<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 January 30, 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
-------
<TABLE>
<CAPTION>
McNaughton Apparel Group Inc.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
<S> <C>
Delaware 13-3747173
-------------------------------------------------------------- -----------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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)
Norton McNaughton, Inc.
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
</TABLE>
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, 7,428,435 shares as of March 15, 1999.
<PAGE>
INDEX TO FORM 10-Q
MCNAUGHTON APPAREL GROUP INC.
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1.
Financial Statements:
Consolidated Balance Sheets at January 30, 1999 (Unaudited)
and October 31, 1998 3
Consolidated Statements of Operations for the thirteen weeks ended
January 30, 1999 and January 31, 1998 (Unaudited) 4
Consolidated Statements of Stockholders' Equity for the thirteen
weeks ended January 30, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the thirteen weeks
ended January 30, 1999 and January 31, 1998 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-12
ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-17
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
McNaughton Apparel Group Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 30, October 31,
1999 1998
(Unaudited) (Note)
-------------------------------------------
(In Thousands)
<S> <S> <C>
ASSETS
Current assets:
Cash $ 1,901 $ 205
Due from factor 49,099 85,998
Inventory 61,565 47,386
Income taxes receivable and current deferred taxes 4,067 2,522
Prepaid expenses and other current assets 3,168 1,273
-------- --------
Total current assets 119,800 137,384
Fixed assets, net 8,814 8,261
Notes receivable from management stockholders 2,471 2,471
Intangible assets, net 42,994 43,464
Deferred financing costs, net 6,322 6,348
Other assets 3,460 3,661
-------- --------
Total assets $183,861 $201,589
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,539 $ 15,932
Revolving credit loan - 3,839
Accrued expenses and other current liabilities 8,079 13,629
-------- --------
Total current liabilities 17,618 33,400
12 1/2% Senior Notes due 2005 125,000 125,000
Other long-term liabilities 1,704 1,719
-------- --------
Total liabilities 144,322 160,119
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, authorized 20,000,000 shares, 8,079,435
and 8,065,429 shares issued, respectively, and 7,428,435 and 7,414,429
shares outstanding, respectively 81 81
Capital in excess of par 23,951 23,923
Retained earnings 21,042 23,001
Treasury stock, at cost, 651,000 shares (5,535) (5,535)
-------- --------
Total stockholders' equity 39,539 41,470
-------- --------
Total liabilities and stockholders' equity $183,861 $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
--------------------
January 30, January 31,
1999 1998
---- ----
(In Thousands, Except Per Share Amounts)
<S> <C> <C>
Net sales $66,619 $ 53,508
Cost of goods sold 51,452 42,111
------- --------
Gross profit 15,167 11,397
Selling, general and administrative expenses 13,299 10,673
Depreciation and amortization 1,031 349
------- --------
Income from operations 837 375
Interest expense and amortization of deferred financing costs 4,506 1,701
Other income, net (107) (41)
------- --------
Loss before benefit for income taxes (3,562) (1,285)
Benefit for income taxes (1,603) (440)
------- --------
Net loss $(1,959) $ (845)
======= ========
BASIC EARNINGS PER SHARE:
Net loss $ (0.26) $ (0.11)
======= ========
Weighted average number of common shares outstanding 7,419 7,411
======= ========
DILUTED EARNINGS PER SHARE:
Net loss $ (0.26) $ (0.11)
======= ========
Weighted average number of common shares outstanding
assuming dilution 7,419 7,411
======= ========
</TABLE>
See accompanying notes.
4
<PAGE>
MCNAUGHTON APPAREL GROUP INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THIRTEEN WEEKS ENDED JANUARY 30, 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 loss for the thirteen weeks
ended January 30, 1999 - - - (1,959) - (1,959)
Issuance of 14,006 shares of common
stock through the employee
stock purchase plan 14 - 28 - - 28
--------- -------- --------- --------- -------- ---------
Balance at January 30, 1999 8,079 $81 $23,951 $21,042 $(5,535) $39,539
========= ======== ========= ========= ======== =========
</TABLE>
See accompanying notes.
5
<PAGE>
MCNAUGHTON APPAREL GROUP INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------------------------------
January 30, January 31,
1999 1998
-----------------------------------------------
(In Thousands)
<S> <C> <C>
Net loss $ (1,959) $ (845)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization of fixed assets 476 295
Amortization of intangible assets and deferred financing costs 768 288
Changes in operating assets and liabilities:
Due from factor 36,899 18,921
Inventory (14,179) (17,936)
Income taxes receivable and current deferred taxes (1,545) (348)
Prepaid expenses and other current assets (1,895) 1,392
Other assets 201 (130)
Accounts payable (6,393) (2,196)
Accrued expenses and other current liabilities (5,550) (1,516)
Other long-term liabilities (15) 5
------------ ------------
Net cash provided by (used for) operating activities 6,808 (2,070)
------------ ------------
INVESTING ACTIVITIES
Purchase of fixed assets (1,029) (582)
Additional purchase price (85) (133)
------------ ------------
Net cash used for investing activities (1,114) (715)
------------ ------------
FINANCING ACTIVITIES
Net (repayments) advances under revolving credit agreement (3,839) 3,139
Deferred financing costs (187) -
Proceeds from issuance of common stock 28 12
Repayment of term loan - (750)
----------- ------------
Net cash (used for) provided by financing activities (3,998) 2,401
----------- ------------
Increase (decrease) in cash 1,696 (384)
Cash at beginning of year 205 529
------------ ------------
Cash at end of period $ 1,901 $ 145
============ ============
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ - $ -
Interest paid $ 7,473 $ 1,468
</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 January 30, 1999 and the results of operations for the
thirteen weeks ended January 30, 1999 and January 31, 1998 and cash flows for
the thirteen weeks ended January 30, 1999 and January 31, 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 ended January 30, 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 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.
The Company changed its name from Norton McNaughton, Inc. to McNaughton
Apparel Group Inc. on February 9, 1999.
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 fiscal 1998 in connection with
obtaining the Company's current revolving credit agreement and the Company's
issuance of 12 1/2% Senior Notes due 2005 (the "Senior Notes"). Such deferred
financing costs are being amortized on a straight-line basis over the three-year
term of the current financing agreement and over the seven-year term of the
Senior Notes.
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 weeks ended
January 30, 1999 and January 31, 1998, options outstanding during the period
using the treasury stock method were excluded from the net loss per share
computation of diluted earnings per share because they were antidilutive.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 is
effective for fiscal years beginning after December 15, 1997. This statement
requires disclosure of all components of comprehensive income on an annual and
interim basis. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company has adopted this statement
for fiscal 1999 and such adoption has no impact on the Company's net income or
shareholders' equity.
The Financial Accounting Standards Board issued SFAS No. 131, which is
effective for fiscal years beginning after December 15, 1997. This statement
changes the way that companies report information about operating segments in
financial statements. The Company operates entirely in one segment, women's
apparel, which is sold through diverse distribution channels to many markets.
It is not possible, therefore, to divide the Company's business into meaningful
industry segments. The Company's operations and sales are only in the United
States, therefore geographical segments are not applicable.
2. ACQUISITIONS
Miss Erika
- ----------
On September 30, 1997, 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
the Company's, $0.01 par value, common stock ("Common Stock") in the event that
certain earnings targets are achieved by Miss Erika for the two fiscal years
ending November 6, 1999. The aggregate contingent payment, if any, payable by
the Company is equal to the amount by which four times the average of Miss
Erika's earnings before 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. Any 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 limits the number of shares of Common Stock
payable by the Company to a number of shares which, after giving effect to their
issuance, does not exceed 12% of the aggregate number of outstanding shares of
Common Stock at the time of payment. The Company has agreed to cause any shares
of Common Stock issued as a contingent payment to be registered under the
Securities Act. The Company intends to pay the cash portion, if any, of the
contingent consideration from internally generated funds and borrowings under
the Company's revolving credit facility. Miss Erika achieved Miss Erika EBITDA
during fiscal 1998 which, if sustained in 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.
Jeri-Jo
- -------
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 has secured any obligation to pay the cash
8
<PAGE>
MCNAUGHTON APPAREL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS (CONTINUED)
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, if any. The Company has agreed to
cause offers and sales by the holders of any shares of Common Stock issued as a
contingent payment to be registered under the Securities Act, including, if
requested, in an underwritten offering. The Jeri-Jo purchase agreement provides
that in certain events, the sellers under the Jeri-Jo purchase agreement will
have the option to accelerate the Company's contingent payment obligation. In
such events, the accelerated contingent payment obligation would be payable in
cash in an amount equal to the amount by which (i) five times the greater of
$17.0 million or an amount equal to Jeri-Jo's annualized EBITDA (as defined in
the Jeri-Jo purchase agreement) at the time of such event exceeds (ii) $55.0
million. The Company intends to pay the cash portion of the contingent
consideration from internally generated funds and borrowings under the Company's
revolving credit facility. Jeri-Jo achieved Jeri-Jo EBITDA for the seven month
period ended January 30, 1999 which, if sustained, will result in the payment of
a significant additional consideration, however, the Company cannot predict the
amount of additional consideration that may be payable.
The acquisitions were accounted for as purchases, and Miss Erika's and
Jeri-Jo's results are included in the consolidated statements of operations
beginning September 30, 1997 and June 18, 1998, respectively. The unaudited pro
forma consolidated results of operations for the thirteen weeks ended January
31, 1998, assuming consummation of the Jeri-Jo acquisition and related
financings at the beginning of the respective periods are as follows:
<TABLE>
<CAPTION>
Thirteen Weeks
Ended January 31, 1998
---------------------------------------
As reported Pro forma
---------------------------------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C>
Net sales $53,508 $67,940
Income from operations $ 375 $ 896
Depreciation and amortization $ 349 $ 921
Net loss $ (845) $(2,063)
Net loss per share:
Basic $ (0.11) $ (0.28)
Diluted $ (0.11) $ (0.28)
</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 January 30, 1999 and January 31, 1998, net
sales made to three customers were approximately 22%, 14%, and 13%, and
approximately 16%, 16% and 9%, 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>
January 30, October 31,
1999 1998
----------- -----------
(In Thousands)
<S> <C> <C>
Raw materials $ 2,295 $ 3,733
Work in process 2,044 1,158
Finished goods 57,226 42,495
------- -------
$61,565 $47,386
======= =======
</TABLE>
9
<PAGE>
MCNAUGHTON APPAREL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
January 30, October 31,
1999 1998
----------- -----------
(In Thousands)
<S> <C> <C>
Tradenames and trademarks $17,585 $17,500
Goodwill 26,932 26,918
------- -------
44,517 44,418
Less accumulated amortization 1,523 954
------- -------
$42,994 $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 of the Company.
In the event of any sale or transfer of shares of Common Stock by any of
the management stockholders, such person is required to make a principal
repayment of his loan from the Company in an amount equal to the product of (i)
the percentage representing the number of shares sold by such person to the base
amount set forth in the promissory note, and (ii) the outstanding balance of the
notes as of the date of the promissory note. No other principal payments are
required under the loans except for the payment at maturity. The loans mature
on November 5, 2003 at which time full payment is to be made by the management
stockholders for the balance of their respective loans. As of the end of the
fourth quarter of fiscal 1998, all necessary payments had been made under the
terms of the loans by the management stockholders.
As of January 30, 1999, the fair market value of the Company's Common Stock
held by such persons was $10,195,685 and the fair market value of the stock
pledged by the management stockholders as security for the loans was $3,808,336.
The aggregate principal balance of all loans to management stockholders was
$2,470,862. The loan balance set forth above reflects the required principal
payments of $529,138 resulting from sales of Common Stock by management
stockholders.
7. FINANCING ARRANGEMENTS
In connection with the Miss Erika acquisition, on September 30, 1997, 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 "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
million term loan and $125 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 $6,250,000 on October 2, 2000.
Concurrent with the closing of the Jeri-Jo acquisition on June 18, 1998,
the Company entered into a $175 million secured revolving credit and letter of
credit facility with NationsBanc Commercial Corporation, The CIT
Group/Commercial Services, Inc. and Fleet Bank N.A. (the "Current Credit
Agreement"). The facility 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
75 basis points below the prime rate (based upon the current prime rate, the
interest rate under the Current Credit Agreement is 7.00% per annum). Available
credit under the Current Credit Agreement is as follows: revolving credit
advances not to exceed $60.0 million, documentary letters of
10
<PAGE>
MCNAUGHTON APPAREL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. FINANCING ARRANGEMENTS (CONTINUED)
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 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 7.0% for the first quarter 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 governing the Senior Notes (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.
At January 30, 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 January 30, 1999, the Company had
obligations under undrawn letters of credit in the aggregate face amount of
approximately $88.6 million and had total additional available credit under the
Current Credit Agreement of approximately $22.7 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>
January 30, 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 2,500 2,500
Contractual bonuses payable 35 2,325
Profit sharing contribution payable 872 720
Other accrued expenses and current
liabilities 2,067 2,311
------ -------
$8,079 $13,629
====== =======
</TABLE>
9. STOCK REPURCHASE
The Company's Board of Directors authorized a stock repurchase program,
under which the Company may repurchase up to $7.5 million of the Company's
Common Stock. Shares may be purchased from time to time in the open market and
in block transactions. As of January 30, 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.
11
<PAGE>
MCNAUGHTON APPAREL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. LEGAL PROCEEDINGS
On July 14, 1998, Norton McNaughton of Squire, Inc.'s ("Norton")
distribution and cutting contractors (collectively, "Plaintiffs"), filed an
action in the New York State Supreme Court for New York County which, as
amended, is entitled Cutting Edge Services, Inc. and Railroad Enterprises, Inc.
----------------------------------------------------------
v. Norton McNaughton of Squire, Inc. and Norton McNaughton, Inc. Plaintiffs
- ----------------------------------------------------------------
claim that Norton breached its contracts with them because, among other things,
Miss Erika and Jeri-Jo failed to use Plaintiffs' services as allegedly required
under Norton's contracts with Plaintiffs. The Company believes these contracts
do not require Miss Erika or Jeri-Jo to utilize Plaintiffs' services. This
action seeks substantial compensatory and punitive damages and related
declaratory relief concerning rights under the contracts. On December 30, 1998,
the Company and Norton moved to dismiss most of Plaintiffs' claims. The Company
believes the claims are meritless and intends to defend this matter vigorously.
There can be no assurance that the Company will be successful in defending the
action or that any determination rendered would not have a material adverse
effect on the business, financial condition, results of operations and cash flow
of the Company.
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without material adverse effect on the
Company's business, financial condition, results of operations and cash flow.
In connection with the Cutting Edge Services, Inc. and Railroad Enterprises,
Inc. lawsuit, as well as other pending litigation, the Company established a
litigation reserve of $2.5 million in fiscal 1998 (see Note 8).
11. SHAREHOLDER RIGHTS PLAN
On January 19, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan in which shareholders of record on February 8, 1996 received a
dividend distribution of one common share purchase right for each outstanding
share of the Common Stock held. Each right entitles the holder to purchase
Common Stock at an initial exercise price of $32.00.
The rights are not exercisable or transferable apart from the Common Stock
until the earlier to occur of (i) ten days following a public announcement that
a person or group of affiliated or associated persons have acquired beneficial
ownership of 20% or more of the outstanding Common Stock of the Company, or (ii)
ten business days following the commencement of, or announcement of, an
intention to make a tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a person or group of 20% or more of
such outstanding Common Stock.
The rights are redeemable by the Company's Board of Directors at a price of
$0.01 per right at any time prior to the acquisition by a person or group of
beneficial ownership of 20% or more of the Company's Common Stock.
If a person or group acquires 20% or more of the Company's outstanding
Common Stock, each right will entitle the holder to purchase, at the right's
exercise price, a number of shares of the Company's Common Stock having a market
value at that time of twice the right's exercise price. If the Company is
acquired in a merger or other business combination transaction, each right will
entitle its holder to purchase, at the right's exercise price, a number of the
acquiring company's common shares having a market value at that time of twice
the right's exercise price.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
- -------
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.
On June 18, 1998, a wholly-owned subsidiary of the Company completed the
acquisition of substantially all of the assets of Jeri-Jo and assumed
substantially all the liabilities of the privately-held apparel importers of
moderately-priced juniors' and misses' updated sportswear. The purchase price
paid in the Jeri-Jo acquisition was (i) $55.0 million in cash at the closing of
the acquisition, (ii) the assumption of indebtedness of $10.9 million and
certain other contractual obligations. In addition, the Company agreed to pay
an additional contingent payment in cash and Common Stock in the event that
certain earnings targets are achieved by Jeri-Jo for the two years subsequent to
the closing of the Jeri-Jo acquisition.
Concurrent with the closing of the Jeri-Jo acquisition, the Company entered
into the Current Credit Agreement, a $175.0 million secured revolving credit and
letter of credit facility with NationsBanc Commercial Corporation, The CIT
Group/Commercial Services, Inc. and Fleet Bank N.A. The facility is used to
finance ongoing working capital requirements of the Company and its
subsidiaries.
On June 18, 1998, the Company also sold $125.0 million of unsecured 12
1/2% Senior Notes due 2005. The terms and conditions of the Senior Notes are
governed by the Indenture. The proceeds of the Senior Notes were used to
finance the Jeri-Jo acquisition and to refinance then existing indebtedness of
the Company and Jeri-Jo. The Company's obligations under the Senior Notes are
guaranteed by all of the Company's subsidiaries.
The Company's 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 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.
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.
13
<PAGE>
This Management's Discussion and Analysis contains forward-looking
information about the Company's anticipated operating results. The Company's
ability to achieve its projected results is dependent on many factors which are
outside of management's control. Some of the most significant factors would be
a further deterioration in retailing conditions for women's apparel, a further
increase in price pressures and other competitive factors, any of which could
result in an unanticipated decrease in gross profit margins, an unanticipated
need to hire additional personnel above the Company's plan, unanticipated
problems arising with Miss Erika's and Jeri-Jo's businesses or the integration
of Miss Erika's and Jeri-Jo's businesses with that of the Company, the
unanticipated loss of a major customer, the unanticipated loss of a major
contractor or supplier, year 2000 issues, particularly with respect to the
Company's vendors and customers, and weather conditions which could impact
retail traffic and the Company's ability to ship on a timely basis.
Accordingly, there can be no assurance that the Company will achieve its
anticipated operating results.
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 30, 1999 January 31, 1998
---------------- -----------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 77.2 78.7
------- ------
Gross profit 22.8 21.3
Selling, general and administrative expenses 20.0 20.0
Depreciation and amortization 1.5 0.6
------- ------
Income from operations 1.3 0.7
Interest expense and amortization of
deferred financing costs 6.8 3.2
Other income, net (0.2) (0.1)
------- ------
Loss before benefit for income taxes (5.3) (2.4)
Benefit for income taxes (2.4) (0.8)
------- ------
Net loss (2.9)% (1.6)%
======= ======
</TABLE>
Quarter Ended January 30, 1999 Compared to Quarter Ended January 31, 1998
- -------------------------------------------------------------------------
Net sales were $66.6 million for the first quarter of fiscal 1999 compared
to $53.5 million for the first quarter of fiscal 1998. The increase in net sales
of $13.1 million was primarily attributable to the addition of the Energie,
Currants and Jamie Scott product lines of $20.2 million in net sales following
the acquisition of Jeri-Jo on June 18, 1998. This increase was offset in part by
a decrease in net sales of $4.3 million in the Norton McNaughton product lines,
a decrease in net sales of $1.7 million, in the aggregate, due to the
discontinuation of certain Norton divisions and a decrease of $1.2 million in
the Erika product lines.
Gross profit margin was 22.8% for the first quarter of fiscal 1999 compared
to 21.3% for the first 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 beginning on June 18, 1998, which
experienced higher gross profit margins than those experienced in the Norton
McNaughton and Erika product lines in the first quarter of fiscal 1998.
Depreciation and amortization was $1.0 million for the first quarter of
fiscal 1999 compared to $349,000 for the first quarter of fiscal 1998. The
increase was primarily due to the amortization of goodwill resulting from the
Jeri-Jo acquisition.
Selling, general and administrative expenses ("SG&A" expenses) were $13.3
million, or 20.0% of net sales, in the first quarter of fiscal 1999 compared to
$10.7 million, or 20.0% of net sales, in the first quarter of fiscal 1998. The
increase in SG&A of $2.6 million resulted from the acquisition of Jeri-Jo.
Interest expense increased to $4.5 million in the first quarter of fiscal
1999 from $1.7 million in the first quarter of fiscal 1998. The increase of $2.8
million was primarily attributable to incremental interest expense associated
with debt used to acquire Jeri-Jo.
14
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company is highly leveraged. On January 30, 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 January 30, 1999, the Company had obligations under undrawn letters of credit
in the aggregate face amount of approximately $88.6 million and had total
additional available credit under the Current Credit Agreement of approximately
$22.7 million pursuant to the borrowing base formula set forth therein. The
Company may be permitted to incur substantial additional indebtedness pursuant
to the terms of the Current Credit Agreement.
The Company's ability to make scheduled payments of principal or to pay the
interest on, or to refinance its indebtedness, or to fund planned capital
expenditures will depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control. Based upon the current level of
operations, management believes that cash flow from operations and available
cash, together with available borrowings under the Current Credit Agreement,
will be adequate to meet the Company's liquidity needs for the foreseeable
future.
The Company's liquidity requirements arise from the funding of the
Company's working capital needs, primarily inventory and accounts receivable.
The Company's primary sources of working capital are cash flow from operations
and advances under the Current Credit Agreement. The Company's borrowing
requirements for working capital purposes are seasonal, with peak working
capital needs generally arising during the second and third fiscal quarters and
extending through the fourth fiscal quarter. The Company had working capital of
$102.2 million at January 30, 1999 as compared to $104.0 million at October 31,
1998. The decrease was caused primarily by the net loss for the first quarter of
fiscal 1999.
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, if
any, 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. Any 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 limits the number of shares of
Common Stock payable by the Company to a number of shares which, after giving
effect to their issuance, does not exceed 12% of the aggregate number of
outstanding shares of Common Stock at the time of payment. The Company has
agreed to cause any shares of Common Stock issued as a contingent payment to be
registered under the Securities Act. The Company intends to pay the cash
portion, if any, of the contingent consideration from internally generated funds
and borrowings under the Company's revolving credit facility. Miss Erika
achieved Miss Erika EBITDA during fiscal 1998 which, if sustained in 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
15
<PAGE>
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
any 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, if any. The Company has agreed to cause offers and sales by the
holders of any shares of Common Stock issued as a contingent payment to be
registered under the Securities Act, including, if requested, in an underwritten
offering. The Jeri-Jo purchase agreement provides that in certain events, the
sellers under the Jeri-Jo purchase agreement will have the option to accelerate
the Company's contingent payment obligation. In such events, the accelerated
contingent payment obligation would be payable in cash in an amount equal to the
amount by which (i) five times the greater of $17.0 million or an amount equal
to Jeri-Jo's annualized EBITDA (as defined in the Jeri-Jo purchase agreement) at
the time of such event exceeds (ii) $55.0 million. The Company intends to pay
the cash portion of the contingent consideration from internally generated funds
and borrowings under the Company's revolving credit facility. Jeri-Jo achieved
Jeri-Jo EBITDA for the seven month period ended January 30, 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 75 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 7.00% per annum). Available credit under the Current
Credit Agreement is as follows: revolving credit advances not to exceed $60.0
million, documentary letters of credit not to exceed $130.0 million and stand-by
letters of credit not to exceed $45.0 million (including the $30.0 million
stand-by letter of credit to secure the Company's cash contingent payment
obligation in connection with the Jeri-Jo acquisition), with aggregate letters
of credit not to exceed $160.0 million. Under the Current Credit Agreement, the
aggregate credit available to the Company is equal to the lesser of (i) $175.0
million or (ii) the sum of 85% of eligible accounts receivable and 60% of
eligible inventory. The Company and its subsidiaries guarantee the Company's
obligations under the Current Credit Agreement and have granted a lien on
substantially all of their respective assets to secure the obligations under the
Current Credit Agreement. The weighted average interest rate on the revolving
credit facility was 8.0% for fiscal 1998 and 7.0% for the first quarter 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.
The Company anticipates that in the remainder of fiscal 1999 it will incur
capital expenditures of approximately $3.3 million to $3.6 million principally
in connection with relocating its warehouse and distribution facility to the
southeastern United States and the upgrade of its management information
systems, which includes the Company's migration to new financial and warehouse
management software packages. See "The Year 2000 Issue" below. The Company
expects to finance these capital expenditures from internally generated funds
and advances under the Current Credit Agreement. The expenditures required to
modify portions of the Company's software so that it will function properly in
the year 2000 will not have a material impact on the Company's business,
operations, financial condition or cash flow. 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 authorized a stock repurchase program,
under which the Company may repurchase up to $7.5 million of the Company's
Common Stock. Shares may be purchased from time to time in the open market and
in block transactions. As of January 30, 1999, the Company had purchased a total
of 651,000 shares at an aggregate cost of approximately $5.5 million. The
Company's ability to repurchase shares of Common Stock is restricted by the
Indenture and the Current Credit Agreement.
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.
16
<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. 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 plans to compile 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.
Based on preliminary data, 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 is in the process of updating its purchasing, production and shipping
systems to be Year 2000 compliant and is in the process of implementing a new
financial software package. The Company anticipates that these systems will be
Year 2000 compliant by June 1999. The Company anticipates that it will incur
approximately $600,000 in the remainder of fiscal 1999 in connection therewith.
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 has not yet established a
contingency plan in the event of non-compliance by its customers and vendors.
17
<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 January 30, 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 75 basis points 7.0% - - - - - 7.0%
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>
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 14, 1998, Norton McNaughton of Squire, Inc.'s ("Norton")
distribution and cutting contractors (collectively, "Plaintiffs"), filed an
action in the New York State Supreme Court for New York County which, as
amended, is entitled Cutting Edge Services, Inc. and Railroad Enterprises, Inc.
----------------------------------------------------------
v. Norton McNaughton of Squire, Inc. and Norton McNaughton, Inc. Plaintiffs
- ----------------------------------------------------------------
claim that Norton breached its contracts with them because, among other things,
Miss Erika and Jeri-Jo failed to use Plaintiffs' services as allegedly required
under Norton's contracts with Plaintiffs. The Company believes these contracts
do not require Miss Erika or Jeri-Jo to utilize Plaintiffs' services. This
action seeks substantial compensatory and punitive damages and related
declaratory relief concerning rights under the contracts. On December 30, 1998,
the Company and Norton moved to dismiss most of Plaintiffs' claims. The Company
believes the claims are meritless and intends to defend this matter vigorously.
There can be no assurance that the Company will be successful in defending the
action or that any determination rendered would not have a material adverse
effect on the business, financial condition, results of operations and cash flow
of the Company.
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without material adverse effect on the
Company's business, financial condition, results of operations and cash flow.
In connection with the Cutting Edge Services, Inc. and Railroad Enterprises,
Inc. lawsuit, as well as other pending litigation, the Company established a
litigation reserve of $2.5 million in fiscal 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 3.1 Certificate of Amendment of Certificate of Incorporation of
McNaughton Apparel Group, Inc.
Exhibit 3.2 Certificate of Incorporation of McNaughton Apparel Group, Inc.
Exhibit 3.3 Certificate of Ownership and Merger of McNaughton Apparel Group
Inc. into Norton McNaughton, Inc.
Exhibit 3.4 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 Third Amendment, dated as of March 15, 1999 to the Amended and
Restated Financing Agreement, dated as of June 18, 1998 by and
among McNaughton Apparel Group Inc., Norton McNaughton of Squire,
Inc., Miss Erika Inc., Jeri-Jo Knitwear, Inc., the lenders party
thereto, NationsBanc Commercial Corporation, as collateral agent
for the lenders, The CIT Group/Commercial Services, Inc., as
administrative agent for the lenders, and Fleet Bank N.A., as
documentation agent for the lenders.
Exhibit 27 Financial Data Schedule (for SEC purposes only)
The Registrant filed no Current Reports on Form 8-K for the thirteen weeks ended
January 30, 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MCNAUGHTON APPAREL GROUP INC.
-----------------------------
(Registrant)
Date: March 16, 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)
20
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
OF
MCNAUGHTON APPAREL GROUP, INC.
Pursuant to Section 242 of
the General Corporation Law of
the State of Delaware
---------------------
McNaughton Apparel Group, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: The Certificate of Incorporation of the Corporation is hereby
------
amended by deleting Article FIRST of the Certificate of Incorporation in
its present form and substituting therefor a new Article FIRST in the
following form:
FIRST: The name of the corporation is: "McNaughton Apparel Group
Inc." (the "Corporation")."
SECOND: The amendment to the Certificate of Incorporation of the
-------
Corporation set forth in this Certificate of Amendment has been duly
adopted in accordance with the applicable provisions of Section 242 of the
General Corporation Law of the State of Delaware, (a) the Board of
Directors of the Corporation, in lieu of a meeting and vote of Directors,
having duly adopted a resolution setting forth such amendment and declaring
its advisability by unanimous written consent and (b) in lieu of a meeting
and vote of stockholders, the sole holder of all the issued and outstanding
capital stock of the Corporation having duly consented in writing to the
adoption of such amendment.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Amendment as of the 19th day of January, 1999.
MCNAUGHTON APPAREL GROUP, INC.
By: /s/ Amanda J. Bokman
----------------------------
Name: Amanda J. Bokman
Title: Vice President
<PAGE>
EXHIBIT 3.2
Page 1
State of Delaware
Office of the Secretary of State
------------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "MCNAUGHTON APPAREL GROUP, INC.", FILED IN THIS OFFICE ON THE
ELEVENTH DAY OF DECEMBER, A.D. 1998, AT 9 O'CLOCK A.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY
RECORDER OF DEEDS.
Edward J. Freel, Secretary State
AUTHENTICATION: 9456432
DATE: 12-11-98
<PAGE>
CERTIFICATE OF INCORPORATION
OF
MCNAUGHTON APPAREL GROUP, INC.
THE UNDERSIGNED, for the purpose of forming corporation pursuant to
the provisions of the General Corporation Law of the State of Delaware (the
"General Corporation Law"), does hereby certify pursuant to Section 103(a)(1) of
the General Corporation Law as follows:
FIRST: The name of the corporation is "McNaughton Apparel Group, Inc."
(the "Corporation").
SECOND: The address of the Corporation's registered office in the
State of Delaware is 1013 Centre Road, Wilmington, Delaware 19805, which address
is located in the County of New Castle, and the name of the Corporation's
registered agent at such address is the Corporation Service Company.
THIRD: The purpose for which the Corporation is organized is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law.
FOURTH: The total number of shares of capital stock which the
Corporation shall have authority to issue is 1,000 shares of common stock, par
value $.01 per share.
FIFTH: Subject to the provisions of the General Corporation Law, the
number of Directors of the Corporation shall be determined as provided in the
By-Laws of the Corporation.
SIXTH: To the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, or any comparable successor law, as the same may be
amended and supplemented from time to time, the Corporation (i) may indemnify
any persons whom it shall have power to indemnify thereunder from and against
any and all of the expenses, liabilities or other matters referred to in or
covered thereby, (ii) shall indemnify each such person if he or she is or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by reason of the fact that he or she is or was a director,
officer, employee or agent of the Corporation or because he or she was serving
the Corporation or any other legal entity in any capacity at the request of the
Corporation while a director, officer, employee or agent of the Corporation and
(iii) shall pay the expenses of such a current or former director, officer,
employee or agent incurred in connection with any such action, suit or
proceeding in advance of the final disposition of such action, suit or
proceeding. The indemnification and advancement of expenses provided for herein
shall not be deemed exclusive of any other rights to which those entitled to
indemnification or advancement of expenses may be entitled under any by-law,
agreement, contract or vote of stockholders or disinterested directors or
pursuant to the direction (however embodied) of any court of competent
jurisdiction or otherwise, both as to action in his or her official capacity and
as to action in another capacity while holding such office, and shall continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
SEVENTH: In furtherance and not in limitation of the general powers
conferred by the laws of the State of Delaware, the Board of Directors of the
Corporation is expressly authorized to make, alter or repeal the By-Laws of the
Corporation, except as specifically stated therein.
EIGHTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of the General Corporation Law or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of the General Corporation Law,
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of
<PAGE>
creditors, and/or of the stockholders or class of stockholders, of the
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of the Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of the Corporation, as the case may be,
and also on the Corporation.
NINTH: Except as otherwise required by the laws of the State of
Delaware, the stockholders and directors shall have the power to hold their
meetings and to keep the books, documents and papers of the Corporation outside
of the State of Delaware, and the Corporation shall have the power to have one
or more offices within or without the State of Delaware, at such places as may
be from time to time designated by the Corporation. Elections of directors need
not be by ballot unless the By-Laws of the Corporation shall so provide.
TENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ELEVENTH: A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the General Corporation Law is amended to further
eliminate or limit the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law, as so amended. Any repeal or
modification of this Article by the stockholders of the Corporation shall be by
the affirmative vote of the holders of not less than eighty percent (80%) of the
outstanding shares of stock of the Corporation and entitled to vote in the
election of directors, considered for the purposes of this Article ELEVENTH as
one class, shall be prospective only and shall not adversely affect any right or
protection of any director of the Corporation existing at the time of such
repeal or modification.
TWELFTH: The name and address of the incorporator is Jonathan M.
Anderson, Haythe & Curley, 237 Park Avenue, New York, New York 10017.
IN WITNESS WHEREOF, the undersigned, being the incorporator
hereinabove named, does hereby execute this Certificate of Incorporation 11/th/
day of December, 1998.
/s/ Jonathan M. Anderson
------------------------------
Jonathan M. Anderson
Incorporator
<PAGE>
EXHIBIT 3.3
Page 1
State of Delaware
Office of the Secretary of State
____________________________________
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF OWNERSHIP,
WHICH MERGES:
"MCNAUGHTON APPAREL GROUP INC.", A DELAWARE CORPORATION, WITH AND INTO
"NORTON MCNAUGHTON, INC." UNDER THE NAME OF "MCNAUGHTON APPAREL GROUP INC.", A
CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE, AS
RECEIVED AND FILED IN THIS OFFICE THE THIRD DAY OF FEBRUARY, A.D. 1999, AT 9
O'CLOCK A.M.
AND I DO HEREBY FURTHER CERTIFY THAT THE EFFECTIVE DATE OF THE AFORESAID
CERTIFICATE OF OWNERSHIP IS THE NINTH DAY OF FEBRUARY, A.D. 1999.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY
RECORDER OF DEEDS.
Edward J. Freel, Secretary of State
AUTHENTICATION: 9557720
DATE: 02-03-99
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED: 09:00 AM 02/03/1999
991043958 2366203
CERTIFICATE OF OWNERSHIP AND MERGER
OF
MCNAUGHTON APPAREL GROUP INC.
(a Delaware corporation)
INTO
NORTON MCNAUGHTON, INC.
(a Delaware corporation)
It is hereby certified that:
1. Norton McNaughton, Inc. (the "Corporation") is a business corporation of
the State of Delaware.
2. The Corporation is the owner of all of the outstanding shares of the
stock of McNaughton Apparel Group Inc., which is also a business corporation of
the State of Delaware.
3. On January 14, 1999, the Board of Directors of the Corporation adopted
the following resolutions to merge McNaughton Apparel Group Inc. into the
Corporation:
RESOLVED, that McNaughton Apparel Group Inc. be merged into the
Corporation, and that
all of the estate, property, rights, privileges, powers and franchises of
McNaughton Apparel Group Inc. be vested in and held and enjoyed by the
Corporation as fully and entirely and without change or diminution as the
same were before held and enjoyed by McNaughton Apparel Group Inc. in its
name; and it is
FURTHER RESOLVED that the Corporation shall assume all of the
obligations of McNaughton Apparel Group Inc.; and it is
FURTHER RESOLVED that, at the effective time of the merger as set
forth below, the corporate name of the Corporation shall be changed to
"McNaughton Apparel Group Inc."; and it is
FURTHER RESOLVED that the Corporation shall cause to be executed and
filed and/or recorded the documents prescribed by the laws of the State of
Delaware and by the laws of any other appropriate jurisdiction and will
cause to be performed all necessary acts within the State of Delaware and
within any other appropriate jurisdiction; and it is
<PAGE>
2
FURTHER RESOLVED that the effective time of the Merger Certificate
setting forth a copy of these resolutions, and the time when the merger therein
provided for, shall become effective shall be February 9, 1999.
Executed on February 3, 1999.
NORTON MCNAUGHTON, INC.
By: /s/ Amanda J. Bokman
-------------------------
Name: Amanda J. Bokman
Title: Vice President
<PAGE>
EXHIBIT 10.1
THIRD AMENDMENT
TO
AMENDED AND RESTATED FINANCING AGREEMENT
Third Amendment, dated as of March 15, 1999 to the Amended and
Restated Financing Agreement, dated as of June 18, 1998, as amended through the
date hereof (the "Financing Agreement"), by and among McNaughton Apparel Group
Inc., a Delaware corporation and successor by merger to Norton McNaughton, Inc.
(the "Company"), Norton McNaughton of Squire, Inc., a New York corporation
("Squire"), Miss Erika, Inc., a Delaware corporation ("Miss Erika"), Jeri-Jo
Knitwear, Inc., a Delaware corporation formerly known as JJ Acquisition Corp.
("Jeri-Jo" and together with Squire and Miss Erika, each a "Borrower" and
collectively, the "Borrowers"), the lenders party thereto (each a "Lender" and
collectively, the "Lenders"), NationsBanc Commercial Corporation, as collateral
agent for the Lenders (in such capacity, the "Collateral Agent"), The CIT
Group/Commercial Services, Inc., as administrative agent for the Lenders (in
such capacity, the "Administrative Agent") and Fleet Bank NA, as documentation
agent for the Lenders (in such capacity, the "Documentation Agent" and together
with the Collateral Agent and the Administrative Agent, each an "Agent" and
collectively, the "Agents").
The Company, the Borrowers, the Lenders and the Agents desire to
amend certain terms and conditions in the Financing Agreement as hereafter set
forth.
Accordingly, the Company, the Borrowers, the Agents and the Lenders
hereby agree as follows:
1. Definitions. A11 capitalized terms used herein and not otherwise
-----------
defined herein are used herein as defined in the Financing Agreement.
2. Financial Covenants. Section 7.02(p) of the Financing Agreement
-------------------
is hereby amended to read in its entirety as follows:
"(i) Net Worth. Permit Consolidated Net Worth of the Company
---------
and its Consolidated Subsidiaries at the end of each Fiscal1 Quarter to be
less than the amount set forth below opposite each such Fiscal Quarter end:
Fiscal Minimum
Quarter End Net Worth
-------------- -----------
January 30, 1999 $38,000,000
May 1,1999 $38,000,000
<PAGE>
July 31, 1999 $38,000,000
November 6, 1999 $40,000,000
provided that, upon receipt of the financial projections required to be
delivered to the Lenders pursuant to Section 7.01(a)(vi) hereof for each
Fiscal Year, the Company and the Agents shall negotiate in good faith to
determine the Consolidated Net Worth for the Company and its Consolidated
Subsidiaries as of the end of each Fiscal Quarter covered by such financial
projections and, in the event that the Company and the Required Lenders are
unable to agree upon the amounts of such Consolidated Net Worth on or
before the date that is 30 days after the date that the Lenders have
received such financial projections, the Consolidated Net Worth at the end
of each Fiscal Quarter of the Fiscal Year covered by such financial
projections shall not be less than the amount set forth for the last Fiscal
Quarter end set forth above.
(ii) Leverage Ratio. Permit the ratio of Consolidated
--------------
Total Liabilities to Consolidated Net Worth of the Company and its
Consolidated Subsidiaries as of the end of each Fiscal Quarter to be
greater than the amount set forth below opposite each such Fiscal Quarter
end:
Fiscal Maximum
Quarter End Leverage Ratio
---------------- --------------
January 30, 1999 3.8 to 1.0
May 1, 1999 5.0 to 1.0
July 31, 1999 4.7 to 1.0
November 6, 1999 4.0 to 1.0
provided that, upon receipt of the financial projections required to be
delivered to the Lenders pursuant to Section 7.01(a)(vi) hereof for each
Fiscal Year, the Company and the Agents shall negotiate in good faith to
determine the ratio of Consolidated Total Liabilities to Consolidated Net
Worth of the Company and its Consolidated Subsidiaries as of the end of
each Fiscal Quarter covered by such financial projections and, in the
event that the Company and the Required Lenders are unable to agree upon
such ratio on or before the date that is 30 days after the date that the
Lenders have received such projections, such ratio as of the end of each
Fiscal Quarter of the Fiscal Year covered by such financial projections
shall not be greater than the ratio set forth for the last Fiscal Quarter
end set forth above.
-2-
<PAGE>
(iii) Working Capital. Permit Working Capital at the
---------------
end of each Fiscal Quarter to be less than the amount set forth below
opposite each such Fiscal Quarter:
Fiscal Minimum
Quarter End Working Capital
-------------- ---------------
January 30, 1999 $101,000,000
May 1, 1999 $102,000,000
July 31, 1999 $103,000,000
November 6, 1999 $105,000,000
provided that, upon receipt of the financial projections required to be
delivered to the Lenders pursuant to Section 7.01(a)(vi) hereof for each
Fiscal Year, the Company and the Agents shall negotiate in good faith to
determine the minimum Working Capital as of the end of each Fiscal Quarter
covered by such financial projections and, in the event that the Company
and the Required Lenders are unable to agree upon the amounts of such
Working Capital on or before the date that is 30 days after the date that
the Lenders have received such projections, the Working Capital at the end
of each Fiscal Quarter of the Fiscal Year covered by such financial
projections shall not be less than the amount set forth for the last Fiscal
Quarter end set forth above.
(iv) Fixed Charge Coverage Ratio. Permit the ratio of
---------------------------
Consolidated EBITDA of the Company and its Consolidated Subsidiaries to
Consolidated Fixed Charges of the Company and its Consolidated Subsidiaries
for each Fiscal Quarter to be less than the amount set forth below opposite
each such Fiscal Quarter.
Fiscal Minimum Fixed
Quarter End Charge Coverage Ratio
-------------- ---------------------
January 30, 1999 .25 to 1.0
May 1, 1999 1.30 to 1.0
July 31, 1999 1.07 to 1.0
November 6, 1999 1.35 to 1.0
provided that, upon receipt of the financial projections required to be
delivered to the Lenders pursuant to Section 7.01(a)(vi) hereof for each
Fiscal Year, the Company and the Agents shall negotiate in good faith to
determine the ratio of Consolidated EBITDA of the Company and its
Consolidated Subsidiaries to Consolidated Fixed Charges of the Company
and its Consolidated Subsidiaries as of the end of each Fiscal Quarter
covered by such financial projections and, in the event that the Company
and the Required
-3-
<PAGE>
Lenders are unable to agree upon the amounts of such ratio on or before the
date that is 30 days after the date that the Lenders have received such
projections, such ratio for each Fiscal Quarter of the Fiscal Year covered
by such financial projections shall not be less than the ratio set forth
for the last Fiscal Quarter end set forth above.
(v) Cash Flow Ratio. Permit the ratio of
---------------
Consolidated EBIT of the Company and its Consolidated Subsidiaries to
Consolidated Net Interest Expense of the Company and its Consolidated
Subsidiaries at the end of each Fiscal Quarter be less than the amount set
forth below opposite each such Fiscal Quarter:
Fiscal Minimum
Quarter End Cash Flow Ratio
--------------- ---------------
January 30, 1999 10 to 1.0
May 1, 1999 1.33 to 1.0
July 31, 1999 1.06 to 1.0
November 6, 1999 1.68 to 1.0
provided that, upon receipt of the financial projections required to be
delivered to the Lenders pursuant to Section 7.01 (a)(vi) hereof for each
Fiscal Year, the Company and the Agents shall negotiate in good faith to
determine the ratio of Consolidated EBIT of the Company and its
Consolidated Subsidiaries to Consolidated Net Interest Expense of the
Company and its Consolidated Subsidiaries as of the end of each Fiscal
Quarter covered by such financial projections and, in the event that the
Company and the Required Lenders are unable to agree upon such ratio on or
before the date that is 30 days after the date that the Lenders have
received such projections, such ratio at the end of each Fiscal Quarter of
the Fiscal Year covered by such financial projections shall not be less
than the ratio set forth for the last Fiscal Quarter set forth above."
3. Conditions to Effectiveness. This Amendment shall be effective only
---------------------------
upon satisfaction in full of the following conditions precedent (the first date
upon which al1 such conditions have been satisfied in full being herein called
the "Amendment Effective Date")
(i) The representations and warranties contained in this
Amendment and in Article VI of the Financing Agreement shall be true and
correct in all material respects on and as of the Amendment Effective Date
and the date hereof as though made on and as of each of such dates (except
where such representations and warranties relate to an earlier date in
which case such representations and warranties shall be true and correct
as of such earlier date); no Event of Default or Default shall have
occurred and be continuing on the Amendment Effective Date or on the date
hereof, or result from this Amendment becoming, effective in accordance
with its terms.
-4-
<PAGE>
(ii) The Agents shall have received counterparts of this
Amendment which bear the signatures of the Company, the Borrowers and each
of the Required Lenders.
(iii) All legal matters incident to this Amendment shall be
satisfactory to the Agents and their counsel.
4. Representations and Warranties. Each of the Company and the
------------------------------
Borrowers represents and warrants to the Lenders as follows:
(a) The Company and each Borrower (i) is duly organized, validly
existing and in good standing under the laws of the state of its organization
and (ii) has all requisite power, authority and legal right to execute, deliver
and perform this Amendment, all other documents executed by it in connection
with this Amendment, and to perform the Financing Agreement, as amended hereby.
(b) The execution, delivery and performance by the Company and
the Borrowers of this Amendment and all other documents executed by it in
connection with this Amendment and the performance by the Company and the
Borrowers of the Financing Agreement as amended hereby (i) have been duly
authorized by all necessary action, (ii) do not and will not violate or create
a default under the Company's or any Borrower's organizational documents, any
applicable law or any contractual restriction binding on or otherwise affecting
the Company or any Borrower or any of the Company's or such Borrower's
properties, and (iii) except as provided in the Loan Documents, do not and will
not result in or require the creation of any Lien upon or with respect to the
Company's or any Borrower's property.
(c) No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority or other regulatory body is
required in connection with the due execution, delivery and performance by the
Company or any of the Borrowers of this Amendment and all other documents
executed by it in connection with this Amendment and the performance by the
Company and the Borrowers of the Financing Agreement as amended hereby.
(d) This Amendment and the Financing Agreement, as amended
hereby, and all other documents executed in connection with this Amendment
constitute the legal, valid and binding obligations of the Company and the
Borrowers party thereto, enforceable against such Persons in accordance with
their terms except to the extent the enforceability thereof may be limited by
any applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws from time to time in effect affecting generally the enforcement of
creditors' rights and remedies and by general principles of equity.
(e) The representations and warranties contained in Article VI
of the Financing Agreement are true and correct on and as of the Amendment
Effective Date and as of the date hereof though made on and as of the
Amendment Effective Date and the date hereof (except to the extent such
representations and warranties expressly relate to an earlier date), and
-5-
<PAGE>
no Event of Default or Default has occurred and is continuing on and as of the
Amendment Effective Date or on the date hereof.
5. Continued Effectiveness of Financing Agreement. Each of the
----------------------------------------------
Company and the Borrowers hereby (i) confirms and agrees that each Loan Document
to which it is a party is, and shall continue to be, in full force and effect
and is hereby ratified and confirmed in all respects except that on and after
the Agreement Effective Date of this Amendment all references in any such Loan
Document to "the Financing Agreement", "thereto", "thereof', "thereunder" or
words of like import referring to the Financing Agreement shall mean the
Financing Agreement as amended by this Amendment, and (ii) confirms and agrees
that to the extent that any such Loan Document purports to assign or pledge to
the Collateral Agent, or to grant to the Collateral Agent a Lien on any
collateral as security for the Obligations of the Company and the Borrowers from
time to time existing in respect of the Financing AGreement and the Loan
Documents, such pledge, assignment and/or grant of a Lien is hereby ratified and
confirmed in all respects.
6. Miscellaneous.
-------------
(a) This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which shall be
deemed to be an original, but all of which taken together shall constitute one
and the same agreement.
(b) Section and paragraph headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
(c) This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.
(d) The Borrowers will pay on demand all reasonable out-of-
pocket costs and expenses of the Agents in connection with the preparation,
execution and delivery of this Amendment, including, without limitation, the
reasonable fees, disbursements and other charges of Schulte Roth & Zabel LLP,
counsel to the Agents.
-6-
<PAGE>
IN WITNESS WHEREOF, tbe parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the
day and year first above written.
MCNAUGHTON APPAREL GROUP INC.
By: /s/ Amanda J. Bokman
-------------------------------------
Title: VP, CFO, Secretary & Treasurer
---------------------------------
NORTON MCNAUGHTON OF SQUIRE, INC.
By: /s/ Amanda J. Bokman
-------------------------------------
Title: VP, CFO, Secretary & Treasurer
---------------------------------
MISS ERIKA, INC.
By: /s/ Amanda J. Bokman
-------------------------------------
Title: VP, CFO, Secretary & Treasurer
---------------------------------
JERI-JO KNITWEAR, INC.
By: /s/ Amanda J. Bokman
-------------------------------------
Title: VP, CFO, Secretary & Treasurer
---------------------------------
AGENTS AND LENDERS
------------------
THE CIT GROUP/COMMERCIAL SERVICES,
INC., as Administrative Agent
By: /s/ Charles Carbone
-------------------------------------
Title: VP
----------------------------------
NATIONSBANC COMMERCIAL
CORPORATION, as Collateral Agent
By: /s/ Carl Banilower
-------------------------------------
Title: Sr. VP
----------------------------------
-7-
<PAGE>
FLEET BANK NA, as Documentation Agent
By: /s/ Stephen Leavenworth
-----------------------------------------
Title: _____________________________________
SANWA BUSINESS CREDIT CORPORATION
By:_________________________________________
Title:______________________________________
ISRAEL DISCOUNT BANK OF NEW YORK
By:__________________________________________
Title:_______________________________________
SUNROCK CAPITAL CORP.
By: /s/ Stephen Coffey
-----------------------------------------
Title: V.P.
--------------------------------------
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Edmundo Kahn
-----------------------------------------
Title: Asst. V.P.
--------------------------------------
HELLER FINANCIAL CORPORATION
By: /s/ Albert Forzano
-----------------------------------------
Title: V.P.
--------------------------------------
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-06-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,901
<SECURITIES> 0
<RECEIVABLES> 49,099
<ALLOWANCES> 0
<INVENTORY> 61,565
<CURRENT-ASSETS> 119,800
<PP&E> 13,021
<DEPRECIATION> 4,207
<TOTAL-ASSETS> 183,861
<CURRENT-LIABILITIES> 17,618
<BONDS> 125,000
0
0
<COMMON> 81
<OTHER-SE> 39,458
<TOTAL-LIABILITY-AND-EQUITY> 183,861
<SALES> 66,619
<TOTAL-REVENUES> 66,619
<CGS> 51,452
<TOTAL-COSTS> 51,452
<OTHER-EXPENSES> 14,330
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,506
<INCOME-PRETAX> (3,562)
<INCOME-TAX> (1,603)
<INCOME-CONTINUING> (1,959)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,959)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
