<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 July 31, 1999
-------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------------------
Commission File Number: 0-23440
-------
McNaughton Apparel Group Inc.
-----------------------------
(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)
___________________________________________________
(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, 7,445,324 shares as of September 14, 1999.
<PAGE>
INDEX TO FORM 10-Q
McNaughton Apparel Group Inc.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1.
Financial Statements:
Consolidated Balance Sheets at July 31, 1999 (Unaudited)
and October 31, 1998 3
Consolidated Statements of Operations for the thirteen and
thirty-nine weeks ended July 31, 1999 and August 1, 1998 (Unaudited) 4
Consolidated Statements of Stockholders' Equity for the thirty-nine
weeks ended July 31, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the thirty-nine weeks
ended July 31, 1999 and August 1, 1998 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-13
ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-20
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION 22
ITEM 1.
Legal Proceedings
ITEM 6.
Exhibits and Reports on Form 8-K
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
McNaughton Apparel Group Inc.
Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
(Unaudited) (Note)
---------- ---------
<S> <C> <C>
Assets
Current assets:
Cash $ 23,572 $ 205
Due from factor 58,141 85,998
Inventory 46,875 47,386
Income taxes receivable 3,583 2,522
Prepaid expenses and other current assets 1,407 1,273
-------- --------
Total current assets 133,578 137,384
Fixed assets, net of accumulated depreciation of $5,191 and $3,731 respectively 8,999 8,261
Notes receivable from management stockholders 2,287 2,471
Intangible assets 41,889 43,464
Deferred financing costs 5,687 6,348
Other assets 3,392 3,661
-------- --------
Total assets $195,832 $201,589
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 9,210 $ 15,932
Revolving credit loans - 3,839
Accrued expenses and other current liabilities 14,851 13,629
-------- --------
Total current liabilities 24,061 33,400
12 1/2% Senior Notes due 2005 125,000 125,000
Other long-term liabilities 1,673 1,719
-------- --------
Total liabilities 150,734 160,119
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, authorized 20,000,000 shares, 8,095,658 and
8,065,429 shares issued, respectively, and 7,444,658 and 7,414,429 shares
outstanding, respectively 81 81
Capital in excess of par 23,985 23,923
Retained earnings 26,567 23,001
Treasury stock, at cost, 651,000 shares (5,535) (5,535)
-------- --------
Total stockholders' equity 45,098 41,470
-------- --------
Total liabilities and stockholders' equity $195,832 $201,589
======== ========
</TABLE>
Note: The balance sheet at October 31, 1998 has been derived from the audited
financial statements as of that date.
See accompanying notes.
3
<PAGE>
McNaughton Apparel Group Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------- -------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Net sales $ 92,856 $ 79,967 $ 283,447 $ 227,591
Cost of goods sold 67,757 60,764 214,393 178,955
----------- ----------- ----------- -----------
Gross profit 25,099 19,203 69,054 48,636
Selling, general and administrative expenses 14,977 13,730 45,787 37,693
Depreciation and amortization 1,323 633 3,359 1,384
----------- ----------- ----------- -----------
Income from operations 8,799 4,840 19,908 9,559
Other expense (income):
Interest expense 4,384 3,237 13,670 7,052
Interest income (99) (44) (246) (126)
----------- ----------- ----------- -----------
Income before provision for
income taxes and extraordinary item 4,514 1,647 6,484 2,633
Provision for income taxes 2,031 1,191 2,918 1,706
----------- ----------- ----------- -----------
Income before extraordinary item 2,483 456 3,566 927
Extraordinary item, net of tax - (1,161) - (1,161)
----------- ----------- ----------- -----------
Net income (loss) $ 2,483 $ (705) $ 3,566 $ (234)
=========== =========== =========== ===========
Basic earnings per share:
Income before extraordinary item $ 0.33 $ 0.06 $ 0.48 $ 0.13
Extraordinary item, net of tax - (0.16) - (0.16)
----------- ----------- ----------- -----------
Net income (loss) $ 0.33 $ (0.10) $ 0.48 $ (0.03)
=========== =========== =========== ===========
Weighted average number of common shares 7,434 7,413 7,427 7,412
=========== =========== =========== ===========
Diluted earnings per share:
Income before extraordinary item $ 0.32 $ 0.06 $ 0.47 $ 0.13
Extraordinary item, net of tax - (0.15) - (0.16)
----------- ----------- ----------- -----------
Net income (loss) $ 0.32 $ (0.09) $ 0.47 $ (0.03)
=========== =========== =========== ===========
Weighted average number of common shares assuming dilution 7,856 7,536 7,590 7,458
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
McNaughton Apparel Group Inc.
Consolidated Statements of Stockholders' Equity
for the Thirty-Nine Weeks Ended July 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Capital
Common Stock in Excess Retained Treasury
------------
Shares Amount of Par Earnings Stock Total
------------ ----------- ----------- ----------- ------------ -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1998 8,065 $81 $23,923 $23,001 $(5,535) $41,470
Net income for the thirty-nine weeks
ended July 31, 1999 - - - 3,566 - 3,566
Issuance of 30,063 shares of common
stock through the employee
stock purchase plan 30 - 62 - - 62
------------- ------------- ------------- ------------- ------------- -------------
Balance at July 31, 1999 8,095 $81 $23,985 $26,567 $(5,535) $45,098
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes.
5
<PAGE>
McNaughton Apparel Group Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------
July 31, August 1,
1999 1998
------------------------------------------
<S> <C> <C>
(In Thousands)
Net income (loss) $ 3,566 $ (234)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization of fixed assets 1,461 984
Amortization of intangibles 2,855 1,130
Write-off of deferred financing costs - 1,161
Changes in operating assets and liabilities:
Due from factor, net 27,857 7,952
Inventory 511 (15,965)
Refundable income taxes (1,061) 988
Prepaid expenses and other current assets (134) (1,156)
Other assets 36 (120)
Accounts payable (6,722) (4,995)
Accrued expenses and other current liabilities 1,222 930
Other long-term liabilities (46) 15
------------------- ------------------
Net cash provided by (used for) operating activities 29,545 (9,310)
------------------- ------------------
Investing activities
Notes receivable from management stockholders 184 184
Purchase of net assets of Jeri-Jo, net of cash of $1,312 - (54,145)
Additional purchase price (92) -
Purchase of fixed assets (2,199) (1,666)
------------------- ------------------
Net cash used for investing activities (2,107) (55,627)
------------------- ------------------
Financing activities
Net repayments under revolving credit agreement (3,839) (28,579)
Payments on term loan - (15,000)
Proceeds from issuance of common stock 62 20
Deferred financing costs (294) (5,686)
Repayment of acquired company's debt - (10,900)
Issuance of 12 1/2% Senior Notes due 2005 - 125,000
------------------- ------------------
Net cash (used for) provided by financing activities (4,071) 64,855
------------------- ------------------
Increase (decrease) in cash 23,367 (82)
Cash at beginning of period 205 529
------------------- ------------------
Cash at end of period $ 23,572 $ 447
=================== ==================
Supplemental disclosures
Income taxes paid $ 557 $ 150
Interest paid $ 15,991 $ 4,471
</TABLE>
See accompanying notes.
6
<PAGE>
MCNAUGHTON APPAREL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of McNaughton
Apparel Group Inc. and its wholly-owned 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 July 31, 1999 and the results of operations for the
thirteen weeks and thirty-nine weeks ended July 31, 1999 and August 1, 1998 and
cash flows for the thirty-nine weeks ended July 31, 1999 and August 1, 1998 have
been included. These statements should be read in conjunction with the audited
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Operating results for the thirteen weeks and thirty-nine weeks
ended July 31, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending November 6, 1999.
The consolidated financial statements include the accounts of McNaughton
Apparel Group Inc. and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
The Company changed its name from Norton McNaughton, Inc. to McNaughton
Apparel Group Inc. on February 9, 1999.
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 as an extraordinary loss when the
facility was repaid in June 1998.
Deferred financing costs were incurred in connection with obtaining the
Company's current revolving credit agreement and the Company's issuance of 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.
Earnings Per Share
Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the period presented. Diluted earnings per
share is computed based on the weighted average number of common shares
outstanding during the period and the effect of dilutive options outstanding
during the period using the treasury stock method. For the thirteen and thirty-
nine weeks ended July 31, 1999, the dilutive effect of options outstanding
during the period using the treasury stock method was approximately 422,000
shares and approximately 163,000 shares, respectively. 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 46,000 shares, respectively.
Revenue Recognition
Revenues are recorded at the time of shipment of merchandise. The Company
establishes reserves for sales discounts, returns and allowances. Sales
discounts represent customary trade discounts which may be negotiated with the
Company's customers as a payment term of the sale. Sales allowances represent
sales rebates which may be granted to customers and other miscellaneous
deductions from accounts receivable. The Company records sales discounts
granted as a reduction of sales at the time of shipment. Sales returns and
allowances are reserved for as a reduction of sales based upon estimated future
returns and allowances related to current sales.
7
<PAGE>
MCNAUGHTON APPAREL GROUP INC. (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. 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 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. The additional consideration paid for
Miss Erika will be accounted for as additional purchase price and will be
reflected in intangible assets. At the Company's discretion, the Company may,
subject to a maximum number of shares, pay all or any portion of the contingent
payment in shares of Common Stock. The Miss Erika purchase agreement, as
originally executed, limited the number of shares of Common Stock payable by the
Company to a number of shares which, after giving effect to their issuance, did
not exceed 12% of the aggregate number of outstanding shares of Common Stock at
the time of payment. Following the early payment of a portion of the Miss Erika
earn-out obligation described below, this percentage limit was amended to
2.822%. The Company has agreed to cause any shares of Common Stock issued as a
contingent payment to be registered under the Securities Act.
On August 4, 1999, the Company retired 64.3% of the earn-out obligation
payable to the sellers of Miss Erika for $10.0 million in cash. The portion of
the earn-out obligation which was retired was owned by two investment funds and
their affiliates who were interested in monetizing their portion of the
contingent earn-out payment due to closure of the funds in which these
investments were held. The remaining earn-out obligation, representing 35.7%,
continues to be governed by the original earn-out provisions described above.
This remaining interest is held substantially by members of the current Miss
Erika management team, none of whom desired to exercise the option of receiving
a potentially discounted early payment of the contingent earn-out. The Company
intends to pay the cash portion of the remaining contingent consideration from
internally generated funds and borrowings under the Company's revolving credit
facility. Miss Erika achieved Miss Erika EBITDA during fiscal 1998 and to date
during fiscal 1999 which, if sustained for the remainder of fiscal 1999, will
result in the payment of significant additional consideration, however, the
Company cannot predict the amount of additional consideration that may be
payable.
In connection with the foregoing, the Company amended the indenture dated
as of June 18, 1998 governing the Senior Notes (the "Indenture") to provide for,
among other matters, the early extinguishment of a portion of the outstanding
earn-out obligation payable to certain of the sellers of Miss Erika and to
restrict the amount of cash that may be paid with respect to the Company's earn-
out obligation incurred in connection with its acquisition of Jeri-Jo.
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 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 intangible
assets. The Company secured its obligation to pay the cash portion of the
contingent payment by delivery of a stand-by letter of credit in the face amount
of $30.0 million, which letter of credit may be drawn upon, in whole or in part,
in certain circumstances, including in the event of a default under the cash
contingent payment obligation. Pursuant to the Indenture, the Company may pay
up to a maximum of 75% of the contingent payment in cash. The Company intends
to pay the cash portion of the contingent consideration from internally
generated funds and borrowings under the Company's revolving credit facility.
Jeri-Jo achieved Jeri-Jo EBITDA for the thirteen month period ended July 31,
1999 which, if sustained, will result in the payment of significant additional
consideration, however, the Company cannot predict the amount of additional
consideration that may be payable.
8
<PAGE>
McNaughton Apparel Group Inc, (Continued)
Notes to Consolidated Financial Statements
(Unaudited)
2. Acquisitions (continued)
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 proforma
unaudited consolidated results of operations for the thirteen and thirty-nine
weeks ended August 1, 1998, assuming consummation of the Jeri-Jo acquisition and
related financings at the beginning of the period is as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Thirty-Nine Weeks
Ended August 1, 1998 Ended August 1, 1998
------------------------ ------------------------
As reported Pro forma As reported Pro forma
----------- --------- ----------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 79,967 $ 90,087 $ 227,591 $ 277,826
Income from operations $ 4,840 $ 7,299 $ 9,559 $ 17,309
Depreciation and amortization $ 633 $ 883 $ 1,384 $ 2,765
Income before extraordinary item $ 456 $ 989 $ 927 $ 1,360
Net income (loss) $ (705) $ (172) $ (234) $ 199
Earnings per share:
Basic - income before
extraordinary item $ 0.06 $ 0.13 $ 0.13 $ 0.18
=========== ========= =========== =========
Basic - net income (loss) $ (0.10) $ (0.02) $ (0.03) $ 0.03
=========== ========= =========== =========
Diluted - income before
extraordinary item $ 0.06 $ 0.13 $ 0.13 $ 0.18
=========== ========= =========== =========
Diluted - net income (loss) $ (0.09) $ (0.02) $ (0.03) $ 0.03
=========== ========= =========== =========
</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 acquisition of 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.
3. Sales to Major Customers
For the thirteen weeks ended July 31, 1999 and August 1, 1998, net sales
made to three customers were approximately 14.9%, 13.7%, and 13.2%, and
approximately 15.9%, 13.8% and 12.5%, respectively. For the thirty-nine weeks
ended July 31, 1999 and August 31, 1998, net sales made to three customers were
approximately 19.6%, 12.8%, and 12.3%, and approximately 19.3%, 13.0% and 12.6%,
respectively.
4. Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or market.
Inventories consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
-------- -------
<S> <C> <C>
(In Thousands)
Raw materials $ 1,136 $ 3,733
Work in process 1,193 1,158
Finished goods 44,546 42,495
------- -------
$46,875 $47,386
======= =======
</TABLE>
9
<PAGE>
McNaughton Apparel Group Inc, (Continued)
Notes to Consolidated Financial Statements
(Unaudited)
5. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
----------------------
(In Thousands)
<S> <C> <C>
Tradenames and trademarks $17,592 $17,500
Goodwill 26,932 26,918
------- -------
44,524 44,418
Less accumulated amortization (2,635) 954
------- -------
$41,889 $43,464
======= =======
</TABLE>
6. 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, $0.01 par value ("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. All necessary payments have been made under the terms
of the loans by the management stockholders.
As of July 31, 1999, the fair market value of the Company's Common Stock
pledged by the management stockholders as security for the loans was $7,215,795,
and the aggregate principal balance of all loans to management stockholders was
$2,286,568. The loan balance set forth above reflects the required principal
payments of $713,432 resulting from sales of Common Stock by management
stockholders.
7. Financing Arrangements and Extraordinary Item
In connection with the Miss Erika acquisition on September 30, 1997, the
Company entered into a $140.0 million secured term loan and revolving credit
facility with NationsBanc Commercial Corporation and The CIT Group/Commercial
Services, Inc. (the "Prior Credit Agreement"). The proceeds were used to
finance the acquisition and for ongoing working capital requirements of the
Company and its subsidiaries. The Prior Credit Agreement provided for a $15.0
million term loan and $125.0 million revolving credit and letter of credit
facility, and had an initial expiration date of October 2, 2000. Prior thereto,
the Company's working capital requirements were funded by borrowings pursuant to
its factoring agreement.
The Prior Credit Agreement provided for interest to be paid monthly in
arrears on revolving credit loan balances at an annual rate equal to the prime
rate at NationsBank, N.A. less 0.25%. Interest on the term loan was at an
annual rate equal to the prime rate at NationsBank, N.A. plus 0.25% and required
monthly principal payments of $250,000 on the first day of each month and a
final installment of $6.25 million on October 2, 2000.
Concurrent with the closing of the Jeri-Jo acquisition on June 18, 1998,
the Company entered into a $175.0 million secured revolving credit and letter of
credit facility with NationsBanc Commercial Corporation, The CIT
Group/Commercial Services, Inc. and Fleet Bank N.A. (the "Current Credit
Agreement"). The facility is used to finance ongoing working capital
requirements of the Company and its subsidiaries. The Current Credit Agreement
is a three-year secured revolving credit and letter of credit facility, with
interest on outstanding borrowings determined, at the Company's option, based
upon stated margins below the prime rate at Nations Bank, N.A. or in excess of
LIBOR rates. Presently, the interest rate under the Current Credit Agreement is
50 basis points below the prime rate (based upon the current prime rate, the
interest rate under the Current Credit Agreement is 7.50% per annum). Available
credit under the Current Credit Agreement is as follows: revolving credit
advances not to exceed $60.0 million, documentary letters of credit not to
exceed $130.0 million and stand-by letters of credit not to exceed $45.0 million
(including the $30.0 million stand-by letter of credit to secure the Company's
cash contingent payment obligation in connection with the Jeri-Jo acquisition),
with aggregate letters of credit not to exceed
10
<PAGE>
McNaughton Apparel Group Inc, (Continued)
Notes to Consolidated Financial Statements
(Unaudited)
7. Financing Arrangements and Extraordinary Item (continued)
$160.0 million. Under the Current Credit Agreement, the aggregate credit
available to the Company is equal to the lesser of (i) $175.0 million or (ii)
the sum of 85% of eligible accounts receivable and 60% of eligible inventory.
The 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. The Company and its
subsidiaries guarantee the Company's obligations under the Current Credit
Agreement and have granted a lien on substantially all of their respective
assets to secure the obligations under the Current Credit Agreement. The
weighted average interest rate on the revolving credit facility was 8.0% for
fiscal 1998 and 7.2% for the first nine months of fiscal 1999. The Company
continued to factor accounts receivable pursuant to factoring arrangements.
On June 18, 1998, the Company also issued the Senior Notes due 2005. The
proceeds of the Senior Notes were used to finance the Jeri-Jo acquisition and to
refinance then existing indebtedness of the Company and Jeri-Jo. The Company's
obligations under the Senior Notes are unsecured and are guaranteed by all of
the Company's subsidiaries. The Indenture contains a number of restrictive
covenants, including covenants which limit the incurrence of liens and
indebtedness, limit transactions with affiliates, sales of assets, investments
and other restricted payments. On August 3, 1999, the Company executed the
First Supplemental Indenture, which amended the Indenture to provide for, among
other matters, the early extinguishment of a portion of the outstanding earn-out
obligation payable to certain of the sellers of Miss Erika and to restrict the
amount of cash that may be paid with respect to the Company's earn-out
obligation incurred in connection with its acquisition of Jeri-Jo.
The extraordinary item, net of tax, of $1.2 million resulted from the
write-off of deferred financing costs of $2.0 million associated with the early
extinguishment of the Prior Credit Agreement on June 18, 1998.
At July 31, 1999, the Company had indebtedness totaling $125.0 million of
Senior Notes and had no borrowings under its revolving credit facility under the
Current Credit Agreement. In addition, at July 31, 1999, the Company had
obligations under undrawn letters of credit in the aggregate face amount of
approximately $92.7 million and had total additional available credit under the
Current Credit Agreement of approximately $31.2 million pursuant to the
borrowing base formula set forth therein.
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
-------------------------
(In Thousands)
<S> <C> <C>
Interest on $125.0 million 12 1/2%
Senior Notes $ 2,605 $ 5,773
Reserve for litigation 2,700 2,500
Contractual bonuses payable 2,327 2,325
Profit sharing contribution payable 574 720
Federal income taxes payable 3,132 -
Other accrued expenses and current
liabilities 3,513 2,311
------- -------
$14,851 $13,629
======= =======
</TABLE>
9. 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.
11
<PAGE>
McNaughton Apparel Group Inc, (Continued)
Notes to Consolidated Financial Statements
(Unaudited)
10. 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 July 31, 1999, the
Company has purchased a total of 651,000 shares at an aggregate cost of
approximately $5.5 million. The Company's Current Credit Agreement and the
Indenture limit the amounts which may be expended on stock purchases.
11. Legal Proceedings
On July 14, 1998, Norton McNaughton of Squire, Inc.'s ("Squire")
distribution and cutting contractors, Railroad Enterprises, Inc. ("Railroad")
and Cutting Edge Services, Inc. ("Cutting Edge"), respectively (collectively,
"Plaintiffs"), filed an action in the New York State Supreme Court for New York
County which, as amended, was entitled Cutting Edge Services, Inc. and Railroad
----------------------------------------
Enterprises, Inc. v. Norton McNaughton of Squire, Inc. and Norton McNaughton,
- -----------------------------------------------------------------------------
Inc. Plaintiffs had claimed that Squire breached its contracts with them
- ----
because, among other things, Miss Erika and Jeri-Jo had failed to use
Plaintiffs' services as allegedly required under Norton's contracts with
Plaintiffs. This action sought substantial compensatory and punitive damages
and related declaratory relief concerning rights under the contracts. In
connection with the Cutting Edge and Railroad lawsuit, as well as other pending
litigation, the Company established a litigation reserve of $2.5 million in
fiscal 1998.
On August 9, 1999, the Company and Squire entered into an agreement between
Squire, Railroad and Cutting Edge (the "Agreement"), pursuant to which, among
other matters, the foregoing lawsuit was terminated and Squire purchased certain
assets of Railroad and Cutting Edge, including fixed assets, machinery and
equipment at their facilities, and Railroad's and Cutting Edge's rights under
their existing agreements with Squire. The purchase price (the "Purchase
Price") was $5.5 million payable as follows: $3.0 million at closing;
thereafter, $108,333.33 per month, payable at month-end from July 31, 1999
through March 31, 2000, and $508,333.33 per month payable at month-end from
April 30, 2000 through May 31, 2000, $408,333.33 payable on June 30, 2000, and
$100,000 payable on December 31, 2000.
The Agreement also provided for the termination of Squire's existing long-
term agreements with Railroad (distribution) and Cutting Edge (cutting).
Railroad has agreed to manage the assets Squire purchased and to continue
performing all of Squire's receiving, warehousing and distribution services from
Railroad's New Jersey facilities until Squire relocates such operations to South
Carolina which relocation is expected to occur in the summer of 2000, and to
bear all of the costs in connection therewith. Finally, Squire has also
retained Railroad to provide consulting services relating to the relocation of
its warehouse and distribution facilities to South Carolina for a total fee of
$500,000 payable on a monthly basis over a one-year period.
Pursuant to the Agreement, Railroad and Cutting Edge have agreed to obtain
releases from their landlords of Squire's limited guarantees of Railroad's and
Cutting Edge's warehouse leases. To the extent that those releases are not
obtained, the Purchase Price will be reduced by the amount due under the
guarantees, which totals approximately $800,000. In addition, the Agreement
provides for the early termination of Squire's East Rutherford, New Jersey piece
goods warehouse sublease from Cutting Edge effective September 30, 1999.
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. 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.
12
<PAGE>
McNaughton Apparel Group Inc, (Continued)
Notes to Consolidated Financial Statements
(Unaudited)
12. 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.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Recent Events
- -------------
On August 4, 1999, the Company retired 64.3% of the earn-out obligation
payable to the sellers of Miss Erika for $10.0 million in cash. The portion of
the earn-out obligation which was retired was owned by two investment funds and
their affiliates who were interested in monetizing their portion of the
contingent earn-out payment due to closure of the funds in which these
investments were held. The remaining earn-out obligation, representing 35.7%,
continues to be governed by the original earn-out provisions described above.
This remaining interest is held substantially by members of the current Miss
Erika management team, none of whom desired to exercise the option of receiving
a potentially discounted early payment of the contingent earn-out.
On August 9, 1999, the Company and Squire entered into the Agreement
between Squire, Railroad and Cutting Edge pursuant to which, among other
matters, the foregoing lawsuit was terminated and Squire purchased certain
assets of Railroad and Cutting Edge, including fixed assets, machinery and
equipment at their facilities, and Railroad's and Cutting Edge's rights under
their existing agreements with Squire. The Purchase Price was $5.5 million
payable as follows: $3.0 million at closing; thereafter, $108,333.33 per month,
payable at month-end from July 31, 1999 through March 31, 2000, and $508,333.33
per month payable at month-end from April 30, 2000 through May 31, 2000,
$408,333.33 payable on June 30, 2000, and $100,000 payable on December 31, 2000.
The Agreement also provided for the termination of Squire's existing long-
term agreements with Railroad (distribution) and Cutting Edge (cutting).
Railroad has agreed to manage the assets Squire purchased and to continue
performing all of Squire's receiving, warehousing and distribution services from
Railroad's New Jersey facilities until Squire relocates such operations to South
Carolina in the summer of 2000, and to bear all of the costs in connection
therewith. Finally, Squire has also retained Railroad to provide consulting
services relating to the relocation of its warehouse and distribution facilities
to South Carolina for a total fee of $500,000 payable on a monthly basis over a
one-year period.
Pursuant to the Agreement, Railroad and Cutting Edge have agreed to obtain
releases from their landlords of Squire's limited guarantees of Railroad's and
Cutting Edge's warehouse leases. To the extent that those releases are not
obtained, the Purchase Price will be reduced by the amount due under the
guarantees, which totals approximately $800,000. In addition, the Agreement
provides for the early termination of Squire's East Rutherford, New Jersey piece
goods warehouse sublease from Cutting Edge effective September 30, 1999.
General
- -------
The Company's business strategy is to expand its branded product lines,
broaden its customer base and further develop its global product sourcing
capabilities. A key component of this business strategy involves the selective
acquisition of complimentary businesses and brands. In connection therewith,
the Company completed the Miss Erika and Jeri-Jo acquisitions. As a result of
the Company's recent acquisitions, the following discussion of the Company's
historical financial condition and results of operations is not necessarily
indicative of future results.
The Company's continuing focus on improving profitability has also led the
Company to undertake certain merchandising initiatives to improve gross profit
and gross profit margins with respect to the Norton McNaughton product lines.
The Company has reduced the number of products (i.e., reduced the number of
SKU's) offered in any particular collection of its Norton McNaughton product
lines in an effort to minimize the number of unrelated items unsold by retailers
at the end of a selling period and to reduce any related sales allowances. In
addition, by taking advantage of product sourcing opportunities, the Company has
been able to offer higher quality and more diverse products to retailers at
lower price points in an effort to further enhance sales of Norton McNaughton
products and to further reduce sales allowances. As a result of these
initiatives, the Company anticipates that revenue levels in its Norton
McNaughton product lines in fiscal 1999 will decrease from those in fiscal 1998.
As is the norm in the apparel industry, the Company engages in promotional
activity with its customers which affects the Company's sales, gross profit and
gross profit margins. Accordingly, the Company's sales, gross profit and gross
profit margins vary from quarter to quarter and year to year. In addition, the
Company generally ships its products in accordance with normal apparel industry
shipping cycles. This may result in shipments to customers occurring before or
after a particular fiscal quarter end, thereby affecting both fiscal quarter to
quarter comparisons and quarter to quarter results during a fiscal year.
Correspondingly, sales, gross profit and gross profit margins may be affected by
the timing of shipping cycles or the delivery of finished goods.
14
<PAGE>
The Company contracts for the manufacture of all of its products and
substantially all of its products are produced overseas. Contract manufacturing
allows the Company to avoid significant capital expenditures for manufacturing
facilities and the fixed costs of maintaining a large production work force.
Foreign contract manufacturing allows it to take advantage of lower
manufacturing costs, thereby allowing it to reduce prices to its customers. The
Company believes that foreign sourcing for moderately-priced merchandise also
allows it to avail itself of a well-equipped and skilled labor force, thereby
allowing it to produce a higher quality, better-valued product for its
customers. The Company offsets the longer lead-time necessary for foreign
sourced fabrics and manufacturing by early and timely attention to production
planning.
This 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 deterioration in retailing conditions for women's and junior's apparel, an
increase in price pressures and other competitive factors, any of which could
result in an unanticipated decrease in gross profit margins, unanticipated
problems arising with the integration of Miss Erika's and Jeri-Jo's businesses,
the unanticipated loss of a major customer, the unanticipated loss of a major
contractor or supplier, year 2000 issues, particularly with respect to the
Company's vendors and customers, unanticipated problems arising out of Norton
McNaughton of Squire's relocation of its distribution function to South Carolina
where the activities will be performed "in-house", and weather conditions which
could impact retail traffic and the Company's ability to ship on a timely basis.
Accordingly, there can be no assurance that the Company will achieve its
anticipated operating results.
15
<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
-------------------------------------------- -----------------------------------------
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
------------------ -------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 73.0 76.0 75.6 78.6
------------------ -------------------- ----------------- ------------------
Gross profit 27.0 24.0 24.4 21.4
Selling, general and
administrative expenses 16.1 17.2 16.2 16.6
Depreciation and amortization 1.4 0.8 1.2 0.6
------------------ -------------------- ----------------- ------------------
Income from operations 9.5 6.0 7.0 4.2
Interest expense 4.7 4.0 4.8 3.1
Interest income (0.1) (0.1) (0.1) (0.1)
------------------ -------------------- ----------------- ------------------
Income before provision
for income taxes and
extraordinary item 4.9 2.1 2.3 1.2
Provision for income taxes 2.2 1.5 1.0 0.8
------------------ -------------------- ----------------- ------------------
Income before extraordinary
item 2.7 0.6 1.3 0.4
Extraordinary item, net - (1.5) - (0.5)
------------------ -------------------- ----------------- ------------------
Net income (loss) 2.7% (0.9)% 1.3% (0.1)%
================== ==================== ================= ==================
</TABLE>
Quarter Ended July 31, 1999 Compared to Quarter Ended August 1, 1998
- --------------------------------------------------------------------
Net sales were $92.9 million for the third quarter of fiscal 1999 compared
to $80.0 million for the third quarter of fiscal 1998. The increase in net sales
of $12.9 million was primarily attributable to the incremental addition of net
sales from the Energie, Currants and Jamie Scott product lines of $15.7 million
following the acquisition of Jeri-Jo on June 18, 1998 and an increase in net
sales in the Erika product lines of $6.2 million. These increases were offset
in part by decreases in net sales of $3.6 million in the Norton Studio product
lines, $2.7 million in the Norton McNaughton product lines and $2.6 million in
the DPS product line.
Gross profit margin was 27.0% for the third quarter of fiscal 1999 compared
to 24.0% for the third quarter of fiscal 1998. The increase in gross profit
margin was primarily due to the addition of gross profit from the Energie,
Currants and Jamie Scott product lines following the acquisition of Jeri-Jo on
June 18, 1998, as well as improved gross profit margins in those product lines
as compared to the third quarter of 1998, and improved gross profit margins in
the Erika, Norton McNaughton and Norton Studio product lines in the third
quarter of fiscal 1999.
Selling, general and administrative expenses ("SG&A" expenses) were $15.0
million, or 16.1% of net sales, in the third quarter of fiscal 1999 compared to
$13.7 million, or 17.2% of net sales, in the third quarter of fiscal 1998. The
increase in SG&A expenses of $1.3 million resulted primarily from the
incremental addition of overhead from the Energie, Currants and Jamie Scott
product lines following the acquisition of Jeri-Jo on June 18, 1998. The
decrease in SG&A expenses as a percentage of net sales resulted primarily from
the spreading of the fixed component of these expenses over higher net sales in
the third quarter of fiscal 1999.
Depreciation and amortization was $1.3 million in the third quarter of
fiscal 1999 compared to approximately $600,000 in the third quarter of fiscal
1998. The increase was primarily due to the amortization of goodwill resulting
from the Jeri-Jo acquisition.
Interest expense increased to $4.4 million in the third quarter of fiscal
1999 compared to $3.2 million in the third quarter of fiscal 1998. The increase
of $1.2 million was primarily attributable to incremental interest expense
associated with debt incurred to acquire Jeri-Jo on June 18, 1998.
16
<PAGE>
Thirty-Nine Weeks Ended July 31, 1999 Compared to Thirty-Nine Weeks Ended August
- --------------------------------------------------------------------------------
1, 1998
- -------
Net sales were $283.5 million for the first nine months of fiscal 1999
compared to $227.6 million for the first nine months of fiscal 1998. The
increase in net sales of $55.9 million was attributable to the incremental
addition of net sales from the Energie, Currants and Jamie Scott product lines
of $63.2 million following the acquisition of Jeri-Jo on June 18, 1998 and an
increase in net sales in the Erika product lines of $15.8 million. These
increases were offset in part by a decrease in net sales of $18.4 million in the
Norton McNaughton product lines.
Gross profit margin was 24.4% for the first nine months of fiscal 1999
compared to 21.4% for the first nine months of fiscal 1998. The increase in
gross profit margin was primarily due to the addition of higher gross profit
margin from the Energie, Currants and Jamie Scott product lines following the
acquisition of Jeri-Jo on June 18, 1998.
SG&A expenses were $45.8 million, or 16.2% of net sales, in the first nine
months of fiscal 1999 compared to $37.7 million, or 16.6% of net sales, in the
first nine months of fiscal 1998. The increase in SG&A expenses of $8.1 million
resulted primarily from the incremental addition of overhead from the Energie,
Currants and Jamie Scott product lines following the acquisition of Jeri-Jo on
June 18, 1998. The decrease in SG&A expenses as a percentage of net sales
resulted primarily from the spreading of the fixed component of these expenses
over higher net sales in the first nine months of fiscal 1999.
Depreciation and amortization was $3.4 million in the first nine months of
fiscal 1999 compared to $1.4 million in the first nine months of fiscal 1998.
The increase was primarily due to the amortization of goodwill resulting from
the Jeri-Jo acquisition.
Interest expense increased to $13.7 million in the first nine months of
fiscal 1999 compared to $7.1 million in the first nine months of fiscal 1998.
The increase of $6.6 million was primarily attributable to incremental interest
expense associated with debt incurred to acquire Jeri-Jo on June 18, 1998.
Liquidity and Capital Resources
- -------------------------------
The Company is highly leveraged. On July 31, 1999, the Company had $125.0
million of Senior Notes outstanding, no revolving credit loans outstanding under
the Current Credit Agreement, and obligations under undrawn letters of credit in
the aggregate face amount of approximately $92.7 million. The Company will be
permitted to incur substantial additional indebtedness in the future. At July
31, 1999, the Company had total additional available credit of $31.2 million,
including $5.0 million of overadvance capability, under the Current Credit
Agreement pursuant to the borrowing base formula set forth therein, as well as
cash and cash equivalents of $18.5 million.
The Company's ability to make scheduled payments of principal of, to pay
the interest on, to refinance, as needed, 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 current
and projected levels of operations, management believes that cash flow from
operations and cash, together with available borrowings under the Current Credit
Agreement, will be adequate to meet the Company's liquidity needs for the
foreseeable future.
The Company's liquidity requirements arise from the funding of the
Company's working capital needs, primarily inventory and accounts receivable,
and, additionally, in the future, will arise from the Company's earn-out
obligations pursuant to the acquisitions of Miss Erika and Jeri-Jo. The
Company's primary sources of working capital are cash flow from operations and
advances under the Current Credit Agreement. The Company's borrowing
requirements for working capital purposes are seasonal, with peak working
capital needs generally arising at the end of the first and third fiscal
quarters and extending through the second and fourth fiscal quarters. The
Company had working capital of $109.5 million at July 31, 1999 as compared to
$104.0 million at October 31, 1998.
The Company sells its accounts receivable to a factor without recourse, up
to a maximum established by the factor for each customer. Receivables sold in
excess of these limitations are subject to recourse in the event of nonpayment
by the customer. The factor receives a commission for all purchased accounts
receivable which is calculated based on the net amount of gross sales less sales
discounts.
On September 30, 1997, 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, 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 payable by the Company is equal to the amount by which four
times the average of Miss Erika's earnings before interest expense, income
taxes, depreciation and amortization, as defined in the Miss Erika purchase
agreement ("Miss Erika EBITDA"), for the two fiscal years ending November 6,
1999, exceeds $24.0 million. The additional consideration paid for Miss Erika
will be accounted for as additional purchase price and will be reflected in
intangible assets. At the Company's discretion, the
17
<PAGE>
Company may, subject to a maximum number of shares, pay all or any portion of
the contingent payment in shares of Common Stock. The Miss Erika purchase
agreement, as originally executed, limited the number of shares of Common Stock
payable by the Company to a number of shares which, after giving effect to their
issuance, did not exceed 12% of the aggregate number of outstanding shares of
Common Stock at the time of payment. Following the early payment of a portion of
the Miss Erika earn-out obligation described below, this percentage limit was
amended to 2.822%. The Company has agreed to cause any shares of Common Stock
issued as a contingent payment to be registered under the Securities Act.
On August 4, 1999, the Company retired 64.3% of the earn-out obligation
payable to the sellers of Miss Erika for $10.0 million in cash. The portion of
the earn-out obligation which was retired was owned by two investment funds and
their affiliates who were interested in monetizing their portion of the
contingent earn-out payment due to closure of the funds in which these
investments were held. The remaining earn-out obligation, representing 35.7%,
continues to be governed by the original earn-out provisions described above.
This remaining interest is held substantially by members of the current Miss
Erika management team, none of whom desired to exercise the option of receiving
a potentially discounted early payment of the contingent earn-out. The Company
intends to pay the cash portion of the remaining contingent consideration from
internally generated funds and borrowings under the Company's revolving credit
facility. Miss Erika achieved Miss Erika EBITDA during fiscal 1998 and to date
during fiscal 1999 which, if sustained for the remainder of fiscal 1999, will
result in the payment of significant additional consideration, however, the
Company cannot predict the amount of additional consideration that may be
payable.
The Company entered into 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. Pursuant to this
credit arrangement, Norton continued to factor its accounts receivable, as well
as the accounts receivable of Miss Erika. This credit arrangement was
refinanced by the Current Credit Agreement in June 1998.
On June 18, 1998, a wholly-owned subsidiary of the Company completed the
acquisition of Jeri-Jo, acquiring substantially all the assets and assuming
substantially all the liabilities of the privately-held apparel importers of
moderately-priced juniors' and misses' updated sportswear. The purchase price
paid in the Jeri-Jo acquisition was (i) $55.0 million in cash at the closing of
the acquisition, (ii) the assumption of indebtedness of $10.9 million and
certain other contractual obligations. In addition, the Company agreed to pay an
additional contingent payment in cash and its Common Stock in the event that
certain earnings targets are achieved by Jeri-Jo for the two years subsequent to
the closing of the Jeri-Jo acquisition. 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 average earnings before
interest expense, income taxes, depreciation and amortization, as defined in the
Jeri-Jo purchase agreement ("Jeri-Jo EBITDA"), for the two years ending June 30,
2000, plus (B) 0.50 times any such average Jeri-Jo EBITDA between $17.0 million
and $20.0 million, plus (C) one times any such average Jeri-Jo EBITDA over $20.0
million, over (2) $55.0 million. Any additional consideration paid for Jeri-Jo
will be accounted for as additional purchase price and will be reflected in
intangible assets. The Company secured its obligation to pay the cash portion
of the contingent payment by delivery of a stand-by letter of credit in the face
amount of $30.0 million, which letter of credit may be drawn upon, in whole or
in part, in certain circumstances, including in the event of a default under the
cash contingent payment obligation. The Company has agreed to cause offers and
sales by the holders of any shares of Common Stock issued as a contingent
payment to be registered under the Securities Act, including, if requested, in
an underwritten offering. The Jeri-Jo purchase agreement provides that in
certain events, the sellers under the Jeri-Jo purchase agreement will have the
option to accelerate the Company's contingent payment obligation. In such
events, the accelerated contingent payment obligation would be payable in cash
in an amount equal to the amount by which (i) five times the greater of $17.0
million or an amount equal to Jeri-Jo's annualized EBITDA (as defined in the
Jeri-Jo purchase agreement) at the time of such event exceeds (ii) $55.0
million. Pursuant to the Indenture, the Company may pay up to a maximum of 75%
of the contingent payment in cash. The Company intends to pay the cash portion
of the contingent consideration from internally generated funds and borrowings
under the Company's revolving credit facility. Jeri-Jo achieved Jeri-Jo EBITDA
for the thirteen month period ended July 31, 1999 which, if sustained, will
result in the payment of significant additional consideration, however, the
Company cannot predict the amount of additional consideration that may be
payable.
Concurrent with the closing of the Jeri-Jo acquisition on June 18, 1998,
the Company entered into the Current Credit Agreement, a $175 million secured
revolving credit and letter of credit facility with NationsBanc Commercial
Corporation, The CIT Group/Commercial Services, Inc. and Fleet Bank N.A. The
facility is used to finance ongoing working capital requirements of the Company
and its subsidiaries. The Current Credit Agreement is a three-year secured
revolving credit and letter of credit facility, with interest on outstanding
borrowings determined, at the Company's option, based upon stated margins below
the prime rate or in excess of LIBOR rates. Presently, the interest rate under
the Current Credit Agreement is 50 basis points below the prime rate at Nations
Bank, N.A. (based upon the current prime rate, the interest rate under the
Current Credit Agreement is 7.50% per annum). Available credit under the
Current Credit Agreement is as follows: revolving credit advances not to exceed
$60.0 million, documentary letters of credit not to exceed $130.0 million and
stand-by letters of credit not to exceed $45.0 million (including the $30.0
million stand-by letter of credit to secure the Company's cash contingent
payment obligation in connection with the Jeri-Jo acquisition), with aggregate
letters of credit not to exceed $160.0 million. Under the Current Credit
Agreement, the aggregate credit available to the Company is equal to the lesser
of (i) $175.0 million or (ii) the sum of 85% of eligible accounts receivable and
60% of eligible inventory. The Company and its subsidiaries guarantee
18
<PAGE>
the Company's obligations under the Current Credit Agreement and have granted a
lien on substantially all of their respective assets to secure the obligations
under the Current Credit Agreement. The weighted average interest rate on the
revolving credit facility was 8.0% for fiscal 1998 and 7.2% for the first nine
months of fiscal 1999. The Company continued to factor accounts receivable
pursuant to factoring arrangements.
On June 18, 1998, the Company also issued the Senior Notes due 2005. The
proceeds of the Senior Notes were used to finance the Jeri-Jo acquisition and to
refinance then existing indebtedness of the Company and Jeri-Jo. The Company's
obligations under the Senior Notes are unsecured and are guaranteed by all of
the Company's subsidiaries.
The 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.
On August 9, 1999, the Company and Squire entered into the Agreement
between Squire, Railroad and Cutting Edge pursuant to which, among other
matters, the foregoing lawsuit was terminated and Squire purchased certain
assets of Railroad and Cutting Edge, including fixed assets, machinery and
equipment at their facilities, and Railroad's and Cutting Edge's rights under
their existing agreements with Squire. The Purchase Price was $5.5 million
payable as follows: $3.0 million at closing; thereafter, $108,333.33 per month,
payable at month-end from July 31, 1999 through March 31, 2000, and $508,333.33
per month payable at month-end from April 30, 2000 through May 31, 2000,
$408,333.33 payable on June 30, 2000, and $100,000 payable on December 31, 2000.
The Agreement also provided for the termination of Squire's existing long-
term agreements with Railroad (distribution) and Cutting Edge (cutting).
Railroad has agreed to manage the assets Squire purchased and to continue
performing all of Squire's receiving, warehousing and distribution services from
Railroad's New Jersey facilities until Squire relocates such operations to South
Carolina in the summer of 2000, and to bear all of the costs in connection
therewith. Finally, Squire has also retained Railroad to provide consulting
services relating to the relocation of its warehouse and distribution facilities
to South Carolina for a total fee of $500,000 payable on a monthly basis over a
one-year period.
Pursuant to the Agreement, Railroad and Cutting Edge have agreed to obtain
releases from their landlords of Squire's limited guarantees of Railroad's and
Cutting Edge's warehouse leases. To the extent that those releases are not
obtained, the Purchase Price will be reduced by the amount due under the
guarantees, which totals approximately $800,000. In addition, the Agreement
provides for the early termination of Squire's East Rutherford, New Jersey piece
goods warehouse sublease from Cutting Edge effective September 30, 1999.
The Company anticipates that in the remainder of fiscal 1999 and fiscal
2000 it will incur capital expenditures of approximately $7.0 million to $8.0
million, primarily in connection with Squire's new distribution facilities in
South Carolina. 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 exppensed 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. 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 July 31, 1999, 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.
19
<PAGE>
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 Company is working to resolve the potential impact of the year 2000
(the "Year 2000") on its processing of date sensitive information and network
systems. 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, but not limited
to a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
The Company is continuing to assess its exposure to the Year 2000 problem,
and has established a comprehensive approach to that exposure. Generally, the
Company has Year 2000 exposure in the following areas: (i) financial and
management operating computer systems used to manage the Company's business, and
(ii) computer systems used by third parties, in particular, financial
institutions, customers and suppliers of the Company.
The Company has delegated responsibility to a group of executives to
coordinate the identification, evaluation and implementation of changes to
computer systems and applications necessary to achieve the Company's goal of a
Year 2000 date conversion which would minimize the effect on its customers, and
avoid disruption to business operations. The Company is also focusing on
hardware and software tools, programming and outside forces that may affect its
operations, including its vendors, banks and customers. The Company's analysis
of the Year 2000 threat is ongoing and will be continuously updated throughout
fiscal 1999, as necessary.
The Company has taken an inventory of all systems and software in order to
identify all business and computer applications, so that it can identify
potential compliance problems. The Company has initiated communications with
all of its significant customers, suppliers, contractors and major systems
developers to determine their plans to remedy any Year 2000 issues that arise in
their business. The Company is compiling a database of information based upon
these responses, which is expected to be updated throughout fiscal 1999. To the
extent problems are identified, the Company will implement corrective
procedures, where necessary, then test the applications for Year 2000
compliance. The Company expects to complete this project prior to December 31,
1999. 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.
The Company estimates that its Year 2000 effort will have a nominal cost
impact, although it can make no assurances as to the ultimate cost of the Year
2000 effort or the total cost of information systems. Such costs will be
expensed as incurred, except to the extent such costs are incurred for the
purchase or lease of capital equipment. 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. The Company expects to make some of the necessary modifications
through its ongoing investment in system upgrades. The Company has updated its
purchasing, production and shipping systems to be Year 2000 compliant and is in
the process of implementing a new financial software package, which it expects
to complete by October 1999. The Company anticipates that it will incur
approximately $100,000 in the remainder of fiscal 1999 in connection with its
Year 2000 efforts.
If the Company is unsuccessful in completing remediation of non-compliant
systems, and if customers or vendors cannot rectify Year 2000 issues, the
Company could incur additional costs, which may be substantial, to develop
alternative methods of managing its business and replacing non-compliant
equipment, and may experience delays in receipts from vendors, shipments to
customers, or payments to vendors. The Company is in the process of developing
contingency plans for critical functions in the event of non-compliance by its
customers and vendors.
20
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. The table presents
principal cash flows and weighted-average interest rates by expected maturity
dates for the Company's debt obligations at July 31, 1999.
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term debt:
Revolving credit - - - - - - -
Prime rate less 50 basis points 7.50% - - - - - 7.50%
Long-term debt:
$125 million Senior Notes - - - - - $ 125,000 $125,000
Interest rate 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5%
</TABLE>
21
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
On July 14, 1998, Norton McNaughton of Squire, Inc.'s ("Squire")
distribution and cutting contractors, Railroad Enterprises, Inc. ("Railroad")
and Cutting Edge Services, Inc. ("Cutting Edge"), respectively (collectively,
"Plaintiffs"), filed an action in the New York State Supreme Court for New York
County which, as amended, was entitled Cutting Edge Services, Inc. and Railroad
----------------------------------------
Enterprises, Inc. v. Norton McNaughton of Squire, Inc. and Norton McNaughton,
- -----------------------------------------------------------------------------
Inc. Plaintiffs had claimed that Squire breached its contracts with them
- ----
because, among other things, Miss Erika and Jeri-Jo had failed to use
Plaintiffs' services as allegedly required under Norton's contracts with
Plaintiffs. This action sought substantial compensatory and punitive damages
and related declaratory relief concerning rights under the contracts. In
connection with the Cutting Edge and Railroad lawsuit, as well as other pending
litigation, the Company established a litigation reserve of $2.5 million in
fiscal 1998.
On August 9, 1999, the Company and Squire entered into an agreement between
Squire, Railroad and Cutting Edge (the "Agreement"), pursuant to which, among
other matters, the foregoing lawsuit was terminated and Squire purchased certain
assets of Railroad and Cutting Edge, including fixed assets, machinery and
equipment at their facilities, and Railroad's and Cutting Edge's rights under
their existing agreements with Squire. The purchase price (the "Purchase
Price")was $5.5 million payable as follows: $3.0 million at closing; thereafter,
$108,333.33 per month, payable at month-end from July 31, 1999 through March 31,
2000, and $508,333.33 per month payable at month-end from April 30, 2000 through
May 31, 2000, $408,333.33 payable on June 30, 2000, and $100,000 payable on
December 31, 2000.
The Agreement also provided for the termination of Squire's existing long-
term agreements with Railroad (distribution) and Cutting Edge (cutting).
Railroad has agreed to manage the assets Squire purchased and to continue
performing all of Squire's receiving, warehousing and distribution services from
Railroad's New Jersey facilities until Squire relocates such operations to South
Carolina in the summer of 2000, and to bear all of the costs in connection
therewith. Finally, Squire has also retained Railroad to provide consulting
services relating to the relocation of its warehouse and distribution facilities
to South Carolina for a total fee of $500,000 payable on a monthly basis over a
one-year period.
Pursuant to the Agreement, Railroad and Cutting Edge have agreed to obtain
releases from their landlords of Squire's limited guarantees of Railroad's and
Cutting Edge's warehouse leases. To the extent that those releases are not
obtained, the Purchase Price will be reduced by the amount due under the
guarantees, which totals approximately $800,000. In addition, the Agreement
provides for the early termination of Squire's East Rutherford, New Jersey piece
goods warehouse sublease from Cutting Edge effective September 30, 1999.
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
Exhibit 3.1 Certificate of Amendment of Certificate of Incorporation of
McNaughton Apparel Group Inc. (incorporated herein by reference
to Exhibit 3.1 of the Registrant's Form 10-Q for the quarter
ended January 30, 1999).
Exhibit 3.2 By-Laws of McNaughton Apparel Group Inc. (incorporated herein by
reference to Exhibits to the Registrant's Registration Statement
on Form S-1 No. 33-74200).
Exhibit 10.1 Second Supplemental Indenture dated as of August 25, 1999 by and
between McNaughton Apparel Group Inc., a Delaware corporation,
formerly known as Norton McNaughton, Inc., Norton McNaughton of
Squire, Inc., a New York corporation, Miss Erika, Inc., a
Delaware corporation, Jeri-Jo Knitwear, Inc., a Delaware
corporation, formerly known as JJ Acquisition Corp., Norty's,
Inc., a Delaware corporation, and United States Trust Company of
New York, a New York banking corporation, as Trustee.
Exhibit 27 Financial Data Schedule (For SEC use only).
The Registrant filed a current report on Form 8-K subsequent to July 31, 1999
reporting under Item 5, "Other Events" and Item 7, "Exhibits."
22
<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.
MMCNAUGHTON APPAREL GROUP INC.
----------------------------------------
(Registrant)
Date: September 14, 1999 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)
23
<PAGE>
Exhibit 10.1
SECOND SUPPLEMENTAL INDENTURE dated as of August 25, 1999, by and
among McNaughton Apparel Group Inc. (formerly known as Norton McNaughton, Inc.),
a Delaware corporation (the "Company"), Norton McNaughton of Squire, Inc., a New
York corporation, Miss Erika, Inc., a Delaware corporation, Jeri-Jo Knitwear,
Inc. (formerly known as JJ Acquisition Corp.), a Delaware corporation, and
Norty's, Inc., a Delaware corporation (each a "Subsidiary Guarantor" and
collectively, the "Subsidiary Guarantors"), and United States Trust Company of
New York, a New York banking corporation, as Trustee (the "Trustee").
WHEREAS, the Company, the Subsidiary Guarantors and the Trustee have
entered into an Indenture dated as of June 18, 1998, as amended and supplemented
from time to time (the "Indenture"), pursuant to which the Company issued
$125,000,000 aggregate principal amount of 12 1/2% Senior Notes Due 2005 (the
"Securities");
WHEREAS, Section 9.1 of the Indenture provides that the Company, the
Subsidiary Guarantors and the Trustee may amend or supplement the Indenture
without the written consent of the Holder or Holders of the outstanding
Securities to provide for a Subsidiary Guarantee by a newly incorporated
Restricted Subsidiary pursuant to Sections 4.11 and 10.7(a) of the Indenture;
WHEREAS, the Company is the sole holder of all of the authorized,
issued and outstanding capital stock of McNaughton Apparel Holdings Inc., a
South Carolina corporation ("Holdings");
WHEREAS, pursuant to Section 4.11 of the Indenture, Holdings desires
to execute and deliver, and the Company shall cause Holdings to execute and
deliver, this Second Supplemental Indenture in accordance with and pursuant to
the terms of Sections 9.1 and 10.7(a) of the Indenture to be joined as a
Subsidiary Guarantor under the Indenture;
WHEREAS, all acts and things prescribed by the Indenture, by law and
by the Certificate of Incorporation and the bylaws of the Company, of the
Subsidiary Guarantors, of Holdings and of the Trustee necessary to make this
Second Supplemental Indenture a valid instrument legally binding on the Company,
the Subsidiary Guarantors, Holdings and the Trustee, in accordance with its
terms, have been duly done and performed; and
WHEREAS, all conditions precedent to amend or supplement the Indenture
have been met.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Holdings, the Company, the Subsidiary Guarantors and the Trustee
agree as follows for the benefit of each other and for the equal and ratable
benefit of the Holders of the Securities:
<PAGE>
2
SECTION I
Holdings hereby agrees from and after the date hereof to become a
Subsidiary Guarantor and to be bound by the provisions of the Indenture,
including, without limitation, the representations and warranties contained in
Articles X and XI of the Indenture, as a Subsidiary Guarantor.
SECTION II
Except as amended and supplemented hereby, the Indenture is hereby
ratified and confirmed in all respects and shall remain in full force and
effect.
SECTION III
This Second Supplemental Indenture shall be governed by and construed
in accordance with, the laws of the State of New York but without giving effect
to applicable principles of conflicts of law to the extent that the application
of the laws of another jurisdiction would be required thereby.
SECTION IV
Capitalized terms used herein and not otherwise defined herein have
the meanings assigned to them in the Indenture.
SECTION V
The parties may sign any number of copies of this Second Supplemental
Indenture and may sign such in counterparts. Each signed counterpart copy shall
be an original, but all of them together represent the signed agreement. One
signed copy is enough to prove this Second Supplemental Indenture.
* * *
<PAGE>
3
IN WITNESS WHEREOF, the parties have caused this Second Supplemental
Indenture to be duly executed as of the dated first above written.
MCNAUGHTON APPAREL GROUP INC.
By: /s/ Peter Boneparth
-----------------------------------
Name: Peter Boneparth
Title: Chief Executive Officer
NORTON MCNAUGHTON OF SQUIRE, INC.
By: /s/ Peter Boneparth
-----------------------------------
Name: Peter Boneparth
Title: Chief Executive Officer
MISS ERIKA, INC.
By: /s/ Peter Boneparth
-----------------------------------
Name: Peter Boneparth
Title: Vice Chairman of the Board
JERI-JO KNITWEAR, INC.
By: /s/ Peter Boneparth
-----------------------------------
Name: Peter Boneparth
Title: Vice Chairman of the Board
NORTY'S, INC.
By: /s/ Peter Boneparth
-----------------------------------
Name: Peter Boneparth
Title: Chief Executive Officer
<PAGE>
4
UNITED STATES TRUST COMPANY OF NEW YORK
By: /s/ Margaret Ciesmelewski
-----------------------------------
Name: Margaret Ciesmelewski
Title: Vice President
Agreed and Accepted as of the date hereof:
MCNAUGHTON APPAREL HOLDINGS
INC.
By: : /s/ Peter Boneparth
-------------------------------
Name: Peter Boneparth
Title: Chief Executive Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE NINE
MONTH PERIOD ENDED JULY 31ST, 1999 FOR NORTON MCNAUGHTON, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-06-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 23,572
<SECURITIES> 0
<RECEIVABLES> 58,141
<ALLOWANCES> 0
<INVENTORY> 46,875
<CURRENT-ASSETS> 133,578
<PP&E> 14,190
<DEPRECIATION> 5,191
<TOTAL-ASSETS> 195,832
<CURRENT-LIABILITIES> 24,061
<BONDS> 125,000
0
0
<COMMON> 81
<OTHER-SE> 45,017
<TOTAL-LIABILITY-AND-EQUITY> 195,832
<SALES> 283,447
<TOTAL-REVENUES> 283,447
<CGS> 214,393
<TOTAL-COSTS> 214,393
<OTHER-EXPENSES> 49,146
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,670
<INCOME-PRETAX> 6,484
<INCOME-TAX> 2,918
<INCOME-CONTINUING> 3,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,566
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.47
</TABLE>
