<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 January 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission File Number: 0-23440
Norton McNaughton, Inc.
(Exact name of registrant as specified in its charter)
<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, 7,412,613 shares as of March 16, 1998.
<PAGE> 2
INDEX TO FORM 10-Q
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1.
Financial Statements:
Consolidated Balance Sheets at January 31, 1998 (Unaudited)
and November 1, 1997 3
Consolidated Statements of Operations for the thirteen
weeks ended January 31, 1998 and February 1, 1997 (Unaudited) 4
Consolidated Statements of Stockholders' Equity for the thirteen
weeks ended January 31, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the thirteen weeks
ended January 31, 1998 and February 1, 1997 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-10
ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-15
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk - not applicable
PART II. OTHER INFORMATION 16
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
January 31, November 1,
1998 1997
(Unaudited) (Note)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 145 $ 529
Due from factor 45,723 64,644
Inventory 46,526 28,590
Income taxes receivable 3,549 3,201
Prepaid expenses and other current assets 3,835 5,227
--------- ---------
Total current assets 99,778 102,191
Fixed assets, net of accumulated depreciation of $2,611 and
$2,316, respectively 6,186 5,899
Notes receivable from management stockholders 2,655 2,655
Goodwill 3,906 3,853
Deferred financing costs 2,281 2,481
Other assets 1,805 1,683
--------- ---------
Total assets $ 116,611 $ 118,762
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,224 $ 10,420
Revolving credit loan 47,612 44,473
Term loan payable 3,000 3,000
Accrued expenses and other current liabilities 3,470 4,986
--------- ---------
Total current liabilities 62,306 62,879
Term loan payable 11,250 12,000
Other long-term liabilities 1,725 1,720
--------- ---------
Total liabilities 75,281 76,599
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, authorized 20,000,000 shares,
8,063,613 and 8,060,640 shares issued, respectively, and
7,412,613 and 7,409,640 shares outstanding, respectively 81 81
Capital in excess of par 23,915 23,903
Retained earnings 22,869 23,714
Treasury stock, at cost, 651,000 shares (5,535) (5,535)
--------- ---------
Total stockholders' equity 41,330 42,163
--------- ---------
Total liabilities and stockholders' equity $ 116,611 $ 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> 4
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------
January 31, February 1,
1998 1997
----------- -----------
(In Thousands, Except Per Share Amounts)
<S> <C> <C>
Net sales $ 53,508 $ 41,596
Cost of goods sold 42,111 32,297
-------- --------
Gross profit 11,397 9,299
Selling, general and administrative expenses 10,673 8,764
Depreciation and amortization 349 239
-------- --------
Income from operations 375 296
Other expense (income):
Interest expense 1,701 263
Interest income (41) (42)
-------- --------
Income (loss) before provision (benefit) for
income taxes (1,285) 75
Provision (benefit) for income taxes (440) 32
-------- --------
Net income (loss) $ (845) $ 43
======== ========
BASIC EARNINGS PER SHARE:
Net income (loss) $ (0.11) $ 0.01
======== ========
Weighted average number of common shares 7,411 7,638
======== ========
DILUTED EARNINGS PER SHARE:
Net income (loss) $ (0.11) $ 0.01
======== ========
Weighted average number of common shares and
common stock equivalents outstanding 7,411 7,658
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THIRTEEN WEEKS ENDED JANUARY 31, 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 thirteen weeks
ended January 31, 1998 -- -- -- (845) -- (845)
Issuance of 2,942 shares of common
stock through the employee
stock purchase plan 3 -- 12 -- -- 12
-------- -------- -------- -------- -------- --------
Balance at January 31, 1998 8,064 $ 81 $ 23,915 $ 22,869 $ (5,535) $ 41,330
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------
January 31, February 1,
1998 1997
----------- -----------
(In Thousands)
<S> <C> <C>
Net income (loss) $ (845) $ 43
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization of fixed assets 295 230
Amortization of intangibles 288 9
Changes in operating assets and liabilities:
Due from factor, net 18,921 3,731
Inventory (17,936) (5,424)
Refundable income taxes (348) --
Prepaid expenses and other current assets 1,392 348
Other assets (130) 125
Accounts payable (2,196) 1,040
Accrued expenses and other current liabilities (1,516) (21)
Other long-term liabilities 5 55
-------- --------
Net cash (used for) provided by operating activities (2,070) 136
-------- --------
INVESTING ACTIVITIES
Additional purchase price (133) --
Purchase of fixed assets (582) (223)
-------- --------
Net cash used for investing activities (715) (223)
-------- --------
FINANCING ACTIVITIES
Net advances under revolving credit agreement 3,139 --
Payments on term loan (750) --
Proceeds from issuance of common stock 12 20
-------- --------
Net cash provided by financing activities 2,401 20
-------- --------
Decrease in cash (384) (67)
Cash at beginning of period 529 333
-------- --------
Cash at end of period $ 145 $ 266
======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ -- $ 142
Interest paid $ 1,468 $ 248
</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 January 31, 1998 and the results of operations and cash flows for the
thirteen weeks ended January 31, 1998 and February 1, 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 weeks ended January 31, 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.
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. Data for the thirteen weeks ended January 31,
1998 reflects the acquisition of Miss Erika, Inc. ("Miss Erika"), a wholly-owned
subsidiary, on September 30, 1997.
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 obtaining the Company's credit facility. Financing costs are amortized on a
straight line basis over the three year term of the related credit facility.
GOODWILL
Goodwill resulting from the acquisition of Miss Erika is being
amortized by the straight-line method over twenty years.
7
<PAGE> 8
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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 will be excluded.
Basic earnings per share is computed based on the weighted average
number of common shares outstanding during the periods presented. Diluted
earnings per share is computed based on the weighted average number of common
shares and common stock equivalents outstanding during the period presented. For
the three months ended January 31, 1998, common stock equivalents 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.
8
<PAGE> 9
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>
January 31, November 1,
1998 1997
----------- -----------
(In Thousands)
<S> <C> <C>
Raw materials $ 4,780 $ 2,979
Work in process 1,356 2,258
Finished goods 40,390 23,353
------- -------
$46,526 $28,590
======= =======
</TABLE>
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 January
31, 1998, the Company has purchased a total of 651,000 shares at an aggregate
cost of approximately $5.5 million.
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 their Common Stock of the Company.
In the event of any sale or transfer of shares of Common Stock by any
of the management stockholders, such person is required to 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 fourth quarter of fiscal
1997, all necessary payments have been made under the terms of the loans by the
management stockholders.
As of January 31, 1998, the fair market value of the Company's Common
Stock pledged by the management stockholders as security for the loans was
$4,509,872, 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.
9
<PAGE> 10
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. ACQUISITION OF MISS ERIKA
On September 30, 1997, the Company acquired substantially all the
assets and assumed substantially all the liabilities of Miss Erika, a
privately-held manufacturer of women's moderately priced apparel. The terms of
the transaction provided for the payment of approximately $24 million in cash,
with additional consideration payable at the Company's option in cash or Company
common stock based on the profitability of Miss Erika in fiscal years 1998 and
1999.
In connection with the 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. The proceeds
were used to finance the acquisition and will be for ongoing working capital
requirements of the combined entity. Pursuant to the new financing arrangement,
the Company will continue to factor its accounts receivable, as well as the
accounts receivable of Miss Erika.
The acquisition was accounted for as a purchase, and Miss Erika's
results are included in the consolidated statements of operations beginning
September 30, 1997. The following unaudited pro forma information indicates what
net sales, income (loss) from operations, net income (loss) and net income
(loss) per share would have been had the acquisition of Miss Erika been
completed on November 2, 1996.
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 acquisition of Miss Erika 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.
<TABLE>
<CAPTION>
Thirteen Weeks Ended January 31, 1997
-------------------------------------
As reported Pro forma
----------- ---------
(In thousands, except per share amounts)
<S> <C> <C>
Net sales $ 41,596 $ 55,430
Income (loss) from operations $ 296 $ (793)
Net income (loss) $ 43 $ (1,065)
Net income (loss) per share:
Basic $ 0.01 $ (0.14)
Diluted $ 0.01 $ (0.14)
</TABLE>
6. 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.
10
<PAGE> 11
NORTON MCNAUGHTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SHAREHOLDER RIGHTS PLAN (CONTINUED)
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.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
As is the norm in the apparel industry, the Company engages in
promotional activity with its customers which affect the Company's sales, gross
profit and gross profit margins. Norton McNaughton of Squire, Inc. ("Norton"), a
wholly-owned subsidiary, accomplishes this by granting its customers sales
allowances, while Miss Erika sells merchandise at promotional prices.
Accordingly, the Company's sales, gross profit and gross profit margins vary
from fiscal quarter to quarter and fiscal year to year. In addition, the Company
generally ships its products in accordance with normal apparel industry shipping
cycles. Correspondingly, sales, gross profit and gross profit margins may be
affected by the timing of shipping cycles or the delivery of finished goods.
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.
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 also allows the Company to avail itself
of a better equipped and more 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.
The Company's continuing focus on improving profitability has led the
Company to undertake certain initiatives to improve gross profit and gross
profit margins. These include the implementation of certain merchandising
changes, as well as the closure of underperforming divisions.
In the merchandising area, the Company has recently reduced the number
of products (i.e. reduced the number of SKU's) offered in any particular
collection of its Norton McNaughton product line in an effort to minimize the
number of unrelated items unsold at the end of a selling period. The Company has
undertaken this initiative to reduce sales allowances required to compensate
retailers for retail price reductions taken to sell unrelated clothing items. In
addition, by taking advantage of product sourcing opportunities, the Company has
been able to offer quality and fashionable products to retailers at lower price
points in an effort to further enhance the sales of the Company's products to
retailers and to consumers and to further reduce sales allowances. These
initiatives have been undertaken without a change to quality of merchandise. As
a result of these initiatives, the Company anticipates that revenue levels in
fiscal 1998, excluding Miss Erika, will decrease from those in fiscal 1997.
The Company continually monitors the success, in terms of sales,
profitability and customer acceptance, of its product lines. In the event that
one or more of its product lines does not meet the Company's expectations, the
Company will discontinue their production. During the third quarter of fiscal
1997, the Company began selling merchandise under its existing product lines to
Sears, including Norton McNaughton and Norton Studio. Correspondingly, the
Company discontinued the Modiano product line, which had been produced
exclusively for Sears, in the fourth quarter of fiscal 1997. In addition, the
Company discontinued the Lauren Alexandra private-label product line produced
for Federated Department Stores and the catalog division in the first quarter of
fiscal 1998, and will discontinue the Pant-her private-label product line
produced for The May Department Stores Company in the second quarter of fiscal
1998.
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 discounters and other retailers.
In fiscal 1997, the aforementioned discontinued divisions contributed
approximately $33.4 million to net sales and experienced approximately breakeven
operating results. In connection with the closure of these divisions, the
Company recorded special charges in the fourth quarter of fiscal 1997 of
approximately $3.7 million. These discontinued divisions contributed
approximately $8.0 million to net sales in the first quarter of fiscal 1997.
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.
12
<PAGE> 13
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 savings measures implemented included
merchandising changes, which will enable the Company to produce fewer samples,
and reductions in executive compensation and ancillary expenses. As a result of
these initiatives and those undertaken in the second quarter, the Company
anticipates that it (without taking Miss Erika into account) may achieve cost
savings of up to $3.0 million in fiscal 1998, although savings as a result of
workforce reductions will be offset by any new hires above the Company's plan.
Cost savings realized in the first quarter of fiscal 1998 as a result of the
above were approximately $1.0 million.
This Management's Discussion and Analysis contains forward-looking
information about the Company's anticipated operating results, including
following the acquisition of Miss Erika. 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 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 to ship on a timely basis.
Accordingly, there can be no assurance that the Company, including following the
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
--------------------------
January 31, February 1,
1998 1997
----------- -----------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 78.7 77.6
------ ------
Gross profit 21.3 22.4
Selling, general and
administrative expenses 20.0 21.1
Depreciation and amortization 0.6 0.6
------ ------
Income (loss) from operations 0.7 0.7
Interest expense 3.2 0.6
Interest income (0.1) (0.1)
------ ------
Income (loss) before provision
(benefit) for income taxes (2.4) 0.2
Provision (benefit) for income taxes (0.8) 0.1
------ ------
Net income (loss) (1.6)% 0.1%
====== ======
</TABLE>
Quarter Ended January 31, 1998 Compared to Quarter Ended February 1, 1997
Net sales were $53.5 million for the first quarter of fiscal 1998
compared to $41.6 million for the first quarter of fiscal 1997. The increase in
net sales of $11.9 million was primarily attributable to the addition of net
sales for the Erika product line of $18.2 million, following the acquisition of
Miss Erika in September 1997, and increased sales in the Norton Studio product
line of $2.4 million. These increases were offset in part by a decrease in net
sales of $2.4 million in the Norton McNaughton product lines, and decreases in
net sales of $6.3 million, in the aggregate, due to the discontinuation of the
Modiano, Lauren Alexandra and Pant-her product lines.
The gross profit margin was 21.3% for the first quarter of fiscal 1998
, as compared to 22.4% for the first quarter of fiscal 1997. The decrease
resulted primarily from lower gross profit margins in the Lauren Alexandra and
Pant-her product lines. The Company discontinued shipments of the Lauren
Alexandra product line during the first quarter of fiscal 1998 and will
discontinue the Pant-her product line in the second quarter of fiscal 1998.
13
<PAGE> 14
Selling, general and administrative expenses ("SG&A" expenses) were
$10.7 million, or 20.0% of net sales, in the first quarter of fiscal 1998
compared to $8.8 million, or 21.1% of net sales in the first quarter of fiscal
1997. The increase in SG&A expenses of $1.9 million resulted from the addition
of SG&A expenses relating to Miss Erika of $3.8 million. This increase was
offset in part by a decrease in SG&A expenses for Norton of $1.9 million. This
decrease resulted primarily from cost savings measures implemented in the second
and fourth quarters of 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 quarter of
fiscal 1998 for Norton.
Interest expense increased to $1.7 million in the first quarter of
fiscal 1998 from $263,000 in the first quarter of fiscal 1997. The increase was
primarily attributable to incremental interest expense associated with
borrowings used to effect the acquisition of Miss Erika on September 30, 1997.
Liquidity and Capital Resources
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 below, advances
under the Company's factoring agreement for its trade accounts receivable. 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 $37.5 million at January 31, 1998 as compared to
$39.3 million at November 1, 1997. The decrease was caused primarily by the net
loss for the period and payments on the Company's term loan.
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.
Prior to the Company's new revolving credit agreement entered into on
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 a $140.0 million secured term loan and
revolving credit facility with NationsBanc Commercial Corporation and The CIT
Group/Commercial Services, Inc. (the "Financing Agreement") on September 30,
1997 in connection with the acquisition of Miss Erika. The Financing Agreement
provides for a $15.0 million term loan and $125.0 million revolving credit
facility (the "RCF"). The Financing Agreement has an expiration date of October
2, 2000. The proceeds were used to finance the acquisition of Miss Erika and
will be used for ongoing working capital requirements of the combined entity.
Pursuant to the new financing arrangement, the Company will continue to factor
its accounts receivable, as well as the accounts receivable of Miss Erika.
Pursuant to the RCF, the Company has available credit of up to $125.0
million for working capital loans and letters of credit based upon a borrowing
base of 85% and 60% of Eligible Accounts Receivable and Eligible Inventory,
respectively, as defined in the Financing Agreement, and overadvances above the
borrowing base of $10.0 million at month end and up to $15.0 million permitted
mid-month ($20.0 million in the months of August, September and October),
provided that for any two consecutive month end periods, the combined
overadvance amount is zero. The RCF provides for maximum sublimits of $70.0
million for letters of credit and $70.0 million for working capital loans.
The Financing Agreement provides for interest to be paid monthly in
arrears on revolving credit loan balances at an annual rate equal to, at the
Company's option, the prime rate at NationsBank, N.A. less 0.25%, or the LIBOR
rate plus 2.75%. The rates of interest decrease by 0.25% after the term loan is
repaid. Under the letter of credit facility, the Company is required to pay a
fee of 1.25% per annum of the stated amount of letters of credit upon opening,
in addition to lender administrative fees. In addition, the Financing Agreement
provides for a Co-agent fee of $150,000 per annum.
At January 31, 1998, borrowings and letters of credit outstanding under
the RCF were $47.6 million and $46.6 million, respectively. The Company had
total additional available credit of $4.3 million under the Financing Agreement
as of that date, pursuant to the borrowing base formula set forth therein.
14
<PAGE> 15
The Financing Agreement provides for interest to be paid monthly in
arrears on the term loan at an annual rate equal to, at the Company's option,
the prime rate at NationsBank, N.A. plus (i) 0.25% on and before September 27,
1999 and (ii) 0.75% thereafter, or the LIBOR rate plus (i) 3.25% on and before
September 27, 1999 and (ii) 3.75% thereafter. The term loan requires monthly
principal payments of $250,000 on the first day of each month and a final
installment of approximately $6.3 million on October 2, 2000. The Financing
Agreement also provides for excess cash flow principal payments, as defined
therein.
The Financing Agreement contains a number of restrictive covenants,
including covenants which limit incurrence of liens, indebtedness and capital
expenditures and payment of dividends, and requires that the Company maintain
certain financial ratios and meet specified minimum levels of working capital
and tangible net worth. The Company was in compliance with these covenants at
January 31, 1998. The Financing Agreement imposes decreasing prepayment
penalties under certain circumstances. All of the Company's assets are subject
to a security interest under the Financing Agreement.
The Company anticipates that in the remainder of fiscal 1998 it will
incur capital expenditures of approximately $1.5 million to $1.7 million,
principally in connection with the upgrade of its management information
systems. The Company expects to finance these capital expenditures from
internally generated funds and advances under the Financing Agreement.
Additional expenditures will be required to modify portions of the Company's
software so that it will function properly in the year 2000. The Company
believes that the total costs to be incurred prior to the year 2000 are
immaterial 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.
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 January
31, 1998, the Company has purchased a total of 651,000 shares at an aggregate
cost of approximately $5.5 million.
Management believes that cash generated from operations and advances
under the RCF 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. As a
result of the acquisition of Miss Erika, the Company anticipates that it may
experience its highest sales in the second quarter, followed by the fourth
quarter. 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.
15
<PAGE> 16
PART II. OTHER INFORMATION
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 27 Financial Data Schedule (For SEC use only).
b) The Registrant filed a Current Report on Form 8-K/A on December 15,
1997 reporting under Item 2, "Acquisition or Disposition of Assets" and
Item 7, "Financial Statements and Exhibits." The following financial
statements were included in the Current Report:
Financial statements of business acquired:
Independent Auditor's Report
Miss Erika, Inc. Balance Sheets as of January 31, 1997 and 1996
Miss Erika, Inc. Statements of Operations and Retained Earnings
(Deficit) for the fiscal years ended January 31, 1997, 1996 and
1995
Miss Erika, Inc. Statements of Cash Flows for the fiscal years
ended January 31, 1997, 1996 and 1995
Miss Erika, Inc. Notes to Financial Statements
Miss Erika, Inc. Unaudited Condensed Balance Sheet as of July 31,
1997
Miss Erika, Inc. Unaudited Condensed Statements of Income and
Retained Earnings for the six months ended July 31, 1997 and 1996
Miss Erika, Inc. Unaudited Condensed Statements of Cash Flows for
the six months ended July 31, 1997 and 1996
Miss Erika, Inc. Notes to Unaudited Condensed Financial Statements
Pro Forma Financial Information:
Pro forma financial information (introduction)
Unaudited Pro Forma Condensed Combined Balance Sheet as of August
2, 1997 for Norton McNaughton, Inc. and as of July 31, 1997 for
Miss Erika, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations for
Norton McNaughton, Inc. for the year ended November 2, 1996 and
for Miss Erika, Inc. for the year ended January 31, 1997
Unaudited Pro Forma Condensed Combined Statement of Operations for
Norton McNaughton, Inc. for the nine months ended August 2, 1997
and for Miss Erika, Inc. for the nine months ended July 31, 1997
Condensed Combined Pro Forma Adjustments
16
<PAGE> 17
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: March 16, 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)
17
<TABLE> <S> <C>
<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
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-02-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1
<CASH> 145
<SECURITIES> 0
<RECEIVABLES> 45,723
<ALLOWANCES> 0
<INVENTORY> 46,526
<CURRENT-ASSETS> 99,778
<PP&E> 8,797
<DEPRECIATION> 2,611
<TOTAL-ASSETS> 116,611
<CURRENT-LIABILITIES> 62,306
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 41,249
<TOTAL-LIABILITY-AND-EQUITY> 116,611
<SALES> 53,508
<TOTAL-REVENUES> 53,508
<CGS> 42,111
<TOTAL-COSTS> 11,022
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,701
<INCOME-PRETAX> (1,285)
<INCOME-TAX> (440)
<INCOME-CONTINUING> (845)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (845)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
