<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 November 6, 1999
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
MCNAUGHTON APPAREL GROUP INC.
(formerly 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 February 2, 2000, was approximately $53,555,700.
As of February 2, 2000, there were 7,472,395 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 13, 2000, 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.
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PART I
Item 1. Business
McNaughton Apparel Group Inc. (formerly 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 reputations 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
name Erika(R) and under private labels to national chains, department stores,
off-price retail chains, and specialty stores.
The Company changed its name from Norton McNaughton, Inc. to McNaughton
Apparel Group Inc. on February 9, 1999.
Industry Overview
The Company competes in the moderately-priced women's and juniors' segments
of the apparel market. According to industry data, sales of moderately-priced
women's apparel accounted for in excess of $17 billion or approximately 20% of
total retail women's apparel sales in 1997. Juniors' apparel is marketed to
teenagers and young women. According to the U.S. Census Bureau, the so-called
Generation Y (ages 10 to 24 years) numbers more than 49 million people and is
expected to grow 13.2% to approximately 55 million people by 2010. An
independent consumer research firm has estimated that the teenaged segment of
the Generation Y consumer (ages 12 to 19 years) accounted for approximately $141
billion of retail sales, up 16% from 1997, and estimated that approximately 33%
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 $75 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, as a result of the
consolidation of the operations of its three divisions, the Company will
realize economies of scale associated with sourcing, manufacturing,
marketing, distribution and administration. In connection with this focus,
the Company is in the process of relocating Norton's warehousing and
distribution activities to South Carolina where it will perform these
operations "in-house" beginning in its third fiscal quarter of 2000. 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. The Company has implemented new
merchandising programs designed to increase sales and expand retail
personnel and consumer awareness of its brands. For its Norton product
lines, the Company has updated its product offerings, narrowed its product
assortments and lowered its prices. In addition, Norton is constructing
"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, the redesign of product logos and
labels, and the launch of an advertising campaign in Spring of 2000.
Similarly, Miss Erika has implemented merchandising initiatives to broaden
its product offerings to expand sales of its fall season merchandise.
. 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)
Polar 2000(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 $75 $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), Jamie Scott(R) and Polar 2000(R)
The Energie(R), Currants(R) and Jamie Scott(R) product lines were first
introduced in 1975, and consist of juniors' and misses, moderately-priced
separates, including updated sportswear, knitwear and other casual wear. The
Polar 2000(R) product line was introduced in 1999 to broaden Jeri-Jo's product
offerings into different fabrications. The target consumers of these product
lines 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 incomes 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, petite 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,
Norton, Miss Erika and Jeri-Jo consult with retailers to develop product lines
sold under private labels. Norton, 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 Norton, Miss Erika or Jeri-Jo or, together with Norton, Miss Erika's
or Jeri-Jo's designers, create their own variations.
Customers
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 for fiscal 1999, 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 and fiscal
1997.
<TABLE>
<CAPTION>
Pro forma
Fiscal Fiscal Fiscal Fiscal
Name 1999 1998 1998/(3)/ 1997/(4)/
- ---- ------ --------- -------- --------
<S> <C> <C> <C> <C>
J.C. Penney.......................... 20% 20% 17% 11%
May Company/(1)/..................... 14 17 16 29
Federated/(2)/....................... 14 16 15 17
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Total.............................. 48% 53% 48% 57%
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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.
5
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Sales and Merchandising
The Jeri-Jo, Norton and Miss Erika non-commissioned sales forces 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 has not advertised historically, although its products are frequently
featured by retailers in their advertisements. As part of its strategy to
increase brand awareness, a print advertising campaign will be launched for the
Company's Norton McNaughton and Maggie McNaughton product lines commencing in
Spring of 2000.
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. In addition, Norton is constructing "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, the redesign of product logos and labels, and the advertising
campaign discussed above. Similarly, Miss Erika has implemented merchandising
initiatives to broaden its product offerings to expand sales of its fall season
merchandise.
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.
Generally, the Company sources its products abroad, and has continued to
place a greater percentage of its production overseas over the last five years.
During fiscal 1999, substantially all of the Company's products were produced
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 2000, the Company
anticipates that substantially all of its production will be conducted outside
of the United States.
The Company attributes the 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.
6
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In fiscal 1999, the Company engaged the services of approximately 50 buying
agents and 200 sewing and knitting contractors in the United States, Caribbean
basin, Central America, Far East, 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.
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 them for over
ten years. Although the agents facilitate the procurement process, the Company
also maintains relationships with many 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 portion of its products in the Caribbean basin
and Central America. These regions help utilize favorable "807" and North
American Free Trade Agreement ("NAFTA") regulations. "807" regulations provide
that articles assembled abroad from United States components may be exempt from
United States duties on the value of these components. NAFTA regulations provide
that labor and other components produced in countries to which NAFTA treatment
is applicable are also potentially exempt from duties. Production in these
locations begins with on-site inspection of fabrics from mills, converters and
other fabric suppliers. The fabrics may be cut domestically and assembled in the
Caribbean basin or cut and assembled in Central American NAFTA countries. The
production process for Caribbean or Central American based sourcing takes
approximately two to four months.
The Company's quality control program monitors the manufacturing processes
at the Company's contractors in order to ensure that they meet the Company's
quality control standards. This includes the inspection of substantially all of
the Company's fabrics prior to their being placed into production, as well as
on-site inspections of work in process and finished goods during the production
process. This may be performed by the Company's quality control personnel or its
agents. In addition, finished goods are inspected upon receipt into the
Company's warehouses.
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.
In order to provide for its future distribution needs, Norton is in the
process of relocating its distribution activities to South Carolina, 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 negotiated a long-term lease for a
warehouse and distribution center which is being built to its specifications to
accommodate its requirements. Norton intends to commence shipments from this
facility during its third fiscal quarter in 2000. This new leased facility will
initially house Norton's distribution activities and, may eventually, house Miss
Erika's distribution activities.
During a portion of fiscal 1999 (and for many prior years), Norton had
long-term agreements with a distribution contractor (Railroad Enterprises, Inc.,
"Railroad") and a cutting contractor (Cutting Edge Services, Inc., formerly
Toni-Linda Productions, Inc., "Cutting Edge") who performed their functions in
the contractors' leased cutting and warehouse facilities in New Jersey. These
agreements did not cover the manufacturing or distribution activities of Miss
Erika or Jeri-Jo. In addition, Norton had guaranteed the distribution
contractor's obligations under its lease in an amount up to $500,000 and had
guaranteed the cutting contractor's obligations under its lease in an amount up
to approximately $250,000.
On August 9, 1999, the Company and Norton entered into an agreement with
Railroad and Cutting Edge (the "Agreement"), pursuant to which, among other
matters, a lawsuit brought against the Company and Norton by Railroad and
Cutting Edge was terminated (see Item 3, "Legal Proceedings") and Norton
purchased certain assets of Railroad and Cutting Edge, including fixed assets,
machinery and equipment at their facilities, and Railroad's and Cutting Edge's
rights under their then existing agreements with Norton. The purchase price
(the "Purchase Price") was $5.5 million payable as follows: $3.0 million at
closing; thereafter, $108,333.33 per month, payable at month-end from July 31,
1999 through March 31, 2000, and $508,333.33 per month payable at month-end from
April 30, 2000 through May 31, 2000, $408,333.33 payable on June 30, 2000, and
$100,000 payable on December 31, 2000. Norton also retained Railroad to provide
consulting services relating to the relocation of its warehouse and distribution
facilities to South Carolina for a total fee of $500,000 payable on a monthly
basis over a one-year period.
7
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The Agreement also provided for the termination of Norton's then existing
long-term agreements with Railroad and Cutting Edge. Railroad has agreed to
manage the assets Norton purchased and to continue performing all of Norton's
receiving, warehousing and distribution services from Railroad's New Jersey
facilities through June 30, 2000, although Norton may, at its option, extend
this time period until August 31, 2000.
Pursuant to the Agreement, Railroad and Cutting Edge agreed to obtain
releases of Norton's limited guarantees from the landlords of their respective
warehouse leases. On September 23, 1999, Norton received a release from the
landlord of Cutting Edge's warehouse lease in exchange for a payment of
approximately $230,000. As provided in the Agreement, this amount will be
withheld from subsequent Purchase Price installments. In addition, also as
provided in the Agreement, the Purchase Price will be reduced by the amount due
under Norton's guarantee of Railroad's lease, which totals $500,000. Finally,
the Agreement provided for the early termination of Norton's East Rutherford,
New Jersey piece goods warehouse sublease from Cutting Edge, which occurred on
September 30, 1999.
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 Jeri-Jo,
Norton and Miss Erika each of which address the purchasing, shipping and
production functions in fully integrated applications. During fiscal 1998,
Norton automated its pattern-making, marking and grading areas by implementing
CAD-based application systems. In fiscal 1999, the Company completed the
implementation of a new financial software package which will ultimately serve
the accounting and financial applications of all three divisions. New systems
developments in fiscal 2000 will include the implementation of a warehouse
management system and an automated materials handling system in its new
warehouse and distribution facility in South Carolina. The Company will over
time, integrate Miss Erika's and Jeri-Jo's management information systems with
Norton's. 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 November 6, 1999, the Company had a total of approximately $180.4
million of unfilled customer orders compared to approximately $135.2 million at
October 31, 1998. The increase was due to an increase in Spring bookings for
Jeri-Jo, Miss Erika and Norton products. 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 400 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/(1)/ 10,300
New York, NY
4th Floor
26th Floor January 31, 2004 11,600
28th and 29th Floors January 31, 2004 12,100
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/(2)/
Distribution Facility/(3)/ 1020 Northpoint Ind. Blvd. January 30, 2015 300,000
Hanahan, SC
</TABLE>
__________________
(1) The Company is currently in negotiations to extend the expiration date
of this lease and anticipates that it will occupy this space on a month-to-month
basis in the interim.
(2) This warehouse space is leased from a partnership of which certain
partners are employees of Jeri-Jo. The lease has a five-year renewal option.
(3) The Company anticipates that Norton will commence occupancy of this
property in March 2000 and begin warehousing and distribution activities during
the Company's third fiscal quarter of 2000.
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, Railroad
and Cutting Edge, respectively (collectively, "Plaintiffs"), filed an action in
the New York State Supreme Court for New York County which, as amended, was
entitled Cutting Edge Services, Inc. and Railroad Enterprises, Inc. v. Norton
--------------------------------------------------------------------
McNaughton of Squire, Inc. and Norton McNaughton, Inc. Plaintiffs had claimed
- ------------------------------------------------------
that Norton breached its contracts with them because, among other things, Miss
Erika and Jeri-Jo had failed to use Plaintiffs' services as allegedly required
under Norton's contracts with Plaintiffs. This action sought substantial
compensatory and punitive damages and related declaratory relief concerning
rights under the contracts. In connection with the Cutting Edge and Railroad
lawsuit, as well as other pending litigation, the Company established a
litigation reserve of $2.5 million in fiscal 1998.
On August 9, 1999, the Company and Norton entered into an Agreement with
Railroad and Cutting Edge, pursuant to which, among other matters, the foregoing
lawsuit was terminated and Norton purchased certain assets of Railroad and
Cutting Edge, including fixed assets, machinery and equipment at their
facilities, and Railroad's and Cutting Edge's rights under their existing
agreements with Norton. The Purchase Price was $5.5 million payable as follows:
$3.0 million at closing; thereafter, $108,333.33 per month, payable at month-end
from July 31, 1999 through March 31, 2000, and $508,333.33 per month payable at
month-end from April 30, 2000 through May 31, 2000, $408,333.33 payable on June
30, 2000, and $100,000 payable on December 31, 2000. Norton also retained
Railroad to provide consulting services relating to the relocation of its
warehouse and distribution facilities to South Carolina for a total fee of
$500,000 payable on a monthly basis over a one-year period.
The Agreement also provided for the termination of Norton's then existing
long-term agreements with Railroad and Cutting Edge. Railroad has agreed to
manage the assets Norton purchased and to continue performing all of Norton's
receiving, warehousing and distribution services from Railroad's New Jersey
facilities through June 30, 2000, although Norton may, at its option, extend
this time period until August 31, 2000.
Pursuant to the Agreement, Railroad and Cutting Edge agreed to obtain
releases of Norton's limited guarantees from the landlords of their respective
warehouse leases. On September 23, 1999, Norton received a release from the
landlord of Cutting Edge's warehouse lease in exchange for a payment of
approximately $230,000. As provided in the Agreement, this amount will be
withheld from subsequent Purchase Price installments. In addition, also as
provided in the Agreement, the Purchase Price will be reduced by the amount due
under Norton's guarantee of Railroad's lease, which totals $500,000. Finally,
the Agreement provided for the early termination of Norton's East Rutherford,
New Jersey piece goods warehouse sublease from Cutting Edge, which occurred on
September 30, 1999.
The $5.5 million Purchase Price was allocated to current assets in the
amount of $2.2 million, representing the estimated value of the intangible
contract rights acquired, fixed assets in the amount of $600,000, and the
remaining $2.7 million was offset against the $2.5 million reserve for
litigation established in fiscal 1998 with the balance being charged to expense
in fiscal 1999. The intangible contract rights are being amortized over the term
of the management arrangement provided for in the Agreement and the fixed assets
are being amortized over five years. The Company fully expensed in fiscal 1999
its obligation of $500,000 under the Railroad consulting arrangement provided
for in the Agreement.
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. At
November 6, 1999, the Company had a reserve for litigation of approximately
$900,000 in connection with an ongoing claim. 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
Effective February 9, 1999, the Company changed its name to McNaughton
Apparel Group Inc. from Norton McNaughton, Inc. The Company's, $0.01 par value,
common stock ("Common Stock") is traded on the NASDAQ Stock Market ("NASDAQ")
under the symbol MAGI (formerly, its Common Stock traded on NASDAQ under the
symbol NRTY). The table below sets forth the high and low sales prices as
reported by NASDAQ.
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
---------------------- -----------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1st quarter $ 5.75 $2.25 $6.75 $4.88
2nd quarter $ 6.13 $3.75 $6.50 $4.63
3rd quarter $10.25 $5.13 $8.25 $5.38
4th quarter $10.38 $7.25 $7.50 $3.25
</TABLE>
The closing sales price of the Company's Common Stock on February 2, 2000
was $8.88 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 February 2, 2000, there were approximately 130 record holders of the
Company's Common Stock and, the Company estimates, approximately 600 beneficial
holders of the Company's Common Stock.
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)/
------------------------------------------------------------------------------
November 6, October 31, November 1, November 2, November 4,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $407,812 $ 344,604 $ 218,782 $220,823 $227,530
Income (loss) from
operations 34,615 13,566 (5,773)/(3)/ 4,781 17,813
Income (loss) before extraordinary
item 8,531 448 (4,705)/(3)/ 1,524 9,703
Net income (loss) 8,531 (713)/(2)/ (4,705)/(3)/ 1,524 9,703
Basic Earnings Per Share:
Income (loss) before extraordinary
item $ 1.15 $ 0.06 $ (0.63)/(3)/ 0.20 $ 1.21
======== ========= ========= ======== ========
Net income (loss) $ 1.15 $ (0.10)/(2)/ $ (0.63)/(3)/ 0.20 $ 1.21
======== ========= ========= ======== ========
Weighted average number of common
shares outstanding 7,432 7,413 7,488 7,767 8,000
======== ========= ========= ======== ========
Diluted Earnings Per Share:
Income (loss) before extraordinary
item $ 1.11 $ 0.06 $ (0.63)/(3)/ 0.20 $ 1.20
======== ========= ========= ======== ========
Net income (loss) $ 1.11 $ (0.10)/(2)/ $ (0.63)/(3)/ $ 0.20 $ 1.20
======== ========= ========= ======== ========
Weighted average number of common
shares outstanding assuming dilution 7,708 7,432 7,488 7,781 8,056
======== ========= ========= ======== ========
Balance Sheet Data:
Working capital $ 93,607 $ 103,984 $ 39,312 $ 40,057 $ 43,502
Total assets 228,098 201,589 118,762 61,109 73,524
Long-term debt, excluding
current portion 125,000 125,000 12,000 - -
Stockholders' equity 50,067 41,470 42,163 48,286 50,469
(Footnotes on following page)
</TABLE>
12
<PAGE>
(1) The Company operates on a 52 or 53-week fiscal year. The Company's fiscal
year ends on October 31, if such date falls on a Saturday, or the first
Saturday following October 31. 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, except the fiscal year ended November 6, 1999,
which was a 53-week fiscal year.
(2) Reflects net loss 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.
(3) 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").
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
- -------
The Company's business strategy is to expand its branded product lines,
broaden its customer base and further develop its global product sourcing
capabilities. A key component of this 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
Company's recent acquisitions, the following discussion of the Company's
historical financial condition and results of operations is not necessarily
indicative of future results.
On September 30, 1997, the Company completed the acquisition of
substantially all the assets and the assumption of substantially all the
liabilities of Miss Erika, a privately-held manufacturer of women's moderately
priced apparel. The 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 agreed to pay an
additional contingent payment in cash and/or Common Stock in the event that
certain earnings targets were achieved by Miss Erika for the two fiscal years
ended November 6, 1999. On August 4, 1999, the Company retired, at a discount,
64.3% of the earn-out obligation payable to the sellers of Miss Erika for $10.0
million in cash. The remaining earn-out obligation, representing 35.7%, will be
paid in February 2000. See "Liquidity and Capital Resources".
On June 18, 1998, 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.
See "Liquidity and Capital Resources".
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
Banc of America Commercial Corporation (formerly known as 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's continuing focus on improving profitability has also led the
Company to undertake certain merchandising initiatives to improve gross profit
and gross profit margins with respect to the Norton McNaughton product lines.
The Company has reduced the number of products (i.e., reduced the number of
SKU's) offered in any particular collection of its Norton McNaughton product
lines 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 Norton McNaughton
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 1999 from those recorded in fiscal 1998. However, the Company does not
anticipate a decrease in revenue levels in its Norton McNaughton product lines
in fiscal 2000 as a consequence of those initiatives.
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
13
<PAGE>
production. During fiscal 1997, the Company closed several divisions, including
its retail outlet stores, and discontinued product lines which had contributed
approximately $33.4 million in the aggregate to net sales.
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 relationships with the Company. In addition, the
Company terminated certain lease obligations, and reduced its workforce by
approximately 33%. In connection with these changes, as well as the divisional
closures discussed above, the Company recorded special charges of approximately
$9.4 million in fiscal 1997.
The Company continually explores cost savings opportunities in an attempt
to reduce overhead and improve operating income. In connection therewith, the
Company will relocate the warehousing and distribution operations for its Norton
product lines to South Carolina during the third fiscal quarter of 2000. On
August 9, 1999, the Company and Norton entered into an Agreement with Railroad,
its distribution contractor, and Cutting Edge, its cutting contractor, which
provided for the termination of its existing long-term agreements therewith.
Pursuant to the Agreement, Norton purchased certain assets of Railroad and
Cutting Edge, including fixed assets, machinery and equipment at their
facilities, and Railroad's and Cutting Edge's rights under their existing
agreements with Norton. Railroad has agreed to manage the assets Norton
purchased and to continue performing all of Norton's receiving, warehousing and
distribution services from Railroad's New Jersey facilities through June 30,
2000, although Norton may, at its option, extend this time period until August
31, 2000. See Item 3, "Legal Proceedings" and "Liquidity and Capital Resources".
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 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 Annual Report on Form 10-K, including this Management's Discussion and
Analysis of Financial Condition and Results of Operations, 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 deterioration in retailing conditions for women's and juniors'
apparel, an increase in price pressures and other competitive factors, any of
which could result in an unanticipated decrease in gross profit margins,
unanticipated problems arising with the integration of Miss Erika's and Jeri-
Jo's businesses, the unanticipated loss of a major customer, the unanticipated
loss of a major contractor or supplier, unanticipated problems arising out of
Norton's relocation of its distribution function to South Carolina where the
activities will be performed "in-house", 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.
14
<PAGE>
Results of Operations
- ---------------------
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The following table is derived from the Company's
Consolidated Statements of Operations and sets forth, for the periods indicated,
selected operating data as a percentage of net sales.
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------------------
1999 1998(1) 1997(2)
---- ------ -------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 74.5 79.4 82.1
----- ------ -------
Gross profit 25.5 20.6 17.9
Selling, general and administrative expenses 15.7 16.0 20.1
Depreciation and amortization 1.3 0.7 0.5
----- ------ -------
Income (loss) from operations 8.5 3.9 (2.7)
Interest expense and amortization of deferred
financing costs 4.6 3.5 1.1
Other income, net (0.1) (0.1) (0.1)
----- ------ -------
Income (loss) before provision (benefit) for income taxes and
extraordinary item 4.0 0.5 (3.7)
Provision (benefit) for income taxes 1.9 0.4 (1.6)
----- ------ -------
Income (loss) before extraordinary item 2.1 0.1 (2.1)
Extraordinary item, net of tax - (0.3) -
----- ------ -------
Net income (loss) 2.1% (0.2)% (2.1)%
===== ====== =======
</TABLE>
_______________________
(1) Includes Jeri-Jo from June 18, 1998.
(2) Includes Miss Erika from September 30, 1997.
Fiscal 1999 Compared to Fiscal 1998
- -----------------------------------
Net sales
Net sales increased by $63.2 million, or 18.3%, to $407.8 million for
fiscal 1999 compared to $344.6 million for fiscal 1998. The increase in net
sales was attributable to incremental net sales from the Energie, Currants and
Jamie Scott product lines of $74.1 million following the acquisition of Jeri-Jo
on June 18, 1998 and an increase in net sales in the Erika product lines of
$17.1 million. These increases were offset in part by a planned decrease in net
sales of $15.8 million in the Norton McNaughton product lines, a decrease in net
sales of $7.6 million in the Norton Studio product line and a decrease in net
sales of $4.7 million in the D.P.S. product line.
Gross Profit
Gross profit margin was 25.5% for fiscal 1999 compared to 20.6% for fiscal
1998. The increase in gross profit margin was primarily due to the addition of
higher gross profit margins from the Energie, Currants and Jamie Scott product
lines following the acquisition of Jeri-Jo on June 18, 1998, as well as gross
margin improvements in those product lines.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A" expenses) were $64.1
million, or 15.7% of net sales in fiscal 1999, compared to $55.0 million, or
16.0% of net sales, in fiscal 1998. The increase in SG&A expenses of $9.1
million resulted primarily from the incremental SG&A of $7.4 million from the
Energie, Currants and Jamie Scott product lines following the acquisition of
Jeri-Jo on June 18, 1998, and an increase in SG&A of $2.8 million due to an
increase in personnel expenses resulting primarily from additions to headcount
in the production and shipping areas as a result of increased sales volume in
the Erika product lines, the non-recurrence of certain significant bad debt
recoveries experienced in fiscal 1998, an increase in outside shipping services,
an increase in contractual bonus expense, the write-off of certain assets and an
increase in professional fees resulting from litigation. These increases were
offset in part by a decrease in SG&A of approximately $1.0 million which
resulted from the absence of the litigation reserve established in fiscal 1998
and a decrease in shipping rates under an agreement with a shipping contractor.
The decrease in SG&A expenses as a percentage of net sales resulted primarily
from the spreading of the fixed component of these expenses over higher net
sales in fiscal 1999.
15
<PAGE>
Depreciation and Amortization
Depreciation and amortization was $5.3 million in fiscal 1999 compared to
$2.4 million in fiscal 1998. The increase was primarily due to the amortization
of goodwill resulting from the Jeri-Jo acquisition, Miss Erika's early
discounted earn-out payment, which increased goodwill, and the amortization of
intangible assets acquired in connection with the Company's settlement agreement
with its shipping and cutting contractors. See Item 3, "Legal Proceedings".
Operating Income
Operating income for fiscal 1999 was $34.6 million as compared to $13.6
million for fiscal 1998. The increase in fiscal 1999 operating income of
approximately $21.0 million resulted primarily from the increase in net sales
from the acquisition of Jeri-Jo on June 18, 1998 and the improvement in gross
profit margins discussed above.
Interest Expense
Interest expense increased to $18.7 million in fiscal 1999 compared to
$11.8 million in fiscal 1998. The increase of $6.9 million was primarily
attributable to the incremental interest cost of the Senior Notes that replaced
revolving credit loans which had lower interest rates, as well as the inclusion
of a full year of interest expense and amortization of deferred financing costs
from the Jeri-Jo acquisition.
Taxes
The provision for income taxes in fiscal 1999 included an additional
provision of approximately $400,000 for audit exposures. The provision for
income taxes in fiscal 1998 included an additional provision of $600,000 in
connection with the resolution of certain Federal income tax audits covering
fiscal years 1991 through 1996 and the corresponding impact on state and local
taxes.
Cash Earnings Per Share
Cash earnings per share, or earnings per share before goodwill
amortization, increased in fiscal 1999 to $1.21 per diluted share, from a loss
per diluted share of $0.04 in fiscal 1998.
Fiscal 1998 Compared to Fiscal 1997
- -----------------------------------
Net Sales
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
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 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.
16
<PAGE>
Operating Income
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 increase in net sales from the
acquisitions of Miss Erika and Jeri-Jo, which occurred on September 30, 1997 and
June 18, 1998, respectively.
Interest Expense
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.
Taxes
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.
Extraordinary Item
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.
Cash Earnings per Share
Cash earnings per share, or earnings per share before goodwill amortization,
increased in fiscal 1998 to a loss per diluted share of $0.04 from a loss per
diluted share of $0.63 in fiscal 1997.
Liquidity and Capital Resources
- -------------------------------
The Company is highly leveraged and significant additional earn-out payments
will be required to be made by the Company in February and August 2000 in
connection with the Miss Erika and Jeri-Jo acquisitions, respectively. On
November 6, 1999, the Company had $125.0 million of Senior Notes outstanding,
$725,000 of revolving credit loans outstanding under the Current Credit
Agreement, and obligations under undrawn letters of credit in the aggregate face
amount of approximately $122.3 million. Under the terms of its credit
documentation, the Company can incur substantial additional indebtedness in the
future. At November 6, 1999, the Company had total additional available credit
of $28.4 million under the Current Credit Agreement, including $5.0 million of
overadvance capability, pursuant to the borrowing base formula set forth
therein, as well as cash and cash equivalents of $13.8 million. In addition,
the Company has secured its obligation to pay the cash portion of the Jeri-Jo
earn-out with a $30.0 million stand-by letter of credit (which is currently
reducing the Company's availability under the Current Credit Agreement), which
funds will become available for payment of the earn-out when the latter becomes
due and payable. Based upon actual results of Miss Erika, the Company will pay
approximately $12.0 million in additional consideration to certain of the
sellers of Miss Erika in February 2000, approximately $10.0 million of which
will be paid in cash and $2.0 million of which will be paid in shares of Common
Stock. In addition, based on Jeri-Jo's results through November 6, 1999, and
assuming Jeri-Jo achieves its budgeted results through June 30, 2000, the
Company will be required to pay the sellers of Jeri-Jo in excess of $125.0
million in August 2000, with at least 50% thereof being payable in cash and the
balance payable in shares of Common Stock.
The Company's ability to make earn-out payments and scheduled payments of
principal of, to pay the interest on, to refinance, as needed, its indebtedness,
and to fund working capital requirements and 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 current and budgeted levels of
operations, management believes that cash flow from operations and cash,
together with available borrowings under the Current Credit Agreement, will be
adequate to meet the Company's liquidity needs for fiscal 2000.
The Company's liquidity requirements arise from the funding of the Company's
working capital needs, primarily inventory and accounts receivable, interest on
indebtedness, planned capital expenditures, and, additionally, from the
Company's earn-out obligations pursuant to the acquisitions of Miss Erika and
Jeri-Jo. 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 $93.6 million at November 6, 1999 as
compared to $104.0 million at October 31, 1998. The decrease in working capital
resulted primarily from the early discounted payment of a portion of the Miss
Erika earn-out obligation totaling $10.0 million and the accrual of an
additional $10.0 million representing the estimated cash portion of the
remaining Miss Erika earn-out. The decrease was offset in part by fiscal 1999
net income.
17
<PAGE>
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.
On September 30, 1997, the Company completed the acquisition of substantially
all the assets and the assumption of substantially all the liabilities of Miss
Erika, a privately-held manufacturer of women's moderately-priced apparel. The
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 agreed to pay an additional
contingent payment in cash and/or Common Stock based upon earnings achieved by
Miss Erika for the two fiscal years ended November 6, 1999. As originally
agreed, the aggregate contingent payment 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 ended
November 6, 1999, exceeds $24.0 million. The 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, as
originally executed, limited the number of shares of Common Stock payable by the
Company to a number of shares which, after giving effect to their issuance, did
not exceed 12% of the aggregate number of outstanding shares of Common Stock at
the time of payment. Following the early discounted payment of a portion of the
Miss Erika earn-out obligation described below, this percentage limit was
amended to 2.822%. The Company has agreed to cause any shares of Common Stock
issued as a contingent payment to be registered under the Securities Act of
1933, as amended (the "Securities Act").
On August 4, 1999, the Company retired, at a discount, 64.3% of the earn-out
obligation payable to the sellers of Miss Erika for $10.0 million in cash. The
portion of the earn-out obligation which was retired was owned by two investment
funds and their affiliates who were interested in monetizing their portion of
the contingent earn-out payment due to closure of the funds in which these
investments were held. The early cash payment will save the Company
approximately $10.0 million, net of consent fees of $1.2 million paid to Senior
Noteholders under the Indenture, compared to what would have otherwise been due
and payable in February 2000. The remaining earn-out obligation, representing
35.7%, continues to be governed by the original earn-out provisions described
above. This remaining interest is held substantially by members of the current
Miss Erika management team, none of whom desired to exercise the option of
receiving a discounted early payment of the contingent earn-out. The Company
intends to pay the cash portion of the remaining contingent consideration from
internally generated funds and borrowings under the Company's revolving credit
facility. Miss Erika achieved Miss Erika EBITDA during fiscal 1998 and fiscal
1999 which will result in the payment of additional consideration of
approximately $12.0 million. Payment is expected to be made in February 2000,
approximately $10.0 million of which will be paid in cash and approximately $2.0
million of which will be paid in Common Stock. Such amounts have been reflected
in the Company's financial statements as of November 6, 1999 as current and
long-term liabilities, respectively.
On June 18, 1998, the Company completed the acquisition of 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.
Such payment must be made no later than August 30, 2000. The Jeri-Jo purchase
agreement requires that the Company pay at least 50% of the required contingent
payment in cash and the Indenture limits this cash payment to 75% of the total
contingent payment. The aggregate contingent payment 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. Additional consideration paid for
Jeri-Jo will be accounted for as additional purchase price and will be reflected
in intangible assets. The Company secured its 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. 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 16 month
period ended November 6, 1999 which will result in the payment of significant
additional consideration. Based upon the Jeri-Jo EBITDA achieved for the 16
month period ended November 6, 1999, and assuming that Jeri-Jo achieves its
budgeted EBITDA for the period from November 7, 1999 through June 30, 2000 (the
end of the Jeri-Jo earn-out period), additional consideration in excess of
$125.0 million would be payable in accordance with the Jeri-Jo purchase
agreement.
18
<PAGE>
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 Banc of America Commercial
Corporation (formerly known as NationsBanc Commercial Corporation), The CIT
Group/Commercial Services, Inc. and Fleet Bank N.A. The facility is 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 100 basis points below the prime rate at Banc of
America, N.A. (formerly known as Nations Bank, N.A.) (based upon the current
prime rate, the interest rate under the Current Credit Agreement is 7.50% 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 7.3% for
fiscal 1999 and 8.0% for fiscal 1998. The Company continues to factor accounts
receivable pursuant to factoring arrangements.
On June 18, 1998, the Company also issued the 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 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, as defined therein.
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. At November 6, 1999, the
Company was in compliance with all of its restrictive and financial covenants
under the Current Credit Agreement and Indenture, with the exception of the
minimum working capital requirement under the Current Credit Agreement. The
non-compliance with the latter was caused by the Company's early retirement, at
a discount, of 64.3% of the Miss Erika earn-out obligation and the accrual for
financial reporting purposes at November 6, 1999 of the estimated cash portion
of the remaining earn-out payment, which is due and payable in February 2000.
These events were unanticipated at the time that the covenant requirements were
set in 1998. On January 12, 2000, the Company's lenders executed a Waiver and
Consent waiving this non-compliance with the working capital requirement for
this period.
On August 9, 1999, the Company and Norton entered into a settlement with
Railroad and Cutting Edge, pursuant to which, among other matters, contract
disputes were settled, Norton purchased certain assets of Railroad and Cutting
Edge, including fixed assets, machinery and equipment at their facilities, and
Railroad's and Cutting Edge's rights under their existing agreements with
Norton. The Purchase Price was $5.5 million payable as follows: $3.0 million at
closing; thereafter, $108,333.33 per month, payable at month-end from July 31,
1999 through March 31, 2000, and $508,333.33 per month payable at month-end from
April 30, 2000 through May 31, 2000, $408,333.33 payable on June 30, 2000, and
$100,000 payable on December 31, 2000. Norton has also retained Railroad to
provide consulting services relating to the relocation of its warehouse and
distribution facilities to South Carolina for a total fee of $500,000 payable on
a monthly basis over a one-year period. See Item 3, "Legal Proceedings".
The Agreement also provided for the termination of Norton's then existing
long-term agreements with Railroad (distribution) and Cutting Edge (cutting).
Railroad has agreed to manage the assets Norton purchased and to continue
performing all of Norton's receiving, warehousing and distribution services from
Railroad's New Jersey facilities through June 30, 2000, although Norton may, at
its option, extend this time period until August 31, 2000.
Pursuant to the Agreement, Railroad and Cutting Edge agreed to obtain
releases of Norton's limited guarantees from the landlords of their respective
warehouse leases. On September 23, 1999, Norton received a release from the
landlord of Cutting Edge's warehouse lease in exchange for a payment of
approximately $230,000. As provided in the Agreement, this amount will be
withheld from subsequent Purchase Price installments. In addition, also as
provided in the Agreement, the Purchase Price will be reduced by the amount due
under Norton's guarantee of Railroad's lease, which totals $500,000. Finally,
the Agreement provided for the early termination of Norton's East Rutherford,
New Jersey piece goods warehouse sublease from Cutting Edge, which occurred on
September 30, 1999.
The Company's capital expenditures were approximately $4.0 million and $2.4
million in fiscal 1999 and fiscal 1998, respectively. The Company anticipates
that in fiscal 2000 it will incur capital expenditures of approximately $6.5
million to $7.0 million, primarily in connection with Norton's new warehouse and
distribution facility in South Carolina, which will include an automated
materials handling system, management information systems, including hardware
and software, machinery and equipment
19
<PAGE>
and furniture and fixtures. The Company expects to finance these capital
expenditures from internally generated funds and advances under the Current
Credit Agreement.
The Company's Board of Directors has authorized a stock repurchase program,
under which the Company may repurchase up to $11.5 million of the Company's
Common Stock. The Company expects that the shares may be purchased from time to
time in the open market and in block transactions. As of November 6, 1999, the
Company had purchased a total of 651,000 shares at an aggregate cost of
approximately $5.5 million. As of February 2, 2000, the Company had purchased a
total of 776,300 shares at an aggregate cost of approximately $6.5 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 quarter and, to a lesser
extent, the fourth quarter of each fiscal year. 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 believes it has resolved the potential impact of the year 2000
(the "Year 2000") on its processing of date sensitive information and network
systems.
The Company, to date, has not experienced any negative effects due to the
Year 2000 problem, either internally or with its customers or vendors. If the
Company encounters Year 2000 problems during the year 2000, 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 contingency plans for critical functions 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
-------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term debt:
Revolving credit $ 725 - - - - - $ 725
Prime rate less 100 basis
points(1) 7.50% - - - - - 7.50%
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 10
and 14 to the Company's consolidated financial statements.
(1) Prior to February 1, 2000, the rate was prime less 50 basis points.
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 2000 Annual Meeting of Stockholders to
be filed pursuant to Regulation 14A (the "Company's 2000 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 2000 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 2000 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 2000 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 Statement Schedule and
Supplementary Data" on page F-1
3. The Exhibits required to be filed as part of this Annual Report on Form 10-
K are listed on the Exhibit Index 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), 10.8(b) and 10.8(c), 10.9,
10.9(a) and 10.9(b), 10.10, 10.10(a), 10(b) and 10.10(c), 10.11 and
10.11(a), 10.12, 10.38, 10.40, 10.41, 10.42, 10.43, 10.44, 10.45, 10.51,
10.52 and 10.53 are the management contracts and compensatory plans or
arrangements required to be filed as part of this Annual Report on Form 10-
K.
(b) The Registrant filed one Current Report on Form 8-K during the fourteen-
weeks ended November 6, 1999.
23
<PAGE>
MCNAUGHTON APPAREL GROUP INC.
(formerly Norton McNaughton, Inc.)
Index to Consolidated Financial Statements, Financial Statement Schedule and
Supplementary Data
Page
----
Financial Statements:
Report of Independent Auditors F-2
Consolidated Balance Sheets at November 6, 1999
and October 31, 1998 F-3
Consolidated Statements of Operations for
Each of the Three Years in the Period Ended November 6, 1999 F-4
Consolidated Statements of Stockholders' Equity for
Each of the Three Years in the Period Ended November 6, 1999 F-5
Consolidated Statements of Cash Flows for
Each of the Three Years in the Period Ended November 6, 1999 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
II - "Valuation and Qualifying Accounts" F-24
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-25
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
McNaughton Apparel Group Inc.
We have audited the accompanying consolidated balance sheets of McNaughton
Apparel Group Inc. and Subsidiaries (the "Company") as of November 6, 1999 and
October 31, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended November 6, 1999. 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 auditing standards generally accepted
in the United States. 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 November 6, 1999 and October 31, 1998 and the consolidated results of
their operations, changes in their stockholders' equity and their cash flows for
each of the three years in the period ended November 6, 1999 in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
ERNST & YOUNG LLP
New York, New York
January 5, 2000
F-2
<PAGE>
McNaughton Apparel Group Inc.
Consolidated Balance Sheets
November 6, October 31,
1999 1998
-------------------------
(In Thousands)
Assets
Current assets:
Cash and cash equivalents $ 13,842 $ 205
Due from factor 82,189 85,998
Inventory 40,917 47,386
Income taxes receivable 2,145 2,522
Prepaid expenses and other current assets 3,787 1,273
-------- --------
Total current assets 142,880 137,384
Fixed assets, net 10,177 8,261
Notes receivable from management stockholders 2,287 2,471
Intangible assets, net 63,198 43,464
Deferred financing costs 6,642 6,348
Other assets 2,914 3,661
-------- --------
Total assets $228,098 $201,589
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 14,237 $ 15,932
Revolving credit loan 725 3,839
Income taxes payable 7,151 -
Accrued expenses and other current liabilities 27,160 13,629
-------- --------
Total current liabilities 49,273 33,400
12 1/2% Senior Notes due 2005 125,000 125,000
Other long-term liabilities 3,758 1,719
-------- --------
Total liabilities 178,031 160,119
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value,
authorized 20,000,000 shares, 8,096,324
and 8,065,429 shares issued, respectively,
and 7,445,324 and 7,414,429
shares outstanding, respectively 81 81
Capital in excess of par 23,989 23,923
Retained earnings 31,532 23,001
Treasury stock, at cost, 651,000 shares (5,535) (5,535)
-------- --------
Total stockholders' equity 50,067 41,470
-------- --------
Total liabilities and stockholders' equity $228,098 $201,589
======== ========
See accompanying notes.
F-3
<PAGE>
McNaughton Apparel Group Inc.
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------
November 6, October 31, November 1,
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Net sales $407,812 $344,604 $218,782
Cost of goods sold 303,769 273,703 179,556
-------- -------- --------
Gross profit 104,043 70,901 39,226
Selling, general and administrative expenses 64,146 54,965 44,015
Depreciation and amortization 5,282 2,370 984
-------- -------- --------
Income (loss) from operations 34,615 13,566 (5,773)
Interest expense and amortization of deferred financing costs 18,712 11,788 2,500
Other income, net (364) (165) (168)
-------- -------- --------
Income (loss) before provision (benefit) for income taxes and
extraordinary item 16,267 1,943 (8,105)
Provision (benefit) for income taxes 7,736 1,495 (3,400)
-------- -------- --------
Income (loss) before extraordinary item 8,531 448 (4,705)
Extraordinary item, net of $840 tax benefit - (1,161) -
-------- -------- --------
Net income (loss) $ 8,531 $ (713) $ (4,705)
======== ======== ========
Basic earnings per share:
Income (loss) before extraordinary item $ 1.15 $ 0.06 $ (0.63)
Extraordinary item - (0.16) -
-------- -------- --------
Net income (loss) $ 1.15 $ (0.10) $ (0.63)
======== ======== ========
Weighted average number of common shares outstanding 7,432 7,413 7,488
======== ======== ========
Diluted earnings per share:
Income (loss) before extraordinary item $ 1.11 $ 0.06 $ (0.63)
Extraordinary item - (0.16) -
-------- -------- --------
Net income (loss) $ 1.11 $ (0.10) $ (0.63)
======== ======== ========
Weighted average number of common shares outstanding assuming
dilution 7,708 7,432 7,488
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
McNaughton Apparel Group Inc.
Consolidated Statements of Stockholders' Equity
Years Ended November 6, 1999, October 31, 1998 and November 1, 1997
<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 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
Net income for the year - - - 8,531 - 8,531
Issuance of common stock
through stock purchase plan 30 - 62 - - 62
Exercise of stock options 1 - 4 - - 4
----- ----- ---------- ---------- --------- ---------
Balance at November 6, 1999 8,096 $ 81 $ 23,989 $ 31,532 $ (5,535) $ 50,067
===== ===== ========== ========== ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
McNaughton Apparel Group Inc.
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------
November 6, October 31, November 1,
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 8,531 $ (713) $ (4,705)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization of fixed assets 2,018 1,415 931
Write-off of fixed assets 32 - 627
Amortization of intangible assets and deferred financing costs 4,603 1,953 131
Changes in operating assets and liabilities:
Due from factor 3,809 (9,671) (19,014)
Inventory 6,469 (11) 4,084
Income taxes receivable and current deferred taxes 377 679 (3,102)
Prepaid expenses and other current assets (2,514) 4,265 (73)
Other assets (158) (1,938) (2,205)
Accounts payable (1,695) 987 (2,598)
Accrued expenses and other current liabilities 10,682 5,587 (736)
Other long-term liabilities 39 (1) 170
-------- -------- --------
Net cash provided by (used for) operating activities 32,193 2,552 (26,490)
-------- -------- --------
Investing activities
Purchase of fixed assets (3,966) (2,430) (1,571)
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) -
Additional purchase price to Miss Erika (10,094) - -
Notes receivable from management stockholders 184 184 -
-------- -------- --------
Net cash used for investing activities (13,876) (56,499) (26,124)
-------- -------- --------
Financing activities
Purchase of treasury stock - - (1,457)
Net advances (repayments) under revolving credit agreements (3,114) (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 (1,632) (4,863) (2,559)
Proceeds from issuance of common stock, net 66 20 39
Proceeds from (repayment of) term loan - (15,000) 15,000
-------- -------- --------
Net cash (used for) provided by financing activities (4,680) 53,623 52,810
-------- -------- --------
Increase (decrease) in cash 13,637 (324) 196
Cash at beginning of year 205 529 333
-------- -------- --------
Cash at end of year $ 13,842 $ 205 $ 529
======== ======== ========
Supplemental disclosures
Income taxes paid $ 792 $ 400 $ 361
Interest paid $ 16,391 $ 5,346 $ 1,999
</TABLE>
See accompanying notes.
F-6
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Organization and Principles of Consolidation
McNaughton Apparel Group Inc. (formerly, Norton McNaughton, Inc.) (the
"Company") was incorporated in Delaware on December 30, 1993.
The consolidated financial statements include the accounts of McNaughton
Apparel Group 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.
The Company changed its name from Norton McNaughton, Inc. to McNaughton
Apparel Group Inc. on February 9, 1999.
Principal Business Activity
Through its wholly-owned subsidiaries, the Company designs, sources,
markets 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 November
6, 1999, October 31, 1998 and November 1, 1997 includes the results of
operations for 53, 52 and 52 weeks, respectively.
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 as an extraordinary item when the
facility was repaid in June 1998.
Deferred financing costs were incurred in connection with obtaining the
Company's current revolving credit agreement and the Company's issuance of
$125.0 million 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.
F-7
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (continued)
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.
Intangible contract rights acquired in connection with the agreement
entered into on August 9, 1999 with Railroad Enterprises, Inc. ("Railroad") and
Cutting Edge Services, Inc. ("Cutting Edge") (the "Agreement") are being
amortized over the term of the management arrangement being provided for in the
Agreement. These intangible contract rights have been recorded as current
assets. See Note 11.
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
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 1999 and fiscal
1998, the dilutive effect of options outstanding during the period using the
treasury stock method was approximately 276,000 shares and 19,000 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 November 6, 1999,
the amount due from factor was $82.2 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. The Company continually
monitors its cash position. At November 6, 1999, the Company had $14.5 million
invested in a money market fund at 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 the Financial Accounting
Standard Board's Statement of Financial Accounting Standards ("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.
F-8
<PAGE>
McNaughton Apparel Group Inc.
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"
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 adopted this statement in
fiscal 1999 and such adoption did not have a material effect on the financial
statements.
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 operates entirely in one segment, women's
apparel, which is sold through diverse distribution channels to many markets. It
is not possible, therefore, to divide the Company's business into meaningful
industry segments. The Company's operations and sales are only in the United
States, therefore, geographical segments are not applicable.
2. Acquisitions
Miss Erika
- ----------
On September 30, 1997, the Company completed the acquisition of substantially
all the assets and the assumption of substantially all the liabilities of Miss
Erika, a privately-held manufacturer of women's moderately-priced apparel. The
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 agreed to pay an additional
contingent payment in cash and/or the Company's, $0.01 par value, common stock
("Common Stock") based upon earnings achieved by Miss Erika for the two fiscal
years ended November 6, 1999. As originally agreed, the aggregate contingent
payment 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 ended November 6, 1999, exceeds
$24.0 million. The 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, as originally executed, limited
the number of shares of Common Stock payable by the Company to a number of
shares which, after giving effect to their issuance, did not exceed 12% of the
aggregate number of outstanding shares of Common Stock at the time of payment.
Following the early discounted payment of a portion of the Miss Erika earn-out
obligation described below, this percentage limit was amended to 2.822%. The
Company has agreed to cause any shares of Common Stock issued as a contingent
payment to be registered under the Securities Act of 1933, as amended (the
"Securities Act").
On August 4, 1999, the Company retired, at a discount, 64.3% of the earn-
out obligation payable to the sellers of Miss Erika for $10.0 million in cash.
The portion of the earn-out obligation which was retired was owned by two
investment funds and their affiliates who were interested in monetizing their
portion of the contingent earn-out payment due to closure of the funds in which
these investments were held. The early cash payment will save the Company
approximately $10.0 million, net of consent fees of $1.2 million paid to senior
noteholders under the indenture dated as of June 18, 1998 governing the Senior
Notes (the "Indenture") compared to what would have otherwise been due and
payable in February 2000. The remaining earn-out obligation, representing 35.7%,
continues to be governed by the original earn-out provisions described above.
This remaining interest is held substantially by members of the current Miss
Erika management team, none of whom desired to exercise the option of receiving
a discounted early payment of the contingent earn-out. The Company intends to
pay the cash portion of the remaining contingent consideration from internally
generated funds and borrowings under the Company's revolving credit facility.
Miss Erika achieved Miss Erika EBITDA during fiscal 1998 and fiscal 1999 which
will result in the payment of additional consideration of approximately $12.0
million. Payment is expected to be made in February 2000, approximately $10.0
million of which will be paid in cash and $2.0 million of which will be paid in
Common Stock. Such amounts have been reflected in the Company's financial
statements as of November 6, 1999 as current and long-term liabilities,
respectively.
In connection with the foregoing, the Company amended the Indenture to
provide for, among other matters, the early extinguishment of a portion of the
outstanding earn-out obligation payable to certain of the sellers of Miss Erika
and to restrict the amount of cash that may be paid with respect to the
Company's earn-out obligation incurred in connection with its acquisition of
Jeri-Jo.
F-9
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
2. Acquisitions (continued)
Jeri-Jo
- -------
On June 18, 1998, the Company completed the acquisition of 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. Such payment must be made no later than
August 30, 2000. The Jeri-Jo purchase agreement requires that the Company pay at
least 50% of the required contingent payment in cash and the Indenture limits
this cash payment to 75% of the total contingent payment. The aggregate
contingent payment 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. Additional consideration paid for Jeri-Jo will be
accounted for as additional purchase price and will be reflected in intangible
assets. The Company secured its 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. 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 16 month period ended November 6, 1999
which will result in the payment of significant additional consideration. Based
upon the Jeri-Jo EBITDA achieved for the 16 month period ended November 6, 1999,
and assuming that Jeri-Jo achieves its budgeted EBITDA for the period from
November 7, 1999 through June 30, 2000 (the end of the Jeri-Jo earn-out period),
additional consideration in excess of $125.0 million would be payable in
accordance with the Jeri-Jo purchase agreement.
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)
----------------------- -------------- ------------------- --------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
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 (loss) before
extraordinary item $ 448 $ 881 $ (4,705) $ (2,337)
Net loss $ (713) $ (280) $ (4,705) $ (2,337)
Net 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.
F-10
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
3. Sales to Major Customers
For the years ended November 6, 1999, October 31, 1998 and November 1,
1997, net sales made to three customers were approximately 20%, 14% and 14%,
approximately 17%, 16% and 15%, and approximately 11%, 29% and 17%,
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 November 6, 1999,
October 31, 1998 and November 1, 1997 were approximately $1.4 million, $1.3
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 November 6, 1999 and October 31, 1998, the amounts due from factor
of $82.2 million and $86.0 million, respectively, 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 Banc of America, N.A. (formerly known as NationsBank of
Georgia, N.A.) prime rate (the "Banc of America Prime Rate") for amounts
advanced which were less than the purchase price of eligible accounts
receivable, and 1.25% above the Banc of America Prime Rate for amounts advanced
in excess of the purchase price of eligible accounts receivable.
5. Inventories
Inventories consist of the following:
November 6, October 31,
1999 1998
-----------------------------------
(In Thousands)
Raw materials $ 3,116 $ 3,733
Work-in-process 1,104 1,158
Finished goods 36,697 42,495
-------- --------
$ 40,917 $ 47,386
======== ========
6. Fixed Assets
Fixed assets are summarized as follows:
November 6, October 31,
1999 1998
-----------------------------------
(In Thousands)
Machinery and equipment $ 1,940 $ 1,312
Furniture and fixtures 1,518 963
Computer equipment 8,624 5,955
Leasehold improvements 3,828 3,762
-------- --------
Total 15,910 11,992
Less accumulated depreciation
and amortization 5,733 3,731
-------- --------
$ 10,177 $ 8,261
======== ========
F-11
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
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
third quarter of fiscal 1999, all necessary payments had been made under the
terms of the loans by the management stockholders.
As of November 6, 1999, the fair market value of the Company's Common Stock
held by such persons was $16,366,758 and the fair market value of the stock
pledged by the management stockholders as security for the loans was $6,113,382.
The aggregate principal balance of all loans to management stockholders was
$2,286,568. The loan balance set forth above reflects the required principal
payments of $713,432 resulting from sales of Common Stock by management
stockholders. Interest income relating to these loans for the years ended
November 6, 1999, October 31, 1998 and November 1, 1997 amounted to
approximately $148,000, $147,000 and $155,000, respectively.
8. Intangible Assets
Intangible assets consist of the following:
November 6, October 31,
1999 1998
------------------------------
(In Thousands)
Tradenames and trademarks $ 17,591 $ 17,500
Goodwill 48,921 26,918
-------- --------
66,512 44,418
Less accumulated amortization 3,314 954
-------- --------
$ 63,198 $ 43,464
======== ========
In fiscal 1998, the Company completed the valuations and analysis necessary
to finalize the Miss Erika and Jeri-Jo purchase price allocations. Accordingly,
the Company 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:
November 6, October 31,
1999 1998
------------------------------
(In Thousands)
Miss Erika earn-out obligation $ 10,000 $ -
Interest on $125.0 million 12 1/2%
Senior Notes 6,837 5,773
Contractual bonuses payable 2,706 2,325
Payable to Railroad and Cutting
Edge in connection with the Agreement 1,967 -
Reserve for litigation 932 2,500
Profit sharing contribution payable 879 720
Other accured expenses and current
liabilities 3,839 2,311
-------- -------
$ 27,160 $13,629
======== =======
F-12
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
10. Financing Arrangements and Extraordinary Item
In connection with the Miss Erika acquisition on September 30, 1997, the
Company entered into a $140.0 million secured term loan and revolving credit
facility with Banc of America Commercial Corporation (formerly known as
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 $15.0 million term loan
and $125.0 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.
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 Banc of America, N.A. (formerly known as NationsBank, N.A.) less 0.25%.
Interest on the term loan was at an annual rate equal to the prime rate at Banc
of America, 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 $6.25 million on
October 2, 2000.
Concurrent with the closing of the Jeri-Jo acquisition on June 18, 1998,
the Company entered into a $175.0 million secured revolving credit and letter of
credit facility with Banc of America 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. 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 at Banc of America, N.A. or in excess
of LIBOR rates. Presently, the interest rate under the Current Credit Agreement
is 100 basis points below the prime rate (based upon the current prime rate, the
interest rate under the Current Credit Agreement is 7.50% 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 7.3% for fiscal 1999 and 8.0% 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 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. At November 6, 1999, the
Company was in compliance with all of its restrictive and financial covenants
with the exception of the minimum working capital requirement. The non-
compliance with the latter was caused by the Company's early retirement, at a
discount, of 64.3% of the Miss Erika earn-out obligation and the accrual for
financial reporting purposes at November 6, 1999 of the estimated cash portion
of the remaining earn-out payment, which is due and payable in February 2000.
These events were unanticipated at the time that the covenant requirements were
set in 1998. On January 12, 2000, the Company's lenders executed a Waiver and
Consent waiving this non-compliance with the working capital requirement for
this period.
On June 18, 1998, the Company also issued the 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 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. On August 3, 1999, the Company executed the First
Supplemental Indenture, which amended the Indenture to provide for, among other
matters, the early extinguishment of a portion of the outstanding earn-out
obligation payable to certain of the sellers of Miss Erika and to restrict the
amount of cash that may be paid with respect to the Company's earn-out
obligation incurred in connection with its acquisition of Jeri-Jo.
The extraordinary item, net of tax, of $1.2 million 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.
F-13
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
10. Financing Arrangements and Extraordinary Item (continued)
At November 6, 1999, borrowings and letters of credit outstanding under the
Current Credit Agreement were $725,000 and $122.3 million, respectively. The
Company had total additional available credit of $28.4 million under the Current
Credit Agreement as of that date, including $5.0 million of overadvance
capability, pursuant to the borrowing base formula set forth above. In addition,
the Company had cash and cash equivalents totaling $13.8 million. At October 31,
1998, borrowings, letters of credit outstanding and additional available credit,
including $5.0 million of overadvance, under the Current Credit Agreement were
$3.8 million, $110.1 million, and $31.2 million, respectively.
Long-term debt at November 6, 1999 and October 31, 1998 consists of $125.0
million 12 1/2 % Senior Notes, due June 3, 2005.The Senior Notes mature in full
on June 3, 2005. There are no required principal payments prior to the maturity
date.
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)
----------- --------------
2000 $ 3,614
2001 3,573
2002 3,362
2003 3,153
2004 2,383
Thereafter 9,270
-------
$25,355
=======
Rent expense for the years ended November 6, 1999, October 31, 1998 and
November 1, 1997 amounted to approximately $3.7 million, $3.4 million and $2.1
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 (see Note 13). The Company
also 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. In June 1999, the
President and Chief Operating Officer was also appointed the Chief Executive
Officer of the Company and his employment agreement was amended. The amended
employment agreement provides for a base salary of $754,000 per annum and
terminates on November 1, 2003. In June 1999, the Company also entered into an
amended and restated employment agreement with its Chairman of the Board. The
amended employment agreement provides for a base salary of $754,000 per annum
through November 2, 2001, with an automatic one year extension at the same base
rate if certain events do not occur. The agreement also provides that upon the
termination of the agreement and if such agreement is not renewed, the employee
will be retained by the Company as a consultant for the following two years and
will be compensated at the rate of $75,000 per month.
The Company has entered into employment agreements with certain executive
officers (including those described above) which provide for aggregate minimum
annual compensation of approximately $4.9 million through November 2000 and $6.3
million beyond 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 and bonus stock option grants based
upon the attainment of certain Miss Erika EBITDA targets, as defined therein.
Contractual bonuses pursuant to these contracts were $2.7 million, $2.3 million
and $1.5 million, in fiscal 1999, fiscal 1998 and fiscal 1997, respectively (see
Note 9). In addition, the Company granted 392,000 bonus stock options pursuant
to these employment agreements for the fiscal year ended October 31, 1998 (see
Note 13).
F-14
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
11. Commitments and Contingencies (continued)
Employment Agreements (continued)
The employment agreements entered into in connection with the Jeri-Jo
acquisition provide for the grant of bonus stock options based upon the
attainment of certain Jeri-Jo EBITDA targets, as defined therein. The Company
granted 440,000 bonus stock options pursuant to these employment agreements for
the 12 months ended June 30, 1999 (see Note 13).
Contractor Agreements
During a portion of fiscal 1999 (and for many prior years), Norton
McNaughton of Squire, Inc. ("Norton") had long-term agreements with a
distribution contractor (Railroad Enterprises, Inc.) and a cutting contractor
(Cutting Edge Services, Inc., formerly Toni-Linda Productions, Inc.) who
performed their functions in the contractors' leased cutting and warehouse
facilities in New Jersey. These agreements did not cover the manufacturing or
distribution activities of Miss Erika or Jeri-Jo. In addition, Norton had
guaranteed the distribution contractor's obligations under its lease in an
amount up to $500,000 and had guaranteed the cutting contractor's obligations
under its lease in an amount up to approximately $250,000.
On August 9, 1999, the Company and Norton entered into an agreement with
Railroad and Cutting Edge, pursuant to which, among other matters, a lawsuit
brought against the Company and Norton by Railroad and Cutting Edge was
terminated (see "Litigation") and Norton purchased certain assets of Railroad
and Cutting Edge, including fixed assets, machinery and equipment at their
facilities, and Railroad's and Cutting Edge's rights under their then existing
agreements with Norton. Norton also retained Railroad to provide consulting
services relating to the relocation of its warehouse and distribution facilities
to South Carolina for a total fee of $500,000 payable on a monthly basis over a
one-year period.
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 has authorized a stock repurchase program,
under which the Company may repurchase up to $11.5 million of the Company's
Common Stock. The Company expects that the shares may be purchased from time to
time in the open market and in block transactions. As of November 6, 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.
Litigation
On July 14, 1998, Norton's distribution and cutting contractors, Railroad
Enterprises and Cutting Edge, respectively (collectively, "Plaintiffs"), filed
an action in the New York State Supreme Court for New York County which, as
amended, was entitled Cutting Edge Services, Inc. and Railroad Enterprises, Inc.
----------------------------------------------------------
v. Norton McNaughton of Squire, Inc. and Norton McNaughton, Inc. Plaintiffs had
- ----------------------------------------------------------------
claimed that Norton breached its contracts with them because, among other
things, Miss Erika and Jeri-Jo had failed to use Plaintiffs' services as
allegedly required under Norton's contracts with Plaintiffs. This action sought
substantial compensatory and punitive damages and related declaratory relief
concerning rights under the contracts. In connection with the Cutting Edge and
Railroad lawsuit, as well as other pending litigation, the Company established a
litigation reserve of $2.5 million in fiscal 1998.
On August 9, 1999, the Company and Norton entered into an Agreement with
Railroad and Cutting Edge, pursuant to which, among other matters, the foregoing
lawsuit was terminated and Norton purchased certain assets of Railroad and
Cutting Edge, including fixed assets, machinery and equipment at their
facilities, and Railroad's and Cutting Edge's rights under their existing
agreements with Norton. The purchase price (the "Purchase Price") was $5.5
million payable as follows: $3.0 million at closing; thereafter, $108,333.33 per
month, payable at month-end from July 31, 1999 through March 31, 2000, and
$508,333.33 per month payable at month-end from April 30, 2000 through May 31,
2000, $408,333.33 payable on June 30, 2000, and $100,000 payable on December 31,
2000. Norton also retained Railroad to provide consulting services relating to
the relocation of its warehouse and distribution facilities to South Carolina
for a total fee of $500,000 payable on a monthly basis over a one-year period.
F-15
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
11. Commitments and Contingencies (continued)
Litigation (continued)
The Agreement also provided for the termination of Norton's then existing
long-term agreements with Railroad and Cutting Edge. Railroad has agreed to
manage the assets Norton purchased and to continue performing all of Norton's
receiving, warehousing and distribution services from Railroad's New Jersey
facilities through June 30, 2000, although Norton may, at its option, extend
this time period until August 31, 2000.
Pursuant to the Agreement, Railroad and Cutting Edge agreed to obtain
releases of Norton's limited guarantees from the landlords of their respective
warehouse leases. On September 23, 1999, Norton received a release from the
landlord of Cutting Edge's warehouse lease in exchange for a payment of
approximately $230,000. As provided in the Agreement, this amount will be
withheld from subsequent Purchase Price installments. In addition, also as
provided in the Agreement, the Purchase Price will be reduced by the amount due
under Norton's guarantee of Railroad's lease, which totals $500,000. Finally,
the Agreement provided for the early termination of Norton's East Rutherford,
New Jersey piece goods warehouse sublease from Cutting Edge, which occurred on
September 30, 1999.
The $5.5 million Purchase Price was allocated to current assets in the
amount of $2.2 million, representing the estimated value of the intangible
contract rights acquired, fixed assets in the amount of $600,000, and the
remaining $2.7 million was offset against the $2.5 million reserve for
litigation established in fiscal 1998 with the balance being charged to expense
in fiscal 1999. The intangible contract rights are being amortized over the term
of the management arrangement provided for in the Agreement and the fixed assets
are being amortized over five years. The Company fully expensed in fiscal 1999
its obligation of $500,000 under the Railroad consulting arrangement provided
for in the Agreement.
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. At
November 6, 1999, the Company had a reserve for litigation of approximately
$900,000 in connection with an ongoing claim. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 9.
Acquisition Earnouts
Miss Erika
- ----------
On September 30, 1997, the Company completed the acquisition of
substantially all the assets and the assumption of substantially all the
liabilities of Miss Erika, a privately-held manufacturer of women's moderately-
priced apparel. The 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 agreed to pay an
additional contingent payment in cash and/or Common Stock based upon earnings
achieved by Miss Erika for the two fiscal years ended November 6, 1999. As
originally agreed, the aggregate contingent payment payable by the Company is
equal to the amount by which four times the average of Miss Erika's EBITDA as
defined in the Miss Erika purchase agreement for the two fiscal years ended
November 6, 1999, exceeds $24.0 million. The 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, as
originally executed, limited the number of shares of Common Stock payable by the
Company to a number of shares which, after giving effect to their issuance, did
not exceed 12% of the aggregate number of outstanding shares of Common Stock at
the time of payment. Following the early discounted payment of a portion of the
Miss Erika earn-out obligation described below, this percentage limit was
amended to 2.822%. The Company has agreed to cause any shares of Common Stock
issued as a contingent payment to be registered under the Securities Act.
On August 4, 1999, the Company retired, at a discount, 64.3% of the earn-
out obligation payable to the sellers of Miss Erika for $10.0 million in cash.
The portion of the earn-out obligation which was retired was owned by two
investment funds and their affiliates who were interested in monetizing their
portion of the contingent earn-out payment due to closure of the funds in which
these investments were held. The early cash payment will save the Company
approximately $10.0 million, net of consent fees of $1.2 million paid to senior
noteholders under the Indenture, compared to what would have otherwise been due
and payable in February 2000. The remaining earn-out obligation, representing
35.7%, continues to be governed by the original earn-out provisions described
above. This remaining interest is held substantially by members of the current
Miss Erika management team, none of whom desired to exercise the option of
receiving a discounted early payment of the contingent earn-out. The Company
intends to pay the cash portion of the remaining contingent consideration from
internally generated funds and borrowings under the Company's revolving
F-16
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
11. Commitments and Contingencies (continued)
Acquisition Earnouts (continued)
Miss Erika (continued)
- ----------
credit facility. Miss Erika achieved Miss Erika EBITDA during fiscal 1998 and
fiscal 1999 which will result in the payment of additional consideration of
approximately $12.0 million. Payment is expected to be made in February 2000,
approximately $10.0 million of which will be paid in cash and $2.0 million of
which will be paid in Common Stock. Such amounts have been reflected in the
Company's financial statements as of November 6, 1999 as current and long-term
liabilities, respectively.
Jeri-Jo
- -------
On June 18, 1998, the Company completed the acquisition of 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. Such payment must be made no later than
August 30, 2000. The Jeri-Jo purchase agreement requires that the Company pay at
least 50% of the required contingent payment in cash and the Indenture limits
this cash payment to 75% of the total contingent payment. The aggregate
contingent payment payable by the Company is equal to the excess of (1) the sum
of (A) five times Jeri-Jo's average EBITDA, as defined in the Jeri-Jo purchase
agreement, for the two years ending June 30, 2000, plus (B) 0.50 times any such
average 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. Additional consideration paid for Jeri-Jo will be accounted for as
additional purchase price and will be reflected in intangible assets. The
Company secured its 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. 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 16 month period ended November 6, 1999 which will result
in the payment of significant additional consideration. Based upon the Jeri-Jo
EBITDA achieved for the 16 month period ended November 6, 1999, and assuming
that Jeri-Jo achieves its budgeted EBITDA for the period from November 7, 1999
through June 30, 2000 (the end of the Jeri-Jo earn-out period), additional
consideration in excess of $125.0 million would be payable in accordance with
the Jeri-Jo purchase agreement.
F-17
<PAGE>
McNaughton Apparel Group Inc.
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 November 6, 1999, October 31, 1998 and November 1, 1997
is comprised of the following:
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------------------------
November 6, October 31, November 1,
1999 1998 1997
------------------- ------------------- -----------------
<S> <C> <C> <C>
(In Thousands)
Current:
Federal $4,164 $1,187 $(2,788)
State and local 1,385 573 65
------ ------ -------
5,549 1,760 (2,723)
Deferred:
Federal 1,952 (180) 360
State and local 235 (85) (1,037)
------ ------ -------
2,187 (265) (677)
------ ------ -------
$7,736 $1,495 $(3,400)
====== ====== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities. At November 6, 1999,
October 31, 1998, November 1, 1997, there were net deferred tax assets of
$1,012,000, $3,526,000 and $3,261,000, 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 November 6, 1999, October 31, 1998 and November 1, 1997
is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
Amount % Amount % Amount %
------ --- ------ ------ --------- ---
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal statutory tax rate $5,577 34% $ 661 34% $ (2,768) 34%
State and local taxes, net of federal
income tax benefit 1,427 9 178 9 (632) 8
Effect of tax audits 400 3 600 31 - -
Other, net 332 2 56 3 - -
------ -- ------ ----- ------- --
Provision for income taxes $7,736 48% $1,495 77%/(a)/ $(3,400) 42%
====== == ====== ===== ======= ==
</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-18
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
13. Employee Benefit Plans
Stock Option Plans
Pursuant to the Company's 1994 Stock Option Plan, as amended, and the
Company's 1998 Long Term Incentive Plan, the Company may grant stock options to
eligible individuals to purchase up to 1,150,000 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, Mr. Boneparth, 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. Accordingly, at November
6, 1999, an aggregate of 600,000 options were vested. 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 under the Miss Erika Stock Option Plan 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, pursuant to the employment agreements with certain
executive officers of Miss Erika, bonus options may be granted in the event
certain earnings targets for Miss Erika are exceeded (see Note 11). For the
fiscal year ended October 31, 1998, bonus stock options were granted under the
Miss Erika Stock Option 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 re-granting, 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 per share, 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.
On April 15, 1999, 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 $4.69 per share, 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 April 28, 1999, the Company granted 100,000 stock options to its Chief
Executive Officer, President and Chief Operating Officer, Mr. Boneparth. The
exercise price of such options was $5.50 per share, which was the fair market
value of the Common Stock on the date of grant. All options have 10 year terms
and vest over three years (see Note 11).
On April 28, 1999, the Company granted 60,000 stock options to its Chairman
under the 1998 Long-Term Incentive Plan. The exercise price of such options was
$5.50 per share, which was the fair market value of the Common Stock on the date
of grant. All options have 10 year terms and vest over three years.
F-19
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
13. Employee Benefit Plans (continued)
Stock Option Plans (continued)
The Company granted stock options to certain Jeri-Jo executives in fiscal
1999 under the Jeri-Jo Stock Option Plan to purchase an aggregate of 200,000
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. These
options have 10 year terms and vest on June 18, 2001. In addition, pursuant to
the employment agreements with certain executive officers of Jeri-Jo, bonus
options may be granted in the event certain earnings targets for Jeri-Jo are
exceeded (see Note 11). For the 12 months ended June 30, 1999, bonus stock
options were granted under the Jeri-Jo Stock Option Plan to purchase an
aggregate of 440,000 shares of Common Stock of the Company at an exercise price
of $9.00 per share, which was the fair market value of the Common Stock on the
date of grant. These options have 10 year terms and vested on the date of grant.
The change in outstanding options under the Company's stock option plans
for each of the three years in the period ended November 6, 1999, 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
Granted 1,198,000 $ 2.75 - $ 9.00
Canceled (124,734) $ 5.38 - $ 14.00
Exercised (832) $ 6.00 - $ 6.50
---------
Outstanding at November 6, 1999 3,604,363 $ 2.75 - $ 17.25
=========
</TABLE>
Options outstanding at November 6, 1999 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>
2.75 - $ 5.44 690,500 8.80 $3.97 594,500
5.50 - $ 5.50 1,195,000 8.25 $5.50 385,000
6.00 - $ 6.38 710,429 8.49 $6.31 208,317
6.50 - $ 8.19 472,434 7.69 $7.00 272,596
8.69 - $ 17.25 536,000 9.38 $9.54 488,000
----------- ---------
3,604,363 8.50 $6.16 1,948,413
=========== =========
</TABLE>
As of November 6, 1999, 110 individuals held options, 39,734 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 Stock Option Plan, 513,751 shares were available for future grants to
certain Jeri-Jo executives under the Jeri-Jo Stock Option Plan, 80,000 shares
were available for non-employee directors under the Stock Option Plan for Non-
Employee Directors and no shares were available for future grants under the
Company's 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.
F-20
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
13. Employee Benefit Plans (continued)
Stock Option Plans (continued)
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 1999, fiscal 1998 and fiscal 1997, risk-free interest
rates of 5.6% for fiscal 1999, 5.8% for fiscal 1998 and 6.2% for fiscal 1997;
zero dividend yields; volatility factor of the expected market price of the
Company's Common Stock of 0.75 for fiscal 1999 and 0.56 for fiscal 1998 and
fiscal 1997; a weighted average expected life of the option of 5.6 years for
fiscal 1999, 5.6 years for fiscal 1998 and 5.0 years for fiscal 1997. Based on
the assumptions set forth above, the weighted average fair value of the options
granted in fiscal 1999 was $4.63 per share on the date of grant.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for earnings per share
information):
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------------------
November 6, October 31, November 1,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss):
As reported $8,531 $ (713) $(4,705)
Pro forma $5,596 $(1,988) $(5,458)
Basic earnings (loss)
per share:
As reported $ 1.15 $ (0.10) $ (0.63)
Pro forma $ 0.75 $ (0.27) $ (0.73)
</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 November 6, 1999, 53,132 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: 20% vested after one year of
service, 40% vested after two years of service, 60% vested after three years of
service, 80% 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 November 6, 1999, October 31, 1998 and November 1, 1997 were
$146,334, $179,389 and $193,220, respectively.
F-21
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
13. Employee Benefit Plans (continued)
Savings Plan (continued)
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 November
6, 1999 and October 31, 1998 (from the date of acquisition of June 18, 1998) was
$166,666 and $58,833, respectively.
Profit Sharing Plan
The Company sponsors a profit sharing plan covering Miss Erika employees with
more than one year of continuous service. Vesting occurs at a rate of 25% per
year and employees are fully vested after four years. 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 $30,000 per employee. From
the acquisition date of September 30, 1997 to November 1, 1997, the accrual
amounted to $46,815, in fiscal 1998 the accrual amounted to $720,000 and in
fiscal 1999 the accrual amounted to $879,000 (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 carrying amounts and fair values of the Company's financial instruments
are as follows:
November 6, 1999
----------------
Carrying
Amount Fair Value
-------------------------
(In Thousands)
Cash and cash equivalents $ 13,842 $ 13,842
Short-term debt:
Revolving credit loan 725 725
Long-term debt:
$125 million 12 1/2% Senior Notes 125,000 85,000
October 31, 1998
----------------
Carrying
Amount Fair Value
---------------------------
(In Thousands)
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
F-22
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
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.
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. 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-23
<PAGE>
McNaughton Apparel Group Inc.
Schedule II - Valuation and Qualifying Accounts
(In Thousands)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Costs and End of
Description of Year Expenses Deductions /1)/ Year
----------- -------------- -------------- --------------------- ------------
<S> <C> <C> <C> <C>
Year ended November 6, 1999
Reserve for sales discounts, returns
and allowances $3,791 $38,384 $35,808 $6,367
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
</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-24
<PAGE>
McNaughton Apparel Group Inc.
Quarterly Financial Data (Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
FISCAL 1999 Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Net sales $66,619 $123,972 $92,856 $124,365 $407,812
Gross profit 15,167 28,788 25,099 34,989 104,043
Net income (loss) (1,959) 3,042 2,483 4,965 8,531
Basic per share data:
Net income (loss) $ (0.26) $ 0.41 $ 0.33 $ 0.67 $ 1.15
======= ======== ======= ======== ========
Weighted average number of common
shares outstanding 7,419 7,428 7,434 7,445 7,432
======= ======== ======= ======== ========
Diluted per share data:
Net income (loss) $ (0.26) $ 0.41 $ 0.32 $ 0.62 $ 1.11
======= ======== ======= ======== ========
Weighted average number of common
shares outstanding assuming dilution 7,419 7,494 7,856 8,063 7,708
======= ======== ======= ======== ========
FISCAL 1998
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
shares outstanding assuming dilution 7,411 7,423 7,536 7,414 7,432
======= ======== ======= ======== ========
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-25
<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: February 4, 2000 MCNAUGHTON APPAREL GROUP INC.
(Registrant)
By: /s/ Sanford Greenberg
-------------------------
Sanford Greenberg, Chairman of
the Board 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 February 4, 2000.
Signature Title
/s/ Sanford Greenberg Chairman of the Board and Director
- ---------------------
(Sanford Greenberg)
/s/ Peter Boneparth Chief Executive Officer,President,
- --------------------- Chief Operating Officer and Director
(Peter Boneparth)
/s/ Amanda J. Bokman Vice President, Chief Financial
- -------------------- Officer, Secretary, Treasurer and
(Amanda J. Bokman) Director (principal financial and
accounting officer)
/s/ Stuart Bregman Director
- ------------------
(Stuart Bregman)
/s/ Bradley P. Cost Director
- -------------------
(Bradley P. Cost)
/s/ Ben Mayo Director
- ------------
(Ben Mayo)
/s/ Robert Siegel Director
- ------------------
(Robert Siegel)
S-1
<PAGE>
McNaughton Apparel Group Inc.
(formerly Norton McNaughton, Inc. and Subsidiaries)
Exhibit Index
Exhibit No. Description
----------- -----------
2.1x Agreement of Purchase and Sale made as of the 29th day of
August, 1997 by and among Miss Erika, Inc., a Delaware
corporation; Terbem Limited, a British Virgin Islands
corporation, Bobst Investment Corp., a British Virgin Islands
corporation, TCRI Offshore Partners C.V., a Netherlands
Antilles corporation and TCR International Partners L.P., a
Delaware limited partnership, Triumph Capital, L.P. II, a
Delaware limited partnership, Stuart Bregman, Howard Zwilling,
Sidney Goldstein, Christian Baillet, ME Acquisition Corp., a
Delaware corporation, and Norton McNaughton, Inc., a Delaware
corporation. Schedules to this Agreement have been omitted and
the Company shall furnish to the Securities and Exchange
Commission a copy of any omitted schedule as supplemental
information upon request.
2.1(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.
2.1(b) Amendment to Agreement of Purchase and Sale dated as of June
30, 1999 to the Agreement of Purchase and Sale dated as of
August 29, 1997 by and among Miss Erika, Inc., now known as
Old ME Corp., Terbem Limited, Bobst Investment Corp., TCRI
Offshore Partners C.V., TCR International Partners L.P.,
Triumph Capital II, L.P., Stuart Bregman, Howard Zwilling,
Sidney Goldstein, Christian Baillet, ME Acquisition Corp., now
known as Miss Erika, Inc., and Norton McNaughton, Inc., now
known as McNaughton Apparel Group Inc. (incorporated herein by
reference to the Exhibits to the Registrant's Current Report
on Form 8-K filed August 12, 1999). Schedules to this
Agreement have been omitted and the Company shall furnish to
the Securities and Exchange Commission a copy of any omitted
schedule as supplemental information upon request.
2.2 Agreement of Purchase and Sale 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.
2.2(c) Amendment dated as of June 17, 1999 to Agreement of Purchase
and Sale dated as of April 15, 1998 by and among JJ
Acquisition Corp., now known as Jeri-Jo Knitwear, Inc., Norton
McNaughton, Inc., now known as McNaughton Apparel Group Inc.,
Jeri-Jo Knitwear, Inc. now known as JJK II, Inc., Jamie Scott,
Inc., now known as JJK III, Inc. and the stockholders of JJK
III, Inc. (incorporated herein by reference to the Exhibits to
the Registrant's Current Report on Form 8-K filed August 12,
1999).
E-1
<PAGE>
McNaughton Apparel Group Inc.
Exhibit Index (continued)
Exhibit No. Description
----------- -----------
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).
3.1(a) Certificate of Ownership and Merger of McNaughton Apparel
Group Inc. into Norton McNaughton, Inc. (incorporated herein
by reference to Exhibit 3.3 of the Registrant's Form 10-Q for
the quarter ended January 30, 1999).
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).
4.3(a) First Supplemental Indenture dated as of August 3, 1999 by and
between McNaughton Apparel Group Inc., a Delaware corporation
. formerly known as Norton McNaughton, Inc., Norton McNaughton
of Squire, Inc., a New York corporation, Miss Erika, Inc., a
Delaware corporation, Jeri-Jo Knitwear, Inc., a Delaware
corporation formerly known as JJ Acquisition Corp., Norty's,
Inc., a Delaware corporation, and United States Trust Company
of New York, a New York banking corporation, as Trustee
(incorporated herein by reference to the Exhibits to the
Registrant's Current Report on Form 8-K filed August 12,
1999).
4.3(b) Second Supplemental Indenture dated as of August 25, 1999 by
and between McNaughton Apparel Group Inc., a Delaware
corporation, formerly known as Norton McNaughton, Inc., Norton
McNaughton of Squire, Inc., a New York corporation, Miss
Erika, Inc., a Delaware corporation, Jeri-Jo Knitwear, Inc., a
Delaware corporation, formerly known as JJ Acquisition Corp.,
Norty's, Inc., a Delaware corporation, and United States Trust
Company of New York, a New York banking corporation, as
Trustee. (incorporated herein by reference to Exhibit 10.1 of
the Registrant's Form 10-Q for the quarter ended July 31,
1999).
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).
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.
10.4xxx ME Acquisition Corp. Bonus Plan for Senior Executives.
E-2
<PAGE>
McNaughton Apparel Group Inc.
Exhibit Index (continued)
Exhibit No. Description
----------- -----------
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.
10.8(c) Amended and Restated Employment Agreement dated June 7, 1999,
between Norton McNaughton of Squire, Inc. and Sanford
Greenberg (incorporated herein by reference to the Exhibits to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended May 1, 1999).
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* Employment Agreement dated as of November 4, 1993 between
Amanda J. Bokman and Norton McNaughton of Squire, Inc.
10.10(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).
10.10(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.
10.10(c)+++ Amendment No. 2 dated as of September 10, 1999 to the
Employment Agreement dated November 4, 1993 between Norton
McNaughton of Squire, Inc. and Amanda J. Bokman.
10.11 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).
E-3
<PAGE>
McNaughton Apparel Group Inc.
Exhibit Index (continued)
Exhibit No. Description
----------- -----------
10.11(a) Amended and Restated Employment Agreement dated June 7, 1999,
between Norton McNaughton of Squire, Inc. and Peter Boneparth
(incorporated herein by reference to the Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended May 1, 1999).
10.12++ Employment Agreement dated as of November 11, 1998 between
Lynne F. Fish and Norton McNaughton of Squire, Inc.
10.13x 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.
10.13(a) First Amendment dated as of November 21, 1997 to Financing
Agreement dated as of September 25, 1997 among Norton
McNaughton, Inc., Norton McNaughton of Squire, Inc., Miss
Erika, Inc., the Lenders from time to time party thereto,
NationsBanc Commercial Corporation, as collateral agent for
the Lenders, and The CIT Group/Commercial Services, Inc., as
administrative agent for the Lenders (incorporated herein by
reference to Exhibit 10.3 to Registrant's Current Report on
Form 8-K filed July 2, 1998).
10.13(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).
10.13(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).
10.13(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).
10.14 Amended and Restated Financing Agreement dated as of June 18,
1998 (the "Financing Agreement") by and 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).
E-4
<PAGE>
McNaughton Apparel Group Inc.
Exhibit Index (continued)
Exhibit No. Description
----------- -----------
10.14(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).
10.14(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.
10.14(c) Third Amendment, dated as of March 15, 1999 to the Amended and
Restated Financing Agreement, dated as of June 18, 1998 by and
among McNaughton Apparel Group 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.
(incorporated herein by reference to Exhibit 10.1 of the
Registrant's Form 10-Q for the quarter ended January 30,
1999).
10.14(d) Fourth Amendment dated as of July 29, 1999 to Amended and
Restated Financing Agreement dated as of June 18, 1999 by and
among McNaughton Apparel Group Inc., a Delaware corporation
formerly known as Norton McNaughton, Inc., Norton McNaughton
of Squire, Inc., a New York corporation, Miss Erika, Inc., a
Delaware corporation, Jeri-Jo Knitwear, Inc., a Delaware
corporation formerly known as JJ Acquisition Corp., the
Lenders form 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 the
Exhibits to the Registrant's Current Report on Form 8-K filed
August 12, 1999).
10.14(e) +++ Waiver and Consent, dated January 12, 2000, to the Amended and
Restated Financing Agreement, dated as of June 18, 1998, by
and among Norton McNaughton, Inc., Norton McNaughton of
Squire, Inc., a New York corporation, Miss Erika, Inc., a
Delaware corporation, Jeri-Jo Knitwear, Inc., a Delaware
corporation formerly known as JJ Acquisition Corp., the
Lenders, Banc of America Commercial Corporation f/k/a
NationsBanc Commercial Corporation, as Collateral Agent for
the Lenders, The CIT Group/Commercial Services, Inc., as
Administrative Agent for the Lenders and Fleet Bank NA, as
Documentation Agent for the Lenders.
10.15x Factoring Agreement entered into between Miss Erika, Inc. and
NationsBanc Commercial Corporation dated September 25, 1997.
10.16x Amended and Restated Factoring Agreement entered into between
Norton McNaughton of Squire, Inc. and NationsBanc Commercial
Corporation dated September 25, 1997.
E-5
<PAGE>
McNaughton Apparel Group Inc.
Exhibit Index (continued)
Exhibit No. Description
----------- -----------
10.17 Guarantor Security Agreement dated as of July 29, 1999 by
McNaughton Apparel Holdings Inc., a South Carolina
corporation, in favor of NationsBanc Commercial Corporation,
as Collateral Agent under the Financing Agreement
(incorporated herein by reference to the Exhibits to the
Registrant's Current Report on Form 8-K filed August 12,
1999).
10.18 Subsidiary Guaranty dated as of July 29, 1999 by McNaughton
Apparel Holdings Inc., in favor of each of the Lenders from
time to time party to the Financing Agreement and NationsBanc
Commercial Corporation, as Collateral Agent under the
Financing Agreement (incorporated herein by reference to the
Exhibits to the Registrant's Current Report on Form 8-K filed
August 12, 1999).
10.19* Pledge Agreement dated as of January 14, 1994 made by Sanford
Greenberg in favor of Norton McNaughton of Squire, Inc.
10.19(a)+++ First Amendment to Pledge Agreement dated July 15, 1994,
amending and supplementing the Pledge Agreement dated as of
January 14, 1994 made by Sanford Greenberg in favor of Norton
McNaughton of Squire, Inc.
10.19(b) Second Amendment to Pledge Agreement dated March 27, 1995,
amending and supplementing the Pledge Agreement dated as of
January 14, 1994 made by 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).
10.20* Pledge Agreement dated as of January 14, 1994 made by Norton
Sperling 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 Norton Sperling 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 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).
10.21* 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.
10.21(a)+++ Second Amended and Restated Non-Negotiable Limited Recourse
Promissory Note dated July 15, 1994, amending the Amended and
Restated Non-Negotiable Limited Recourse Promissory Note of
Sanford Greenberg dated as of November 5, 1993 payable to
Norton McNaughton of Squire, Inc. in the principal amount of
$920,000.
10.21(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).
E-6
<PAGE>
McNaughton Apparel Group Inc.
Exhibit Index (continued)
Exhibit No. Description
----------- -----------
10.22* 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.
10.22(a)+++ Second Amended and Restated Non-Negotiable Limited Recourse
Promissory Note dated July 15, 1994, amending the Amended and
Restated Non-Negotiable Limited. Recourse Promissory Note of
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).
10.23* Form of Indemnification Agreement with Directors and Executive
Officers.
10.24* Agreement dated March 17, 1993 between Norton McNaughton of
Squire, Inc. and Toni-Linda Productions, Inc., as amended
December 15, 1993.
10.24(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.
10.25* Sublease Agreement dated January 17, 1994 between Norton
McNaughton of Squire, Inc. and Toni-Linda Productions, Inc.
10.25(a)**** Amendment dated November 7, 1995 to Sublease Agreement dated
January 17, 1994 between Norton McNaughton of Squire, Inc. and
Toni-Linda Productions, Inc., now known as Cutting Edge
Services, Inc.
10.26* Limited Guaranty dated December 30, 1993 made by Norton
McNaughton of Squire, Inc. in favor of Braun Management, Inc.
10.26(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.
10.27* Agreement dated January 7, 1993 between Norton McNaughton of
Squire, Inc. and Railroad Enterprises, Inc.
10.28 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).
10.29 Agreement dated as of July 5, 1999 by and among Norton
McNaughton of Squire, Inc., a New York corporation, Railroad
Enterprises, Inc. a New Jersey corporation, and Cutting Edge
Services, Inc., a New Jersey corporation (incorporated herein
by reference to the Exhibits to the Registrant's Current
Report on Form 8-K filed August 12, 1999).
10.30 Agreement of lease dated May 14, 1999, between North Point
Park, LLC and McNaughton Apparel Holdings Inc. (incorporated
herein by reference to the Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended May 1,
1999).
10.30(a) First Amendment, dated May 27, 1999, to Agreement of Lease
dated May 14, 1999, between North Point Park, LLC and
McNaughton Apparel Holdings Inc. (incorporated herein by
reference to the Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended May 1, 1999).
E-7
<PAGE>
McNaughton Apparel Group Inc.
Exhibit Index (continued)
Exhibit No. Description
----------- -----------
10.31 Agreement of Guaranty dated May 14, 1999, between North Point
Park, LLC and McNaughton Apparel Group Inc. (incorporated
herein by reference to the Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended May 1,
1999).
10.32* Guaranty dated May 19, 1992 made by Norton McNaughton of
Squire, Inc. in favor of 5 Empire Boulevard Associates.
10.33* Agreement dated February 1, 1993 between Norton McNaughton of
Squire, Inc. and May Company.
10.34* Lease Agreement dated December 7, 1993 between Gettinger
Associates and Norton McNaughton of Squire, Inc.
10.35* Lease Agreement dated October 4, 1991 between 1400 Broadway
Associates and McNaughton Affiliates, Inc.
10.36* Lease Agreement dated April 30, 1993 between The Arsenal
Company and Norton McNaughton of Squire, Inc.
10.37 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).
10.37(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).
10.38**** Split Dollar Agreement dated March 8, 1994 between Norton
McNaughton, Inc. and Northwestern Mutual Life Insurance
Company for Sanford Greenberg.
10.39**** Split Dollar Agreement dated March 8, 1994 between Norton
McNaughton, Inc. and Northwestern Mutual Life Insurance
Company for Norton Sperling.
10.40xxx Employment Agreement dated August 29, 1997 between ME
Acquisition Corp. and Stuart Bregman.
10.41xxx Employment Agreement dated August 29, 1997 between ME
Acquisition Corp. and Howard Zwilling.
10.42xxx Employment Agreement dated August 29, 1997 between ME
Acquisition Corp. and Roberta Ciacci.
10.43xxx Employment Agreement dated August 29, 1997 between ME
Acquisition Corp. and Samuel Glaser.
10.44xxx Employment Agreement dated August 29, 1997 between ME
Acquisition Corp. and Elizabeth Moser.
10.45xxx Employment Agreement dated August 29, 1997 between ME
Acquisition Corp. and Kenny Tse.
10.46+ Agency Agreement dated October 9, 1997 between The Ozer Group
LLC and Norty's, Inc.
E-8
<PAGE>
McNaughton Apparel Group Inc.
Exhibit Index (continued)
Exhibit No. Description
----------- -----------
10.47+ Consulting Agreement dated November 7, 1997 between DJM Asset
Management, Inc. and Norton McNaughton of Squire, Inc.
10.48+ Lease Agreement dated December 16, 1993 between Gettinger
Associates, LP and Miss Erika, Inc.
10.49+ Lease Agreement dated April 1, 1975 between Empire Carpet
Corporation and Miss Erika, Inc.
10.49(a)+ Amendment dated January 17, 1978 to Lease Agreement dated
April 1, 1975 between Empire Carpet Corporation and Miss
Erika, Inc.
10.49(b)+ Second Amendment dated February 17, 1981 to Lease Agreement
dated April 1, 1975 between Empire Carpet Corporation and Miss
Erika, Inc.
10.49(c)+ Third Amendment dated March 5, 1982 to Lease Agreement dated
April 1, 1975 between Empire Carpet Corporation and Miss
Erika, Inc.
10.49(d)+ Fourth Amendment dated August 15, 1983 to Lease Agreement
dated April 1, 1975 between Empire Carpet Corporation and Miss
Erika, Inc.
10.49(e)+ Lease Modification and Extension Agreement dated January 24,
1985 between Teterboro Associates and Miss Erika, Inc. to
Lease Agreement dated April 1, 1975.
10.49(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.
10.49(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.
10.49(h)+ Third Lease Modification and Extension Agreement dated January
18, 1989 to the Amended Lease Modification and Extension
Agreement dated August 8, 1985 between Teterboro Associates
and Miss Erika, Inc.
10.49(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.
10.49(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.
10.49(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.
10.50 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).
10.51 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).
E-9
<PAGE>
McNaughton Apparel Group Inc.
Exhibit Index (continued)
Exhibit No. Description
----------- -----------
10.52 Form of Employment Agreement between JJ Acquisition Corp. and
Leslie Schneider (incorporated herein by reference to Exhibit
10.2 to Registrant's Current Report on Form 8-K filed April
22, 1998).
10.53 Form of Employment Agreement between JJ Acquisition Corp. and
Scott Schneider (incorporated herein by reference to Exhibit
10.2 to Registrant's Current Report on Form 8-K filed April
22, 1998).
10.54 Lease dated June 18, 1998 between 80 Carter Drive Associates
and Jeri-Jo Knitwear, Inc. (incorporated herein by reference
to Exhibit 10.1 to Registrant's Current Report on Form 8-K
filed July 2, 1998).
10.55 Guaranty of Lease dated June 18, 1998 by Norton McNaughton,
Inc. in favor of 80 Carter Drive Associates (incorporated
herein by reference to Exhibit 10.2 to Registrant's Current
Report on Form 8-K filed July 2, 1998).
10.56 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).
________________
* 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, 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.
E-10
<PAGE>
++ Incorporated herein by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the period ended October 31, 1998.
+++ 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>
Exhibit 10.10(c)
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
---------------------------------------
AMENDMENT No. 2 dated as of the 10th day of September, 1999 to
EMPLOYMENT AGREEMENT dated as of November 4, 1993, as amended as of October 22,
1997, by and between NORTON MCNAUGHTON OF SQUIRE, INC., a New York corporation
(the "Company") and AMANDA J. BOKMAN (the "Employee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Employee and the Company have heretofore entered into an
Employment Agreement dated as of November 4, 1993, as amended as of October 22,
1997, (the "Employment Agreement"); and
WHEREAS, the parties desire to further amend the Employment Agreement
as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Section 1.2 of the Employment Agreement is hereby amended by
deleting Section 1.2 in its entirety and substituting therefor a new Section 1.2
to read as follows:
"The term of the Employee's employment under this Agreement
(the "Term") shall commence on the date hereof and shall
terminate on November 3, 2001, unless sooner terminated in
accordance with this Agreement."
2. Section 3.1(a) of the Employment Agreement is hereby amended by
deleting Section 3.1(a) in its entirety and substituting therefor a new Section
3.1(a) to read as follows:
"During the Term, 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, a base salary (i) during the period November 7, 1999
through November 4, 2000 at the rate of $335,000 per annum
and (ii) during the period November 5, 2000 through November
3, 2001 at the rate of $350,000 per annum, in all cases,
payable in accordance with the standard payroll practices of
the Company."
3. The reference to "(i)" set forth in Section 4 of the Employment
Agreement is hereby deleted and clause (ii) of Section 4 of the Employment
Agreement is hereby deleted in its entirety.
<PAGE>
4. Section 5 of the Employment Agreement is hereby amended by adding
"(a)" to the existing provision and adding the following new Section 5(b) to
read as follows:
"(b) During the Term, subject to availability on
commercially reasonable terms, the Company shall
provide the Employee with disability insurance
providing for a monthly disability benefit of
$15,000. The Company's obligation under Section
6.2 of this Agreement shall be subject to
appropriate reductions for amounts paid to the
Employee under such disability insurance during
the Disability Salary Continuance Period (as
defined in Section 6.2 of this Agreement), taking
into account the tax treatment of such disability
insurance payments."
5. Section 6.2 of the Employment Agreement is hereby amended by deleting
the second sentence thereof in its entirety and substituting therefor a new
second sentence to read as follows:
"In the event of such termination, subject to
Section 5(b) of this Agreement, the Company shall
continue to pay to the Employee the salary
provided for in Section 3.1(a) for the remainder
of the Term (the period of time during which the
Company shall be required to continue to pay such
salary, the "Disability Salary Continuance
Period").
6. The reference in the last sentence of Section 6.3 of the Employment
Agreement to "fifteen (15) days" is hereby amended to be a reference to "thirty
(30) days."
7. The phrase "(at the annual rate then in effect)" in the first sentence
of Section 6.4 is hereby deleted and replaced with the phrase "((i) in the case
of any termination of the Employee's employment during the period November 7,
1999 through November 4, 2000, at the annual rate in effect on the date of
termination through November 4, 2000 and, thereafter for the balance of the
Term, at the annual rate as provided in Section 3(a)(ii) of this Agreement and
(ii) in the case of any termination of the Employee's employment during the
period November 5, 2000 through November 3, 2001, at the annual rate then in
effect)."
8. Section 9 of the Employment Agreement is hereby deleted in its
entirety and all references to such Section 9 contained elsewhere in the
Emplyment Agreement are also hereby deleted.
9. The address for notices to the Employee set forth in Section 15 of
the Employment Agreement is hereby amended to read as follows:
"Amanda J. Bokman
45 East 85/th/ Street
Apartment 9E
<PAGE>
New York, New York 10028"
10. Except as hereby amended, the Employment Agreement continues in
full force and effect and is hereby ratified and affirmed.
* * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
No. 2 as of the date first above written.
NORTON MCNAUGHTON OF SQUIRE, INC.
By:_____________________________________
Title: Chief Executive Officer
____________________________________
Amanda J. Bokman
<PAGE>
Exhibit 10.14(e)
WAIVER AND CONSENT
Waiver and Consent 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 McNaughton Apparel Group Inc., a Delaware corporation
formerly known as Norton McNaughton, Inc. (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"), Banc of America
Commercial Corporation f/k/a 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").
1. Definitions. All capitalized terms used herein and not otherwise
-----------
defined herein are used herein as defined in the Financing Agreement.
2. Waiver and Consent.
------------------
(a) Pursuant to Section 12.03 of the Financing Agreement, 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(p)(iii) of the Financing Agreement
by reason of the failure of the Company and its Consolidated Subsidiaries to
maintain Working Capital of no less than $105,000,000 at the end of the Fiscal
Quarter ended November 6, 1999, provided that the Working Capital at such Fiscal
Quarter end is not less than $93,000,000.
(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
continue in full force and effect.
3. Miscellaneous.
-------------
(a) This Waiver and Consent shall become effective when the
Administrative Agent shall have received counterparts hereof which bear the
signatures of the Required Lenders.
(b) This Waiver and Consent 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.
<PAGE>
(c) Section and paragraph headings herein are included for
convenience of reference only and shall not constitute a part of this Waiver and
Consent for any other purpose.
(d) This Waiver and Consent shall be governed by, and construed
in accordance with, the laws of the State of New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Waiver and
Consent to be executed by their respective officers thereunto duly authorized as
of the ____ day of January, 2000.
AGENTS AND LENDERS
------------------
THE CIT GROUP/COMMERCIAL SERVICES,
INC., as Administrative Agent
By: ______________________________________
Title:____________________________________
BANC OF AMERICA COMMERCIAL CORPORATION F/K/A
NATIONSBANC COMMERCIAL CORPORATION,
as Collateral Agent
By: ______________________________________
Title:____________________________________
FLEET BANK NA, as Documentation Agent
By: ______________________________________
Title:____________________________________
FLEET BUSINESS CREDIT CORPORATION
By: ______________________________________
Title:____________________________________
ISRAEL DISCOUNT BANK OF NEW YORK
By: ______________________________________
Title:____________________________________
<PAGE>
SUNROCK CAPITAL CORP.
By: _____________________________________
Title:___________________________________
PNC BANK, NATIONAL ASSOCIATION
By: _____________________________________
Title:___________________________________
HELLER FINANCIAL, INC.
By: _____________________________________
Title:___________________________________
<PAGE>
Exhibit 10.19(a)
FIRST AMENDMENT
---------------
TO
--
PLEDGE AGREEMENT
----------------
This FIRST AMENDMENT TO PLEDGE AGREEMENT is dated as of July 15, 1994,
amending and supplementing the Pledge Agreement dated as of January 14, 1994
(the "Pledge Agreement") made by Sanford Greenberg (the "Pledgor") in favor of
Norton McNaughton of Squire, Inc., a New York corporation (the "Pledgee").
Capitalized terms used herein but not defined herein shall have the meanings
ascribed to them in the Pledge Agreement.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Pledgee has made a loan in the amount of $920,000 to the
Pledgor (the "Loan") evidenced by a Non-Negotiable Limited Recourse Promissory
Note of the Pledgor dated as of November 5, 1993 payable to the order of the
Pledgee (the "Note"), which Note has been amended and restated by the Amended
and Restated Non-Negotiable Limited Recourse Promissory Note and the Second
Amended and Restated Non-Negotiable Limited Recourse Promissory Note (the
"Second Amended Note");
WHEREAS, each determining it to be in such party's best interest to do
so, the Pledgor and Pledgee in the Second Amended Note have amended the
prepayment provisions of the Note; and
WHEREAS, to fulfill the purposes and intentions of such amendment to
the Note, the Pledgor and the Pledgee agree that an amendment to the Pledge
Agreement is required.
NOW, THEREFORE, for the foregoing reasons and upon the terms and
conditions set forth herein, the parties hereto agree as follows:
1. Additional Provision. The Pledge Agreement shall be amended to
--------------------
add a new Section 5 which shall read in its entirety as follows:
"5. Release of Pledged Stock upon Sale or Transfer.
----------------------------------------------
Upon the sale or transfer of Pledged Stock by the
Pledgor in accordance with the terms hereof, the
Pledgee hereby agrees to release the pledge with
respect to such shares being so sold or transferred
provided that, and only upon the condition that,
certain of the proceeds of such sale
<PAGE>
or transfer of Pledged Stock be applied to the
prepayment of the Second Amended Note in accordance
with the terms thereof."
2. Renumbering of Sections. The former "Section 5" of the Pledge
-----------------------
Agreement shall become "Section 6" and every section thereafter shall be
increased by one.
3. Severability. Any provision of this First Amendment to Pledge
------------
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
4. Notices. All notices, demands, requests and other communications
-------
given to or made upon any party hereto in connection with this First Amendment
to Pledge Agreement shall, except as otherwise expressly herein provided, be in
writing (including telecopied, telexed or telegraphic communication) and mailed,
by certified or registered mail, postage prepaid, telecopied, telexed,
telegraphed or personally delivered to the respective parties, as follows:
Pledgor:
Sanford Greenberg
c/o Norton McNaughton, Inc.
463 Seventh Avenue
10th Floor
New York, New York 10018
Telecopy: (212) 643-9316
with a copy to:
Opton Handler Gottlieb Feiler Landau & Hirsch
52 Vanderbilt Avenue
17th Floor
New York, New York 10017
Attention: Daniel M. Hirsch, Esq.
Telecopy: (212) 972-2219
Pledgee:
Norton McNaughton of Squire, Inc.
463 Seventh Avenue
10th Floor
New York, New York 10018
Telecopy: (212) 643-9316
with a copy to:
Haythe & Curley
<PAGE>
237 Park Avenue
20th Floor
New York, New York 10017-3142
Attention: Bradley P. Cost, Esq.
Telecopy: (212) 682-0200
or in accordance with any subsequent written direction from the recipient party
to the sending party. All such notices and other communications shall, except as
otherwise expressly herein provided, be effective upon delivery if delivered by
hand, two days after deposit in the mail, postage prepaid, in the case of
telecopy or telex, when received, or in the case of telegraph, when delivered to
the telegraph company, charges prepaid.
5. Further Indemnification. The Pledgor agrees to pay, and to save
-----------------------
the Pledgee harmless from, any and all liabilities with respect to, or resulting
from any delay in paying, any and all excise, sales, transfer or other taxes
which may be payable or determined to be payable with respect to any of the
Pledged Stock.
6. No Waiver; Cumulative Remedies. The Pledgee shall not by any act,
------------------------------
delay, omission or otherwise be deemed to have waived any of its rights or
remedies hereunder and no waiver shall be valid unless in writing, signed by the
Pledgee, and then only to the extent therein set forth. A waiver by the Pledgee
of any right or remedy hereunder on any one occasion shall not be construed as a
bar to any right or remedy which the Pledgee would otherwise have on any future
occasion. No failure to exercise nor any delay in exercising on the part of the
Pledgee, any right, power or privilege hereunder, shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided are cumulative and may be exercised singly or concurrently, and are not
exclusive of any rights or remedies provided by law.
7. Waivers, Amendments; Applicable Law. None of the terms or
-----------------------------------
provisions of this First Amendment to Pledge Agreement may be waived, altered,
modified or amended except by an instrument in writing, duly executed by the
Pledgee and the Pledgor. This Pledge Agreement and all obligations of the
Pledgor hereunder shall be binding upon the heirs, legal representatives and
permitted assigns of the Pledgor, and, together with the rights and remedies of
the Pledgee hereunder, shall inure to the benefit of the Pledgee and its
successors and assigns, provided that the Pledgor may not assign any of his
rights or obligations hereunder without the prior written consent of the
Pledgee. This First Amendment to Pledge Agreement shall be governed by, and be
construed and interpreted in accordance with, the laws of the State of New York
applicable to agreements made and to be performed entirely within such State.
8. Resolution of Drafting Ambiguities. The Pledgor acknowledges that
----------------------------------
he was represented by counsel in connection with the preparation, execution and
delivery of this First Amendment to Pledge Agreement and the other instruments,
documents and agreements contemplated hereby or thereby to be executed and
delivered by him and that his counsel received all of the foregoing instruments,
documents and agreements and that any rule of construction under any applicable
law to the effect that ambiguities are to be resolved against the
<PAGE>
drafting party shall not be employed in the interpretation of any of the
foregoing instruments, documents and agreements.
9. Counterparts. This First Amendment to Pledge Agreement may be
------------
executed in two or more 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 Pledgor has duly executed and delivered this
PLEDGE AGREEMENT as of the day and year first above written.
PLEDGOR:
________________________________
Sanford Greenberg
PLEDGEE:
NORTON MCNAUGHTON OF SQUIRE, INC.
By: _____________________________
Name:
Title:
<PAGE>
Exhibit 10.20(a)
FIRST AMENDMENT
---------------
TO
--
PLEDGE AGREEMENT
----------------
This FIRST AMENDMENT TO PLEDGE AGREEMENT is dated as of July 15, 1994,
amending and supplementing the Pledge Agreement dated as of January 14, 1994
(the "Pledge Agreement") made by Norton Sperling (the "Pledgor") in favor of
Norton McNaughton of Squire, Inc., a New York corporation (the "Pledgee").
Capitalized terms used herein but not defined herein shall have the meanings
ascribed to them in the Pledge Agreement.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Pledgee has made a loan in the amount of $920,000 to the
Pledgor (the "Loan") evidenced by a Non-Negotiable Limited Recourse Promissory
Note of the Pledgor dated as of November 5, 1993 payable to the order of the
Pledgee (the "Note"), which Note has been amended and restated by the Amended
and Restated Non-Negotiable Limited Recourse Promissory Note and the Second
Amended and Restated Non-Negotiable Limited Recourse Promissory Note (the
"Second Amended Note");
WHEREAS, each determining it to be in such party's best interest to do
so, the Pledgor and Pledgee in the Second Amended Note have amended the
prepayment provisions of the Note; and
WHEREAS, to fulfill the purposes and intentions of such amendment to
the Note, the Pledgor and the Pledgee agree that an amendment to the Pledge
Agreement is required.
NOW, THEREFORE, for the foregoing reasons and upon the terms and
conditions set forth herein, the parties hereto agree as follows:
1. Additional Provision. The Pledge Agreement shall be amended to
--------------------
add a new Section 5 which shall read in its entirety as follows:
"5. Release of Pledged Stock upon Sale or Transfer.
----------------------------------------------
Upon the sale or transfer of Pledged Stock by the
Pledgor in accordance with the terms hereof, the
Pledgee hereby agrees to release the pledge with
respect to such shares being so sold or transferred
provided that, and only upon the condition that,
certain of the proceeds of such sale
<PAGE>
or transfer of Pledged Stock be applied to the
prepayment of the Second Amended Note in accordance
with the terms thereof."
2. Renumbering of Sections. The former "Section 5" of the Pledge
-----------------------
Agreement shall become "Section 6" and every section thereafter shall be
increased by one.
3. Severability. Any provision of this First Amendment to Pledge
------------
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
4. Notices. All notices, demands, requests and other communications
-------
given to or made upon any party hereto in connection with this First Amendment
to Pledge Agreement shall, except as otherwise expressly herein provided, be in
writing (including telecopied, telexed or telegraphic communication) and mailed,
by certified or registered mail, postage prepaid, telecopied, telexed,
telegraphed or personally delivered to the respective parties, as follows:
Pledgor:
Norton Sperling
c/o Norton McNaughton, Inc.
463 Seventh Avenue
10th Floor
New York, New York 10018
Telecopy: (212) 643-9316
with a copy to:
Opton Handler Gottlieb Feiler Landau & Hirsch
52 Vanderbilt Avenue
17th Floor
New York, New York 10017
Attention: Daniel M. Hirsch, Esq.
Telecopy: (212) 972-2219
Pledgee:
Norton McNaughton of Squire, Inc.
463 Seventh Avenue
10th Floor
New York, New York 10018
Telecopy: (212) 643-9316
with a copy to:
Haythe & Curley
<PAGE>
237 Park Avenue
20th Floor
New York, New York 10017-3142
Attention: Bradley P. Cost, Esq.
Telecopy: (212) 682-0200
or in accordance with any subsequent written direction from the recipient party
to the sending party. All such notices and other communications shall, except as
otherwise expressly herein provided, be effective upon delivery if delivered by
hand, two days after deposit in the mail, postage prepaid, in the case of
telecopy or telex, when received, or in the case of telegraph, when delivered to
the telegraph company, charges prepaid.
5. Further Indemnification. The Pledgor agrees to pay, and to save
-----------------------
the Pledgee harmless from, any and all liabilities with respect to, or resulting
from any delay in paying, any and all excise, sales, transfer or other taxes
which may be payable or determined to be payable with respect to any of the
Pledged Stock.
6. No Waiver; Cumulative Remedies. The Pledgee shall not by any act,
------------------------------
delay, omission or otherwise be deemed to have waived any of its rights or
remedies hereunder and no waiver shall be valid unless in writing, signed by the
Pledgee, and then only to the extent therein set forth. A waiver by the Pledgee
of any right or remedy hereunder on any one occasion shall not be construed as a
bar to any right or remedy which the Pledgee would otherwise have on any future
occasion. No failure to exercise nor any delay in exercising on the part of the
Pledgee, any right, power or privilege hereunder, shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided are cumulative and may be exercised singly or concurrently, and are not
exclusive of any rights or remedies provided by law.
7. Waivers, Amendments; Applicable Law. None of the terms or
-----------------------------------
provisions of this First Amendment to Pledge Agreement may be waived, altered,
modified or amended except by an instrument in writing, duly executed by the
Pledgee and the Pledgor. This Pledge Agreement and all obligations of the
Pledgor hereunder shall be binding upon the heirs, legal representatives and
permitted assigns of the Pledgor, and, together with the rights and remedies of
the Pledgee hereunder, shall inure to the benefit of the Pledgee and its
successors and assigns, provided that the Pledgor may not assign any of his
rights or obligations hereunder without the prior written consent of the
Pledgee. This First Amendment to Pledge Agreement shall be governed by, and be
construed and interpreted in accordance with, the laws of the State of New York
applicable to agreements made and to be performed entirely within such State.
8. Resolution of Drafting Ambiguities. The Pledgor acknowledges that
----------------------------------
he was represented by counsel in connection with the preparation, execution and
delivery of this First Amendment to Pledge Agreement and the other instruments,
documents and agreements contemplated hereby or thereby to be executed and
delivered by him and that his counsel received all of the foregoing instruments,
documents and agreements and that any rule of construction under any applicable
law to the effect that ambiguities are to be resolved against the
<PAGE>
drafting party shall not be employed in the interpretation of any of the
foregoing instruments, documents and agreements.
9. Counterparts. This First Amendment to Pledge Agreement may be
------------
executed in two or more 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 Pledgor has duly executed and delivered this
PLEDGE AGREEMENT as of the day and year first above written.
PLEDGOR:
____________________________________
Norton Sperling
PLEDGEE:
NORTON MCNAUGHTON OF SQUIRE, INC.
By:_________________________________
Name:
Title:
<PAGE>
Exhibit 10.21(a)
Allonge to and endorsement of the Amended and Restated Non-Negotiable
Limited Recourse Promissory Note dated as of November 5, 1993 from
Sanford Greenberg to NORTON MCNAUGHTON OF SQUIRE, INC. in the
principal amount of $920,000.
Attached to the Non-Negotiable Limited Recourse Promissory Note, the
above-mentioned Amended and Restated Non-Negotiable Limited Recourse Promissory
Note and prior related allonge and this Allonge is a Second Amended and Restated
Non-Negotiable Limited Recourse Promissory Note, which Second Amended and
Restated Non-Negotiable Limited Recourse Promissory Note shall be an amendment
to the above-referenced Amended and Restated Non-Negotiable Limited Recourse
Promissory Note and shall be deemed to restate the above-referenced Amended and
Restated Non-Negotiable Limited Recourse Promissory Note in its entirety.
________________________________
Sanford Greenberg
Dated: As of July 15, 1994
ACCEPTED:
NORTON MCNAUGHTON OF SQUIRE, INC.
By:_______________________________
Name: Sanford Greenberg
Title: Chief Executive Officer
SECOND AMENDED AND RESTATED NON-NEGOTIABLE
LIMITED RECOURSE PROMISSORY NOTE
----------------------------------------
<PAGE>
$920,000
As of November 5, 1993 New York, New York
FOR VALUE RECEIVED, Sanford Greenberg (the "Maker") hereby promises to
pay to Norton McNaughton of Squire, Inc., a New York corporation (the "Payee"),
at 463 Seventh Avenue, New York, New York 10018 (or at such other place as the
Payee may from time to time designate), the principal sum of Nine Hundred Twenty
Thousand Dollars ($920,000) in lawful money of the United States of America. The
principal amount hereof shall be payable, without necessity for notice or
demand, on November 5, 2003. The Maker also promises to pay interest on the
unpaid principal amount hereof in like money at such place from the date hereof
at the rate of 5.84% per annum. Such interest shall be payable annually on
November 5 in each year commencing November 5, 1994 and ending November 5, 2003,
at which time the principal amount of this Note then outstanding, together with
any outstanding accrued and unpaid interest thereon, shall be paid in full. This
Note is being issued by the Maker to evidence a loan (the "Loan") by the Payee
in the principal amount hereof made as of November 5, 1993.
The Maker shall have the right, at his option, to prepay the principal
amount owing under this Note, in whole or in part at any time and from time to
time, without premium or penalty, together with all interest accrued through the
date of prepayment in respect of the principal amount hereof so prepaid. In
addition, on the date of each closing or settlement, as applicable, of the sale
or other transfer by or on behalf of the Maker of shares of common stock, $.01
par value (the "Common Stock"), of Norton McNaughton, Inc., a Delaware
corporation, owned by the Maker, the Maker shall apply the Percentage Amount (as
hereinafter defined) to the prepayment of the principal amount owing under this
Note, and shall also pay all interest accrued through the date of prepayment in
respect of the principal amount hereof so prepaid; provided that, if on the date
of any sale or other transfer of Common Stock by or on behalf of the Maker, the
fair market value of the Common Stock held by the Maker (determined immediately
prior to such sale or transfer) is equal to or less than twice the then
outstanding principal amount of this Note, then, notwithstanding the foregoing,
the Maker shall apply all of the Net Proceeds (as hereinafter defined) of any
such sale or transfer of Common Stock by or on behalf of the Maker to the
prepayment of the principal amount owing under this Note. For the purposes
hereof, (1) the term "Percentage Amount" shall mean a dollar amount determined
by multiplying (a) the Net Proceeds by (b) a fraction, the numerator of which is
the number of shares of Common Stock which are being sold or transferred by or
on behalf of the Maker in the particular case and the denominator of which is
795,450 (as such number shall be appropriately adjusted to take into account
stock splits, stock dividends or similar events in respect of the Common Stock)
and (2) the term "Net Proceeds" shall mean a dollar amount equal to the gross
proceeds from the sale or other transfer of Common Stock by or on behalf of the
Maker in the particular case less the normal and customary expenses incurred by
the Maker in connection with such sale or transfer and less any taxes payable by
the Maker in respect of such sale or transfer including, without limitation, any
capital gains taxes.
The Payee shall have the right, without demand or notice, to
accelerate this Note and to declare the entire unpaid balance hereof and the
obligations evidenced hereby
<PAGE>
immediately due and payable and to seek and obtain payment of this Note upon the
occurrence of any of the following events of default (each, an "Event of
Default"), unless every such Event of Default shall have been made good and
cured: (a) the Maker fails to make payment or prepayment of principal or
interest under this Note when and as the same shall become due and payable or
(b) the Maker admits in writing his inability to pay his debts generally as they
become due, files a petition in bankruptcy or a petition to take advantage of
any bankruptcy, reorganization or insolvency act, makes an assignment for the
benefit of creditors, or, on a petition in bankruptcy filed against him, is
adjudicated a bankrupt, which judgment, order or decree shall not be appealed
within the permitted time period from the date of entry thereof and subsequently
vacated. Upon such declaration, the obligations evidenced by this Note shall be
immediately due and payable.
In the event of any Event of Default hereunder, the Maker agrees to
pay to the Payee all costs and expenses, including without limitation reasonable
attorneys' fees and other legal expenses, incurred by the Payee in the
enforcement and collection of this Note.
Notwithstanding anything to the contrary contained herein, the Maker
shall have no personal liability for the payment of the Loan or any interest in
respect thereof, it being expressly understood that the sole recourse of the
Payee against the Maker shall be limited to the Pledged Stock (as defined in the
Pledge Agreement dated as of January 14, 1994 made by the Maker in favor of the
Payee, as amended by the First Amendment to Pledge Agreement dated as of July
15, 1994 (the "Pledge Agreement")) pledged by the Maker under the Pledge
Agreement; provided, however, that (i) the Maker shall be fully and personally
liable hereunder for any and all costs and expenses, including reasonable
attorneys' fees and other legal expenses, referred to in the immediately
preceding paragraph, or incurred by the Payee in connection with any suit or
other action by the Maker that attempts to prevent or otherwise inhibit the
Payee from exercising any of its rights or remedies under this Note or the
Pledge Agreement and (ii) nothing contained herein shall prevent recourse to and
enforcement against the Pledged Stock under this Note and under the Pledge
Agreement.
This Note shall be governed by and construed in accordance with the
laws of the State of New York and shall be binding upon the Maker, his heirs and
legal representatives and inure to the benefit of the Payee, its successors,
endorsees and assigns. If any term or provision of this Note shall be held
invalid, illegal or unenforceable, the validity of all other terms and
provisions hereof shall in no way be affected thereby.
________________________________
Sanford Greenberg
<PAGE>
Exhibit 10.22(a)
Allonge to and endorsement of the Amended and Restated
Non-Negotiable Limited Recourse Promissory Note dated
as of November 5, 1993 from Norton Sperling to NORTON
MCNAUGHTON OF SQUIRE, INC. in the principal amount of
$920,000.
Attached to the Non-Negotiable Limited Recourse Promissory Note, the
above-mentioned Amended and Restated Non-Negotiable Limited Recourse Promissory
Note and prior related allonge and this Allonge is a Second Amended and Restated
Non-Negotiable Limited Recourse Promissory Note, which Second Amended and
Restated Non-Negotiable Limited Recourse Promissory Note shall be an amendment
to the above-referenced Amended and Restated Non-Negotiable Limited Recourse
Promissory Note and shall be deemed to restate the above-referenced Amended and
Restated Non-Negotiable Limited Recourse Promissory Note in its entirety.
____________________________________
Norton Sperling
Dated: As of July 15, 1994
ACCEPTED:
NORTON MCNAUGHTON OF SQUIRE, INC.
By: _______________________________
Name: Sanford Greenberg
Title: Chief Executive Officer
SECOND AMENDED AND RESTATED NON-NEGOTIABLE
LIMITED RECOURSE PROMISSORY NOTE
------------------------------------------
<PAGE>
$920,000
As of November 5, 1993 New York, New York
FOR VALUE RECEIVED, Norton Sperling (the "Maker") hereby promises to
pay to Norton McNaughton of Squire, Inc., a New York corporation (the "Payee"),
at 463 Seventh Avenue, New York, New York 10018 (or at such other place as the
Payee may from time to time designate), the principal sum of Nine Hundred Twenty
Thousand Dollars ($920,000) in lawful money of the United States of America. The
principal amount hereof shall be payable, without necessity for notice or
demand, on November 5, 2003. The Maker also promises to pay interest on the
unpaid principal amount hereof in like money at such place from the date hereof
at the rate of 5.84% per annum. Such interest shall be payable annually on
November 5 in each year commencing November 5, 1994 and ending November 5, 2003,
at which time the principal amount of this Note then outstanding, together with
any outstanding accrued and unpaid interest thereon, shall be paid in full. This
Note is being issued by the Maker to evidence a loan (the "Loan") by the Payee
in the principal amount hereof made as of November 5, 1993.
The Maker shall have the right, at his option, to prepay the principal
amount owing under this Note, in whole or in part at any time and from time to
time, without premium or penalty, together with all interest accrued through the
date of prepayment in respect of the principal amount hereof so prepaid. In
addition, on the date of each closing or settlement, as applicable, of the sale
or other transfer by or on behalf of the Maker of shares of common stock, $.01
par value (the "Common Stock"), of Norton McNaughton, Inc., a Delaware
corporation, owned by the Maker, the Maker shall apply the Percentage Amount (as
hereinafter defined) to the prepayment of the principal amount owing under this
Note, and shall also pay all interest accrued through the date of prepayment in
respect of the principal amount hereof so prepaid; provided that, if on the date
of any sale or other transfer of Common Stock by or on behalf of the Maker, the
fair market value of the Common Stock held by the Maker (determined immediately
prior to such sale or transfer) is equal to or less than twice the then
outstanding principal amount of this Note, then, notwithstanding the foregoing,
the Maker shall apply all of the Net Proceeds (as hereinafter defined) of any
such sale or transfer of Common Stock by or on behalf of the Maker to the
prepayment of the principal amount owing under this Note. For the purposes
hereof, (1) the term "Percentage Amount" shall mean a dollar amount determined
by multiplying (a) the Net Proceeds by (b) a fraction, the numerator of which is
the number of shares of Common Stock which are being sold or transferred by or
on behalf of the Maker in the particular case and the denominator of which is
795,450 (as such number shall be appropriately adjusted to take into account
stock splits, stock dividends or similar events in respect of the Common Stock)
and (2) the term "Net Proceeds" shall mean a dollar amount equal to the gross
proceeds from the sale or other transfer of Common Stock by or on behalf of the
Maker in the particular case less the normal and customary expenses incurred by
the Maker in connection with such sale or transfer and less any taxes payable by
the Maker in respect of such sale or transfer including, without limitation, any
capital gains taxes.
The Payee shall have the right, without demand or notice, to
accelerate this Note and to declare the entire unpaid balance hereof and the
obligations evidenced hereby
<PAGE>
immediately due and payable and to seek and obtain payment of this Note upon the
occurrence of any of the following events of default (each, an "Event of
Default"), unless every such Event of Default shall have been made good and
cured: (a) the Maker fails to make payment or prepayment of principal or
interest under this Note when and as the same shall become due and payable or
(b) the Maker admits in writing his inability to pay his debts generally as they
become due, files a petition in bankruptcy or a petition to take advantage of
any bankruptcy, reorganization or insolvency act, makes an assignment for the
benefit of creditors, or, on a petition in bankruptcy filed against him, is
adjudicated a bankrupt, which judgment, order or decree shall not be appealed
within the permitted time period from the date of entry thereof and subsequently
vacated. Upon such declaration, the obligations evidenced by this Note shall be
immediately due and payable.
In the event of any Event of Default hereunder, the Maker agrees to
pay to the Payee all costs and expenses, including without limitation reasonable
attorneys' fees and other legal expenses, incurred by the Payee in the
enforcement and collection of this Note.
Notwithstanding anything to the contrary contained herein, the Maker
shall have no personal liability for the payment of the Loan or any interest in
respect thereof, it being expressly understood that the sole recourse of the
Payee against the Maker shall be limited to the Pledged Stock (as defined in the
Pledge Agreement dated as of January 14, 1994 made by the Maker in favor of the
Payee, as amended by the First Amendment to Pledge Agreement dated as of July
15, 1994 (the "Pledge Agreement")) pledged by the Maker under the Pledge
Agreement; provided, however, that (i) the Maker shall be fully and personally
liable hereunder for any and all costs and expenses, including reasonable
attorneys' fees and other legal expenses, referred to in the immediately
preceding paragraph, or incurred by the Payee in connection with any suit or
other action by the Maker that attempts to prevent or otherwise inhibit the
Payee from exercising any of its rights or remedies under this Note or the
Pledge Agreement and (ii) nothing contained herein shall prevent recourse to and
enforcement against the Pledged Stock under this Note and under the Pledge
Agreement.
This Note shall be governed by and construed in accordance with the
laws of the State of New York and shall be binding upon the Maker, his heirs and
legal representatives and inure to the benefit of the Payee, its successors,
endorsees and assigns. If any term or provision of this Note shall be held
invalid, illegal or unenforceable, the validity of all other terms and
provisions hereof shall in no way be affected thereby.
___________________________
Norton Sperling
<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,
McNaughton Apparel Holdings Inc., a South Carolina corporation, is a wholly
owned subsidiary of the Company.
<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),
(Form S-8 No. 333-39049), (Form S-8 No. 333-79239) and (Form S-8, No. 333-89637)
pertaining to the Stock Option Plan of McNaughton Apparel Group Inc. the
Employee Stock Purchase Plan of McNaughton Apparel Group Inc., the Executive
Stock Option Plan of McNaughton Apparel Group Inc. the ME Acquisition Corp.
Bonus Plan for Senior Executives; and the McNaughton Apparel Group Inc. 1998
Long-Term Incentive Plan, the McNaughton Apparel Group Inc. Stock Option Plan
for Non-Employee Directors and the McNaughton Apparel Group Inc. Option Bonus
Plan for Senior Executives of JJ Acquisition Corp., respectively, of our report
dated January 5, 2000, with respect to the consolidated financial statements and
schedule of McNaughton Apparel Group Inc. included in this Annual report (Form
10-K) for the year ended November 6, 1999.
ERNST & YOUNG LLP
New York, New York
February 4, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-06-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> NOV-06-1999
<CASH> 13,842
<SECURITIES> 0
<RECEIVABLES> 82,189
<ALLOWANCES> 0
<INVENTORY> 40,917
<CURRENT-ASSETS> 142,880
<PP&E> 15,910
<DEPRECIATION> 5,733
<TOTAL-ASSETS> 228,098
<CURRENT-LIABILITIES> 49,273
<BONDS> 125,000
0
0
<COMMON> 81
<OTHER-SE> 49,986
<TOTAL-LIABILITY-AND-EQUITY> 228,098
<SALES> 407,812
<TOTAL-REVENUES> 407,812
<CGS> 303,769
<TOTAL-COSTS> 303,769
<OTHER-EXPENSES> 69,428
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,712
<INCOME-PRETAX> 16,267
<INCOME-TAX> 7,736
<INCOME-CONTINUING> 8,531
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,531
<EPS-BASIC> 1.15
<EPS-DILUTED> 1.11
</TABLE>
