<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-23440
Norton McNaughton, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 13-3747173
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
463 Seventh Avenue, New York, N.Y. 10018
(Address of principal executive offices)
(Zip code)
(212) 947-2960
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value, 7,409,640 shares as of September 15, 1997.
<PAGE> 2
INDEX TO FORM 10-Q
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM I.
Financial Statements:
Consolidated Balance Sheets at August 2, 1997 (Unaudited)
and November 2, 1996 3
Consolidated Statements of Operations for the thirteen weeks ended
August 2, 1997 and August 3, 1996 (Unaudited) and the thirty-nine
weeks ended August 2, 1997 and August 3, 1996 (Unaudited) 4
Consolidated Statements of Stockholders' Equity for the thirty-nine
weeks ended August 2, 1997 (Unaudited) 5
Consolidated Statements of Cash Flows for the thirty-nine weeks
ended August 2, 1997 and August 3, 1996 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-9
ITEM II.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-13
PART II. OTHER INFORMATION 14
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 2, November 2,
1997 1996
(Unaudited) (Note)
----------- -----------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 197 $ 333
Due from factor, net 8,635 30,794
Inventory 33,088 17,939
Prepaid expenses and other current assets 8,120 2,979
-------- --------
Total current assets 50,040 52,045
Fixed assets, net of accumulated depreciation
of $2,141 and $1,542, respectively 5,270 5,077
Notes receivable from management stockholders 2,655 2,655
Other assets 1,034 1,332
-------- --------
Total assets $ 58,999 $ 61,109
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,796 $ 11,334
Accrued expenses and other current liabilities 1,131 654
-------- --------
Total current liabilities 13,927 11,988
Other long-term liabilities 1,000 835
-------- --------
Total liabilities 14,927 12,823
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares, 8,060,640 and 8,052,718
shares issued, respectively, and 7,409,640 and
7,636,718 shares outstanding, respectively 81 80
Capital in excess of par 23,903 23,865
Retained earnings 25,623 28,419
Treasury stock, at cost, 651,000 and 416,000 shares, respectively (5,535) (4,078)
-------- --------
Total stockholders' equity 44,072 48,286
-------- --------
Total liabilities and stockholders' equity $ 58,999 $ 61,109
======== ========
</TABLE>
Note: The balance sheet at November 2, 1996 has been derived from the
audited financial statements as of that date.
See accompanying notes.
3
<PAGE> 4
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
-------- -------- --------- ---------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Net sales $ 48,240 $ 48,261 $ 142,708 $ 148,107
Cost of goods sold 37,463 37,051 113,672 117,037
-------- -------- --------- ---------
Gross profit 10,777 11,210 29,036 31,070
Selling, general and administrative expenses 9,007 9,684 32,894 30,362
-------- -------- --------- ---------
Income (loss) from operations 1,770 1,526 (3,858) 708
Other expense (income):
Interest expense 575 592 1,292 1,589
Interest income (43) (42) (127) (121)
-------- -------- --------- ---------
Income (loss) before provision (benefit) for
income taxes 1,238 976 (5,023) (760)
Provision (benefit) for income taxes 526 393 (2,227) (327)
-------- -------- --------- ---------
Net income (loss) $ 712 $ 583 $ (2,796) $ (433)
======== ======== ========= =========
PER SHARE DATA:
Net income (loss) $ 0.10 $ 0.08 $ (0.37) $ (0.06)
======== ======== ========= =========
Weighted average number of common shares and
common share equivalents outstanding 7,414 7,654 7,520 7,856
======== ======== ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THIRTY-NINE WEEKS ENDED AUGUST 2, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Capital
------------ in Excess Retained Treasury
Shares Amount of Par Earnings Stock Total
-------- -------- --------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at November 2, 1996 8,053 $ 80 $ 23,865 $ 28,419 $ (4,078) $ 48,286
Net loss for the thirty-nine weeks
ended August 2, 1997 -- -- -- (2,796) -- (2,796)
Treasury stock acquired, 235,000
shares, at cost -- -- -- -- (1,457) (1,457)
Issuance of 7,922 shares of common
stock through the Employee
Stock Purchase Plan 8 1 38 -- -- 39
-------- -------- -------- -------- -------- --------
Balance at August 2, 1997 8,061 $ 81 $ 23,903 $ 25,623 $ (5,535) $ 44,072
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------
AUGUST 2, AUGUST 3,
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Net loss $ (2,796) $ (433)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Depreciation and amortization of fixed assets 689 481
Write-off of leasehold improvements 492 --
Amortization of intangibles 26 26
Changes in operating assets and liabilities:
Due from factor, net 16,849 31,141
Inventory (15,149) (7,501)
Prepaid expenses and other current assets (5,141) (4,131)
Other assets 272 (387)
Accounts payable 1,462 (10,253)
Accrued expenses and other current liabilities 477 (248)
Other long-term liabilities 165 152
-------- --------
Net cash (used for) provided by operating activities (2,654) 8,847
-------- --------
INVESTING ACTIVITIES
Notes receivable from management stockholders -- 5
Purchase of fixed assets (1,374) (1,172)
-------- --------
Net cash used for investing activities (1,374) (1,167)
-------- --------
FINANCING ACTIVITIES
Net (repayments) advances under factoring agreement 5,310 (4,080)
Proceeds from issuance of common stock 39 45
Purchase of treasury stock (1,457) (3,752)
-------- --------
Net cash provided by (used for) financing activities 3,892 (7,787)
-------- --------
Decrease in cash (136) (107)
Cash at beginning of period 333 444
-------- --------
Cash at end of period $ 197 $ 337
======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 361 $ 313
Interest paid $ 1,282 $ 1,598
</TABLE>
See accompanying notes.
6
<PAGE> 7
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of Norton
McNaughton, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes necessary
for a fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles. In the
opinion of management, all normal and recurring adjustments and accruals
considered necessary for a fair presentation of the Company's financial position
at August 2, 1997 and the results of operations and cash flows for the
thirty-nine weeks ended August 2, 1997 and August 3, 1996 have been included.
These statements should be read in conjunction with the audited consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission. Operating
results for the thirteen weeks and thirty-nine weeks ended August 2, 1997 are
not necessarily indicative of the results that may be expected for the fiscal
year ending November 1, 1997.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material balances and transactions have been
eliminated in consolidation.
The Company has adopted a 52-53 week accounting period. The Company's fiscal
year ends on October 31, if such date falls on a Saturday, or the first Saturday
following October 31.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes.
Actual results could differ from those estimates.
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities"
During the quarter ended February 1, 1997, the Company adopted Statement 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. Statement 125 is required to be applied to transfers of assets
occurring after January 1, 1997. The effect of adopting the new standard for the
thirteen weeks and thirty-nine weeks ended August 2, 1997 was immaterial.
SFAS 130, " Reporting Comprehensive Income" and SFAS 131, " Disclosures about
Segments of an Enterprise and Related Information"
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130. This
new standard requires reclassification of financial statements for earlier
periods provided for comparative purposes, and will be effective beginning with
the Company's fiscal year ending October 31, 1998. The Company has determined
that the effect of adopting the new standard will be immaterial.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131. This
new standard will be effective for financial statement periods beginning after
December 15, 1997. This Statement significantly changes the way that public
business enterprises report information about operating segments in financial
statements. The Company has not yet determined the impact of Statement 131 on
disclosures in its financial statements.
7
<PAGE> 8
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out basis) or market.
Inventories consist of the following:
<TABLE>
<CAPTION>
August 2, November 2,
1997 1996
--------- -----------
(In Thousands)
<S> <C> <C>
Raw materials $ 8,549 $ 5,530
Work in process 7,868 3,337
Finished goods 16,671 9,072
------- -------
$33,088 $17,939
======= =======
</TABLE>
3. EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of shares of
common stock and the dilutive effect of the weighted average number of common
stock equivalents of the Company. Common stock equivalents are shares issuable
upon the exercise of stock options under the treasury stock method. Common stock
equivalents were excluded from the net loss per share calculation for the
thirty-nine weeks ended August 3, 1996 as the effects were anti-dilutive.
4. PROFORMA EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement No. 128 on the
calculation of earnings per share for the thirteen and thirty-nine weeks ended
August 2, 1997 is not expected to be material.
5. STOCKHOLDERS' EQUITY
As previously announced, the Company's Board of Directors has authorized a stock
repurchase program, under which the Company may repurchase up to $7.5 million of
the Company's Common Stock. The Company expects that the shares may be purchased
from time to time in the open market and in block transactions. In the third
quarter of fiscal 1997, the Company purchased 25,000 shares at an aggregate cost
of $131,250. As of the end of the third quarter of fiscal 1997, the Company had
purchased a total of 651,000 shares at an aggregate cost of $5,534,950.
6. NOTES RECEIVABLE FROM MANAGEMENT STOCKHOLDERS
In the event of any sale or transfer of shares of Common Stock by any of the
management stockholders, such person is required to apply a portion of the net
proceeds of the sale or transfer to the principal repayment of his loan from the
Company. No other principal payments are required under the loans except for the
payment at maturity. The loans mature on November 5, 2003 at which time full
payment is to be made by the management stockholders for the balance of their
respective loans. As of the end of the third quarter of fiscal 1997, all
necessary payments have been made under the terms of the loans by the management
stockholders.
As of August 2, 1997, the fair market value of the Company's Common Stock
pledged by the management stockholders as security for the loans was $4,610,091,
and the aggregate principal balance of all loans to management stockholders was
$2,654,680. The loan balance set forth above reflects the required principal
payments of $345,320 resulting from sales of Common Stock by management
stockholders.
8
<PAGE> 9
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. 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.
8. SUBSEQUENT EVENT
The Company has entered into a definitive agreement to acquire substantially all
the assets and assume substantially all the liabilities of Miss Erika, Inc.
("Miss Erika"), a privately-held apparel manufacturer of moderate women's casual
separates. The terms of the transaction provide for the payment of approximately
$24 million in cash at closing, with additional consideration payable at the
Company's option in cash or Company Common Stock, to be paid based on the
profitability of Miss Erika in 1998 and 1999. The transaction will be accounted
for under the purchase method of accounting. The closing of the transaction,
which the Company expects will take place during its fourth fiscal quarter of
1997, is subject to the expiration of the Hart Scott Rodino waiting period and
the satisfaction of other customary closing conditions (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
General and Liquidity and Capital Resources").
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company has entered into a definitive agreement to acquire
substantially all the assets and assume substantially all the liabilities of
Miss Erika, a privately-held manufacturer of moderate women's casual separates.
Based in New York and founded in 1968, Miss Erika designs, contracts for the
manufacture of and markets women's moderate separates, including knit tops and
bottoms, sweaters, dresses and short sets in a variety of fabrications. Miss
Erika's merchandise is sold primarily under the Erika label and is distributed
through regional chains, department stores and specialty chains.
The terms of the Miss Erika transaction provide for the payment of
approximately $24 million in cash at closing, with additional consideration
payable at the Company's option in cash or Company Common Stock, to be paid
based on the profitability of Miss Erika in 1998 and 1999. The closing of the
transaction, which the Company expects will take place during its fourth fiscal
quarter of 1997, is subject to the expiration of the Hart Scott Rodino waiting
period and the satisfaction of other customary closing conditions. The
transaction will be accounted for under the purchase method of accounting. (For
a description of the acquisition financing, see "Liquidity and Capital
Resources.")
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. In accordance with this strategy, the
Company discontinued the Kate McNaughton suit division in May 1996. During the
third quarter of fiscal 1997, the Company began selling merchandise under its
existing product lines to Sears, including Norton McNaughton and Norton Studio.
Correspondingly, the Company will discontinue the Modiano product line in the
fourth quarter of fiscal 1997. In addition, in the first quarter of fiscal 1998,
the Company will discontinue the Lauren Alexandra private-label product line
produced for Federated Department Stores. The Company expects to record special
charges in the fourth quarter of fiscal 1997 in connection with the foregoing
and the Company's continued focus on improving profitability.
The Company contracts for the manufacture of all of its products. As a
result, the Company has modest amounts of property and equipment, as well as
modest annual depreciation expense and capital expenditures. In addition, the
Company generally ships its products in accordance with normal apparel industry
shipping cycles. The timing of shipping cycles or the delivery of finished goods
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.
As is the norm in the apparel industry, the Company grants its
customers sales allowances which affect the Company's gross profit margins. The
level of sales allowances granted varies from quarter to quarter and year to
year.
As a result of the Company's continued focus on improving
profitability, the Company has implemented certain measures to improve gross
profit margins and reduce overhead expenses. The Company intends to minimize the
production of merchandise that it does not anticipate can be sold at acceptable
profit levels to strengthen gross profit margins. In addition, effective in the
first quarter of fiscal 1998, the Company has adopted a new pricing strategy
pursuant to which the Company will offer its merchandise at lower initial
selling prices relative to historical prices in an effort to reduce future sales
allowances. This will be affected without a change to quality of merchandise.
The Company anticipates that revenue levels in fiscal 1997 will (and in fiscal
1998, excluding Miss Erika may) decrease from those in fiscal 1996.
With respect to the Company's efforts to control costs, the Company
implemented certain cost savings measures at the end of the third quarter of
fiscal 1996, which resulted in a significant reduction of its workforce. The
benefits of this workforce reduction were savings of approximately $220,000 and
$660,000, respectively, for the thirteen weeks and thirty-nine weeks ended
August 2, 1997. These savings were offset in part by new hires and salary
increases which occurred in the first half of fiscal 1997. In addition, the
Company eliminated its in-store specialist program as of the end of fiscal 1996,
which resulted in savings of approximately $175,000 and $525,000, respectively,
for the thirteen weeks and thirty-nine weeks ended August 2, 1997. Subsequent to
fiscal 1997, the Company expects that selling, general and administrative
expenses ("SG&A" expenses) will decrease (exclusive of Miss Erika) due to
certain cost savings measures, including further workforce reductions, which
will be implemented during the fourth quarter of fiscal 1997 and the first
quarter of fiscal 1998.
This Management's Discussion and Analysis contains forward-looking
information about the Company's anticipated operating results, including
following the proposed acquisition of Miss Erika. The Company's ability,
including following the proposed acquisition of Miss Erika, to achieve its
projected results is dependent on many factors which are outside of management's
control. Some of the most significant factors, including following the proposed
acquisition of Miss Erika, would be a further deterioration in retailing
conditions for women's apparel, a further increase in price pressures and other
competitive factors, any of which could result in an unanticipated decrease in
gross profit margins, unanticipated
10
<PAGE> 11
problems arising with Miss Erika's business or the integration of Miss Erika's
business with that of the Company, the unanticipated loss of a major customer,
the unanticipated loss of a major contractor or supplier, and weather conditions
which could impact retail traffic and the Company's ability, including following
the proposed acquisition of Miss Erika, to ship on a timely basis. Accordingly,
there can be no assurance that the Company, including following the proposed
acquisition of Miss Erika, will achieve its anticipated operating results.
Results of Operations
The following table is derived from the Company's Consolidated Statements of
Operations and sets forth, for the periods indicated, selected operating data as
a percentage of net sales:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 77.7 76.8 79.7 79.0
------ ------ ------ ------
Gross profit 22.3 23.2 20.3 21.0
Selling, general and
administrative expenses 18.6 20.1 23.0 20.5
------ ------ ------ ------
Income (loss) from operations 3.7 3.1 (2.7) 0.5
Interest expense 1.2 1.2 1.0 1.1
Interest income (0.1) (0.1) (.1) (0.1)
------ ------ ------ ------
Income (loss) before provision
(benefit) for income taxes 2.6 2.0 (3.6) (0.5)
Provision (benefit) for income taxes 1.1 0.8 (1.6) (0.2)
------ ------ ------ ------
Net income (loss) 1.5% 1.2% (2.0)% (0.3)%
====== ====== ====== ======
</TABLE>
Quarter Ended August 2, 1997 Compared to Quarter Ended August 3, 1996
Net sales were $48.2 million for the third quarter of fiscal 1997
compared to $48.3 million for the third quarter of fiscal 1996. Net sales in the
Norton McNaughton product line increased $1.9 million due to a reduction in
sales allowances and net sales in the Norton Studio product line increased $1.0
million. These increases were offset by a decrease in net sales in the Modiano
product line of $2.2 million and a decrease in the Pant-her product line of $1.1
million.
The gross profit margin was 22.3% for the third quarter of fiscal
1997, as compared to 23.2% for the third quarter of fiscal 1996. The decrease
resulted primarily from a planned decrease in the selling prices of goods in an
effort to avoid the later sale of merchandise at break-even or below cost and to
reduce future sales allowances.
SG&A expenses were $9.0 million in the third quarter of fiscal 1997,
or 18.6% of net sales, as compared to $9.7 million in the third quarter of
fiscal 1996, or 20.1% of net sales. The decrease resulted primarily from the
allocation of certain personnel costs to capital projects related to the
implementation of certain MIS systems, the elimination of the Company's in-store
specialist program and the elimination of certain consulting agreements.
Operating income increased from $1.5 million in the third quarter of
fiscal 1996 to $1.8 million in the third quarter of fiscal 1997. The increase
resulted primarily from a decrease in SG&A expenses in the third quarter of
fiscal 1997 offset by a decrease in gross profit in the third quarter of fiscal
1997.
Interest expense remained constant at approximately $600,000 for both
the third quarter of fiscal 1997 and the third quarter of fiscal 1996.
11
<PAGE> 12
Thirty-Nine Weeks Ended August 2, 1997 Compared to the Thirty-Nine Weeks Ended
August 3, 1996
Net sales decreased by 3.6% to $142.7 million in first nine months of
fiscal 1997 from $148.1 million in the first nine months of fiscal 1996. The
decrease of $5.4 million was primarily attributable to a decrease in net sales
of $5.0 million, or 38.5%, in the Modiano product line due to a decision not to
continue business with certain customers, a decrease in net sales of $3.4
million resulting from the discontinuation of the Kate McNaughton suit division
in May 1996 and a decrease in net sales of $2.4 million, or 2.4%, in the Norton
McNaughton product lines. These decreases were offset in part by an increase in
net sales of $5.8 million, or 93.8%, in the Norton Studio product line and an
increase of $1.4 million, or 34%, in the D.P.S. product line.
The gross profit margin was 20.3% for the first nine months of fiscal
1997 as compared to 21.0% for the first nine months of fiscal 1996. The decrease
resulted primarily from a planned decrease in the selling prices of goods in an
effort avoid the later sale of merchandise at break-even or below cost and to
reduce future sales allowances.
SG&A expenses were $32.9 million in the first nine months of fiscal
1997, or 23.0% of net sales, as compared to $30.4 million in the first nine
months of fiscal 1996, or 20.5% of net sales. SG&A expenses for the first nine
months of fiscal 1997 includes a special charge 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 anticipated closing of the Company's retail stores. Excluding the
special charge of $5.7 million, SG&A expenses for the first nine months of
fiscal 1997 would have been $27.2 million, or 19.1% of net sales. The decrease
of $3.2 million, excluding the special charge, resulted primarily from the
implementation of certain cost saving measures at the end of the third and
fourth quarters of fiscal 1996. These included a significant reduction in the
Company's workforce due to a further centralization of its production functions
and the elimination of its in-store specialist program. The decrease was also
attributable to the allocation of certain personnel costs to capital projects
related to the implementation of certain MIS systems and a decrease in variable
distribution and freight expenses resulting from a decrease in the volume of
products shipped in the first nine months of fiscal 1997.
Operating loss for the first nine months of fiscal 1997 was $3.9
million as compared to operating income for the first nine months of fiscal 1996
of $700,000. Excluding the special charge of $5.7 million, the Company would
have had operating income of $1.8 million. The increase in operating income
excluding the special charge resulted from the reduction in SG&A expenses in the
first nine months of fiscal 1997, which was offset in part by lower sales volume
and lower gross profit margin in the first nine months of fiscal 1997.
Interest expense decreased to $1.3 million in the first nine months of
fiscal 1997 from $1.6 million in the first nine months of fiscal 1996. The
decrease of $300,000 was primarily attributable to the lower inventories being
carried by the Company resulting from the Company's decision to increase its
production of goods overseas. This has required outlays for inventory to be
outstanding for shorter periods of time. The Company anticipates that it will
continue to produce more of its garments overseas. For the fiscal year ended
November 2, 1996, the Company produced approximately 57% of its garments
overseas. The Company anticipates that approximately 60% to 70% of its products
will be manufactured outside the United States in fiscal 1997.
Liquidity and Capital Resources
The Company has received a commitment letter from two financial
institutions to provide a $140.0 million secured term loan and revolving credit
facility. The proceeds will be used to finance the acquisition of Miss Erika and
the future working capital requirements of both the Company and Miss Erika.
Pursuant to the new financing arrangement, the Company will continue to factor
its accounts receivable as well as the accounts receivable of Miss Erika.
However, the Company will no longer borrow under its existing factoring
agreement. The closing of the aforementioned credit facility is subject to the
execution of definitive documentation and other customary closing conditions.
The Company's liquidity requirements arise from the funding of the
Company's working capital needs, primarily inventory and accounts receivable.
The Company's primary sources of working capital are cash flow from operations
and, prior to the closing of the new credit facility described above, advances
under the Company's factoring agreement for its trade accounts receivable (the
"Factoring Agreement"). The Company's borrowing requirements for working capital
purposes are seasonal, with peak working capital needs generally arising at the
end of the third fiscal quarter and extending through the fourth fiscal quarter.
The Company had working capital of $36.1 million at August 2, 1997 as compared
to $40.1 million at November 2, 1996. The decrease resulted primarily from the
net loss for the first nine months of fiscal 1997 and the Company's expenditure
of $1.5 million in connection with the open market purchases of its Common Stock
under its stock repurchase program.
12
<PAGE> 13
The Company's Factoring Agreement provides for the sale of its trade
accounts receivable, generally without recourse, up to a maximum established by
the factor for each customer. The Company may 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. From time to
time, the Company borrows additional amounts from the factor in excess of those
set forth in the preceding sentence. No such additional amounts were outstanding
at August 2, 1997. Interest on factor advances is payable monthly at 0.75% below
the NationsBank of Georgia, N.A. prime rate (the "Nations Prime Rate") for
amounts advanced which are less than the purchase price of eligible accounts
receivable, and 1.25% above the Nations Prime Rate for amounts advanced in
excess of the purchase price of eligible accounts receivable. At August 2, 1997,
outstanding advances under the Factoring Agreement were approximately $30.4
million and outstanding advances under the $10.0 million additional advance
facility were approximately $6.1 million. Letters of credit outstanding amounted
to approximately $15.7 million at August 2, 1997.
The Company anticipates that it will incur an additional $300,000 to
$500,000 of capital expenditures in connection with the upgrade of its
management information systems in the remainder of fiscal 1997. The Company
expects to finance these capital expenditures from internally generated funds
and, prior to the closing of the new credit facility described above, advances
under the Factoring Agreement.
As previously announced, the Company's Board of Directors has
authorized a stock repurchase program, under which the Company may repurchase up
to $7.5 million of the Company's Common Stock. The Company expects that the
shares may be purchased from time to time in the open market and in block
transactions. In the third quarter of fiscal 1997, the Company purchased 25,000
shares at an aggregate cost of $131,250. As of the end of the third quarter of
fiscal 1997, the Company had purchased a total of 651,000 shares at an aggregate
cost of $5,534,950.
Management believes that cash generated from operations and advances
under its Factoring Agreement (and following the closing of its new credit
facility, advances thereunder) will provide sufficient cash resources to finance
the Company's working capital and capital expenditure requirements for the
current and next fiscal year.
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. 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.
Fall season merchandise is generally shipped between August and October, and
spring season merchandise is generally shipped between February and April.
13
<PAGE> 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 3 Certificate of Incorporation of ME Acquisition Corp.
Exhibit 27 Financial Data Schedule (For SEC use only).
b) There was one Current Report on Form 8-K filed by the registrant
during the thirteen weeks ended August 2, 1997 under Item 5, "Other
Events." There was one Current Report on Form 8-K filed by the
registrant subsequent to the thirteen weeks ended August 2, 1997 under
Item 5, "Other Events."
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTON MCNAUGHTON, INC.
(Registrant)
Date: Sept. 16, 1997 By /s/Sanford Greenberg
SANFORD GREENBERG
Chairman of the Board and
Chief Executive Officer
(Principal Executive and
Operating Officer)
Date: Sept. 16, 1997 By /s/Amanda J. Bokman
AMANDA J. BOKMAN
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
15
<PAGE> 16
EXHIBIT INDEX
Exhibit 3 Certificate of Incorporation of ME Acquisition Corp.
Exhibit 27 Financial Data Schedule (For SEC use only).
<PAGE> 1
EXHIBIT 3
CERTIFICATE OF INCORPORATION
OF
ME ACQUISITION CORP.
THE UNDERSIGNED, for the purpose of forming a corporation pursuant to the
provisions of the General Corporation Law of the State of Delaware (the "General
Corporation Law"), does hereby certify pursuant to Section 103(a)(1) of the
General Corporation Law as follows:
FIRST: The name of the corporation is "ME Acquisition Corp." (the
"Corporation").
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, Wilmington, Delaware 19805, which address is
located in the County of New Castle, and the name of the Corporation's
registered agent at such address is The Prentice-Hall Corporation System, Inc.
THIRD: The purpose for which the Corporation is organized is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law.
FOURTH: The total number of shares of capital stock which the Corporation shall
have authority to issue is 1,000 shares of common stock, par value $.01 per
share.
FIFTH: Subject to the provisions of the General Corporation Law, the number of
Directors of the Corporation shall be determined as provided in the By-Laws of
the Corporation.
SIXTH: To the fullest extent permitted by Section 145 of the General Corporation
Law, or any comparable successor law, as the same may be amended and
supplemented from time to time, the Corporation (i) may indemnify any persons
whom it shall have power to indemnify thereunder from and against any and all of
the expenses, liabilities or other matters referred to in or covered thereby,
(ii) shall indemnify each such person if he or she is or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
by reason of the fact that he or she is or was a director, officer, employee or
agent of the Corporation or because he or she was serving the Corporation or any
other legal entity in any capacity at the request of the Corporation while a
director, officer, employee or agent of the Corporation and (iii) shall pay the
expenses of such a current or former director, officer, employee or agent
incurred in connection with any such action, suit or proceeding in advance of
the final disposition of such action, suit or proceeding. The indemnification
and advancement of expenses provided for herein shall not be deemed exclusive of
any other rights to which those entitled to indemnification or advancement of
expenses may be entitled under any by-law, agreement, contract or vote of
stockholders or disinterested directors or pursuant to the direction (however
embodied) of any court of competent jurisdiction or otherwise, both as to action
in his or her official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
SEVENTH: In furtherance and not in limitation of the general powers conferred by
the laws of the State of Delaware, the Board of Directors of the Corporation is
expressly authorized to make, alter or repeal the By-Laws of the Corporation,
except as specifically stated therein.
EIGHTH: Whenever a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under the provisions of
Section 291 of the General Corporation Law or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of Section 279 of the General Corporation Law, order a meeting of
the creditors or
<PAGE> 2
class of creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders, of the Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of the Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of the Corporation, as the case
may be, and also on the Corporation.
NINTH: Except as otherwise required by the laws of the State of Delaware, the
stockholders and directors shall have the power to hold their meetings and to
keep the books, documents and papers of the Corporation outside of the State of
Delaware, and the Corporation shall have the power to have one or more offices
within or without the State of Delaware, at such places as may be from time to
time designated by the Corporation. Elections of directors need not be by ballot
unless the By-Laws of the Corporation shall so provide.
TENTH: The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ELEVENTH: A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law, or
(iv) for any transaction from which the director derived an improper personal
benefit. If the General Corporation Law is amended to further eliminate or limit
the personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the General Corporation Law, as so amended. Any repeal or modification of this
Article by the stockholders of the Corporation shall be by the affirmative vote
of the holders of not less than eighty percent (80%) of the outstanding shares
of stock of the Corporation entitled to vote in the election of directors,
considered for the purposes of this Article ELEVENTH as one class, shall be
prospective only and shall not adversely affect any right or protection of any
director of the Corporation existing at the time of such repeal or modification.
TWELFTH: The name and address of the incorporator is Shawn A. Bannister, Haythe
& Curley, 237 Park Avenue, New York, New York 10017.
IN WITNESS WHEREOF, the undersigned, being the incorporator hereinabove named,
does hereby execute this Certificate of Incorporation this 25th day of July,
1997.
/s/ Shawn Bannister
- -----------------------------
Shawn A. Bannister
Incorporator
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-Q and is qualified in its entirety be reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-01-1997
<PERIOD-START> NOV-03-1996
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<CASH> 197
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<INVENTORY> 33,088
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0
0
<COMMON> 81
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<INTEREST-EXPENSE> 1,165
<INCOME-PRETAX> (5,023)
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