-----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, LTCu+Qrl6PHsk7DzpFFLt6/HzYskGx/b+n1SOxBry+0uYaRdShAw+ygG2bQSusOR M/Oki3jsc/3FtU/TtW+wSQ== 0000891092-00-000077.txt : 20000208 0000891092-00-000077.hdr.sgml : 20000208 ACCESSION NUMBER: 0000891092-00-000077 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990529 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-Q SEC ACT: SEC FILE NUMBER: 033-08955 FILM NUMBER: 525608 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-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 29, 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 10003 --------------------------------------------------- ---------- (Former Address, since last report) (Zip Code) 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 ninety days. X YES ___NO --- APPLICABLE ONLY TO CORPORATE ISSUERS: As of January 14, 2000, the Registrant had outstanding 3,238,796 shares of common stock not including 3,052 shares classified as Treasury Stock. NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES QUARTERLY REPORT FOR QUARTER ENDED MAY 29, 1999 I N D E X ---------- PAGE ---- Part I.- FINANCIAL INFORMATION Consolidated balance sheets 3 Consolidated statements of operations 4 Consolidated statements of cash flows 5 Notes to consolidated financial statements 6 - 15 Management's discussion and analysis of financial condition and results of operations 16 - 18 Part II.- OTHER INFORMATION 19 - 21 Signature 22 Nantucket Industries, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
May 29, February 27, 1999 1999 -------------------------------- (unaudited) (1) ASSETS CURRENT ASSETS Cash $ 200,844 $ 622,268 Accounts receivable, reserves of $279,000 and $273,000, respectively 1,773,714 961,989 Inventories (Note 4) 730,751 1,108,860 Other current assets 133,839 67,347 -------------------------------- Total current assets 2,839,148 2,760,464 PROPERTY, PLANT AND EQUIPMENT, NET 506,313 538,522 OTHER ASSETS, NET 165,186 176,601 -------------------------------- $3,510,647 $3,475,587 ================================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Convertible subordinated debentures (Note 6) $2,052,986 2,052,986 Current portion of capital lease obligations 57,651 56,452 Accounts payable 446,377 248,538 Accrued salaries and employee benefits 27,127 80,740 Accrued unusual charge (Note 7) 87,500 95,833 Accrued expenses and other liabilities 835,213 863,271 Accrued royalties 319,048 319,048 -------------------------------- Total current liabilities 3,825,902 3,716,868 CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 49,380 64,250 -------------------------------- 3,875,282 3,781,118 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.10 par value; 500,000 shares authorized, of which 5,000 shares have been designated as non-voting with liquidating preference of $200 per share and are issued 500 500 outstanding 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 (86,783) (96,425) Accumulated deficit (13,122,103) (13,053,357) -------------------------------- (344,698) (285,594) Less 3,052 shares of common stock held in treasury, at cost 19,937 19,937 -------------------------------- (364,635) (305,531) -------------------------------- $3,510,647 $3,475,587 ================================
(1) Derived from audited financial statements. The accompanying notes are an integral part of these statements 3 Nantucket Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Thirteen Weeks Ended --------------------------------- May 29, May 30, 1999 1998 --------------------------------- Net sales $2,182,275 $4,282,704 Cost of sales 1,496,609 3,391,240 --------------------------------- Gross profit 685,666 891,464 Selling, general and administrative expenses 658,825 1,018,217 --------------------------------- Operating (loss) profit 26,841 (126,753) Other income - 675,000 Interest expense (95,592) (162,733) --------------------------------- Net income (loss) ($68,751) $385,514 ================================= Net income (loss) per share - basic and diluted (Note 3) ($0.02) $0.12 ================================= Weighted average common shares outstanding 3,238,796 3,238,796 =================================
The accompanying notes are an integral part of these statements 4 Nantucket Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Thirteen Weeks Ended ---------------------------- May 29, May 30, 1999 1998 ------------ ----------- Cash flows from operating activities Net (loss) income ($68,751) $385,514 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities Depreciation and amortization 58,453 93,219 Provision for doubtful accounts 7,489 80,287 Gain on sale of fixed assets 0 - Provision for obsolete and slow moving inventory 0 - (Increase) decrease in assets Accounts receivable (819,214) 472,218 Inventories 378,109 1,452,511 Other current assets (66,492) (50,411) Increase (decrease) increase in liabilities Accounts payable 197,843 (118,522) Accrued expenses and other liabilities (81,671) (118,889) Accrued unusual charge (8,333) 16,749 ------------ ----------- Net cash (used in) provided by operating activities (402,567) 2,212,676 ------------ ----------- Cash flows from investing activities (Additions) removals to property, plant and equipment (5,186) (25,967) Proceeds from sale of fixed assets 0 19,040 Decrease in other assets 0 666 ------------ ----------- Net cash used in investing activities (5,186) (6,261) ------------ ----------- Cash flows from financing activities Repayments under line of credit agreement, net 0 (2,193,847) Payments of capital lease obligations (13,671) (12,568) Repayments of long-term debt 0 0 ------------ ----------- Net cash used in financing activities (13,671) (2,206,415) ------------ ----------- NET (DECREASE) INCREASE IN CASH ($421,424) $0 Cash at beginning of period 622,268 8,850 ------------ ----------- Cash at end of period $200,844 $8,850 ============ =========== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Cash paid during the period: Interest $3,119 $77,846 ============ =========== Income taxes - - ============ ===========
The accompanying notes are an integral part of these statements 5 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THIRTEEN WEEKS ENDED MAY 29, 1999 AND MAY 30, 1998 (unaudited) The following notes to the consolidated financial statements should be read in light of the following: 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. NOTE 1-TERMINATION OF OPERATIONS AND LIQUIDITY MATTERS 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 Part II, Item 1, "Legal Proceedings" of this report, Levi Strauss & Co., the parent company of Brittania Sportswear Ltd., a licensor which 6 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 Part II, Item 1 "Legal Proceedings"). 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. 7 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 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, reflect $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 9 to the financial statements included in this report.) 8 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 marketed 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 and settled this litigation (see Part II, Item 1 "Legal Proceedings"). Financing Arrangements 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. Congress Financial and the Company subsequently, on October 15, 1999, terminated the agreement. Currently the Company has no 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 9 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") 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. NOTE 2-CONSOLIDATED FINANCIAL STATEMENTS The consolidated balance sheet as of May 29, 1999 and the consolidated statements of operations for the thirteen week period and statements of cash flows for the thirteen weeks ended May 29, 1999 and May 30, 1998 were prepared by the Company without audit. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the financial position of the Company and its subsidiaries at May 29, 1999 and the results of their operations for the thirteen week period and cash flows for the thirteen weeks ended May 29, 1999 and May 30, 1998 were made on a consistent basis. 10 Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles were condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1999 Annual Report on Form 10-K. The results of operations for the periods presented were not necessarily indicative of the operating results for the full year. NOTE 3-EARNINGS (LOSS) PER COMMON SHARE In fiscal year 1998, the Company adopted the Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share", which requires public companies to present earnings per share and, if applicable, diluted earnings per share. All comparative periods had to be restated as of February 28, 1998 in accordance with SFAS 128. Basic earnings per share were based on the weighted average number of common and potential common shares outstanding. The calculation took into account the shares that might have been be issued upon exercise of stock options, reduced by the shares that might have been repurchased with the funds received from the exercise, based upon the average price during that year. The adoption of this standard did not have any impact on the disclosure of per share results in the financial statements. NOTE 4-INVENTORIES Inventories are summarized as follows: May 29, May 28, 1999 1998 Raw Materials - $346,517 Work in Process - 776,492 Finished Goods $730,751 925,234 -------- ------- $730,751 $2,048,243 NOTE 5-INCOME TAXES At February 27, 1999 the Company had a net deferred tax asset approximating $7,166,000 which is fully reserved until it can be utilized to offset deferred tax liabilities or realized against taxable income. The Company had a net operating loss carryforward for book and tax purposes of approximately $18,405,000. Accordingly, no provision for income taxes has been reflected in the accompanying financial statements. 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 such 11 regulations, exceeds 50%. Through May 29, 1999 the change in ownership was less than 50%. NOTE 6-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 12.5% convertible subordinated debentures, which were due August 15, 2001. The convertible subordinated debentures were secured by a second mortgage on the Company's manufacturing and distribution facility located in Cartersville, GA. In conjunction with the sale of this property completed on October 1, 1997 (Note 9), 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 costs and will be amortized over the expected 5-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 relating to the shares issued which have been charged to paid in capital. The remaining balance of $305,000 will be amortized over the 5-year term of the 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. 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 Congress facility, and to issue five-year warrants convertible to 16,500,000 shares of the Company's stock at an exercise price of 12 $.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. 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. NOTE 7-UNUSUAL CHARGE In March 1994, the Company terminated the employment contracts of its Chairman and Vice Chairman. In accordance with the underlying agreement, they are to be paid an aggregate of approximately $400,000 per year in severance, as well as certain other benefits, through February 28, 1999. The present value of these payments, $1,915,000, was accrued at February 26, 1994. As of October 1997, pending negotiation of more favorable terms, payment under this agreement was suspended (see Note 8 to the financial statements included in this report). NOTE 8-LITIGATION Phoenix Matter- In September 1993, the Company filed an action against the former owners of Phoenix Associates, Inc. ("Phoenix"). The Company is seeking compensatory damages of approximately $4,000,000 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 $4,000,000, rescission of the stock purchase agreement, rescission of an employment agreement and other matters, all on account of alleged breaches of the stock purchase agreement, fraudulent misrepresentation and breach of fiduciary duties. In November 1993, the former owners of Phoenix filed counterclaims against the Company alleging improper termination with regard to their employment agreement and breach of the stock purchase agreement. The former owners have filed for damages of approximately $9,000,000. The Company settled this litigation and realized $675,000 from this matter in the first quarter of fiscal year 1999. Donald Gold 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 13 payments allegedly due him under the March 18, 1994 Severance Agreement, and is seeking damages in the amount of $219,472. The Company has 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's this provision has no value. Gorge Gold Matter- 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 is seeking damages in the amount of $559,456 plus applicable interest and legal fees. The Company on March 9, 1998 filed counterclaims in 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 in the fourth quarter of fiscal year 1999. Theresa M. Bohenberger Matter- 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 Ms. Bohenberger. Brittania Matter- Since September 1988, the Company has been 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 trademarks "Brittania" and "Brittania from Levi Strauss & Co.". Sales under this license aggregated $0 in fiscal 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 are achieved. On January 22, 1997, Levi 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 of Brittania product, advised the Company that 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 licensing agreement, including without limitation its covenant of good faith and fair dealing. The Company settled the Levi litigation and realized approximately $725,000 in 14 gross value from this matter in the second quarter of fiscal year 1999, which is included in the accompanying statement of operations under the caption "Other Income." 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. NOTE 9-SALE OF MANUFACTURING FACILITY 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, GA. to Mimms Enterprises, a Real Estate Investment General Partnership, for cash aggregating $2,850,000. The Company reflected a gain on the sale in its third fiscal quarter of fiscal 1998 of $793,000. The proceeds were used to repay the $525,000 financing secured by this property and to prepay $707,000 of the convertible subordinated debentures secured by a second mortgage on this property. The remaining net proceeds were utilized to reduce the revolving credit financing. NOTE 10-NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (SFAS 130) and Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). The Company implemented SFAS 130 and SFAS 131 as required in the fiscal year which ended February 1999, which required the Company to report and display certain information related to comprehensive income and operating segments, respectively. Adoption of SFAS 130 and SFAS 131 did not impact the Company's financial position or results of operations. 15 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following results of operations should be read in light of the following: 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. Sales Net sales for the three months ended May 29, 1999 decreased 49% from prior year levels to $2,182,000. The decline in the sales was directly related to the discontinuance of the GUESS? product line as of the first quarter of the prior fiscal year. GUESS? products accounted for $1,992,000 of the prior year net sales. Gross Margin Gross profit margins for the three months ended May 29, 1999 increased to 31.42% from the prior year levels of 21%. This reflected the impact of the Company's strategy to phase-out the GUESS? product line, and the associated closeout of inventory which was substantially accomplished in the first quarter of the prior fiscal year. This improvement also reflected the benefit of increased utilization of the lower cost offshore manufacturing facilities. Selling, general and administrative expenses Selling, general and administrative expenses for the three months ended May 29, 1999 declined by $359,000 from prior year levels to $659,000. This improvement was the result of reduced staffing levels, efficiencies, and reductions in overhead associated with the phase-out of the GUESS? division. Interest Expense Interest expense for the first three months of the fiscal year decreased $67,000 from prior year levels, reflecting reductions in the outstanding revolving credit facility. 16 Liquidity and Capital Resources The Company incurred significant losses in recent years which resulted in severe cash flow problems that 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 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 decreased $30,000 from February 27, 1999 levels which reflected an increase in receivables and a reduction in inventories. The Company was continuing its efforts to manage its supply chain towards delivering inventory closer to forecasted demand. The subordinated debt was 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 the Board of Directors, on October 11, 1999, voted to allow the subordinated debt holder to liquidate the assets covered by its security agreement. 17 Please refer to the business risks and uncertainties discussed elsewhere in this report and in the Company's recent report on Form 10-K. 18 PART II Item 1. Legal Proceedings Phoenix Matter- In September 1993, the Company filed an action against the former owners of Phoenix Associates, Inc. ("Phoenix"). The Company is seeking compensatory damages of approximately $4,000,000 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 $4,000,000, rescission of the stock purchase agreement, rescission of an employment agreement and other matters, all on account of alleged breaches of the stock purchase agreement, fraudulent misrepresentation and breach of fiduciary duties. In November 1993, the former owners of Phoenix filed counterclaims against the Company alleging improper termination with regard to their employment agreement and breach of the stock purchase agreement. The former owners have filed for damages of approximately $9,000,000. The Company settled this litigation and realized $675,000 from this matter in the first quarter of fiscal year, 1999. Donald Gold 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 is seeking damages in the amount of $219,472. The Company has 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's this provision has no value. Gorge Gold Matter- 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 is seeking damages in the amount of $559,456 plus applicable interest and legal fees. The Company on March 9, 1998 filed counterclaims in 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 in fiscal year 1999. 19 Theresa M. Bohenberger Matter- 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 Ms. Bohenberger. Brittania Matter- Since September 1988, the Company has been 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 trademarks "Brittania" and "Brittania from Levi Strauss & 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 five-year term, including automatic renewals of two years if certain minimum sales levels are achieved. On January 22, 1997, Levi 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 of Brittania product, advised the Company that 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 licensing agreement, including without limitation its covenant of good faith and fair dealing. The Company settled the Levi litigation and realized approximately $725,000 in gross value from this matter in fiscal year 1999. The Company is subject to other legal proceedings and claims, which arise, in the ordinary course of its business. In the opinion of management, these legal proceedings and claims will be successfully defended and the Company will prevail. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities During the quarter contained in this report, the Company remained in default with regards to certain senior security holders as discuss more fully in Part I, Item 2 of this report "Management's Discussion and Analysis of Financial Condition and Results of Operations". 20 Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K None 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NANTUCKET INDUSTRIES, INC. By: /s/ John H.Treglia January 31, 2000 ------------------------------- John H.Treglia President, Secretary and CFO /s/ Marsha C. Ellis January 31, 2000 ------------------------------- Marsha C. Ellis Treasurer and Chief Accounting Officer 22 EX-27 2 ART. 5 FDS FOR 1ST QUARTER 10-Q
5 THIS SCHEDULE CONTAINS INFORMATION EXTRACTED FROM THE STATEMENTS DATED MAY 29, 1999 AS FILED IN FORM 10-Q FOR THE QUARTERLY PERIOD THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1 3-MOS FEB-26-2000 MAY-29-1999 200,844 0 2,052,714 279,000 730,751 2,839,148 1,413,441 907,128 3,510,647 3,825,902 0 0 500 324,185 (689,320) 3,510,647 2,182,275 2,182,275 1,496,609 1,496,609 658,825 0 95,592 (68,751) 0 (68,751) 0 0 0 (68,751) (0.02) (0.02)
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