<PAGE>
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 1, 1998
-----------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------------------
Commission File Number: 0-23440
-------
Norton McNaughton, Inc.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3747173
- ----------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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, 7,414,429 shares as of September 14, 1998.
<PAGE>
INDEX TO FORM 10-Q
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1.
Financial Statements:
Consolidated Balance Sheets at August 1, 1998 (Unaudited)
and November 1, 1997 3
Consolidated Statements of Operations for the thirteen and
thirty-nine weeks ended August 1, 1998 and August 2, 1997
(Unaudited) 4
Consolidated Statements of Stockholders' Equity for the
thirty-nine weeks ended August 1, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the thirty-nine weeks
ended August 1, 1998 and August 2, 1997 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-12
ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-18
ITEM 3.
Quantitative and Qualitative Disclosures About Market
Risk--not applicable
PART II. OTHER INFORMATION 19
ITEM 1.
Legal Proceedings
ITEM 6.
Exhibits and Reports on Form 8-K
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
August 1, November 1,
1998 1997
(Unaudited) (Note)
----------- -----------
</CAPTION>
<S> <C> <C>
ASSETS
Current assets:
Cash $ 447 $ 529
Due from factor 68,375 64,644
Inventory 63,340 28,590
Income taxes receivable 2,213 3,201
Prepaid expenses and other current assets 6,694 5,227
---------- ----------
Total current assets 141,069 102,191
Fixed assets, net of accumulated depreciation of $3,300 and
$2,316, respectively 7,928 5,899
Notes receivable from management stockholders 2,471 2,655
Goodwill 43,908 3,853
Deferred financing costs 6,281 2,481
Other assets 1,843 1,683
--------- --------
Total assets $203,500 $118,762
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,950 $ 10,420
Revolving credit loans 15,894 44,473
Term loan payable _ 3,000
Accrued expenses and other current liabilities 8,972 4,986
--------- --------
Total current liabilities 34,816 62,879
12-1/2% Senior Notes due 2005 125,000 -
Term loan payable - 12,000
Other long-term liabilities 1,735 1,720
--------- --------
Total liabilities 161,551 76,599
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, authorized 20,000,000 shares, 8,065,429
and 8,060,640 shares issued, respectively, and 7,414,429 and 7,409,640
shares outstanding, respectively 81 81
Capital in excess of par 23,923 23,903
Retained earnings 23,480 23,714
Treasury stock, at cost, 651,000 shares (5,535) (5,535)
--------- --------
Total stockholders' equity 41,949 42,163
--------- --------
Total liabilities and stockholders' equity $203,500 $118,762
========= ========
</TABLE>
Note: The balance sheet at November 1, 1997 has been derived from the audited
financial statements as of that date.
See accompanying notes.
3
<PAGE>
Norton McNaughton, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------------- ---------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
--------- --------- --------- ---------
(In Thousands, Except Per Share Amounts)
</CAPTION>
<S> <C> <C> <C> <C>
Net sales $ 79,967 $ 48,240 $ 227,591 $ 142,708
Cost of goods sold 60,764 37,463 178,955 113,672
-------- -------- --------- --------
Gross profit 19,203 10,777 48,636 29,036
Selling, general and administrative expenses 13,730 8,769 37,693 32,179
Depreciation and amortization 633 238 1,384 715
-------- -------- --------- --------
Income (loss) from operations 4,840 1,770 9,559 (3,858)
Other expense (income):
Interest expense 3,237 575 7,052 1,292
Interest income (44) (43) (126) (127)
-------- -------- --------- --------
Income (loss) before provision (benefit) for
income taxes and extraordinary item 1,647 1,238 2,633 (5,023)
Provision (benefit) for income taxes 1,191 526 1,706 (2,227)
Income (loss) before extraordinary item 456 712 927 (2,796)
Extraordinary item, net of tax (1,161) _ (1,161) _
-------- -------- --------- --------
Net income (loss) $ (705) $ 712 $ (234) $ (2,796)
======== ======== ========= ========
BASIC EARNINGS PER SHARE:
Income (loss) before extraordinary item $ 0.06 $ 0.10 $ 0.13 $ (0.37)
Extraordinary item, net of tax (0.16) _ (0.16) _
-------- -------- --------- --------
Net income (loss) $ (0.10) $ 0.10 $ (0.03) (0.37)
======== ======== ========= ========
Weighted average number of commons shares 7,413 7,414 7,412 7,520
======== ======== ========= ========
DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item $ 0.06 $ 0.10 $ 0.13 $ (0.37)
Extraordinary item, net of tax (0.15) _ (0.16) _
-------- -------- --------- --------
Net income (loss) $ (0.09) $ 0.10 $ (0.03) $ (0.37)
======== ======== ========= ========
Weighted average number of common shares assuming
dilution 7,536 7,414 7,458 7,520
======== ======== ========= ========
</TABLE>
See accompanying notes.
4
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THIRTY-NINE WEEKS ENDED AUGUST 1, 1998
(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 1, 1997 8,061 $ 81 $23,903 $23,714 $(5,535) $42,163
Net loss for the thirty-nine
weeks ended August 1,
1998 - - - (234) - (234)
Issuance of 4,789 shares of
common stock through the
employee stock purchase
plan 4 - 20 - - 20
------- ------ ------- ------- ------- -------
Balance at August 1, 1998 8,065 $ 81 $23,923 $23,480 $(5,535) $41,949
======= ====== ======= ======= ======= =======
</TABLE>
See accompanying notes.
5
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------
August 1, August 2,
1998 1997
---------- ------------
(In Thousands)
<S> <C> <C>
Net Loss $ (234) $ (2,796)
Adjustments to reconcile net loss to net
cash (used for) operating activities:
Depreciation and amortization of fixed assets 984 689
Amortization of intangibles 1,130 26
Write-off of leasehold improvements - 492
Write-off of deferred financing costs 1,161
Changes in operating assets and liabilities:
Due from factor, net 7,952 16,849
Inventory (15,965) (15,149)
Refundable income taxes 988 -
Prepaid expenses and other current assets (1,156)
Other assets (120) 272
Accounts payable (4,995) 1,462
Accrued expenses and other current liabilities 930 477
Other long-term liabilities 15 165
---------- ------------
Net cash used for operating activities (9,310) (2,654)
---------- ------------
INVESTING ACTIVITIES
Repayment of notes receivable from management
stockholders 184 -
Purchase of net assets of Jeri-Jo, net of cash
acquired of $1,312 (54,145) -
Purchase of fixed assets (1,666) (1,374)
---------- ------------
Net cash used for investing activities (55,627) (1,374)
---------- ------------
FINANCING ACTIVITIES
Net repayments under revolving credit agreement (28,579) -
Payments on term loan (15,000) -
Proceeds from issuance of common stock 20 39
Deferred financing costs (5,686) -
Repayment of acquired company's debt (10,900) -
Issuance of 12 1/2% Senior Notes due 2005 125,000 -
Net advances under factoring agreement - 5,310
Purchase of treasury stock - (1,457)
---------- ------------
Net cash provided by financing activities 64,855 3,892
---------- ------------
Decrease in cash (82) (136)
Cash at beginning of period 529 333
---------- ------------
Cash at end of period $ 447 $ 197
========== ============
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 150 $ 361
Interest paid $ 4,471 $ 1,282
</TABLE>
See accompanying notes.
6
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Norton
McNaughton, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with 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 1, 1998 and the results of operations for the thirteen weeks and
thirty-nine weeks ended August 1, 1998 and August 2, 1997 and cash flows for the
thirty-nine weeks ended August 1, 1998 and August 2, 1997 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 and thirty-nine weeks ended August 1, 1998
are not necessarily indicative of the results that may be expected for the
fiscal year ending October 31, 1998.
The consolidated financial statements include the accounts of Norton
McNaughton, Inc. and its wholly-owned subsidiaries. All material balances and
transactions have been eliminated in consolidation. Data for the thirteen and
thirty-nine weeks ended August 1, 1998 includes Jeri-Jo Knitwear, Inc. ("Jeri-
Jo"), from its date of acquisition on June 18, 1998.
The Company operates on a 52-53 week accounting period. The Company's
fiscal year ends on October 31, if such date falls on a Saturday, or the first
Saturday following October 31.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
DEFERRED FINANCING COSTS
Deferred financing costs were incurred in fiscal 1997 in connection with
the Company's credit facility. Such financing costs were amortized on a
straight line basis over the three-year term of the related credit facility.
The balance of such costs were written off when the facility was repaid. See
Note 6.
Deferred financing costs were incurred in fiscal 1998 in connection with
obtaining the Company's current revolving credit agreement and the Company's
issuance of 12 1/2% Senior Notes due 2005 (the "Senior Notes"). Such deferred
financing costs are being amortized on a straight-line basis over the three-year
term of the current financing agreement and over the seven-year term of the
Senior Notes.
GOODWILL
Goodwill resulting from the acquisition of Miss Erika and Jeri-Jo is being
amortized by the straight-line method over twenty years.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which
requires adoption for both interim and annual financial statements for periods
ending after December 15, 1997. In the first quarter of fiscal 1998, the
Company changed the method previously used to compute earnings per share and has
restated all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options is excluded.
7
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (CONTINUED)
Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the period presented. Diluted earnings per
share is computed based on the weighted average number of common shares
outstanding during the period and the effect of dilutive options outstanding
during the period using the treasury stock method. For the thirteen and thirty-
nine weeks ended August 1, 1998, the dilutive effect of options outstanding
during the period using the treasury stock method was approximately 123,000
shares and approximately 47,000 shares, respectively. For the thirteen weeks
ended August 2, 1997, there was no dilutive effect of options outstanding during
the period using the treasury stock method. For the thirty-nine weeks ended
August 2, 1997, options outstanding during the period using the treasury stock
method were excluded from the net loss per share computation of dilutive
earnings per share because they were antidilutive.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash and cash equivalents
include all liquid debt instruments with a maturity of three months or less when
purchased.
ACCOUNTING FOR STOCK OPTIONS
The Company has elected to follow Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB No. 25,
because the exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
SFAS NO. 130, "REPORTING COMPREHENSIVE INCOME" AND SFAS NO. 131, "DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
The Financial Accounting Standards Board issued SFAS No. 130, which
requires reclassification of financial statements for earlier periods provided
for comparative purposes, and is effective for fiscal years beginning after
December 15, 1997. The Company believes that the effect of adopting the new
standard will be immaterial.
The Financial Accounting Standards Board issued SFAS No. 131, which is
effective for fiscal years beginning after December 15, 1997. This statement
changes the way that companies report information about operating segments in
financial statements. The Company has not yet determined the impact of SFAS No.
131 on disclosures in its financial statements.
2. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out basis) or market.
Inventories consist of the following:
August 1, November 1,
1998 1997
(Audited)
-------------- --------------
(In Thousands)
Raw materials $ 4,264 $ 2,979
Work in process 5,412 2,258
Finished goods 53,664 23,353
------ ------
$63,340 $28,590
======= =======
8
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. STOCK REPURCHASE
The Company's Board of Directors has authorized a stock repurchase program,
under which the Company may repurchase up to $7.5 million of the Company's
Common Stock. The Company expects that the shares may be purchased from time to
time in the open market and in block transactions. As of August 1, 1998, the
Company has purchased a total of 651,000 shares at an aggregate cost of
approximately $5.5 million. The Company's financing agreement and indenture
governing the Senior Notes (the "Indenture") limit the amounts which may be
expended on stock purchases.
4. NOTES RECEIVABLE FROM MANAGEMENT STOCKHOLDERS
In 1993, the Company loaned certain management stockholders $3,000,000 in
the aggregate. Each loan is evidenced by a limited recourse promissory note
with interest accruing at 5.84% per annum. The Company's recourse on the
promissory notes is limited to the management stockholders' pledges of a portion
of the Company's common stock, $0.01 par value ("Common Stock").
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 1998, all
necessary payments have been made under the terms of the loans by the management
stockholders.
As of August 1, 1998, the fair market value of the Company's Common Stock
pledged by the management stockholders as security for the loans was $5,712,504,
and the aggregate principal balance of all loans to management stockholders was
$2,470,862. The loan balance set forth above reflects the required principal
payments of $529,138 resulting from sales of Common Stock by management
stockholders.
5. ACQUISITIONS
Miss Erika
- ----------
On September 30, 1997, a wholly owned subsidiary of the Company completed
the acquisition of substantially all the assets and the assumption of
substantially all the liabilities of Miss Erika, Inc. ("Miss Erika"), a
privately-held manufacturer of women's moderately priced apparel. The purchase
price of Miss Erika consisted of $24.0 million in cash paid at the closing, the
assumption of $2.5 million of indebtedness and certain other contractual
obligations. In addition, the Company has agreed to pay an additional
contingent payment in cash and/or Common Stock in the event that certain
earnings targets are achieved by Miss Erika for the two fiscal years ending
November 6, 1999. The aggregate contingent payment, if any, payable by the
Company is equal to the amount by which four times the average of Miss Erika's
earnings before income taxes, depreciation and amortization, as defined in the
Miss Erika purchase agreement ("Miss Erika EBITDA"), for the two fiscal years
ending November 6, 1999, exceeds $24.0 million. Any additional consideration
paid for Miss Erika will be accounted for as additional purchase price and will
be reflected in goodwill. At the Company's discretion, the Company may, subject
to a maximum number of shares, pay all or any portion of the contingent payment
in shares of Common Stock. The Miss Erika purchase agreement limits the number
of shares of Common Stock payable by the Company to a number of shares which,
after giving effect to their issuance, does not exceed 12% of the aggregate
number of outstanding shares of Common Stock at the time of payment. The
Company intends to pay the cash portion, if any, of the contingent consideration
from internally generated funds and borrowings under the Company's revolving
credit facility. The Company cannot predict whether Miss Erika will achieve the
necessary Miss Erika EBITDA targets to qualify for additional consideration.
Jeri-Jo
- -------
On June 18, 1998, a wholly owned subsidiary of the Company completed the
acquisition of Jeri-Jo Knitwear Inc. and Jamie Scott, Inc. (collectively "Jeri-
Jo"), acquiring substantially all the assets and assuming substantially all the
liabilities of the privately-held apparel importers of moderately-priced
juniors' and misses' updated sportswear. The purchase price paid in the Jeri-Jo
acquisition was (i) $55.0 million in cash at the closing of the acquisition,
(ii) the assumption of indebtedness of $10.9 million and certain other
contractual obligations. In addition, the Company agreed to pay an additional
contingent payment in cash and its Common Stock in the event that certain
earnings targets are achieved by Jeri-Jo for the two years subsequent to the
closing of the Jeri-Jo acquisition. The Jeri-Jo purchase agreement requires that
the Company pay at least 50% of the required contingent payment in cash. The
aggregate contingent payment, if any, payable by the Company is equal to the
excess of (1) the sum of (A) five times Jeri-Jo's
9
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. ACQUISITIONS (CONTINUED)
average earnings before income taxes, depreciation and amortization, as defined
in the Jeri-Jo purchase agreement ("Jeri-Jo EBITDA"), for the two years ending
June 30, 2000, plus (B) 0.50 times any such average Jeri-Jo EBITDA between
$17.0 million and $20.0 million, plus (C) one times any such average Jeri-Jo
EBITDA over $20.0 million, over (2) $55.0 million. Any additional consideration
paid for Jeri-Jo will be accounted for as additional purchase price and will be
reflected in goodwill. The Company intends to pay the cash portion of the
contingent consideration from internally generated funds and borrowings under
the Company's revolving credit facility. The Company cannot predict whether
Jeri-Jo will achieve the necessary Jeri-Jo EBITDA targets to qualify for
additional consideration.
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 pro forma
unaudited consolidated results of operations for the thirty-nine weeks ended
August 2, 1998 and 1997, assuming consummation of the acquisitions and related
financings at the beginning of the respective periods are as follows:
<TABLE>
<CAPTION>
Thirty-Nine Weeks Thirty-Nine Weeks
Ended August 1, 1998 Ended August 2, 1997
------------------------------------- ---------------------------------------
As reported Pro forma As reported Pro forma
------------------ --------------- ----------------- -----------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 227,591 $ 277,826 $ 142,708 $ 284,444
Income (loss) from operations $ 9,559 $ 17,309 $ (3,858) $ 10,725
Net income (loss) $ (234) $ 199 $ (2,796) $ (1,577)
Net income (loss) per share:
Basic $ (0.03) $ 0.03 $ (0.37) $ (0.21)
Diluted $ (0.03) $ 0.03 $ (0.37) $ (0.21)
</TABLE>
The pro forma adjustments are based upon available information and
assumptions that management believes are reasonable at the time made. The
unaudited pro forma financial information does not purport to present the
results of operations of the Company had the acquisitions of Miss Erika and
Jeri-Jo occurred on the date specified, nor is it necessarily indicative of the
financial position or results of operations that may be achieved in the future.
The unaudited pro forma financial information does not reflect any adjustments
for synergies that management expects to realize. No assurances can be made as
to the amount of cost savings or revenue enhancements, if any, that may be
realized.
6. FINANCING ARRANGEMENTS AND EXTRAORDINARY ITEM
In connection with the Miss Erika acquisition, the Company entered into a
$140 million secured term loan and revolving credit facility with NationsBanc
Commercial Corporation and The CIT Group/Commercial Services, Inc.
(collectively, the "Prior Credit Agreement"). The proceeds were used to finance
the acquisition and for ongoing working capital requirements of the Company and
its subsidiaries. Pursuant to the financing arrangement, the Company continued
to factor its accounts receivable, as well as the accounts receivable of Miss
Erika.
Concurrent with the closing of the Jeri-Jo acquisition on June 18, 1998,
the Company entered into a $175 million secured revolving credit and letter of
credit facility with NationsBanc Commercial Corporation, The CIT
Group/Commercial Services, Inc. and Fleet Bank N.A. (the "Current Credit
Agreement"). The facility will be 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. Initially,
the interest rate under the Current Credit Agreement is 75 basis points below
the prime rate (based upon the current prime rate, the interest rate under the
Current Credit Agreement is 7.75% per annum). Available credit under the Current
Credit Agreement is as follows: revolving credit advances not to exceed $60.0
million, documentary letters of credit not to exceed $130.0 million and stand-
by letters of credit not to exceed $45.0 million (including $30.0 million of
stand-by letters of credit necessary to secure the Company's cash contingent
payment obligation in connection with the Jeri-Jo acquisition), with the
aggregate credit available to the Company equal to the lesser of (i) $175.0
million or (ii) the sum of 85% of eligible accounts receivable and 60% of
eligible inventory. The Current Credit Agreement contains a number of
restrictive covenants, including covenants which limit incurrence of liens and
indebtedness, limit transactions with affiliates, acquisitions, sales of assets,
investments and other restricted
10
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. FINANCING ARRANGEMENTS AND EXTRAORDINARY ITEM (CONTINUED)
payments, and require that the Company maintain certain fixed charge coverage,
cash flow coverage and leverage ratios and meet specified minimum levels of
working capital and net worth. The Company and its subsidiaries have granted a
lien on substantially all of their respective assets to secure the obligations
under the Current Credit Agreement.
On June 18, 1998, the Company also closed the private placement of $125.0
million of Senior Notes. The proceeds of the private placement were used to
finance the Jeri-Jo acquisition and to refinance then existing indebtedness of
the Company and Jeri-Jo. The Company is conducting an exchange offer of Senior
Notes registered under the Securities Act of 1933, as amended, pursuant to a
registration statement declared effective on August 21, 1998. The exchange
offer will remain open until September 22, 1998 unless extended by the Company.
The Company's obligations under the Senior Notes are unsecured and are
guaranteed by all of the Company's subsidiaries. The Indenture governing the
Senior Notes 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.
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.
7. INCOME TAX PROVISION
The provision for income taxes includes additional provisions of $500,000
and $600,000 for the third quarter of fiscal 1998 and the first nine months of
fiscal 1998, respectively, in connection with the estimated effects of a
resolution of Federal income tax audits covering fiscal 1991 through fiscal
1995, and the corresponding effect on state and local taxes in those fiscal
years.
8. 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 Common Stock held. Each right entitles the holder to purchase
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.
9. LEGAL PROCEEDINGS
In April 1998, in response to notice by Norton McNaughton of Squire, Inc.
("Norton") of its intention not to renew its agreements with its distribution
and cutting contractors, Norton received a letter from the contractors' attorney
alleging that Norton had breached its agreements and, as a result, alleging that
such contractors, had incurred substantial damages. Norton does not believe
that it has breached any of its agreements with these contractors, believes that
it has meritorious defenses to any claim, and will vigorously defend any
proceeding. Subsequent to the receipt of the above-mentioned letter, in
preliminary discussions between attorneys for the contractors and Norton, the
contractors offered to sell the contractors' operations to Norton. Consistent
with Norton's business strategy of relocating its distribution function to the
southeastern United States, Norton has declined the offer to purchase the
distribution and cutting activities of these contractors.
11
<PAGE>
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. LEGAL PROCEEDINGS (CONTINUED)
On July 15, 1998, the distribution and cutting contractors filed an action
entitled Cutting Edge Services, Inc. and Railroad Enterprises, Inc. v. Miss
------------------------------------------------------------------
Erika, Inc., Jeri-Jo Knitwear, Inc. and Jamie Scott, Inc. in the New York State
- ---------------------------------------------------------
Supreme Court, New York County, for breach of contract for failure to use their
services. That action seeks substantial damages and related declaratory relief.
Miss Erika and Jeri-Jo believe the claims are meritless and intend to defend
this action vigorously. There can be no assurance that Miss Erika and Jeri-Jo
will be successful in defending this action, or that any determination rendered
would not have a material adverse effect on the business, financial condition
and results of operations of the Company.
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without material adverse effect on the
Company's financial position, results of operations and cash flow.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Recent Events
- -------------
On June 18, 1998, a wholly owned subsidiary of the Company completed the
acquisition of substantially all of the assets of Jeri-Jo and assumed
substantially all the liabilities of the privately-held apparel importers of
moderately-priced juniors' and misses' updated sportswear. The purchase price
paid in the Jeri-Jo acquisition was (i) $55.0 million in cash at the closing of
the acquisition, (ii) the assumption of funded indebtedness of $10.9 million and
certain other contractual obligations. In addition, the Company agreed to pay an
additional contingent payment in cash and Common Stock in the event that certain
earnings targets are achieved by Jeri-Jo for the two years subsequent to the
closing of the Jeri-Jo acquisition. The Jeri-Jo purchase agreement requires that
the Company pay at least 50% of the required contingent payment in cash. The
aggregate contingent payment, if any, payable by the Company is equal to the
excess of (1) the sum of (A) five times average Jeri-Jo EBITDA for the two years
ending June 30, 2000, plus (B) 0.50 times any such average Jeri-Jo EBITDA
between $17.0 million and $20.0 million, plus (C) one times any such average
Jeri-Jo EBITDA over $20.0 million, over (2) $55.0 million. Any additional
consideration paid for Jeri-Jo will be accounted for as additional purchase
price and will be reflected in goodwill. The Company intends to pay the cash
portion of the contingent consideration from internally generated funds and
borrowings under the Current Credit Agreement. The Company cannot predict
whether Jeri-Jo will achieve the necessary Jeri-Jo EBITDA targets to qualify for
additional consideration.
Concurrent with the closing of the Jeri-Jo acquisition, the Company entered
into the Current Credit Agreement, which provides for a $175.0 million secured
revolving credit and letter of credit facility with NationsBanc Commercial
Corporation, The CIT Group/Commercial Services, Inc. and Fleet Bank N.A. The
facility will be 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. Initially, the
interest rate under the Current Credit Agreement is 75 basis points below the
prime rate (based upon the current prime rate, the interest rate under the
Current Credit Agreement is 7.75% per annum). Available credit under the
Current Credit Agreement is as follows: revolving credit advances not to exceed
$60.0 million, documentary letters of credit not to exceed $130.0 million and
stand-by letters of credit not to exceed $45.0 million (including $30.0 million
of stand-by letters of credit necessary to secure the Company's cash contingent
payment obligation in connection with the Jeri-Jo acquisition), with the
aggregate credit available to the Company equal to the lesser of (i) $175.0
million or (ii) the sum of 85% of eligible accounts receivable and 60% of
eligible inventory.
The Current Credit Agreement contains a number of restrictive covenants,
including covenants which limit incurrence of liens and indebtedness, limit
transactions with affiliates, acquisitions, sales of assets, investments and
other restricted payments, and require that the Company maintain certain fixed
charge coverage, cash flow coverage and leverage ratios and meet specified
minimum levels of working capital and net worth.
On June 18, 1998, the Company also closed the private placement of $125
million of Senior Notes. The proceeds of the private placement were used to
finance the Jeri-Jo acquisition and to refinance then existing indebtedness of
the Company and Jeri-Jo. The Company is conducting an exchange offer of Senior
Notes registered under the Securities Act of 1933, as amended, pursuant to a
registration statement declared effective on August 21, 1998. The exchange
offer will remain open until September 22, 1998 unless extended by the Company.
The Company's obligations under the Senior Notes are guaranteed by all of the
Company's subsidiaries.
General
- -------
The Company has recently adopted and implemented a new business strategy to
expand its branded product lines, broaden its customer base and further develop
its global product sourcing capabilities. A key component of this new business
strategy involves the selective acquisition of complimentary businesses and
brands. In connection therewith, the Company completed the Miss Erika
acquisition and the Jeri-Jo acquisition. As a result of the acquisitions, the
following discussion of the Company's historical financial condition and results
of operations is not necessarily indicative of future results.
The Company's continuing focus on improving profitability has also led the
Company to undertake certain initiatives to improve gross profit and gross
profit margins. These include the implementation of certain merchandising
changes, as well as the closure of underperforming divisions.
In the merchandising area, the Company has recently reduced the number of
products (i.e., reduced the number of SKU's) offered in any particular
collection of its Norton McNaughton(R) product line in an effort to minimize the
number of unrelated items unsold by retailers at the end of a selling period and
to reduce any related sales allowances. In addition, by taking advantage of
product sourcing opportunities, the Company has been able to offer higher
quality and more diverse products to retailers at lower price points in an
effort to further enhance sales of the Company's products and to further reduce
sales allowances. As a result of these initiatives, the Company anticipates
that revenue levels in its Norton McNaughton(R) division in fiscal 1998 will
decrease from those in fiscal 1997.
13
<PAGE>
The Company continually monitors the success, in terms of sales,
profitability and customer acceptance, of its product lines. In the event that
one or more of its product lines does not meet the Company's expectations, the
Company will discontinue their production. During the third quarter of fiscal
1997, the Company began selling merchandise under its existing product lines to
Sears, including Norton McNaughton(R) and Norton Studio(R) and, correspondingly,
discontinued the Modiano(R) product line produced for Sears. In addition, in
the first quarter of fiscal 1998, the Company discontinued the Lauren
Alexandra(R) private label product line produced for Federated and the catalog
division and, in the second quarter of fiscal 1998, the Company discontinued the
Pant-her(R) private label product line produced for May Company.
In addition, during the second quarter of fiscal 1997, the Company decided
to close its retail outlet stores due to this division's inability to meet the
Company's profitability targets. The Company utilized these retail outlets to
liquidate excess inventory, including end-of-stock, out-of-season and other
miscellaneous merchandise. Due to the Company's new merchandising strategy, the
Company believes that it will reduce its need to liquidate excess inventory. To
the extent that the Company is required to dispose of excess merchandise in the
future, the Company believes that it can do so on a more cost-effective basis
through off-price retail chains and other retailers.
In fiscal 1997, the aforementioned closed divisions and product lines
contributed approximately $33.4 million to net sales and experienced
approximately breakeven operating results. The Company recorded special charges
in the fourth quarter of fiscal 1997 of approximately $3.7 million in connection
with the closure of these divisions.
The Company implemented several other significant initiatives in fiscal
1997. In the second quarter of fiscal 1997, the Company appointed a new
President and Chief Operating Officer, and the Company's former President and a
consultant terminated their relationship with the Company. In addition, the
Company terminated certain lease obligations, and made the determination to
close its retail outlet stores, as discussed above. In connection with these
changes, the Company recorded special charges of approximately $5.7 million in
the second quarter of fiscal 1997.
During the fourth quarter of fiscal 1997, in an effort to further
streamline operations and in conjunction with the Company's decision to
discontinue the various divisions discussed earlier, the Company reduced its
workforce by approximately 33%. Other cost saving measures that were implemented
included merchandising changes, which will enable the Company to produce fewer
samples, and reductions in executive compensation and ancillary expenses.
As is the norm in the apparel industry, the Company engages in promotional
activity with its customers which affects the Company's sales, gross profit and
gross profit margins. Norton accomplishes this by granting its customers sales
allowances, while Miss Erika and Jeri-Jo sell merchandise at promotional prices.
Accordingly, the Company's sales, gross profit and gross profit margins vary
from quarter to quarter and year to year. In addition, the Company generally
ships its products in accordance with normal apparel industry shipping cycles.
This may result in shipments to customers occurring before or after a particular
fiscal quarter end, thereby affecting both fiscal quarter to quarter comparisons
and quarter to quarter results during a fiscal year. Correspondingly, sales,
gross profit and gross profit margins may be affected by the timing of shipping
cycles or the delivery of finished goods.
The Company contracts for the manufacture of all of its products and
continues to increase the proportion of its products produced overseas.
Contract manufacturing allows the Company to avoid significant capital
expenditures for manufacturing facilities and the fixed costs of maintaining a
large production work force. Foreign contract manufacturing allows it to take
advantage of lower manufacturing costs, thereby allowing it to reduce prices to
its customers. The Company believes that foreign sourcing for moderately-priced
merchandise also allows it to avail itself of a well-equipped and skilled labor
force, thereby allowing it to produce a higher quality, better-valued product
for its customers. The Company offsets the longer lead-time necessary for
foreign sourced fabrics and manufacturing by early and timely attention to
production planning.
This Management's Discussion and Analysis contains forward-looking
information about the Company's anticipated operating results. The Company's
ability to achieve its projected results is dependent on many factors which are
outside of management's control. Some of the most significant factors would be
a further deterioration in retailing conditions for women's apparel, a further
increase in price pressures and other competitive factors, any of which could
result in an unanticipated decrease in gross profit margins, an unanticipated
need to hire additional personnel above the Company's plan, unanticipated
problems arising with Miss Erika's and Jeri-Jo's businesses or the integration
of Miss Erika's and Jeri-Jo's businesses with that of the Company, the
unanticipated loss of a major customer, the unanticipated loss of a major
contractor or supplier, year 2000 issues, particularly with respect to the
Company's vendors and customers, and weather conditions which could impact
retail traffic and the Company's ability to ship on a timely basis.
Accordingly, there can be no assurance that the Company will achieve its
anticipated operating results.
14
<PAGE>
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 1, 1998 August 2, 1997 August 1, 1998 August 2, 1997
------------------ --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 76.0 77.7 78.6 79.7
------------------ --------------- ----------------- -----------------
Gross profit 24.0 22.3 21.4 20.3
Selling, general and administrative
expenses 17.2 18.1 16.6 22.5
Depreciation and amortization 0.8 0.5 0.6 0.5
------------------ --------------- ----------------- -----------------
Income (loss) from operations 6.0 3.7 4.2 (2.7)
Interest expense 4.0 1.2 3.1 1.0
Interest income (0.1) (0.1) (0.1) (0.1)
------------------ --------------- ----------------- -----------------
Income (loss) before provision
(benefit) for income taxes
and extraordinary item 2.1 2.6 1.2 (3.6)
Provision (benefit) for income
taxes 1.5 1.1 0.8 (1.6)
------------------ --------------- ----------------- -----------------
Income (loss) before extraordinary
item 0.6 1.5 0.4 (2.0)
Extraordinary item, net (1.5) - (0.5) -
------------------ --------------- ----------------- -----------------
Net income (loss) (0.9)% 1.5% (0.1)% (2.0)%
================== =============== ================= =================
</TABLE>
Quarter Ended August 1, 1998 Compared to Quarter Ended August 2, 1997
- ---------------------------------------------------------------------
Net sales were $80.0 million for the third quarter of fiscal 1998 compared
to $48.2 million for the third quarter of fiscal 1997. The increase in net sales
of $31.8 million was primarily attributable to the addition of the Erika
product line of $25.7 million, following the acquisition of Miss Erika on
September 30, 1997, the addition of the Jeri-Jo product lines of $16.3 million,
following the acquisition of Jeri-Jo on June 18, 1998, increased net sales in
the Norton Studio product line of $3.9 million and increased net sales in the
D.P.S. product line of $3.2 million. These increases were offset in part by a
decrease in net sales of $9.5 million in the Norton McNaughton product lines,
and decreases in net sales of $7.7 million, in the aggregate, due to the
discontinuation of the Modiano, Lauren Alexandra and Pant-her product lines and
Norton's retail outlet stores.
The gross profit margin was 24.0% for the third quarter of fiscal 1998
compared to 22.3% for the third quarter of fiscal 1997. The increase in gross
profit margin was primarily due to the addition of gross profit from the Jeri-Jo
product lines beginning on June 18, 1998, which experienced higher gross profit
margins than those experienced in the Norton McNaughton product lines in the
third quarter of fiscal 1997.
Selling, general and administrative expenses ("SG&A" expenses) were $13.7
million, or 17.2% of net sales, in the third quarter of fiscal 1998 compared to
$8.8 million, or 18.2% of net sales, in the third quarter of fiscal 1997. The
increase in SG&A expenses of $4.9 million resulted primarily from the
acquisitions of Miss Erika and Jeri-Jo, whose SG&A expenses for the third
quarter of fiscal 1998 were $4.4 million and $1.3 million, respectively. The
increase was offset in part by savings experienced by Norton in the third
quarter of fiscal 1998 due to cost savings measures implemented in fiscal 1997,
including a significant reduction in Norton's workforce and a decrease in
variable distribution and freight expenses due to a decrease in the volume of
products shipped in the third quarter of fiscal 1998 compared to the third
quarter of fiscal 1997.
Interest expense increased to $3.2 million in the third quarter of fiscal
1998 from $575,000 in the third quarter of fiscal 1997. The increase was
primarily attributable to incremental interest expense and amortization of
deferred financing costs associated with debt used to acquire Miss Erika and
Jeri-Jo.
The provision for income taxes includes an additional provision of $500,000
in connection with the estimated effects of the resolution of certain Federal
income tax audits and corresponding impact on state and local taxes.
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 debt on June 18, 1998.
15
<PAGE>
Thirty-Nine Weeks Ended August 1, 1998 Compared to Thirty-Nine Weeks Ended
- --------------------------------------------------------------------------
August 2, 1997
- --------------
Net sales were $227.6 million for the first nine months of fiscal 1998
compared to $142.7 million for the first nine months of fiscal 1997. The
increase in net sales of $84.9 million was primarily attributable to the
addition of the Erika product line of $96.8 million following the acquisition of
Miss Erika on September 30, 1997, the addition of the Jeri-Jo product lines of
$16.3 million following the acquisition of Jeri-Jo on June 18, 1998, increased
net sales in the Norton Studio product line of $9.0 million and increased net
sales in the D.P.S. product line of $5.0 million. These increases were offset
in part by a decrease in net sales of $19.5 million in the Norton McNaughton
product lines, and decreases in net sales of $22.9 million, in the aggregate,
due to the discontinuation of the Modiano, Lauren Alexandra and Pant-her product
lines and Norton's retail outlet stores.
The gross profit margin was 21.4% for the first nine months of fiscal 1998
compared to 20.3% for the first nine months of fiscal 1997. Gross profit margin
for the first nine months of fiscal 1998 was negatively impacted by sales
allowances of approximately $3.3 million granted to certain customers of
discontinued divisions in order to encourage those customers to do business with
Norton's remaining divisions. Had these sales allowances not been granted,
gross profit margin for the first nine months of fiscal 1998 would have been
22.5%. The increase in gross profit margin was primarily due to the addition of
gross profit from the Erika product line, beginning on September 30, 1997 and
the addition of gross profit from Jeri-Jo, beginning on June 18, 1998, both of
which experienced higher gross profit margins than those experienced in the
Norton McNaughton product lines in the first nine months of fiscal 1997.
SG&A expenses were $37.7 million, or 16.6% of net sales, in the first nine
months of fiscal 1998 compared to $32.2 million, or 22.5% of net sales, in the
first nine months of fiscal 1997. SG&A expenses for the first nine months of
fiscal 1997 included special charges of $5.7 million for severance payments
resulting from management changes, the termination of certain lease obligations
and the establishment of reserves for certain contingencies, including the
closing of the Company's retail outlet stores. Excluding these special charges,
SG&A expenses for the first nine months of fiscal 1997 would have been $26.5
million, or 18.5% of net sales. The increase in SG&A expenses of $11.2
million, excluding the special charges, resulted primarily from the acquisition
of Miss Erika and Jeri-Jo, whose SG&A expenses for the first nine months of
fiscal 1998 were $14.0 million and $1.3 million, respectively. The increase was
offset in part by savings experienced by Norton in the first nine months of
fiscal 1998 due to cost saving measures implemented in fiscal 1997, including a
significant reduction in Norton's workforce and a decrease in variable
distribution and freight expenses due to a decrease in the volume of products
shipped in the first nine months of fiscal 1998 compared to the first nine
months of fiscal 1997.
Interest expense increased to $7.1 million in the first nine months of
fiscal 1998 from $1.3 million in the first nine months of fiscal 1997. The
increase was primarily attributable to incremental interest expense and
amortization of deferred financing costs on debt used to acquire Miss Erika and
Jeri-Jo.
The provision for income taxes includes an additional provision of $600,000
in connection with the estimated effects of the resolution of certain Federal
income tax audits and corresponding impact on state and local taxes.
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 debt on June 18, 1998.
Liquidity and Capital Resources
- -------------------------------
The Company is highly leveraged. On August 1, 1998, the Company had
indebtedness totaling approximately $140.9 million, of which $15.9 million
represented revolving credit loans under the Current Credit Agreement, and
obligations under undrawn letters of credit in the aggregate face amount of
approximately $91.1 million. The Company will be permitted to incur substantial
additional indebtedness in the future. At August 1, 1998, the Company had total
additional available credit of $23.8 million under the Current Credit Agreement,
pursuant to the borrowing base formula set forth therein.
The Company's ability to make scheduled payments of principal of, or to pay
the interest, if any, on, or to refinance its indebtedness, or to fund planned
capital expenditures will depend on its future performance, which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. Based upon the current
level of operations, management believes that cash flow from operations and
available cash, together with available borrowings under the Current Credit
Agreement, will be adequate to meet the Company's liquidity needs for the
foreseeable future.
The Company's liquidity requirements arise from the funding of the
Company's working capital needs, primarily inventory and accounts receivable.
The Company's primary sources of working capital are cash flow from operations
and advances under the Current Credit Agreement. The Company's borrowing
requirements for working capital purposes are seasonal, with peak working
capital needs generally arising at the end of the first and third fiscal
quarters and extending through the second and fourth fiscal quarters. The
Company had working capital of $106.3 million at August 1, 1998 as compared to
$39.3 million at November 1, 1997. The increase was caused primarily by the
refinancing of approximately $42.0 million of current revolving credit loans
with long-term debt upon the issuance of the Senior Notes and the addition of
approximately $25.0 million of working capital resulting from the Jeri-Jo
acquisition which was funded with the Senior Notes.
16
<PAGE>
The Company sells its accounts receivable to a factor without
recourse, up to a maximum established by the factor for each customer.
Receivables sold in excess of these limitations are subject to recourse in the
event of nonpayment by the customer. The factor receives a commission for all
purchased accounts receivable which is calculated based on the net amount of
gross sales less sales discounts.
Prior to September 30, 1997, the Company borrowed up to 90% of the net
balance due on eligible accounts receivable, up to $10.0 million of additional
advances and up to $20.0 million in letter of credit financing. Interest on
factor advances was payable monthly at 0.75% below the NationsBank of Georgia,
N.A. prime rate (the "Nations Prime Rate") for amounts advanced which were less
than the purchase price of eligible accounts receivable, and 1.25% above the
Nations Prime Rate for amounts advanced in excess of the purchase price of
eligible accounts receivable.
The Company entered into the Prior Credit Agreement, a $140.0 million
secured term loan and revolving credit facility with The CIT Group/Commercial
Services, Inc. and NationsBanc Commercial Corporation on September 30, 1997 in
connection with the Miss Erika acquisition. The proceeds were used to finance
the Miss Erika acquisition and for ongoing working capital requirements of the
Company and its subsidiaries. Pursuant to this credit arrangement, Norton
continued to factor its accounts receivable, as well as the accounts receivable
of Miss Erika.
On June 18, 1998, the Company entered into the Current Credit
Agreement and prepaid the term loans and repaid the revolving credit loans under
the Prior Credit Agreement. The Current Credit Agreement is a three-year
secured revolving credit and letter of credit facility, with interest on
outstanding borrowings determined, at the Company's option, based on stated
margins below the prime rate or in excess of LIBOR rates. Initially, the
interest rate under the Current Credit Agreement is 75 basis points below the
prime rate (based upon the current prime rate, the interest rate under the
Current Credit Agreement is 7.75% per annum) for the first six months, and
thereafter will be determined by grid pricing based upon certain financial
ratios set forth in the Current Credit Agreement. Available credit under the
Current Credit Agreement is limited to the lesser of (i) $175.0 million or (ii)
the sum of 85% of eligible accounts receivable and 60% of eligible inventory,
with revolving credit advances not to exceed $60.0 million and letters of credit
not to exceed $160.0 million. The Company will continue to factor the accounts
receivable of Norton, Miss Erika and Jeri-Jo pursuant to factoring arrangements.
On June 18, 1998, the Company also closed the private placement of $125.0
million of Senior Notes. The proceeds of the private placement were used to
finance the Jeri-Jo acquisition and to refinance then existing indebtedness of
the Company and Jeri-Jo. The Company is conducting an exchange offer of Senior
Notes registered under the Securities Act of 1933, as amended, pursuant to a
registration statement declared effective on August 21, 1998. The exchange
offer will remain open until September 22, 1998 unless extended by the Company.
The Company's obligations under the Senior Notes are guaranteed by all of the
Company's subsidiaries.
The Current Credit Agreement contains a number of restrictive
covenants, including covenants which limit the incurrence of liens and
indebtedness, limit transactions with affiliates, acquisitions, sales of assets,
investments and other restricted payments, and require that the Company maintain
certain fixed charge coverage, cash flow coverage and leverage ratios and meet
specified minimum levels of working capital and net worth. The Indenture
contains a number of restrictive covenants, including covenants which limit the
incurrence of liens and indebtedness, and restricted payments, as defined
therein.
The Company anticipates that in the remainder of fiscal 1998 it will
incur capital expenditures of approximately $500,000 to $600,000 principally in
connection with the upgrade of its management information systems, which
includes the Company's migration to a new financial reporting system during
fiscal 1998 and the renovation of certain of its facilities. See "The Year 2000
Issue". The Company expects to finance these capital expenditures from
internally generated funds and advances under the Current Credit Agreement.
Additional expenditures will be required to modify portions of the Company's
software so that it will function properly in the year 2000 and will not have a
material impact on the Company's business, operations or its financial
condition. Maintenance or modification costs will be expensed as incurred,
while the costs of new software will be capitalized and amortized over the
software's useful life.
From time to time, the Company may grant stock options to eligible
individuals to purchase Common Stock. The Company believes that the issuance of
options rather than current cash compensation enhances future performance by
employees as well as aligning the employees' interests with those of the
Company's stockholders. The Company has elected to follow Accounting Principles
Board Opinion no. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation ("FASB 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized. The Black-
Scholes option valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Given
that the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. Compensation
17
<PAGE>
expense relating to these grants in fiscal 1997 and fiscal 1996 would have been
approximately $1.3 million and approximately $350,000, respectively, had the
Company adopted the fair value accounting method of expense recognition under
FASB 123.
The Company's Board of Directors has authorized a stock repurchase
program, under which the Company may repurchase up to $7.5 million of the
Company's Common Stock. The Company expects that the shares may be purchased
from time to time in the open market and in block transactions. In fiscal 1996,
the Company purchased 396,000 shares of its stock in the open market at an
aggregate cost of approximately $3.8 million. In fiscal 1997, the Company
purchased 235,000 shares of its stock in the open market at an aggregate cost of
approximately $1.5 million. As of August 1, 1998, the Company has purchased a
total of 651,000 shares at an aggregate cost of approximately $5.5 million. The
Company's ability to repurchase shares of Common Stock is restricted by the
Indenture and the Current Credit Agreement.
The moderate rate of inflation over the past few years has not had a
significant impact on the Company's sales or profitability. Inflation is not
expected to have a significant impact on the Company's business.
Seasonality
- -----------
Historically, the Company has achieved its highest sales in the fourth
quarter and, to a lesser extent, the second quarter of each fiscal year. As a
result of the Miss Erika and Jeri-Jo acquisitions, the Company anticipates that
it will experience its highest sales in the second and fourth quarters equally.
This pattern results primarily from the timing of shipments for each season,
although the timing of shipments can vary from quarter to quarter and season to
season. Spring season merchandise is generally shipped in the Company's second
fiscal quarter between February and April, and fall season merchandise is
generally shipped in the Company's fourth fiscal quarter between August and
October.
The Year 2000 Issue
- -------------------
The nationwide issue which has arisen given the approach of the year
2000 is the result of computer programs being written using two digits rather
than four digits to define the applicable year. Any of the Company's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company has assessed that additional expenditures will be required
to modify certain portions of the Company's existing software so that it will
function properly in the year 2000. Preliminary estimates of the total costs to
be incurred on existing software prior to the year 2000 will not have a material
impact on the Company's business, operations or its financial condition.
However, in connection with the Company's year 2000 compliance program, it
intends to migrate to a new financial reporting system during fiscal 1998 and
fiscal 1999 and expects to incur approximately $600,000, in the aggregate, in
connection therewith.
The Company has initiated communications with all of its significant
suppliers and customers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remedy their own year
2000 issues. The Company's total year 2000 project cost and estimates to
complete include the estimated costs and time associated with the impact of
third party year 2000 issues based on presently available information. However,
there can be no assurance that the systems of other companies on which the
Company's systems rely will be timely converted and would not have a material
adverse effect on the Company's systems.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In April 1998, in response to Norton's notice of an intention not to renew
its agreements with its distribution and cutting contractors, Norton received a
letter from the contractors' attorney alleging that Norton had breached its
agreements and, as a result, alleging that such contractors had incurred
substantial damages. Norton does not believe that it has breached any of its
agreements with these contractors, believes that it has meritorious defenses to
any claim, and will vigorously defend any proceeding. Subsequent to the receipt
of the above-mentioned letter, in preliminary discussions between attorneys for
the contractors and Norton, the contractors offered to sell the contractors'
operations to Norton. Consistent with Norton's business strategy of relocating
its distribution function to the southeastern United States, Norton has declined
the offer to purchase the distribution and cutting activities of these
contractors.
On July 15, 1998, the distribution and cutting contractors filed an action
entitled Cutting Edge Services, Inc. and Railroad Enterprises, Inc. v. Miss
------------------------------------------------------------------
Erika, Inc., Jeri-Jo Knitwear, Inc. and Jamie Scott, Inc. in the New York State
- ---------------------------------------------------------
Supreme Court, New York County, for breach of contract for failure to use their
services. That action seeks substantial damages and related declaratory relief.
Miss Erika and Jeri-Jo believe the claims are meritless and intend to defend
this action vigorously. There can be no assurance that Miss Erika and Jeri-Jo
will be successful in defending this action, or that any determination rendered
would not have a material adverse effect on the business, financial condition
and results of operations of the Company.
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without material adverse effect on the
Company's financial position, results of operations and cash flow.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 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).
Exhibit 3.2 By-Laws of the Company (incorporated herein by reference to
Exhibits to the Registrant's Registration Statement on Form
S-1 No. 33-74200).
Exhibit 10.1 First Amendment, dated as of August 7, 1998 to the Amended
and Restated Credit Agreement, dated as of June 18, 1998 by
and among Norton McNaughton, Inc., a Delaware corporation,
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 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
NA, as documentation agent for the Lenders.
Exhibit 27 Financial Data Schedule (For SEC use only).
The Registrant filed three Current Reports on Form 8-K during the third quarter
of fiscal 1998 reporting under Item 2, "Acquisition or Disposition of Assets",
Item 5, "Other Events" and Item 7, "Exhibits." The Registrant filed a current
report on Form 8-K/A subsequent to August 1, 1998 under Item 2, "Acquisition or
Disposition of Assets", and Item 7, "Exhibits."
19
<PAGE>
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: September 17, 1998 By /s/ Amanda J. Bokman
---------------------
AMANDA J. BOKMAN
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
20
<PAGE>
Exhibit 10.1
FIRST AMENDMENT
TO
AMENDED AND RESTATED FINANCING AGREEMENT
First Amendment, dated as of August 7, 1998 to the Amended and
Restated Financing Agreement, dated as of June 18, 1998 (the "Financing
Agreement"), by and among Norton McNaughton, Inc., a Delaware corporation (the
"Company"), Norton McNaughton of Squire, Inc., a New York corporation
("Squire"), Miss Erika, Inc., a Delaware corporation ("Miss Erika"), Jeri-Jo
Knitwear, Inc., a Delaware corporation formerly known as JJ Acquisition Corp.
("Jeri-Jo" and together with Squire and Miss Erika, each a "Borrower" and
collectively, the "Borrowers"), the lenders listed on Schedule I hereto under
the captions "Continuing Lenders" (the "Continuing Lenders") and "Additional
Lenders" (the "Additional Lenders" and together with the Continuing Lenders,
each a "Lender" and collectively the "Lenders"), NationsBanc Commercial
Corporation, as collateral agent for the Lenders (in such capacity, the
"Collateral Agent"), The CIT Group/Commercial Services, Inc., as administrative
agent for the Lenders (in such capacity, the "Administrative Agent") and Fleet
Bank NA, as documentation agent for the Lenders (in such capacity, the
"Documentation Agent" and together with the Collateral Agent and the
Administrative Agent, each an "Agent" and collectively, the "Agents").
The Company, the Borrowers, the Lenders and the Agents desire to (i)
add the Additional Lenders as parties to the Financing Agreement and (ii) amend
certain other terms and conditions hereafter set forth.
In addition, the Continuing Lenders wish to assign a portion of their
interests in the Revolving Credit Commitment and the Loans and Letter of Credit
Obligations Senior under the Financing Agreement to the Additional Lenders and
the Additional Lenders wish to accept such assignments.
Accordingly, the Company, the Borrowers, the Agents and the Lenders
hereby agree as follows:
1. Definitions. All capitalized terms used herein and not otherwise
-----------
defined herein are used herein as defined in the Financing Agreement.
2. Assignments. (a) On and as of the Amendment Effective Date (as
-----------
hereinafter defined), each of the Continuing Lenders shall assign and each of
the Additional Lenders shall purchase, at the principal amount thereof, such
interests in the Revolving Credit Loans and Letter of Credit Obligations Senior
on such date as shall be necessary in order that, after giving effect to all
such assignments and purchases, the Loans and Letter of Credit Obligations
Senior will be held by the Lenders ratably in accordance with their Pro Rata
Shares in the Revolving Credit Commitment, as set forth in Annex I to this
Amendment. Such assignments and purchases shall be without recourse,
representation or warranty, except that (i) each Continuing Lender represents
that it is the legal and beneficial owner of the interests assigned by it free
and clear of any Lien and (ii) paragraphs 2 (other than clauses (i) and (v)
thereof), 4 and 5 of Exhibit H to the Financing Agreement are hereby
incorporated by reference as if set forth herein and each Continuing Lender
shall be deemed to have made the representations, warranties and statements of
Assignor in such paragraphs and each Additional Lender shall be deemed to have
made the representations, warranties and statements of Assignee in such
paragraphs.
(b) On the Amendment Effective Date, (i) the Additional Lenders
shall pay the purchase price for the Revolving Credit Loans purchased by it
pursuant to paragraph (a) of this Section 2 by wire transfer of immediately
available funds to the Administrative Agent in New York, New York, not later
than 12:00 noon, New York City time, and (ii) the Administrative Agent shall
promptly pay to each Continuing Lender, out of the amounts received by it
pursuant to clause (i) of this paragraph (b), the purchase price for the
interests assigned by it pursuant to such paragraph (a) by wire transfer of
immediately available funds to an account designated by such Lender.
(c) The Company and the Borrowers hereby consent to the
assignments and purchases provided for in paragraphs (a) and (b) of this Section
4 and agree that each Additional Lender shall have all of the rights of a Lender
under the Financing Agreement with respect to the interests purchased by it
pursuant to such paragraphs. Commencing on the Amendment Effective Date, each
Additional Lender will be a party to the Financing Agreement, agrees to be bound
by the terms and conditions of the Financing Agreement and the Loan Documents
and will have all of the rights and obligations of a Lender under the Financing
Agreement and the Loan Documents.
3. Delivery of Notes. The Continuing Lenders shall deliver to the
-----------------
Administrative Agent, for delivery to and cancellation by the Borrowers, all
Notes issued by the Borrowers and held by the Continuing Lenders under the
Financing Agreement (collectively, the "Old Notes"), which Old Notes are hereby
deemed cancelled effective from delivery of the New Notes to the Administrative
Agent. The Borrowers shall execute and deliver to the Administrative Agent for
the account of each Lender the Notes which such Lender is entitled to receive
pursuant to Section 2.04 of the Financing Agreement, in the form of Exhibit A
thereto and in the principal amount for each Lender equal to its Pro Rata Share
of the Revolving Credit Commitment, as set forth in Annex I to this
<PAGE>
Amendment (the "New Notes"). The Administrative Agent shall release and deliver
the Old Notes to the Borrowers for cancellation and deliver the New Notes to the
Lenders.
4. Accrued Interest and Fees. At the times and pursuant to the terms
-------------------------
contained in the Financing Agreement, the Administrative Agent will pay all
accrued interest and fees payable pursuant to Section 3.03(b) of the Financing
Agreement to the Lenders entitled thereto after giving effect to the assignments
and purchases made pursuant to Section 2 above.
5. Schedule. Schedule 1.01A to the Financing Agreement is hereby
--------
amended in its entirety to read as set forth in Annex I to this Amendment.
6. Keyman Life Insurance. Section 7.01(k) of the Financing Agreement
---------------------
is hereby amended by deleting the number "sixty (60)" at the end of the first
line thereof and substituting in its place "ninety (90)".
7. Intellectual Property Appraisals. Section 7.01(p) of the
--------------------------------
Financing Agreement is hereby amended by deleting the number "sixty (60)" at the
beginning of the second line thereof and substituting in its place "ninety
(90)".
8. Conditions to Effectiveness. This Amendment shall become
---------------------------
effective only upon satisfaction in full of the following conditions precedent
(the first date upon which all such conditions shall have been satisfied being
herein called the "Amendment Effective Date"):
(i) The representations and warranties contained in this
Amendment and in Article VI of the Financing Agreement shall be correct in
all material respects on and as of the Amendment Effective Date as though
made on and as of such date (except where such representations and
warranties relate to an earlier date in which case such representations and
warranties shall be true and correct as of such earlier date); no Event of
Default or Default shall have occurred and be continuing on the Amendment
Effective Date, or result from this Amendment becoming effective in
accordance with its terms.
(ii) The Agents shall have received counterparts of this
Amendment which bear the signatures of the Company, the Borrowers and each
of the Lenders.
(iii) The Administrative Agent shall have received the New
Notes, duly executed by each of the Borrowers.
(iv) The Agents shall have received an acknowledgment to the
agreement among the Lenders duly executed by each Additional Lender.
(v) All legal matters incident to this Amendment shall be
satisfactory to the Agents and their counsel.
9. Representations and Warranties. Each of the Company and the
------------------------------
Borrowers represents and warrants to the Lenders as follows:
(a) The Company and each Borrower (i) is duly organized, validly
existing and in good standing under the laws of the state of its organization
and (ii) has all requisite power, authority and legal right to execute, deliver
and perform this Amendment, the New Notes, in the case of the Borrowers, all
other documents executed by it in connection with this Amendment, and to perform
the Financing Agreement, as amended hereby.
(b) The execution, delivery and performance by the Company and
the Borrowers of this Amendment and all other documents executed by it in
connection with this Amendment, the execution, delivery and performance by each
Borrower of the New Notes and the performance by the Company and the Borrowers
of the Financing Agreement as amended hereby (i) have been duly authorized by
all necessary action, (ii) do not and will not violate or create a default under
the Company's or any Borrower's organizational documents, any applicable law or
any contractual restriction binding on or otherwise affecting the Company or any
Borrower or any of the Company's or such Borrower's properties, and (iii) except
as provided in the Loan Documents, do not and will not result in or require the
creation of any Lien, upon or with respect to the Company's or any Borrower's
property.
<PAGE>
(c) No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority or other regulatory body is
required in connection with the due execution, delivery and performance by the
Company or any of the Borrowers of this Amendment and all other documents
executed by it in connection with this Amendment, the execution, delivery and
performance by each Borrower of the New Notes and the performance by the Company
and the Borrowers of the Financing Agreement as amended hereby.
(d) This Amendment and the Financing Agreement, as amended
hereby, and all other documents executed in connection with this Amendment
constitute the legal, valid and binding obligations of the Company and the
Borrowers party thereto, enforceable against such Persons in accordance with
their terms except to the extent the enforceability thereof may be limited by
any applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws from time to time in effect affecting generally the enforcement of
creditors' rights and remedies and by general principles of equity.
(e) The representations and warranties contained in Article VI of
the Financing Agreement are correct on and as of the Amendment Effective Date as
though made on and as of the Amendment Effective Date (except to the extent such
representations and warranties expressly relate to an earlier date), and no
Event of Default or Default, has occurred and is continuing on and as of the
Amendment Effective Date.
10. Continued Effectiveness of Financing Agreement. Each of the
----------------------------------------------
Company and the Borrowers hereby (i) confirms and agrees that each Loan Document
to which it is a party is, and shall continue to be, in full force and effect
and is hereby ratified and confirmed in all respects except that on and after
the Amendment Effective Date of this Amendment all references in any such Loan
Document to "the Financing Agreement", "thereto", "thereof", "thereunder" or
words of like import referring to the Financing Agreement shall mean the
Financing Agreement as amended by this Amendment, and (ii) confirms and agrees
that to the extent that any such Loan Document purports to assign or pledge to
the Collateral Agent, or to grant to the Collateral Agent a Lien on any
collateral as security for the Obligations of the Company and the Borrowers from
time to time existing in respect of the Financing Agreement and the Loan
Documents, such pledge, assignment and/or grant of a Lien is hereby ratified and
confirmed in all respects.
11. Miscellaneous.
-------------
a. This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which shall be
deemed to be an original, but all of which taken together shall constitute one
and the same agreement.
b. Section and paragraph headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
c. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.
d. The Borrowers will pay on demand all reasonable out-of-pocket
costs and expenses of the Agents in connection with the preparation, execution
and delivery of this Amendment, including, without limitation, the reasonable
fees, disbursements and other charges of Schulte Roth & Zabel LLP, counsel to
the Agents.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the day
and year first above written.
NORTON MCNAUGHTON, INC.
By:
----------------------------------
Title:
-------------------------------
NORTON MCNAUGHTON OF SQUIRE, INC.
By:
----------------------------------
Title:
-------------------------------
MISS ERIKA, INC.
By:
----------------------------------
Title:
-------------------------------
JERI-JO KNITWEAR, INC.
By:
----------------------------------
Title:
-------------------------------
AGENTS AND LENDERS
------------------
THE CIT GROUP/COMMERCIAL SERVICES,
INC., as Administrative Agent
By:
----------------------------------
Title:
-------------------------------
NATIONSBANC COMMERCIAL
CORPORATION, as Collateral Agent
By:
----------------------------------
Title:
-------------------------------
FLEET BANK NA, as Documentation Agent
By:
----------------------------------
Title:
-------------------------------
<PAGE>
LENDERS
-------
SANWA BUSINESS CREDIT CORPORATION
By:
----------------------------------
Title:
-------------------------------
Address:
500 Glenpointe Centre West
Teaneck, NJ 07666-6802
Attn: Carmen Caporrino
Senior Account Executive
Telephone: (201) 836-4006, ext. 106
Telecopier: (201) 836-4744
Wiring Instructions:
Harris Bank and Trust Company
ABA #: 071-000-288
AC#: 401-686-1
REF: Norton McNaughton
ATTN: Kevin O'Hara
Sanwa Business Credit Corporation
Telephone: (201) 836-4006, ext. 114
Telecopier: (201) 836-4744
ISRAEL DISCOUNT BANK OF NEW YORK
By:
----------------------------------
Title:
-------------------------------
Address:
511 Fifth Avenue
New York, New York 10017
Attn: Mr. Gary Harkins
Telephone: (212) 551-8852
Telecopier: (212) 551-8720
Wiring Instructions:
ABA #: 026009768
AC#: 355400901621
<PAGE>
SUNROCK CAPITAL CORP.
By:
----------------------------------
Title:
-------------------------------
Address:
1835 Market Street
11 Penn Center Bldg.
Suite #306
Philadelphia, PA 19103
Attn: John D. Erwin
Telephone: (215) 979-7654
Telecopier: (215) 979-7679
Wiring Instructions:
Mellon Bank, N.A.
Philadelphia, PA
ABA#: 031000037
Credit: Sunrock Capital Corp.
Acct. No. 2-024-404
Reference: Norton McNaughton
PNC BANK, NATIONAL ASSOCIATION
By:
----------------------------------
Title:
-------------------------------
<PAGE>
SCHEDULE I
CONTINUING LENDERS:
- ------------------
The CIT Group/Commercial Services, Inc.
NationsBanc Commercial Corporation
Fleet Bank NA
PNC Bank, National Association
ADDITIONAL LENDERS:
- ------------------
Sanwa Business Credit Corporation
Israel Discount Bank of New York
Sunrock Capital Corp.
ANNEX I
-------
Schedule 1.01A
--------------
Lenders and Lenders' Commitments
<TABLE>
<CAPTION>
Revolving
Lender Credit Commitment Percentage
------ ----------------- ----------
<S> <C> <C>
NationsBanc Commercial Corporation $ 50,000,000.00 28.572%
The CIT Group/Commercial Services, Inc. 30,000,000.00 17.143%
Fleet Bank NA 30,000,000.00 17.143%
Sanwa Business Credit Corp. 20,000,000.00 11.429%
PNC Business Credit 15,000,000.00 8.571%
Israel Discount Bank of New York 15,000,000.00 8.571%
Sunrock Capital Corp. 15,000,000.00 8.571%
$175,000,000.00 100.000%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-02-1997
<PERIOD-END> AUG-01-1998
<CASH> 447
<SECURITIES> 0
<RECEIVABLES> 68,375
<ALLOWANCES> 0
<INVENTORY> 63,340
<CURRENT-ASSETS> 141,069
<PP&E> 11,228
<DEPRECIATION> 3,300
<TOTAL-ASSETS> 203,500
<CURRENT-LIABILITIES> 34,816
<BONDS> 125,000
0
0
<COMMON> 81
<OTHER-SE> 41,868
<TOTAL-LIABILITY-AND-EQUITY> 203,500
<SALES> 227,591
<TOTAL-REVENUES> 227,591
<CGS> 178,955
<TOTAL-COSTS> 178,955
<OTHER-EXPENSES> 39,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,052
<INCOME-PRETAX> 2,633
<INCOME-TAX> 1,706
<INCOME-CONTINUING> 927
<DISCONTINUED> 0
<EXTRAORDINARY> (1,161)
<CHANGES> 0
<NET-INCOME> (234)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
