-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HGQH//pVfBSiaCRAo83Fsk0b7olZQMJAfbTespTguE9SiejUDaXVexldGS0bEDpJ FZ8iS8VtGR6ecBoDNTbP4w== 0000891092-00-000075.txt : 20000208 0000891092-00-000075.hdr.sgml : 20000208 ACCESSION NUMBER: 0000891092-00-000075 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990227 FILED AS OF DATE: 20000207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NANTUCKET INDUSTRIES INC CENTRAL INDEX KEY: 0000069623 STANDARD INDUSTRIAL CLASSIFICATION: MEN'S & BOYS' FURNISHINGS, WORK CLOTHING, AND ALLIED GARMENTS [2320] IRS NUMBER: 580962699 STATE OF INCORPORATION: DE FISCAL YEAR END: 0225 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-08955 FILM NUMBER: 525584 BUSINESS ADDRESS: STREET 1: 510 BROADHOLLOW RD STREET 2: STE 300 CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 9178530475 MAIL ADDRESS: STREET 1: 73 FIFTHA VENUE SUITE 6A CITY: NEW YORK STATE: NY ZIP: 10003 FORMER COMPANY: FORMER CONFORMED NAME: NANTUCKET LINGERIE INC DATE OF NAME CHANGE: 19690715 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 27, 1999 Commission File Number: 1-8509 NANTUCKET INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 58-0962699 (State of other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 73 5th Avenue, Suite 6A, New York, New York 10003 (Address of principal executive offices) (Zip Code) 917-853-0475 (Registrant's telephone number, including area code) 510 Broadhollow Road, Suite 300, Melville, New York 11747 (Former Address, since last report) Common Stock, $.10 par value NASD Supplemental Market Securities registered pursuant to Name of each exchange on which registered Section 12(g) of the Act 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 twelve months (or for 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 --- --- The aggregate market value of the outstanding Common Stock of the registrant held by non-affiliates of the registrant as of January 5, 2000, based on the average bid and asked price of the Common Stock on the NASD Supplemental Market on said date was $194,328. As of January 5, 2000, the Registrant had outstanding 3,238,796 shares of common stock not including 3,052 shares classified as Treasury Stock. PART I ITEM 1. BUSINESS General Nantucket Industries, Inc. (the "Company") is an insolvent, currently dormant company which is presently exploring the advisability of filing a voluntary petition under Chapter 11 of the federal bankruptcy laws, with the goal of reorganizing its management and searching for a new business opportunity which will potentially allow the Company to successfully reorganize. Until the end of October 1999, when the Company discontinued all business activities, it produced and distributed popular priced branded men's fashion undergarments for sale, throughout the United States, to mass merchandisers and national chains. Until March 31, 1998, Nantucket also produced, under the GUESS? label, women's innerwear for sale to department and specialty stores. Packaging and distribution of the Company's product lines was based in its leased facility in Cartersville, Georgia. From November, 1992 to July 1, 1994, the Company had a manufacturing facility in Rio Grande, Puerto Rico, and until September 1997 had a manufacturing facility in Cartersville, Georgia. Prior to the cessation of all business activities, all of the Company's products were manufactured by offshore production contractors located in Mexico, the Far East and the Caribbean Basin. Due to the lack of capital resources needed to properly develop and support the GUESS? product line, the Company initiated a strategy to discontinue its GUESS? division to focus its resources on its core mens fashion underwear business. Termination of Operations As more fully described in Note N to the financial statements included in this report, Levi Strauss & Co., the parent company of Brittania Sportswear Ltd., a licensor which accounted for 49% of the Company's fiscal 1997 sales, and 21% of the Company's fiscal 1998 sales, announced their intention to sell Brittania. In light of the actions announced by Levi, K-Mart, the largest retailer of the Brittania brand and the Company's largest customer, accounting for sales of Brittania product of approximately $11 million in fiscal year 1997, and $3 million in fiscal year 1998, advised the Company that it would no longer continue its on-going commitment to the Brittania trademark. In response, the Company filed a multi-million lawsuit against Levi Strauss & Co in March 1997 alleging that the licensor breached various obligations under the license agreement, including without limitation it's covenant of good faith and fair dealing. The Company settled this litigation in June 1998 (see Item 3 "Legal Proceedings"). 2 The Company experienced significant losses in recent years which resulted in severe cash flow issues that negatively impacted the ability of the Company to continue its business as formerly structured. Due to the lack of capital resources needed to properly develop and support the GUESS? product line, the Company with the support of GUESS? Inc., agreed in March 1998, to discontinue its GUESS? division. This was completed during the first quarter of the fiscal year ended February 27, 1999. Sales for this product line in fiscal 1999, 1998, and 1997 aggregated $2.7, $7.0, and $4.7 million respectively. Until April 17, 1998 the Company's Common Stock was traded on the American Stock Exchange. Because the Company fell below American Stock Exchange guidelines for continued listing, effective April 17, 1998, the Company's stock was delisted. It is currently traded in the over-the-counter market and quoted on the OTC electronic bulletin board of the NASD Supplemental Market under the symbol "NANK". The Company defaulted on interest payments to its subordinated debt holder, and has no credit facilities of any kind in place. As a result of the Brittania matter and the continuing losses from operations, interest payment default, and the lack of any credit facilities, the Company was forced to discontinue all business operations by the end of October 1999. The Company intends to seek protection and to initiate reorganization under Chapter 11 of the federal bankruptcy laws. Present plans include the possibility of changing the Company's capitalization, business, and management. There can be no assurance that the ultimate impact of resolution of these matters will not have a materially adverse effect on the Company and its shareholders. The Company implemented a restructuring strategy to improve operating results and enhance its financial resources, which included reducing costs, streamlining its operations and closing its Puerto Rico plant. In addition Management implemented additional steps to reduce its operating costs which it believed were sufficient to provide the Company with the ability to continue in existence. Major elements of these action plans included: The phase-out of the Guess? product line, which was completed in the first quarter of fiscal 1999. The sale of the Company's Cartersville, GA location, competed in October 1997, and the relocation to more appropriate space for its packaging and distribution facilities. The transfer of all domestic manufacturing requirements to foreign manufacturing contract facilities. Staff reductions associated with the transfer of manufacturing to offshore contractors, closing the GUESS? division, efficiencies and reduced volume. The relocation, in May 1997, of executive offices and showrooms to more appropriate, lower cost facilities. In connection with the implementation of these actions, the Company reflected, in its financial statements for the fiscal years ended February 26, 1994 through March 2, 1996, unusual charges 3 aggregating $6.4 million. These combined charges include approximately $760,000 of expenses incurred in closing the Puerto Rico facility, write-downs and reserves of asset values and other non-cash items ($1.5 million write-off of goodwill, $2.1 million writedowns of inventory, $530,000 writedowns of fixed assets), the accrual for the severance payments to the former Chairman and Vice Chairman of the Board ($1,765,000) and , in fiscal 1996, an unusual credit, as described below, of $300,000 related to the elimination of a subordinated note payable associated with the purchase of the Puerto Rico facility since the likelihood of payment on such note was considered remote. In fiscal year 1998, the financial statements, through operating results, reflects $1.8 million in charges including $1.2 million associated with the phase out of the GUESS? division ($660,000 inventory write-offs, $540,000 in deferred costs and other charges), with the balance associated with write-downs, and reserves of asset values, and other non cash items. Recent Developments The Company experienced significant losses in recent years which resulted in severe cash flow problems that negatively impacted the ability of the Company continue to conduct its business. Due to the lack of capital resources necessary to develop and support the GUESS? product line, the Company with the support of GUESS? Inc. agreed in March 1998 to discontinue its GUESS? Division. This was completed during the first quarter of the fiscal year ended February 27, 1999. At the date of this filing the Company is no longer operating and is insolvent. On October 1, 1997 the Company sold its 152,000 sq. ft. manufacturing and distribution facility in Cartersville, GA to Mimms Enterprises, a Real Estate Investment General Partnership, for cash aggregating $2,850,000. The Company reflected a gain of $793,000, and used the proceeds to repay financing secured by the property, and to reduce long term debt. (See note G to the financial statements included in this report.) From September 1988, the Company was a licensee of Brittania Sportswear, Ltd., a wholly owned subsidiary of Levi Strauss & Co. pursuant to which manufactured and marketd men's underwear and other products under the trademarks "Brittania" and "Brittania from Levi Straus & Co.". Sales under this license aggregated $4.5 million in fiscal 1998, $14.9 million in fiscal 1997 and $14.6 million in fiscal 1996. As of January 1, 1997, the license was renewed for a 5 year term, including automatic renewals of 2 years if certain minimum sales levels were achieved. On January 22, 1997, Levi's announced that it was seeking purchasers of its Brittania subsidiary. In January 1997, K-Mart, the Company's largest customer and the largest retailer of the Brittania brand, advised the Company that in light of the actions announced by Levi's it would no longer continue its on-going commitment to the Brittania trademark. The Company filed a multimillion lawsuit dollar against Levi Strauss & Co. and Brittania Sportswear, Ltd. alleging that the licensor breached various obligations under the licensing agreement, including without limitation, its covenant of good faith and fair dealing. In June 1998, the Company reached an accord with Levi to settle this litigation (see item 3 "Legal Proceedings"). As of March 1999, the Company reached an agreement with Cluett, Peabody & Co., the 4 licensor of the "ARROW" trademark, to terminate its Arrow license. (see item 3 "Legal Proceedings"). Financing Arrangements Revolving Credit The Company had a $15 million revolving credit facility with Congress Financial Corp. which expired in March, 1998, and was extended to August 31, 1999. The revolving credit agreement provided for loans based upon eligible accounts receivable and inventory, a $3,000,000 letter of credit facility and purchase money term loans of up to 75% of the orderly liquidation value of newly acquired and eligible equipment. Borrowings bear interest at 2-3/4% above prime. The agreement required, among other provisions, the maintenance of minimum working capital and net worth levels and also contained restrictions regarding payment of dividends. Borrowings under the agreement were collateralized by substantially all of the assets of the Company. As at February 27, 1999 the company was not in compliance with the net worth and working capital covenants nor was the facility utilized. The agreement was subsequently, on October 15, 1999, terminated by Congress Financial and the Company. Currently the Company has no long-term financing facility. Capital Investment and Change of Management In September, 1997 the Company entered into an agreement with NAN Investors LP, the holder of two Convertible Subordinated Debentures in the aggregate principal amount of $2,760,000, to release a security interest in the property sold at 200 Cook St., Cartersville, Georgia, and to extend the cure period with respect to an $172,500 interest payment default on the debentures. Nantucket agreed to pay a portion of the net proceeds from the sale of the property to retire an amount of the subordinated debt ($707,000), a prepayment premium of $176,000, and to place a person, satisfactory to NAN, as a senior operations/financial manager with the company. The forbearance agreement was extended month by month until May 1998. In May 1998, the Company entered into an agreement with the debt holder to extend the cure period, with respect to $322,551 in prior interest payment defaults and for the interest payment due in August 1998, until December 1998. In return, the Company agreed to secure the debentures by a first priority lien on all the assets of the Company, to the extent not otherwise prohibited under the revolving credit facility, and to issue five-year warrants convertible to 16,500,000 shares of the Company's stock at an exercise price of $.10. The Company had its authorized capital increased to the extent necessary to satisfy the conversion rights in full. The Company had an option, within the framework of the forbearance agreement, to prepay all or part of the outstanding subordinated debt at a price equal to 125% of the principal amount. The Company is currently in default for interest payments due since August 1997 on this note. There was no forbearance agreement in effect subsequent to December 1998. Simultaneously with the financing transactions with Congress Financial, on March 22, 1994 the Samberg Group, L.L.C. (the "Group"), a limited liability company organized under the laws of Delaware with certain senior managers of the Company as members (the "Group Members") 5 purchased 5,000 shares of the Company's Non-Voting Convertible Preferred Stock ("Preferred Stock") for $1,000,000. The Preferred Stock acquired by the Group was convertible into shares of Common Stock, $. 10 par value per share, of the Company ("Common Stock") at the rate of $5.00 per share, and was redeemable by the Company at anytime after March 1999. In May 1998, this conversion right was waived by the Samberg Group and the Company conditionally agreed to redeem the Perferred Stock. The Gold's existing employment contracts (the terms of which were scheduled to expire on February 28, 1999) have been canceled and replaced by a Termination and Severance Agreement pursuant to which the Gold's are scheduled to receive aggregate payments for severance of approximately $400,000 per year and other benefits for five years. In fiscal 1994, $1.8 million, representing the present value of this amount was accrued. Products and Sales The Company manufactured and sold men's fashion underwear to mass merchandisers and, in the case of the GUESS? division, ladies' undergarments to better department and specialty stores, primarily through direct contact by salaried and commissioned Company sales personnel. All sales were made to customers generally not affiliated with the Company. These goods were sold under various licensed trademarks as well as under the private label of the customer. The Company promoted its brand name undergarments with seasonal marketing programs and sales events. The Company operated as a single business segment. Net sales and operating profits or losses for each of fiscal years ending February, 1999, February 1998 and March, 1997 are presented in the accompanying financial statement captioned "Consolidated Statements of Operations". At the date of this filing the Company is no longer operating and is insolvent. Men's Undergarment The Company's men's fashion briefs were sold primarily under private label, and the licensed trademarks "BRITTANIA" and "ARROW'. Sales under the Brittania brand were $4.6 million in fiscal year 1998, and nil for fiscal year 1999. The Company targeted undergarments marketed under each of these trademarks to different segments of the market. GUESS? Division The Company sold ladies' innerwear under the licensed trademark "GUESS?". These products were distributed through better department and specialty stores. Sales of GUESS? products commenced at the end of the third fiscal quarter of fiscal 1994. Sales in fiscal 1999, 1998 and 1997 of GUESS? products aggregated $2.4, $7.0 million and $4.7 million. The Company did not have the resources to continue to support and develop the GUESS? product line into the levels 6 required in the licensing agreement. The Company, with the support of GUESS? Inc., initiated plans to terminate its licensing agreement in March 1998, and to phase out this line of business in the first quarter of the fiscal year ended February 27, 1999. Sources of Materials Until it ceased operations in October 1999, the Company purchased 100% of its production requirements as complete garments from certain of many available foreign manufacturers located in Mexico, the Far East and the Caribbean Basin. The Company does not have any long term contracts with any of its foreign manufacturers. Licenses and Trademarks On December 7, 1992, the Company signed an agreement with GUESS?, Inc. for the exclusive United States rights to produce and sell undergarments bearing the "GUESS?" trademark and variations thereof. The Company began shipping product under this trademark during the third quarter of fiscal 1994. Effective May 31, 1996, the license was extended through the period ended May 31, 1999. The license was subject to termination prior to its expiration if certain minimum sales goals were not met. For the contract year ending May 31, 1997, required minimum sales goals were not achieved. For each contract year ending after May, 1997, the minimum sales goal increased by $2,000,000. Minimum royalties were $560,000, $700,000 and $840,000 for the contract years ended May 31, 1997, 1998 and 1999 respectively. Due to the lack of capital resources necessary to develop and support the GUESS? product line, the Company with the support of the licensor, GUESS? Inc., initiated a strategy to terminate the GUESS? license, and the Company discontinued its GUESS? division during the first quarter of fiscal year 1999. From September 1988, the Company was a licensee of Brittania Sportswear, Ltd., a wholly owned subsidiary of Levi Strauss & Co. pursuant to which manufactured and marketd men's underwear and other products under the trademarks "Brittania" and "Brittania from Levi Straus & Co.". Sales under this license aggregated $4.5 million in fiscal 1998, $14.9 million in fiscal 1997 and $14.6 million in fiscal 1996. As of January 1, 1997, the license was renewed for a 5 year term, including automatic renewals of 2 years if certain minimum sales levels were achieved. On January 22, 1997, Levi's announced that it was seeking purchasers of its Brittania subsidiary. Nantucket's largest customer and the largest retailer of the Brittania brand. In January 1997, K-Mart, the Company's largest customer and the largest retailer of the Brittania brand, advised the Company that in light of the actions announced by Levi's it would no longer continue its on-going commitment to the Brittania trademark. The Company filed a multimillion dollar lawsuit against Levi Strauss & Co. and Brittania Sportswear, Ltd. alleging that the licensor breached various obligations under the license agreement, including without limitation its covenant of good faith and fair dealing. The Company agreed to settle this litigation in June 1998 and realized approximately $725,000 in gross value from this matter in the second quarter of the fiscal year ended February 27, 1999. 7 On October 5, 1992, the Company signed an agreement with Cluett, Peabody & Co., Inc. for the exclusive United States rights to produce and sell men's and boys' fashion underwear, T-shirts, V- neck shirts, tank tops, briefs and boxer shorts bearing the "ARROW" trademark during the period commencing January 1, 1993 and expiring, as extended, December 31, 1999. A minimum royalty of $162,500 was guaranteed under the license for each annual period through December 31, 1996; increasing to $250,000 for each annual period from January 1, 1997 through December 31, 1999. The Company began shipping product under this trademark during the first quarter of fiscal 1994. Net sales under this license were $4.4 million in fiscal 1999, $4.8 million in fiscal 1998 and $5.7 million in fiscal 1997. As of March 12, 1999, the Company reached an agreement with the licensor to terminate the Arrow license agreement. On December 21, 1992, the Company signed an agreement with McGregor Corporation for the exclusive United States rights to produce and sell men's and boys' fashion knit underwear briefs bearing the "BOTANY 500" trademark during the period commencing on January 1, 1993 and expiring, pursuant to an extension, December 31, 2001. McGregor Corporation may, at its option, terminate the license prior to its expiration if certain minimum sales goals are not met. Minimum sales levels for calendar 1996 are $750,000 and $1 million for each calendar year thereafter through December 31, 1998. Net sales under this license were $225,000 in fiscal 1998 and $652,000 in fiscal 1997. McGregor Corporation has not terminated this license in view of the fiscal 1998 sales levels. The Company is not currently producing, nor is it projecting sales under this license and has no plans to do so in the future. The Company is currently not operating and is insolvent. Seasonality Until it ceased operations in October 1999, sales of the Company's products were traditionally highest in the third fiscal quarter, which extends through autumn, when many of the pre-Christmas sales are made, and were typically lowest in the fourth fiscal quarter. Customers Until it ceased operations in October 1999, two of the Company's customers each accounted for more than 10% of the Company's consolidated net sales during fiscal 1999, and three customers accounted for more that 10% in fiscal 1998 and 1997. For the fiscal year ended February 27, 1999 net sales to K-Mart were nil, as compared to approximately 16% and 40% of total net sales for 1998 and 1997 respectively. As previously described, K-Mart, the largest retailer of the Brittania brand, advised the Company that in light of Levi's announced decision to sell the Brittania brand, K-Mart would no longer continue it's on-going commitment to the Brittania trademark. For the fiscal year ended February 27, 1999 approximately 34% of the Company's consolidated net sales were made to Target, as compared to 22% for fiscal 1998 and 19% for fiscal 1997. For the fiscal 1999, approximately 39% of the Company's consolidated net sales were made to 8 Sears, as compared to sales in the prior fiscal year of 23%. Sales in fiscal 1997 were 18% of consolidated net sales. Until the Company ceased operations in October 1999, it had long-standing relationships with these customers. No other customer accounted for more than 10% of the Company's consolidated net sales for fiscal 1999, 1998 or 1997. Delivery Requirements Until the Company ceased operations in October 1999, all purchase orders were taken for current delivery and the Company had no long-term sales contracts with any customer, or any contract entitling the Company to be the exclusive supplier of merchandise to a retailer or distributor. Backlog The nature of the Company's backlog of orders changed with the elimination of the Guess? division. Orders for the Company's two remaining major customers were received the same week as the expected ship date, therefore the backlog of orders at February 27, 1999 was an immaterial amount, as compared to $1 million at the end of February 1998 and $2 million at the end of February 1997. Competition Until the Company ceased operations in October 1999, all of the Company's markets were highly competitive. During the past several years there was a reduction in the number of retailers available to purchase the Company's products. The remaining retailers were relatively larger and possessed strengthened negotiating positions. It became increasingly important for the Company to cooperate closely with its customers, who were among the largest retailers in the United States, in the development of products, programs and packaging and that it be able to quickly and completely ship orders which it received through EDI. In prior years the Company experienced difficulty in filling all of its orders, caused in large part by the cash shortage resulting from losses at its former Puerto Rico facility (see item 3 "Legal Proceedings"), the expiration of its financing arrangement with Chemical Bank, and the failure to obtain the investment necessary to support and develop the GUESS? product line. The Company had previously addressed its liquidity issues by the infusion of debt and equity financing, including (i) the refinancing in March 1994; (ii) the additional equity of $3.9 million raised in fiscal 1995; (iii) the $3.5 million private placement completed in August, 1996; and by the reduction in costs associated with the consolidation and restructuring of the operations in fiscal 1998 and 1999, and the more effective management of 9 working capital. Until it ceased operations in October 1999, the Company competed in the manufacture of its products with numerous other companies, many of which had substantially greater financial resources than the Company. The Company's competitors included manufacturers of retailers' private label, designer label and unbranded merchandise, as well as manufacturers which produce goods for sale under their own recognized name brands, including Fruit of the Loom Inc. and Hanes. Although the largest producers of branded men's underwear are Fruit of the Loom, Inc. and Hanes, the Company did not consider these large national brands to be its direct competition. The Company primarily produced and sold fashion underwear either under licensed brands which had consumer recognition in areas other than undergarments or under so-called "private labels" for specific retailers. The Company's largest competition in the GUESS? Division's business were Calvin Klein and Jockey. The Company succeeded in licensing significant brand names, primarily as a result of its past successes in extending brand names to its products. As recent events indicate, the acquisition and retention of licenses to use desirable brand names was subject to legal risks as well as business considerations. Patents The Company has developed and patented packaging which it believes can make products more attractive to the consumer and more theft and damage resistant than its competitors' packaging. It involves a transparent plastic blister pack which allows single or multiple garments to be visible in a package which is heat sealed. Unlike the typical cardboard box with only a small transparent window, all garments are visible without the need to open the package and, in fact, the package cannot be opened without a cutting implement. As a result, until it ceased operations in October 1999, the Company received fewer returns of damaged merchandise. This packaging continues to receive strong acceptance, and over the years has been imitated by several of the Company's competitors. Imports From June 1997 until the Company ceased operations in October 1999, it achieved 100% sourcing of its production requirements through imported merchandise produced in factories in Mexico, the Caribbean Basin and the Far East. Environmental Matters Until it ceased operations in October 1999, the Company's packaging and distribution facility was located in Cartersville, GA. The Company believes that such facility materially conformed to all governmental regulations pertaining to environmental quality as then promulgated. 10 Employees On February 27, 1999, the Company had 42 employees, of which 39 were located in Cartersville, Georgia. Since the termination of operations in October of 1999, the Company has had no employees. None of the Company's employees were covered by a collective bargaining agreement. The Company never experienced a work stoppage due to labor difficulties and it believed that its relations with its employees were satisfactory. ITEM 2. PROPERTIES Until it terminated operations in October 1999 the Company's executive offices were located at 510 Broadhollow Road, Melville, New York. The Company occupied 2,000 square feet under a lease which was scheduled to expire July 31, 2002. This lease provided for aggregate rentals which increased 4% annually from $46,000 to $52,000 plus increases for certain taxes and energy costs. The Company terminated this lease agreement effective September 30, 1999. The Company also occupied a showroom and design facility consisting of a 2,300 square foot location at 180 Madison Avenue, New York, New York. Annual rentals were $52,000. The lease for these premises was scheduled to expire May 31, 2002, but was terminated effective May 31, 1998, for a nominal fee of $8,770. The Company occupied a 71,000 square foot manufacturing and distribution facility in Cartersville, Georgia under a five year lease. This facility was located at 435 Industrial Park Road, Cartersville, Georgia. The annual rentals were $188,148 increasing based on an established formula over the five year lease term which was scheduled to expire on December 31, 2002. The Company was notified on December 17, 1999 that the premises were considered abandoned and that in accordance with sections 20 and 21 of the lease the lease was terminated effective that date. The leased Cartersville facility was used for the packaging and distribution of the Company's products. ITEM 3. LEGAL PROCEEDINGS On September 27, 1993, a civil action (case No. 93-6766) was instituted by the Company and its wholly-owned subsidiary, Nantucket Mills, Inc. ("Mills") in the United States District Court, Southern District of New York, against Stanley R. Varon and others, seeking compensatory damages of approximately $4,000,000 plus declaratory and injunctive relief for acts of alleged securities fraud, fraudulent conveyance, breach of fiduciary trust and unfair competition. The action arises out of the acquisition by Mills of all of the common stock of Phoenix Associates, Inc. ("Phoenix") from Mr. Varon and Armando Lugo on February 22, 1993. Certain claims against Mr. Varon arise from facts which predate the acquisition of Phoenix as well as from his former positions as a director, officer and employee of Nantucket. On November 16, 1993 in connection with such civil action and arbitration proceeding, Mr. Varon filed certain 11 counterclaims against the Company and Mills alleging improper termination and breach of his Employment Agreement with the Company and breach by the Company and Mills of the Stock Purchase Agreement pursuant to which all of the stock of Phoenix was acquired from Messrs. Varon and Lugo. In his counterclaims Mr. Varon also sought indemnification and contribution from the Company, Mills and their respective principal officers, directors and employees. On March 29, 1996, the Company and Mills filed an amended Complaint and Demand for Jury Trial which added certain parties as defendants and alleged certain fraudulent activities constituting a pattern of racketeering activity under the Racketeering Influenced Corrupt Organization Act. The Company settled this litigation and realized $675,000 from this matter in the first quarter of the fiscal year ended February 27, 1999 Levi Strauss & Co. the parent company of Brittania Sportswear Ltd.. a licensor which accounted for 49% of the Company's fiscal 1997 sales, announced, in January, 1997, their intention to sell Brittania. In light of the actions announced by Levi, K-Mart, the Company's largest customer of Brittania product advised the Company that it would no longer continue its on-going commitment to the Brittania trademark. In response, the Company filed a multimillion dollar lawsuit against Levi Strauss & Co. and Brittania Sportswear Ltd. alleging that the licensor breached its obligations under the licensing agreement, including without limitations its covenant of good faith and fair dealings. The Company has settled the Levi litigation and has realized approximately $725,000 in gross value from this matter. On December 9, 1997, Donald Gold, a former director of the Company, filed a complaint against the Company in the State Court of Fulton County, Sate of Georgia relating to payments allegedly due him under the March 18, 1994 Severance Agreement and seeking damages in the amount of $219,472. The Company subsequently reached a settlement with Mr. Gold in the amount of $100,000 plus an amount based on a reaching of a certain level of recovery, if any, from the Levi Strauss litigation. Based on the settlement with Levi this provision has no value. As of the date of this filing, there remains a balance of $37,500. On January 15, 1998, in the Supreme Court of the State of New York, Westchester County, George Gold, a director of the Company, filed a complaint against the Company for breach of the March 18, 1994 Severance Agreement and seeking damages in the amount of $559,456 plus applicable interest and legal fees. The Company on March 9, 1998 filed counterclaims for a significantly larger amount. On July 30, 1998 the court granted a summary judgement on behalf of George Gold. Subsequently, in April 1999, the Company reached a settlement with the Director for $75,000 which resulted in a reduction of approximately $530,000 in the accrued unusual charge during the fiscal year ended February 27, 1997. On February 17, 1998 Theresa M. Bohenberger, a former director of the Company, filed a complaint against the Company in the United States District Court for the Southern District of New York, relating to payments due her under the May 2, 1992 Severance Agreement. The Company reached a settlement with the estate of Ms. Bohenberger and to the best knowledge of current management all amounts due have been paid. To existing management's best knowledge there is only one outstanding litigation with SGS U.S. Testing Co., Inc. In the Company's opinion, it will prevail in its counter-suit against SGS. 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. During the year ended February 27, 1999 the Company did not submit any matters to a vote of its shareholders. 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company is an insolvent, currently dormant company which is presently exploring the advisability of filing a voluntary petition under Chapter 11 of the federal bankruptcy laws, with the goal of reorganizing its management and searching for a new business opportunity which will potentially allow the Company to successfully reorganize. The Company's Common Stock, $. 10 par value, was traded on the American Stock Exchange under the symbol "NAN" until April 17, 1998. Because the Company had fallen below American Stock Exchange guidelines for continued listing, effective April 17, 1998 the Company's Stock was delisted. It is currently traded on a sporadic and limited basis under the symbol "NANK", in the over-the-counter market and quoted on the OTC Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc. (the "OTC Bulletin Board"). The following table sets forth representative high and low bid prices by calendar quarters as traded on the American Stock Exchange until April 17, 1998 and as reported in the OTC Bulletin Board since May 21, 1998 during the last two fiscal years and the subsequent interim period through January 11, 2000. The level of trading in the Company's common stock has been sporadic and limited and the bid prices reported may not be indicative of the value of the common stock or the existence of an active market. The OTC market quotations reflect inter-dealer prices without retail markup, markdown, or other fees or commissions, and may not necessarily represent actual transactions. Low High Fiscal Year Ended February 28, 1998 First Quarter $1.06 $2.63 Second Quarter 1.00 1.56 Third Quarter 0.25 1.19 Fourth Quarter 0.25 1.38 Fiscal Year Ended February 27, 1999 First Quarter $0.35 $1.00 Second Quarter 0.13 0.44 Third Quarter 0.03 0.13 Fourth Quarter 0.01 0.09 Fiscal Year Ended February 26, 2000 First Quarter $0.03 $0.07 Second Quarter 0.02 0.06 14 Third Quarter 0.02 0.06 As of January 14, 2000, the Company's Common Stock was held by approximately 271 holders of record. The Company has never paid any cash dividends on its Common Stock, and has no present intention of so doing in the foreseeable future. The Company was prohibited from declaring and paying cash dividends on its Common Stock by the terms of its credit agreement with Congress Financial Corporation dated March 22, 1994. This agreement has subsequently been terminated effective October 15, 1999. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial information with respect to the Company and its subsidiaries for the five fiscal years ended February 27, 1999. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and in conjunction with the Company's Consolidated Financial Statements and notes thereto appearing elsewhere in this Report. The Company is an insolvent, currently dormant company which is presently exploring the advisability of filing a voluntary petition under Chapter 11 of the federal bankruptcy laws, with the goal of reorganizing its management and searching for a new business opportunity which will potentially allow the Company to successfully reorganize.
For Fiscal Year Ended --------------------- (In thousands, except per share amounts) Feb. 27, Feb.28, March 1, March 2, Feb 25, 1999 1998 1997 1996 1995 Summary Statements of Operations -------------------------------- Net sales $11,518 $21,683 $35,394 $35,060 $37,015 Gross profit 2,410 3,102 5,999 8,328 7,061 Net (loss) gain sale of asset (15) 712 -- -- -- Net gain sale of asset 712 -- -- -- -- Unusual credit (charge) -- -- -- 300 (1,252) Net income (loss) 937 (4,665) (2,747) (239) (3,147) Net (loss) per share-basic and diluted $ .26 $ (1.47) $ (.91) $ (.08) $ (1.15) Average shares outstanding 3,239 3,239 3,125 2,985 2,743 Summary Balance Sheet Data --------------------------
15 Total assets $3,476 $7,208 $18,063 $18,855 $22,184 Working capital (956) (2,120) 10,906 10,827 12,830 Long-term debt (exclusive of current maturities 64 299 8,837 9,108 11,300 Convertible subordinated debt 2,053 2,053 2,760 -- -- Stockholders' equity (306) (1,262) 3,159 5,257 5,465
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is an insolvent, currently dormant company which is presently exploring the advisability of filing a voluntary petition under Chapter 11 of the federal bankruptcy laws, with the goal of reorganizing its management and searching for a new business opportunity which will potentially allow the Company to successfully reorganize. Termination of Operations On January 22, 1997 Levi Strauss & Co., the parent company of Brittania Sportswear Ltd., a licensor which accounted for $14.9 million of the Company's fiscal 1997 sales, and $4.5 million of fiscal 1998 sales, announced their intention to sell Brittania. In light of the actions announced by Levi, K-Mart, the largest retailer of the Brittania brand and the Company's largest customer accounting for approximately $11 million of the Company's fiscal 1997 sales and only approximately $3.0 million in fiscal 1998, of Brittania product, advised the Company that it would no longer continue its on-going commitment to the Brittania trademark. In response, the Company filed a multimillion-dollar lawsuit against Levi Strauss & Co. alleging that the licensor breached various obligations under the license agreement, including without limitation its covenant of good faith and fair dealing. In June 1998, the Company reached an accord with Levi to settle this litigation (see item 3 "Legal Proceedings"). The Company experienced significant losses in recent years which have generally resulted in severe cash flow issues that have negatively impacted the ability of the Company to conduct its business as presently structured. Due to the lack of capital resources needed to properly develop and support the GUESS? product line, the Company with the support of GUESS? Inc. initiated a strategy to discontinue its GUESS? division. Sales for this product line in fiscal 1998, 1997, and 1996 aggregated $7.0, $4.7, and $4.9 million respectively. Until April 17, 1998 the Company's Common Stock was traded on the American Stock Exchange. Because the Company fell below American Stock Exchange guidelines for continued listing, effective April 17, 1998, the Company's stock was delisted. It is currently traded on the NASD Supplemental Market under the symbol "NANK". The Company has defaulted on interest payments to its subordinated debt holder, and has no credit facility of any kind in place. Subsequent to the period covered by this report the Board of Directors, on October 11, 1999, voted to allow the subordinated debt holder to liquidate the assets covered by its security agreement. 16 As a result of the Brittania matter and the continuing losses from operations, interest payment default, and the lack of any credit facility, there can be no assurance that the Company can continue as a going concern. At the date of this filing the Company is insolvent and no longer operating. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue in existence. The Company had funded its operating losses by refinancing its debt in fiscal 1995 and increasing its capital through (a) the sale of $1 million of non-voting convertible preferred stock to management in fiscal 1995; (b) the fiscal 1995 sale of treasury stock which increased equity by $2.9 million and (c) the completion, in August 1996 of a $3.5 million private placement. The Company implemented a restructuring strategy to improve operating results and enhance its financial resources, which included reducing costs, streamlining its operations and closing its Puerto Rico plant. In addition Management has implemented additional steps to reduce its operating costs which it believes are sufficient to provide the Company with the ability to continue in existence. Major elements of these action plans included: The phase-out of the Guess? product line, which was completed in the first quarter of fiscal 1999. The sale of the Company's Cartersville, GA location, competed in October 1997, and the relocation to more appropriate space for its packaging and distribution facilities. The transfer of all domestic manufacturing requirements to foreign manufacturing contract facilities. Staff reductions associated with the transfer of manufacturing to offshore contractors, closing the GUESS? division, efficiencies and reduced volume. The relocation, in May 1997, of executive offices and showrooms to more appropriate, lower cost facilities. In connection with the implementation of these actions, the Company reflected, in its financial statements for the fiscal years ended February, 1994 through March, 1, 1996, unusual charges aggregating $6.4 million. These charges include approximately $760,000 of expenses incurred in fiscal 1995 closing the Puerto Rico facility, write-downs and reserves of asset values and other non-cash items ($1.5 million write-off of goodwill, $2.1 million writedowns of inventory, $530,000 writedowns of fixed assets), the accrual for the severance payments to the former Chairman and Vice Chairman of the Board ($1,765,000) and, in fiscal 1996, an unusual credit, as described below, of $300,000 related to the elimination of a subordinated note payable associated with the purchase of the Puerto Rico facility since the likelihood of payment on such note was considered remote. In fiscal year 1998, the financial statements, through operating results, reflects $1.8 million in restructuring charges including $1.2 million associated with the 17 phase out of the GUESS? division ($660,000 inventory write-offs, $540,000 in deferred costs and other charges), with the balance associated with write-downs, and reserves of asset values, and other non cash items. The operating results for the current fiscal year include $1,930,000 in other income all of which is a result of settled litigation as discussed earlier (see note L to the financial statements included in this report). Results of Operations Sales Net sales for the fiscal year ended February 27, 1999 decreased 47% from the prior year levels to $11.5 million. Sales under the Brittania license were nil as compared to $4.5 million in the prior fiscal year while the balance of the men's fashion underwear business remained constant. The decline in total sales is primarily related to the discontinuance of the Brittania product associated with the actions announced by Levi to dispose of the Brittania brand and the discontinuance of the GUESS? product line. GUESS? product sales only amounted to $2.4 million compared to approximately $7 million in the prior fiscal year. Net sales for the fiscal year ended February 28, 1998 decreased 29% from the prior year levels to $21.7 million. Sales under the Brittania license declined $10.4 million from prior year levels, with the balance of the men's business off by $609,000. The decline in sales of men's products is a direct result of the phase out of the Brittania product associated with the actions announced by Levi to dispose of the Brittania brand, and the loss of certain styles to competitors within the Companies business environment. GUESS? product sales increase $2.3 million from prior year levels, which includes $2.7 million in close out sales, and reflects the Company's efforts to reduce its carrying levels of GUESS? inventory, and generate cash. Net sales for the fiscal year ended March 1, 1997 decreased 13% from the prior year levels to $30.4 million. These declines, associated with lower unit volumes, reflect inventory reductions by Nantucket's customers. In addition, the Company canceled customer orders for specialized new products due to production delays and quality issues experienced by supplementary foreign manufacturing contractors which were engaged to assemble these new products. In view of these problems, the Company no longer used these contractors. Gross Margin Gross profit margin levels are summarized as follows: For Fiscal Year Ended Feb. 27, Feb. 28, March 1, 1999 1998 1997 Gross Margin % 21% 14% 20% 18 $ Amount-% Increase (decrease) (22%) (30%) (28%) The decline in fiscal year 1999 gross profits and the increase in the gross margin are results associated with the discontinuance of product lines and the benefit of increased utilization of the lower cost off-shore manufacturing facilities. The declines in fiscal year 1998 gross margin reflect non recurring inventory reserves and write-offs associated with discontinued product lines, and close out sales used to reduce inventory levels and to generate cash. In the aggregate this represents approximately $1.2 million, or 6 points of gross margin. The declines in fiscal 1997 gross margin are the result of increased manufacturing variances associated with reduced unit volumes and the additional processing costs of imported garments as operations of the new contractor base were fine tuned. In addition, gross profit levels reflect $1.6 million in fully reserved close-out sales of the GUESS? products as the Company continued to reduce slow moving inventory levels. Selling, general and administrative expenses Selling, general and administrative expenses in fiscal 1999 of $2.9 million were 25% of sales. For fiscal 1998 and 1997, these expenses were $2 million and $7.5 million respectively, and as a percentage of sales, 33% for fiscal year 1998, and 25% for fiscal year 1997. These improvements are the result of lower occupancy costs, reduced staffing levels, efficiencies, and reductions in overhead associated with the discontinued GUESS? division. General and administrative expenses for fiscal year 1998 included $691,000 in non-recurring charges incurred as part of the Company's restructuring efforts. Interest expense Interest expense decreased by $805,000 in fiscal 1999, reflecting reductions in the outstanding revolving credit facility and the subordinated debt. Interest expense increased by $112,000 in fiscal 1998, reflecting the $175,000 booked as the expense resulting from the issuance of 16,500,000 warrants (see Note 3), and the Company's strategy of generating cash, by more effective management of its working capital, to decrease its debt. The decrease in interest expense in fiscal 1997 of $114,000 reflects lower borrowing levels as the Company reduced inventory levels. In addition, the proceeds of the August, 1996 $3.5 million private placement were used to prepay the remaining $533,000 due to Chemical Bank pursuant to its credit agreement with Congress Financial Corp. The impact of these reduced borrowing levels was offset by the 150 basis point higher interest rate of the $2.7 million Convertible Subordinated Debentures. 19 Liquidity and Capital Resources The Company has incurred significant losses in recent years which have generally resulted in severe cash flow problems that have negatively impacted the ability of the Company to conduct its business as structured. In March, 1994 the Company was successful in refinancing its credit agreements with (i) a three year $15,000,000 revolving credit facility with Congress Financial; (ii) a $2,000,000 Term Loan Agreement with Chemical Bank; and (iii) an additional $1,500,000 Term Loan with Congress replacing the Industrial Revenue Bond financing of the Cartersville, Georgia manufacturing plant. On May 31, 1996, the Company amended its Loan and Security Agreement with Congress Financial Corporation dated March 24, 1994. This amendment provided (a) $251,000 in additional equipment term loan financing, (b) extension of the repayment period for all outstanding term loans, (c) supplemental revolving loan availability from March 1st through June 30the of each year and (d) extension of the renewal date to March 20, 1998. In March, May, August and December of 1998, Congress Financial Corporation extended its Loan and Security Agreement with the Company. As of February 27, 1999 the agreement was set to expire on December 31, 1998. Subsequently the agreement was renewed to August 31, 1999 and from each month thereon extended on a month to month basis until October 15, 1999 when the agreement was mutually terminated by Congress Financial and the Company. Currently the Company has no financing facility, is insolvent and has discontinued all business operations. The Company increased its equity over the past three years through (i) a $1,000,000 investment by the Management Group in fiscal 1995; (ii) the $2.9 million sale of 490,000 shares of common treasury stock to GUESS?, Inc. and certain of its affiliates; and (iii) the $3.5 million private placement which included the issuance of 250,000 shares and $2,760,000 convertible subordinated debentures. These transactions have had a positive effect on the Company's liquidity and capital resources. The Company utilized the proceeds of the $3.5 million private placement to prepay existing debt. On October 1, 1997 the Company completed the consolidation of its facilities and sold its 152,000 sq. foot manufacturing and distribution facility in Cartersville, Georgia for cash aggregating $2,850,000. The Company reflected a gain on the sale of $793,000. The proceeds were used to repay the $525,000 financing secured by this property, to prepay $707,000 of the convertible subordinated debentures secured by a second mortgage on the property, and to pay a $176,000 prepayment penalty incurred from the prepayment of the subordinated debt. The remaining net proceeds were utilized to reduce the revolving credit financing. Working capital levels increased to $(956,000) from February 28, 1998 levels reflecting reductions in receivable and inventories utilized to reduce debt levels. The $2 million reduction in inventory levels reflects the Company's reduction in sales volume, and its continuing efforts to manage its supply chain towards delivering inventory closer to forecasted demand. The subordinated debt has been reclassified to short term due to the Company's inability to make interest payments to the subordinated debt holder. Subsequent to the period covered by this report 20 the Board of Directors, on October 11, 1999, voted to allow the subordinated debt holder to liquidate the assets covered by its security agreement. Outlook The Company has incurred significant losses in recent years which have generally resulted in severe cash flow problems that have negatively impacted the ability of the Company to conduct its business as structured. Currently the Company is dormant and insolvent and is presently exploring the advisability of filing a voluntary petition under Chapter 11 of the federal bankruptcy laws, with the goal of reorganizing its management and searching for a new business opportunity which will potentially allow the Company to successfully reorganize. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached hereto at Page F-1 et seq. 21 [GRANT THORNTON LETTERHEAD] Report of Independent Certified Public Accountants Board of Directors Nantucket Industries, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Nantucket Industries, Inc. and Subsidiaries as of February 27, 1999 and February 28, 1998, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended February 27, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nantucket Industries, Inc. and Subsidiaries as of February 27, 1999 and February 28, 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 27, 1999 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As presented in the accompanying financial statements, the Company has had significant decreases in sales, operating losses, and defaulted on interest payments. These factors, among others discussed in Note A to the accompanying financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note A. These financial statements do not include any adjustments that might result from the outcome of these uncertainties. /s/ Grant Thornton LLP Atlanta, Georgia May 14, 1999 F-1 Nantucket Industries, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS ASSETS
February 27, February 28, 1999 1998 ------------ ------------ CURRENT ASSETS Cash $ 622,268 $ 8,850 Accounts receivable, less allowance for doubtful accounts of $273,000 and $351,000, respectively (Notes B and H) 961,989 2,879,735 Inventories (Notes F and H) 1,108,860 3,090,383 Other current assets 67,347 71,895 ------------ ------------ Total current assets 2,760,464 6,050,863 PROPERTY, PLANT AND EQUIPMENT, NET (Notes G and H) 538,522 958,075 OTHER ASSETS, NET 176,601 198,786 ------------ ------------ $ 3,475,587 $ 7,207,724 ============ ============
The accompanying notes are an integral part of these statements. F-2 LIABILITIES AND STOCKHOLDERS' DEFICIT
February 27, February 28, 1999 1998 ------------ ------------ CURRENT LIABILITIES Current portion of long-term debt (Note H) $ -- $ 3,161,286 Current portion of capital lease obligations (Note H) 56,452 51,898 Convertible subordinated debt (Note D) 2,052,986 2,052,986 Accounts payable 248,538 722,483 Accrued salaries and employee benefits 80,740 223,031 Accrued unusual charge (Note E) 95,833 465,000 Accrued expenses and other liabilities 863,271 730,478 Accrued royalties 319,048 763,270 ------------ ------------ Total current liabilities 3,716,868 8,170,432 CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION (Note H) 64,250 120,702 ACCRUED UNUSUAL CHARGE (Notes E and L) -- 178,717 ------------ ------------ 3,781,118 8,469,851 STOCKHOLDERS' DEFICIT (Notes D and K) Preferred stock, $.10 par value; 500,000 shares authorized, of which 5,000 shares have been designated as non-voting convertible with liquidating preference of $200 per share and are issued and outstanding 500 500 Common stock, $.10 par value; authorized 20,000,000 shares; Issued 3,241,848 324,185 324,185 Additional paid-in capital 12,539,503 12,539,503 Deferred issuance cost (96,425) (115,541) Accumulated deficit (13,053,357) (13,990,837) ------------ ------------ (285,594) (1,242,190) Less 3,052 shares of common stock held in treasury, at cost 19,937 19,937 ------------ ------------ (305,531) (1,262,127) ------------- ------------ $ 3,475,587 $ 7,207,724 ============ ============
F-3 Nantucket Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year ended
February 27, February 28, March 1, 1999 1998 1997 ------------- ------------ ----------- Net sales $ 11,517,842 $ 21,683,326 $ 30,394,409 Cost of sales 9,107,947 18,581,718 24,395,054 ------------- ------------ ------------ Gross profit 2,409,895 3,101,608 5,999,355 Selling, general and administrative expenses 2,879,200 7,166,124 7,546,341 ------------- ------------ ------------ Operating profit (loss) (469,305) (4,064,516) (1,546,986) Other (income) expense Net loss (gain) on sale of assets (Note G) 15,093 (711,686) -- Interest expense 506,746 1,311,875 1,199,529 Other income (Note L) (1,928,624) -- -- ------------- ------------ ------------ Total other (income) expense (1,406,785) 600,189 1,199,529 ------------- ------------ ------------ Earnings (loss) before income taxes 937,480 (4,664,705) (2,746,515) Income taxes (Note J) -- -- -- ------------- ------------ ------------ Net earnings (loss) $ 937,480 $ (4,664,705) $ (2,746,515) ============= ============ ============ Net earnings (loss) per share - basic and diluted $ 0.26 $ (1.47) $ (0.91) ============= ============ ============ Weighted average common shares outstanding 3,238,796 3,238,796 3,124,785 ============= ============ ============
The accompanying notes are an integral part of these statements. F-4 Nantucket Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT Years ended February 27, 1999, February 28, 1998 and March 1, 1997
Preferred stock designated as non-voting convertible Common stock Additional ---------------------- ------------------ paid-in Shares Amount Shares Amount capital -------- ------ ------ ------ ---------- Balance at March 2, 1996 5,000 $ 500 2,991,848 $299,185 $11,556,386 Net loss -- -- -- -- -- Common stock issued (Note D) -- -- 250,000 25,000 808,117 ------ -------- --------- -------- ----------- Balance at March 1, 1997 5,000 500 3,241,848 324,185 12,364,503 Net loss -- -- -- -- -- Issue of warrants -- -- -- -- 175,000 Amortization of deferred costs -- -- -- -- -- ------ -------- --------- -------- ----------- Balance at February 28, 1998 5,000 500 3,241,848 324,185 12,539,503 Net earnings -- -- -- -- -- Amortization of deferred costs -- -- -- -- -- ------ -------- --------- -------- ----------- Balance at February 27, 1999 5,000 $ 500 3,241,848 $324,185 $12,539,503 ====== ======== ========= ======== =========== Deferred issuance Accumulated Treasury stock ----------------- costs deficit Shares Amount Total -------- ----------- ------ ------ ---------- Balance at March 2, 1996 $ -- $(6,579,617) 3,052 $(19,937) $5,256,517 Net loss -- (2,746,515) -- -- (2,746,515) Common stock issued (Note D) (183,772) -- -- -- 649,345 ---------- ------------ ------- -------- ---------- Balance at March 1, 1997 (183,772) (9,326,132 3,052 (19,937) 3,159,347 Net loss -- (4,664,705) -- -- (4,664,705) Issue of warrants -- -- -- -- 175,000 Amortization of deferred costs 68,231 -- -- -- 68,231 ---------- ------------ -------- --------- ---------- Balance at February 28, 1998 (115,541) (13,990,837) 3,052 (19,937) (1,262,127) Net earnings -- 937,480 -- -- 937,480 Amortization of deferred costs 19,116 -- -- -- 19,116 ---------- ------------ -------- --------- ---------- Balance at February 27, 1999 $ (96,425) $(13,053,357) 3,052 $(19,937) $ (305,531) ========= ============ ======== ========= ==========
The accompanying notes are an integral part of this statement. F-5 Nantucket Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
February 27, February 28, March 1, 1999 1998 1997 ------------ ------------ -------- Cash flows from operating activities: Net earnings (loss) $ 937,480 $(4,664,705) $(2,746,515) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities Depreciation and amortization 397,053 569,121 361,425 Provision for doubtful accounts 11,210 239,982 32,000 Loss (gain) on sale of fixed assets 15,093 (711,686) (44,496) Provision for obsolete and slow-moving inventory 77,528 1,175,646 415,000 Issue of warrants -- 175,000 -- Decrease (increase) in assets Accounts receivable 1,906,536 2,753,047 (1,487,701) Inventories 1,903,995 3,560,411 1,915,199 Other current assets 4,548 419,024 283,886 (Decrease) increase in liabilities Accounts payable (473,945) (166,629) (497,380) Accrued expenses and other liabilities (453,720) 468,708 221,895 Income taxes payable -- (1,909) (1,025) Accrued unusual charge (547,884) (92,151) (408,011) ----------- ----------- ----------- Net cash provided by (used in) operating activities 3,777,894 3,723,859 (1,955,723) Cash flows from investing activities: Additions to property, plant and equipment (59,562) (212,093) (152,516) Proceeds from sale of fixed assets 51,745 2,808,731 33,756 Decrease (increase) in other assets 56,525 348,724 (396,838) ----------- ----------- ----------- Net cash provided by (used in) investing activities 48,708 2,945,362 (515,598)
F-6 Nantucket Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
February 27, February 28, March 1, 1999 1998 1997 ------------ ------------ -------- Cash flows from financing activities: (Repayments) borrowings under line of credit agreement, net (3,161,286) (5,915,589) 173,093 Payments of short-term debt -- -- (800,000) Issuance of convertible subordinated debentures, net of expenses -- -- 2,351,084 Payments of long-term debt and capital lease obligations (51,898) (752,693) -- Issuance of common stock -- -- 740,000 ----------- ----------- ---------- Net cash (used in) provided by financing activities (3,213,184) (6,668,282) 2,464,177 Net increase (decrease) in cash 613,418 909 (7,144) Cash at beginning of year 8,850 7,941 15,085 ----------- ----------- ---------- Cash at end of year $ 622,268 $ 8,850 $ 7,941 =========== =========== ========== Supplemental Disclosure of Cash Flow Information: - ------------------------------------------------ Cash paid during the year for: Interest $ 191,440 $ 762,798 $1,173,981 =========== =========== ========== Income taxes $ -- $ -- $ -- =========== =========== ==========
The accompanying notes are an integral part of these statements. F-7 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS February 27, 1999, February 28, 1998 and March 1, 1997 NOTE A - RESTRUCTURING AND LIQUIDITY MATTERS The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Net sales for the fiscal year ended February 27, 1999 decreased 47% from the prior year level to $11.5 million. There were no sales under the Brittania license for the current fiscal year, and sales under the GUESS? license declined by $4.5 million from prior year levels. As more fully described in Note L, Levi Strauss & Co., the parent company of Brittania Sportswear Ltd. a licensor which accounted for $14.9 million of the Company's fiscal 1997 sales, and $4.5 million of fiscal 1998 sales, announced their intention to sell Brittania. In light of the actions announced by Levi's, K mart, the largest retailer of the Brittania brand and the Company's largest customer, advised the Company that it would no longer continue its on-going commitment to the Brittania trademark. Sales to this customer decreased from $11 million in fiscal year 1997, to $3 million in fiscal 1998, to $0 sales in fiscal year 1999. In response, the Company filed a lawsuit against Levi Strauss & Co., alleging that the licensor breached various obligations under the license agreement, including without limitation its covenant of good faith and fair dealing. The Company settled this litigation in June 1998 (see Note L). The Company has experienced significant losses in recent years which have generally resulted in severe cash flow issues that have negatively impacted the ability of the Company to conduct its business as presently structured. In fiscal year 1999 due to the lack of capital resources needed to properly develop and support the GUESS? product line, the Company has discontinued sales under the GUESS? license. Sales for this product line in fiscal 1999, 1998, and 1997 aggregated $2.5, $7.0 and $4.7 million, with gross margins of 11.8%, 6.4% and 13.2%, respectively. As of March 1999, the Company reached an agreement with Cluett, Peabody & Co., the licensor of the ARROW trademark, to terminate its Arrow license (see Note L). Until April 17, 1998, the Company's common stock was traded on the American Stock Exchange. Because the Company fell below American Stock Exchange guidelines for continued listing, effective April 17, 1998, the Company's stock was delisted. The Company has defaulted on interest payments to its subordinated debt holder, and has no long-term credit facility in place, and currently three customers represent 90% of the Company's net sales. As a result of sharply decreasing revenue, the continuing losses, interest payment default, the lack of a long-term credit facility and the present sales concentration over three customers, there can be no assurance that the Company can continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue in existence. The ultimate impact or resolution of these matters may have a materially adverse effect on the Company or on its financial condition. In view of the issues described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon the continued operations of the Company, which in turn is dependent upon the Company's ability to maintain the financing of its working capital requirements on a continuing basis and to improve its future operations. F-8 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE A - RESTRUCTURING AND LIQUIDITY MATTERS - Continued The Company has funded its operating losses by refinancing its debt in fiscal 1995 and increasing its capital through (a) the sale of $1 million of non-voting convertible preferred stock to management (Note K) in fiscal 1995; (b) the fiscal 1995 sale of treasury stock which increased equity by $2.9 million, and (c) the completion in 1996 of a $3.5 million private placement (Note D). The Company has been implementing a restructuring strategy to improve operating results and enhance its financial resources which included reducing costs, streamlining its operations and closing its Puerto Rico plant. In addition, management has implemented additional steps to reduce its operating costs which it believes are sufficient to provide the Company with the ability to continue in existence. Major elements of these action plans include: o The phase-out of the GUESS? product line, completed in the second quarter of fiscal year 1999. o The sale of the Company's Cartersville, Georgia location (Note G), and the relocation to more appropriate space for its packaging and distribution facilities. o The transfer of all domestic manufacturing requirements to foreign manufacturing contract facilities. o Staff reductions associated with the transfer of manufacturing to offshore contractors. o The relocation of executive offices and showrooms to more appropriate, lower cost facilities. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. The Company Nantucket Industries, Inc. and its wholly-owned subsidiaries (the "Company") design and distribute branded and private label fashion undergarments to mass merchandisers and national chains throughout the United States. 2. Principles of Consolidation The consolidated financial statements include the accounts of Nantucket Industries, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. F-9 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 3. Accounts Receivable An allowance for doubtful accounts is provided based upon historical bad debt experience and periodic evaluations of the aging of the accounts. 4. Property, Plant and Equipment Property, plant and equipment are stated at cost. Equipment under lease is stated at the present value of the minimum lease payments at the inception of the lease. Depreciation and amortization are provided by the straight-line method over the estimated useful lives of the assets as follows: Years ----- Buildings and improvements 20-40 Machinery and equipment 3-10 Furniture and fixtures 10 5. Other Assets Other long-term assets consist primarily of capitalized loan origination costs. These costs are being amortized over the term of the related credit agreements. Other assets includes $196,000 and $151,000 of accumulated amortization as of February 27, 1999 and February 28, 1998, respectively. 6. Stock Options As described in Note I, the Company has granted stock options for a fixed number of shares to employees and officers at an exercise price equal to the market value of the shares on the date of grant. As permitted by SFAS No. 123, the Company has elected to continue to account for stock options grants in accordance with APB No. 25 and recognizes no compensation expense for these grants. 7. Income Taxes The Company and its wholly-owned subsidiaries file a consolidated federal income tax return. Deferred income taxes arise as a result of differences between financial statement and income tax reporting. F-10 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 8. Earnings (Loss) Per Common Share In fiscal year 1998, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS No. 128), Earnings Per Share, which requires public companies to present earnings per share and, if applicable, diluted earnings per share. All comparative periods must be restated as of February 28, 1998 in accordance with SFAS No. 128. Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of potential common share equivalents. Diluted earnings per share is based on the weighted average number of common and potential common shares outstanding. The calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the year. At February 27, 1999, the Company had 106,000 outstanding stock options and warrants to purchase 16,500,000 shares of common stock which would potentially dilute basic earnings per share but have not been considered for the two prior periods as they would have had an antidilutive impact (see Note I). 9. Reporting Comprehensive Income In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130 (SFAS No. 130), Reporting Comprehensive Income, which is effective for the Company's year ending February 27, 1999. SFAS No. 130 addresses the reporting and displaying of comprehensive income and its components. Earnings (loss) per share will only be reported for net earnings (loss), and not for comprehensive income. Adoption of SFAS No. 130 relates to disclosure within the financial statements and is not expected to have a material effect on the Company's financial statements. 10. Segment Information In June 1997, the FASB also issued Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosure About Segments of an Enterprise and Related Information, which is effective for the Company's year ending February 26, 1999. SFAS No. 131 changes the way public companies report information about segments of their business in their financial statements and requires them to report selected segment information in their quarterly reports. Adoption of SFAS No.131 relates to disclosure within the financial statements and is not expected to have a material effect on the Company's financial statements. 11. Fiscal Year The Company's fiscal year ends on the Sunday nearest to February 28. The fiscal years ended February 27, 1999, February 28, 1998 and March 1, 1997 contained 52 weeks. 12. Reclassification Certain prior year amounts have been reclassified in order to conform to the current year's presentation. F-11 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 13. Use of Estimates In preparing the Company's financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 14. Impairment of Long-Lived Assets The Company applies Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Accordingly, when indicators of impairment are present, the Company periodically evaluates the carrying value of property, plant and equipment and intangibles in relation to the operating performance and future undiscounted cash flows of the underlying business. The Company adjusts carrying amount of the respective assets if the expected future undiscounted cash flows are less than their book values. No impairment loss was required in fiscal years 1999, 1998 and 1997. 15. Fair Value of Financial Instruments Based on borrowing rates currently available to the Company for debt with similar terms and maturities, the fair value of the Company's long-term debt approximate the carrying value. The carrying value of all other financial instruments potentially subject to valuation risk, principally cash, accounts receivable and accounts payable, also approximate fair value. NOTE C - CONCENTRATION OF RISK For the current fiscal year, sales to the Company's largest customer accounted for 38.8% of net sales and 23% and 18%, respectively, for the two prior fiscal years. Sales to the second largest customer in the current fiscal year were 33.6% of net sales and 22% and 19%, respectively, for the two prior fiscal years. As previously described, K mart, which represented $0 of net sales in the current fiscal year, 16% and 40%, for the two prior fiscal years, advised the Company it would no longer continue its commitment to the Brittania trademark and consequently, the Company currently has no business with this customer. No other customer accounts for more than 10% of the Company's consolidated net sales for fiscal 1999, 1998 and 1997. F-12 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE D - PRIVATE PLACEMENT On August 15, 1996, the Company completed a $3.5 million private placement with an investment partnership. Terms of this transaction included the issuance of 250,000 shares and $2,760,000 of 12.5% convertible subordinated debentures which are due August 15, 2001. The convertible subordinated debentures are secured by a second mortgage on the Company's manufacturing and distribution facility located in Cartersville, Georgia. In conjunction with the sale of this property completed on October 1, 1997 (see Note G), the Company prepaid $707,000 of these debentures. The debentures, after giving effect to the prepayment related to the sale of the Company's facility referred to above, were convertible into the Company's common stock over the next five years. The investment partnership waived all conversion rights. The agreement grants the investor certain registration rights for the shares issued and the conversion shares to be issued. The difference between the purchase price of the shares issued and their fair market value on August 15, 1996 aggregated $197,500. This was reflected as deferred issue cost and will be amortized over the expected five-year term of the subordinated convertible debentures. The prorated portion of these costs associated with the prepaid $707,000 of these debentures was recognized in the accounting period in which the event occurred. Costs associated with this private placement aggregated $409,000 including $104,000 related to the shares issued which have been charged to paid in capital. The remaining balance of $305,000 will be amortized over the five-year term of the debentures. F-13 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE D - PRIVATE PLACEMENT - Continued The Company was in default in respect to interest payments due on the subordinated debt in August 1997, and again in February 1998. In September 1997, the Subordinated debt holder and the Company entered into an agreement to extend the cure period on the default. This forbearance agreement was extended month by month until May 1998. In May 1998, the Company entered into an agreement with the debt holder to extend the cure period, with respect to $322,551 in prior interest payment defaults and for the interest payment due in August 1998, until December 1998. In return, the Company agreed to secure the debentures by a first priority lien on all the assets of the Company, to the extent not otherwise prohibited under the revolving credit facility (Note H), and to issue five-year warrants convertible to 16,500,000 shares of the Company's stock at an exercise price of $.10. The Company obtained an independent valuation of this transaction, in the amount of $175,000, and this amount was expensed in fiscal year 1998. To the extent that the Company has insufficient authorized and unissued shares of common stock to satisfy the exercise of the warrants, the Company shall use its best efforts to promptly cause its authorized capital to be increased to the extent necessary to satisfy the conversion rights in full. The Company can, at its option within the framework of the forbearance agreement, prepay all or part of the outstanding subordinated debt at a price equal to 125% of the principal amount paid. The Company is currently in default for interest payments due since August 1997 on this note, including the interest payment due February 1999. There is no forbearance agreement in effect subsequent to December 1998 and therefore, the outstanding liability of $2,052,986 is classified as a current liability. NOTE E - UNUSUAL (CREDIT) CHARGE In November, 1992, the Company acquired Phoenix Associates, Inc., a manufacturing facility in Puerto Rico, pursuant to a stock purchase agreement. Phoenix had been an exclusive contractor for the Company, manufacturing many of the Company's product lines. A portion of the purchase price was subordinated debt payable to the former owners of Phoenix, of which $300,000 was due February 2, 1998. In April, 1993, the Company discovered an inventory variance of $1,700,000, principally attributable to unrecorded manufacturing and material cost variance at the Puerto Rico facility, which were incurred prior to the Company's acquisition of this facility. As a result, the Company initiated an action against the former owners of the facility as more fully described in Note L. Accordingly, in fiscal 1995 the Company eliminated this payable and reflected such reduction as an unusual credit in the 1995 financial statements. In March of fiscal 1994, the Company terminated the employment contracts of its Chairman and Vice-Chairman. In accordance with the underlying agreement, they were paid in aggregate of approximately $400,000 per year in severance and other benefits, through February 27, 1999. As of February 27, 1999, the accued unusual charge of $95,833 represents payments due under the termination agreements to the former Chairman and Vice-Chairman. As of October 1997, pending negotiation of more favorable terms, payment under these agreements was suspended (see Note L). F-14 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE F - INVENTORIES Inventories are recorded at the lower of cost or market value using the first in-first-out (FIFO) cost flow method, and are summarized as follows: February 27, February 28, 1999 1998 ------------- ------------- Raw materials $ -- $ 166,646 Work in process -- 756,959 Finished goods 1,108,860 2,166,778 ------------- ------------- $ 1,108,860 $ 3,090,383 ============= ============= NOTE G - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are summarized as follows: February 27, February 28, 1999 1998 ------------- ------------- Land $ -- $ -- Buildings and improvements 26,034 9,130 Machinery and equipment 1,485,090 3,384,115 Furniture and fixtures 142,489 791,242 ------------- ------------- 1,653,613 4,184,487 Less accumulated depreciation 1,115,090 3,226,412 ------------- ------------- $ 538,523 $ 948,075 ============= ============= On October 1, 1997, the Company completed the consolidation if its facilities and sold its 152,000 square foot manufacturing and distribution facility in Cartersville, Georgia for cash aggregating $2,850,000. The Company reflected a gain on the sale in its third fiscal quarter of $793,000. The proceeds were used to pay the $525,000 financing secured by this property, to prepay $707,000 of the convertible subordinated debentures secured by a second mortgage on this property, and to pay a $176,000 prepayment penalty incurred from the prepayment of the subordinated debt. The remaining proceeds were utilized to reduce the revolving credit financing. F-15 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE H - LONG-TERM DEBT AND NOTES PAYABLE 1. Revolving Credit The Company has a $15 million revolving credit facility which expired in March, 1998, and has been extended to August 31, 1999. The revolving credit agreement provides for loans based upon eligible accounts receivable and inventory, a $3,000,000 letter of credit facility and purchase money term loans of up to 75% of the orderly liquidation value of newly acquired and eligible equipment. Borrowings bear interest at 2-3/4% above prime. The agreement requires, among other provisions, the maintenance of minimum working capital and net worth levels and also contains restrictions regarding payment of dividends. Borrowings under the agreement are collateralized by substantially all of the assets of the Company. At February 27, 1999, the revolving credit facility was not utilized, and the Company was not in compliance with the net worth and working capital covenants. 2. Capital Leases The Company leases equipment under capital leases. A schedule of the yearly minimum rental payments is as follows: February 2000 $ 64,488 February 2001 64,488 February 2002 2,857 ------------- Total minimum lease payments 131,833 Less amount representing interest (11,131) ------------- Present value of net minimum lease payments 120,702 Less current maturities (56,452) ------------- Long-term capital lease obligation $ 64,250 ============= At February 27, 1999, the Company has approximately $96,709 of equipment under capital lease with accumulated depreciation of approximately $29,013. F-16 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE I - NET EARNINGS (LOSS) PER COMMON SHARE The following table sets forth the computation of basic and diluted loss per share:
February 27, February 28, March 1, 1999 1999 1998 ------------ ------------ ------------ Net earnings (loss) attributable to common stockholders $ 937,480 $ (4,664,705) $ (2,746,515) Accrued dividends on preference shares (81,103) (84,603) (82,274) ------------- -------------- ------------- Numerator for basic and diluted net earnings (loss) per common share - earnings (loss) attributable to common stockholders $ 856,377 $ (4,749,308) $ (2,828,789) ============= ============= ============= Denominator for basic and diluted net earnings (loss) per common share - weighted average shares outstanding $ 3,238,796 $ 3,238,796 $ 4,124,785 ============= ============= ============= Basic and diluted net earnings (loss) per share $ 0.26 $ (1.47) $ (0.91) ============= ============= =============
F-17 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE J - INCOME TAXES Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Deferred tax assets and liabilities are measured using enacted tax rates. Significant components of the Company's deferred taxes at February 27, 1999 and February 28, 1998 are as follows:
February 27, February 28, 1999 1998 ------------- ------------- Deferred tax assets Net operating loss carryforward $ 6,987,000 $ 7,150,000 Accrued severance 36,000 257,000 Excess of tax basis over book basis of inventories -- 333,000 Capitalized inventory costs 22,000 63,000 Other 121,000 127,000 ------------- ------------- 7,166,000 7,930,000 Deferred tax liabilities Difference between the book and tax basis of property, plant and equipment 331,000 366,000 ------------- ------------- Net deferred tax asset 6,835,000 7,564,000 Valuation allowance (6,835,000) (7,564,000) ------------- ------------- Net deferred taxes $ -- $ -- ============= =============
The Company anticipates utilizing its deferred tax assets only to the extent of its deferred tax liabilities. Accordingly, the Company has fully reserved all remaining deferred tax assets, which it cannot presently utilize. The decrease in valuation allowance of $729,000 is equal to the decrease in net deferred tax assets. For tax purposes at February 27, 1999, the Company's net operating loss carryforward was $18,405,000, which, if unused, will expire from 2009 to 2013. Certain tax regulations relating to the change in ownership may limit the Company's ability to utilize its net operating loss carryforward if the ownership change, as computed under each regulation, exceeds 50%. Through February 27, 1999, the change in ownership was less than 50%. There was no income tax provision (benefit) for the fiscal years 1999, 1998 and 1997. F-18 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE J - INCOME TAXES - Continued The following is a reconciliation of the normal expected statutory federal income tax rate to the effective rate reported in the financial statements.
February 27, February 28, March 1, 1999 1998 1997 ------------ ------------ -------- Computed "expected" provision for Federal income taxes (35.0)% (35.0)% (35.0)% Valuation allowance 35.0 35.0 35.0 ---- ---- ---- Actual provision for income taxes -- % -- % -- % ==== ===== ==== =
NOTE K - STOCKHOLDERS' EQUITY 1. Stock Options The 1972 stock option plan, as amended, provides for the issuance of options to purchase up to 340,000 shares of common stock at the market value of the date of grant. Options are exercisable up to ten years from the date of grant and vest at 20% per year. The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation costs have been recognized for grants made under the Company's stock option plan. Had compensation cost been determined based on the fair value, as determined in accordance with the requirements of SFAS No. 123, at the date of grant of stock option awards, the increase in the net loss for fiscal 1999, 1998 and 1997 would be $91,000, $91,000 and $91,000, respectively. In fiscal 1999, 1998 and 1997 there were no awards of stock options. During the initial phase-in period of SFAS No. 123, such compensation may not be representative of the future effects of applying this statement. F-19 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE K - STOCKHOLDERS' EQUITY - Continued A summary of option activity for the years ended February 28, 1999, February 28, 1998 and March 1, 1997 is as follows: Number of Weighted Average Options Exercise Price --------- ---------------- Balance, March 1, 1997 264,000 $4.95 Forfeited (11,000) $3.37 ------- ----- Balance, March 1, 1997 253,000 $5.02 Forfeited (78,500) $5.43 ------- ----- Balance, February 28, 1998 174,500 $4.84 Forfeited (68,500) $4.51 ------- ----- Balance, February 27, 1999 106,000 $5.05 ======= ===== At February 27, 1999 the status of outstanding stock options is summarized as follows: Weighted average Exercise Options remaining Options Prices Outstanding contractual life exercisable -------- ----------- ---------------- ----------- $3.37 31,000 6.7 years 18,600 $5.75 75,000 5.7 years 60,000 ------- ------ 106,000 78,600 ======= ====== The weighted average fair value at date of grant for those options granted in fiscal 1996 was $2.34. The fair value of each option at date of grant was estimated using the Black-Scholes options pricing model utilizing the following weighted average assumptions: Dividend yield 0% Risk-free interest rate 6.23% Expected life after vesting period 10 years Expected volatility 58% F-20 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE K - STOCKHOLDERS' EQUITY - Continued 3. Issuance of Preferred Stock On March 22, 1994, the Company sold to its management group 5,000 shares of non-voting convertible preferred stock for $1,000,000. These shares are convertible into 200,000 shares of common stock at the rate of $5.00 per share. These shares provide for cumulative dividends at a floating rate equal to the prime rate. Such dividends were convertible into common stock at the rate of $5.00 per share. The conversion rights were waived in May 1998. These shares are redeemable, at the option of the Company, on or after February 27, 1999 and have a liquidation preference of $200 per share. As of February 27, 1999 and February 28, 1998 dividends in arrears were $408,384 and $327,281, respectively. 4. Issuance of Treasury Stock In connection with the Company's refinancing on March 22, 1994, (Note D), the Company entered into a $2,000,000 term loan agreement with a financial institution. Pursuant to the agreement, the Company issued to the bank 10,000 treasury common shares related to mandatory prepayments, which were not made. 5. Grant of Warrants Warrants have been granted to NAN Investors LP to purchase 16,500,000 shares of the Company's Common Stock for $.10 per share, with a five-year term effective May 21, 1998. NOTE L - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS 1. Lease Commitments Minimum rental commitments under noncancellable leases (excluding escalation) having a term of more than one year are as follows: Fiscal year ending 2000 $ 258,000 2001 260,000 2002 265,000 2003 202,000 2004 3,000 --------- $ 988,000 ========= Rental expense under operating leases, including escalation amounts was approximately $249,000, $228,007 and $266,000 for the fiscal years ended February 27, 1999, February 27, 1998 and March 1, 1997, respectively. F-21 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE L - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS - Continued 2. Agreement with Principal Stockholders On March 1, 1994, in connection with the restructuring described in Note A, the Company entered into agreements with its two principal stockholders and a group of employees (the "Management Group"). The agreements provide, among other things, for: The reimbursement of the principal stockholders, limited to $1.50 per share to the extent that the gross proceeds per share from the sale of common stock by the stockholders during the two-year period beginning September 1, 1994 are less than $5.00 per share. Such guaranty is applicable to a maximum of 150,000 shares sold by such stockholders, subject to reductions under certain circumstances. The principal stockholders sold 157,875 shares including 88,400 at prices below $5.00 per share: 37,125 shares in the fiscal year ended March 1, 1997 and 51,275 shares in the year ended March 2, 1996 which resulted in a charge to operating results of $12,000 and $35,000, respectively. Warrants to purchase up to 157,875 shares of common stock equal to the number of shares sold by the principal stockholders. The exercise price per share of such warrants would equal the gross proceeds per share from the corresponding sale by the principal stockholders. Such warrants expire on February 28, 2000. As of May 14, 1999, these warrants have not been requested to be issued, nor have they been issued. The contribution to the Company of life insurance policies with a cash value of $535,000 which, if borrowed by the Company, would be repaid by the two principal stockholders. The cancellation of the outstanding stock options and incentive awards of the Group members and the principal stockholders and the authorization to issue options to Group members to purchase 150,000 shares of common stock based upon certain terms and conditions. 3. Trademark Licensing Agreements Royalties including minimum licensing payments to GUESS?, Inc. which owns 9.9% of the outstanding common stock of the Company, aggregated $74,000 in fiscal 1999, $840,000 in fiscal 1998 and $294,000 in fiscal 1997. Due to the lack of capital resources necessary to develop and support the GUESS? product line, the Company discontinued its GUESS? division in the first quarter of fiscal year 1999. The GUESS? license was terminated as of March 31, 1998. Royalty payments including agreement minimums for product sold under the ARROW brand aggregated $250,000 in fiscal 1999, $250,000 in fiscal 1998 and $315,000 in fiscal 1997. As of March 12, 1999, the Company reached an agreement with the licensor to terminate the ARROW license agreement. No payment of sales royalties, or guaranteed minimum royalties were required to be made after January 1, 1999. The licensor made payment of $50,000 to the Company to settle any and all outstanding issues connected with the termination of the licensing agreement. F-22 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE L - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS - Continued 4. Litigation In September 1993, the Company filed an action against the former owners of Phoenix Associates, Inc. (Phoenix). The Company sought compensatory damages of approximately $4.0 million plus declaratory and injunctive relief for acts of alleged securities fraud, fraudulent conveyances, breach of fiduciary trust and unfair competition in connection with the acquisition of the common stock of Phoenix. Additionally, the Company has filed a demand for arbitration which seeks compensatory damages of $4.0 million, rescission of the stock purchase agreement, rescission of an employment agreement and other matters, all on account of alleged breaches of the stock employment agreement, fraudulent misrepresentation and breach of fiduciary duties. In November 1993, the former owners of Phoenix filed counter claims against the Company alleging improper termination with regard to their employment agreement and breach of the stock purchase agreement. The Company settled this litigation and realized $675,000 from this matter which is included in the accompanying statement of operations for 1999 under the caption "Other income." On December 9, 1997, a former officer and director of the Company filed a complaint against the Company in the State Court of Fulton County, State of Georgia relating to payments allegedly due him under the March 18, 1994 Severance Agreement, and was seeking damages in the amount of $219,472. The Company reached a settlement with the officer in the amount of $100,000 plus an amount based on reaching a certain level of recovery, if any, from the Levi Strauss litigation. Based on the settlement with Levi's, no additional accrual to the former officer and director was necessary. On January 15, 1998, in the Supreme court of the State of New York, Westchester County, a Director of the Company filed a complaint against the Company for breach of the March 18, 1994 Severance Agreement, and seeking damages in the amount of $559,456 plus applicable interest and legal fees which was accrued as of February 28, 1998. The Company on March 9, 1998, filed counterclaims in a significantly larger amount. In April 1999, the Company reached a settlement with the Director for $75,000 which resulted in the reduction of approximately $530,000 in the accrued unusual charge this reduction is included in the accompanying Statement of Operations under the caption "Other Income." F-23 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE L - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS - Continued 4. Litigation - Continued The Company is subject to other legal proceedings and claims, which arise, in the ordinary course of its business. In the opinion of management, other legal proceedings and claims in which the Company is defendant will be successfully defended or resolved without a material adverse effect on the consolidated financial position or results of operations of the Company. The Company with respect to the aforementioned litigation at February 27, 1999 has made no provision in the accompanying financial ststements. 5. Letters of Credit At February 27, 1999, the Company had outstanding letters of credit, primarily with foreign banks of approximately $597,000 for purposes of collateralizing the Company's obligations for inventory purchases. NOTE M - RETIREMENT PLAN The Company has a 401(k) plan for the benefit of all qualified employees. No contribution was made for fiscal years 1999, 1998 and 1997. NOTE N - BRITTANIA LITIGATION Beginning in September, 1988, the Company became a licensee of Brittania Sportswear, Ltd., a wholly-owned subsidiary of Levi Strauss & Co., to manufacture and market men's underwear and other products under the trademark "Brittania from Levi Strauss & Co". Sales under this license aggregated $0 in fiscal year 1999, $4.5 million in fiscal 1998, and $14.9 million in fiscal 1997. As of January 1, 1997, the license was renewed for a five-year term, including automatic renewals of two years if certain minimum sales levels were achieved. On January 22, 1997, Levi's announced its intention to sell Brittania. In light of the actions announced by Levi's, K mart, the largest retailer of the Brittania brand and the Company's largest customer accounting for approximately $11 million of the Company's fiscal 1997 sales of Brittania product, advised the Company that it would no longer continue its on-going commitment to the Britannia trademark. The Company filed a lawsuit against Levi Strauss & Co. and Brittania Sportswear, Ltd., alleging that the licensor breached various obligations under the licensing agreement, including without limitation its covenant of good faith and fair dealing. The Company agreed to settle this litigation in June 1998 and realized approximately $725,000 in gross value from this matter which is included in the accompanying statement of operations under the caption "Other income." F-24 Nantucket Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 27, 1999, February 28, 1998 and March 1, 1997 NOTE O - SUBSEQUENT EVENT (UNAUDITED) Subsequent to year-ended February 27, 1999, the Company ceased all operations and sold certain inventory and fixed assets as well as turned over the collection of all accounts receivable to the primary lender of the Company in order to satisfy a portion of the outstanding debt secured by the assets. The carrying value of the inventory and fixed assets sold was approximately $1,000,000. The Company expects to seek relief from the remaining debt outstanding, to all creditors, through a voluntary petition under Chapter 11 of the United States Bankruptcy Code in February 2000. Pending Bankruptcy Court approval of the Disclosure Statement as adequate, the Company intends to solicit votes on the Plan of Reorganization ("the Plan") from the Company's secured lenders and stockholders. From the Filing Date of the Plan until the Effective Date of the Plan, the Company will operate its business as a debtor-in-possession subject to the jurisdiction of the Bankruptcy Court. F-25 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The table below sets forth for each director at February 27, 1999, such director's name, age and other positions with the Company as at that date. DIRECTOR (AGE) AND POSITION YEAR FIRST WITH THE COMPANY ELECTED DIRECTOR Steven Schneider (46) 1997 George J. Gold (78) 1966 Kenneth Klein (60) 1996 Marc M. Feder (49) 1997 Set forth below is information regarding the principal occupations of each current director during the past five years and other directorships held by each such director in public companies. George J. Gold had been Chairman of the Board, Chief Executive officer and Treasurer of the Company, which positions he resigned on March 18, 1994. Steven Schneider has been President of Urban Marketing and Sales, a sales and marketing company which represents apparel businesses including Bear USA, AXO Sports, Changes, Rp-55, Spiewak and Timberline. Mr. Schneider is also the co-owner of two retail apparel stores in New York. Marc M. Feder has been President and Corporate Counsel for Fulcrum Investments Corp., a real estate lender and purchaser. From 1993, until his affiliation with Fulcrum, Mr. Feder participated as an investor in several venture capital transactions. In 1995 and 1996, he also was a principal of Sandmark Industries. Kenneth Klein has been engaged in the private practice of law since January 1, 1997. From 1994 until December 1996, Mr. Klein served as President and a director of National Capital Benefits Corp. a financial services company. From January 1992 to March 1994 Mr. Klein was the President of Viatical Funding Company, a financial services company. From January 1988 to January 1992, Mr. Klein was the Senior Vice President, Chief Operating officer and General Counsel of Amivest Corporation, a New York Stock Exchange, Inc. Member Firm and an NASD Registered Investment Advisor. Mr. Klein also serves as a director or trustee of several privately- held companies and not-for-profit entities. Mr. Klein serves as a director pursuant to the Purchase Agreement with NAN Investors, L.P. as further described under the heading "Certain Relationship and Related Transactions." 22 Executive Officers To the best knowledge of current management Stephen M. Samberg resigned from his position as President of the Company sometime after March 1999, and Nick Dmytryszyn resigned from his positions as Secretary and Treasurer of the Company as of October 1999. At the time of such resignations, the Board of Directors did not appoint any persons to fill these vacancies. On January 18, 2000 the Board of Directors appointed John H. Treglia to serve, on an interim basis as the Company's President, Secretary and CFO. The Board also appointed Marsha Ellis, on an interim basis to serve as Treasurer and Chief Accounting Officer. Section 16(a) Ownership Reporting Compliance The best knowledge of current management and since the Company has not received Forms 3 and 4 and nor any amendments thereto, no director, officer or beneficial owner of more than 10% of the Company's equity securities failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the fiscal year ended February 27, 1999 or any previous fiscal year. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Directors, other than those employed by the Company, are paid $5,000 annually and an additional $500 for each Board or committee meeting attended in person. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Robert M. Rosen was general counsel to, and a director of, the Company and was a member of the Company's Compensation Committee until his resignation from such positions in May 1998. During his tenure with the Company, Mr. Rosen was also a partner of the law firm of Lane Altman & Owens LLP. There were no legal fees accrued for professional services rendered by Lane Altman & Owens to the Company in fiscal 1999. The only amounts received were in settlement of certain fees with respect to litigation, which is the subject of a contingent fee agreement. There are no other relationships or transactions involving members of the Compensation Committee during the fiscal year ended February 27, 1999 required to be reported pursuant to Item 402(j) of Regulation S-K. Following Mr. Rosen's resignation in May 1998, the Compensation Committee was disbanded and, as of the date hereof, the Board of Directors has not established a new Compensation Committee and it has no plans to do so until such time as the financial position and prospects of the Company improve significantly. 23 SUMMARY COMPENSATION TABLE The Summary Compensation Table shows compensation information for the Company's Chief Executive Officers and each highly compensated executive officers of the Company ended February 27, 1999, February 28, 1998 and March 1, 1997.
ANNUAL COMPENSATION OTHER ALL ANNUAL RESTRICTED OTHER COMPEN- STOCK OPTIONS LTIP COMPEN- NAME AND PRINCIPAL FISCAL SALARY BONUS SATION AWARDS / SAR PAYOUTS SATION POSITION YEAR ($) (1) ($) ($) (8) # # ($) # (2) -------- ---- ------- --- ------- - - --- ----- Stephen M. Samberg Chairman of the Board, 1999 $300,000 $0 $132,700 0 0 $0 $ 1,152 Chief Executive Officer, 1998 $370,942 $0 $ 79,280 0 0 $0 $ 14,786 President and Director 1997 $518,000 $0 $ 0 0 0 $0 $ 1,152 Ronald S. Hoffman (3) Vice President-Finance, 1999 $ 0 $0 $ 0 0 0 $0 $ 0 Chief Financial Officer, 1998 $112,500 $0 $ 0 0 0 $0 $ 6,152 Secretary and Director 1997 $150,000 $0 $ 0 0 0 $0 $ 1,152 Nicholas Dmytryszyn (4) 1999 $ 80,000 $0 $ 0 0 0 $0 $ 0 Chief Financial Officer 1998 $ 27,692 $0 $ 0 0 0 $0 $ 0 And Secretary 1997 $ 0 $0 $ 0 0 0 $0 $ 0 George G. Gold 1999 $ 0 $0 $ 0 0 0 $0 $ 37,500 Director 1998 $ 0 $0 $ 0 0 0 $0 $ 71,515 (5) 1997 $ 0 $0 $ 0 0 0 $0 $250,061 (5) Donald D. Gold 1999 $ 0 $0 $ 0 0 0 $0 $ 41,667 Director 1998 $ 0 $0 $ 0 0 0 $0 $ 93,497 (5) 1997 $ 0 $0 $ 0 0 0 $0 $104,061 (5) Stephen P. Sussman (6) 1999 $ 0 $0 $ 0 0 0 $0 $ 0 1998 $ 85,846 $0 $ 0 0 0 $0 $ 6,152 1997 $144,000 $0 $ 0 0 0 $0 $ 1,152 Joseph Visconti (7) 1999 $ 0 $0 $ 0 0 0 $0 $ 0 President and Director 1998 $166,346 $0 $ 15,692 0 0 $0 $ 1,152 1997 $300,000 $0 $ 0 0 0 $0 $ 1,152
(1) Includes amounts deferred at the election of each of the named executive officers pursuant to the Company's 401(k) Profit Sharing Plan. (2) Comprised of 401(k)contributions in fiscal 1996 and life insurance premiums which benefits are payable to the estates of the named executive officers, except where specifically footnoted as pursuant to the Severance Agreement. For fiscal 1997 and 1998, no 401(k) 24 contributions were made and other compensation reported hereunder was comprised solely of life insurance premiums (for all), consulting fees (for Messrs. Sussman and Hoffman in 1998), and automobile lease payments (for Mr. Samberg in 1998). (3) Mr. Hoffman resigned his positions as vice President - Finance, Chief Financial officer, Secretary and Director of the Company effective November 22, 1997. His employment contract expired on June 30, 1997, and was not extended. He continued to be employed by the Company on an at-will basis until his resignation in November, 1997. (4) Mr. Dmytryszyn was hired in November, 1997 as Chief Financial Officer. He was elected as Secretary in May, 1998 and subsequently resigned in October 1999. (5) Amounts paid pursuant to the Severance Agreement dated as of March 18, 1994 more fully described herein above. (6) Mr. Sussman managed the Company's production and distribution facility in Cartersville, Georgia through May 31, 1997. He provided consulting services to the Company on a project basis thereafter as requested until the end of the term of his employment contract on February 28, 1998. (7) Mr. Visconti resigned his position as a Director effective November 24, 1997. His employment contract with the Company was terminated effective March 31, 1998. (8) Other annual compensation paid to Messrs. Samberg and Visconti for fiscal 1998 is comprised of sales commissions. OPTION/SAR GRANTS IN FISCAL YEAR ENDED FEBRUARY 27, 1999 No Option/SAR agents were made to the executives in the fiscal year ended February 27, 1999. AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR ENDED FEBRUARY 27, 1999 AND FISCAL YEAR-END OPTION/SAR VALUES (1)
VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS SHARES AT FY-END ($) ACQUIRED ON EXERCISABLE/EXERCISE (#) NAME UNEXERCISABLE (2) VALUE REALIZED ($) ---- ----------------- ------------------ Stephen M. Samberg 0
25 $0/$0 $0
(1) There are currently no outstanding stock appreciation rights. (2) No outstanding options were in the money at the end of fiscal 1999. (3) 18,000, 13,500 and 12,000 of securities underlying unexercised options of Messrs. Hoffman, Sussman and Visconti, respectively, were terminated pursuant to the terms thereof upon the occurrence of each such person's ceasing to be employed with the Company as described herein. LONG-TERM INCENTIVE PLANS - AWARDS IN FISCAL YEAR ENDED FEBRUARY 27, 1999 No Long Term Incentive Plan Awards were made to the CEO and other named executives in the fiscal year ended February 27, 1999. EMPLOYMENT AND SEVERANCE AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS As of March 18, 1994, Messrs. George J. Gold and Donald D. Gold (the "Golds") resigned their positions as executive officers of the Company and entered into a Severance Agreement with the Company. The Severance Agreement provides for an annual payment to the Golds of approximately $400,000, in the aggregate, for each year of the five year term of the Severance Agreement. The Severance Agreement also provides for the Company to pay them an amount equal to their life and health insurance benefits and to continue paying one-half of each of the Golds' share of the annual payments to his spouse in the event of his death. Pursuant to the Severance Agreement, stock options for 20,000 and 10,000 shares of Common Stock issued to George and Donald Gold, respectively, under the 1992 Long-Term Incentive Stock Option Plan, and bonus awards for maximums of $123,000 and $61,500 made to George and Donald Gold, respectively, under the 1992 Executive Performance Benefit Plan, were canceled. Further, the Golds agreed to relinquish their rights to receive ownership of the whole life insurance policies on their lives described in the previous paragraph. Under the Severance Agreement, the Company also provided certain benefits to the Golds in respect of sales of shares of the Company's Common Stock ("Shares") by them during the period September 1. 1994 to August 31, 1996 (the "Resale Period"). Such benefits provided, in general and subject to certain limitations, that, for up to 100,000 Shares in the case of George J. Gold and 60,000 Shares in the case of Donald D. Gold, the Company would pay to the Golds for each Share sold by them for less than $5.00 during the Resale Period, 80% of the lesser of (a) $1.50 and (b) the difference between the sale price per Share and $5.00. The Golds sold a total of 157,875 Shares of Common Stock including 86,400 shares at prices below $5.00 per share. Further, the Severance Agreement provides for the Company, in general and subject to specific limitations, to issue as of April 1, 1997, warrants for the purchase of up to 157,875 Shares to the Golds. The number of such warrants to be issued to George Gold is 93,840 and the 26 number of such warrants to be issued to Donald D. Gold is 64,035, the number of shares sold by each of them during the Resale Period. As to each of the Golds, the Severance Agreement provides that the aggregate exercise price for the warrants issued to each of them will equal the aggregate gross proceeds from his sales of Shares during the Resale Period. As of the date hereof, the warrants have not been issued to the Golds. As of March 1, 1994, the Company and Stephen M. Samberg, in connection with his election as Chairman of the Board and Chief Executive Officer, entered into a new employment agreement (the "1994 Agreement"). Under the 1994 Agreement, Mr. Samberg's annual base compensation is $518,000 and he is entitled to discretionary bonuses as determined by the Compensation Committee, in an amount not to exceed $300,000 per year. The 1994 Agreement also provides that Mr. Samberg is eligible for the Company's other compensatory plans and that the Company will provide health and disability insurance for Mr. Samberg and reimburse all reasonable business expenses. Effective July 1, 1997, the 1994 Agreement was amended and Mr. Samberg's annual base compensation was reduced to $318,000. The Amendment also provides for Mr. Samberg to receive commissions equal to 1 1/2% of net sales of the Company's products. The maximum amount of Mr. Samberg's annual cash compensation is not to exceed $518,000 in any one year. Mr. Samberg is still entitled to receive discretionary bonuses determined by the Compensation Committee. On July 1, 1994, the Company entered into a one (1) year employment agreement (extended through June 30, 1997) with Ronald S. Hoffman which provides for an annual salary of $150,000. As additional contingent compensation, Mr. Hoffman was granted options to purchase 30,000 shares of Common Stock under the 1992 Executive Long Term Stock Option Plan. The agreement also requires the Company to provide health and life insurance and to reimburse all reasonable business expenses. Mr. Hoffman's agreement expired on June 30, 1997, and was not extended. Mr. Hoffman continued to be employed by the Company on an at-will basis as an officer and director until his resignation in November, 1997. As of January 1, 1996, the Company entered into an employment agreement with Joseph Visconti which provides for an annual salary of $200,000 plus a bonus or each year based on increases in sales from those achieved in fiscal 1996, which bonus in the first fiscal year shall not be less than $100,000. Effective July 1, 1997, the employment agreement was amended and Mr. Visconti's annual salary was reduced to $150,000 and his bonus program was eliminated. In addition to his salary Mr. Visconti will be entitled to receive commissions on the Company's net sales equal to 1 1/2% and 1/2% of certain customer accounts to be identified by the Company. Mr. Visconti was granted options to purchase 30,000 shares of Common Stock under the Stock Option Plan. The agreement also required the Company to provide health and disability insurance and to reimburse all reasonable business expenses. The Agreement was terminated as of March 31, 1998. In addition to delineating the duties and responsibilities of each executive employee, the employee's salary and certain fringe benefits, and the circumstances under which employment with the Company may be terminated, the employment agreements for Stephen M. Samberg and Joseph Visconti, and the Severance Agreement also contain certain provisions to take effect in 27 the event of a "Change in Control." A "Change in Control" generally is defined to include (i) a merger or consolidation involving the Company pursuant to which less than 75% of the outstanding voting securities or other beneficial interest of the surviving or resulting corporation or other entity is held by the stockholders of the Company other than those stockholders who acquire beneficial ownership of 20% or more of the Company's outstanding stock after the date of each agreement; (ii) the transfer to another corporation (other than a wholly owned subsidiary or a corporation which is at least 75% owned by the Company's stockholders other than those stockholders who acquire beneficial ownership of 20% or more of the Company's outstanding stock after the date of each agreement) of substantially all of the assets of the Company; (iii) the acquisition by any person of the beneficial ownership of 30% or more of the Company's then outstanding securities; (iv) a change in the composition of the majority of the Board of Directors occurring within 24 months of the acquisition by any person of the beneficial ownership of 10% or more of the Company's then outstanding securities; or (v) the occurrence of any of the trigger events described in Sections 11(a)(ii) or 13(a) of the Company's Shareholders Rights Plan. In the event of any such Change in Control, certain specified benefits ("Termination Benefits") are provided for each such executive employee upon termination of his employment by the Company other than for cause, or in the event that he leaves the employ of the Company due to one of the following events: (i) assignment inconsistent with his current status; (ii) distant transfer; (iii) default by the Company under the employment agreement or other agreement with the employee; (iv) failure on the part of the Company to provide the employee with substantially similar plan benefits to those in which he had been a participant; or (v) in the case of Messrs. Samberg, Visconti, and Hoffman, inability to effectively discharge his duties due to a Change in Control. The amount of Termination Benefits payable to Mr. Samberg is determinable only at the time of termination and is, if such termination is by the Company or by Mr. Samberg following a default by the Company, in addition to any other amounts due under his employment agreement. Cash benefits include (x) three years' base salary (totaling $1,500,000) and (y) three times the average annual bonus in the preceding three years (or such lesser number of years as have elapsed since the agreement was made); the sum of (x) and (y) payable in a lump sum and discounted to present value. Mr. Samberg, after an event giving rise to Termination Benefits, would also have rights (a) for seven months thereafter, to exercise or be compensated for any stock options or stock appreciation rights; and (b) to the immediate vesting of any unvested equity or deferred compensation rights. With respect to the Golds, in the event that, following such a Change in Control, (a) the Company defaults, in an amount greater than $1,000, in its obligations to pay money to either of the Golds, such of the Golds, in addition to all other benefits under the Severance Agreement, shall be entitled to a lump sum payment of twice the annual payment due him, discounted to its then-present value; or (b) the Company defaults in any other of its obligations to either of the Golds, such of the Golds shall be entitled to a lump sum, discounted to its present value, of the greater of (x) twice the annual payment due him, or (y) the aggregate of the remaining payments due him under the Severance Agreement. 28 ITEM NO. 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of January 7, 2000 the beneficial share ownership of each current director and executive officer owning Common Stock, and of all current officers and directors as a group.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS (1) - ---------------- -------------------- --------- + George J. Gold 359,078 (2) 11.09% 209 Sterling Road Harrison, NY 10528 Stephen M. Samberg 76,003 (3) 2.31% 510 Broadhollow Road Melville, NY 11747 Steven Schneider 0 * 2016 Linden Blvd, Suite 17 Elmont, NY 11003 James Carey 0 * Canterbury Road Manchester, VT 05254 Marc M. Feder 0 * 652 Harris Avenue Staten Island, NY 10314 Kenneth Klein 0 * 242 E. 72nd. Street Apt. # 7A New York, NY 10021 All directors and officers as a 435,081 13.25% group (9 persons) *Less than 1%
29 (1) Pursuant to the rules of the Securities and Exchange Commission, shares of Common Stock which an individual or member of a group has right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Accordingly, where applicable, each individual or group member's rights to acquire shares pursuant to the exercise of options or warrants are noted below. (2) All such shares are subject to the Nantucket Industries Stock Voting Trust u/i/d March 22, 1994 (the "Voting Trust"). In addition, the Severance Agreement provides for the Company to issue, as of April 1, 1997, warrants for the purchase of up to a total of 157,875 shares to George J. Gold and Donald D. Gold. Such warrants have not yet been issued. (3) Includes 20,303 shares which are subject to the Voting Trust and 45,000 shares that may be issued to Mr. Samberg pursuant to immediately exercisable stock options, but does not include or assume conversion of any of the 5,000 shares of the Company's Non-Voting Convertible Preferred Stock issued to the Samberg Group, LLC, which Preferred Stock by its terms is convertible into 232,000 shares of the Company's Common Stock, but which conversion right was waived by the Samberg Group in May, 1998. The Company has conditionally agreed to redeem such Preferred Stock. In addition, each of the following has reported that it is the beneficial owner of more than 5% of the outstanding Common Stock of the Company.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS (1) - ---------------- -------------------- --------- Dimensional Fund Advisors, Inc. 176,765 (2) 5.46% 1229 Ocean Avenue Santa Monica, CA The Samberg Group, L.L.C. 232,000 (3) (5) 6.68% 510 Broadhollow Road Melville, NY 11747 GUESS?, Inc. 422,835 13.06% 1444 South Alameda Street Los Angeles, CA 90021
30 Guess Group (4) 544,834 16.82% NAN Investors, L.P. 16,750,000 (6) 84.86% c/o Fundamental Capital Corp. 291 Ocean Avenue Lawrence, NY 11559
(1) Pursuant to the rules of the Securities and Exchange Commission, shares of Common Stock which an individual or member of a group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Accordingly, where applicable, each individual or group member's rights to acquire shares pursuant to the exercise of options or warrants are noted below. (2) Dimensional Fund Advisors, Inc. is an investment advisor registered under the Investment Advisors Act of 1940. Of this amount, Dimensional Fund Advisors, Inc., has reported as of January 31, 1995 that it has sole voting power of 110,230 shares. (3) The Samberg Group, L.L.C. owns 5,000 shares of the Company's Non-Voting Convertible Preferred Stock, which by its terms is convertible into 232,000 shares of the Company's Common Stock. In May, 1998, the Samberg Group waived this conversion right and the Company conditionally agreed to redeem the Preferred Stock. Thus, as of May, 1998, the Samberg Group disclaims beneficial ownership of all 232,000 shares of the Company's Common Stock previously reported as owned by it. See also "Certain Relationships and Related Transactions." (4) The Guess Group comprises Guess?, Inc. ("GUESS?") and those other Reporting Persons set forth in the Schedule 13D dated August 26, 1994, as amended through December 23, 1997. (5) In accordance with Rule 13d-3(d) of the 1934 Act, assumes the conversion into 232,000 shares of Common Stock of the Non-Voting Convertible Preferred Stock held by the Samberg Group, L.L.C. See also Note (3) above. (6) In accordance with Rule 13d-3(d) of the 1934 Act, assumes conversion of 16,500,000 currently exercisable warrants into an equal number of shares of Common Stock. Such warrants were issued on May 21, 1998 to NAN Investors, L.P. pursuant to a Forbearance Agreement filed as Exhibit (10)(bbb)(i) to the Form 10-K of which this Amendment is a part. The percentage ownership shown above for NAN Investors, L.P. does not assume the conversion of the 12.5% Convertible Subordinated Debentures in the original principal amount of $1,168,150 into 305,000 shares of Common Stock or the conversion of the Convertible Subordinated Debenture in the original principal amount of $1,591,850 into 318,370 shares of Common Stock, which securities were purchased on August 15, 1996 31 by NAN Investors because NAN Investors has waived its rights to convert such Debentures. See "Certain Relationships and Related Transactions." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company, the Golds, Messrs. Samberg, Sussman, Raymond L. Wathen (a former employee of the Company), Robert Polen (a former employee of the Company), and The Samberg Group, L.L.C., a limited liability company organized in Delaware, entered into a Management Agreement as of March 1, 1994, pursuant to which the Company on March 22, 1994 sold 5,000 shares of Non-Voting Convertible Preferred Stock to The Samberg Group for $1,000,000. Such preferred stock is convertible into shares of the Company's Common Stock at the rate of $5.00 per share and is redeemable by the Company at any time after March, 1999. In May, 1998, this conversion right was waived by the Samberg Group and the Company conditionally agreed to redeem the Preferred Stock. Messrs. Samberg, Sussman, Wathen and Polen and Mr. Hoffman's wife are each members of The Samberg Group. The Management Agreement further provides for the cancellation of all outstanding stock options and incentive awards granted prior to the date thereof to the Golds and Messrs. Samberg, Sussman, Wathen and Polen and the issuance of stock options for 150,000 shares of Common Stock in the aggregate to Messrs. Samberg, Sussman, Wathen and Polen upon terms and conditions determined by the Compensation Committee. Pursuant to the Management Agreement, the Severance Agreement described above was entered into by the Golds and the Company, the 1995 Agreement described above was entered into by Mr. Samberg and the Company, and an employment agreement was entered into by Mr. Wathen and the Company. Mr. Wathen's employment agreement was subsequently terminated effective March 31 1998. On August 19, 1994, the Guess Group bought 490,000 shares of Common Stock pursuant to a Common Stock Purchase Agreement dated August 18, 1994 by and among the Company, the Guess Group and the Samberg Group (the "Guess Agreement"). Consideration paid was $6.00 in cash per share of Common Stock. All shares sold were previously held by the Company as treasury stock. The Guess Agreement provides the Guess Group with certain registration rights and, with respect to the issuance of additional stock by the Company, certain rights to purchase additional shares. The Agreement also provides certain restrictions on the ability of the Guess Group to acquire additional voting stock of the Company, to dispose of its Common Stock and to engage in control transactions or proxy solicitations with respect to the Company. The Guess Group initially designated Roger A. Williams, the Executive Vice President and Chief Financial Officer of GUESS?, to serve as a director of the Company, and he was elected to such position in 1994. The Guess Agreement requires the Company and the Samberg Group to each use its best efforts to cause one individual designated collectively by the Guess Group to be elected a director of the Company at future annual meetings of the Company so long 32 as the Guess Group and their affiliates beneficially own in the aggregate at least the lesser of 490,000 shares of Common Stock or 15% of the outstanding Common Stock. Mr. Williams resigned from the Board of Directors effective July 21, 1997. The Guess Group did not designate another individual to serve as a director. As a condition to the Guess Agreement, the Company amended its Share Rights Agreement so that the Guess Group's acquisition of Common Stock would not trigger any defensive measures thereunder. Provisions were made in each executive officer's employment agreement and the Severance Agreement so that such acquisition would not be a "Change in Control" under those agreements. The Company was licensed by GUESS? to manufacture and sell certain garments under the GUESS? trademarks. Effective May 31, 1996, the License was extended though the period ended May 31, 1999. For the contract year ending May 31, 1997, minimum sales of $8 million were required but not achieved by the Company. However, GUESS? agreed not to terminate the license agreement at that time and the Company agreed that GUESS?, in its sole and subjective discretion could terminate the license agreement at any time after December 31, 1997. For each contract year after May, 1997, the minimum sales goal increases by $2,000,000. In addition, minimum royalties are $560,000, $700,000 and $840,000 of the contract years ended May 31, 1997, 1998 and 1999, respectively. Due to the lack of capital resources necessary to develop and support GUESS? product line, the Company, with the Support of GUESS, Inc. has initiated a strategy to terminate the GUESS? license and had discontinued its GUESS Division as of the first quarter of fiscal 1999. On August 15, 1996, pursuant to a Common Stock and Convertible Subordinated Debenture Purchase Agreement dated as of August 13, 1996 (the "Purchase Agreement") between the Company and NAN Investors, L.P. (the "Investor"), the Company sold to the Investor 250,000 shares of Common Stock for an aggregate purchase price of $740,000, and two (2) convertible subordinated debentures of the Company in the original principal amounts of $1,168,150 and $1,591,850, respectively (the "Debentures"), which Debentures are convertible into 305,000 and 318,370 additional shares ("Conversion Shares") of Common Stock. All shares sold and all Conversion Shares to be issued are authorized and unissued shares of Common Stock reserved for issuance pursuant to the Purchase Agreement. The Purchase Agreement provided the Investor with certain registration rights. Pursuant to the exercise of those rights, the Company filed a Registration Statement covering the registration of the 250,000 shares sold to the Investor and the Conversion Shares which was declared effective by the Securities and Exchange Commission on April 11, 1997. The Purchase Agreement also provides that the Company and The Samberg Group will each use its best efforts to cause Kenneth Klein to be elected as a director of the Company at future annual meetings of the Company so long as the Investor and its affiliates beneficially own in the aggregate at least the lesser of 250,000 shares of Common Stock or 7% of the outstanding Common Stock. The Company has been advised that Mr. Klein is not an affiliate of Investor. He is currently serving as a director of the Company and is scheduled to stand for re-election at the Annual Meeting of Shareholders to be held later this year. 33 As a condition to the Purchase Agreement, the Board of Directors and shareholders of the Company adopted Amendments to the Company's Certificate of Incorporation. In addition, provisions were made in each executive officer's employment agreement and the Severance Agreement so that the Investor's acquisition would not be a "Change in Control" under those Agreements. In September, 1997 the Company entered into a forbearance agreement with the Investor, to release a security interest in the property sold at 200 Cook St., Cartersville, Georgia, and to extend the cure period with respect to an $172,500 interest payment default on the Debentures. Nantucket agreed to pay a portion of the net proceeds from the sale of the property to retire an amount and to of the subordinated debt ($707,000), a prepayment premium of $176,000, place a person, satisfactory to Investor, as a senior operations/financial manager with the Company. Nick Dmytryszyn was elected as the Company's Chief Financial Officer in November, 1997, with the approval of Investor. In May 1998, the Company entered into an agreement with Investor to extend the cure period with respect to $322,551 in prior interest payment defaults and for interest payments due in August 1998, until December 1998. In return the Company agreed to secure the Debentures by a first lien on all the assets of the Company to the extent not otherwise prohibited under its existing revolving credit facility with Congress Financial Corp. to issue to Investor five year warrants (the "Warrants") to purchase 16,500,000 shares of Nantucket Industries, Inc. stock at a price of $.10 per share, and to cause certain members of the Board of Directors to be retained, reelected, or removed. Additional relationships and related transactions are described above, under the caption "Compensation Committee Interlocks and Insider Participation." PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8- K The following is a list of all exhibits and financial statement schedules filed as part of this report, certain of which documents have been incorporated by reference to documents previously filed on behalf of the Registrant. (a)(1) Index to Consolidated Financial Statements of Nantucket Industries, Inc.
Page Report of Independent Certified Public Accounts - Grant Thornton LLP F-1 Consolidated Balance Sheets- F-2
34 F-2 F-4 February 27, 1999 and February 28, 1998 Consolidated Statements of Operations - Years Ended February 27, 1999, F-4 February 28, 1998, and March 1, 1997 Consolidated Statements of Stockholders' Equity -Years Ended February 27, F-5 1999, February 28, 1998, and March 1, 1997 Consolidated Statements of Cash Flows - Years Ended February 27, 1999, F-6 February 28, 1998, and March 1, 1997 Notes to Consolidated Financial Statements F-8 (a)(2) Financial Statement Schedule Schedule Il - Consolidated valuation and qualifying accounts F-25
(a)(3) Exhibits Exhibits which, in their entirety, are incorporated by reference to any report, exhibit or other filing previously made with the Securities and Exchange Commission are designated by an asterisk (*) and the location of such material is included in its description.
Exhibit Page No. Description No. (3)(a) Certificate of Incorporation as currently in effect (filed as Exhibit 3 (a) * to Form 10-K Report for the fiscal year ended February 27, 1988 (the" 1988 10-K"). (3)(b) By-Laws as currently in effect (filed as Exhibit 3(b) to the Form 8K dated * August 15, 1996).
35 (4)(a) Specimen Stock Certificate (filed as Exhibit 4(b) to Registration Statement * on Form S-1, No. 2-87229 filed October 17, 1983 (the "1983 Form S-1). (4)(b) Share Purchase Rights Agreement, dated as of September 6, 1988, between the * Company and State Street Bank and Trust Company (filed as Exhibit 4(a) to Form 8-K Report dated as of September 6, 1988), as amended by the following: Amendment No. 1 dated October 3, 1988 (filed as Exhibit 9 to Schedule 14D-9 Amendment No. I dated October 4, 1988), Amendment No. 2 dated October 18, 1988 (filed as Exhibit 14 to Schedule 14D-9 Amendment No. 2 dated October 19, 1988) and Amendment No. 3 dated November 1, 1988 (filed as Exhibit 4(c) to Form 10-K Report for the fiscal year ended February 25, 1989 (the " 1989 10K"), Amendment No. 4 dated as of November 17, 1988 (filed as Exhibit 1 to Amendment No. 1 to Form 8-A, dated November 18, 1988) and Amendment dated as of August 15, 1994 (filed as Exhibit 4(e) to Form 8-K dated August 19, 1994). (4)(c) Note Acquisition Rights Agreement dated as of September 6, 1988 between the * Company and State Street Bank and Trust Company, as amended on September 19, 1988 (filed as Exhibit 4(b) to Form 8-K Report dated Septemuer 6, 1988) as amended by the following: Amendment No. 2 dated October 3, 1988 (filed as Exhibit 10 to Schedule 14D-9 Amendment No. 2 dated October 4, 1988), Amendment No. 3 dated October 18, 1988 (filed as Exhibit 15 to Schedule 14D-9 Amendment No. 2 dated October 19, 1988), Amendment No. 4 dated November 1, 1988, (filed as Exhibit 4(d) to the 1989 10-K) and Amendment No. 5 dated as of November 17, 1988 (filed as Exhibit 2 to Amendment No. 1 to Form 8-A, dated November 18, 1988). (4)(d) Certificate of Designation, Preferences and Rights of Non-Voting Convertible * Preferred Stock of Nantucket Industries, Inc. (filed as Exhibit 4 to Form 8-K Current Report dated March 22, 1994 (the " 1994 8-K").
36 (4)(e) Common Stock Purchase Agreement dated as of August 18, 1994 by and among * Registrant, Guess?, Inc., the Maurice Marciano 1990 Children's Trust, the Paul Marciano Trust u/t/d 2/20/86, the Armand Marciano Trust u/t/d 2/20/86 and The Samberg Group, L.L.C. (filed as Exhibit 4(d) to Form 8-K dated August 19, 1994). (4)(f) Common Stock and Convertible Subordinated Debenture Purchase Agreement dated * as of August 13, 1996 by and among Nantucket Industries, Inc. and NAN Investors, L.P. (filed as Exhibit 4(f) to the Form 8-K dated August 15, 1996). (4)(g) Sixth Amendment dated as of August 15, 1996 to that certain Rights Agreement * dated as of September 6, 1988 between Nantucket Industries, Inc., and State Street Bank & Trust Company (filed as Exhibit 4(g) to the Form 8-K dated August 15, 1996). (9) Voting Trust Agreement by and among the Samberg Group, L.L.C., George Gold, * Donald Gold, Stephen Samberg, Stephen Sussman, Robert Polen, Ray Wathen, Nantucket Industries, Inc., Robert Rosen and Joseph Mazzella dated as of March 21, 1994 (filed as Exhibit 99(b) to 1994 8-K). (10)(a) Nantucket Industries, Inc. Savings Plan effective June 1, 1988 by and * between the Registrant and George Gold and Donald Gold as Trustees, Amendment No. 1 thereto dated June 22, 1990 and Amendment No. 2 thereto dated November 19, 1990 (filed as Exhibit (10)(a) to Form 10-K Report for the fiscal year ended February 29, 1992 (the " 1992 10-K")). (10)(b) Incentive Stock Option Plan (filed as Exhibit 10(d) to the 1988 10-K). * (10)(c) 1988 Nantucket Industries, Inc. Nonstatutory Stock Option Plan (filed as * Exhibit 10(c) to the 1989 10-K).
37 (10)(e)(i) Trademark Agreement between Registrant and Faberge, Incorporated dated * November 1, 1980 ("Trademark Agreement") regarding the trademarks "Faberge" and "BRUT" for use with men's and boy's underwear and bathing suits (filed as Exhibit 10(g)(i) to 1987 10-K); Amendment dated November 16, 1982 regarding the trademark "BRUT 33" (filed as Exhibit 10(m) to 1983 S-1); Letter dated August 24, 1983 from Faberge to Registrant with respect to renewal of the Trademark Agreement for an additional five year period (filed as Exhibit 10(g)(iii) to 1987 10-K); Amendment dated May 6, 1983 regarding the trademarks "BRUT Medallion Design" and "Brut Royale" (filed as Exhibit 10(k)(ii) to 1983 S-1; Amendment dated December 5, 1983 (filed as Exhibit 10(g)(iv) to the Form 10-K Report for the fiscal year ended March 3, 1984 (the " 1984 10-K"); Amendment dated October 3 1, 1984 (filed as Exhibit 10(g)(xiii) to the Form 10-K Report for the fiscal year ended March 2, 198 5 (the "1985 10-K")); Amendment dated March 14, 1986 extending license to include swimwear tops (filed as Exhibit 10(g)(v) to the 1986 10-K; Amendment dated April 25, 1984 (filed as Exhibit 10(g)(v) to the 1984 10-K); Letter dated December 31, 1987, extending term of Trademark Agreement for an additional five year period and deleting men's and boy's bathing suits from coverage (filed as Exhibit 10(g)(iii) to the 1988 10-K); extension dated February 24, 1989, extending expiration date of the Trademark Agreement to February 28, 1998 (filed as Exhibit 10(e)(ii) to the 1989 10-K). (10)(e)(ii) Intentionally omitted. (10)(e)(iii) License Agreement between the Company and BRITTANIA Sportswear, Ltd. * (subsidiary of Levi Strauss) dated September 6, 1988 for the manufacture and sale of men's and ladies' underwear under the "BRITTANIA" trademark (filed as Exhibit 19 to Form 10-Q for the Quarter ended August 27, 1988). (10)(e)(iv) License Agreement between the Company and BRITTANIA Sportswear, Ltd. * (subsidiary of Levi Strauss) dated December 31, 1991 for the manufacture and sale of men's and ladies' underwear under the "BRITTANIA" trademark (filed as Exhibit 10(e)(iv) to Form 10-K for the fiscal year ending February 26, 1994.
38 (10)(e)(v) Amendment dated January 31, 1996 to License Agreement between the Registrant * and BRITTANIA Sportswear, Ltd. (subsidiary of Levi Strauss) for the manufacture and sale of men's and ladies' loungewear under the "BRITTANIA" trademark. (10)(e)(vi) Intentionally omitted. (10)(e)(vii) License Agreement between the Company and Brittania Sportswear Limited, a * subsidiary of Levi Strauss & Co. effective as of January 1, 1997, extending the Company's license through December 31, 1999, for the manufacture and sale of men's underwear and loungewear under the 'BRITTANIA" trademark (filed as Exhibit 10(e)(iii) to the Form 10-Q for the quarter ended August 31, 1996). (10)(f) Modification and Extension of Lease dated November 30, 1982 between * Registrant and Satti Development Corp. (filed as Exhibit 10(1) to the 1983 10-K); (i) amendment dated February 16, 1988 extending term of lease through April 30, 1993 (filed as Exhibit 10(h) to the 1988 10-K); (ii) amendment dated August 15, 1991 expanding dernised premises, extending term of lease through May 31, 1997 and modifying annual rental (filed as Exhibit 10(f)(ii) to 1992 Form 10-K). (10)(f)(i) Intentionally omitted. (10)(g) Promissory Notes from George J. Gold and Donald D. Gold to Registrant (filed * as Exhibit 10(s) to 1983 S-1). (10)(h) Intentionally omitted.
39 (10)(i) Amended and Restated Credit Agreement dated December 8, 1989, between * Registrant and Manufacturers Hanover Trust Company ("MHTC") for the borrowing of up to $11,500,000 of which $8,500,000 is on a revolving credit basis until March 5, 1993, the balance to be used against letters of credit issued by NIETC for the benefit of the Registrant; $8,500,000 Note dated December 8, 1989, from Registrant to MHTC; Continuing Letter of Credit Security Agreement dated December 8, 1989, between Registrant and MHTC. (filed as Exhibit 10(i) to the Form 10-K Report for the fiscal year ended March 3, 1990 (the " 1990 10-K") Omitted exhibits to said Agreement will be ftunished to the Commission upon request. (i) First Amendment dated August 1, 1990 to Loan Agreement between Registrant and M]HTC (filed as Exhibit 10(i)(i) to the Form 10-K Report for the fiscal year ended March 2, 1991); (ii) Second Amendment and Waiver dated as of May 23, 1991 to Loan Agreement between Registrant and MHTC (filed as Exhibit (10)(i)(ii) to the 1992 Form 10-K); (iii) Fifth Amendment and Waiver dated as of February 22, 1993, to Amended and Restated Credit Agreement dated as of December 8, 1989, between the Registrant and Chemical Bank, as successor by merger to MHTC (filed as Exhibit (iii) to the Form 8-K dated March 4, 1993); (iv) Sixth Amendment and Waiver dated as of March 4, 1993, to Amended and Restated Credit Agreement (filed as Exhibit 10(k)(iv) to 1993 10-K). (10)(j)(i) Revolving Credit Agreement dated as of December 30, 1993 by and between * Chemical Bank, Nantucket Industries, Inc., Nantucket Mills, Inc. and Nantucket Management Corporation (the "Credit Agreement") (filed as Exhibit 10(j)(i) to the 1994 Form 10-K). (10)(j)(ii) First Amendment to Credit Agreement dated as of February 28, 1994 by and * between Chemical Bank, Nantucket Industries, Inc., Nantucket Mills, Inc. and Nantucket Management Corporation (filed as Exhibit 10(j)(ii) to the 1994 10-K). (10)(j)(iii) Second Amendment to Credit Agreement dated as of March 17, 1994 by and * between Chemical Bank, Nantucket Industries, Inc., Nantucket Mills, Inc. and Nantucket Management Corporation (filed as Exhibit 10(j)(iii) to the 1994 10-K). (10)(k) Intentionally omitted.
40 (10)(n) Intentionally omitted. (10)(o) Intentionally omitted. (10)(q) Intentionally omitted. (10)(s) Intentionally omitted. (10)(t) Intentionally omitted. (10)(u) Intentionally omitted. (10)(v) Sublicense Agreement dated November 20, 1991 by and among Dawson Consumer * Products, Inc., Registrant and PGH Company regarding the use of the trademark "Adolfo" on men's high fashion underwear briefs (filed as Exhibit (10)(v) to the 1992 Form 10-K). (10)(w) Sublicense Agreement dated October 16, 1992 by and among Salant Corporation, * Dawson Consumer Products, Inc. and the Registrant regarding the use of the trademark "John Henry" on men's high fashion underwear briefs (filed as Exhibit (10)(w) to the 1992 Form 10-K). (10)(x) Employment Agreement dated May 26, 1992 by and between the Registrant and * Stephen P. Sussman (filed as Exhibit 10(x) to the Form 10Q Report for November 28, 1992) as amended by the Amendment dated August 8, 1994 (filed as Exhibit 99(a) to Form 8-K dated August 19, 1994). (10)(x)(i) Amendment No. 2 dated August 9, 1996 to that certain Employment Agreement * dated as of May 26, 1992 by and between Nantucket Industries, Inc. and Stephen P. Sussman (filed as Exhibit 99(a) to the Form 8-K dated August 15, 1996). (10)(y) Purchase and Sale Agreement dated as of July 31, 1997 by and among Mimms * Investments, a Georgia general partnership and Nantucket Industries, Inc. regarding the sale of the Registrant's property at 200 Cook St., Cartersville, GA.(filed as Exhibit (10)(y) to 10Q report for August 30, 1997).
41 (10)(y)(i) Amendment dated August 14, 1997 to Purchase and Sale Agreement dated as of * July 31, 1997 by and among Mimms Investments, a Georgia general partnership regarding the sale of the Registrants property located at 200 Cook St., Cartersville, GA (filed as Exhibit (10)(y)(i) to 10Q report for August 30, 1997). (10)(y)(ii) Amendment dated August 27, 1997 to Purchase and Sale Agreement dated as of * July 31, 1997 by and among MimmsInvestments, a Georgia general partnership regarding the sale of the Registrants property located at 200 Cook St., Cartersville, GA (filed as Exhibit (10)(y)(ii) to 10Q report for August 31,1997). (10)(z)(i) Intentionally omitted. (10)(z)(ii) Amended and Restated Employment Agreement by and between Nantucket * Industries, Inc. and Stephen M. Samberg (filed as Exhibit 10(z)(ii) to the 1994 Form 10-K) as amended by the Amendment dated August 8, 1994 (filed as Exhibit 99(c) to Form 8-K dated August 19, 1994). (10)(z)(iii) Amendment No. 2 dated August 9, 1996 to that certain Employment Agreement * dated as of March 18, 1994 by and between Nantucket Industries, Inc. and Stephen M. Samberg (filed as Exhibit 99(c) to the Form 8-K dated August 15, 1996). (10)(z)(iv) Amendment No. 3 dated July 1, 1997 to that certain Employment Agreement * dated as of March 18, 1994 by and between Nantucket Industries, Inc and Stephen M. Samberg (filed as Exhibit (10)(z)(iv) to 1998 10-K). (10)(aa) License Agreement dated October 5, 1992 between Cluett Peabody & Co., Inc. * and Registrant with respect to the ARROW trademark (filed as Exhibit 2 to Form 10Q Report for November 28, 1992). (10)(bb) License Agreement dated December 9, 1992 between GUESS?, Inc. and Registrant * with respect to the GUESS? trademark (filed as Exhibit 3 to Form 10Q Report for November 28, 1992).
42 (10)(cc) Registrant's 1992 Long-Term Stock Option Plan (filed as Exhibit 4 to Form * 10Q Report for November 28, 1992). (10)(dd) Registrant's 1992 Executive Performance Benefit Plan (filed as Exhibit 5 to * Form 10Q for November 28, 1992). (10)(ee) Management Agreement made as of January 1, 1993 by and between Nantucket * Management Corp. (a subsidiary of Registrant) and Registrant (filed as Exhibit 10(ee) to 1993 10-K). (10)(ff) License Agreement dated December 21, 1992 between Registrant and McGregor * Corporation with respect to the Botany 500 Trademark (filed as Exhibit 10(ff) to 1993 10-K). (10)(ff)(I) Letter Agreement dated July 10, 1995 amending License Agreement between the * Registrant and McGregor Corporation with respect to the Botany 500 Trademark (filed as Exhibit 10(ff) to 1993 10-K). (10)(gg) Severance Agreement dated as of March 18, 1994 by and among Nantucket * Industries George J. Gold and Donald Gold (filed as Exhibit 10(gg)(i) to the Form 10K Report for the fiscal year ended February 25, 1995). (Filed as Exhibit 10(gg) to the 1994 Form 10-K) as amended by the Amendment dated August 17, 1994 (filed as Exhibit 99(b) to Form 8-K dated August 19, 1994). (10)(gg)(i) Letter dated February 28, 1995 amending Severance Agreement by and among * Registrant, George J. Gold and Donald D. Gold (filed as Exhibit 10(gg)(i) to the Form 10-K Report for the fiscal year ended February 25, 1995). (10)(gg)(ii) Third Amendment dated August 9, 1996 to that certain Severance Agreement * dated as of March 18, 1994 by and among Nantucket Industries, Inc. George J. Gold and Donald D. Gold (filed as Exhibit 99(b) to the Form 8-K dated August 15, 1996). (10)(hh) Agreement dated as of March 1, 1994 by and among the Samberg Group, L.L.C., * George J. Gold, Donald D. Gold, Stephen M. Samberg, Stephen P. Sussman, Robert Polen, Raymond L. Wathen and Nantucket Industries, Inc. (filed as Exhibit 10(hh) to the 1994 Form 10-K).
43 (10)(ii) Loan and Security Agreement by and between Nantucket Industries, Inc. and * Congress Financial Corp. dated as of March 21, 1994 (filed as Exhibit 99(b) to 1994 8-K). (10)(ii)(i) Amendment No. 2 dated July 31, 1996, to Loan and Security Agreement dated as * of March 21, 1994, among Nantucket Industries, Inc. and Congress Financial Corp. (filed as Exhibit 99(o) to the Form 8-K dated August 15, 1996). (10)(ii)(ii) Amendment No. 3 dated August 15, 1996, to Loan and Security Agreement dated * as of March 21, 1994, among Nantucket Industries, Inc. and Congress Financial Corp. (filed as Exhibit 99(p) to the Form 8-K dated August 15, 1996). (10)(ii)(iii) Amendment No.4 dated March 18, 1997 to Loan and Security Agreement dated as * of March 21, 1994 among Nantucket Industries, Inc and Congress Financial Corp (filed as Exhibit (10)(ii)(ih) to 10Q report for August 30, 1997). (10)(ii)(iv) Amendment No. 5 dated March 31, 1997 to Loan and Security Agreement dated as * of March 21, 1994 among Nantucket Industries, Inc and Congress Financial Corp (filed as Exhibit (10)(ii)(iv) to 10Q report for August 30, 1997). (10)(ii)(v) Amendment No. 6 dated May 4, 1997, to Loan and Security Agreement dated as * of March 21, 1994, among Nantucket Industrie, Inc and Congress Financial Corp (filed as Exhibit (10)(ii)(v) to 10Q report for August 30, 1997). (10)(ii)(vi) Extention dated March 20, 1998 to the Loan and Security Agreement dated as * of March 21, 1994, among Nantucket Industries, Inc and Congress Financial Corp.(filed as Exhibit (10)(ii)(vi) to 1998 10-K). (10)(ii)(vii) Extention No. 2 dated May 20, 1998 to the Loan and Security Agreement dated * as of March 21, 1994, among Nantucket Industries. Inc and Congress Financial Corp. (filed as Exhibit (10)(ii)(vii) to 1998 10-K). (10)(jj) Guaranty by Nantucket Mills, Inc. in favor of Congress Financial Corp. dated * as of March 21, 1994 (filed as Exhibit 99(c) to 1994 8-K).
44 (10)(kk) General Security Agreement by Nantucket Mifls, Inc. in favor of Congress * Financial Corp. dated as of March 21, 1994 (filed as Exhibit 99(d) to 1994 8-K). (10)(ll) Guarantee of Nantucket Management Corporation in favor of Congress Financial * Corp. dated as of March 21, 1994 (filed as Exhibit 99(e) to 1994 8-K). (10)(mm) General Security Agreement by Nantucket Management Corporation in favor of * Congress Financial Corp. dated as of March 21, 1994 (filed as Exhibit 99(f) to 1994 8-K). (10)(nn) Amended and Restated Credit Agreement by and among Chemical Bank, Nantucket * Industries, Inc., Nantucket Nfills, Inc. and Nantucket Management Corporation dated as of March 21, 1994 (filed as Exhibit 99(g) to 1994 8-K) and amended by the Amendment dated as.of August 18, 1994 (filed as Exhibit 99(e) to the Form 8-K dated August 19, 1994). (10)(oo) Amended and Restated Security Agreement by and between Nantucket Industries, * Inc. and Chemical Bank dated as of March 21, 1994 (filed as Exhibit 99(h) to 1994 Form 8-K). (10)(pp) Amended and Restated Security Agreement by and between Nantucket Mills, Inc. * and Chemical Bank dated as of March 21 1994 (filed as Exhibit 99(i) to 1994 8-K). (10)(qq) Security Agreement by and between Management Corporation and Chemical Bank * dated as of March 21, 1994 (filed as Exhibit 99(j) to 1994 8-K). (10)(rr) Deed to Secure Debt, Security Agreement and Assignment of Leases and Rents * by Nantucket Industries, Inc. to Chemical Bank dated as of June 8, 1994 (filed as Exhibit 10(ss) to the 1994 Form 10-K). and Assignment of Leases and Rents by Nantucket Industries, Inc. to Congress Financial Corporation dated June 8, 1994 (filed as Exhibit 10(rr) to the 1994 Form 10-K). (10)(ss) Deed to Secure Debt, Security Agreement and Assignment of Leases and Rents * by Nantucket Industries, Inc. to Chemical Bank dated as of June 8, 1994 (filed as Exhibit 10(ss) to the 1994 Form 10-K).
45 (10)(tt) Employment Agreement dated November 23, 1994 by and between Registrant and * Raymond L. Wathen (filed as Exhibit 10(tt) to Form 10-K Report for the fiscal year ended February 25, 1995). (10)(tt)(i) Amendment to Employment Agreement entered into as of January 1, 1996 between * Registrant and Raymond L. Wathen. (10)(uu) Employment Agreement dated July 1, 1994 by and between Registrant and Ronald * S. Hoffman (filed as Exhibit 10(uu) to Form 10-K Report for the fiscal year ended February 25, 1995). (10)(uu)(i) Letter Agreement dated June 12, 1995 between Registrant and Ronald S. * Hoffman, extending the term of his employment to June 30, 1996. (10)(uu)(ii) Letter Agreement dated August 9, 1996 between Registrant and Ronald S. * Hoffman amending the change of control provision in his employment agreement (filed as Exhibit 99(e) to the Form 8-K dated August 15, 1996). (10)(uu)(iv) Letter Agreement dated as of June 30, 1996 between Registrant and Ronald S. * Hoffman, extending the term of his employment to June 30, 1997 (filed as Exhibit 99(j) to the Form 8-K dated August 15, 1996). (10)(vv) Employment Agreement dated as of January 1996 by and between Registrant and * Joseph Visconti. (10)(vv)(i) Amendment dated August 9, 1996 to that certain Employment Agreement dated as * of January 1, 1996 by and between Nantucket Industries, Inc and Joseph Visconti (filed as Exhibit 99(d) to the Form 8-K dated August 15, 1996). (10)(vv)(ii) Amendment No. 2 dated as of July 1, 1997 to that certain Employment * Agreement dated as of January 1, 1996 by and between Nantucket Industries and Joseph Visconti (filed as Exhibit (10)(vv)(ii) to the 1998 10-K Form). (10)(ww) First Amendment, dated as of December 15, 1995 to Amended and Restated * Credit Agreement dated as of March 21, 1994, among Nantucket Industries, Inc. and its subsidiaries and Chemical Bank (filed as Exhibit (10)(w) to Form 10-Q Report for the quarter ended November 25, 1995).
46 (10)(xx) Complaint filed on March 7, 1997 with Superior Court of California for the * County of San Francisco C.A. No. 985160, Nantucket Industries, Inc. v. Levi Strauss & Co., and Brittania Sportswear Limited (filed as Exhibit 99(q) to the Form 8-K dated March 7, 1997). (10)(zz) Press Release dated March 10, 1997 (filed as Exhibit 99(r) to the Form 8-K * dated March 7, 1997). (10)(aaa) Lease between Registrant and First Industrial LP dated December 3, 1997 * (filed as Exhibit 99(s) to Form 8-K dated November 26, 1997. (10)(bbb) Letter Agreement dated September 30, 1997 from Nantucket Industries, Inc. to * NAN Investers,LP (filed as Exhibit 99(t) to the 10Q report for November 29, 1997.) (10)(bbb)(i) Letter Agreement No. 2 dated May 19, 1998 from Nantucket Industries to NAN * Investers LP (filed as Exhibit (10)(bbb)(i) to 1998 Form 10-K). (10)(ccc) Termination of License Agreement dated March 25, 1998 between GUESS? Inc. * and the Registrant (filed as Exhibit (10)(ccc) to 1998 Form 10-K).
(c) Subsidiaries of the Company Current management is currently reviewing, with the various attorneys of the corporation, the status of any of its wholly owned subsidiaries named in certain documents, tax returns, and insurance documents. When management determines the status of these corporations it will file whatever appropriate amendments required to this document. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York. NANTUCKET INDUSTRIES, INC. February 2, 2000 By /s/ John Treglia ----------------------------------- John Treglia, President, Secretary and CFO February 2, 2000 By /s/ Marsha Ellis ----------------------------------- Marsha Ellis, Treasurer and Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated. January 21, 2000 /s/ Steven Schneider ----------------------------------- Steven Schneider, Director January 18, 2000 /s/ Kenneth Klein ----------------------------------- Kenneth Klein, Director January 15, 2000 /s/ Marc M. Feder ----------------------------------- Marc M. Feder, Director January 18, 2000 /s/ George J. Gold ----------------------------------- George J. Gold, Director 48 EX-27 2 FDS --
5 THIS SCHEDULE CONTAINS INFORMATION EXTRACTED FROM THE STATEMENTS DATED FEBRUARY 27, 1999 AS FILED IN FORM 10-K FOR THE YEARLY PERIOD THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1 YEAR FEB-27-1999 FEB-27-1999 622,268 0 1,234,989 273,000 1,108,860 2,760,464 1,653,613 1,115,090 3,475,587 3,716,868 0 0 500 324,185 (630,216) 3,475,587 11,517,842 11,517,842 9,107,947 9,107,947 2,894,293 103,165 506,746 937,480 0 937,480 0 0 0 937,480 0.26 0.26
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