0.08 per share, in connection with the proposed
resolution of Federal income tax audits covering fiscal years 1991 through
1996, and the corresponding impact on state and local taxes in these fiscal
years.
(4) Reflects net income after extraordinary item of approximately $1.2 million,
or $0.16 per share. As a result of the repayment of long-term indebtedness
in June 1998, the Company wrote-off the remaining unamortized balance of
deferred financing costs of approximately $2.0 million. This write-off was
reflected as an extraordinary item, net of tax of $840,000, in the
consolidated statement of operations for the fiscal year ended October 31,
1998.
(5) Loss from operations for fiscal year 1997 includes special charges of
approximately $9.4 million. On an after-tax basis, such special charges
aggregated $5.5 million, or $0.73 per share. (See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations").
(6) Reflects net income available to holders of Common Stock after payment of
dividends on Class B Preferred Stock-redeemable of $168,000. This stock
was redeemed by the Company in March 1994.
(7) Reflects net income 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
- -------
On September 30, 1997, a wholly-owned subsidiary of 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 purchase price of Miss Erika
consisted of $24.0 million in cash paid at the closing, the assumption of $2.5
million of indebtedness and 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.
On June 18, 1998, a wholly-owned subsidiary of the Company completed the
acquisition of substantially all of the assets of Jeri-Jo and assumed
substantially all the liabilities of the privately-held apparel importers of
moderately-priced juniors' and misses' updated sportswear. 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 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.
Concurrent with the closing of the Jeri-Jo acquisition, the Company entered
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 is used to
finance ongoing working capital requirements of the Company and its
subsidiaries.
On June 18, 1998, the Company also sold $125 million of unsecured 12 1/2%
Senior Notes due 2005 (the "Senior Notes"). The terms and conditions of the
Senior Notes are governed by an indenture (the "Indenture"). The proceeds of
the Senior Notes were used to finance the Jeri-Jo acquisition and to refinance
then existing indebtedness of the Company and Jeri-Jo. The Company's
obligations under the Senior 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 complimentary businesses and
brands. In connection therewith, the Company completed the Miss Erika and Jeri-
Jo acquisitions. 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.
13
<PAGE>
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.
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 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 revenue levels in its
Norton McNaughton product lines decreased in fiscal 1998 from those recorded in
fiscal 1997 and the Company anticipates that revenue levels in its Norton
McNaughton product lines in fiscal 1999 will decrease from those in fiscal 1998.
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 and Norton Studio and, correspondingly,
discontinued the Modiano product line produced for Sears. In addition, in the
first quarter of fiscal 1998, the Company discontinued the Lauren Alexandra
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
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 for
its Norton McNaughton product lines, the Company believes that it will reduce
that product lines' 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 saving measures that were
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. 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
substantially all (approximately 91% in fiscal 1998) of its products are
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.
This Management's Discussion and Analysis contains forward-looking
information about the Company's anticipated operating results. The Company's
ability to achieve its projected results is dependent on many factors which are
outside of management's control. Some of the most significant factors would be
a further deterioration in retailing conditions for women's
14
<PAGE>
apparel, a further increase in price pressures and other competitive factors,
any of which could result in an unanticipated decrease in gross profit margins,
an unanticipated need to hire additional personnel above the Company's plan,
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, year 2000 issues, particularly with respect to the
Company's vendors and customers, and weather conditions which could impact
retail traffic and the Company's ability to ship on a timely basis. Accordingly,
there can be no assurance that the Company will achieve its anticipated
operating results.
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
elsewhere herein. The following table is derived from the Company's Consolidated
Statements of Income and sets forth, for the periods indicated, selected
operating data as a percentage of net sales.
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------------------------
1998/(1)/ 1997/(2)/ 1996
--------- --------- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 79.4 82.1 79.7
------ ------- -----
Gross profit 20.6 17.9 20.3
Selling, general and administrative expenses 16.0 20.1 17.8
Depreciation and amortization 0.7 0.5 0.3
------ ------- -----
Income (loss) from operations 3.9 (2.7) 2.2
Interest expense and amortization of deferred
financing costs 3.5 1.1 1.1
Other income, net (0.1) (0.1) (0.1)
Income (loss) before provision (benefit) for income taxes and ------ ------- -----
extraordinary item
0.5 (3.7) 1.2
Provision (benefit) for income taxes 0.4 (1.6) 0.5
------ ------- -----
Income (loss) before extraordinary item
Extraordinary item, net of tax 0.1 (2.1) 0.7
(0.3) - -
------ ------- -----
Net income (loss) (0.2)% (2.1)% 0.7%
====== ======= =====
</TABLE>
__________________
/(1)/ Includes Jeri-Jo from June 18, 1998.
/(2)/ Includes Miss Erika from September 30, 1997.
Fiscal 1998 Compared to Fiscal 1997
- -----------------------------------
Net sales increased by $125.8 million, or 57.5%, to $344.6 million in
fiscal 1998 from $218.8 million in fiscal 1997. The increase in net sales was
primarily attributable to the addition of the Erika product lines of $110.2
million following the acquisition of Miss Erika on September 30, 1997, the
addition of the Energie, Currants and Jamie Scott product lines of $54.1 million
following the acquisition of Jeri-Jo on June 18, 1998, increased net sales in
the Norton Studio product line of $12.0 million and increased net sales in the
D.P.S. product line of $7.0 million. These increases were offset in part by a
decrease in net sales of $25.4 million in the Norton McNaughton product lines,
and decreases in net sales of $31.6 million, in the aggregate, due to the
discontinuation of the Modiano, Lauren Alexandra and Pant-her product lines and
Norton's retail outlet stores.
Gross profit margin was 20.6% in fiscal 1998 compared to 17.9% in fiscal
1997. Gross profit margin in fiscal 1998 was negatively impacted by sales
allowances of approximately $3.3 million granted to certain customers of
discontinued divisions. Had these sales allowances not been granted, gross
profit margin in fiscal 1998 would have been 21.3%. The increase in gross
profit margin was primarily due to the addition of gross profit from the Erika
product lines, beginning on September 30, 1997, and the addition of gross profit
from the Energie, Currants and Jamie Scott product lines, beginning on June 18,
1998, both of which experienced higher gross profit margins than those
experienced in the Norton McNaughton product lines in fiscal 1997.
Selling, general and administrative expenses ("SG&A" expenses) were $55.0
million, or 16.0% of net sales, in fiscal 1998 compared to $44.0 million, or
20.1% of net sales, in fiscal 1997. SG&A expenses in fiscal 1998 included a
reserve for litigation of $2.5 million (see Item 3, "Legal Proceedings").
Excluding this charge, SG&A expenses for fiscal 1998 would have been $52.5
million, or 15.2% of net sales. SG&A expenses in 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. As of October 31, 1998, all charges related to such
reserves
15
<PAGE>
were incurred and no changes in estimates were required. Excluding these special
charges, SG&A expenses for fiscal 1997 would have been $38.3 million, or 17.5%
of net sales. The increase in SG&A expenses of $14.2 million, excluding the
special charges, resulted primarily from the acquisition of Miss Erika and Jeri-
Jo, whose incremental SG&A expenses in fiscal 1998 were $21.9 million in the
aggregate. The increase was offset in part by savings experienced by Norton in
fiscal 1998 due to cost saving measures implemented in fiscal 1997 and fiscal
1998, including a significant reduction in Norton's workforce resulting in
savings of approximately $2.8 million, the closure of Norton's retail outlet
stores resulting in savings of approximately $1.5 million, and a decrease in
variable distribution and freight expenses of approximately $1.6 million due to
a decrease in the volume of products shipped in fiscal 1998 compared to fiscal
1997.
Operating income for fiscal 1998 was $13.6 million as compared to operating
loss for fiscal 1997 of $5.8 million. Excluding the reserve for litigation of
$2.5 million, operating income for fiscal 1998 would have been $16.1 million.
Excluding the special charges of approximately $9.4 million, operating income
for fiscal 1997 would have been approximately $3.6 million. The increase in
fiscal 1998 operating income of approximately $12.5 million, after adjusting for
the special charges, resulted primarily from the acquisitions of Miss Erika and
Jeri-Jo, which occurred on September 30, 1997 and June 18, 1998, respectively.
Interest expense increased to $11.8 million in fiscal 1998 from $2.5
million in fiscal 1997. The increase was primarily attributable to incremental
interest expense and amortization of deferred financing costs on debt incurred
to acquire Miss Erika and Jeri-Jo.
The provision for income taxes in fiscal 1998 included an additional
provision of $600,000 in connection with the proposed resolution of certain
Federal income tax audits covering fiscal years 1991 through 1996 and the
corresponding impact on state and local taxes.
The extraordinary item in fiscal 1998, of $1.2 million net of tax resulted
from the write-off of deferred financing costs of $2.0 million associated with
the early extinguishment of debt on June 18, 1998.
Fiscal 1997 Compared to Fiscal 1996
- -----------------------------------
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
product lines, a decrease in net sales of $5.2 million in the Modiano product
line, a decrease in net sales of $3.8 million in the Pant-her product line, a
decrease in net sales of $2.1 million in the Lauren Alexandra product line and a
decrease in net sales of $3.0 million resulting from the discontinuation of the
Kate McNaughton 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 product line,
an increase in net sales of $2.8 million in the D.P.S. product line and net
sales of Erika product lines of $10.4 million, following the acquisition of Miss
Erika on September 30, 1997.
Gross profit margin was 17.9% in fiscal 1997 as compared to 20.3% in fiscal
1996. 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 of approximately $700,000 and approximately $300,000 of severance
payments related to the closure of other divisions, including the Company's
catalog division. Excluding the special charges of $3.7 million, gross profit
margin for fiscal 1997 would have been 19.4%. The decrease in fiscal 1997 gross
profit margins compared to fiscal 1996 resulted primarily from sales of Norton
McNaughton holiday merchandise at lower gross profit margins than those
experienced on such merchandise in fiscal 1996.
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 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 $600,000 and related primarily to remaining reserves
for the closure of the retail outlet stores. All other special charges were
incurred and utilized at the time they were recorded and no changes in estimates
were required. Excluding these special charges of approximately $5.7 million,
SG&A expenses for fiscal 1997 would have been $39.3 million, or 18.0% of net
sales. The net decrease of approximately $700,000, 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, and a reduction in
professional fees due primarily to the termination in the second quarter of a
16
<PAGE>
consulting agreement. These decreases were offset in part by the addition of
approximately $1.7 million in overhead relating to Miss Erika, following the
acquisition on September 30, 1997.
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 in
fiscal 1997 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 increased to $2.5 million in fiscal 1997 from $2.3 million
in fiscal 1996. The increase was primarily attributable to incremental interest
expense associated with the acquisition of Miss Erika on September 30, 1997.
Liquidity and Capital Resources
- -------------------------------
The Company is highly leveraged. On October 31, 1998, the Company had
indebtedness totaling approximately $128.8 million, of which approximately $3.8
million represented revolving credit loans under the Current Credit Agreement.
In addition, at October 31, 1998, the Company had obligations under undrawn
letters of credit in the aggregate face amount of approximately $110.1 million.
The Company will be permitted to incur substantial additional indebtedness in
the future. At October 31, 1998, the Company had total additional available
credit under the Current Credit Agreement of approximately $31.2 million,
including $5.0 million of overadvance capability, pursuant to the borrowing base
formula set forth therein.
The Company's ability to make scheduled payments of principal or to pay the
interest, if any, on, or to refinance its indebtedness, 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'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 advances under the Current Credit Agreement. 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 $104.0 million at October 31, 1998 as compared to
$39.3 million at November 1, 1997. The increase was caused primarily by the
refinancing of approximately $40.6 million of current revolving credit loans
with long-term debt upon the issuance of the Senior Notes and the addition of
approximately $25.0 million of working capital resulting from the Jeri-Jo
acquisition which was funded with the Senior Notes, offset by purchases of fixed
assets and net loss for the year.
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 October 31, 1998,
November 1, 1997 and November 2, 1996 were approximately $1.3 million, $1.0
million and $1.0 million, respectively.
Prior to 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.
On September 30, 1997, a wholly-owned subsidiary of 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 purchase price of Miss Erika
consisted of $24.0 million in cash paid at the closing, the assumption of $2.5
million of indebtedness and 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 four times the average of Miss Erika's earnings before interest expense,
income taxes, depreciation and amortization, as defined in the Miss Erika
purchase agreement ("Miss Erika 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 intangible assets. 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 has agreed to cause any shares of Common
17
<PAGE>
Stock issued as a contingent payment to be registered under the Securities Act.
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. Miss Erika achieved Miss Erika EBITDA during fiscal
1998 which, if sustained in fiscal 1999, will result in the payment of
significant additional consideration, however, the Company cannot predict the
amount of additional consideration that may be payable.
The Company entered into a $140.0 million secured term loan and revolving
credit facility with The CIT Group/Commercial Services, Inc. and NationsBanc
Commercial Corporation 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 Company. Pursuant to this credit
arrangement, Norton continued to factor its accounts receivable, as well as the
accounts receivable of Miss Erika. This credit arrangement was refinanced by the
Current Credit Agreement in June 1998.
On June 18, 1998, a wholly-owned subsidiary of 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. 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 and certain other
contractual obligations. In addition, the Company agreed to pay an additional
contingent payment in cash and its 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 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 earnings before
interest expense, income taxes, depreciation and amortization, as defined in the
Jeri-Jo purchase agreement ("Jeri-Jo EBITDA"), for the two years ending June 30,
2000, plus (B) 0.50 times any such average Jeri-Jo EBITDA between $17.0 million
and $20.0 million, plus (C) one times any such average Jeri-Jo 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
intangible assets. The Company secured 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 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 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. 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. Jeri-Jo achieved Jeri-Jo EBITDA for the four month
period ended October 31, 1998 which, if sustained, will result in the payment of
significant additional consideration, however, the Company cannot predict the
amount of additional consideration that may be payable.
Concurrent with the closing of the Jeri-Jo acquisition on June 18, 1998,
the Company entered into the Current Credit Agreement, 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
facility is being used to finance ongoing working capital requirements of the
Company and its subsidiaries. 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. Presently, 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 is 7.00% 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 the $30.0 million
stand-by letter of credit to secure the Company's cash contingent payment
obligation in connection with the Jeri-Jo acquisition), with aggregate letters
of credit not to exceed $160.0 million. Under the Current Credit Agreement, the
aggregate credit available to the Company is 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 Company and its subsidiaries guarantee the Company's
obligations under the Current Credit Agreement and have granted a lien on
substantially all of their respective assets to secure the obligations under the
Current Credit Agreement. The weighted average interest rate on the revolving
credit facility was 8.03% for fiscal 1998. The Company continued to factor
accounts receivable pursuant to factoring arrangements.
On June 18, 1998, the Company also sold $125.0 million of 12 1/2% Senior
Notes due 2005. The proceeds of the Senior Notes were used to finance the Jeri-
Jo acquisition and to refinance then existing indebtedness of the Company and
Jeri-Jo. The Company's obligations under the Senior Notes are unsecured and are
guaranteed by all of the Company's subsidiaries.
The Current Credit Agreement contains a number of restrictive covenants,
including covenants which limit the 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
18
<PAGE>
levels of working capital and net worth. The Indenture contains a number of
restrictive covenants, including covenants which limit the incurrence of liens
and indebtedness, and restricted payments, as defined therein.
The Company anticipates that in fiscal 1999 it will incur capital
expenditures of approximately $4.2 to $4.5 million principally in connection
with relocating its warehouse and distribution facility to the southeastern
United States and the upgrade of its management information systems, which
includes the Company's migration to new financial and warehouse management
software packages. See "The Year 2000 Issue" below. The Company expects to
finance these capital expenditures from internally generated funds and advances
under the Current Credit Agreement. The expenditures required to modify portions
of the Company's software so that it will function properly in the year 2000
will not have a material impact on the Company's business, operations, financial
condition or cash flow. 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 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 FASB 123. Compensation expense relating to
these grants in fiscal 1998 and fiscal 1997 would have been approximately $2.2
million and approximately $1.3 million, respectively, had the Company adopted
the fair value accounting method of expense recognition under FASB 123.
The Company's Board of Directors authorized a stock repurchase program,
under which the Company may repurchase up to $7.5 million of the Company's
Common Stock. Shares may be purchased from time to time in the open market and
in block transactions. As of January 28, 1999, the Company had 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.
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 Miss Erika and Jeri-Jo 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 Company is working to evaluate and resolve the potential impact of Year
2000 on its processing of date sensitive information and network systems. 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, but not limited to
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
The Company is currently in the process of assessing its exposure to the
Year 2000 problem, and has established a comprehensive approach to that
exposure. Generally, the Company has Year 2000 exposure in the following areas:
(i) financial and management operating computer systems used to manage the
Company's business, and (ii) computer systems used by third parties, in
particular, financial institutions, customers and suppliers of the Company.
19
<PAGE>
The Company has delegated responsibility to a group of executives to
coordinate the identification, evaluation and implementation of changes to
computer systems and applications necessary to achieve the Company's goal of a
Year 2000 date conversion which would minimize the effect on its customers, and
avoid disruption to business operations. The Company is also focusing on
hardware and software tools, programming and outside forces that may affect its
operations, including its vendors, banks and customers. The Company's analysis
of the Year 2000 threat is ongoing and will be continuously updated throughout
fiscal 1999, as necessary.
The Company has taken an inventory of all systems and software in order to
identify all business and computer applications, so that it can identify
potential compliance problems. The Company has initiated communications with all
of its significant customers, suppliers, contractors and major systems
developers to determine their plans to remedy any Year 2000 issues that arise in
their business. The Company plans to compile a database of information based
upon these responses, which is expected to be updated throughout fiscal 1999. To
the extent problems are identified, the Company will implement corrective
procedures, where necessary, then test the applications for Year 2000
compliance. The Company expects to complete this project prior to December 31,
1999. 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.
Based on preliminary data, the Company estimates that its Year 2000 effort
will have a nominal cost impact, although it can make no assurances as to the
ultimate cost of the Year 2000 effort or the total cost of information systems.
Such costs will be expensed as incurred, except to the extent such costs are
incurred for the purchase or lease of capital equipment. 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. The Company expects to make some of the
necessary modifications through its ongoing investment in system upgrades. The
Company is in the process of updating its purchasing, production and shipping
systems to be Year 2000 compliant and will be implementing a new financial
software package. The Company anticipates that these systems will be Year 2000
compliant by June 1999. The Company anticipates that it will incur
approximately $800,000 in fiscal 1999 in connection therewith.
If the Company is unsuccessful in completing remediation of non-compliant
systems, and if customers or vendors cannot rectify Year 2000 issues, the
Company could incur additional costs, which may be substantial, to develop
alternative methods of managing its business and replacing non-compliant
equipment, and may experience delays in receipts from vendors, shipments to
customers, or payments to vendors. The Company has not yet established a
contingency plan in the event of non-compliance by its customers and vendors.
20
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flows and weighted-average
interest rates by expected maturity dates.
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term debt:
Revolving credit $3,839 - - - - - $ 3,839
Prime rate less 75 basis points 7.25% - - - - - 7.25%
Long-term debt:
$125 million Senior Notes - - - - - $125,000 $125,000
Interest rate 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50%
</TABLE>
For more information concerning the Company's debt obligations see Notes 4,
10 and 14 to the Company's consolidated financial statements.
21
<PAGE>
PART III
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA
Information called for by this Item 8 is included following the "Index to
Consolidated Financial Statements, Financial Statement Schedule and
Supplementary Data" appearing at the end of this Annual Report on Form 10-K
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information which is called for by this Item 10 is incorporated by
reference to the information set forth under the heading "Election of Directors"
in the Company's Proxy Statement relating to its 1999 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A (the "Company's 1999 Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
Information called for by this Item 11 is incorporated by reference to the
information set forth under the headings "Executive Compensation", "Compensation
of Directors" and "Employment Agreements" in the Company's 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by this Item 12 is incorporated by reference to the
information set forth under the heading "Information Concerning Certain
Stockholders" in the Company's 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by this Item 13 is incorporated by reference to the
information set forth under the headings "Election of Directors" and "Certain
Relationships and Related Transactions" in the Company's 1999 Proxy Statement.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. and 2. See "Index to Consolidated Financial Statements, Financial
Statement Schedule and Supplementary Data" on page F-1.
3. The Exhibits which are required to be filed as part of this Annual
Report on Form 10-K are listed on the Exhibit Index beginning on page
E-1, Exhibits 10.1, 10.1(a), 10.3, 10.4, 10.5, 10.6, 10.7, 10.8,
10.8(a) and 10.8(b), 10.9, 10.9(a) and 10.9(b), 10.12 and 10.12(a),
10.13, 10.13(a) and 10.13(b), 10.14, 10.15, 10.43, 10.47, 10.48,
10.49, 10.50, 10.51, 10.52, 10.58, 10.59 and 10.60 are the management
contracts and compensatory plans or arrangements required to be filed
as part of this Annual Report on Form 10-K.
(b) There were no Current Reports on Form 8-K filed during the thirteen
weeks ended October 31, 1998.
23
<PAGE>
Norton McNaughton, Inc. and Subsidiaries
Exhibit Index
Exhibit No. Description
- ----------- -----------
2.1/x/ 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.
2.1(a)++ Amendment dated as of September 25, 1997 to Agreement of Purchase
and Sale dated as of the 29th day of August, 1997 by and among
Miss Erika, Inc.; Terbem Limited, Bobst Investment Corp., TCRI
Offshore Partners C.V., and TCR International Partners L.P.,
Triumph Capital, L.P. II, Stuart Bregman, Howard Zwilling, Sidney
Goldstein, Christian Baillet, ME Acquisition Corp., and Norton
McNaughton, Inc.
2.2 Agreement of Purchase and Sale dated as of April 15, 1998 by and
among Jeri-Jo Knitwear Inc., Jamie Scott, Inc., the Stockholders
of Jamie Scott, Inc., JJ Acquisition Corp. and Norton McNaughton,
Inc. (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.
2.2(a)++ Amendment No. 1 dated as of May 27, 1998 to Agreement of Purchase
and Sale dated as of April 15, 1998 by and among Jeri-Jo Knitwear
Inc., Jamie Scott, Inc., the Stockholders of Jamie Scott, Inc.,
JJ Acquisition Corp. and Norton McNaughton, Inc.
2.2(b)++ Amendment No. 2 dated as of June 18, 1998 to Agreement of
Purchase and Sale dated as of April 15, 1998 by and among Jeri-Jo
Knitwear Inc., Jamie Scott, Inc., the Stockholders of Jamie
Scott, Inc., JJ Acquisition Corp. and Norton McNaughton, Inc.
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 in 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
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).
E-1
<PAGE>
Norton McNaughton, Inc. and Subsidiaries
Exhibit Index (continued)
Exhibit No. Description
- ----------- -----------
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/xxxx/ Norton McNaughton, Inc. Executive Stock Option Plan.
10.4/xxx/ ME Acquisition Corp. Bonus Plan for Senior Executives.
10.5 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).
10.6 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).
10.7 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).
10.8**** Amended and Restated Employment Agreement dated as of November 4,
1995 between Sanford Greenberg and Norton McNaughton of Squire,
Inc.
10.8(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.
10.8(b)++ Agreement dated as of November 16, 1998 by and between Norton
McNaughton of Squire, Inc. and Sanford Greenberg.
10.9**** Amended and Restated Employment Agreement dated as of November 4,
1995 between Norton Sperling and Norton McNaughton of Squire,
Inc.
10.9(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).
10.9(b)/xx/ Amendment dated November 25, 1997 to Separation Agreement dated
May 3, 1997 between Norton McNaughton of Squire, Inc. and Norton
Sperling.
10.10 Letter Agreement dated January 31, 1996 terminating Jay
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).
10.10(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).
E-2
<PAGE>
Norton McNaughton, Inc. and Subsidiaries
Exhibit Index (continued)
Exhibit No. Description
- ----------- -----------
10.10(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 in
Form 10-Q for the quarter ended May 3, 1997).
10.11* Amended and Restated Employment Agreement dated as of November 5,
1993 between Andrew Miller and Norton McNaughton of Squire, Inc.
10.11(a)+ Separation Agreement between Andrew Miller and Norton McNaughton
of Squire, Inc. dated December 17, 1997.
10.12* Amended and Restated Employment Agreement dated as of November 4,
1993 between Howard Greenberg and Norton McNaughton of Squire,
Inc.
10.12(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.
10.13* Employment Agreement dated as of November 4, 1993 between Amanda
J. Bokman and Norton McNaughton of Squire, Inc.
10.13(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).
10.13(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.
10.14 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).
10.15++ Employment Agreement dated as of November 11, 1998 between Lynne
F. Fish and Norton McNaughton of Squire, Inc.
10.16/x/ 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.
10.16(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).
E-3
<PAGE>
Norton McNaughton, Inc. and Subsidiaries
Exhibit Index (continued)
Exhibit No. Description
- ----------- -----------
10.16(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).
10.16(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 reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended May 2,1998).
10.16(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).
10.17 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, The CIT Group/Commercial
Services, Inc., as administrative agent for the Lenders, and
Fleet Bank N.A., as documentation agent for the Lenders
(incorporated herein by reference to Exhibit 10.6 to Registrant's
Current Report on Form 8-K filed July 2, 1998).
10.17(a) First Amendment, dated as of August 7, 1998 to the Amended and
Restated Financing Agreement, dated as of June 18, 1998 by and
among Norton McNaughton, Inc., Norton McNaughton of Squire, Inc.,
Miss Erika, Inc., Jeri-Jo Knitwear, Inc., the lenders listed on
Schedule I thereto under the captions "Continuing Lenders" and
"Additional Lenders", NationsBanc Commercial Corporation, as
collateral agent for the Lenders, The CIT Group/Commercial
Services, Inc., as administrative agent for the Lenders, and
Fleet Bank N.A., as documentation agent for the Lenders
(incorporated herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
August 1, 1998).
10.17(b)++ Second Amendment, dated as of January 29, 1999 to the Amended and
Restated Financing Agreement, dated as of June 18, 1998 by and
among Norton McNaughton, Inc., Norton McNaughton of Squire, Inc.,
Miss Erika, Inc., Jeri-Jo Knitwear, Inc., the lenders party
thereto NationsBanc Commercial Corporation, as collateral agent
for the lenders, The CIT Group/Commercial Services, Inc., as
administrative agent for the lenders, and Fleet Bank N.A., as
documentation agent for the lenders.
10.18/x/ Factoring Agreement entered into between Miss Erika, Inc. and
NationsBanc Commercial Corporation dated September 25, 1997.
E-4
<PAGE>
Norton McNaughton, Inc. and Subsidiaries
Exhibit Index (continued)
Exhibit No. Description
- ----------- -----------
10.19/x/ Amended and Restated Factoring Agreement entered into between
Norton McNaughton of Squire, Inc. and NationsBanc Commercial
Corporation dated September 25, 1997.
10.20* Pledge Agreement dated as of January 14, 1994 made by Sanford
Greenberg in favor of Norton McNaughton of Squire, Inc.
10.20(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.
10.20(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).
10.21* Pledge Agreement dated as of January 14, 1994 made by Norton
Sperling in favor of Norton McNaughton of Squire, Inc.
10.22*** 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.
10.22(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).
10.23* Pledge Agreement dated as of January 14, 1994 made by Jay
Greenberg in favor of Norton McNaughton of Squire, Inc.
10.23(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.
10.23(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).
10.24* Pledge Agreement dated as of January 14, 1994 made by Andrew
Miller in favor of Norton McNaughton of Squire, Inc.
10.24(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.
E-5
<PAGE>
Norton McNaughton, Inc. and Subsidiaries
Exhibit Index (continued)
Exhibit No. Description
- ----------- -----------
10.24(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).
10.25* Pledge Agreement dated as of January 14, 1994 made by Howard
Greenberg in favor of Norton McNaughton of Squire, Inc.
10.25(a)*** First Amendment to Pledge Agreement dated July 15, 1994, amending
and supplementing the Pledge Agreement dated as of January 14,
1994 made by Howard Greenberg in favor of Norton McNaughton of
Squire, Inc.
10.25(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).
10.26* 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.
10.26(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.
10.26(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).
10.27* 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.
10.27(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
May 5, 1995).
10.28* 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.
10.28(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.
E-6
<PAGE>
Norton McNaughton, Inc. and Subsidiaries
Exhibit Index (continued)
Exhibit No. Description
- ----------- -----------
10.28(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).
10.29* 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.
10.29(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.
10.29(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).
10.30* 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.
10.30(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.
10.30(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).
10.31* Form of Indemnification Agreement with Directors and Executive
Officers.
10.32* Agreement dated March 17, 1993 between Norton McNaughton of
Squire, Inc. and Toni-Linda Productions, Inc., as amended
December 15, 1993.
10.32(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.
10.33* Sublease Agreement dated January 17, 1994 between Norton
McNaughton of Squire, Inc. and Toni-Linda Productions, Inc.
10.33(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.
E-7
<PAGE>
Norton McNaughton, Inc. and Subsidiaries
Exhibit Index (continued)
Exhibit No. Description
- ----------- -----------
10.34* Limited Guaranty dated December 30, 1993 made by Norton
McNaughton of Squire, Inc. in favor of Braun Management, Inc.
10.34(a)**** Amendment dated November 7, 1995 to Limited Guaranty dated
December 30, 1993 made by Norton McNaughton of Squire, Inc. in
favor of Braun Management, Inc.
10.35* Agreement dated January 7, 1993 between Norton McNaughton of
Squire, Inc. and Railroad Enterprises, Inc.
10.36 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).
10.37* Guaranty dated May 19, 1992 made by Norton McNaughton of Squire,
Inc. in favor of 5 Empire Boulevard Associates.
10.38* Agreement dated February 1, 1993 between Norton McNaughton of
Squire, Inc. and May Company.
10.39* Lease Agreement dated December 7, 1993 between Gettinger
Associates and Norton McNaughton of Squire, Inc.
10.40* Lease Agreement dated October 4, 1991 between 1400 Broadway
Associates and McNaughton Affiliates, Inc.
10.41* Lease Agreement dated April 30, 1993 between The Arsenal Company
and Norton McNaughton of Squire, Inc.
10.42 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).
10.42(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).
10.43**** Split Dollar Agreement dated March 8, 1994 between Norton
McNaughton, Inc. and Northwestern Mutual Life Insurance Company
for Sanford Greenberg.
10.44**** Split Dollar Agreement dated March 8, 1994 between Norton
McNaughton, Inc. and Northwestern Mutual Life Insurance Company
for Norton Sperling.
10.45**** Split Dollar Agreement dated March 8, 1994 between Norton
McNaughton, Inc. and Northwestern Mutual Life Insurance Company
for Jay Greenberg.
10.46 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).
10.47/xxx/ Employment Agreement dated August 29, 1997 between ME Acquisition
Corp. and Stuart Bregman.
E-8
<PAGE>
Norton McNaughton, Inc. and Subsidiaries
Exhibit Index (continued)
Exhibit No. Description
- ----------- -----------
10.48/xxx/ Employment Agreement dated August 29, 1997 between ME Acquisition
Corp. and Howard Zwilling.
10.49/xxx/ Employment Agreement dated August 29, 1997 between ME Acquisition
Corp. and Roberta Ciacci.
10.50/xxx/ Employment Agreement dated August 29, 1997 between ME Acquisition
Corp. and Samuel Glaser.
10.51/xxx/ Employment Agreement dated August 29, 1997 between ME Acquisition
Corp. and Elizabeth Moser.
10.52/xxx/ Employment Agreement dated August 29, 1997 between ME Acquisition
Corp. and Kenny Tse.
10.53+ Agency Agreement dated October 9, 1997 between The Ozer Group LLC
and Norty's, Inc.
10.54+ Consulting Agreement dated November 7, 1997 between DJM Asset
Management, Inc. and Norton McNaughton of Squire, Inc.
10.55+ Lease Agreement dated December 16, 1993 between Gettinger
Associates, LP and Miss Erika, Inc.
10.56+ Lease Agreement dated April 1, 1975 between Empire Carpet
Corporation and Miss Erika, Inc.
10.56(a)+ Amendment dated January 17, 1978 to Lease Agreement dated April
1, 1975 between Empire Carpet Corporation and Miss Erika, Inc.
10.56(b)+ Second Amendment dated February 17, 1981 to Lease Agreement dated
April 1, 1975 between Empire Carpet Corporation and Miss Erika,
Inc.
10.56(c)+ Third Amendment dated March 5, 1982 to Lease Agreement dated
April 1, 1975 between Empire Carpet Corporation and Miss Erika,
Inc.
10.56(d)+ Fourth Amendment dated August 15, 1983 to Lease Agreement dated
April 1, 1975 between Empire Carpet Corporation and Miss Erika,
Inc.
10.56(e)+ Lease Modification and Extension Agreement dated January 24, 1985
between Teterboro Associates and Miss Erika, Inc. to Lease
Agreement dated April 1, 1975.
10.56(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.
10.56(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.
10.56(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.
E-9
<PAGE>
Norton McNaughton, Inc. and Subsidiaries
Exhibit Index (continued)
Exhibit No. Description
- ----------- -----------
10.56(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.
10.56(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.
10.56(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.
10.57 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).
10.58 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).
10.59 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).
10.60 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).
10.61 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).
10.62 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).
10.63 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).
21++ List of Registrant's Subsidiaries.
23++ Consent of Ernst & Young LLP.
27++ Financial Data Schedule (For SEC use only).
99 Press Release dated April 22, 1998 (incorporated herein by
reference to Exhibit 99 to the Registrant's Current Report on
Form 8-K filed April 22, 1998).
99(a) Press Release dated May 28, 1998 (incorporated herein by
reference to Exhibit 99 to the Registrant's Current Report on
Form 8-K filed May 28, 1998).
E-10
<PAGE>
Norton McNaughton, Inc. and Subsidiaries
Exhibit Index (continued)
Exhibit No. Description
- ----------- -----------
99(b) Press Release dated June 18, 1998 (incorporated herein by
reference to Exhibit 99 to the Registrant's Current Report on
Form 8-K filed June 22, 1998).
99(c) Press Release dated June 18, 1998 (incorporated herein by
reference to Exhibit 99 to the Registrant's Current Report on
Form 8-K filed July 2, 1998).
________________
* 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 Exhibits to the Registrant's Annual
Report on Form 10-K for the period ended November 1, 1997.
++ Filed herewith.
Exhibits have been included in copies of this Report filed with the Securities
and Exchange Commission. Stockholders of the Company will be provided with
copies of these exhibits upon written request to the Company.
E-11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: January 28, 1999 NORTON MCNAUGHTON, INC.
(Registrant)
By: /s/ Sanford Greenberg
------------------------------
Sanford Greenberg, Chairman of the Board,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities indicated on January 28, 1999.
Signature Title
/s/ Sanford Greenberg Chairman of the Board, Chief Executive Officer
- -------------------------
(Sanford Greenberg) and Director
/s/ Peter Boneparth President, Chief Operating Officer and Director
- -------------------------
(Peter Boneparth)
/s/ Amanda J. Bokman Vice President, Chief Financial Officer,
- -------------------------
(Amanda J. Bokman) Secretary, Treasurer and Director (principal
financial and accounting officer)
/s/ David M. Blumberg Director
- -------------------------
(David M. Blumberg)
/s/ Stuart Bregman Director
- -------------------------
(Stuart Bregman)
/s/ Bradley P. Cost Director
- -------------------------
(Bradley P. Cost)
/s/ Jerald Politzer Director
- -------------------------
(Jerald Politzer)
S-1
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND
SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements:
Report of Independent Auditors F-2
Consolidated Balance Sheets at October 31, 1998 and November 1, 1997 F-3
Consolidated Statements of Operations for Each of the Three Years
in the Period Ended October 31, 1998 F-4
Consolidated Statements of Stockholders' Equity for Each of the
Three Years in the Period Ended October 31, 1998 F-5
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended October 31, 1998 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
II - "Valuation and Qualifying Accounts" F-23
Note: Schedules other than that referred to above have been omitted as inapplicable or not required under the instructions
contained in Regulation S-X or the information is included elsewhere in the financial statements or the notes thereto.
Supplementary Data:
Quarterly Financial Data (Unaudited) F-24
</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 October 31, 1998 and
November 1, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended October 31, 1998. 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 the
Company at October 31, 1998 and November 1, 1997 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 October 31, 1998 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
December 21, 1998
F-2
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, November 1,
1998 1997
----------------------------------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 205 $ 529
Due from factor 85,998 64,644
Inventory 47,386 28,590
Income taxes receivable and current deferred taxes 2,522 3,201
Prepaid expenses and other current assets 1,273 5,227
-------- --------
Total current assets 137,384 102,191
Fixed assets, net 8,261 5,899
Notes receivable from management stockholders 2,471 2,655
Intangible assets, net 43,464 3,853
Deferred financing costs 6,348 2,481
Other assets 3,661 1,683
-------- --------
Total assets $201,589 $118,762
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,932 $ 10,420
Revolving credit loan 3,839 44,473
Term loan payable - 3,000
Accrued expenses and other current liabilities 13,629 4,986
-------- --------
Total current liabilities 33,400 62,879
12 1/2% Senior Notes due 2005 125,000 -
Term loan payable - 12,000
Other long-term liabilities 1,719 1,720
-------- --------
Total liabilities 160,119 76,599
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, authorized 20,000,000 shares, 8,065,429
and 8,060,640 shares issued, respectively, and 7,414,429 and 7,409,640
shares outstanding, respectively 81 81
Capital in excess of par 23,923 23,903
Retained earnings 23,001 23,714
Treasury stock, at cost, 651,000 shares (5,535) (5,535)
-------- --------
Total stockholders' equity 41,470 42,163
-------- --------
Total liabilities and stockholders' equity $201,589 $118,762
======== ========
</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
-----------------------------------------------------------
OCTOBER 31, NOVEMBER 1, NOVEMBER 2,
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
Net sales $344,604 $218,782 $220,823
Cost of goods sold 273,703 179,556 176,063
-------- -------- --------
Gross profit 70,901 39,226 44,760
Selling, general and administrative expenses 54,965 44,015 39,317
Depreciation and amortization 2,370 984 662
-------- -------- --------
Income (loss) from operations 13,566 (5,773) 4,781
Interest expense and amortization of deferred financing costs 11,788 2,500 2,294
Other income, net (165) (168) (164)
-------- -------- --------
Income (loss) before provision (benefit) for income taxes and
extraordinary item 1,943 (8,105) 2,651
Provision (benefit) for income taxes 1,495 (3,400) 1,127
-------- -------- --------
Income (loss) before extraordinary item 448 (4,705) 1,524
Extraordinary item, net of $840 tax benefit (1,161) - -
-------- -------- --------
Net income (loss) $ (713) $ (4,705) $ 1,524
======== ======== ========
BASIC EARNINGS PER SHARE:
Income (loss) before extraordinary item $ 0.06 $ (0.63) $ 0.20
Extraordinary item (0.16) - -
-------- -------- --------
Net income (loss) $ (0.10) $ (0.63) $ 0.20
======== ======== ========
Weighted average number of common shares outstanding 7,413 7,488 7,767
======== ======== ========
DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item $ 0.06 $ (0.63) $ 0.20
Extraordinary item (0.16) - -
-------- -------- --------
Net income (loss) $ (0.10) $ (0.63) $ 0.20
======== ======== ========
Weighted average number of common shares outstanding assuming
dilution 7,432 7,488 7,781
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1998, NOVEMBER 1, 1997, AND NOVEMBER 2, 1996
<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, 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
Net loss for the year - - - (713) - (713)
Issuance of common stock
through stock purchase plan 4 - 20 - - 20
-------- ------ --------- -------- -------- --------
Balance at October 31, 1998 8,065 $81 $23,923 $ 23,001 $ (5,535) $ 41,470
======== ====== ========= ======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------
OCTOBER 31, NOVEMBER 1, NOVEMBER 2,
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (713) $ (4,705) $ 1,524
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization of fixed assets 1,415 931 628
Write-off of fixed assets - 627 -
Amortization of intangibles assets and deferred financing costs 1,953 131 34
Changes in operating assets and liabilities:
Due from factor (9,671) (19,014) 5,016
Inventory (11) 4,084 9,577
Income taxes receivable and current deferred taxes 679 (3,102) 291
Prepaid expenses and other current assets 4,265 (73) (1,111)
Other assets (1,938) (2,205) (295)
Accounts payable 987 (2,598) (10,305)
Accrued expenses and other current liabilities 5,587 (736) (134)
Other long-term liabilities (1) 170 207
-------- -------- --------
Net cash provided by (used for) operating activities 2,552 (26,490) 5,432
-------- -------- --------
INVESTING ACTIVITIES
Purchase of fixed assets (2,430) (1,571) (1,841)
Purchase of net assets of Miss Erika, net of cash of $70 - (24,553) -
Purchase of net assets of Jeri-Jo, net of cash of $1,312 (54,253) - -
Notes receivable from management stockholders 184 - 5
-------- -------- --------
Net cash used for investing activities (56,499) (26,124) (1,836)
-------- -------- --------
FINANCING ACTIVITIES
Purchase of treasury stock - (1,457) (3,752)
Net advances (repayments) under revolving credit agreements (40,634) 44,287 -
Repayment of acquired company's debt (10,900) (2,500) -
Issuance of 12 1/2% Senior Notes due 2005 125,000 - -
Deferred financing costs (4,863) (2,559) -
Proceeds from issuance of common stock, net 20 39 45
Proceeds from (repayment of) term loan (15,000) 15,000 -
-------- -------- --------
Net cash provided by (used for) financing activities 53,623 52,810 (3,707)
-------- -------- --------
(Decrease) increase in cash (324) 196 (111)
Cash at beginning of year 529 333 444
-------- -------- --------
Cash at end of year $ 205 $ 529 $ 333
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 400 $ 361 $ 529
Interest paid $ 5,346 $ 1,999 $ 2,272
</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.
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 fiscal year
ended November 1, 1997 reflects the acquisition of Miss Erika, Inc. ("Miss
Erika") on September 30, 1997. Data for the fiscal year ended October 31, 1998
reflects the acquisition of Jeri-Jo Knitwear, Inc. ("Jeri-Jo") on June 18, 1998.
PRINCIPAL BUSINESS ACTIVITY
Through its wholly-owned subsidiaries, the Company designs, sources and
distributes a broad line of brand name, moderately-priced women's and juniors'
career and casual clothing. The Company's customer base consists principally of
department stores, national chains, mass merchandisers and specialty retailers
located in the United States.
FISCAL YEAR
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. Data for each of the fiscal years ended October
31, 1998, November 1, 1997, and November 2, 1996 includes the results of
operations for 52 weeks.
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 three 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.
DEFERRED FINANCING COSTS
Deferred financing costs were incurred in fiscal 1997 in connection with
the Company's credit facility. Such financing costs were amortized on a
straight-line basis over the three-year term of the related credit facility.
The balance of such costs were written off when the facility was repaid.
Deferred financing costs were incurred in fiscal 1998 in connection with
obtaining the Company's current revolving credit agreement and the Company's
issuance of 12 1/2% Senior Notes due 2005 (the "Senior Notes"). Such deferred
financing costs are being amortized on a straight-line basis over the three-year
term of the current financing agreement and over the seven-year term of the
Senior Notes. See Note 10.
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.
INTANGIBLE ASSETS
Goodwill, trademarks and tradenames resulting from the acquisition of Miss
Erika and Jeri-Jo are being amortized by the straight-line method over twenty
years.
F-7
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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". 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
fiscal 1998 and fiscal 1996, the dilutive effect of options outstanding during
the period using the treasury stock method was approximately 19,000 shares and
14,000 shares, respectively. For fiscal 1997, options outstanding during the
period using the treasury stock method were excluded from the net loss per share
computation of diluted earnings per share because they were antidilutive.
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.
CREDIT RISK
The Company sells its accounts receivable to a factor. At October 31,
1998, the amount due from factor was $86.0 million. 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.
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 Opinion 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. See Note 13 for pro forma disclosures
required by SFAS No. 123.
SFAS 130, "REPORTING COMPREHENSIVE INCOME" AND SFAS 131, "DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
The Financial Accounting Standards Board issued SFAS No. 130, which is
effective for fiscal years beginning after December 15, 1997. SFAS No. 130
requires disclosure of all components of comprehensive income on an annual and
interim basis. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company will adopt this statement for
fiscal 1999 and such adoption is not expected to have a material effect on the
financial statements.
F-8
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS 130, "REPORTING COMPREHENSIVE INCOME" AND SFAS 131, "DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION" (CONTINUED)
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.
1. ACQUISITIONS
Miss Erika
- ----------
On September 30, 1997, a wholly-owned subsidiary of 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 purchase price of Miss Erika
consisted of $24.0 million in cash paid at the closing, the assumption of $2.5
million of indebtedness and 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 four times the average of Miss Erika's earnings before interest expense,
income taxes, depreciation and amortization, as defined in the Miss Erika
purchase agreement ("Miss Erika 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 intangible assets. 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 has agreed to cause any shares of Common Stock issued as a
contingent payment to be registered under the Securities Act. 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. Miss Erika achieved Miss Erika EBITDA during fiscal 1998 which, if
sustained in fiscal 1999, will result in the payment of significant additional
consideration, however, the Company cannot predict the amount of additional
consideration that may be payable.
Jeri-Jo
- -------
On June 18, 1998, a wholly-owned subsidiary of 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. 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 and certain other
contractual obligations. In addition, the Company agreed to pay an additional
contingent payment in cash and its 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 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 earnings before
interest expense, income taxes, depreciation and amortization, as defined in the
Jeri-Jo purchase agreement ("Jeri-Jo EBITDA"), for the two years ending June 30,
2000, plus (B) 0.50 times any such average Jeri-Jo EBITDA between $17.0 million
and $20.0 million, plus (C) one times any such average Jeri-Jo 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
intangible assets. The Company has secured 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 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 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. 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. Jeri-Jo achieved Jeri-Jo EBITDA for the four month
period ended October 31, 1998 which, if sustained, will result in the payment of
a significant additional consideration, however, the Company cannot predict the
amount of additional consideration that may be payable.
F-9
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The acquisitions were accounted for as purchases, and Miss Erika's and
Jeri-Jo's results are included in the consolidated statements of operations
beginning September 30, 1997 and June 18, 1998, respectively. The unaudited pro
forma consolidated results of operations for the years ended October 31, 1998
and November 1, 1997, assuming consummation of the acquisitions and related
financings at the beginning of the respective periods are as follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
Ended October 31, 1998 Ended November 1, 1997
---------------------------- ---------------------------
As reported Pro forma As reported Pro forma
(unaudited) (unaudited)
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Net sales $344,604 $394,839 $218,782 $404,710
Income (loss) from operations $ 13,566 $ 21,316 $ (5,773) $ 13,751
Depreciation and amortization $ 2,370 $ 3,751 $ 984 $ 3,778
Income before extraordinary item $ 448 $ 881 $ (4,705) $ (2,337)
Net income (loss) $ (713) $ (280) $ (4,705) $ (2,337)
Net income (loss) per share:
Basic $ (0.10) $ (0.04) $ (0.63) $ (0.31)
Diluted $ (0.10) $ (0.04) $ (0.63) $ (0.31)
</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 acquisitions of Miss Erika and
Jeri-Jo 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.
3. SALES TO MAJOR CUSTOMERS
For the years ended October 31, 1998, November 1, 1997 and November 2,
1996, net sales made to three customers were approximately 17%, 16% and 15%,
approximately 11%, 29% and 17%, and approximately 12%, 34% and 20%,
respectively.
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 which is calculated as 0.3% of the net amount of gross sales less
sales discounts. Factor commissions for the fiscal years ended October 31,
1998, November 1, 1997 and November 2, 1996 were approximately $1.3 million,
$1.0 million and $1.0 million, respectively.
In connection with the acquisitions of Jeri-Jo and Miss Erika, the Company
transferred outstanding accounts receivable on the dates 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 October 31, 1998, the amount due from factor of $86.0 million did
not include any accounts receivable with recourse.
Prior to September 30, 1997, 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.
F-10
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVENTORIES
Inventories consist of the following:
October 31, November 1,
1998 1997
--------------------------------------------
(In Thousands)
Raw materials $ 3,733 $ 2,979
Work-in-process 1,158 2,258
Finished goods 42,495 23,353
------- -------
$47,386 $28,590
======= =======
6. FIXED ASSETS
Fixed assets are summarized as follows:
October 31, November 1,
1998 1997
-----------------------------------------
(In Thousands)
Machinery and equipment $ 1,312 $ 872
Furniture and fixtures 963 448
Computer equipment 5,955 4,032
Leasehold improvements 3,762 2,863
------- ------
Total 11,992 8,215
Less accumulated depreciation
and amortization 3,731 2,316
------- ------
$ 8,261 $5,899
======= ======
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 make a principal
repayment of his loan from the Company in an amount equal to the product of (i)
the percentage representing the number of shares sold by such person to the base
amount set forth in the promissory note, and (ii) the outstanding balance of the
notes as of the date of the promissory note. 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 1998, all necessary payments had been made under the
terms of the loans by the management stockholders.
As of October 31, 1998, the fair market value of the Company's Common Stock
held by such persons was $7,780,918 and the fair market value of the stock
pledged by the management stockholders as security for the loans was $2,906,362.
The aggregate principal balance of all loans to management stockholders was
$2,470,862. The loan balance set forth above reflects the required principal
payments of $529,138 resulting from sales of Common Stock by management
stockholders. Interest income relating to these loans for the years ended
October 31, 1998, November 1, 1997 and November 2, 1996 amounted to
approximately $147,000, $155,000 and $155,000, respectively.
F-11
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INTANGIBLE ASSETS
Intangible assets consist of the following:
October 31, November 1,
1998 1997
-------------------------------------------
(In Thousands)
Tradenames and trademarks $17,500 $3,872
Goodwill 26,918 -
------- ------
44,418 3,872
Less accumulated amortization 954 19
------- ------
$43,464 $3,853
======= ======
The Company has recently completed the valuations and analysis necessary to
finalize the Miss Erika and Jeri-Jo purchase price allocations. Accordingly,
the Company has allocated certain amounts previously recorded as goodwill to
tradenames and trademarks.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
October 31, November 1,
1998 1997
-----------------------------------
(In Thousands)
Interest on $125.0 million 12 1/2%
Senior Notes $ 5,773 $ -
Reserve for litigation 2,500 -
Contractual bonuses payable 2,325 1,513
Profit sharing contribution payable 720 578
Accrual for closure of retail - 600
outlet stores
Other accrued expenses and current
liabilities 2,311 2,295
------- ------
$13,629 $4,986
======= ======
10. FINANCING ARRANGEMENTS AND EXTRAORDINARY ITEM
In connection with the Miss Erika acquisition, on September 30, 1997 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 "Prior Credit Agreement"). The proceeds were used to
finance the acquisition and for ongoing working capital requirements of the
Company and its subsidiaries. The Prior Credit Agreement provided for a $15
million term loan and $125 million revolving credit and letter of credit
facility, and had 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).
The Prior Credit Agreement provided for interest to be paid monthly in
arrears on revolving credit loan balances at an annual rate equal to the prime
rate at NationsBank, N.A. less 0.25%. Interest on the term loan was at an
annual rate equal to the prime rate at NationsBank, N.A. plus 0.25% and required
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 weighted average
interest rates on the term loan and the revolving credit facility were 8.75% and
7.70%, respectively, for fiscal 1997.
F-12
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. FINANCING ARRANGEMENTS AND EXTRAORDINARY ITEM (CONTINUED)
Concurrent with the closing of the Jeri-Jo acquisition on June 18, 1998,
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 "Current Credit
Agreement"). The facility is being used to finance ongoing working capital
requirements of the Company and its subsidiaries. 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. Presently,
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 is 7.00% 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 the $30.0 million
stand-by letter of credit to secure the Company's cash contingent payment
obligation in connection with the Jeri-Jo acquisition), with aggregate letters
of credit not to exceed $160.0 million. Under the Current Credit Agreement, the
aggregate credit available to the Company is 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. The Company and its
subsidiaries guarantee the Company's obligations under the Current Credit
Agreement and have granted a lien on substantially all of their respective
assets to secure the obligations under the Current Credit Agreement. The
weighted average interest rate on the revolving credit facility was 8.03% for
fiscal 1998. The Company continued to factor accounts receivable pursuant to
factoring arrangements. The Current Credit Agreement contains a number of
restrictive covenants, including covenants which limit the 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.
The extraordinary item in fiscal 1998 of $1.2 million, net of tax, resulted
from the write-off of deferred financing costs of $2.0 million associated with
the early extinguishment of the Prior Credit Agreement on June 18, 1998.
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 Senior
Notes were used to finance the Jeri-Jo acquisition and to refinance then
existing indebtedness of the Company and Jeri-Jo. The Company's obligations
under the Senior Notes are unsecured and are guaranteed by all of the Company's
subsidiaries. The indenture governing the Senior Notes (the "Indenture")
contains a number of restrictive covenants, including covenants which limit the
incurrence of liens and indebtedness, limit transactions with affiliates, sales
of assets, investments and other restricted payments.
At October 31, 1998, borrowings and letters of credit outstanding under the
Current Credit Agreement were $3.8 million and $110.1 million, respectively.
The Company had total additional available credit of $31.2 million, including
$5.0 million of overadvance capability, under the Current Credit Agreement as of
that date, pursuant to the borrowing base formula set forth above. At November
1, 1997, borrowings and letters of credit outstanding under the Prior Credit
Agreement were $44.5 million and $57.1 million, respectively.
Long-term debt consists of the following:
October 31, November 1,
1998 1997
-----------------------------------
(In Thousands)
12 1/2% Senior Notes due June 3, 2005 $125,000 $ -
Term loan - 15,000
Less current portion of term loan - (3,000)
-------- -------
$125,000 $12,000
======== =======
The Senior Notes mature in full on June 3, 2005. There are no required
principal payments prior to the maturity date.
F-13
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company operates 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 non-
cancelable operating leases are as follows:
Fiscal Year (In Thousands)
----------- --------------
1999 $ 3,909
2000 3,616
2001 3,483
2002 3,295
2003 2,920
Thereafter 8,654
-------
$25,877
=======
Rent expense for the years ended October 31, 1998, November 1, 1997 and
November 2, 1996 amounted to approximately $3.4 million, $2.1 million and $2.2
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 13). 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.
The Company has entered into employment agreements with certain executive
officers which provide for aggregate minimum annual compensation of
approximately $5.0 million through November 1999 and $1.5 million through
November 2000. All employment agreements provide that the payment of
discretionary bonuses will be determined at the discretion of the Compensation
Committee of the Board of Directors. The employment agreements entered into in
connection with the Miss Erika acquisition provide for contractual bonuses based
upon the attainment of certain Miss Erika EBITDA targets, as defined therein.
Contractual bonuses pursuant to these contracts were $2.3 million and $1.5
million in fiscal 1998 and fiscal 1997, respectively, (see Note 9). Other than
the signing bonus to the Company's new President and contractual bonuses for
Miss Erika executives described above, no bonuses were paid for the years ended
October 31, 1998, November 1, 1997 and November 2, 1996.
CONTRACTOR AGREEMENTS
Norton has long-term agreements with its distribution contractor (Railroad
Enterprises, Inc.) and its 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) 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 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 year in 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 1998, if the agreements were terminated as of January 1, 1999, Norton
would have been required to pay the
F-14
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTRACTOR AGREEMENTS (CONTINUED)
distribution contractor approximately $1,350,000 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. 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 October 31, 1998, November 1,
1997 and November 2, 1996, the Company paid approximately $7.3 million, $7.8
million and $8.6 million, respectively, to its distribution contractor and
approximately $653,000, $3.9 million and $5.8 million, respectively, to its
cutting contractor. In March 1998, Norton notified these contractors that it
does not intend to renew the agreements. Norton's finished goods distribution
contractor and domestic contractor have commenced a lawsuit against the Company
and Norton alleging breach of contract under these agreements. See "Litigation"
below.
Miss Erika has an agreement for inland shipping services with 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. Shipping costs under this agreement are approximately $700,000 per
annum.
STOCK REPURCHASE
The Company's Board of Directors authorized a stock repurchase program,
under which the Company may repurchase up to $7.5 million of the Company's
Common Stock. 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 28,
1999, 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.
LITIGATION
On July 14, 1998, Norton's distribution and cutting contractors,
(collectively, "Plaintiffs"), filed an action in the New York State Supreme
Court for New York County which, as amended, is entitled Cutting Edge Services,
----------------------
Inc. and Railroad Enterprises, Inc. v. Norton McNaughton of Squire, Inc. and
- ----------------------------------------------------------------------------
Norton McNaughton, Inc. Plaintiffs claim that Norton breached its contracts
- -----------------------
with them because, among other things, Miss Erika and Jeri-Jo failed to use
Plaintiffs' services as allegedly required under Norton's contracts with
Plaintiffs. The Company believes these contracts do not require Miss Erika or
Jeri-Jo to utilize Plaintiffs' services. This action seeks substantial
compensatory and punitive damages and related declaratory relief concerning
rights under the contracts. On December 30, 1998, the Company and Norton moved
to dismiss most of Plaintiffs' claims. The Company believes the claims are
meritless and intends to defend this matter vigorously. There can be no
assurance that the Company will be successful in defending the action or that
any determination rendered would not have a material adverse effect on the
business, financial condition, results of operations and cash flow of the
Company.
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 business, financial condition, results of operations and cash flow.
In connection with the Cutting Edge Services, Inc. and Railroad Enterprises,
Inc. lawsuit, as well as other pending litigation, the Company established a
litigation reserve of $2.5 million. See Note 9.
F-15
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ACQUISITION EARNOUTS
Miss Erika
- ----------
On September 30, 1997, a wholly-owned subsidiary of 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 purchase price of Miss Erika
consisted of $24.0 million in cash paid at the closing, the assumption of $2.5
million of indebtedness and 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 four times the average of Miss Erika's earnings before interest expense,
income taxes, depreciation and amortization, as defined in the Miss
Erikapurchase agreement ("Miss Erika 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 intangible assets. 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 has agreed to cause any shares of Common Stock issued as a
contingent payment to be registered under the Securities Act. 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. Miss Erika achieved Miss Erika EBITDA during fiscal 1998 which, if
sustained in fiscal 1999, will result in the payment of significant additional
consideration, however, the Company cannot predict the amount of additional
consideration that may be payable.
Jeri-Jo
- -------
On June 18, 1998, a wholly-owned subsidiary of 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. 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 and certain other
contractual obligations. In addition, the Company agreed to pay an additional
contingent payment in cash and its 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 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 earnings before
interest expense, income taxes, depreciation and amortization, as defined in the
Jeri-Jo purchase agreement ("Jeri-Jo EBITDA"), for the two years ending June 30,
2000, plus (B) 0.50 times any such average Jeri-Jo EBITDA between $17.0 million
and $20.0 million, plus (C) one times any such average Jeri-Jo 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
intangible assets. The Company has secured 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 Company as 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 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. 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. Jeri-Jo achieved Jeri-Jo EBITDA for the four month
period ended October 31, 1998 which, if sustained, will result in the payment of
significant additional consideration, however, the Company cannot predict the
amount of additional consideration that may be payable.
F-16
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES
Income taxes are provided using the liability method prescribed by SFAS 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 (benefit) for income taxes before extraordinary item
for the fiscal years ended October 31, 1998, November 1, 1997 and November 2,
1996 is comprised of the following:
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------------
October 31, November 1, November 2,
1998 1997 1996
---------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ 1,187 $ (2,788) $ 530
State and local 573 65 180
---------------- -------------- --------------
1,760 (2,723) 710
Deferred:
Federal (180) 360 326
State and local ( 85) (1,037) 91
---------------- -------------- --------------
(265) (677) 417
---------------- -------------- --------------
$ 1,495 $ (3,400) $ 1,127
================ ============== ==============
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities. At October 31, 1998,
November 1, 1997 and November 2, 1996, there were net deferred tax assets of
$3,526,000, $3,261,000 and $183,000, respectively, related primarily to uniform
capitalization of inventory costs, the reporting of rent expense using the
straight-line method and net operating loss carryforwards.
Reconciliation of the statutory federal tax rate and the effective rate for
the fiscal years ended October 31, 1998, November 1, 1997 and November 2, 1996
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Amount % Amount % Amount %
------ --------- --------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
Federal statutory tax rate $ 661 34% $(2,768) 34% $ 928 34%
State and local taxes, net of federal
income tax benefit 178 9 (632) 8 176 7
Effect of tax audits 600 31 - - - -
Other, net 56 3 - - 23 2
------ -------- ------- -- ------ --
Provision for income taxes $1,495 77%/(a)/ $(3,400) 42% $1,127 43%
====== ======== ======= == ====== ==
</TABLE>
(a) The difference between the statutory rate and actual effective rate in
fiscal 1998 relates to the proposed resolution of prior years' tax examinations
covering fiscal years 1991 through 1996 and the corresponding impact on state
and local taxes.
F-17
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. 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 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 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. 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. For the fiscal year ended October
31, 1998, stock options were granted pursuant to the Miss Erika Bonus Plan to
purchase an aggregate of 392,000 shares of Common Stock of the Company at an
exercise price of $3.63, which was the fair market value of the Common Stock on
the date of grant. All options vested on the date of grant and have 10 year
terms.
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 to employees under the Company's 1994
Stock Option Plan with exercise prices of $13.25 per share and $14.00 per share.
As a result, 235,500 options were canceled and re-granted, 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.
On April 15, 1998, the Company granted an aggregate of 15,000 stock options
to non-employee directors under the Stock Option Plan for Non-Employee
Directors. The exercise price of such options was $5.38, which was the fair
market value of the Common Stock on the date of grant. All options have 10 year
terms and vest over two years.
On June 18, 1998, the Company granted an aggregate of 546,429 stock options
to executive management of Jeri-Jo under their respective employment agreements.
The exercise price of such options was $6.38, which was the fair market value of
the Common Stock on the date of grant. All options have 10 year terms. An
aggregate of 100,000 of such options vested on the date of grant with the
remainder vesting on October 28, 2000.
F-18
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The change in outstanding options under the Company's stock option plans
for each of the three years in the period ended October 31, 1998, 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, 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
Granted 1,013,429 $ 3.63 - $ 6.38
Canceled (118,000) $ 5.50 - $14.00
Exercised - -
---------
Outstanding at October 31, 1998 2,531,929 $ 3.63 - $17.25
=========
</TABLE>
Options outstanding at October 31, 1998 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> <C>
$ 3.63 - $ 5.44 547,000 9.7 $ 4.14 532,000
5.50 - 5.50 735,000 8.5 5.50 135,000
6.00 - 6.13 159,000 8.9 6.01 56,307
6.38 - 6.38 596,429 9.0 6.38 120,000
6.50 - 8.19 431,500 8.2 6.99 226,793
13.25 - 17.25 63,000 5.5 14.81 63,000
----------- -----------
2,531,929 8.8 5.90 1,133,100
=========== ===========
</TABLE>
As of October 31, 1998, 94 individuals held options, 68,000 shares were
available for future grants under the Company's 1994 Stock Option Plan, 108,000
shares were available for future grants to Miss Erika employees under the Miss
Erika Bonus Plan, 503,571 shares were available for future grants to three Jeri-
Jo employees under the Jeri-Jo Bonus Plan, 85,000 shares were available for non-
employee directors under the Stock Option Plan for Non-Employee Directors and
300,000 shares were available for future grants to Norton McNaughton, Inc.
employees and consultants under the 1998 Long-Term Incentive Plan.
The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
employee stock options because, as discussed below, 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 Opinion 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.
Pro forma information regarding net income and earnings per share is
required by SFAS 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 1998, fiscal 1997 and fiscal 1996: risk-free interest
rates of 5.8% for fiscal 1998 and 6.2% for both fiscal 1997 and fiscal 1996;
zero dividend yields; volatility factor of the expected market price of the
Company's Common Stock of 0.56 for all fiscal years; a weighted average expected
life of the option of 5.6 years for fiscal 1998 and 5 years for both fiscal 1997
and fiscal 1996. Based on the assumptions set forth above, the weighted average
fair value of the options granted in fiscal 1998 was $3.23 per share on the date
of grant.
F-19
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
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
---------------------------------------------------------------
October 31, November 1, November 2,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $ (713) $(4,705) $1,524
Pro forma $(1,988) $(5,458) $1,322
Earnings per share:
As reported $ (0.10) $ (0.63) $ 0.20
Pro forma $ (0.27) $ (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
limitations, to purchase the shares. As of October 31, 1998, 23,069 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 Norton 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 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 under Norton's plan for the years ended October 31, 1998, November
1, 1997 and November 2, 1996 were $179,389, $193,220 and $192,687, respectively.
Effective January 1, 1988, the Company began sponsoring an employee savings
plan under Section 401(k) of the Internal Revenue Code for all Jeri-Jo full-time
employees with one year of continuous service. Eligible employees may make pre-
tax contributions of up to 15% of their annual compensation subject to the
maximum allowable contribution. 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. Employees are 100% vested in their pre-tax
contributions immediately, and become vested in the employer matching
contributions as follows: 20% vested after two years of service, 40% vested
after three years of service, 60% vested after four years of service, 80% vested
after five years of service and 100% vested after six years of service. The
Company's matching contribution under Jeri-Jo's plan for the year ended October
31, 1998 (from the date of acquisition of June 18, 1998) was $58,833.
F-20
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
PROFIT SHARING PLAN (CONTINUED)
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. Profit sharing plan
assets consist primarily of stocks, bonds and U.S. Government securities. 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 and in fiscal 1998 the accrual amounted to $720,000 (see
Note 9).
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
consolidated balance sheets approximate fair value.
Short-term debt: The carrying amounts reported in the consolidated balance
sheets approximate fair value.
Long-term debt: The fair value of the 12 1/2% Senior Notes due 2005 is
based on the quoted market price. The fair value of the long-term portion of the
term loan was estimated using discounted cash flow analysis, based on the
Company's incremental borrowing rate for similar types of borrowing
arrangements.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
October 31, 1998
----------------
Carrying
Amount Fair Value
----------------------------
(In Thousands)
<S> <C> <C>
Cash and cash equivalents $ 205 $ 205
Short-term debt:
Revolving credit loan 3,839 3,839
Long-term debt:
$125 million 12 1/2% Senior Notes 125,000 105,625
</TABLE>
<TABLE>
<CAPTION>
November 1, 1997
----------------
Carrying
Amount Fair Value
----------------------------
(In Thousands)
<S> <C> <C>
Cash and cash equivalents $ 529 $ 529
Short-term debt:
Revolving credit loan 44,473 44,473
Current portion of term loan 3,000 3,000
Long-term debt:
Term loan 12,000 12,000
</TABLE>
15. 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 totaling approximately $700,000 and approximately $300,000 of
severance payments related to the closure of other divisions, including the
Company's catalog division.
F-21
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SPECIAL CHARGES (CONTINUED)
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 $600,000 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 (see Note 9). As of October 31, 1998, all charges related
to such reserves were incurred and no changes in estimates were required.
16. 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.
F-22
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Balance at Balance
Beginning Costs and at End of
Description of Year Expenses Deductions/(1)/ Year
----------- ---------- --------- --------------- ---------
<S> <C> <C> <C> <C>
Year ended October 31, 1998
Reserve for sales discounts, returns
and allowances $2,198 $49,336/(2)/ $47,743 $3,791
Year ended November 1, 1997
Reserve for sales discounts, returns
and allowances $ 500 $44,730/(3)/ $43,032 $2,198
Year ended November 2, 1996
Reserve for sales discounts, returns
and allowances $1,448 $50,648 $51,596 $ 500
</TABLE>
(1) Discounts, returns and allowances granted to customers and charged against
reserve.
(2) Includes Jeri-Jo Knitwear, Inc.'s acquired reserve at June 18, 1998.
(3) Includes Miss Erika, Inc.'s acquired reserve at September 30, 1997.
F-23
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
FISCAL 1998 Quarter Quarter Quarter Quarter Year
---------- ------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $53,508 $94,116 $79,967 $117,013 $344,604
Gross profit 11,397 18,036 19,203 22,265 70,901
Income (loss) before extraordinary item (845) 1,316 456 (479) 448
Extraordinary item, net - - (1,161) - (1,161)
Net income (loss) (845) 1,316 (705) (479) (713)
BASIC PER SHARE DATA:
Income (loss) before extraordinary item $ (0.11) $ 0.18 $ 0.06 $ (0.06) $ 0.06
Extraordinary item, net - - (0.16) - (0.16)
------- ------- ------- -------- --------
Net income (loss) $ (0.11) $ 0.18 $ (0.10) $ (0.06) $ (0.10)
Weighted average number of common ======= ======= ======= ======== ========
shares outstanding
7,411 7,413 7,413 7,414 7,413
======= ======= ======= ======== ========
DILUTED PER SHARE DATA:
Income (loss) before extraordinary item $ (0.11) $ 0.18 $ 0.06 $ (0.06) $ 0.06
Extraordinary item, net - - (0.15) - (0.16)
------- ------- ------- -------- --------
Net income (loss) $ (0.11) $ 0.18 $ (0.09) $ (0.06) $ (0.10)
======= ======= ======= ======== ========
Weighted average number of common
7,411 7,423 7,536 7,414 7,432
shares outstanding assuming dilution ======= ======= ======= ======== ========
FISCAL 1997
Net sales $41,596 $52,873 $48,240 $ 76,073 $218,782
Gross profit 9,299 8,959 10,777 10,191 39,226
Net income (loss) 43 (3,551) 712 (1,909) (4,705)
BASIC PER SHARE DATA:
Net income (loss) $ 0.01 $ (0.47) $ 0.10 $ (0.26) $ (0.63)
======= ======= ======= ======== ========
Weighted average number of common
shares outstanding 7,638 7,489 7,414 7,410 7,488
======= ======= ======= ======== ========
DILUTED PER SHARE DATA:
Net income (loss) $ 0.01 $ (0.47) $ 0.10 $ (0.26) $ (0.63)
======= ======= ======= ======== ========
Weighted average number of common
shares outstanding assuming dilution 7,658 7,489 7,414 7,410 7,488
======= ======= ======= ======== ========
</TABLE>
F-24
<PAGE>
EXHIBIT 2.1(a)
AMENDMENT TO
AGREEMENT OF PURCHASE AND SALE
THIS AMENDMENT made as of September 25, 1997 (this "Amendment")
to that certain Agreement of Purchase and Sale made as of the 29/th/ day of
August, 1997 (the "Original Agreement") 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, TCR International Partners
L.P., 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.
Capitalized terms used herein and not otherwise herein, shall have the meanings
assigned to such terms in the Original Agreement.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, parties hereto desire to amend the Original Agreement as
set forth herein.
NOW THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein and in the Original Agreement, and
intending to be legally bound, the parties hereto hereby agree as follows:
Section 1. The first sentence of Section 2.02(b)(viii) of the Original
Agreement is hereby amended by replacing the phrase "require Norton, within 45
days of Norton's receipt of the Security Notice, either" with the phrase
"require Norton, within 45 days of Norton's receipt of the Security Notice, to
do one of the following, as chosen by Norton,".
Section 2. The definition of "EBITDA" in Section 14.01 of the Original
Agreement is hereby amended by adding the following paragraph at the end
thereof:
"(y) If the Purchaser shall create an Inventory
reserve on its opening balance sheet as at the
Closing Date in addition to the Inventory reserve
on the Company's balance sheet as at the day before
the Closing Date (an "Additional Inventory
Reserve") and such Additional Inventory Reserve is
subsequently reduced during the year ending October
31, 1998 or the year ending November 6, 1999, then
in calculating EBITDA for each such year there
shall be subtracted an amount equal to one-half of
the reduction to the Additional Inventory Reserve
during such year."
Section 3. The Original Agreement, as amended hereby, shall remain in full
force and effect in accordance with its terms.
Section 4. The provisions of Sections 13.01, 13.02, 13.03, 13.05, 13.06,
13.07, 13.08, 13.09, 13.13 and 13.17 of the Original Agreement shall apply
equally to this Amendment.
* * *
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed by the
parties hereto as of the date first above written.
MISS ERIKA, INC.
By:________________________________
Name:
Title:
ME ACQUISITION CORP.
By:________________________________
Name:
Title:
NORTON MCNAUGHTON, INC.
By:________________________________
Name:
Title:
TRIUMPH CAPITAL, L.P. II
By Triumph Management, L.P., its general partner
By:________________________________
Name:
Title:
TERBEM LIMITED
By_________________________________
Name:
Title: Attorney-in-Fact
BOBST INVESTMENT CORP.
By:________________________________
Name:
Title: Attorney-in-Fact
<PAGE>
TCRI OFFSHORE PARTNERS C.V.
By Three Cities Management Partners, L.P., its general
partner
By Three Cities Research, Inc., its general partner
By__________________________________
Name:
Title:
TCR INTERNATIONAL PARTNERS L.P.
By Three Cities Management Partners, L.P., its general
partner
By Three Cities Research, Inc., its general partner
By__________________________________
Name:
Title:
____________________________________
Stuart Bregman
___________________________________
Howard Zwilling
___________________________________
Sidney Goldstein
___________________________________
Christian Baillet
<PAGE>
EXHIBIT 2.2(a)
JJ Acquisition Corp.
Norton McNaughton, Inc.
463 Seventh Avenue
New York, New York 10018
May 27, 1998
Jeri-Jo Knitwear Inc.
Jamie Scott, Inc.
Stockholders of Jamie Scott, Inc.
c/o Currants
1407 Broadway
Suite 2909
New York, New York 10018
Re: Agreement of Purchase and Sale dated as of April 15, 1998 (the
"Agreement") by and among JJ Acquisition Corp., Norton McNaughton,
Inc., Jeri-Jo Knitwear Inc., Jamie Scott, Inc. and the Stockholders of
Jamie Scott, Inc.
-----------------
Ladies and Gentlemen:
Reference is made to the Agreement; capitalized terms used herein and
not defined herein shall have the meanings assigned to such terms in the
Agreement. For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby amend the Agreement as
set forth herein.
1. Section 2.02(C) of the Agreement is hereby amended to add the
following clauses before the definition of "Acceleration Event" in the first
sentence of Section 2.02(C) of the Agreement:
"(vi) for any reason not initiated or consented to by Susan
Schneider, Leslie Schneider and Scott Schneider, for so long as any of them is
employed by the Purchaser, or for any reason other than a force majeure event
(which event causes the Purchaser not to utilize the warehouse and distribution
facility which is the subject of the Warehouse Lease), the Purchaser shall
utilize a warehouse or distribution facility other than the facility which is
the subject of the Warehouse Lease,
(vii) there shall occur (a) (i) a final and non appealable judgment
or arbitration determination against the Purchaser, Miss Erika, Inc. ("Miss
Erika"), Norton McNaughton of Squire, Inc. ("Squire") or Norton in an amount of
more than $5 million, inclusive of interest and costs, or (ii) a payment by
Norton of such a judgment or arbitration determination, or (b) a settlement
agreed to by Norton in an amount of more than $75 million, in any case, which
judgment, arbitration determination or settlement shall arise out of the
warehousing, distribution and/or cutting activities of Norton, Miss Erika,
Squire, or the Purchaser, or
(viii) other than as a result of events or circumstances affecting
the financial markets or the apparel industry generally, the Market Value for
the Norton Common Stock shall decline by over 50% (determined without reference
to the 20-business day averaging set forth in the definition of "Market Value"
herein, but rather with Market Value determined over a five consecutive business
day period commencing on and including the date of a public announcement by
Norton concerning events affecting Norton other than matters concerning (a) the
financial performance of Norton or any of its subsidiaries relating to the day
to day business operations of Norton or any of its subsidiaries, (b)
acquisitions or dispositions of businesses, or (c) public offerings or other
sales of equity or debt securities of Norton."
2. Section 7.12(a) of the Agreement is hereby amended by adding the
following clause at the end of Section 7.12(a) of the Agreement:
<PAGE>
"(vii) Norton agrees, in good faith, to recommend the Jeri-Jo
Recommendation (as defined below) for approval by the Stock Option Committee of
the Board of Directors of Norton, and agrees to use its best efforts to have
such Committee approve the Jeri-Jo Recommendation. For purposes hereof, the
"Jeri-Jo Recommendation" shall mean the written recommendation given, if at all,
at the end of each fiscal year of Norton by Susan Schneider, Leslie Schneider
and Scott Schneider, for so long as any of them is employed by the Purchaser, as
to (i) the employees of the Purchaser to whom they recommend the granting of
options to purchase shares of Norton Common Stock under stock option and other
similar plans adopted by Norton and (ii) the number of shares of Norton Common
Stock to be subject to options granted to each such employee; provided that,
Norton agrees to so recommend an aggregate number of options for grant to
employees of the Purchaser pursuant to the Jeri-Jo Recommendation which is not
less than a number which is approximately equal to the aggregate number of
options to be submitted for the approval of the Stock Option Committee of the
Board of Directors of Norton at the end of a fiscal year multiplied by the
approximate percentage of operating income contributed by the Purchaser to the
consolidated operating income of Norton for such fiscal year."
3. Section 7.12(a)(ii) of the Agreement is hereby amended by adding
the following phrase to the phrase "including the opening or closing of or
access to showrooms and warehouse facilities":
"and the selection of which warehouse or distribution facility to be
utilized by the Purchaser"
4. Section 9.13 of the Agreement is hereby amended by adding the
following phrase at the end thereof:
"; provided that the Warehouse Lease will provide for a five year term
commencing on the Closing Date, notwithstanding the terms of Exhibit K hereto."
5. Section 9.07 of the Agreement is hereby amended to add the
following phrase at the end thereof:
"; provided that, notwithstanding the definition of Earn Out Letter of
Credit set forth in Section 14.01 hereof and notwithstanding Exhibit G of the
Agreement, the face amount of the Earn Out Letter of Credit shall be $30
million, of which $30 million shall be drawable in payment of the Seventh Amount
(as defined in the Earn Out Certificate attached to the Earn Out Letter of
Credit in the Form of Exhibit F hereto) and of which $15 million shall be
drawable in payment of the First Amount, Second Amount, Third Amount, Fourth
Amount, Fifth Amount or Sixth Amount (as defined in the Earn Out Certificate).
6. Section 7.07(a) of the Agreement is hereby amended by adding the
following sentences after the first sentence of Section 7.07(a):
"Those benefits shall include but not be limited to eligibility of
each Transferred Employee to participate in, to the extent permitted by
applicable law and such plan, the Norton McNaughton, Inc. Employee Stock
Purchase Plan. In addition, to the extent permitted by applicable law and the
terms of the applicable plan, at the request of Susan Schneider made during the
Earn Out Period, the Purchaser shall have the right to adopt and participate in
Norton's 401(k) plan and medical plan."
7. The definition of "EBITDA" set forth in Section 14.01 of the
Agreement shall be amended to add the following sentence at the end of such
definition:
"Notwithstanding anything to the contrary contained in this
definition, EBITDA shall not include any expenses or costs incurred by the
Purchaser in connection with the events which are the subject of clause (vii) of
Section 2.02(C) hereof."
8. Exhibit F to the Agreement is hereby amended in its entirety to
read as set forth in Exhibit F attached hereto.
9. Notwithstanding the terms of the Employment Agreements attached
as exhibits to the Agreement, the Employment Agreements to be executed and
delivered at the Closing shall provide that Susan Schneider and Leslie Schneider
will be the Co-Chief Executive Officers and Presidents of the Purchaser and that
Scott Schneider shall be the Executive Vice President of the Purchaser.
<PAGE>
10. Except as amended hereby, the Agreement is ratified and confirmed
in all respects by the parties hereto. Nothing herein shall confer or be deemed
to confer any right, remedy, benefit or entitlement on any third-party. This
amendment shall be construed pursuant to and in accordance with the laws of the
State of New York, without regard to conflict of laws principles, and may be
executed in counterparts, including by telecopy, each of which shall be deemed
an original, all of which taken together shall constitute one and the same
amendment.
* * *
Very truly yours,
JJ ACQUISITION CORP.
NORTON MCNAUGHTON, INC.
By:______________________________
Name: Peter Boneparth
Agreed as of the date
above written:
JERI-JO KNITWEAR INC.
By:____________________________
Name: Leonard Schneider
JAMIE SCOTT, INC.
By:____________________________
Name: Susan Schneider
_______________________________
Susan Schneider
_______________________________
Leslie Schneider
_______________________________
Scott Schneider
<PAGE>
EXHIBIT 2.2(b)
JJ Acquisition Corp.
Norton McNaughton, Inc.
463 Seventh Avenue
New York, New York 10018
June 18, 1998
Jeri-Jo Knitwear Inc.
Jamie Scott, Inc.
Stockholders of Jamie Scott, Inc.
c/o Currants
1407 Broadway
Suite 2909
New York, New York 10018
Re: Agreement of Purchase and Sale dated as of April 15, 1998, as
amended (the "Agreement"), by and among JJ Acquisition Corp.,
Norton McNaughton, Inc., Jeri-Jo Knitwear Inc., Jamie Scott, Inc.
and the Stockholders of Jamie Scott, Inc.
---------------------------------
Ladies and Gentlemen:
Reference is made to the Agreement; capitalized terms used herein and
not defined herein shall have the meanings assigned to such terms in the
Agreement. For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby amend the Agreement as
set forth herein.
1. Section 13.15 of the Agreement is hereby amended to delete the
references therein to "Leonard Schneider" and replacing them with references to
"Susan Schneider." In addition, all references to "Leonard Schneider, as the
Stockholder Representative" in Exhibits F and G to the Agreement are hereby
replaced with references to "Susan Schneider, as the Stockholder
Representative."
2. Section 8.04(b) of the Agreement is amended to read in its
entirety as follows:
"(b) If the Agreement does not terminate and the Closing occurs, on the
Closing Date, upon receipt by the Escrow Agent of a notice from
the Purchaser, Norton and the Companies that the Closing is
occurring (which notice the parties hereto agree to give to the
Escrow Agent), the Escrow Agent shall release (i) the entire
Escrow Deposit to the Companies, which entire Escrow Deposit
shall be applied toward the Closing Purchase Price and (ii) any
and all interest and other earnings on the Escrow Deposit to the
Purchaser or Norton."
3. Norton hereby agrees, promptly following its obtaining knowledge
thereof, to give notice to the Stockholder Representative of the occurrence of
an Acceleration Event, provided that the failure to give such notice shall not
effect the Companies' and the Stockholders' rights under the Agreement or
Norton's or the Purchaser's obligations under the Agreement.
4. The definition of "EBITDA" set forth in Section 14.01 of the
Agreement shall be amended by deleting the last sentence thereof (which sentence
was added to the Agreement by the Amendment to the Agreement dated May 27, 1998)
and by adding the following sentence at the end of such definition:
"Notwithstanding anything to the contrary contained in this
definition, "EBITDA" shall not include any expenses, costs,
settlements, arbitration awards or judgments incurred by the
Purchaser, if any, in connection with the events which are the subject
of clause (vii) of Section 2.02(C) hereof."
5. Section 1.01(b) of the Agreement is hereby amended to add to such
subsection a new clause (viii) thereto and the additional following language:
"(viii) subject to the terms and conditions set forth in this
subsection (b) below, all causes of action, actions, claims and rights
of any kind of either of the Companies against Club Italia, Inc.,
Sixty S.p.A. or any related or affiliated Person of either Club
Italia, Inc. or Sixty S.p.A. (collectively, "Sixty") arising out of or
related to the alleged use by Sixty of the name "Energie" or
"L'Energia" to sell clothing.
<PAGE>
The parties hereto understand and agree that the Companies propose to commence
litigation against Sixty, including for alleged infringement by Sixty through
the Closing Date against the registered trademark "Energie" (the "Litigation").
It is further understood and agreed by the parties hereto that any and all
settlements, judgments or other amounts payable by Sixty to the Companies and/or
the Stockholders and arising out of the Litigation shall be exclusively the
property of the Companies and Stockholders (the "Amounts"), and that any and all
costs, expenses and other amounts (whether by settlement, judgment or otherwise)
expended or to be expended by the Companies (or either of them) or by any of the
Stockholders in connection with the Litigation (including without limitation,
legal costs, costs of experts or any other third party costs) arising out of or
relating to the Litigation (and any counterclaims by Sixty, including against
Norton or the Purchaser) shall be exclusively the obligation and responsibility
of the Companies and the Stockholders, on the one hand, and not of Norton or the
Purchaser, on the other hand (the "Costs"). Neither the Amounts nor the Costs
shall be included in the calculation of EBITDA for purposes hereof. Norton and
the Purchaser agree to reasonably cooperate with the Companies and the
Stockholders in connection with the Litigation. Notwithstanding anything to the
contrary contained herein, the Companies and the Indemnifying Stockholders,
jointly and severally, hereby agree to indemnify and hold harmless each of the
Purchaser Indemnified Parties from and against any and all Damages which are
sustained or incurred by any of the Purchaser Indemnified Parties in connection
with or by reason of the Litigation, any related matters, actions or claims, or
any counterclaim or other claim made by Sixty against any of the Purchaser
Indemnified Parties, including without limitation, arising out of the ownership
and/or use after the Closing by the Purchaser of the trademark "Energie,"
including by Set Off. Notwithstanding anything to the contrary contained
herein, nothing in the subsection (b) shall grant any rights or entitlements to
the Companies or the Stockholders with respect to the ownership or use of, or
goodwill associated with, the trademark "Energie"; such trademark and the
goodwill associated therewith being an Asset hereunder.
6. Following the Closing Date, Norton and the Purchaser agree to
investigate, and to reasonably cooperate with the Stockholders in investigating,
the feasibility and benefits arising out of the establishment of a separate
importing subsidiary, which subsidiary would act in such capacity for the
Purchaser and the other operating subsidiaries of Norton.
7. Except as amended hereby, the Agreement is ratified and confirmed
in all respects by the parties hereto. Nothing herein shall confer or be deemed
to confer any right, remedy, benefit or entitlement on any third-party. This
amendment shall be construed pursuant to and in accordance with the laws of the
State of New York, without regard to conflict of laws principles, and may be
executed in counterparts, including by telecopy, each of which shall be deemed
an original, all of which taken together shall constitute one and the same
amendment.
* * *
Very truly yours,
JJ ACQUISITION CORP.
NORTON MCNAUGHTON, INC.
By:______________________________
Name:
Agreed as of the date
above written:
JERI-JO KNITWEAR INC.
By:____________________________
Name: Leonard Schneider
JAMIE SCOTT, INC.
By:____________________________
Name: Susan Schneider
By:____________________________
Susan Schneider
_______________________________
Leslie Schneider
_______________________________
Scott Schneider
<PAGE>
EXHIBIT 10.8(B)
AGREEMENT
---------
AGREEMENT made as of the 16th day of November 1998 by and between
Norton McNaughton of Squire, Inc., a New York corporation (the "Company"), and
Sanford Greenberg ("Greenberg").
W I T N E S S E T H:
- - - - - - - - - - -
WHEREAS, Greenberg and the Company are parties to the Amended and
Restated Employment Agreement dated as of November 4, 1995, with a termination
date of November 5, 1999 (the "Employment Agreement");
WHEREAS, the Employment Agreement, as originally executed, provided
for an annual base salary payable at the rate of $62,500 per month and an
extension bonus payable at the rate of $12,391.08 per month;
WHEREAS, during 1998, the parties agreed to reduce the aggregate
monthly payments of salary and extension bonus payable under the Employment
Agreement from $74,891.08 to $62,833.33, which reduction the parties hereto
hereby ratify and confirm through the existing Term (as defined in the
Employment Agreement); and
WHEREAS, the parties have agreed to enter into this Agreement for the
purposes hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Consulting Agreement.
--------------------
1.1 In the event that (i) Greenberg shall remain in the employ of the
Company on November 5, 1999 and (ii) on or prior to November 5, 1999 the Company
shall have not offered to Greenberg to extend the Term (as defined in the
Employment Agreement) of the Employment Agreement for at least one year and
otherwise on the terms and conditions set forth in the Employment Agreement as
then in effect then, subject to Section 8 hereof, the Company hereby agrees to
retain Greenberg to provide consulting and advisory services on a project-by-
project basis to the Company during the period commencing on November 6, 1999
and terminating on October 31, 2001 (the "Consulting Term"). During the
Consulting Term, Greenberg shall provide such consulting and advisory services
to the Company as may be agreed to between Greenberg and the Board of Directors
of the Company. Unless a greater amount of time is agreed to by Greenberg,
Greenberg shall devote up to 15 hours per week to the mutually agreed upon
consulting and advisory services, if any, hereunder, provided that, to the
extent feasible, such services may be conducted telephonically outside of the
Company's offices and Greenberg's performance of such duties and
responsibilities does not materially interfere with any obligations of Greenberg
to provide services to any activity or business venture which is not in
violation of Section 9 of the Employment Agreement. Subject to subsection 1.2
hereof, during the Consulting Term, in consideration of the performance by
Greenberg of services set forth herein, the Company shall pay Greenberg, and
Greenberg shall accept, a consulting fee (the "Fee") (payable on the 15/th/ day
of each month for the month in which the payment occurs) in an amount per month
equal to either (a) in the event that the Employment Agreement is not amended
after the date hereof to adjust the salary and/or extension bonus payable
thereunder, $74,891.08 (i.e., $898,692.96 annually) or (b) in the event that the
Employment Agreement is amended by the Company and Greenberg after the date
hereof to adjust the salary and/or extension bonus thereunder, the aggregate
monthly consideration payable to Greenberg by the Company under the Employment
Agreement as so amended.
1.2 In the event of the death of Greenberg during the Consulting
Term, the Company shall continue to pay the Fee to the estate or other legal
representative of Greenberg in accordance with the terms hereof, all
notwithstanding the death of Greenberg. Rights and benefits of the estate or
other legal representative of Greenberg under the benefit plans and programs of
the Company, if applicable to Greenberg, shall be continued subject to the
provisions of such plans and programs. Except as aforesaid, in the event of the
death of Greenberg during the Consulting Term, neither the estate or other legal
representative of Greenberg nor the Company shall have any further rights or
obligations under this Agreement.
1.3 Greenberg shall perform his duties and responsibilities during
the Consulting Term as an independent contractor. Nothing herein shall be deemed
to create a partnership, joint venture or employment relationship between
Greenberg and the Company during the Consulting Term or thereafter. Anything to
the contrary herein notwithstanding, all payments required to be made by the
Company hereunder shall be subject to withholding of such amounts relating to
taxes as the Company may reasonably determine it should withhold pursuant to any
applicable law or regulation.
2. Medical Insurance. Subject to Section 8 hereof, for the period
-----------------
commencing on the termination of the Employment Agreement (for reasons other
than Due Cause (as hereinafter defined)) until the death of Greenberg, the
Company
<PAGE>
agrees, at its expense, to provide Greenberg and Greenberg's wife and his
children under age 20 or under age 24 if such children are full-time students
with coverage under the medical plans of the Company on the same terms and
conditions (including the same Company-paid portions) that coverage is generally
available to employees of the Company. In the event that the Company is unable
to provide the coverage set forth in the preceding sentence during any month as
a result of (a) a change of law or regulation which restricts the provision of
coverage for persons who are not employees of the Company, (b) the failure by
the Company's insurance carrier or plan to provide coverage for persons who are
not employees of the Company or (c) a change in the cost of such coverage such
that the cost to the Company to provide such coverage for any monthly period
exceeds the amount set forth on Exhibit A hereto under the column labeled
"Monthly Premium", the Company shall not be obligated to provide such coverage
under its medical plans and shall reimburse Greenberg for any premiums paid by
Greenberg for comparable medical coverage. Such reimbursement shall not exceed
the amount set forth on Exhibit A hereto under the column labeled "Monthly
Premium" for any monthly period.
3. Split Dollar Insurance. Notwithstanding Section 8 of the Split
----------------------
Dollar Agreement (the "Split Dollar Agreement") dated as of March 8, 1994 by and
among the Company, Greenberg and Jay Greenberg, as trustee of a trust
established under a trust agreement between Sanford Greenberg, as settlor, and
Jay Greenberg, as trustee, subject to Section 8 hereof and except in the event
that Greenberg's employment under the Employment Agreement is terminated for Due
Cause, until the death of Greenberg, the Company agrees to continue to pay
premiums on the Policy (as defined in the Split Dollar Agreement) until payment
of the twentieth annual Policy premium, subject to the other terms and
provisions of the Split Dollar Agreement.
4. Life Insurance. The parties acknowledge and agree that the
--------------
Company is currently providing Greenberg with the benefits of a $2 million life
insurance policy. Subject to Section 8 hereof, for the period commencing on the
termination of the Employment Agreement (for reasons other than Due Cause) until
the death of Greenberg, the Company agrees, at its expense, to continue to
provide to Greenberg such life insurance benefits.
5. Loan Forgiveness. In the event that the Company agrees to
----------------
forgive certain loans made to each of Jay Greenberg, Howard Greenberg, Norton
Sperling and Andrew Miller pursuant to each of their respective Third Amended
and Restated Non-Negotiable Limited Recourse Promissory Notes dated March 27,
1995 and payable to the Company, subject to Section 8 hereof and except in the
event that Greenberg's employment under the Employment Agreement is terminated
for Due Cause, the Company shall forgive the loan (the "Loan") made to Greenberg
pursuant to his Third Amended and Restated Non-Negotiable Limited Recourse
Promissory Note dated March 27, 1995 (the "Note") and payable to the Company.
6. Registration Rights.
-------------------
6.1 Subject to Section 8 hereof, in the event that, at any time or
from time to time, except in the event that Greenberg's employment under the
Employment Agreement is terminated for Due Cause, Norton McNaughton, Inc., a
Delaware corporation (the "Parent"), proposes to register any shares of common
stock (the "Common Stock"), under the Securities Act of 1933 (the "Securities
Act") other than pursuant to a registration statement on Forms S-4 or S-8, or
any successor to such Forms, for the purpose of the sale or other transfer of
such shares of Common Stock by either Sanford Greenberg or Norton Sperling or
both (the "Registration Shares"), the Parent shall deliver to Greenberg at least
twenty (20) days prior to the filing of the registration statement with respect
to the Registration Shares, a written notice (a "Registration Notice") of its
intention so to register the Registration Shares.
6.2 In the event that a Registration Notice shall have been so
delivered, Greenberg, at his election, may deliver to the Parent a written
notice (a "Response") (i) specifying the number of shares of Common Stock
(together with the Registration Shares, the "Supplemental Registration Shares")
proposed to be sold or otherwise transferred by Greenberg, (ii) describing the
proposed manner of sale or other transfer thereof and (iii) requesting the
registration thereof under the Securities Act; provided, however, that a
Response shall be so delivered by Greenberg, if at all, not more than fifteen
(15) days after the date of delivery to Greenberg of a Registration Notice.
6.3 From and after receipt of a Response, the Parent shall use its
reasonable best efforts to cause the Supplemental Registration Shares specified
in such Response to be registered under the Securities Act and to effect and to
comply with all such qualifications, compliances and requirements as may be
necessary to permit the sale or other transfer of such Supplemental Registration
Shares, in the manner described in such Response, without limitation,
qualifications under the applicable Blue Sky or other state securities laws
(provided that the Parent shall not be required in connection therewith to
qualify as a foreign corporation or to execute general consent to service of
process in any state); provided, however, that if (i) in the case of an
underwritten public offering of securities, the managing underwriter shall
advise the Parent in writing that the inclusion of some or all of such
Supplemental Registration Shares would, in such managing underwriter's opinion,
materially interfere with the proposed distribution of any securities to be
issued by the Parent in respect of which registration was originally to be
effected or would materially interfere with the proposed distribution of all the
Supplemental Registration Shares, then the Parent may, upon written notice to
Greenberg, allocate the Supplemental Registration Shares to be included in the
registration statement (if and to the extent such allocation is certified by the
managing underwriter as necessary to eliminate such interference) pro rata among
the holders
<PAGE>
thereof (including Greenberg) on the basis of the number of shares of Common
Stock at the time owned by such holders or (ii) any firm of counsel representing
the Parent in connection with such registration shall advise the Parent and
Greenberg in writing that in its opinion one or more of the steps contemplated
hereby is not necessary to permit the sale of the Registration Shares in a
transaction constituting a public offering within the meaning of the Securities
Act, then the Parent shall not be required to take any action with respect to
such step or steps.
7. Resignations. Effective upon the termination of the Term (as
------------
defined in the Employment Agreement) of the Employment Agreement, Greenberg
shall hereby be deemed to have resigned (i) as an officer of the Company, of its
parent corporation and of each of the subsidiaries of such parent corporation
and of the Company and (ii) as a director of the Company and of each of the
subsidiaries of such parent corporation and of the Company.
8. Termination and Suspension. (a) Notwithstanding anything to the
--------------------------
contrary contained herein, the agreements and obligations of the Company set
forth in this Agreement may be terminated at any time during the Consulting Term
or thereafter for Due Cause (as defined below) by notice from the Company to
Greenberg (the "Due Cause Notice"). In the event of such termination, the
Company shall pay to Greenberg the Fee, if any, accrued to the date of
termination and not theretofore paid to Greenberg. Rights and benefits of
Greenberg under the benefit plans and programs of the Company, if applicable to
Greenberg, shall be continued subject to the provisions of such plans and
programs. After satisfaction of any claim of the Company against Greenberg
arising from such Due Cause, following the date of the Due Cause Notice, neither
Greenberg nor the Company shall have any rights or obligations under this
Agreement, provided that nothing herein shall affect Greenberg's obligations
under the Employment Agreement, including without limitation, Sections 7, 8, 9
and 10 thereof (including after the termination of the Term (as defined in the
Employment Agreement)). For purposes hereof, "Due Cause" shall (i) have the
meaning set forth in the Employment Agreement and (ii) in addition, mean the
entry of a plea of nolo contendere by Greenberg to any felony.
(b) Notwithstanding anything to the contrary contained herein, the
agreements and obligations of the Company set forth in this Agreement may be
suspended (but not terminated; any termination to be governed by Section 8(a)
hereof) at any time during the Consulting Term (during which suspension the Fee
otherwise payable shall accrue, but not past the end of the Consulting Term) or
thereafter for Good Reason (as defined below) by notice to Greenberg by the
Company (the "Good Reason Notice"). In the event of such suspension, the
Company shall pay to Greenberg the Fee, if any, accrued to the date of the
suspension and not theretofore paid to Greenberg. Rights and benefits to
Greenberg under the benefit plans and programs of the Company, if applicable to
Greenberg, shall thereafter be determined in accordance with the provisions of
such plans and programs. Following the date of the Good Reason Notice, neither
Greenberg nor the Company shall have any rights or obligations under this
Agreement until such time as the Good Reason shall cease to exist, provided that
nothing herein shall affect Greenberg's obligations under the Employment
Agreement, including without limitation, Sections 7, 8, 9 and 10 thereof
(including after the termination of the Term (as defined in the Employment
Agreement)) and nothing herein shall limit or otherwise affect the Company's
rights under Section 8(a) hereof. Notwithstanding the foregoing, in the event
that a Good Reason Notice shall have been given as a result of an Investigation
(as defined below) and within 18 months from the date of such Good Reason Notice
neither an Indictment (as defined below) nor Due Cause shall exist, then any Fee
which shall have accrued during the suspension period pursuant to this clause
(b) (but not past the end of the Consulting Term) shall be paid at the end of
such suspension period. For purposes hereof, "Good Reason" shall mean the
conduct by a Federal, state or local governmental agency, court or other
judicial body of a criminal investigation of the activities of Greenberg (an
"Investigation") or the indictment of Greenberg for a felony ("Indictment").
9. Successors and Assigns. Greenberg may not assign this Agreement
----------------------
or any part thereof without the prior written consent of a majority of the Board
of Directors of the Company(other than Greenberg if he is a member of the Board
of Directors at the time); provided, however, that nothing herein shall preclude
one or more beneficiaries of Greenberg from receiving any benefits set forth in
this Agreement following the occurrence of his legal incompetency or his death
and shall not preclude the legal representative of his estate from receiving
such benefits or from assigning any right hereunder to the person or persons
entitled thereto under his will or, in the case of intestacy, to the person or
persons entitled thereto under the laws of the intestacy applicable to his
estate. The term "beneficiaries", as used in this Agreement, shall mean the
legal representative of Greenberg (in the event of his incompetency) or
Greenberg's estate.
10. Governing Law. This Agreement shall be deemed a contract made
-------------
under, and for all purposes shall be construed in accordance with, the laws of
the State of New York applicable to contracts to be performed entirely within
such State.
11. Entire Agreement. This Agreement contains all the understandings
----------------
and representations between the parties hereto pertaining to the subject matter
hereof and supersedes all undertakings and agreements, whether oral or in
writing, if there be any, previously entered into by them with respect thereto.
Notwithstanding anything to the contrary contained herein, except as expressly
set forth herein, nothing herein shall or be deemed to amend, modify or waive
any provision of the Employment Agreement, which Employment Agreement is hereby
ratified and confirmed in all respects, including without limitation, Sections
7, 8, 9 and 10 thereof.
<PAGE>
12. Modification and Amendment; Waiver. The provisions of this
----------------------------------
Agreement may be modified, amended or waived, but only upon the written consent
of the party against whom enforcement of such modification, amendment or waiver
is sought and then such modification, amendment or waiver shall be effective
only to the extent set forth in such writing. No delay or failure on the part of
any party hereto in exercising any right, power or remedy hereunder shall effect
or operate as a waiver thereof, nor shall any single or partial exercise thereof
or any abandonment or discontinuance of steps to enforce such right, power or
remedy preclude any further exercise thereof or of any other right, power or
remedy.
13. Notices. All notices, requests or instructions hereunder shall
-------
be in writing and delivered personally, sent by telecopier or sent by registered
or certified mail, postage prepaid, return receipt requested, as follows:
If to the Company:
Norton McNaughton of Squire, Inc.
463 Seventh Avenue
New York, New York 10018
Attention: President
Telecopy No.: (212) 868-1013
Telephone No.: (212) 947-2960
If to Greenberg:
Sandy Greenberg
21 Koenig Drive
Oyster Bay Cove, New York 11771
Telephone No.: (516) 922-3917
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered or telecopied, and three business days after the date of
mailing, if mailed.
14. Severability. Should any provision of this Agreement be held by
------------
a court of competent jurisdiction to be enforceable only if modified, such
holding shall not affect the validity of the remainder of this Agreement, the
balance of which shall continue to be binding upon the parties hereto with any
such modification to become a part hereof and treated as though originally set
forth in this Agreement. The parties further agree that any such court is
expressly authorized to modify any such unenforceable provision of this
Agreement in lieu of severing such unenforceable provision from this Agreement
in its entirety, whether by rewriting the offending provision, deleting any or
all of the offending provision, adding additional language to this Agreement, or
by making such other modifications as it deems warranted to carry out the intent
and agreement of the parties as embodied herein to the maximum extent permitted
by law. The parties expressly agree that this Agreement as so modified by the
court shall be binding upon and enforceable against each of them. In any event,
should one or more of the provisions of this Agreement be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions hereof, and if such
provision or provisions are not modified as provided above, this Agreement shall
be construed as if such invalid, illegal or unenforceable provisions had never
been set forth herein.
15. Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
16. Expenses. Each of the parties hereto shall bear his or its own
--------
costs and expenses, including attorneys' fees and disbursements, incurred in
connection with this Agreement and the transactions contemplated hereby.
17. Titles. Titles of the sections of this Agreement are intended
------
solely for convenience and no provision of this Agreement is to be construed by
reference to the title of any section.
18. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
* * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.
NORTON MCNAUGHTON OF SQUIRE, INC.
By:_______________________________
Name: Peter Boneparth
Title: President
__________________________________
Name: Sanford Greenberg
<PAGE>
EXHIBIT A
---------
MEDICAL INSURANCE PREMIUMS TO SANFORD GREENBERG
IF COMPANY IS UNABLE TO PROVIDE COVERAGE
-----------------------------------------------
<TABLE>
<CAPTION>
Fiscal Period
- ------------------------------
Beginning Ended Annual Monthly
Nov. 1: Oct. 31: Premium Premium
- ------------------------------------------------------------------
<S> <C> <C> <C>
1999 2000 $ 7,200.00 $ 600.00
2000 2001 7,560.00 630.00
2001 2002 7,938.00 661.50
2002 2003 8,334.90 694.58
2003 2004 8,751.64 729.30
2004 2005 9,189.23 765.77
2005 2006 9,648.69 804.06
2006 2007 10,131.12 844.26
2007 2008 10,637.68 886.47
2008 2009 11,169.56 930.80
2009 2010 11,728.04 977.34
2010 2011 12,314.44 1,026.20
2011 2012 12,930.17 1,077.51
2012 2013 13,576.67 1,131.39
2013 2014 14,255.51 1,187.96
2014 2015 14,968.28 1,247.36
2015 2016 15,716.70 1,309.72
2016 2017 15,502.53 1,375.21
2017 2018 17,327.66 1,443.97
2018 2019 18,194.04 1,516.17
2019 2020 19,103.74 1,591.98
2020 2021 20,058.93 1,671.58
2021 2022 21,061.88 1,755.16
2022 2023 22,114.97 1,842.91
2023 2024 23,220.72 1,935.06
2024 2025 24,381.76 2,031.81
2025 2026 25,600.84 2,133.40
2026 2027 26,880.89 2,240.07
2027 2028 28,224.93 2,352.08
2028 2029 29,636.18 2,469.68
2029 2030 31,117.99 2,593.17
2030 2031 32,673.88 2,722.82
2031 2032 34,307.58 2,858.96
2032 2033 36,022.96 3,001.91
2033 2034 37,824.11 3,152.01
2034 2035 39,715.31 3,309.61
2035 2036 41,701.08 3,475.09
2036 2037 43,786.13 3,648.84
2037 2038 45,975.44 3,831.29
2038 2039 48,274.21 4,022.85
2039 2040 50,687.92 4,223.99
2040 2041 53,222.31 4,435.19
2041 2042 55,883.43 4,656.95
2042 2043 58,677.60 4,889.80
2043 2044 61,611.48 5,134.29
2044 2045 64,692.06 5,391.00
2045 2046 67,926.66 5,660.55
2046 2047 71,322.99 5,943.58
2047 2048 74,889.14 6,240.76
2048 2049 78,633.60 6,552.80
2049 2050 82,565.28 6,880.44
2050 2051 86,693.54 7,224.46
</TABLE>
<PAGE>
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT dated as of the 11th day of November, 1998, by and between
Norton McNaughton of Squire, Inc., a New York corporation (the "Company"), and
Lynne F. Fish (the "Employee").
W I T N E S S E T H:
- - - - - - - - - - -
WHEREAS, the Company wishes to assure itself of the services of the
Employee, and the Employee wishes to serve in the employ of the Company, on the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto hereby agree as follows:
1. Employment, Term.
----------------
1.1 The Company agrees to employ the Employee, and the Employee
agrees to serve in the employ of the Company, for the term set forth in Section
1.2, in the position and with the responsibilities, duties and authority set
forth in Section 2 and on the other terms and conditions set forth in this
Agreement.
1.2 The term of the Employee's employment under this Agreement (the
"Initial Term") shall commence on November 30, 1998 (the "Commencement Date")
and shall terminate on November 30, 2000, unless sooner terminated in accordance
with this Agreement; provided that the Initial Term may be extended at the
Company's option for an additional two years (that is, until November 30, 2002)
(as so extended, the "Extended Term;" the Initial Term and the Extended Term,
collectively, the "Term") by written notice to the Employee given, if at all, at
least 60 days prior to the end of the Initial Term.
2. Position, Duties. The Employee shall serve in the position of
----------------
Executive Vice President of Merchandising of the Company. The Employee shall
perform, faithfully and diligently, such duties, and shall have such
responsibilities, appropriate to said position, as shall be assigned to her from
time to time by the Chief Executive Officer, President or the Board of Directors
of the Company. The Employee shall report to the Chief Executive Officer,
President and the Board of Directors of the Company. During the Term, the
Employee also agrees to serve, if elected, as an officer of any subsidiary or
affiliate of the Company. The Employee shall devote her complete and undivided
attention to the performance of her duties and responsibilities hereunder during
the normal working hours of executive employees of the Company.
3. Salary; Bonus.
-------------
3.1 Salary. (a) In consideration of the performance by the Employee
------
of the services set forth in Section 2 and her observance of the other covenants
set forth herein, the Company shall pay the Employee, and the Employee shall
accept, (i) during the Initial Term, a base salary at a rate of $325,000 per
annum, and (ii) during the Extended Term, if any, a base salary at a rate of
$375,000 per annum, in any case, payable in accordance with the standard payroll
practices of the Company.
3.2 Bonus. (a) For each of the fiscal years of the Company during
-----
the Term, in addition to the salary provided for in Section 3.1, the Employee
shall be eligible to participate in and receive a portion of any bonus pool (the
"Bonus Pool"). The amount of the Bonus Pool, if any, for each fiscal year shall
be determined by the Compensation Committee and approved by the Board of
Directors. The Employee's share, if any, of the Bonus Pool shall be as
recommended by the President of the Company and as approved by the Compensation
Committee. Notwithstanding the foregoing, in no event shall the Employee's
bonus for the fiscal year ending November 6, 1999 be less than $75,000
(b) In the event of the termination of the employment of the Employee
pursuant to Section 6.1, 6.2 or 6.4 of this Agreement during the Term and prior
to the end of any fiscal year of the Company, the Employee (or her estate or
other legal representative) shall be eligible for a bonus for the portion of
such fiscal year during which the Employee was employed hereunder, as approved
by the Compensation Committee of the Board of Directors. In the event of the
termination of the employment of the Employee pursuant to Section 6.3 of this
Agreement, the Employee shall not be eligible for a bonus for the fiscal year of
the Company in which such termination takes place. The Employee shall not be
eligible for a bonus for any fiscal year of the Company subsequent to the fiscal
year in which the termination of her employment takes place.
<PAGE>
(c) The bonus, if any, payable to the Employee (or her estate or
other legal representative) for any fiscal year of the Company pursuant to this
Section 3.2 shall (except as specifically provided otherwise) be paid by the
Company within ninety (90) days of receipt by the Company of the audited
financial statements of the Company for such fiscal year.
3.3 Execution Bonus. On the Commencement Date, the Company shall pay
---------------
the Employee $50,000 in consideration of the execution, delivery and performance
by the Employee of this Agreement.
3.4 Stock Options. (a) On the date of the execution and delivery
-------------
hereof by the Company and the Employee (the "Execution Date"), the Company shall
cause to be granted to the Employee by the Board of Directors of Norton
McNaughton, Inc., a Delaware corporation ("Norton"), the Company's corporate
parent, options to purchase an aggregate of 60,000 shares of common stock, par
value $.01 per share (the "Common Stock"), of Norton, with an exercise price
per share equal to the fair market value of the Common Stock on the Execution
Date (the "Options"). The Options shall vest as to one-third (1/3) of the
shares of Common Stock covered thereby on the Execution Date, two-thirds (2/3)
of the shares of Common Stock covered thereby on the first anniversary of the
Execution Date and as to all of the shares of Common Stock covered thereby on
the second anniversary of the Execution Date. The term of the Options shall be
ten years and, otherwise, the terms and conditions of the Options shall be
subject to and governed by Norton's 1998 Long Term Incentive Plan.
4. Expense Reimbursement. During the Term of this Agreement, the
---------------------
Company shall reimburse the Employee for all reasonable and necessary out-of-
pocket expenses incurred by her in connection with the performance of her duties
hereunder, upon the presentation of proper accounts therefor in accordance with
the Company's policies (in any case, as such policies are adopted from time to
time by the Compensation Committee of the Board of Directors).
5. Benefits. (a) During the Term of this Agreement, the Employee
--------
will be eligible to participate in all employee benefit plans and programs
offered by Norton and/or by the Company (and, to the extent required by
applicable law or this Agreement, approved by the Compensation Committee of the
Board of Directors) from time to time to its employees of comparable seniority,
subject to the provisions of such plans and programs as in effect from time to
time.
(b) During the Term of this Agreement, the Employee shall be entitled
to three weeks paid vacation.
6. Termination of Employment.
-------------------------
6.1 Death. In the event of the death of the Employee during the
-----
Term, the Company shall pay to the estate or other legal representative of the
Employee the base salary provided for in Section 3 (at the annual rate then in
effect) accrued to the date of the Employee's death and not theretofore paid to
the Employee and any bonus payable to the Employee in accordance with Section
3.2. Rights and benefits of the estate or other legal representative of the
Employee under the benefit plans and programs of the Company shall be determined
in accordance with the provisions of such plans and programs. Neither the
estate or other legal representative of the Employee nor the Company shall have
any further rights or obligations under this Agreement.
6.2 Disability. If during the Term the Employee shall become
----------
incapacitated by reason of physical or mental disability and shall be unable to
perform her normal duties hereunder for a cumulative period of six (6) months in
any period of twelve (12) consecutive months, the employment of the Employee
hereunder may be terminated by the Company or the Employee upon notice to the
other. In the event of such termination, the Company shall pay to the Employee
the base salary provided for in Section 3 (at the annual rate then in effect)
accrued to the date of such termination and not theretofore paid to the Employee
and any bonus payable to the Employee in accordance with Section 3.2. Rights
and benefits of the Employee under the benefit plans and programs of the Company
shall be determined in accordance with the provisions of such plans and
programs. Neither the Employee nor the Company shall have any further rights or
obligations under this Agreement, except as provided in Sections 7, 8, 9 and 10.
6.3 Due Cause. The employment of the Employee hereunder may be
---------
terminated by the Company at any time during the Term for Due Cause (as
hereinafter defined). In the event of such termination, the Company shall pay
to the Employee the base salary provided for in Section 3 (at the annual rate
then in effect) accrued to the date of such termination and not theretofore paid
to the Employee. Rights and benefits of the Employee under the benefit plans
and programs of the Company shall be determined in accordance with the
provisions of such plans and programs. After the satisfaction of any claim of
the Company against the Employee incidental to such Due Cause, neither the
Employee nor the Company shall have any further rights or obligations under this
Agreement, except as provided in Sections 7, 8, 9 and 10. For purposes hereof,
"Due Cause" shall mean (a) the Employee's gross neglect or willful misconduct in
the discharge of her duties and responsibilities to any member of the Company
Group (as defined in Section 9 below), (b) any act of the Employee against any
member of the Company Group intended to enrich her in derogation of her duties
to such member and at the expense of such member, (c) any willful or purposeful
act (or any act or omission taken in bad faith) of the Employee having the
effect of materially injuring the business or business relationships of any
member of the Company Group, (d) the Employee's commission of (1) a felony or
(2) any crime or offense involving moral turpitude, fraud or misrepresentation,
(f) the Employee's willful and material breach of this Agreement (including,
without limitation,
<PAGE>
her duties and responsibilities hereunder) or (f) the Employee's breach of her
duty of loyalty to the members of the Company Group; provided, however, that the
Employee shall be given written notice by a majority of the Board of Directors
of the Company that it intends to terminate the Employee's employment for Due
Cause under this Section, which written notice shall specify the act or acts
upon the basis of which the majority of the Board of Directors of the Company
intends so to terminate the Employee's employment, and the Employee shall then
be given the opportunity, within thirty (30) days of her receipt of such notice,
to have a meeting with the Board of Directors of the Company to discuss such act
or acts.
6.4 Other Termination by the Company. The Company may terminate the
--------------------------------
Employee's employment at any time during the Term for whatever reason it deems
appropriate or without reason; provided, however, that in the event that such
termination is not pursuant to Section 6.1, 6.2 or 6.3 the Company shall (a)
continue to pay to the Employee, until the first to occur of (i) the date which
is six (6) months after the expiration of the Initial Term or the Extended Term,
as applicable, of this Agreement in effect immediately prior to such termination
or (ii) the death of the Employee, the base salary provided for in Section 3 (at
the annual rate then in effect) and (b) pay to the Employee any bonus payable to
the Employee in accordance with Section 3.2. The Employee shall be under no
obligation to seek subsequent employment and upon obtaining subsequent
employment shall be under no obligation to offset any amounts earned from such
subsequent employment (whether as an employee, a consultant or otherwise)
against such payment. Rights and benefits of the Employee under the benefit
plans and programs of the Company shall be determined in accordance with the
provisions of such plans and programs. Neither the Employee nor the Company
shall have any further rights or obligations under this Agreement, except as
provided in Sections 7, 8, 9 and 10.
6.5 Non-Extension. If the Initial Term is not extended by the
-------------
Company for the Extended Term for any reason other than the prior termination of
the Employee's employment by the Employee or pursuant to Sections 6.1, 6.2, 6.3
or 6.4 hereof, the Company shall continue to pay the Employee the salary then in
effect under Section 3.1 for a period of six (6) months from the date of
expiration of the Initial Term. The Employee shall be under no obligation to
seek subsequent employment and obtaining subsequent employment shall be under no
obligation to offset any amounts earned from such subsequent employment (whether
as an employee, consultant or otherwise) against such payment. Rights and
benefits of the Employee under the benefit plans and programs of the Company
shall be determined in accordance with the provisions of such plans and
programs. Neither the Employee nor the Company shall have any further rights or
obligations under the Agreement, except as provided in Sections 7, 8, 9 or 10.
6.6 Resignation. Upon the termination of employment of the Employee
-----------
for any reason or no reason, the Employee shall be deemed hereby automatically
to have resigned (effective on the date of such termination) all positions as an
officer and director of the Company, Norton and of any and all of the Company's
subsidiaries.
7. Confidential Information.
------------------------
7.1 The Employee shall, during the Term of this Agreement and at all
times thereafter, treat as confidential and, except as required in the
performance of her duties and responsibilities under this Agreement, not
disclose, publish or otherwise make available to the public or to any
individual, firm or corporation any confidential material (as hereinafter
defined). The Employee agrees that all confidential material, together with all
notes and records of the Employee relating thereto, and all copies or facsimiles
thereof in the possession of the Employee, are the exclusive property of the
Company and the Employee agrees to return such material to the Company promptly
upon the termination of the Employee's employment with the Company.
7.2 For the purposes hereof, the term "confidential material" shall
mean all information acquired by the Employee in the course of the Employee's
employment with the Company in any way concerning the products, projects,
activities, business or affairs of the Company or any member of the Company
Group or the customers of the Company or any member of the Company Group,
including, without limitation, all information concerning trade secrets and the
preparation of raw material for, manufacture of, and/or finishing processes
utilized in the production of, the products or projects of the Company or any
member of the Company Group and/or any improvements therein, all sales,
merchandising and financial information concerning the Company or any member of
the Company Group, all customer and supplier lists, all information concerning
projects in research and development or merchandizing or marketing plans for any
such products or projects, and all information in any way concerning the
products, projects, activities, business or affairs of customers of the Company
or any member of the Company Group which is furnished to the Employee by the
Company or any of its employees (current or former), agents or customers, as
such; provided, however, that the term "confidential material" shall not include
information which (a) becomes generally available to the public other than as a
result of a disclosure by the Employee, (b) was available to the Employee on a
non-confidential basis prior to her employment with the Company or (c) becomes
available to the Employee on a non-confidential basis from a source other than
the Company or any of its agents, franchisees, creditors, suppliers, lessors,
lessees or customers provided that such source is not bound by a confidentiality
agreement with the Company or any of such agents or customers.
8. Inventions. Any and all inventions, innovations or improvements
----------
("inventions") made, developed or created by the Employee (whether at the
request or suggestion of the Company or otherwise, whether alone or in
conjunction with others, and whether during regular hours of work or otherwise)
during the period of her employment with the Company which may
<PAGE>
be directly or indirectly useful in, or relate to, the business of the Company,
shall be promptly and fully disclosed by the Employee to the Board of Directors
of the Company and shall be the Company's exclusive property as against the
Employee, and the Employee shall promptly deliver to an appropriate
representative of the Company as designated by the Board of Directors all
papers, drawings, models, data and other material relating to any inventions
made, developed or created by her as aforesaid. The Employee shall, at the
request of the Company and without any payment therefor, execute any documents
necessary or advisable in the opinion of the Company's counsel to direct
issuance of patents or copyrights to the Company with respect to such inventions
as are to be the Company's exclusive property as against the Employee or to vest
in the Company title to such inventions as against the Employee. The expense of
securing any such patent or copyright shall be borne by the Company.
9. Non-Competition. The Employee acknowledges that the services to
---------------
be rendered by her to the Company are of a special and unique character. In
consideration of her employment hereunder, the Employee agrees, for the benefit
of the Company, that she will not, during the Term of this Agreement, and
thereafter for a period of one (1) year commencing on the date of termination of
her employment with the Company in the event that the Employee terminates her
employment hereunder at any time during the Term for any reason (other than
pursuant to Section 6.2 hereof), (a) engage, directly or indirectly, whether as
principal, agent, distributor, representative, consultant, employee, partner,
stockholder, limited partner or other investor (other than an investment of not
more than (i) one percent (1%) of the stock or equity of any corporation the
capital stock of which is publicly traded or (ii) five percent (5%) of the
ownership interest of any limited partnership or other entity) or otherwise,
anywhere in the United States, in any activity or business venture which is in
competition with the business then conducted by the Company, any of its
subsidiaries or any of its corporate affiliates (including, without limitation,
Norton, Miss Erika, Inc. and Jeri-Jo Knitwear, Inc., each a Delaware
corporation) (collectively, the "Company Group"), (b) solicit or entice or
endeavor to solicit or entice away from any member of the Company Group any
person who was an officer, employee or consultant of any member of the Company
Group, either for her own account or for any individual, firm or corporation,
whether or not such person would commit any breach of her contract of employment
by reason of leaving the service of a member of the Company Group, and the
Employee agrees not to employ, directly or indirectly, any person who was an
officer or employee of any member of the Company Group or who by reason of such
position at any time is or may be likely to be in possession of any confidential
information or trade secrets relating to the businesses or products of any
member of the Company Group, or (c) solicit or entice or endeavor to solicit or
entice away from any member of the Company Group any customer or prospective
customer of any member of the Company Group, either for her own account or for
any individual, firm or corporation.
10. Equitable Relief, Etc.
---------------------
10.1 Notwithstanding Section 11 hereof, in the event of a breach or
threatened breach by the Employee of any of the provisions of Sections 7, 8 or 9
of this Agreement, the Employee hereby consents and agrees that the Company
shall be entitled to an injunction or similar equitable relief from any court of
competent jurisdiction restraining the Employee from committing or continuing
any such breach or threatened breach or granting specific performance of any act
required to be performed by the Employee under any of such provisions, without
the necessity of showing any actual damage or that money damages would not
afford an adequate remedy and without the necessity of posting any bond or other
security. Nothing herein shall be construed as prohibiting the Company from
pursuing any other remedies at law or in equity which it may have with respect
to any such breach or threatened breach.
10.2 The Company and the Employee understand and agree that in any
lawsuit or other proceeding between any of them with respect to Sections 7, 8 or
9 hereof, the prevailing party in such lawsuit or proceeding shall be entitled
to recover from the other party in such lawsuit or proceeding, and such other
party hereby agrees to pay such prevailing party, for all costs and expenses,
including attorneys' fees, incurred by such prevailing party in the defense,
prosecution or investigation of the matters which are the subject of such
lawsuit or proceeding.
11. Arbitration. Except as set forth in Section 10 hereof, any
-----------
controversies or claims arising out of or relating to this Agreement shall be
fully and finally settled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect (the
"AAA Rules"), conducted in New York, New York by one arbitrator either mutually
agreed upon by Employee and the Company or chosen in accordance with the AAA
Rules, except that the parties thereto shall have any right to discovery as
would be permitted by the Federal Rules of Civil Procedure for a period of 60
days following the commencement of such arbitration and the arbitrator thereof
shall resolve any dispute which arises in connection with such discovery. The
prevailing party shall be entitled to costs, expenses and reasonable attorneys'
fees, and judgment upon the award rendered by the arbitrator may be entered in
any court of competent jurisdiction.
12. Successors and Assigns.
----------------------
12.1 Assignment by the Company. The Company shall require any
------------------------
successors (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform if no
<PAGE>
such succession had taken place. As used in this Section, the "Company" shall
mean the Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law and this Agreement shall be
binding upon, and inure to the benefit of, the Company, as so defined.
12.2 Assignment by the Employee. The Employee may not assign this
--------------------------
Agreement or any part thereof without the prior written consent of a majority of
the Board of Directors of the Company (other than the Employee if she is a
member of such Board at the time); provided, however, that nothing herein shall
preclude one or more beneficiaries of the Employee from receiving any amount
that may be payable following the occurrence of her legal incompetency or her
death and shall not preclude the legal representative of her estate from
receiving such amount or from assigning any right hereunder to the person or
persons entitled thereto under her will or, in the case of intestacy, to the
person or persons entitled thereto under the laws of intestacy applicable to her
estate. The term "beneficiaries", as used in this Agreement, shall mean a
beneficiary or beneficiaries so designated to receive any such amount or, if no
beneficiary has been so designated, the legal representative of the Employee (in
the event of her incompetency) or the Employee's estate.
13. Governing Law. This Agreement shall be deemed a contract made
-------------
under, and for all purposes shall be construed in accordance with, the laws of
the State of New York applicable to contracts to be performed entirely within
such State.
14. Entire Agreement. This Agreement contains all the understandings
----------------
and representations between the parties hereto pertaining to the subject matter
hereof. This Agreement supersedes all understandings and agreements, whether
oral or in writing, if any, previously entered into by the Company with the
Employee in any way relating to the employment of the Employee by the Company,
all of which agreements and understandings are hereby terminated and all rights
and entitlements thereunder are hereby waived and released.
15. Amendment, Modification, Waiver. No provision of this Agreement
-------------------------------
may be amended or modified unless such amendment or modification is agreed to in
writing and signed by the Employee and by representatives of the Company (other
than the Employee) who have been duly authorized by the Board of Directors of
the Company to do so (other than the Employee if she is a member of such Board
at the time). Except as otherwise specifically provided in this Agreement, no
waiver by either party hereto of any breach by the other party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar provision or condition at
the same or any prior or subsequent time, nor shall the failure of or delay by
either party hereto in exercising any right, power or privilege hereunder
operate as a waiver thereof to preclude any other or further exercise thereof or
the exercise of any other such right, power or privilege.
16. Notices. Any notice to be given hereunder shall be in writing
-------
and delivered personally or sent by overnight courier or certified mail, postage
prepaid, return receipt requested, addressed to the party concerned at the
address indicated below or at such other address as such party may subsequently
designate by like notice (and shall be effective upon receipt):
If to the Company:
Norton McNaughton of Squire, Inc.
463 Seventh Avenue
New York, New York 10018
Attention: President
If to the Employee:
471 Union Avenue
Murray Hill, New Jersey 07974
17. Severability. Should any provision of this Agreement be held by
------------
a court or arbitration panel of competent jurisdiction to be enforceable only if
modified, such holding shall not affect the validity of the remainder of this
Agreement, the balance of which shall continue to be binding upon the parties
hereto with any such modification to become a part hereof and treated as though
originally set forth in this Agreement. The parties further agree that any such
court or arbitration panel is expressly authorized to modify any such
unenforceable provision of this Agreement in lieu of severing such unenforceable
provision from this Agreement in its entirety, whether by rewriting the
offending provision, deleting any or all of the offending provision, adding
additional language to this Agreement, or by making such other modifications as
it deems warranted to carry out the intent and agreement of the parties as
embodied herein to the maximum extent permitted by law. The parties expressly
agree that this Agreement as so modified by the court or arbitration panel shall
be binding upon and enforceable against each of them. In any event, should one
or more of the provisions of this Agreement be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions hereof, and if such provision or
provisions are not modified as
<PAGE>
provided above, this Agreement shall be construed as if such invalid, illegal or
unenforceable provisions had never been set forth herein.
18. Withholding. Anything to the contrary notwithstanding, all
-----------
payments required to be made by the Company hereunder to the Employee or her
beneficiaries, including her estate, shall be subject to withholding of such
amounts relating to taxes as the Company may reasonably determine it should
withhold pursuant to any applicable law or regulation. In lieu of withholding
such amounts, in whole or in part, the Company, may, in its sole discretion,
accept other provision for payment of taxes as permitted by law, provided it is
satisfied in its sole discretion that all requirements of law affecting its
responsibilities to withhold such taxes have been satisfied.
19. Survivorship. The respective rights and obligations of the
------------
Employee and the Company hereunder shall survive any termination of this
Agreement to the extent necessary to the intended preservation of such rights
and obligations.
20. Titles. Titles of the sections of this Agreement are intended
------
solely for convenience and no provision of this Agreement is to be construed by
reference to the title of any section.
21. Counterparts. This Agreement may be executed in two or more
------------
counterpart copies, each of which shall be deemed to be an original and all of
which taken together shall be deemed one document.
22. No Conflict The Employee represents and warrants to the Company
-----------
that the execution, delivery and performance by the Employee of her duties
hereunder do not and will not conflict with or result in the breach of any
agreement or understanding with any other person or entity, including without
limitation, John Paul Richard, Inc. or any of the affiliates thereof.
* * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
NORTON MCNAUGHTON
OF SQUIRE, INC.
By:__________________________________
Name: Peter Boneparth
Title: President
EMPLOYEE:
By:__________________________________
Name: Lynne F. Fish
<PAGE>
EXHIBIT 10.17(b)
SECOND AMENDMENT
TO
AMENDED AND RESTATED FINANCING AGREEMENT
Second Amendment, dated as of January 29, 1999 to the Amended and Restated
Financing Agreement, dated as of June 18, 1998, as amended through the date
hereof (the "Financing Agreement"), by and among Norton McNaughton, Inc., a
Delaware corporation (the "Company"), Norton McNaughton of Squire, Inc., a New
York corporation ("Squire"), Miss Erika, Inc., a Delaware corporation ("Miss
Erika"), Jeri-Jo Knitwear, Inc., a Delaware corporation formerly known as JJ
Acquisition Corp. ("Jeri-Jo" and together with Squire and Miss Erika, each a
"Borrower" and collectively, the "Borrowers"), the lenders party thereto (each a
"Lender" and collectively the "Lenders"), NationsBanc Commercial Corporation,
as collateral agent for the Lenders (in such capacity, the "Collateral Agent"),
The CIT Group/Commercial Services, Inc., as administrative agent for the Lenders
(in such capacity, the "Administrative Agent") and Fleet Bank NA, as
documentation agent for the Lenders (in such capacity, the "Documentation Agent"
and together with the Collateral Agent and the Administrative Agent, each an
"Agent" and collectively, the "Agents").
The Company, the Borrowers, the Required Lenders and the Agents desire to
amend certain terms and conditions in the Financing Agreement as hereafter set
forth.
In addition, the Company and the Borrowers have advised the Agents that
it is intended that McNaughton Apparel Group Inc., a Delaware corporation and a
wholly-owned subsidiary of the Company ("Group") be merged into the Company,
whereby the Company will be the surviving corporation and the Company shall
change its name to "McNaughton Apparel Group Inc." (the "Merger"). The Company
and the Borrowers have requested that the Required Lenders waive any Event of
Default under the Financing Agreement by reason of the occurrence of such Merger
and consent to such Merger and the Required Lenders are willing to waive such
Event of Default and consent to such Merger on the terms and conditions herein.
Accordingly, the Company, the Borrowers, the Agents and the Required
Lenders hereby agree as follows:
1. Definitions. All capitalized terms used herein and not otherwise
-----------
defined herein are used herein as defined in the Financing Agreement.
<PAGE>
2. Financial Covenants.
-------------------
(a) Net Worth. Section 7.02(p)(i) of the Financing Agreement is
---------
hereby amended by deleting the amount corresponding to the Fiscal Quarter ending
October 31, 1998 and substituting in lieu thereof $41,000,000.
(b) Fixed Charge Coverage Ratio. Section 7.02(p)(iv) of the
--------------------------
Financing Agreement is hereby amended by deleting the ratio corresponding to the
Fiscal Quarter ending October 31, 1998 and substituting in lieu thereof .90:1.0.
3. Schedule 6.01(g). Schedule 6.01(g) to the Financing Agreement is
----------------
hereby amended to include the items described on Annex A hereto.
4. Waiver and Consent.
------------------
(a) Pursuant to Section 12.03 of the Financing Agreement and in
reliance on the representations and warranties set forth in Section 5 below, the
Required Lenders hereby waive any Event of Default that would otherwise arise
under Section 10.01 (c) of the Financing Agreement from any non-compliance by
the Company with the provisions of Section 7.02(d)(i) of the Financing Agreement
by reason of the Merger. The Company and the Borrowers have represented to the
Agents and the Required Lenders that the sole reason for the Merger is to
effect the name change of the Company to "McNaughton Apparel Group Inc." This
Waiver and Consent is conditioned on such representation being true and correct.
(b) This Waiver and Consent shall be effective only in this specific
instance and does not allow any other or further departure from the terms of
the Financing Agreement or the other Loan Documents, which terms shall
constitute in full force and effect. This Waiver and Consent shall also be
conditioned on that all documents necessary to effect the Merger will be filed
and that such documents (or copies thereof) be delivered to the Administrative
Agent.
5. Conditions to Effectiveness. This Amendment shall be effective as of
---------------------------
October 31, 1998 (the "Amendment Effective Date"), provided that the following
conditions subsequent shall have been satisfied in full:
(i) The representations and warranties contained in this
Amendment and in Article VI of the Financing Agreement shall be true and
correct in all material respects on and as of the Amendment Effective Date
and the date hereof as though made on and as of each of such dates (except
where such representations and warranties relate to an earlier date in
which case such representations and warranties shall be true and correct as
of such earlier date); no Event of Default or Default shall have occurred
an be continuing on the Amendment Effective Date or on the date hereof, or
result from this Amendment becoming effective in accordance with its terms.
(ii) The Agents shall have received counterparts of this
Amendment which bear the signatures of the Company, the Borrowers and each
of the Required Lenders.
-2-
<PAGE>
(iii) The Administrative Agent shall have received a
certified copy of the Certificate of Merger, filed with the Secretary of
State of the State of Delaware to effect the Merger.
(iv) All legal matters incident to this Amendment shall be
satisfactory to the Agents and their counsel.
6. Representations and Warranties. Each of the Company and the
------------------------------
Borrowers represents and warrants to the Lenders as follows:
(a) The Company and each Borrower (i) is duly organized, validly
existing and in good standing under the laws of the state of its organization
and (ii) has all requisite power, authority and legal right to execute, deliver
and perform this Amendment, all other documents executed by it in connection
with this Amendment, and to perform the Financing Agreement, as amended hereby.
(b) The execution, delivery and performance by the Company and
the Borrowers of this Amendment and all other documents executed by it in
connection with this Amendment and the performance by the Company and the
Borrowers of the Financing Agreement as amended hereby (i) have been duly
authorized by all necessary action, (ii) do not and will not violate or create a
default under the Company's or any Borrower's organizational documents, any
applicable law or any contractual restriction binding on or otherwise affecting
the Company or any Borrower or any of the Company's or such Borrower's
properties, and (iii) except as provided in the Loan Documents, do not and will
not result in or require the creation of any Lien, upon or with respect to the
Company's or any Borrower's property.
(c) No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority or other regulatory body is
required in connection with the due execution, delivery and performance by the
Company or any of the Borrowers of this Amendment and all other documents
executed by it in connection with this Amendment and the performance by the
Company and the Borrowers of the Financing Agreement as amended hereby.
(d) This Amendment and the Financing Agreement, as amended
hereby, and all other documents executed in connection with this Amendment
constitute the legal, valid and binding obligations of the Company and the
Borrowers party thereto, enforceable against such Persons in accordance with
their terms except to the extent the enforceability thereof may be limited by
any applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws from time to time in effect affecting generally the enforcement of
creditors' rights and remedies and by general principles of equity.
(e) The representations and warranties contained in Article VI
of the Financing Agreement are true and correct on and as of the Amendment
Effective Date and as of the date hereof as though made on and as of the
Amendment Effective Date and the date hereof (except to the extent such
representations and warranties expressly relate to an earlier date), and no
Event of Default or Default, has occurred and is continuing on and as of the
Amendment Effective Date or on the date hereof.
-3-
<PAGE>
7. Continued Effectiveness of Financing Agreement. Each of the
----------------------------------------------
Company and the Borrowers hereby (i) confirms and agrees that each Loan Document
to which it is a party is, and shall continue to be, in full force and effect
and is hereby ratified and confirmed in all respects except that on and after
the Amendment Effective Date of this Amendment all references in any such Loan
Document to "the Financing Agreement", "thereto", "thereof", "thereunder" or
words of like import referring to the Financing Agreement shall mean the
Financing Agreement as amended by this Amendment, and (ii) confirms and agrees
that to the extent that any such Loan Document purports to assign or pledge to
the Collateral Agent, or to grant to the Collateral Agent a Lien on any
collateral as security for the Obligations of the Company and the Borrowers
from time to time existing in respect of the Financing Agreement and the Loan
Documents, such pledge, assignment and/or grant of a Lien is hereby ratified and
confirmed in all respects.
8. Miscellaneous.
-------------
(a) This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which shall be
deemed to be an original, but all of which taken together shall constitute one
and the same agreement.
(b) Section and paragraph headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
(c) This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.
(d) The Borrowers will pay on demand all reasonable out-of-pocket
costs and expenses of the Agents in connection with the preparation, execution
and delivery of this Amendment, including, without limitation, the reasonable
fees, disbursements and other charges of Schulte Roth & Zabel LLP, counsel to
the Agents.
-4-
<PAGE>
ANNEX A
-------
Amendment to
Schedule 6.01(g)
Norton McNaughton, Inc. (the "Company") and Norton McNaughton of Squire,
Inc. ("Squire"), are parties to a lawsuit filed in New York Supreme Court, New
York County, by Railroad Enterprises, Inc. and Cutting Edge Services, Inc.,
Squire's distribution and cutting contractors, respectively, alleging breach of
and related claims. Norton and Squire do not believe that is any merit to this
action and will vigorously defend this proceeding.
Norton is a party to lawsuits filed in New York Supreme Court, New York
County, by Arch Trading, Inc., and Hyunjin Honduras alleging breach of contract.
Norton does not believe that there is any merit to these actions and will
vigorously defend these proceedings.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the
day and year first above written.
NORTON MCNAUGHTON, INC.
By: /s/ Amanda Bokman
-----------------------------------
Title: VP, CFO, Secretary & Treasurer
--------------------------------
NORTON MCNAUGHTON OF SQUIRE, INC.
By: /s/ Amanda Bokman
-----------------------------------
Title: VP, CFO, Secretary & Treasurer
--------------------------------
MISS ERIKA, INC.
By: /s/ Amanda Bokman
-----------------------------------
Title: VP, CFO, Secretary & Treasurer
--------------------------------
JERI-JO KNITWEAR, INC.
By: /s/ Amanda Bokman
-----------------------------------
Title: VP, CFO, Secretary & Treasurer
--------------------------------
AGENTS AND LENDERS
------------------
THE CITY GROUP/COMMERCIAL SERVICES,
INC., as Administrative Agent
By:___________________________________
Title:________________________________
NATIONSBANC COMMERCIAL
CORPORATION, as Collateral Agent
By:___________________________________
Title:________________________________
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
NORTON MCNAUGHTON, INC.
By:__________________________________
Title:_______________________________
NORTON MCNAUGHTON OF SQUIRE, INC.
By:__________________________________
Title:_______________________________
MISS ERIKA, INC.
By:__________________________________
Title:_______________________________
JERI-JO KNTTWEAR, INC.
By:__________________________________
Title:_______________________________
AGENTS AND LENDERS
------------------
THE CIT GROUP/COMMERCIAL SERVICES,
INC., as Administrative Agent
By: /s/ Charles Carbone
----------------------------------
Title: Vice President
-------------------------------
NATIONSBANC COMMERCIAL
CORPORATION, as Collateral Agent
By:__________________________________
Title:_______________________________
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
NORTON MCNAUGHTON, INC.
By:__________________________________
Title:_______________________________
NORTON MCNAUGHTON OF SQUIRE, INC.
By:__________________________________
Title:_______________________________
MISS ERIKA, INC.
By:__________________________________
Title:_______________________________
JERI-JO KNTTWEAR, INC.
By:__________________________________
Title:_______________________________
AGENTS AND LENDERS
------------------
THE CIT GROUP/COMMERCIAL SERVICES,
INC., as Administrative Agent
By:__________________________________
Title:_______________________________
NATIONSBANC COMMERCIAL
CORPORATION, as Collateral Agent
By: /s/
----------------------------------
Title: Senior Vice President
-------------------------------
-8-
<PAGE>
FLEET BANKNA, as Documentation Agent
By: /s/ Stephen Leavenworth
----------------------------------
Title: Vice President
-------------------------------
SANWA BUSINESS CREDIT CORPORATION
By:__________________________________
Title:_______________________________
ISRAEL DISCOUNT BANK OF NEW YORK
By:__________________________________
Title:_______________________________
SUNROCK CAPITAL CORP.
By:__________________________________
Title:_______________________________
PNC BANK NATIONAL ASSOCIATION
By:__________________________________
Title:_______________________________
HELLER FINANCIAL CORPORATION
By:__________________________________
Title:_______________________________
-9-
<PAGE>
FLEET BANK NA, as Documentation Agent
By:__________________________________
Title:_______________________________
[SANWA BUSINESS CREDIT CORPORATION]
By: /s/
----------------------------------
Title: VP
_______________________________
[ISRAEL DISCOUNT BANK OF NEW YORK]
By:__________________________________
Title:_______________________________
[SUNROCK CAPITAL CORP.]
By:__________________________________
Title:_______________________________
[PNC BANK, NATIONAL ASSOCIATION]
By:__________________________________
Title:_______________________________
[HELLER FINANCIAL CORPORATION]
By:__________________________________
Title:_______________________________
-10-
<PAGE>
FLEET BANK NA, as Documentation Agent
By:__________________________________
Title:_______________________________
SANWA BUSINESS CREDIT CORPORATION
By:__________________________________
Title:_______________________________
ISRAEL DISCOUNT BANK OF NEW YORK
By:__________________________________
Title:_______________________________
SUNROCK CAPITAL CORP.
By: /s/
----------------------------------
Title: VP
-------------------------------
PNC BANK, NATIONAL ASSOCIATION
By:__________________________________
Title:_______________________________
HELLER FINANCIAL CORPORATION
By:__________________________________
Title:_______________________________
-11-
<PAGE>
FLEET BANK NA, as Documentation Agent
By:__________________________________
Title:_______________________________
SANWA BUSINESS CREDIT CORPORATION
By:__________________________________
Title:_______________________________
ISRAEL DISCOUNT BANK OF NEW YORK
By:__________________________________
Title:_______________________________
SUNROCK CAPITAL CORP.
By:__________________________________
Title:_______________________________
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Edmundo Kahn
----------------------------------
Title: [ILLEGIBLE TEXT]
-------------------------------
HELLER FINANCIAL CORPORATION
By:__________________________________
Title:_______________________________
-12-
<PAGE>
FLEET BANK NA, as Documentation Agent
By:__________________________________
Title:_______________________________
SANWA BUSINESS CREDIT CORPORATION
By:__________________________________
Title:_______________________________
ISRAEL DISCOUNT BANK OF NEW YORK
By:__________________________________
Title:_______________________________
SUNROCK CAPITAL CORP.
By:__________________________________
Title:_______________________________
PNC BANK, NATIONAL ASSOCIATION
By:__________________________________
Title:_______________________________
HELLER FINANCIAL CORPORATION
By: /s/ Albert J. Forzano
----------------------------------
Title: Vice President
-------------------------------
-13-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
---------------------------
Norton McNaughton of Squire, Inc., a New York corporation ("Squire"), is a
wholly-owned subsidiary of the Company. Miss Erika, Inc., a Delaware
corporation, is a wholly-owned subsidiary of the Company. Jeri-Jo Knitwear,
Inc., a Delaware corporation, is a wholly-owned subsidiary of the Company,
Norty's Inc., a Delaware corporation, is a wholly-owned subsidiary of Squire.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-80370), (Form S-8 No. 33-92252), (Form S-8 No. 333-29195) and
(Form S-8 No. 333-39049), pertaining to the Stock Option Plan of Norton
McNaughton, Inc. the Employee Stock Purchase Plan of Norton McNaughton, Inc.,
the Executive Stock Option Plan of Norton McNaughton, Inc. the ME Acquisition
Corp. Bonus Plan for Senior Executives; and the Norton McNaughton, Inc. 1998
Long-Term Incentive Plan, the Norton McNaughton, Inc. Stock Option Plan for Non-
Employee Directors and the Norton McNaughton, Inc. Option Bonus Plan for Senior
Executives of JJ Acquisition Corp., respectively, of our report dated December
21, 1998, with respect to the consolidated financial statements and schedule of
Norton McNaughton, Inc. included in this Annual report (Form 10-K) for the year
ended October 31, 1998.
ERNST & YOUNG LLP
New York, New York
January 27, 1999
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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