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.
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.
The following table sets forth information concerning the Company's product lines:
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.
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.
_______________________ (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.
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.
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.
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.
Item 2.
Item 2. Properties
The Company conducts its business from the following leased facilities:
__________________ (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.
Item 3.
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.
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.
PART II
Item 5.
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.
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.
Item 6.
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.
(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.
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
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.
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.
_______________________ (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.
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.
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.
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.
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
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.
Item 7a.
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.
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.
PART III
Item 8.
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.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not Applicable.
Item 10.
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.
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.
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.
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.
PART IV
Item 14.
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
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.
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
Consolidated Balance Sheets at November 6, 1999 and October 31, 1998
Consolidated Statements of Operations for Each of the Three Years in the Period Ended November 6, 1999
Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period Ended November 6, 1999
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended November 6, 1999
Notes to Consolidated Financial Statements
Financial Statement Schedule:
II - "Valuation and Qualifying Accounts"
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)
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
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.
McNaughton Apparel Group Inc. Consolidated Statements of Operations (In Thousands, Except Per Share Amounts)
See accompanying notes.
McNaughton Apparel Group Inc. Consolidated Statements of Stockholders' Equity Years Ended November 6, 1999, October 31, 1998 and November 1, 1997
See accompanying notes.
McNaughton Apparel Group Inc. Consolidated Statements of Cash Flows (In Thousands)
See accompanying notes.
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.
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.
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.
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:
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.
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 ======== ========
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 ======== =======
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.
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).
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.
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
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.
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:
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:
_________________________
(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.
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.
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:
Options outstanding at November 6, 1999 are as follows:
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.
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):
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.
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
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.
McNaughton Apparel Group Inc. Schedule II - Valuation and Qualifying Accounts (In Thousands)
(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.
McNaughton Apparel Group Inc. Quarterly Financial Data (Unaudited) (In Thousands, Except Per Share Data)
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
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).
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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.
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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).
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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).
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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.
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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).
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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
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.
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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).
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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.
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++ 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.
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