-----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, HkgK/iWWeEPDNRE2ygQ4TPx7qwEuKkOiPvjFgA9cHVPqihcvrNZODTiDacNF+DbS vabYucPLJEjcEwYLOw4M0g== 0000891092-02-000024.txt : 20020413 0000891092-02-000024.hdr.sgml : 20020413 ACCESSION NUMBER: 0000891092-02-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011030 FILED AS OF DATE: 20020107 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: 1934 Act SEC FILE NUMBER: 033-08955 FILM NUMBER: 2503104 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 file001.txt FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended November 30, 2001. [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____ to ______. Commission File Number: 1-8509 NANTUCKET INDUSTRIES, INC. (Exact Name of Issuer as Specified in Its Charter) Delaware 58-0962699 (State of other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 45 Ludlow Street, Suite 602, Yonkers, New York 10705 (Address of principal executive offices) 914-375-7591 (Registrant's telephone number, including area code) (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. |X| YES |_| NO APPLICABLE ONLY TO CORPORATE ISSUERS As of January 3, 2002, the Registrant has outstanding 3,238,796 shares of common stock not including 3,052 shares classified as Treasury Stock. Nantucket Industries, Inc. (Debtor-in-Possession) ---------- TABLE OF CONTENTS PART I Item 1 - Financial Information (unaudited) Page ---- Nantucket Industries, Inc. and Subsidiaries Consolidated Balance Sheet as of November 30, 2001............................................3 Consolidated Statements of Operations For the three month periods Ended November 30, 2001 and November 30, 2000............................................4 Consolidated Statements of Cash Flows For the three month periods Ended November 30, 2001 and November 30, 2000............................................5 Notes to Financial Statements..................................6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations..................7 PART II Item 1 - Legal Proceedings...............................................8 Item 6 - Exhibits and Reports on Form 8-K................................8 ---------- The financial statements are unaudited. However, the management of the issuer believes that all necessary adjustments (which include only normal recurring adjustments) have been reflected to present fairly the financial position of registrant at November 30, 2001 and the results of its operations and changes in its financial position for the three month periods ended November 30, 2001 and November 30, 2000. 2 Nantucket Industries, Inc. and Subsidiaries (Debtor-in-Possession) CONSOLIDATED BALANCE SHEETS (unaudited)
November 30, February 28, 2001 2001 ---------------------------- (1) Assets CURRENT ASSETS Cash $ 1,452 $ 1,452 Accounts receivable (Notes 2 and 8) Inventories (Notes 6 and 8) Other current assets 20,331 20,331 ---------------------------- Total current assets 21,783 21,783 ---------------------------- Property, plant and equipment, net 0 0 Other assets, net 0 0 ---------------------------- $ 21,783 $ 21,783 ============================ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Convertible subordinated debentures (Note 4) $ 826,845 $ 826,845 Current portion of capital lease obligations (Note 8) 93,070 93,070 Accounts payable 244,764 244,764 Accrued salaries and employee benefits 11,031 11,031 Accrued unusual charge (Note 5) 77,083 77,083 Accrued expenses and other liabilities 129,515 129,515 Accrued royalties 319,048 319,048 ---------------------------- Total current liabilities 1,701,356 1,701,356 CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 0 0 1,701,356 1,701,356 ---------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.10 par value; 500,000 shares authorized, of which 500 500 5,000 shares have been designated as non-voting with liquidating preference of $200 per share and are issued and outstanding Common stock, $.10 par value; authorized 20,000,000 324,185 324,185 shares; issued 3,241,848 Additional paid-in capital 12,539,503 12,539,503 Deferred issuance cost (61,069) (61,069) Accumulated deficit (14,462,755) (14,462,755) ---------------------------- (1,659,636) (1,659,636) Less 3,052 shares of common stock held in treasury, at cost 19,937 19,937 ---------------------------- (1,679,573) (1,679,573) ---------------------------- $ 21,783 $ 21,783 ============================
(1) Derived from audited financial statements. The accompanying notes are an integral part of these statements. 3 Nantucket Industries, Inc. and Subsidiaries (Debtor-in-Possession) CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) November 30, November 30, 2001 2000 --------------------------- Net sales $0 $0 Cost of sales 0 0 --------------------------- Gross profit 0 0 --------------------------- Selling, general and administrative expenses 0 0 --------------------------- Operating (loss) profit 0 0 --------------------------- Other income 0 0 Interest expense 0 0 --------------------------- Net income (loss) 0 0 =========================== Net income (loss) per share - basic and diluted (Note 3) 0 0 =========================== 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 (Debtor-in-Possession) Consolidated Statements of Cash Flows (unaudited) Thirteen Weeks Ended ---------------------------- November 30, November 30, 2001 2000 ---------------------------- Cash flows from operating activities: Net (loss) earnings $0 $0 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 0 0 Provision for doubtful accounts 0 0 Gain on sale of fixed assets 0 0 Provision for obsolete and slow-moving inventory 0 0 (Increase) decrease in assets Accounts receivable 0 0 Inventories 0 0 Other current assets 0 0 Increase (decrease) in liabilities Accounts payable 0 0 Accrued expenses and other liabilities 0 0 Accrued unusual charge 0 0 ---------------------------- Net cash (used in) provided by operating activities 0 0 ---------------------------- Cash flows from investing activities (Additions) removals to property, plant and equipment 0 0 Proceeds from sale of fixed assets 0 0 Decrease in other assets 0 0 ---------------------------- Net cash used in investing activities 0 0 ---------------------------- Cash flows from financing activities Repayments under line of credit agreement, net 0 0 Payments of capital lease obligations 0 0 Repayments of long-term debt 0 0 ---------------------------- Net cash used in financing activities 0 0 ---------------------------- NET (DECREASE) INCREASE IN CASH 0 0 Cash at beginning of period 0 0 ---------------------------- Cash at end of period $0 $0 ============================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period: Interest $0 $0 ============================ Income taxes $0 $0 ============================ The accompanying notes are an integral part of these statements. 5 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THIRTEEN WEEKS ENDED August 31, 2001 AND August 31, 2000 (unaudited) The following notes to the consolidated financial statements should be read in light of the following: As a result of the following, all information which appears in the financial statements included in this report, is purely historical and will have no impact on future operations and results, if any. For an explanation of the company's historical accounting policies and data, reference is made to the Notes to the Financial Statements included in the Company's annual report on Form 10-K for the fiscal year ended February 28, 2001. The Company experienced significant losses from operations in recent years which resulted in severe cash flow deficiencies. As a result of such losses and the Company's inability to raise financing to continue operations, it became insolvent and, finally, it terminated all business operations in October 1999. On March 3, 2000, the Company filed a Voluntary Petition under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. The goal of the projected reorganization will be for the Company to be merged with, or to acquire the assets or the capital stock of, existing businesses, or to effect similar business combinations. The Company's subsidiaries will be dissolved. No assurance can be given that this goal will be achieved. Management will have sole discretion to determine which businesses, if any, may be merged or acquired, as well as the terms of any merger or acquisition. The Company's second amended Plan of Reorganization, dated July 5, 2001 and the Disclosure Statement thereto, was filed by Management on July 6, 2001 with the Bankruptcy Court. This Plan proposes that the Company acquire, in a "reverse acquisition", Accutone Inc. a Delaware Corporation ("Accutone") controlled by John H. Treglia, the Company's current president. In a "reverse acquisition", the shareholders of the company which is acquired (in this case, Accutone) will end up owning the preponderance of the issued and outstanding capital stock of the company which was the acquirer (in this case, Nantucket Industries, Inc.). before it can be put into effect, the proposed Plan of Reorganization will have to be approved by the Company's creditors and interest holders, confirmed by the Bankruptcy Court. An order approving the Disclosure Statement has been presented to the Court for Settlement on October 17, 2001 and a hearing to confirm the Plan is scheduled for December 10, 2001. Management is completely unable to predict or to even venture an opinion as to whether all such required approvals and confirmation will be forthcoming. As a result, no prediction can be made with respect to whether the reverse acquisition of Accutone by the Company will ever take place. If it should occur, such acquisition would not be considered to be an arm's length transaction. While any transaction between the Company and any of its affiliates could present management with a conflict of interest, it is the intention of management that is such transaction should occur, the terms thereof will be no less beneficial to the Company than if such transaction had been effected on an arms length basis. If a Plan of Reorganization is not confirmed by the Bankruptcy Court, or is confirmed, but management is not able to successfully complete a merger or acquisition, the Company will cease to exist. 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations The Company experienced significant losses from operations in recent years which resulted in severe cash flow deficiencies. As a result of such losses and the Company's inability to raise financial to continue operations, it became insolvent and, finally, it terminated all business operations in October 1999. On March 3, 2000, the Company filed a Voluntary Petition under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. As a result of the foregoing, during the quarters ended November 30, 2001 and November 30, 2000, the company made no sales, realized no revenues, and incurred no operational expenses. For discussions in more detail respecting the Company's results of operations during the three years leading up to the termination of operations, reference is made to Item 7. "Management's Discussion and analysis of Financial Condition and Results of Operations" which appeared in the Company's annual reports on Forms 10-K for the fiscal years ended February 28, 2001 and 2000. Liquidity and Capital Resources During the several years leading up to the termination of operations, the company had funded its operating losses by refinancing its debt and increasing its capital through the sale of debt and equity securities. As at August 31, 2001, the company's assets and liabilities were unchanged from the February 28, 2001 year end, with total assets of $21,783 and total liabilities of $1,701,356. For discussions in more detail respecting the Company's liquidity and capital resources during the three years leading up to the termination of operations, reference is made to Item 7. "Management's Discussion and analysis of Financial Condition and Results of Operations" which appeared in the Company's annual reports on forms 10-K for the fiscal years ended February 28, 2001 and 2000. 7 1 PART II OTHER INFORMATION Item 1 - Legal Proceedings On March 3, 2000, Nantucket Industries, Inc. (the "Company") filed a Voluntary petition under chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. (Case Name: Nantucket Industries, Inc., Case Number: 00-B10867). At a hearing held on December 10, 2001 before United States Bankruptcy Judge, Hon. Richard A. Bohanan, in the Southern District of New York, an order was signed confirming the plan of reorganization, which order became effective December 20, 2001. The signed order calls for the following means of execution of the plan: 1. The assets of Accutone, Inc. shall be acquired by the reorganized (new) Nantucket Industries, Inc. These shall consist of its facilities, contracts, service agreements, accounts receivable, patent rights, customer lists, etc. 2. All currently issued and outstanding shares in (old) Nantucket Industries, Inc. of all classes and all warrants, options and subscriptions to (old) Nantucket Industries, Inc. equity interests shall be deemed cancelled and rendered null and void. 3. The reorganized Nantucket Industries, Inc. shall issue approximately 6 million Shares of common stock out of the total number of shares authorized by the amended charter as follows: A. Approximately 714,840 shares will be issued to the holders of Allowed Claims and Equity Interests in (old) Nantucket Industries, Inc. The basis of this distribution as stated in the plan of reorganization as confirmed by the Federal Bankruptcy Court to be as follows: 1) Holders of Allowed General Unsecured claims shall receive in full settlement and satisfaction of their respective claims (1) one share per $5.00 of General Unsecured Claim. 2) Holders of issued and outstanding shares of preferred stock in (old) Nantucket Industries, Inc. shall receive, in full settlement of their liquidation preference and all other rights appurtenant to such shares one (1) share per $20.00 of liquidation preference currently held, and the currently outstanding shares of preferred stock shall be cancelled of record. 3) Holders of all issued and outstanding shares of common stock in (old) Nantucket Industries, Inc. shall receive in full settlement and satisfaction of their respective equity interests, one (1) share per ten (10) shares of currently issued stock presently held, and the current outstanding common shares in (old) Nantucket Industries, Inc. shall be canceled of record. B. The balance of approximately 5,285,160 shares shall be issued to the current equity interest holders of Accutone, Inc. in consideration of, and exchange for, that entity. C. The currently issued shares of stock in the subsidiaries, all of which are held by Nantucket Industries, Inc. shall be deemed cancelled, null and void. 8 The company anticipates the implementation of the confirmed plan of reorganization, including changing the name of Nantucket Industries, Inc. to Accutone Hearing Care Corp. as expeditiously as possible prior to January 31, 2002. Item 6 - Exhibits and Reports on Form 8-K Exhibits 1. Notice of Entry and Notice of Deadline for Filing Administrative Claims 2. Order Confirming Plan of Reorganization signed by Hon. Richard A. Bohanan. 3. Order Approving Disclosure Statement to Debtor's Second Amended Plan of Reorganization and Fixing Time for Filing Acceptances or Rejections of Plan Combined with Notice. 4. Second Amended Joint Plan of Reorganization. 5. Disclosure Statement to the Second Amended Plan of Reorganization. Form 8-K None 9 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NANTUCKET INDUSTRIES, INC. Dated January 7, 2002 By /s/ John H. Treglia ------------------------------------- John H. Treglia President, Secretary and CFO Dated January 7, 2002 By /s/ Marsha C. Ellis ------------------------------------- Marsha C. Ellis Treasurer and Chief Accounting Officer 9 EX-99.1 3 file002.txt NOTICE OF ENTRY AND NOTICE OF DEADLINE Exhibit 99.1 JOSEPH L. FOX, ESQ. (JF 2313) KOERNER SILBERBERG & WEINER ATTORNEYS FOR THE DEBTOR 112 Madison Avenue New York, New York 10016 (212)689-4400 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - ----------------------------------- In re: In Proceeding for Reorganization under Chapter 11 of the Bankruptcy Code NANTUCKET INDUSTRIES, INC., CASE NO. 00 B 10867 (AJG) Debtor. Tax ID No. 58-0962699 - ----------------------------------- NOTICE OF ENTRY AND NOTICE OF DEADLINE FOR FILING ADMINISTRATION CLAIMS S I R S: PLEASE TAKE NOTICE that the within is a true copy of the Order Confirming the Plan of Reorganization in this bankruptcy case which was duly entered in the office of the Clerk of the United States Bankruptcy Court, Southern District of New York on December 10, 2001. PLEASE TAKE FURTHER NOTICE that the deadline for filing administrative claims is February 8, 2002. Dated: New York, New York Koerner Silberberg & Weiner December 11, 2001 Attorneys for Nantucket Industries, Inc., By: s/ Joseph L. Fox ----------------------------------- Joseph L. Fox, Esq. (JF2313) 112 Madison Avenue New York, New York 10016 (212) 689-4400 To: All creditors, shareholder and other parties in interest 1 EX-99.2 4 file003.txt ORDER CONFIRMING PLAN OF REORGANIZATION Exhibit 99.2 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - ----------------------------------- In Proceeding for Reorganization under In re: Chapter 11 of the Bankruptcy Code NANTUCKET INDUSTRIES, INC., CASE NO. 00 B 10867 (AJG) Debtor. Tax ID No. 58-0962699 - ----------------------------------- ORDER CONFIRMING PLAN OF REORGANIZATION A hearing (the "Hearing") having been held before the undersigned United States Bankruptcy Judge on December 10, 2001, pursuant to an order of this Court (the "Confirmation Hearing Order") dated October 24, 2001; The Second Amended Plan of Reorganization dated July 5, 2001 under Chapter 11 of the Bankruptcy Code (the "Plan"), filed by Nantucket Industries, Inc., the debtor and debtor-in-possession (the "Debtor") and Accutone, Inc. having heretofore been filed in the form annexed hereto as Exhibit "A"; this Court, in the Confirmation Hearing Order, having approved the Debtor's Disclosure Statement Dated July 5, 2001 (the "Disclosure Statement"); a notice (the "Notice") of the Hearing, in a form approved by this Court, together with a copy of the Plan and the Disclosure Statement having been mailed to all creditors, interest holders and other parties in interest as required by the Confirmation Hearing Order and in accordance with Bankruptcy Code ss.1125; proof of service of such mailing having been filed with the Court; Debtor's attorneys having filed a Certification of Acceptances and Rejections of Plan in accordance with Local Rule 3018-1; the Proponents of the Plan having moved the Court to confirm the plan; no objections having been filed to the confirmation of the Plan; Based on the evidence adduced during the Hearing, it is hereby FOUND AND DETERMINED AS TO THE DEBTOR, that the requirements for confirmation set forth in Bankruptcy Code ss.1129(a) have been satisfied; NOW THEREFORE, IT IS ORDERED, that 1. The Plan be and it hereby is confirmed. 2. Any unpaid fees under 28 U.S.C. ss.1930 shall be paid within twenty (20) days of the date of this Order and all future fees shall be paid by the Debtor prior to the entry of a final decree. 3. The provisions of the Plan and this Order shall be, and they hereby are, binding upon the Debtor and any holder of a Claim and/or Interest, whether or not the Claim or Interest is impaired under the Plan and whether or not the holder of such Claim or Interest has accepted the Plan. 4. Title to all assets of the Debtor as debtor in possession shall immediately vest in reorganized Debtor, the post-confirmation entity. Such vesting shall be free and clear of all liens and encumbrances except for any lien or security interest granted or determined to exist under this Order or pursuant to an order entered by this Court during the pendency of the Chapter 11 case. 5. The Debtor is discharged from any debt that arose before the date of this order, and any debt of a kind specified in Bankruptcy Code 502(g), (h), or (i), whether or not-(i) a proof of the claim based on such debt is filed or deemed filed under Bankruptcy Code ss.501; (ii)such claim is allowed under Bankruptcy Code ss.502; or (iii) the holder of such claim has accepted the Plan. 6. Executory Contracts- The Debtor hereby rejects all executory contracts not heretofore assumed. 7. No entity may commence or continue any action or proceeding, or perform any act, to interfere with the implementation and consummation of the Plan and the payments to be made thereunder. 8. Objections to Claims- In accordance with Article 6.2 of the Plan, all objections to the allowance of Claims shall be served and filed no later that ninety (90) days following the Effective Date. 9. Administration Claims and Notice of Claims Bar Date Within fifteen days after the entry of this order pursuant to Rules 2002(f)(7) and 3020(c) of the Federal Rules of Bankruptcy Procedure, the Debtor shall mail to all creditors, interestholders and other parties in interest notice of entry of this Order, together with notice of the last day for filing applications for allowances of compensation and/or reimbursement of expenses or other administration claims, which last day shall be 60 days from the date of this Order. 10. Retention of Jurisdiction Article IX of the Plan is hereby affirmed in all respects and shall be deemed to be and it hereby is incorporated herein by reference as if set forth in its entirety in this Order. 11. In the event there is an inconsistency between the provisions of the Plan and this Order, the provisions of this Order shall control. Dated: New York, New York December 10, 2001 s/ Richard L. Bohanon --------------------- HON. RICHARD L. BOHANON, U.S.B.J. 2 EX-99.3 5 file004.txt ORDER APPROVING DISCLOSURE STATEMENT Exhibit 99.3 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - --------------------------------------- In re: In Proceeding for Reorganization under Chapter 11 of the Bankruptcy Code NANTUCKET INDUSTRIES, INC., CASE NO. 00 B 10867 (AJG) Debtor. Tax ID No. 58-0962699 - ----------------------------------- ORDER APPROVING DISCLOSURE STATEMENT TO DEBTOR'S SECOND AMENDED PLAN OF REORGANIZATION AND FIXING TIME FOR FILING ACCEPTANCES OR REJECTIONS OF PLAN COMBINED WITH NOTICE The Disclosure Statement dated July 5, 2001 (the "Disclosure Statement"), heretofore filed and submitted by the debtor and debtor in possession herein (the "Debtor"), referring to a Second Amended Plan of Reorganization dated July 5, 2001 (the "Plan"), and It having been determined after reviewing the Disclosure Statement that it contains adequate information as that term is defined in 11 U.S.C. ss.1125(a)(l) and hearing no opposition from the Office of the United States Trustee, it is ORDERED, and notice given, that: A. The Disclosure Statement be and it hereby is approved. B. The Debtor shall transmit to creditors and other parties in interest by mail as provided in Bankruptcy Rule 3017(d) the Plan, the Disclosure Statement (excluding Exhibit F-Disclosure Document of Accutone, Inc.), a ballot conforming to Official Form 14, and a copy of this Order no later seven days following the entry of this Order. C. December 3, 2001 is fixed as the last day for filing written acceptances or rejections of the Plan which shall be filed with Koerner, Silberberg & Weiner, LLP, attorneys for the Debtor, 112 Madison Avenue, Third Floor, New York, New York, 10016. D. December 3, 2001 is fixed as the last day for filing and serving pursuant to Bankruptcy Rule 3020(b)(l) written objections to confirmation of the Plan. Objections, if any, shall be in writing and shall be served upon Koerner, Silberberg & Weiner LLP, attorneys for the Debtor, at the address indicated above, the Office of the United States Trustee, attention Tracy Hope Davis, Esq., 33 Whitehall Street, 21st Floor, New York, New York 10004, and the Clerk of the United States Bankruptcy Court, Room 534, Alexander Hamilton Custom House, 1 Bowling Green, New York, N.Y. 10004, with a Chambers Copy to the attention of the Hon. Richard Bohanon, United States Bankruptcy Judge, in room 523 of the courthouse. E. The hearing on confirmation of the Plan is fixed for December 10, 2001, at 9:45 a.m. in room 523 of the Alexander Hamilton Custom House, 1 Bowling Green, New York, New York 10004. Dated: New York, N.Y. October 24, 2001 s/Richard L. Bohanon ------------------------------ HON. RICHARD BOHANON UNITED STATES BANKRUPTCY JUDGE 2 EX-99.4 6 file005.txt SECOND AMENDED JOINT PLAN OF REORGANIZAION Exhibit 99.4 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - ---------------------------------------X In Proceeding for Reorganization under In re: Chapter 11 of the Bankruptcy Code NANTUCKET INDUSTRIES, INC., CASE NO. 00 B 10867 (JHG) Debtor. - ---------------------------------------X SECOND AMENDED JOINT PLAN OF REORGANIZATION Nantucket Industries, Inc., the Debtor herein, (the "Debtor") and Accutone, Inc. jointly propose the following Plan of Reorganization (the "Plan") pursuant to Section 1121 of the Bankruptcy Code: ARTICLE I DEFINITIONS For the purposes of this Plan, the following terms shall have the respective meanings hereinafter set forth: 1.1 ACCUTONE refers to Accutone, Inc., a Pennsylvania corporation, which will be acquired by the Debtor upon the confirmation of the Plan. 1.2 ALLOWED AMOUNT means (a) the amount of a Claim timely filed with the Clerk of the Bankruptcy Court or that is listed by the Debtor in its schedules filed with the Court (as they may be amended or supplemented from time to time in accordance with Bankruptcy Rule 1009) as undisputed, non-contingent or liquidated, as to which Claim (i) no objection to the allowance thereof has been interposed within any period of time fixed by the Bankruptcy Code, the Bankruptcy Rules or orders of the Court, or (ii) an objection has been interposed, which objection has been determined by a Final Order to the extent such objection is determined in favor of a claimant; or (c) the amount of an Administration Claim (i) as to which Claim no objection has been interposed within any period of time fixed by the Bankruptcy Code, the Bankruptcy Rules or orders of the Court, or (ii) as to which Claim an objection has been interposed, which objection has been determined by a Final Order to the extent such objection is determined in favor of the claimant, or (iii) with respect to fees and expenses of Professional Persons, the amount of such fees and expenses as allowed by a Final Order. 1.3 ALLOWED CLAIM shall mean a Claim in an amount to the extent it has become an Allowed Amount. 1.4 BANKRUPTCY CODE means the United States Bankruptcy Code, Title 11 of the United States Code. 1.5 CASH shall mean cash, cash equivalents (including certified checks, wire transfers and money orders) and other assignable and readily marketable direct obligations of the United States of America and certificates of deposit issued by banks. 1.6 CHAPTER 11 CASE means the instant case commenced by a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. ss.1101, et seq., on March 3, 2000 and pending in the United States Bankruptcy Court for the Southern District of New York. 1.7 CLAIM has the meaning set forth in Section 101(5) of the Bankruptcy Code. 1.8 CLASS means a category of holders of Claims which are substantially similar to other Claims in such Class. 1.9 CONFIRMATION DATE means the date of entry of an order of the Court confirming the Plan in accordance with the Bankruptcy Code. 1.10 COURT means the United States Bankruptcy Court for the Southern District of New York or any other court having jurisdiction over the instant Chapter 11 Case. 1.11 DISTRIBUTION DATE shall mean a date upon which the distribution provided for under the terms of the Plan shall be made, which shall be as soon as practicable following the Effective Date. 1.12 EFFECTIVE DATE means the date upon which the order confirming the Plan becomes a Final Order. 1.13 FINAL ORDER means an order of the Court which is no longer appealable pursuant to the applicable rules of procedure. 1.14 GENERAL UNSECURED CLAIM means a Claim that is unsecured by property of the Debtor and that is not entitled to priority in distribution pursuant to Sections 503 or 507 of the Bankruptcy Code. 1.15 PERSON means an individual, corporation, partnership, association, a joint stock company, a joint venture, an estate, a trust, an unincorporated organization or a governmental entity or any political subdivision thereof or any other entity. 1.16 PLAN means this Plan of Reorganization, including such amendments and corrections as are permitted by the Court pursuant to Section 1127 of the Bankruptcy Code, or otherwise. 1.17 PROFESSIONAL PERSONS means persons retained or to be compensated pursuant to Sections 327, 328, 330, and 331 and 503 (b) of the Bankruptcy Code. 1.18 PRO RATA with respect to an allocation among several Persons of an aggregate amount, denotes an allocation to each such Person of a share of such aggregate amount equal to the product of (a) such aggregate amount, multiplied by (b) a fraction of which the numerator is the amount of such person's respective Claim, and the denominator is the total amount of the Claims of all Persons to whom Pro Rata shares are to be allocated. 1.19 REQUESTS FOR PAYMENT means a debt asserted against the Debtor for goods, services or other consideration rendered after the commencement of the Case and prior to the Effective Date representing the actual and necessary costs and expenses of administration of the Debtor's estate referenced in Section 503 of the Bankruptcy Code. 1.20 SECURED CLAIM or Allowed Secured Claim means a Claim to the extent that it is secured by an interest in property of the estate of the Debtor by means of the voluntary or involuntary conveyance of an interest in property of the estate such as a mortgage, judgment lien or otherwise. 1.21 SHARES as used in this plan shall mean shares of common stock to be issued to creditors and current shareholders by the reorganized pursuant to 11 U.S.C. ss.1145 "free harbor" provision and shall be freely tradeable on the public securities markets to the extent allowed by law. 1.22 SUBSIDIARIES refers to the subsidiaries of the Debtor to wit, Nantucket Mills, Inc., a Delaware corporation, Nantucket Hosiery, Inc., a Delaware corporation, Nantucket Hosiery Mills, Inc., a North Carolina corporation, and Nantucket Management, Inc., a New York, corporation. 2 ARTICLE II DESIGNATION OF CLASSES OF CLAIMS For the purposes of the Plan, Claims are classified as follows: 2.1 Class 1 shall consist of the Allowed Claims of governmental units the Claims of which are entitled to priority of distribution under Section 507(a)(8) of the Bankruptcy Code. 2.2 Class 2 shall consist of NAN Investors, LP, to the extent it is a holder of an Allowed Secured claim. 2.3 Class 3 shall consist of the holders of Allowed General Unsecured Claims. 2.4 Class 4 shall consist of the holders of issued and outstanding shares of preferred stock in the Debtor. 2.5 Class 5 shall consist of the holders of issued and outstanding shares of common stock in the Debtor. ARTICLE III PROVISIONS FOR PAYMENT OF ADMINISTRATIVE DEBT 3.1 Each holder of an Allowed Claim for an Administrative Expense including, without limitation, trustee's attorneys', accountants' and U.S. Trustee's fees to the extent awarded by the Bankruptcy Court, shall be paid on the Effective Date, or upon entry of an order allowing such claim, whichever shall be later, or as soon as practicable thereafter, in accordance with such terms as may be agreed upon by the Debtor and the holder of an Administrative Expense Claim. 3.2 All trade and service debts and obligations, if any, incurred in the normal course of business by the Debtor during the reorganization Case shall be paid when due in the ordinary course of business. 3.3 Notwithstanding the foregoing, any agreement for the payment of Administrative Debt will provide for the payment in full of all outstanding fees of the United States Trustee pursuant to 28 U.S.C. ss.1930(a)(6), which shall be paid on the Effective Date of the Plan and the Debtor or any successor thereto by merger, consolidation or otherwise, on or after the Effective Date, shall be liable for same, and the reorganized Debtor shall pay such fees until the entry of a final decree in this Case, or until the Case is converted to another chapter of the Bankruptcy Code or is dismissed. ARTICLE IV TREATMENT OF PRIORITY TAX DEBT 4.1 Holders of Class 1 Allowed Claims of governmental units shall be paid in full settlement and satisfaction of such claims by payment, on account of such claims, of deferred cash payments over a period of six years after the earlier of the date of assessment of such claim or the Effective Date of the Plan, together with interest at the rate provided for in the United States Tax Code as of the date of such payments. ARTICLE V TREATMENT OF SECURED DEBT 5.1 Holder of the Class 2 Secured Claim shall be permitted to liquidate the assets of the Debtor serving as collateral for its Allowed Claim in a commercially reasonable manner and to reduce its Claim thereby. The balance of its Claim remaining after application of the proceeds of the liquidation of the collateral, shall be treated as a Class 3 General Unsecured Claim. 3 ARTICLE VI TREATMENT OF IMPAIRED CLASSES OF CLAIMS 6.1 Holders of Class 3 Allowed General Unsecured Claims shall receive, in full settlement and satisfaction of their respective claims, one (1) Shares per $5.00 of Allowed General Unsecured Claim. 6.2 Holders of Class 4 issued and outstanding shares of preferred stock in the Debtor shall receive, in full settlement and satisfaction of their liquidation preference and all other rights appurtenant to such shares, one (1) Share per $20.00 of liquidation preference currently held, and the currently outstanding shares of preferred stock shall be canceled of record. 6.3 Holders of Class 5 issued and outstanding shares of common stock in the Debtor shall receive, in full settlement and satisfaction of their respective equity interests, one (1) Share per ten (10) shares of currently issued stock presently held, and the current outstanding common shares in the Debtor shall be canceled of record. ARTICLE VII MEANS OF EXECUTION OF THE PLAN 7.1 The assets of Accutone, Inc. shall be acquired by the Debtor consisting of its facilities, contracts, service agreements, accounts receivable, patent rights, customer lists, etc. 7.2 All currently issued and outstanding shares of stock in the Debtor of all classes and all warrants, options, and subscriptions pertaining to the Debtor's equity interests shall be deemed canceled and rendered null and void. 7.3 The reorganized Debtor shall issue 6 million Shares of common stock, out of the total number of shares authorized by the amended charter, as follows: a. approximately 714,840 Shares shall be issued to holders of Allowed Claims and Equity Interests in the Debtor in accordance with the terms of Article IV above; b. the balance of approximately 5,285,160 Shares shall be issued to the current equity interest holders of Accutone, Inc. in consideration of, and in exchange for, that entity. 7.4 Intentionally left blank. 7.5 The currently issued shares of stock in the Subsidiaries, all of which are held by the Debtor, shall be deemed canceled, null and void. 7.6 Intentionally left blank. 7.7 Pursuant to the provisions of Section 1145 of the Bankruptcy Code, the issuance, sale or resale of stock under this Plan is exempt from the securities laws of the United States and any state or local law requiring the registration for offer or sale of a security or registration or licensing of an issuer of, underwriter of, or broker or dealer in a security or issuance, distribution or transfer of such security. ARTICLE VIII MISCELLANEOUS PROVISIONS 8.1 Modification of Plan After confirmation, subject to the approval of the Court, the Plan may be amended to remedy any defect or omission, or to reconcile any inconsistencies, in such manner as may be necessary to carry out the purposes of this Plan and of the Bankruptcy Code, so long as any such amendment does not materially or adversely affect the interests of creditors. 8.2 Objections to Claims All objections to the allowance of Claims or interests shall be served and filed no later than 90 days following the Effective Date. Notwithstanding any other 4 provisions of this Plan, disputed claims shall be paid in accordance with the provisions of the Plan upon their allowance by the Court. A reserve shall be maintained until final disposition by the Court for any claim to which an objection has been interposed. 8.3 Untendered Shares Any shares in the Debtor that shall remain untendered for cancellation and replacement by Shares and Subsidiary Shares shall be deemed canceled, null and void and shall have no value other than for replacement and exchange in accordance with the terms of this Plan by a registered holder thereof through the authorized registration agent of the reorganized Debtor. 8.4 No assumption of liability Accutone is not a principal of the Debtor and has no present interest in the Debtor and shall have no liability for any acts, omissions, Claims, debts or other obligations of the Debtor or any claims arising out of its agreement to be acquired by the Debtor until the Effective Date of the Plan and thereafter, only in a manner consistent with this Plan. ARTICLE IX REJECTION OF ALL EXECUTORY CONTRACTS 9.1 All executory contracts and leases shall be deemed rejected by the Debtor pursuant to ss.1123(b)(2) of the Bankruptcy Code, unless specifically assumed by order of the Court. ARTICLE X RETENTION OF JURISDICTION 10.1 The court shall retain jurisdiction of this Case pursuant to Sections 105(a) and 1127 of the Bankruptcy Code for the purposes set forth in said Section 1127 and for the following purposes: a) to determine any and all objections to the allowance of Claims and interests; b) to determine any and all applications for allowance of compensation by Professional Persons; c) to determine any and all applications pending on the Confirmation Date for the rejection or the assumption and assignment of executory contracts and the allowance of any Claim resulting therefrom; d) to determine any and all controversies and disputes arising under, or in connection with the Plan, and such other matters as may be provided for in the order of confirmation; e) to determine any and all applications, adversary proceedings and litigated matters pending on the Confirmation Date; f) to correct any defect, cure any omission or reconcile an inconsistency in the Plan as may be necessary to carry out the purpose and intent of the Plan; g) to determine such other matters and for such other purposes as may be provided for in the order of confirmation. Dated: New York, N.Y. July 5, 2001 NANTUCKET INDUSTRIES, INC. KOERNER SILBERBERG & WEINER, LLP The Debtor and Debtor in Possession Attorney for Debtor and By: s/ John H. Treglia Debtor in Possession ----------------------------------- s/ Joseph L. Fox JOHN H. TREGLIA, President - -------------------------------- ACCUTONE, INC. JOSEPH L. FOX, ESQ. (JF2313) By: s/ John H. Treglia 112 Madison Avenue ----------------------------------- New York, New York 10016 JOHN H. TREGLIA, President (212) 689-4400 5 EX-99.5 7 file006.txt DISCLOSURE STATEMENT TO THE SECOND AMENDED PLAN Exhibit 99.5 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - --------------------------------------- In Proceeding for Reorganization under In re: Chapter 11 of the Bankruptcy Code NANTUCKET INDUSTRIES, INC., CASE NO. 00 B 10867 (AJG) Debtor. Tax ID No. 58-0962699 - --------------------------------------- DISCLOSURE STATEMENT TO THE SECOND AMENDED PLAN OF REORGANIZATION ARTICLE I PRELIMINARY STATEMENT NANTUCKET INDUSTRIES, INC. (the "Debtor") and ACCUTONE, INC. submit this disclosure statement (the "Disclosure Statement") pursuant to Section 1125 of the Bankruptcy Code (the "Code"), to all known holders of claims against and interests in the Debtor in order to solicit acceptances or rejections to their Second Amended Joint Plan of Reorganization dated July 5, 2001 (the "Plan"). The Plan, which is described in greater detail below, provides for the treatment of secured, priority and general unsecured debt, as well as holders of equity interests by means of a distribution on account of the allowed amount of their respective claims and interests of new shares of stock to be issued by the reorganized entity that will result from the acquisition of Accutone, Inc. by the Debtor. The purpose of this Disclosure Statement is to provide the creditors of and equity interest holders in the Debtor with adequate information to enable them to make an informed judgment whether to vote to accept or reject the plan of reorganization that is put before them. The Plan is the document that contains the exclusive and final statement of the rights of the creditors and interest holders, including what they will receive, how they are to receive it and what will become of the Debtor if the Plan is approved by the Bankruptcy Court. It is strongly recommended that the proposed Plan be read in its entirety, as the statements in this Disclosure Statement are merely explanations of the Plan. If the Plan is confirmed by the Bankruptcy Court, it will become binding on the Debtor, all creditors and interested parties. Creditors and interest holders whose claims and interests are impaired have the right to vote to accept or reject the Plan. Generally speaking, a claim is impaired if the Plan alters the rights to which the holder of the claim would otherwise be entitled. See Article 7-B below for a definition of "impairment." Although the Plan may still be confirmed if the creditors comprising a class do not vote to accept it, the more common way to obtain confirmation of the Plan is by its acceptance by each voting class of creditors and interest holders. A class of creditors accepts the Plan when creditors holding at least two thirds in the dollar amount of claims in such class and more than one-half of the number of creditors in such class who actually cast their ballots have voted to accept the Plan. A class of interest holders accepts the Plan when holders of at least two thirds of the amount of the allowed interests of such class of interests votes to accept the plan. Therefore, the vote of the creditors and shareholders is of great importance. 1 This Disclosure Statement has been approved by the Bankruptcy Court 2 as containing information of a type sufficient to enable creditors and interest holders to make an informed decision concerning their vote. No other representations concerning the Debtor, its operations, or the value of its property has been authorized by the Court or the Debtor and none should be relied upon by you in arriving at your decision. Approval of this Disclosure Statement is not to be construed as approval of the Plan by the Court, which will be considered at the hearing on confirmation. In approving a disclosure statement, the Bankruptcy Court does not make any independent determination of the accuracy of the financial information contained therein. That information, as is the case here, is usually based upon the Debtor's books and records and the filed claims of creditors. Along with this Disclosure Statement, the following items are enclosed: A. The Plan, B. The notice and order fixing the time for the filing of acceptances or rejections of the Plan and a date for the hearing on the Plan (the "Confirmation Hearing"), and C. The ballot for accepting or rejecting the Plan (the "Ballot"). THE STATEMENTS AND THE FINANCIAL INFORMATION SET FORTH IN THIS DISCLOSURE STATEMENT HAVE BEEN MADE AS OF THE DATE HEREOF UNLESS OTHERWISE SPECIFIED. FURTHERMORE, THE FINANCIAL INFORMATION CONTAINED HEREIN HAS BEEN THE SUBJECT OF A CERTIFIED AUDIT WHERE INDICATED AND THE AUDITED STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") AND GENERALLY ACCEPTED AUDITING STANDARDS ("GAAS"). THIS DISCLOSURE STATEMENT WAS PREPARED IN ACCORDANCE WITH SECTION 1125 OF THE BANKRUPTCY CODE AND NOT IN ACCORDANCE WITH FEDERAL OR STATE SECURITIES LAWS OR OTHERWISE APPLICABLE NON-BANKRUPTCY LAW. PERSONS OR ENTITIES TRADING IN OR OTHERWISE PURCHASING, SELLING OR TRANSFERRING SECURITIES OF THE DEBTOR SHOULD EVALUATE THE PLAN IN LIGHT OF THE PURPOSE FOR WHICH IT WAS PREPARED. AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER ACTIONS OR THREATENED ACTIONS, THIS DISCLOSURE STATEMENT SHALL NOT BE CONSTRUED AS AN ADMISSION OR STIPULATION, BUT RATHER AS A STATEMENT MADE IN SETTLEMENT NEGOTIATIONS. THE CREDITORS AND EQUITY INTEREST HOLDERS ARE ENCOURAGED TO READ THE PLAN OF REORGANIZATION IN FULL. IN THE EVENT OF CONFIRMATION, IT SHALL CONSTITUTE A LEGALLY BINDING AGREEMENT BETWEEN THE HOLDERS OF CLAIMS AND INTERESTS AND THE DEBTORS. VOTING ON THE PLAN The Bankruptcy Court has scheduled a hearing to consider confirmation of the Plan for December 10, 2001, at 9:45 a.m., in Room 523 of the Alexander Hamilton Custom House, 1 Bowling - ---------- 1 See note 1 above 2 Green, New York, N.Y. 10004. Holders of claims and interests that are impaired by the Plan may vote for or against the Plan by completing and mailing the enclosed Ballot no later than December 3, 2001 to the attorney for the Debtor, Koerner Silberberg & Weiner, LLP, Attn: Joseph L. Fox, Esq., 112 Madison Avenue, 3rd Floor, New York, NY 10016. ARTICLE II GENERAL BACKGROUND Nantucket Industries, Inc. is currently a dormant company. 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 to mass merchandisers and national chains throughout the United States. The Debtor experienced significant continuing losses in recent years which resulted in severe cash flow issues that negatively impacted the ability of the Debtor to continue its business as formerly structured. While it did $35,000,000 in gross sales in FYE February 28, 1997, by FYE February 28, 1999, sales had declined to $11,518,000. For the company's last partial year of operation, sales totaled approximately $5,000,000. Annexed hereto as Exhibit A is Audited Financial Statement for the Debtor. The Debtor produced and sold its products primarily under licensed labels including Brittania, Arrow, Guess? and others. Disruption in these relationships caused the loss of substantial portions of the Debtor's business. For example, Levi Strauss & Co., the parent company of Brittania Sportswear Ltd., a licensor, accounted for 49% of the Company's fiscal 1997 sales. Levi created a major disruption when it announced its intention to sell off Brittania. In light of the actions announced by Levi, K-Mart, the largest retailer of the Brittania brand and the Debtor's largest customer, accounting for sales of approximately $11 million in fiscal year 1997, advised the Debtor that it would no longer continue its on-going commitment to the Brittania trademark. In response, the Debtor filed a lawsuit against Levi Strauss & Co. in March 1997 alleging that the licensor breached various obligations under the license agreement, including it's covenant of good faith and fair dealing. The Debtor ultimately settled this litigation in June 1998 and received $725,000 in settlement proceeds. However, a major customer was lost, severely undermining sales. Nantucket also produced, under the GUESS? label, women's innerwear for sale to department and specialty stores. In 1998, the Company discontinued its GUESS? line due to the lack of capital resources needed to properly develop and support that product line, and sought to focus its resources on its core men's fashion underwear business. Sales for this product line in fiscal 1999, 1998, and 1997 aggregated $2.7, $7.0, and $4.7 million respectively. By mid 1999, the Debtor was informed by Target Stores, one of its four major clients, that it was being discontinued as a vendor. Packaging and distribution of the Debtor's product lines was based in its leased facility in Cartersville, Georgia. From November, 1992 to July 1, 1994, the Debtor had a manufacturing facility in Rio Grande, Puerto Rico, and until September 1997 had a manufacturing facility in Cartersville, Georgia. Thereafter and until prior to the cessation of all business activities, all of the Debtor's products were manufactured by offshore production contractors located in Mexico, the Far East and the Caribbean Basin. 3 The Company had 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 in an effort to provide the Company with the ability to continue in existence. Major elements of these action plans included the following: - The Debtor transferred its domestic manufacturing requirements to foreign manufacturing contract facilities. - 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. - The Debtor reduced staff associated with the transfer of manufacturing to offshore contractors. - In May, 1997 the Debtor relocated its executive offices and showrooms to more appropriate, less costly facilities. - In the first quarter of fiscal 1999, the Debtor completed the phase-out of the Guess? product line. In connection with the implementation of these actions, the Debtor 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 write-downs of inventory, $530,000 write-downs 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 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. Financing Arrangements The Debtor 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 bore 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 Debtor was not in compliance with the net worth and working capital covenants and the facility was no longer utilized. The agreement was subsequently terminated by Congress Financial on October 15, 1999 as the line was finally satisfied. Currently the Debtor has no long-term financing facility. 4 Simultaneously with the financing transactions with Congress Financial, on March 22, 1994 the Samberg Group, L.L.C., a limited liability company organized under the laws of Delaware with certain senior managers of the Debtor as members, purchased for a $1,000,000 investment of new capital 5,000 shares of the Debtor's Non-Voting Convertible Preferred Stock having a liquidation preference of $200 per share. The Preferred Stock acquired by the Group was convertible into shares of Common Stock, $0.10 par value per share, of the Debtor at the rate of $5.00 per share, and was redeemable by the Debtor at anytime after March 1999. In May 1998, this conversion right was waived by the Samberg Group and the Debtor conditionally agreed to redeem the Preferred Stock. It has not, to date, been redeemed however. In August, 1996, the Debtor borrowed the sum of $3,500,000 from an entity called NAN Investors, LP, ("NAN") which was formed by non-insider and unaffiliated lenders, and issued two debentures as of that date to memorialize the indebtedness and to reflect its subordination to the credit facility of Congress Financial Corp. In September, 1997 the Debtor entered into an agreement with NAN to release a security interest in the manufacturing facility at 200 Cook St., Cartersville, Georgia, to facilitate its sale, and to extend the cure period with respect to $172,500 interest payment default on the debentures. The Debtor 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. Because of the condition of default, a forbearance agreement was entered into and extended from month to month until May 1998. In May 1998, the Debtor entered into a new agreement with NAN to further extend the cure period with respect to $322,551 in prior interest payment defaults and for the deferral of the interest payment due in August 1998 until December 1998. In addition, the Debtor then agreed to secure the debentures by a security interest on all the assets of the Debtor, subject to Congress Financial's first priority of the revolving credit facility, and to issue five-year warrants convertible to 16,500,000 shares of the Debtor's stock at an exercise price of $ 0.10. The Debtor had its authorized capital increased to the extent necessary to satisfy the conversion rights in full. As of the commencement of this case, the Debtor remained in default for interest payments due since August 1997 on the debentures. There was no forbearance agreement in effect subsequent to December 1998. In October 1999 the Debtor's board of directors recognized that the company could no longer continue its operations and it authorized a surrender to NAN of its assets comprising collateral to the NAN loan. These assets consisted of inventory having a value of $430,000 and outstanding accounts receivable in an amount of approximately a half million dollars. On October 12, 1999, the inventory was sold by NAN to American Basics Company LLC, a third party with no affiliation to the Debtor, its management or to NAN, by means of a negotiated sale. The proceeds of this inventory sale and the accounts receivable were applied by NAN towards its outstanding debt. As of the commencement of the case, there remained due to NAN the approximate amount of $800,000.00, which is, upon information and belief, all unsecured. However, if any assets remain in the Debtor's name, they would be encumbered by the NAN security interest. In October, 1999 the Debtor terminated all activity at its remaining, rented, facility in Georgia except to place its books and records in storage. 5 Accutone Proposal Shortly after the surrender of assets to NAN, the Debtor's board of directors was apprized of a new business opportunity for the Debtor, i.e. to explore the entry into a new lines of business, for example, through the acquisition of Accutone, Inc. Accutone, a Pennsylvania corporation, was organized in 1996 for the purpose of engaging in the business of the manufacture, distribution and sale of hearing aids. In 1998 Accutone acquired 100% of the outstanding stock of Interstate Hearing Aid Service, Inc., a Pennsylvania corporation. Interstate had been in the business of manufacturing and distributing hearing aids for approximately 35 years. A more thorough discussion of Accutone's business is contained in Article 4 under the section entitled "Accutone's Business." Briefly, at present Accutone has six sales and dispensing offices: two in Pennsylvania; two in Yonkers, New York; and two in Mt. Vernon, New York. In addition, Accutone expects to open one in New Rochelle, New York during September, 2001. Accutone has signed a contract to be the sole provider of hearing aids and audiological services for The Wartburg Senior Care Facility, Mt. Vernon, New York which has a population of approximately 1200 senior residents. Accutone now has two dispensing office in Wartburg's Out-Patient Clinic, which currently provides various medical services to approximately 6000 patients who are treated there annually. It also intends to utilize these offices to treat Accutone's own patients from the proximately located Bronx and Southern Westchester areas. Operations at this facility began on April 1, 2001. Since September, 2000 Accutone has become the preferred provider of audiology services for St. Joseph's Medical Center in Yonkers, New York, as well as four nursing homes in Westchester County, New York. As reflected above, Accutone also operates two sales and dispensing facilities in Pennsylvania, one located in Forty Fort, and the other in Marshalls Creek. It is expanding its business base and, as reflected by its acquisition of the audiology practice of Park Avenue Medical Associates, See New Business Prospects, Article 4, Accutone is actively investigating the possibility of combining with or acquiring other small hearing aid dispensing offices in order to broaden its geographic area of coverage. Accutone proposes to contribute all of its assets to the Debtor in exchange for new shares in the reorganized Debtor as more fully set forth in Article 4 below. Accutone's management believes that the corporate structure of the Debtor would greatly contribute to its business plan and proposed the transaction which forms the basis of the Plan. Organization of the Debtor The Debtor is a public company that was originally organized under the laws of the State of Delaware in 1966. It went public in 1969 and today its stock is held by approximately 1,100 holders. There are four (4) subsidiary corporations which are wholly owned by the Debtor. These subsidiaries have been substantially inactive for several years and these subsidiaries will not be reactivated. The subsidiaries are as follows: 1. Nantucket Hosiery Mills, Inc. is a Delaware corporation that was formed in 1970. 2. Nantucket Mills, Inc. is a Delaware corporation which was formed in 1992. 3. Nantucket Hosiery Mills Corp. is a North Carolina corporation which was formed in 1946. 4. Nantucket Management Corp. is a New York corporation that was formed in 1993, but was dissolved and later reincorporated in March, 2000. The Debtor traditionally filed consolidated financial statements that incorporated the financials of all the subsidiaries. 6 As explained in greater detail below, the Plan provides for the cancellation of all outstanding shares of stock in the Debtor and the re-issuance of new shares of stock by the reorganized Debtor. All stock of the Subsidiaries will be canceled. All holders of allowed claims and stock interests in the Debtor are to receive ratable distribution of the new shares of stock in accordance with the formulas set forth below in the section on treatment of claims and interests. In that manner, the creditors and shareholders of the Debtor will be able to participate in the future growth and expansion of the reorganized Debtor. See Article 4 below for greater detail. ARTICLE 3 DESCRIPTION OF THE PLAN The Plan of Reorganization, jointly proposed by the Debtor and Accutone, is predicated upon the acquisition by the Debtor corporation of the Accutone business and its business prospects in exchange for a distribution of new stock to the current equity holders of Accutone. The resulting combined entity will likewise issue new shares of its stock to all parties in interest in a manner that reflects the respective liquidation preferences of the classes of claims and interests. ADMINISTRATIVE DEBT The costs and expenses of the administration of the Debtor in the course of the reorganization case have priority of distribution pursuant to 11 U.S.C. ss.503 and must be paid in full upon confirmation, unless other terms are agreed upon by the holders of such claims and the Debtor. The expenses of administration consist primarily of the fees of professional persons retained by the Debtor in the course of this reorganization and their fees are ultimately subject to allowance and approval by the Bankruptcy Court. Joseph L. Fox, the attorney for the Debtor was paid a retainer fee of $10,000 at the outset of this case,3 and by the time of confirmation of the Plan is anticipated to generate fees totaling approximately $10,000 in addition to the original retainer. Frances Katz-Levine, Esq. and Scott Rapfogel, Esq. ("Levine-Rapfogel") proposed special securities co-counsel, application for which is pending at the time of the submission of this Disclosure Statement, is anticipated to generate fees in the approximate sum of $50,000, subject to the allowance of the Bankruptcy Court. The firm of Pilotti, Cunzio & Associates has been retained as the accountants for the Debtor to audit its books and certify its statements. It is anticipated that its fees will total $20,000 for those services, subject to the allowance of the Bankruptcy Court. Accutone has advanced the fees for the Debtor's accountant through the date of this Disclosure Statement and will not seek reimbursement. John H. Treglia, president of the Debtor since December, 1999, and Marsha Ellis, the Debtor's Controller who has been employed by Nantucket for many years. Mr. Treglia has agreed to waive his compensation and Accutone is taking responsibility, at this time, for the compensation of Ms. Ellis. - ---------- 2 As the debtor was without funds, the retainer fee was advanced by John Treglia, the president of the Debtor. 7 CLASS 1 PRIORITY TAX DEBT Class 1 consists of governmental taxing authorities whose claims would be entitled to priority of payment pursuant to Section 507(a)(8) of the Bankruptcy Code. According to the Debtor's records, there are no taxes due to government agencies other than personal property tax due to Bartow County, Georgia, for which a claim has been filed in the amount of $71, 187. According to the Debtor's records, however, the amount should be in the range of $19,000. In addition, the Internal Revenue Service filed a priority claim in the approximate amount $745 and the City of New York filed a priority claim in the approximate amount of $9,300. According to the Debtor these claims are without merit. The exact amount of each claim may ultimately require determination by the Bankruptcy Court in a contested proceeding. The allowed amount of these priority claims, and any other such claims which may ultimately be allowed, will be paid in full by the reorganized Debtor in the manner permitted by Section 1129(a)(9)(C) by payment, on account of such claims, of deferred cash payments over a period of six years after the earlier of the date of assessment of such claim or the Effective Date of the Plan, together with interest at the rate provided for in the United States Tax Code as of the date of such payments. The Effective Date is defined in the Plan as the date upon which the order confirming the Plan is final and no longer subject to an appeal. The reorganized Debtor will be obligated to make monthly installment payments of $340 for a period of six years, if the claims are allowed in the lesser amounts, and approximately $1,450 per month if the claims are allowed in the amounts for which they are presently filed. CLASS 2 SECURED DEBT Class 2 consists of the secured claim of NAN Investors, LP, the entity that loaned the Debtor through a private placement the original amount of $3,500,000, of which $2,760,000 was memorialized in two 12.5% convertible debentures. NAN is still owed, as of the filing date, the approximate sum of $800,000.00. The claim is secured by the assets of pre-bankruptcy Debtor, pursuant to the blanket security interest granted NAN in 1998 to assure payment of the debt. In October, 1999 the assets of the Debtor were surrendered to NAN in lieu of foreclosure and the Debtor's management believes that there are no assets remaining in the Debtor. If there should be assets which remain, then NAN shall be entitled to take possession and liquidate such assets and to apply the proceeds towards its debt. The unsecured portion of the NAN debt, estimated to be in the amount of $800,000 will be treated as a Class 3 general unsecured claim. The Class 2 claim of NAN is not impaired. A full definition of "impairment" for purposes of the Bankruptcy Code is set forth below in Section 7B. CLASS 3 GENERAL UNSECURED DEBT Class 3 consists of the holders of general unsecured claims against the Debtor arising from the operations of its business. According to the Debtor's records, there are general unsecured claims totaling approximately $1,700,000, which include an allowance for certain claims the amounts of which are disputed. Holders of Class 3 allowed general unsecured claims shall receive, in full settlement and satisfaction of their respective claims, one (1) share of stock in the reorganized Debtor per $5.00 of claim. The value of the distribution to be made on account of the general unsecured claims depends upon the value of the shares of stock. As of the date of issuance, it is anticipated that the per share value of the shares to be issued to holders of general unsecured claims shall be $0.10, based entirely upon the book value of the assets and business of Accutone that shall be acquired by the reorganized 8 Debtor. See Exhibit B annexed hereto, the pro forma balance sheet of the reorganized Debtor. However, an assessment of the true value of the stock to be issued must also factor in the value of the prospects of growth and expansion represented by the new business opportunities that Accutone brings to the Debtor and its estate. Based upon the business projections of Accutone, a copy of which is annexed hereto as Exhibit C , the book value of each share is expected to increase to $0.22 within the next year following confirmation. These projections are based upon the Debtor obtaining initial (within the first six months) financing in the approximate amount of $500,000 and the opening of 2 new facilities, as well as the on-site coverage in approximately 20 nursing homes and/or adult care facilities, as expected. In the event financing is not available, the proponents project the value of each share to be $0.14. See Exhibit D. Beyond this, it is expected that the shares will achieve a trading value on the public markets which will reflect the prospects of the reorganized company. Absent the transaction contemplated under the Plan, the holders of general unsecured claims could expect to receive $0.00 based upon the fact that there are no available assets in the Debtor from which to make a meaningful distribution. See Exhibit E annexed hereto, which is the liquidation analysis of Nantucket's assets, without the effects of the Plan. Therefore, there will only be a distribution of any significance in the event that Accutone were to introduce new value into the estate in the context of the proposed acquisition envisioned by the Plan. The general unsecured claims are impaired by the terms of the Plan. Stated briefly, the claims are "impaired" when they are not paid in full, in cash, upon the confirmation of the Plan. A full definition of "impairment" for purposes of the Bankruptcy Code is set forth below in Section 7B. CLASS 4 PREFERRED STOCK Class 4 consists of the Samberg Group, as holders of 5,000 shares of preferred stock issued by the Debtor in 1995. The preferred stock has a liquidation preference of $200 per share, for a total of $1,000,000 based upon the election of redemption rights approved in 1997. The preferred stock was issued in exchange for the investment of additional capital of $1,000,000 by the Samberg Group in 1994 as described above in Article 2. The Samberg Group is comprised of Stephen M. Samberg, the former President and Chairman of the Board of the Debtor (1994 through 1998), Steven Sussman, Raymond Wathen, Robert R. Polen and the wife of Ronald Hoffman, all of whom are former officers of the Debtors and/or members of its board. The Plan provides that the holder of the Class 4 issued and outstanding shares of preferred stock in the Debtor shall receive, in full settlement and satisfaction of its liquidation preference and all other rights appurtenant to such shares, one (1) share of stock in the reorganized Debtor per $20.00 of liquidation preference currently held. As a result, the Samberg Group will receive a total of 50,000 shares of common stock in the reorganized Debtor in full settlement and satisfaction of the redemption claims and all other claims based upon the preferred shares. The currently outstanding shares of preferred stock shall be deemed null and void and shall be canceled of record. The Class 4 holder of preferred shares is impaired by the terms of the Plan. Stated briefly, the claims are "impaired" when they are not paid in full, in cash, the liquidation preference to which it is entitled upon the confirmation of the Plan. A full definition of "impairment" for purposes of the Bankruptcy Code is set forth below in Section 7B. 9 CLASS 5 COMMON STOCK Class 5 consists of the holders of shares of common stock in the Debtor which are issued and outstanding. There are 3,241,848 shares of stock issued and outstanding that are held by approximately 1,100 holders. The Plan provides for the preservation of their participation in the Debtor by issuing to them new shares of stock in the reorganized Debtor at the rate of one (1) new share of stock in the reorganized Debtor per ten (10) shares of currently issued stock presently held. The current shares of stock shall be deemed null and void and Class 5 shareholders are to turn in their present shares for cancellation. In addition, all outstanding warrants and options to purchase stock and to convert debt to stock shall also be deemed null and void and canceled of record. These rights being canceled include those rights granted to NAN Investors in conjunction with the private placement of 1996 of $3,500,000 by which NAN has the right to purchase Nantucket common stock at fixed prices. As a result of the reorganization, the Class 5 shareholders' interests will be diluted. As a class, their collective interests will be reduced from 100% of the Debtor's outstanding common shares to approximately 5.4%. However, whereas they now have interests in a dormant company with no assets, they will, as a result of the Plan, have a lesser interest in a viable operating company with prospects for the future. The 100% shareholder interest they now possess is worth $0.00. At confirmation, the per share value of the newly issued shares will have a book value of approximately $0.10. That value is expected to grow within the first year following confirmation to $0.22 if the reorganized Debtor obtains $500,000 in financing and $0.14 if financing is not obtained. See pro forma projected balance sheet of the reorganized Debtor as at August 31, 2002 annexed hereto as Exhibit C and D. Beyond that, the shares are expected to attain a tradeable value on the public markets which will reflect the company's prospects. The Class 5 holders of shares of common stock are impaired by the terms of the Plan. Stated briefly, the interests are "impaired" when they are not paid in full, in cash, the liquidation preference to which they are entitled upon the confirmation of the Plan. A full definition of "impairment" for purposes of the Bankruptcy Code is set forth below in Section 7B. ARTICLE 4 MEANS OF OPERATION OF PLAN The Plan is predicated upon the premise that creditors and shareholders will receive a distribution on their respective claims and interests through the operation of the Plan which is of a greater value than they would receive under any alternative, such as a liquidation of the Debtor pursuant to Chapter 7 of the Bankruptcy Code, or through other remedies outside of bankruptcy jurisdiction. The Debtor's management firmly believes, and the following information is intended to substantiate this belief, that creditors' and shareholders' interests are greatly enhanced through the operation of the Plan as proposed. The estate will have the benefit of value represented by the assets of Accutone, which will be acquired by the Debtor. That value comprises assets consisting of sales and dispensing offices, related audiological testing equipment, contract rights, patent rights, good will, etc. with a net book value of $139,211.00. As a going concern, Accutone brings with it added value of its future prospects. Performance under the terms of the Plan requires the Debtor to issue new shares of stock to those entitled to receive shares pursuant to the Plan. 10 The reorganized Debtor will pursue the business of dispensing and distributing hearing aid products, in Accutone's current and future sales and dispensing offices. In addition, it intends to engage in a vigorous expansion plan based upon sales of product in additional dispensing offices and on-site nursing home venues to be added. This is expected to substantially increase shareholder equity in the future. ACCUTONE'S BUSINESS Accutone, Inc. was formed in October 1996 with the goal of becoming a leading dispenser and distributor of hearing aids and related products. In December of 1998 it acquired Interstate Hearing Aid Service, Inc. an FDA licensed hearing aid manufacturer, which was the first of its planned acquisitions of independent companies in the industry. Further acquisitions and mergers are planned and can be made possible with offers of equity participation by a public company such as the Debtor, whose shares may be tradeable on the public markets. A more thorough analysis of Accutone's business is contained in the supplement annexed hereto as Exhibit F which is available on the Court's Internet site. This supplement contains information which would more typically be contained in an SEC Registration Statement filing. It includes a comprehensive discussion of Risk Factors, an overview of the industry and a description of Accutone's operations, services, customers and product lines, as well as projections for expansion. It also lists current contracts and contracts reasonably anticipated, addition to providing a summary of Accutone's sales marketing strategy and its prospect for raising funds. Briefly summarized below are the key points of the supplement, however, all creditors and parties in interest are encouraged to read the entire supplement together with this Disclosure Statement. THE INDUSTRY There are several reasons why management believes that this time is appropriate for a concerted effort in this direction. The hearing aid industry is highly fragmented and consists of many small, independent manufacturers and distributors. Management believes that this industry is an appropriate focus for a directed effort at concentration through acquisition. Market share can be accumulated through careful acquisitions in a step by step fashion. Moreover, the market for hearing aid products is one with vast potential. Hearing loss is one of the most prevalent chronic health conditions in the United States and its incidence is on the rise. According to the National Health Interview Survey, between 1977 and 1990 cases of hearing loss increased by 26 percent. See Kochkin, S., 1997 MarkeTrak IV: What is the Viable Market for Hearing Aids?, Also, National Center for Health Statistics. Additionally, although hearing loss traditionally has been considered an old person's condition, it is becoming increasingly common among the younger generations. It is estimated that 10 million Americans between the ages of 45 and 64 have hearing loss, and this number is growing. Experts predict that among the Baby Boom generation, hearing loss will reach epidemic proportions. Id. Only a small percentage, approximately 20% of people with hearing loss, use hearing aids. It is estimated that 23 million people in the U.S. with a hearing impairment do not use aids. Thus far, the use of hearing aids has not increased, as the total number of users has remained unchanged at approximately 5.6 million since 1989. Id. This is expected to change dramatically as managed care health providers offer reimbursement for hearing aid purchases and maintenance and as the Baby Boom population awakens to the need. 11 SALES AND DISPENSING OFFICES Accutone is currently operating six retail sales and dispensing offices, four in New York, two in Yonkers, two in Mt. Vernon; and two in Pennsylvania one in Forty Fort and one in Marshall's Creek. It is scheduled to open another retail sales and dispensing office on Main Street in New Rochelle, New York (see "Facilities and Services", below). Accutone leases and operates two on-site retail offices, one at The Outpatient Health Services Facility of The Wartburg Diagnostic & Treatment Center located at Wartburg Place, Mount Vernon, New York, another at The Wartburg Home of The Evangelical Lutheran Church (the Wartburg nursing home facility.)3 The facilities are staffed by licensed, certified and qualified personnel. In order to respond to increasing demands at each of the facilities Accutone is constantly increasing staff and expanding hours of operations. EXISTING CONTRACTS In addition to the in-house and on-site programs, Accutone has successfully expanded its patient referral base by securing appointments as the sole or primary provider of hearing aids and audiological services to nursing homes4, out-patient facilities5, and adult group homes. It has signed - ---------- 3 The Wartburg is a 35 acre, full-service, senior care facility offering a full range of care, from assisted living facilities to skilled nursing home care. 4 Nursing Home Location Residents ---------------------- -------- ----------- Kings Terrace/Terrace Health Care Bronx, NY 320 Manhattanville Nursing Home Bronx, NY 280 Methodist Church Home Riverdale, NY 240 Riverdale Nursing Home Bronx, NY 300 Tarrytown Hall Care Center Tarrytown, NY 185 Classic Residence by Hyatt Yonkers, NY 277 St. Joseph's Nursing Home Yonkers, NY 5 No. of Patients Seen Facility Location Annually ------------ -------- -------- Urgi Square Geriatric Care Clinic Yonkers, NY 4,000 Urgicare Health Care Clinic Yonkers, NY 7,200 Riverdale Nursing Home Outpatient Clinic Bronx, NY 2,000 Methodist Nursing Home Outpatient Clinic Bronx, NY 2,500 12 service contracts with other types of health care organizations, such as HMO's and PPO's6. Its affiliations with these types of health care organizations and facilities have grown rapidly since October 1, 2000, when it began marketing our services to them. Its customers include: * patients who learn about Accutone through its newspaper advertisements (see "Sales and Marketing", below); * patients who are participating members of health care organizations, who come to it as a result of contractual (or in some cases, non-contractual) arrangements with such organizations, appointing it as an approved, preferred, or sole, provider7 of audiological care to their members. As a provider, it is listed in the organization's provider manual as a source for audiological services and products (see "Existing Contracts With Health Care Providers and Third-Party Payers", below); * patients who are referred to it by out-patient health care clinics and hospitals; * patients who are referred to it, on an out-patient basis, by nursing homes and senior care facilities at which they reside; * patients who are referred to it by area physicians with whom it has established relationships; - ---------- 6 MedicareFederal Health Care Program, Parts A and B; New York State Medical Assistance (Title XIX) Program/Medicaid; Independent Health Association; Magnacare Health Care; Empire Blue Cross Blue Shield Health Care; Corvel Corporation; Oxford Health Plans (New York, Inc.); Health Insurance Plan of Greater New York and Group; Community Choice Health Plan, Inc.; Better Health Advantage, Inc.; Health Source Westchester Pre-Paid Health Services Plan, Inc.; Workers Compensation Agreement; Preferred Choice Management Systems; Speech and Communications Professionals; Los Ninos Services, Inc. 7 To date, Accutone has been appointed as sole provider for one institution, Westchester Prepaid Health Care, Inc., a division of Health Source Hudson, Westchester County, New York. 13 * patients who are treated on an in-patient basis in nursing homes or senior care facilities; and * patients in Pennsylvania who are visited, tested, and fitted in their homes. Generally, it has agreements with health insurance or managed care organizations to provide for services to be offered on three different bases, including: (a) fee for service basis based on a contractual rate which it offers to provider's members (all paid for by the patient); and (b) an encounter basis where it is paid a fixed fee to Accutone by the insurance or managed care organization for each hearing aid sold (with the balance paid by the individual member). (c) a special Medicare/Medicaid encounter basis where it is paid a fixed fee by Medicare and/or Medicaid for particular audiological services, at a price preestablished by Medicare or Medicaid (other than the "deductible" amount, which is paid either by the patient or other third-party payers). NEW BUSINESS PROSPECTS Accutone is currently in the final stages of negotiations with Park Avenue Medical Associates, P.C. ("Park Avenue P.C.") and Park Avenue Health Care Management, Inc.("Park Avenue Management") (collectively referred to as "Park Avenue"). Park Avenue has been in existence since 1986. Park Avenue Management manages the business affairs of Park Avenue P.C. Park Avenue P.C. directly employees medical professional personnel, including physicians in both general and specialty practices and other health care professionals such as podiatrists, audiologists, psychologists and psychotherapists. Nursing homes and long term care facilities contract with Park Avenue for the services of Park Avenue's Medical professionals, on a pre-determined schedule or on an as-needed basis. Pursuant to the terms of the agreement, Park Avenue will contribute its entire audiology practice to Accutone in consideration for approximately 10% of the outstanding stock in Accutone plus an option to purchase an additional 10% of Accutone for the sum of $300,000. In turn, this audiology practice will become part of the reorganized Debtor. Brad I. Markowitz, the president of Park Avenue Management will join the Board of Directors for the reorganized Debtor. Mr. Markowitz is a banker by trade and has been with Park Avenue since 1995. At that time Park Avenue was servicing approximately seven nursing homes. Under his tutelage Park Avenue has grown to service over sixty long term care facilities. In addition, Mr. Markowitz serves on the Board of Trustees of several private companies, and one publicly traded company, Purchasesoft, Inc. Park Avenue presently provides staff to approximately sixty nursing homes, but it only supplies audiological staff to approximately 16 of these nursing homes. It is the mutual goal that Accutone or the reorganized Debtor will be able to increase Park Avenue's access to audiological staff to the point where it can provide such staff to all sixty nursing homes it currently deals with. The proponents of plan believe they have or will have sufficient staff and equipment to service all nursing homes which the Park Avenue contract will add to their clientele. 14 FINANCIAL INFORMATION Annexed hereto as Exhibit G is a copy of the Accutone audited financial statements including its balance sheet for the period ending December 31, 2000 which indicates a net stockholders equity of $104,632 and unaudited net stockholder equity of $139,211 for the period ending March 31, 2001 Exhibit H. This balance sheet value, plus Accutone's going concern value, as it adds new institutions and potential locations, does not appear on the balance sheet, will be incorporated into Nantucket if the Reorganization Plan and the acquisition on which it is based will be approved. Once combined with the balance sheet of Nantucket, which is included with its audited financial statements annexed hereto as Exhibit A, the value of Accutone will benefit the shareholders of the combined companies. Annexed hereto as Exhibit B is a pro forma balance sheet showing the effects of the acquisition and provides a snapshot of the reorganized company after the confirmation of the Plan. As is shown on Exhibit B (pro forma balance sheet) the combined companies will have a net stockholders equity of $600,000, which essentially represents Accutone's value as projected to August 31, 2001 plus the reorganization value of the reorganized Debtor. The per share book value of the shares of the reorganized company will equal approximately $0.10. That, does not take into account the prospective value of the company after one, two or more years of operations. Moreover, that value is in excess of the value of the shares of stock in Nantucket today, which is essentially zero. The value is also more than the liquidation value of Nantucket and the distribution to which holders of general unsecured claims would be entitled to expect, which is likewise zero. For an evaluation of the Debtor's liquidation value, see Exhibit E annexed hereto, which shows that the liquidation value of general unsecured claims equals $0.00. SECURITIES LAW AND CONSIDERATIONS The Plan contemplates the issuance of Common Stock of the reorganized Debtor to its creditors and existing shareholders. The following, discussion describes certain considerations relating to such issuance. The Section 1145 Exemption From Securities Act Registration of Securities Issued Under the Plan. Section 1145 of the Bankruptcy Code, provides that federal and state registration requirements do not apply to the issuance of securities by a debtor under a plan of reorganization to holders of claims or interests wholly or principally in exchange for those claims or interests. With certain exceptions, discussed below, recipients of such securities may also resell them without restriction. a. Issuance. Section 1145 of the Bankruptcy Code exempts the original issuance of securities under a plan of reorganization from registration under the Securities Act and state law. For the original issuance to be exempt, three principal requirements must be satisfied: (i) the securities must be issued by the debtor or its successor "under a plan" of reorganization; (ii) the recipients of the securities must hold a claim against the debtor, an interest in the debtor or a claim for an administrative expense against debtor, and (iii) the securities must be issued entirely in exchange for the recipient's claim against or interest in the debtor or "principally in such exchange and partly for cash or property." The proponents of the Plan believe that, subject to certain conditions described below, the contemplated issuances of the Common Stock, to Creditors and Interestholders, of Reorganized Debtor will satisfy all three conditions because: (i) those issuances are specifically required under 15 the Plan; (ii) the recipients are holders of "claims against" or "interests in" the Debtor; and (iii) the recipients will obtain securities in the reorganized company in exchange for their claims or interests. b. Resale. Although the subsequent disposition of the Common Stock of the reorganized Debtor by their recipients would probably be exempt from registration and not subject to holding periods in most circumstances, certain recipients of the securities-those recipients who may be deemed "underwriters" as defined under Section 1145(b) of the Bankruptcy Code-may be unable to resell such securities absent registration of those securities under the Securities Act of 1933, as amended, (the "Securities Act") and applicable state law or absent exemption therefrom. IT IS RECOMMENDED THAT CREDITORS AND SHAREHOLDERS AFFECTED BY THIS RISK CONSULT THEIR OWN COUNSEL. Bankruptcy Code Section 1145(b) defines four types of "underwriters": (i) a person, who purchases a claim against, or an interest in, or a claim for administration expenses against the debtor with a view to distributing any security received in exchange for such a claim or interest; (ii) a person who offers to sell securities offered under a plan of reorganization for the holders of such securities; (iii) a person who offers to buy such securities for the holders of such securities, if the offer is (a) with a view to distributing them or (b) made under a distribution agreement; and (iv) a person who is an "issuer" with respect to the security, as the term "issuer" is defined in Section 2(11) of the Securities Act, an "issuer" includes any person directly or indirectly controlling or controlled by the Debtor or control, or any person under direct or indirect common control with the Debtor. Whether a person is an "issuer," and therefore an "underwriter" for purposes of Section 1145(b) of the Bankruptcy Code depends on a number of factors. These include: (i) the person's equity interest in a company; (ii) the distribution and concentration of other equity interest in a company; (iii) whether the person is an officer or director of the company; (iv) whether the person, either alone or acting in concert with others, has a contractual or other relationship giving that person power over management policies and decisions of the company; and (v) whether the person actually has such power notwithstanding the absence of formal indicia of control. An officer or director of the company may be deemed a controlling person, particularly if his position is coupled with ownership of a significant percentage of voting stock. In addition, the legislative history of Section l 145 of the Bankruptcy Code suggests that a creditor with at least 20% of the securities of a debtor could be deemed a controlling person. To the extent that persons deemed "underwriters" receive securities pursuant to the Plan, resales by such person would not be exempted by Section 1145 of the Bankruptcy Code from registration under the Securities Act. Given the complex, subjective nature of the question whether a particular holder may be an underwriter, the Proponents of the Plan make no representation concerning the right of any person to trade in the Common Stock of the reorganized Debtor. The Proponents of the Plan recommends that potential recipients of the Common Stock in the reorganized Debtor consult their own counsel concerning whether they may freely trade such securities. ARTICLE 5 POST CONFIRMATION OPERATIONS AND MANAGEMENT Annexed hereto as Exhibit C is a projection of the business of the reorganized Debtor for the twelve months following the projected date of confirmation of its plan of reorganization. These projections anticipate the reorganized debtor obtaining $500,000 through a private placement 16 offering. However, annexed as Exhibit D is a projection of the reorganized assuming the private placement is not obtained during that period of time. They shows that the business done by Accutone and Interstate for the year ended December 31, 2000 totals $314,038. These projections anticipate a full year of operations at facilities recently opened or acquired and the funding anticipated herein. This will be substantially increased in the twelve months following September 1, 2001 according to management's best estimates. Based upon either of these projections, it is clear that the reorganized Debtor will be able to meet its obligations under the Plan and provide value to holders of the new shares of stock to be issued under the Plan. The proponents of the Plan anticipate a private placement facility of at least $500,000. This will enable the reorganized debtor to accelerate its program of expanding sales and acquisitions and should further position the reorganized Debtor to obtain financing for further expansion. This private placement has been conditioned upon the successful confirmation of the Plan, however, the Plan's success is not deemed conditioned upon obtaining such a private placement. However, if the reorganized Debtor has not obtained the anticipated funding through a private placement offering, it will nonetheless substantially increase the value to holders of Claims and interest holders. Based upon the projections of the future operations of the combined companies, as annexed hereto as Exhibit C, the reorganized company can be expected to net almost $215,527 of profit in its first full year of operations after confirmation of the Plan on sales of $1,429,182. FUTURE MANAGEMENT Following confirmation, the management of the reorganized debtor will consist of the following: John H. Treglia, President. John H. Treglia, is the president and chief operating officer of Accutone, and was named president of Nantucket by its Board of Directors in January, 2000. Mr. Treglia intends to enter into an employment contract with the Debtor to be paid a reasonable compensation out of cash flow. It is anticipated that there will be sufficient cash flow during the second half of the current fiscal year. Marsha Ellis is the Treasurer/Controller. Ms. Ellis was assistant treasurer of Nantucket prior to the bankruptcy. She will remain in such capacity for the foreseeable future under an employment agreement now being negotiated. Her salaries since January 2000 have been funded by Mr. Treglia. Brad I. Markowitz, the president of Park Avenue, will be a member of the Board of Directors. The Directors of the Debtor are, and will remain for the foreseeable future, John H. Treglia, Dr. Frank J. Castanaro, and George Gold. Mr. Gold was a director of the Debtor while it operated in the clothing business. Directors are not nor will they be compensated for their services. The Debtor intends to increase to five, the number of Directors and add Mr. Markowitz at that time. ARTICLE 6 ALTERNATIVES TO THE PLAN As alternatives to the treatment proposed through the Plan, the Debtor could be (a) administered through the liquidation chapter of the Bankruptcy Code, Chapter 7, and (b) dismissed from bankruptcy jurisdiction and administered pursuant to state law remedies. 17 In the event that the Debtor were liquidated through Chapter 7, there is no meaningful distribution that could be made to creditors by a bankruptcy trustee as the Debtor has no assets to administer. And, as the next section indicates, management believes that there are no causes of action for the recovery of assets under the bankruptcy laws out of which an estate could be created. Management's recommendation of accepting the Plan and the transaction it encompasses reflects its belief that only through that course is there a realistic and meaningful opportunity for creditor recovery. Outside of the Bankruptcy Court's jurisdiction, there is no viable way in which the proposed transaction can be accomplished. Only through procedures available in the Bankruptcy Code can the debt of the Debtor be treated by conversion to equity through the consent of a majority of claim holders. No other procedure will be acceptable to Accutone, which could not be expected to entrust its assets and its business prospects to an entity with the quantum of debt with which the pre-reorganized Debtor is burdened. In addition, out-of court settlement procedures are too unwieldy and ineffective to give the assurance that the investor needs. Accordingly, it is submitted that the bankruptcy Plan is the best way in which the creditors and the shareholders of the Debtor can realize value for their claims and interests. Absent such a proceeding, they could be reasonably expected to receive no recovery. ARTICLE 7 MISCELLANEOUS PROVISIONS A. Preferential and Fraudulent Transfers Among the assets which could be available for distribution would be the monies subject to recoupment from creditors who had been paid within the 90 days prior to the bankruptcy filing (one year, for creditors who are also insiders), which payment was made while the Debtor was insolvent, on account of antecedent debts, and not paid within their ordinary business terms. A review of the transactions of the Debtor over the year preceding the commencement of this case, supervised by its counsel, indicates that there is no record of preferential transfers having been made to any creditor, including insiders, except as follows. In the year prior to the commencement of the case, the sum of $37,500 was paid to George Gold, a director of the Debtor, in settlement of a judgment that he had obtained against the Debtor to enforce a claim for salaries due him under his employment agreement. The settlement amount was only paid in part, by the time the bankruptcy was filed, and no further payments were made to him. There were no payments of any kind to creditors after the surrender of collateral to NAN in October, 1999. Had there been avoidable transfers, however, it must be considered that in order to recoup these monies from the affected creditors, lawsuits would have to be instituted against them and legal fees incurred. It is possible that defenses to recoupment, as permitted under Section 547 of the Code, exist in favor of any affected creditors which could generate greater legal costs required to effect collection, or they may prove to be total defenses. To the extent that monies are recouped, those creditors' claims on the Debtor's estate will be enlarged_ their claims are restored where payments on invoices are reversed. The Debtor does not intend to pursue recovery of the payment made to Mr. Gold. Similarly, there is no evidence contained in the Debtor's records of any conveyances having been made to any parties that may be voidable as fraudulent conveyances under state or federal law. 18 B. Impairment Under the Plan Only those creditors and interest holders whose claims are impaired may vote for or against a Plan. The term "impairment" is a special term as it is used in the Bankruptcy Code. Section 1124 of the Code defines the term as follows: "ss.1124. Impairment of claims or interests. Except as provided in section 1123(a)(4) of this title, a class of claims or interests is impaired under a plan unless, with respect to each claim or interest of such class, the plan__ (1) leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest; or (2) notwithstanding any contractual provision or applicable law that entitles the holder of such claim or interest to demand or receive accelerated payment of such claim or interest after the occurrence of a default__ (A) cures any such default that occurred before or after the commencement of the case under this title, other than a default of a kind specified in section 365(b)(2) of this title; (B) reinstates the maturity of such claim or interest as such maturity existed before such default; (C) compensates the holder of such claim or interest for any damages incurred as a result of any reasonable reliance by such holder on such contractual provision or such applicable law; and (D) does not otherwise alter the legal, equitable, or contractual rights to which such claim or interest entitles the holder of such claim or interest. In this Plan, holders of Class 3, 4 and 5 Claims are deemed "impaired" by the Plan. C. Consequences of Acceptance or Rejection If the Plan is rejected by a class of impaired claims or interests, the Court may be requested by the Debtor to determine that the Plan be confirmed regardless. This process is generally referred to as a "cram down" pursuant to Section 1129(b) of the Bankruptcy Code. However, if the Court does not hold that the requisites of confirmation have been met irrespective of rejection, then the case may be converted to a case under Chapter 7 of the Bankruptcy Code which will provide for its liquidation. It is the belief of the Debtor's management that in the event of conversion to Chapter 7, the likelihood that any of the general unsecured creditors will receive any distribution at all will be nil, based upon the analysis set forth above in Exhibit E. The Plan, in contrast, offers a distribution to holders of general unsecured claims that is based upon a program that includes substantial new value that will be injected into the Debtor, consisting of Accutone's assets and business opportunities. D. Objections to Claims All objections to the allowance of Claims shall be served and filed no later than 90 days following the Effective Date. Notwithstanding any other provisions of this Plan, disputed claims shall be paid in accordance with the provisions of the Plan upon their allowance by the Court. A reserve shall be maintained until final disposition by the Court for any claim to which an objection has been interposed. ARTICLE 8 TAX IMPLICATION OF THE PLAN The Plan of reorganization may have tax implications to the creditors holding claims and shareholders holding interests in the Debtor. As every person's circumstances are unique, it is not possible to make a general statement that will have relevance to each party in interest in the Debtor's 19 estate. Therefore, all parties in interest are advised to consult their own tax advisors to determine how the terms of the Plan may affect their unique interests. ARTICLE 9 CONCLUSION If the creditors accept the Plan, it is likely that it can be confirmed within approximately five weeks after the approval of the Disclosure Statement, unless a party interposes serious objections. Creditors and shareholders are encouraged to speak to each other and to their own advisors with respect to the Plan and its effects. BALLOT All creditors and shareholders are urged to participate in the process and return their ballots so that they are received on or before the last day for voting, as indicated thereon, at the offices of Koerner Silberberg & Weiner, LLP attn: Joseph L. Fox, Esq., 112 Madison Avenue, New York, New York 10016. All creditors are further urged to read the Plan since it shall constitute a legally binding agreement if it is confirmed by the Bankruptcy Court. Dated: New York, N.Y. July 5, 2001 NANTUCKET INDUSTRIES, INC. The Debtor and Debtor in Possession By: s/ John H. Treglia -------------------------- JOHN H. TREGLIA, President ACCUTONE, INC. By: s/ John H. Treglia --------------------------- JOHN H. TREGLIA, President KOERNER SILBERBERG & WEINER, LLP Attorney for Debtor and Debtor in Possession s/ Joseph L. Fox - ----------------- JOSEPH L. FOX, ESQ. (JF2313) 112 Madison Avenue New York, New York 10016 (212) 689-4400 20 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Audited Financial Statements Years Ended February 28, 2001, February 27, 2000 and February 27, 1999 EXHIBIT "A" NANTUCKET INDUSTRIES, INC. LIST OF EXHIBITS Exhibit A Nantucket Industries, Inc., and Subsidiaries Consolidated Balance Sheet May 31, 2000 Exhibit B Nantucket Industries, Inc., and Subsidiaries Projected Balance Sheet (Unaudited) August 31, 2001 Exhibit C Nantucket Industries, Inc., and Subsidiaries Projected Balance Sheet (Unaudited) August 31, 2002 (Assuming Private Placement) Nantucket Industries, Inc., and Subsidiaries Projected Statement of Operations and Retained Earnings (Unaudited) September 1, 2001-August 31, 2002 Exhibit D Nantucket Industries, Inc., and Subsidiaries Projected Balance Sheet (Unaudited) August 31, 2002 (Assuming No Private Placement) Nantucket Industries, Inc., and Subsidiaries Projected Statement of Operations and Retained Earnings (Unaudited) September 1, 2001-August 31, 2002 Exhibit E Liquidation Analysis of Nantucket Industries, Inc. and Subsidiaries December 31, 2001 Exhibit F Accutone, Inc. Securities and Exchange Commission Disclosure Document Exhibit G Accutone, Inc. and Subsidiary Audited Financial Statements Years ended December 31, 2000, 1999 and 1998 Exhibit H Accutone, Inc. Compiled Financial Statements Three Months Ended March 31, 2001 Nantucket Industries, Inc. (Debtor-In-Possession) Contents ================================================================================ Independent auditors' report 2 Financial statements: Consolidated balance sheets 3 Consolidated statements of operations 4 Consolidated statement of stockholders' deficit 5 Consolidated statements of cash flows 6 Notes to consolidated financial statements 7-19 Independent Auditors' Report To the Board of Directors Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) New York, New York We have audited the accompanying consolidated balance sheet of Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) for the two years ended February 28, 2001 and the related consolidated statements of operations, stockholders' deficit and cash flows for the year then ended. 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 audit. The financial statements for February 27, 1999 were audited by other auditors, therefore we do not render an opinion on these financial statements. We conducted our audit 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 audit provides 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 (Debtor-In-Possession) as of February 28, 2001, and the consolidated results of its operations and its cash flows for the year then ended, 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 represented in the accompanying financial statements, the Company has a net capital deficiency, operating losses, and defaulted on interest payments. These factors, among others discussed in Note 1 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 1. These financial statements do not include any adjustments that might result from the outcome of these uncertainties. /s/ Pilotti, Cunzio & Associates LLP June 6, 2001 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Consolidated Balance Sheets - --------------------------------------------------------------------------------
February 27, February 27, February 28, 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 1,452 $ 1,452 $ 622,268 Accounts receivable (Notes 2 and 8) -- -- 961,989 Inventories (Notes 6 and 8) -- -- 1,108,860 Other current assets 20,331 20,331 67,347 - -------------------------------------------------------------------------------------------------------------------------- Total current assets 21,783 21,783 2,760,464 - -------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net (Notes 7 and 8) -- -- 538,522 Other assets, net -- -- 176,601 - -------------------------------------------------------------------------------------------------------------------------- $ 21,783 $ 21,783 $ 3,475,587 ========================================================================================================================== Liabilities and Stockholders' Deficit Current portion of capital lease obligations (Note 8) $ 93,070 $ 93,070 $ 56,452 Convertible subordinated debt (Note 4) 826,845 826,845 2,052,986 Accounts payable 244,764 244,764 248,538 Accrued salaries and employee benefits 11,031 11,031 80,740 Accrued unusual charge (Note 5) 77,083 77,083 95,833 Accrued expenses and other liabilities 129,515 129,515 863,271 Accrued royalties 319,048 319,048 319,048 - -------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,701,356 1,701,356 3,716,868 Capital lease obligations, net of current portion (Note 8) -- -- 64,250 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,701,356 1,701,356 3,781,118 - -------------------------------------------------------------------------------------------------------------------------- Stockholders' deficit (Notes 4 and 11) 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 500 500 500 Common stock, $.10 par value; authorized 20,000,000 shares; issued 3,241,848 324,185 324,185 324,185 Additional paid-in capital 12,539,503 12,539,503 12,539,503 Deferred issuance cost -- (61,069) (96,425) Accumulated deficit (14,523,824) (14,462,755) (13,053,357) - -------------------------------------------------------------------------------------------------------------------------- (1,659,636) (1,659,636) (285,594) Less 3,052 shares of common stock held in treasury, at cost 19,937 19,937 19,937 - -------------------------------------------------------------------------------------------------------------------------- Total stockholders' deficit (1,679,573) (1,679,573) (305,531) - -------------------------------------------------------------------------------------------------------------------------- $ 21,783 $ 21,783 $ 3,475,587 ==========================================================================================================================
See accompanying notes to financial statements. 3 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Consolidated Statements of Operations - --------------------------------------------------------------------------------
February 27, February 27, Years ended February 28, 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- Net sales $ -- $ 5,344,223 $ 11,517,842 Cost of sales -- 3,719,692 9,107,947 - -------------------------------------------------------------------------------------------------------------------------- Gross profit -- 1,624,531 2,409,895 Selling, general and administrative expenses -- 2,161,376 2,879,200 - -------------------------------------------------------------------------------------------------------------------------- (Loss) from operations -- (536,845) (469,305) Other income (expense): Net loss (gain) on sale of assets (Note 7) -- 538,522 15,093 Interest expense -- 334,031 506,746 Other income (Note 12) -- -- (1,928,624) - -------------------------------------------------------------------------------------------------------------------------- Total other (income) expense -- 872,553 (1,406,785) - -------------------------------------------------------------------------------------------------------------------------- Earnings (loss) before income taxes -- (1,409,398) 937,480 Income taxes (Note 10) -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Net income (loss) -- $ (1,409,398) $ 937,480 Net earnings (loss) per share - basic and diluted -- $ (.40) $ 0.26 - -------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 3,238,796 3,238,796 3,238,796 ==========================================================================================================================
See accompanying notes to financial statements. 4 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession)
Consolidated Statement of Stockholders' Deficit - -------------------------------------------------------------------------------------------------------------------------------- Preferred stock designated as non-voting convertible Common stock ------------------------------------------------------------- Additional Deferred paid-in issuance Shares Amount Shares Amount capital costs - -------------------------------------------------------------------------------------------------------------------------------- Balance at March 1, 1998 5,000 $500 3,241,848 $324,185 $12,539,503 $(115,541) Net earnings Amortization of deferred costs 19,116 ------------------------------------------------------------------------------------------- Balance at February 27, 1999 5,000 500 3,241,848 324,185 12,539,503 (96,425) Net(loss) Amortization of deferred costs 35,356 ------------------------------------------------------------------------------------------- Balance at February 27, 2000 5,000 500 3,241,848 324,195 12,539,503 (61,069) Net earnings (loss) Amortization of deferred costs 61,069 ------------------------------------------------------------------------------------------- Balance at February 27, 2001 5,000 $500 3,241,848 $324,185 $12,539,503 $ -- ================================================================================================================================
Treasury stock ------------------------ Accumulated deficit Shares Amount Total - ------------------------------------------------------------------------------------------------- Balance at March 1, 1998 $(13,990,837) 3,052 $(19,937) $(1,262,127) Net earnings 937,480 937,480 Amortization of deferred costs 19,116 ---------------------------------------------------------------- Balance at February 27, 1999 (13,053,357) 3,052 (19,937) (305,531) Net(loss) (1,409,398) (1,409,398) Amortization of deferred costs 35,356 ---------------------------------------------------------------- Balance at February 27, 2000 (14,462,755) 3,052 (19,937) (1,679,573) Net earnings (loss) Amortization of deferred costs (61,069) ---------------------------------------------------------------- Balance at February 27, 2001 $(14,523,824) 3,052 $(19,937) $(1,644,217) =================================================================================================
See accompanying notes to financial statements. 5 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Consolidated Statements of Cash Flows - --------------------------------------------------------------------------------
February 27, February 27, Years ended February 28, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings (loss) $ -- $(1,409,398) $ 937,480 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization -- 35,356 397,053 Provision for doubtful accounts -- -- 11,210 Loss (gain) on sale of fixed assets -- 538,522 15,093 Provision for obsolete and slow-moving inventory -- -- 77,528 Issue of warrants -- -- -- Decrease (increase) in assets: Accounts receivable -- 961,989 1,906,536 Inventories -- 1,108,860 1,903,995 Other current assets -- 47,016 4,548 (Decrease) increase in liabilities: Accounts payable -- (3,774) (473,945) Accrued expenses and other liabilities -- (803,465) (453,720) Income taxes payable -- -- -- Accrued unusual charge -- (18,750) (547,884) - ---------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities -- 456,356 3,777,894 - ---------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment -- -- (59,562) Proceeds from sale of fixed assets -- -- 51,745 Decrease in other assets -- 176,601 56,525 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by investing activities -- 176,601 48,708 - ---------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: (Repayments) borrowings under line of credit agreement, net -- -- (3,161,286) Payments of short-term debt -- (1,226,141) -- Payments of long-term debt and capital lease obligations -- (27,632) (51,898) - ---------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities -- (1,253,773) (3,213,184) - ---------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents -- (620,816) 613,418 Cash and cash equivalents, beginning of year 1,452 622,268 8,850 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $1,452 $ 1,452 $ 622,268 ================================================================================================================ Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ -- $ 881,670 $ 191,440 Income taxes $ -- $ -- $ --
See accompanying notes to financial statements. 6 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. Restructuring and The accompanying financial statements have Liquidity Matters been prepared assuming that the Company will continue as a going concern. There have been no sales since November 1999 and the Company has remained inactive for fiscal year 2001. The Company filed for Chapter 11 bankruptcy protection in March 2000. Management is seeking merger candidates in order to continue the Corporation. If Management is unsuccessful in its merger search, the Company will cease to exist. There were no sales under the Brittania license for the fiscal years 2001, 2000 and 1999. As more fully described in Note 3, Levi Strauss & Co., the parent company of Brittania Sportswear Ltd. a licensor which accounted for $4.5 million of the Company's 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 $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 12). The Company experienced significant losses in fiscal years 1998 and 1999 which resulted in severe cash flow issues that negatively impacted the ability of the Company to conduct its business as then structured. In fiscal year 1999 due to the lack of capital resources needed to properly develop and support the GUESS? product line, the Company discontinued sales under the GUESS? license. Sales for this product line in fiscal 2001, 2000, and 1999 aggregated $.0, $.0, and $2.5 million, with gross margins of 0%, 0% and 11.8%, 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 12). 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. As a result, there can be no assurance that the Company can continue as a going concern. 7 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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. 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 11) 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 4). 2. Summary of Significant Accounting Policies a. The Company Nantucket Industries, Inc. and its wholly-owned inactive subsidiaries (debtor-in-possession) (the "Company") design and distribute branded and private label fashion undergarments to mass merchandisers and national chains throughout the United States, until it ceased doing business in October 1999. b. Principles of Consolidation The consolidated financial statements include the accounts of Nantucket Industries, Inc. and its wholly owned subsidiaries (debtor-in-possession). All significant intercompany balances and transactions have been eliminated. c. Accounts Receivable An allowance for doubtful accounts is provided based upon historical bad debt experience and periodic evaluations of the aging of the accounts. 8 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- d. 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 e. Stock Options As described in Note 11, 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. f. 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. g. 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 are based on the weighted average number of common shares outstanding without consideration of potential common share equivalents. Diluted earnings per share are 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, 2000, the Company had outstanding 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 9). 9 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- h. 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. i. 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 27, 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. j. Fiscal Year The Company's fiscal year ends on the Sunday nearest to February 28, with the exception of February 28, 2001 an inactive year, the fiscal years ended February 27, 2000 and February 27, 1999 contained 52 weeks. k. Reclassification Certain prior year amounts have been reclassified in order to conform to the current year's presentation. l. 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. m. 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 2001, 2000 and 1999. 10 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- n. 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. 3. Concentration of Risk For the period ended February 28, 2001, there were no sales or other business activities. For February 28, 2000 there were no sales. For February 27, 2000, sales to the Company's largest customer accounted for 38.8% of net sales and 23%, respectively, for the two prior fiscal years. Sales to the second largest customer in fiscal years 1999 and 1998 were 33.6% of net sales and 22%, respectively. As previously described, K Mart, which represented $0 of net sales in the 1999 fiscal year, and 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 accounted for more than 10% of the Company's consolidated net sales for fiscal 1999 and 1998. 4. 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 that were 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 7), 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. The Company was in default in respect to interest payments due on the subordinated 11 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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 8), and to issue five-year warrants convertible to 16,5000,000 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. 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. In October 1999, the Company assigned the accounts receivable, inventory and all law suits to the subordinated creditor. 5. 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 12. 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 28, 2001 and February 27, 2000, the accrued unusual charge of $77,083 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. 12 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 6. 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 28, February 27, February 27 2001 2000 1999 --------------------------------------------------------------------- Raw materials $ -- $ -- $ -- Work in process -- -- -- Finished goods -- -- 1,108,860 --------------------------------------------------------------------- $ -- $ -- $1,108,860 ===================================================================== 7. Property, Plant and Equipment Property, plant and equipment are summarized as follows: February 28, February 27, February 27 2001 2000 1999 --------------------------------------------------------------------- Land $ -- $ -- $ -- Buildings and improvements -- -- 26,034 Machinery and equipment -- -- 1,485,090 Furniture and fixtures -- -- 142,489 --------------------------------------------------------------------- -- -- 1,653,613 Less accumulated depreciation -- -- 1,115,090 --------------------------------------------------------------------- $ -- $ -- $ 538,523 ===================================================================== 8. Long-Term Debt and Notes Payable a. 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 28, 2001 and February 27, 2000, the revolving credit facility was not in place. 13 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- b. Capital Leases The Company leases equipment under capital leases. During Fiscal 2000, the Company's equipment was returned for non-payment. 9. Net Earnings (Loss) Per The following table sets forth the Common Share computation of basic and diluted loss per share:
February 28, February 27, February 27 2001 2000 1999 ------------------------------------------------------------------------------- Net earnings (loss) attributable to common stockholders $ -- $(1,409,398) $ 937,480 Accrued dividends on preference shares -- $ (81,074) $ (81,103) Numerator for basic and diluted net earnings (loss) per common share - earnings (loss) attributable to common stockholders $ -- $ -- $ 856,377 ------------------------------------------------------------------------------- Denominator for basic and diluted net earnings (loss) per common share - weighted average shares outstanding 3,238,796 3,238,796 3,238,796 ------------------------------------------------------------------------------- Basic and diluted net earnings (loss) per share $ -- $ (.40) $ 0.26 ===============================================================================
10. 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 28, 2001, February 27, 2000 and February 27, 1999 are as follows:
February 28, February 27, February 27 2001 2000 1999 -------------------------------------------------------------------------------- Deferred tax assets Net operating loss carryforward $7,215,000 $7,215,000 $6,987,000 Accrued severance -- -- 36,000 Excess of tax basis over book basis of -- -- -- Capitalized inventory costs -- -- 22,000 Other -- -- 121,000 -------------------------------------------------------------------------------- 7,215,000 7,215,000 7,166,000 Deferred tax liabilities Difference between the book and tax basis of property, plant and equipment 331,000 331,000 331,000 -------------------------------------------------------------------------------- Net deferred tax asset 6,884,000 6,884,000 6,835,000 Valuation allowance 6,884,000 6,884,000 (6,835,000) -------------------------------------------------------------------------------- Net deferred taxes $ -- $ -- $ -- ================================================================================
14 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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. For tax purposes at February 28, 2001, the Company's net operating loss carryforward was $20,200,000, which, if unused, will expire from 2008 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 28, 2001, the change in ownership was less than 50%. There was no income tax provision (benefit) for the fiscal years 2001, 2000 and 1999. The following is a reconciliation of the normal expected statutory federal income tax rate to the effective rate reported in the financial statements.
February 28, February 27, February 27, 2001 2000 1999 --------------------------------------------------------------------------------- Computed "expected" provision for: Federal income taxes 0% (35.0)% (35.0)% Valuation allowance 0 35.0 35.0 --------------------------------------------------------------------------------- Actual provision for income taxes 0% -- % -- % ---------------------------------------------------------------------------------
11. Stockholders' Equity a. 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 2001, 2000 and 1999 would be $0, $0 and $91,000, respectively. In fiscal 2001, 2000 and 1999 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. 15 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- A summary of option activity for the years ended February 28, 2001, February 27, 2000, and February 27, 1999 is as follows: Weighted Number of Average Options Exercise Price ----------------------------------------------------------------------- Balance, February 27, 1999 106,000 $5.05 Forfeited 106,000 $5.05 ----------------------------------------------------------------------- Balance, February 27, 2000 -- -- ----------------------------------------------------------------------- Balance, February 28, 2001 -- -- ----------------------------------------------------------------------- b. 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 28, 2001, February 27, 2000 and February 27, 1999 dividends in arrears were $570,134, $489,484 and $408,384, respectively. c. Issuance of Treasury Stock In connection with the Company's refinancing on March 22, 1994, 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. d. 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. 16 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 12. Commitments, Contingencies and Related Party Transactions a. Agreement with Principal Stockholders On March 1, 1994, in connection with the restructuring described in Note 4, 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. b. 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, and $840,000 in fiscal 1998. 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. 17 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- c. 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." 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, 2000 has made no provision in the accompanying financial statements. 18 Nantucket Industries, Inc. and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 13. 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. 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." 14. Subsequent Events On March 3, 2000, the Company filed for Chapter 11 protection with U.S. Bankruptcy Court. The Company is involved in discussion with merger candidates, should these discussions prove futile, a move to Chapter 7 liquidation is probable. 19 Nantucket Industries Inc., and Subsidiaries Projected Balance Sheet (Unaudited) August 31, 2001 Assumes The Following 1. That Nantucket Industries Plan of Reorganization is confirmed and that Nantucket acaquires Accutone, Inc. and subsidiary. 2. Increase in Accounts Receivable is attributable to the increased volume of business generated by the twenty-two nursing homes which Accutone began servicing on June 1, 2001. These facilities are being serviced according to an executory contract which has not yet been finalized for new Nantucket/Accutone to purchase the existing audiology practice of Park Avenue Medical Associates P.C. and Park Avenue Health Care Management, Inc. (A copy of their year end financials are included herein). The current audiology practice serves approximately 17 nursing homes. Accutone as of June 1, 2001 began servicing the homes which are included in this practice. Park Avenue services an additional 55 facilities most of which have expressed a desire to have outside audiological services rendered. We are already in discussion with an additional 12 facilities and intend to move toward servicing their audiological needs between September and December of 2001. (See facility list attached). 3. In accordance with Generally Accepted Accounting Principles, the transaction has been treated as a purchase, as well as the inclusion of the surviving Chapter 11 non dischargeable debt. Below is an outline of the accounting for this transaction. Calculation of Good Will Purchase of Accutone and Subsidiary $ 528,612 Less: Book Value of Accutone (125,495) --------- 403,117 Less: Valuation of Customer List (65% of Estimated Current Volume @ $400,000) (260,000) --------- Good Will $ 143,117 --------- Calculation of Reorganization Value in Excess of Amount Allocatible to Identifiable Assets Survival Subsequent to Chapter 11 of Non Dischargeable Tax Debt $ 92,389 Settle Chapter 11 Debt Utilizing Common Stock 71,388 --------- Settlement of Order $ 163,777 --------- 4. In accordance with Generally Accepted Accounting Principles, Good Will is authorized over 15 years and customer lists are amortized over 7 years. 5. Personal Property Taxes are being paid over six years. EXHIBIT "B" NANTUCKET INDUSTRIES INC. AND SUBSIDIARIES PROJECTED BALANCE SHEET (UNAUDITED)* AUGUST 31, 2002 ASSETS CASH $ 685,893 ACCOUNTS RECEIVABLE 154,103 INVENTORY 12,100 ---------- TOTAL CURRENT ASSETS 852,096 ---------- FIXED ASSETS 123,770 ACCUMULATED DEPRECIATION (43,035) ---------- NET FIXED ASSETS 80,735 ---------- OTHER ASSETS GOODWILL 143,117 AMORTIZATION-GOODWILL (9,541) REORGANIZATION VALUE IN EXCESS OF AMOUNT ALLOCATIBLE TO IDENTIFIABLE ASSETS 163,777 AMORTIZATION-REORGANIZATIONAL VALUE (10,918) CUSTOMER LIST 307,935 AMORTIZATION-CUSTOMER LIST (69,100) ---------- TOTAL OTHER ASSETS 525,270 ---------- $1,458,101 ========== LIABILITIES ACCOUNTS PAYABLE $ 65,170 PERSONAL PROPERTY TAXES 15,398 AUTO LOAN 413 ---------- TOTAL CURRENT LIABILITIES 80,981 PERSONAL PROPERTY TAXES 61,593 ---------- TOTAL LIABILITIES 142,574 ---------- COMMON STOCK 600,000 PAID IN CAPITAL 500,000 RETAINED EARNINGS 215,527 ---------- TOTAL STOCKHOLDERS EQUITY 1,315,527 ---------- $1,458,101 ========== EXHIBIT "C" * This projection statement should be read in conjuction with the attached assumptions Exhibit E Nantucket Industries Inc. and Subsidiaries Projected Balance Sheet (Unlimited) August 31, 2002 Assumes The Following 1. That a private placement of Nantucket Industries common stock, is completed during the year ended August 31, 2002 with total proceeds approximating $500,000.00 adding to the Company's cash position. 2. That the continued increase in sales will cause the total accounts receivable from Medicare, Medicaid and of the third party payers to increase. 3. The increase in Paid-in-Capital reflects the completion during the prior 12 months of the $500,000 private placement. 4. The increase in Accounts Payable results from the increase in business volume and subsequent related expenses. 5. The decrease in personal property taxes result from payments made during the year on the anticipated 6 year payout of these priority tax claims. NANTUCKET INDUSTRIES INC. AND SUBSIDIARIES PROJECTED BALANCE SHEET (UNAUDITED)* AUGUST 31, 2001 ASSETS CASH $ 15,000 ACCOUNTS RECEIVABLE 72,000 INVENTORY 5,000 --------- TOTAL CURRENT ASSETS 92,000 --------- FIXED ASSETS 123,770 ACCUMULATED DEPRECIATION (43,035) --------- NET FIXED ASSETS 80,735 --------- OTHER ASSETS GOODWILL 143,117 AMORTIZATION GOODWILL -- REORGANIZATION VALUE IN EXCESS OF AMOUNT ALLOCATIBLE TO IDENTIFIABLE ASSETS 163,777 AMORTIZATION-REORGANIZATIONAL VALUE -- CUSTOMER LIST 307,935 AMORTIZATION -CUSTOMER LIST (31,957) --------- TOTAL OTHER ASSETS 582,872 --------- $ 755,607 LIABILITIES ACCOUNTS PAYABLE $ 59,870 PERSONAL PROPERTY TAXES 15,398 AUTO LOAN 3,348 --------- TOTAL CURRENT LIABILITIES 78,616 PERSONAL PROPERTY TAXES 76,991 --------- TOTAL LIABILITIES 155,607 --------- COMMON STOCK 600,000 PAID IN CAPITAL -- RETAINED DEFICIT -- --------- TOTAL STOCKHOLDERS EQUITY 600,000 --------- $ 755,607 * This projection statement should be read in conjuction with the attached assumptions NANTUCKET INDUSTRIES ACCUTONE INTERSTATE CASH 10,000 5,000 ACCOUNTS RECEIVABLE 72,000 0 INVENTORY 5,000 0 INVESTMENT-ACCUTONE 528,612 0 0 INVESTMENT-INTERSTATE 60,000 0 LOAN RECEIVABLE-INTERSTATE 8,351 (8,351) EQUIPMENT 97,920 25,850 ACCUMULATED DEPRECIATION (30,956) (12,079) CUSTOMER LIST 47,935 (31,957) GOODWILL 0 AMORTIZATION GOODWILL 0 REORGANIZATION VALUE 163,777 0 AMORTIZATION-REORG 0 ACCOUNTS PAYABLE (14,370) 0 PAYROLL TAX PAYABLE (35,000) (10,500) PERSONAL PROPERTY TAXES (92,389) 0 AUTO LOAN (3,348) 0 PAID IN CAPITAL (429,461) 0 COMMON STOCK (600,000) (1,000) (60,000) RETAINED EARNINGS 260,864 44,102 0 0 0 SALES SALES RETURNS PURCHASES LABOR COMMISSIONS Sales Product Advertising Labor & benefits Amortization & Depreciation Automobile Expense Bank Charges Dues & Subscriptions Insurance (Prop/Comp/Liability) Miscellaneous Expenses Office Expense Postage Health Insurance Rent Administrative Salaries Payroll taxes Supplies Telephone Professional fees Selling expense Travel & Entertainment PROJECTED ACTIVITY CONSOLIDATION AJE ELIMINATION CONSOLIDATED 170,893 185,893 82,103 154,103 7,100 12,100 (528,612) 0 (60,000) 0 0 123,770 0 (43,035) 260,000 307,935 (37,143) (69,100) 143,117 143,117 (9,541) (9,541) 163,777 (10,918) (10,918) (30,000) (44,370) 24,700 (20,800) 15,398 (76,991) 2,935 (413) 429,461 0 1,000 60,000 (600,000) (273,129) (247,364) (215,527) (0) (0) (0) (1,429,182) (1,429,182) 266,205 266,205 72,400 72,400 362,949 362,949 21,024 57,602 78,626 12,000 12,000 3,999 3,999 4,801 4,801 8,001 8,001 3,000 3,000 8,200 8,200 2,199 2,199 16,921 16,921 38,856 38,856 237,999 237,999 26,180 26,180 4,801 4,801 17,519 17,519 24,999 24,999 15,000 15,000 9,000 9,000 (273,129) 0 (215,527) RENT INSURANCE MEDICAL INSURANCE PRINTING OFFICE EXPENSE POSTAGE-DELIVERY TELEPHONE PROFESSIONAL FEES AUTO EXPENSE LICENSES EXPENSE SALES & PROMOTION ADVERTISING TRAVEL & LODGING CLINIC EXPENSE INTEREST EXPENSE MISC EXPENSE REPAIRS PAYROLL TAXES OFFICE SALARIES DEPRECIATION EXPENSE BANK CHARGES NANTUCKET INDUSTRIES INC. AND SUBSIDIARIES PROJECTED BALANCE SHEET (UNAUDITED)* AUGUST 31, 2002 ASSETS CASH $185,893 ACCOUNTS RECEIVABLE 154,103 INVENTORY 12,100 -------- TOTAL CURRENT ASSETS 352,096 -------- FIXED ASSETS 123,770 ACCUMULATED DEPRECIATION (43,035) -------- NET FIXED ASSETS 80,735 -------- OTHER ASSETS GOODWILL 143,117 AMORTIZATION-GOODWILL (9,541) REORGANIZATION VALUE IN EXCESS OF AMOUNT ALLOCATIBLE TO IDENTIFIABLE ASSETS 163,777 AMORTIZATION-REORGANIZATIONAL VALUE (10,918) CUSTOMER LIST 307,935 AMORTIZATION -CUSTOMER LIST (69,100) -------- TOTAL OTHER ASSETS 525,270 -------- $958,101 ======== LIABILITIES ACCOUNTS PAYABLE $ 65,170 PERSONAL PROPERTY TAXES 15,398 AUTO LOAN 413 -------- TOTAL CURRENT LIABILITIES 80,981 PERSONAL PROPERTY TAXES 61,593 -------- TOTAL LIABILITIES 142,574 -------- COMMON STOCK 600,000 PAID IN CAPITAL 0 RETAINED EARNINGS 215,527 -------- TOTAL STOCKHOLDERS EQUITY 815,527 -------- $958,101 ======== * This projection statement should be read in conjuction with the attached assumptions EXHIBIT "D" Exhibit F Nantucket Industries Inc. and Subsidiaries Projected Balance Sheet (Unaudited) August 31, 2002 Assumes The Following 1. No private placement of Nantucket Industries common stock, is completed during the year ended August 31, 2002. 2. That the continued increase in sales will cause the total accounts receivable from Medicare, Medicaid and of the third party payers to increase. 3. The increase in Paid-in-Capital reflects the completion during the prior 12 months of the $500,000 private placement. 4. The increase in Accounts Payable results from the increase in business volume and subsequent related expenses. 5. The decrease in personal property taxes result from payments made during the year on the anticipated 6 year payout of these priority tax claims. PROJECTED ACTIVITY CONSOLIDATION AJE ELIMINATION CONSOLIDATED 170,893 185,893 82,103 154,103 7,100 12,100 (528,612) 0 (60,000) 0 0 123,770 0 (43,035) 260,000 307,935 (37,143) (69,100) 143,117 143,117 (9,541) (9,541) 163,777 (10,918) (10,918) (30,000) (44,370) 24,700 (20,800) 15,398 (76,991) 2,935 (413) 429,461 0 1,000 60,000 (600,000) (273,129) (247,364) (215,527) (0) (0) (0) (1,429,182) (1,429,182) 266,205 266,205 72,400 72,400 362,949 362,949 21,024 57,602 78,626 12,000 12,000 3,999 3,999 4,801 4,801 8,001 8,001 3,000 3,000 8,200 8,200 2,199 2,199 16,921 16,921 38,856 38,856 237,999 237,999 26,180 26,180 4,801 4,801 17,519 17,519 24,999 24,999 15,000 15,000 9,000 9,000 (273,129) 0 (215,527) NANTUCKET INDUSTRIES ACCUTONE INTERSTATE CASH 10,000 5,000 ACCOUNTS RECEIVABLE 72,000 0 INVENTORY 5,000 0 INVESTMENT-ACCUTONE 528,612 0 0 INVESTMENT-INTERSTATE 60,000 0 LOAN RECEIVABLE-INTERSTATE 8,351 (8,351) EQUIPMENT 97,920 25,850 ACCUMULATED DEPRECIATION (30,956) (12,079) CUSTOMER LIST 47,935 AMORTIZATION-CUSTOMER LIST (31,957) GOODWILL 0 AMORTIZATION GOODWILL 0 REORGANIZATION VALUE 163,777 0 AMORTIZATION-REORG 0 ACCOUNTS PAYABLE (14,370) 0 PAYROLL TAX PAYABLE (35,000) (10,500) PERSONAL PROPERTY TAXES (92,389) 0 AUTO LOAN (3,348) 0 PAID IN CAPITAL (429,461) 0 COMMON STOCK (600,000) (1,000) (60,000) RETAINED EARNINGS 260,864 44,102 0 0 0 Sales Product Advertising Labor & benefits Amortization & Depreciation Automobile Expense Bank Charges Dues & Subscriptions Insurance (Prop/Comp/Liability) Miscellaneous Expenses Office Expense Postage Health Insurance Rent Administrative Salaries Payroll taxes Supplies Telephone Professional fees Selling expense Travel & Entertainment Increase due to the acquisition of Accutone and related amortization since depreciation costs. NANTUCKET INDUSTRIES INC. AND SUBSIDIARIES PROJECTED STATEMENT OF OPERATIONS & RETAINED EARNINGS (UNAUDITED)* SEPTEMBER 1, 2001-AUGUST 31, 2002 SALES (NET) $1,429,182 COSTS OF GOODS SOLD PURCHASES 266,205 ADVERTISING 72,400 LABOR & BENEFITS 362,949 ---------- TOTAL COSTS OF GOODS SOLD 701,554 ---------- GROSS PROFIT 727,628 GENERAL & ADMINISTRATIVE AUTOMOBILE EXPENSE 12,000 BANK CHARGES 3,999 DUES & SUBSCRIPTIONS 4,801 INSURANCE 8,001 MISCELLANEOUS EXPENSES 3,000 OFFICE EXPENSE 8,200 POSTAGE 2,199 HEALTH INSURANCE 16,921 RENT 38,856 ADMINISTRATIVE SALARIES 237,999 PAYROLL TAXES 26,180 SUPPLIES 4,801 TELEPHONE 17,519 PROFESSIONAL FEES 24,999 SELLING EXPENSE 15,000 TRAVEL & ENTERTAINMENT 9,000 ---------- TOTAL GENERAL & ADMINISTRATIVE 433,475 ---------- INCOME BEFORE DEPRECIATION 294,153 DEPRECIATION EXPENSE 78,626 ---------- NET INCOME 215,527 BEGINNING RETAINED EARNINGS -- ---------- ENDING RETAINED EARNINGS $ 215,527 ========== * This projection statement should be read in conjuction with the attached assumptions Nantucket Industries Inc. and Subsidiaries Projected Statement of Operations & Retained Earnings (Unaudited) August 31, 2002 Assumes The Following 1. A. Increase in sales at Yonkers locations attributable to the following: 2. Addition of 4 contracts for audiological services for Early Intervention Programs for children (from 8 months to 12 years of age) 3. Increase in referrals from local nursing and adult care facilities 4. Expansion of office hours from 5 to 6 days per week 5. Addition of a St. Joseph's Geriatric Day Care Center contract for both referrals and on-site clinical evaluations and hearing aid dispensing. (This facility services the entire City of Yonkers and parts of lower Westchester). 6. Increase in local doctor referrals. 1. Anticipated addition of a total of at least 30 nursing homes in Westchester, Dutchess and Ulster counties to which we be the exclusive provider of audiological services, including the dispensing of hearing aids (part of Park Avenue contract). 2. Continued growth of sales and revenues in Mount Vernon Wartburg Facility by expanding office hours and number of days open for service. 3. Addition of a minimum of 4 to 6 new registered hearing aid dispensers and an additional dispensing office in the Pennsylvania operation. EXPENDITURES Cost of Sales - increases due to the addition of at least three NYS Licensed Audiologists and revised salary and benefits costs. Purchases increase due to projected greater number of hearing aids sold. General and Administrative Increased as a result of projected increase in sales and overall related costs including but not limited to: A. Required additional administrative executives and staff. B. Additional space required to accomodate administrative offices. Depreciation Expense LIQUIDATION ANALYSIS NANTUCKET INDUSTRIES, INC. AS AT December 31, 2001 ASSETS: Cash 1,452.00 Other current assets 20,331.00(1) ------------ Total assets 21,783.00 LIABILITIES: Secured claims 21,783.00 Balance available to priority and general claims 0.00 Priority Claims 71,187.00(2) ------------ Balance available for General creditors 0.00 General unsecured claims 1,701,000.00 ------------ Balance available for Shareholder interests 0.00 Preferred shares liquidation 1,000,000.00 ------------ Balance available for Common stockholders 0.00 EXHIBIT "E" 1.The "Other Current Asset" consists of various security deposits held by third parties including utilities and the former landlord. It is not certain that these security deposits have or have not been off-set prior to the bankruptcy by the relevant creditors. 2. A priority claim has been filed by Bartow County, Georgia for personal property taxes in the amount of $71,187. This amount is disputed by the Debtor which filed a tax return indicating that the amount of $19,000 is due. EXHIBIT "F" OMITTED AS PER ORDER OF THE COURT THIS DOCUMENT IS AVAILABLE ON THE COURT'S ELECTRONIC FILING SYSTEM Exhibit "F" Accutone, Inc. and Subsidiary Audited Financial Statements Years Ended December 31, 2000, 1999 and 1998 EXHIBIT "G" Accutone, Inc. and Subsidiary Contents - -------------------------------------------------------------------------------- Independent auditors' report 2 Financial statements: Consolidated balance sheets 3 Consolidated statements of operations 4 Consolidated statement of stockholders' deficit 5 Consolidated statements of cash flows 6 Notes to consolidated financial statements 7-8 Independent Auditors' Report To the Board of Directors Accutone, Inc. and Subsidiary Yonkers, New York We have audited the accompanying consolidated balance sheets of Accutone, Inc. and Subsidiary as of December 31, 2000, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. 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 audit. We conducted our audit 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 audit provides 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 Accutone, Inc. and Subsidiary as of December 31, 2000, 1999 and 1998, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. May 8, 2001 Accutone, Inc. and Subsidiary Consolidated Balance Sheets
================================================================================================= December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------- Assets Cash $ 10,860 $ 34,548 $ 11,372 Accounts receivable 19,680 8,500 4,850 Inventories 10,760 13,378 7,500 Deferred costs (Note 5) 70,599 -- -- - ------------------------------------------------------------------------------------------------- Total current assets 111,899 56,426 23,722 - ------------------------------------------------------------------------------------------------- Property, plant and equipment, net (Notes 2 and 3) 87,109 108,133 63,768 - ------------------------------------------------------------------------------------------------- $ 199,008 $ 164,559 $ 87,490 ================================================================================================= Liabilities and Stockholders' Deficit Current portion of long-term debt (Note 3) $ 3,129 $ 2,935 $ 2,767 Accounts payable 63,807 34,447 18,046 Other liabilities (Note 5) 25,000 -- -- - ------------------------------------------------------------------------------------------------- Total current liabilities 91,936 37,382 20,813 Long term debt (Note 3) 2,440 5,569 8,504 - ------------------------------------------------------------------------------------------------- Total liabilities 94,376 42,951 29,317 - ------------------------------------------------------------------------------------------------- Stockholders' equity (Note 4) Common stock, $.01 par value; authorized 100,000 shares; issued and outstanding 1,000 1,000 1,000 Additional paid-in capital 379,504 311,564 216,766 Accumulated deficit (275,872) (190,956) (159,593) - ------------------------------------------------------------------------------------------------- Total stockholders' equity 104,632 121,608 58,173 - ------------------------------------------------------------------------------------------------- $ 199,008 $ 164,559 $ 87,490 =================================================================================================
See accompanying notes to financial statements. 3 Accutone, Inc. and Subsidiary Consolidated Statements of Operations ================================================================================ Years ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Net sales $ 314,028 $ 362,175 $ 267,388 Cost of sales 224,028 232,542 180,702 - -------------------------------------------------------------------------------- Gross profit 90,000 129,633 86,686 Selling, general and administrative expenses 152,254 135,253 144,013 - -------------------------------------------------------------------------------- Loss from operations (62,254) (5,620) (57,327) Other expense: Depreciation 21,024 20,107 11,010 Interest expense 1,638 5,636 3,282 - -------------------------------------------------------------------------------- Total other expense 22,662 25,743 14,292 - -------------------------------------------------------------------------------- Loss before income taxes (84,916) (31,363) (71,619) Income taxes (Note 4) -- -- -- - -------------------------------------------------------------------------------- Net loss $ (84,916) $ (31,363) $ (71,619) ================================================================================ See accompanying notes to financial statements. 4 Accutone, Inc. and Subsidiary Consolidated Statement of Stockholders' Equity ================================================================================ Additional Common paid-in Accumulated stock capital deficit Total - -------------------------------------------------------------------------------- Balance at January 1, 1998 $ 1,000 $ 139,369 $ (87,974) $ 52,395 Net loss (71,619) (71,619) Capital contribution 77,397 77,397 - -------------------------------------------------------------------------------- Balance at December 31, 1998 1,000 216,766 (159,593) 58,173 Net loss (31,363) (31,363) Capital contribution 94,798 94,798 - -------------------------------------------------------------------------------- Balance at December 31, 1999 1,000 311,564 (190,956) 121,608 Net loss (84,916) (84,916) Capital contribution 67,940 67,940 - -------------------------------------------------------------------------------- Balance at December 31, 2000 $ 1,000 $ 379,504 $(275,872) $ 104,632 ================================================================================ See accompanying notes to financial statements. 5 Accutone, Inc. and Subsidiary Consolidated Statements of Cash Flows
======================================================================================= Years ended December 31, 2000 1999 1998 - --------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $(84,916) $(31,363) $(71,619) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 21,024 20,107 11,010 Changes in assets and liabilities Accounts receivable (11,180) (3,650) 650 Inventories 2,618 (5,878) 4,569 Deferred costs (70,599) -- -- Accounts payable 29,360 16,401 (5,054) Other liabilities 25,000 -- -- - --------------------------------------------------------------------------------------- Net cash used by operating activities (88,693) (4,383) (60,444) - --------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property and equipment -- (64,472) (22,251) - --------------------------------------------------------------------------------------- Net cash used by investing activities -- (64,472) (22,251) - --------------------------------------------------------------------------------------- Cash flows from financing activities: Capital contribution 67,940 94,798 77,397 Proceeds from equipment loan -- -- 12,377 Payments on long-term debt (2,935) (2,767) (1,106) - --------------------------------------------------------------------------------------- Net cash provided by financing activities 65,005 92,031 88,668 - --------------------------------------------------------------------------------------- Net increase (decrease) in cash (23,688) 23,176 5,973 Cash, beginning of year 34,548 11,372 5,399 - --------------------------------------------------------------------------------------- Cash, end of year $ 10,860 $ 34,548 $ 11,372 =======================================================================================
See accompanying notes to financial statements. 6 Accutone, Inc. and Subsidiary Notes to Consolidated Financial Statements ================================================================================ 1. Summary of Significant Accounting Policies a. The Company Accutone, Inc. and its wholly-owned subsidiary (the "Company") distribute hearing aids. b. Principles of Consolidation The consolidated financial statements include the accounts of Accutone, Inc. and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated. c. Revenue Recognition Revenue is recognized when the merchandise is shipped. d. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. e. Property and Equipment Property and equipment are stated at cost. Depreciation is computed for financial statement purposes, using the straight-line method over the estimated useful life. For income tax purposes, depreciation is computed using statutory rates. f. 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. g. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions, that affect the reported amounts of the assets and liabilities at the date of the financial statements, the revenues and expenses during the period as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. 7 Accutone, Inc. and Subsidiary Notes to Consolidated Financial Statements ================================================================================ h. Long-Lived Assets The company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair value less cost to sell. 2. Property, Plant and Equipment 2000 1999 1998 --------------------------------------------------------------- Furniture and fixtures $ 13,801 $ 13,801 $ 13,801 Leasehold improvements 25,000 25,000 -- Machinery and equipment 61,269 61,269 21,797 Customer list 47,935 47,935 47,935 ------------------------------------ 148,005 148,005 83,533 Accumulated depreciation (60,896) (39,872) (19,765) --------------------------------------------------------------- $ 87,109 $ 108,133 $ 63,768 =============================================================== 3. Long-term debt 2000 1999 1998 --------------------------------------------------------------- Equipment loan payable to a finance company, collateralized by equipment with monthly installments of $280 including interest at 5.9% maturing in 2002 $5,569 $8,504 $1,998 Less current maturities 3,129 2,935 2,767 --------------------------------------------------------------- $2,440 $5,569 $8,504 =============================================================== 4. Income taxes At December 31, 2000, the Company had net operating loss carryforwards of approximately $276,000 expiring from 2017 to 2020. 5. Commitment and The Company has incurred fees with certain contingencies stockholders for legal services performed in connection with a proposed reverse acquisition with Nantucket Industries Inc. (debtor in possession). It is anticipated that the transaction will be completed within the next six months. ================================================================================ See accompanying notes to financial statements. 8 Accutone, Inc. and Subsidiary Compiled Financial Statements Three Months Ended March 31, 2001 EXHIBIT "H" Accutone, Inc. Contents - -------------------------------------------------------------------------------- Independent accountant's compilation report 2 Financial statements: Consolidated balance sheets 3 Consolidated statement of operation 4 Consolidated statement of stockholders' equity 5 Consolidated statement of cash flows 6 Notes to consolidated financial statements 7-8 Independent Accountants' Compilation Report To the Board of Directors Accutone, Inc. and Subsidiary Yonkers, New York We have compiled the accompanying consolidated balance sheet of Accutone, Inc. and Subsidiary as of March 31, 2001 and the related consolidated statements of operations, stockholders' equity and cash flows for the three months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. May 10, 2001 Accutone, Inc. and Subsidiary Consolidated Balance Sheet ================================================================================ March 31, 2001 - -------------------------------------------------------------------------------- Assets Cash $ 7,315 Accounts receivable 31,270 Inventories 9,940 Deferred costs (Note 5) 71,199 - -------------------------------------------------------------------------------- Total current assets 119,724 - -------------------------------------------------------------------------------- Property, plant and equipment, net (Notes 2 and 3) 111,723 - -------------------------------------------------------------------------------- $ 231,447 ================================================================================ Liabilities and Stockholders' Equity Current portion of long-term debt (Note 3) $ 3,183 Accounts payable 62,435 Other liabilities (Note 5) 25,000 - -------------------------------------------------------------------------------- Total current liabilities 90,618 Long term debt (Note 3) 1,618 - -------------------------------------------------------------------------------- Total liabilities 92,236 - -------------------------------------------------------------------------------- Commitments and contingencies (Note 5) Stockholders' equity Common stock, $.01 par value; authorized 100,000 shares, issued and outstanding 1,000 Additional paid-in capital 399,461 Accumulated deficit (261,250) - -------------------------------------------------------------------------------- Total stockholders' equity 139,211 - -------------------------------------------------------------------------------- $ 231,447 ================================================================================ See accompanying notes to compiled financial statements 3 Accutone, Inc. and Subsidiary Consolidated Statement of Operations ================================================================================ Three months ended March 31, 2001 - -------------------------------------------------------------------------------- Net sales $113,219 Cost of sales 65,293 - -------------------------------------------------------------------------------- Gross profit 47,926 Selling, general and administrative expenses 27,232 - -------------------------------------------------------------------------------- Income from operations 20,694 Other expense: Depreciation 5,286 Interest expense 786 - -------------------------------------------------------------------------------- Total other expense 6,072 - -------------------------------------------------------------------------------- Income before income taxes 14,622 Income taxes (Note 4) -- - -------------------------------------------------------------------------------- Net income $ 14,622 ================================================================================ See accompanying notes to compiled financial statements. 4 Accutone, Inc. and Subsidiary Consolidated Statement of Stockholders' Equity ================================================================================ Additional Common paid-in Accumulated stock capital deficit Total - -------------------------------------------------------------------------------- Balance at January 1, 2001 $1,000 $379,504 $(275,872) $104,632 Net income -- -- 14,622 14,622 Capital contribution -- 19,957 -- 19,957 - -------------------------------------------------------------------------------- Balance at March 31, 2001 $1,000 $399,461 $(261,250) $139,211 ================================================================================ See accompanying notes to compiled financial statements. 5 Accutone, Inc. and Subsidiary Consolidated Statement of Cash Flows ================================================================================ Three months ended March 31, 2001 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 14,622 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,286 Changes in assets and liabilities: Accounts receivable (11,590) Inventories 820 Deferred costs (600) Accounts payable (1,372) - -------------------------------------------------------------------------------- Net cash provided by operating activities 7,166 - -------------------------------------------------------------------------------- Cash flows from investing activities: Additions to equipment (29,900) - -------------------------------------------------------------------------------- Net cash used by investing activities (29,900) - -------------------------------------------------------------------------------- Cash flows from financing activities: Capital contribution 19,957 Payments on long-term debt (768) - -------------------------------------------------------------------------------- Net cash provided by financing activities 19,189 - -------------------------------------------------------------------------------- Net decrease in cash (3,545) Cash, beginning of period 10,860 - -------------------------------------------------------------------------------- Cash, end of period $ 7,315 ================================================================================ See accompanying notes to compiled financial statements. 6 Accutone, Inc. and Subsidiary Notes to Consolidated Financial Statements ================================================================================ 1. Summary of Significant Accounting Policies a. The Company Accutone, Inc. and its wholly-owned subsidiary (the "Company") distribute hearing aids. b. Principles of Consolidation The consolidated financial statements include the accounts of Accutone, Inc. and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated. c. Revenue Recognition Revenue is recognized when the merchandise is shipped. d. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. e. Property and Equipment Property and equipment are stated at cost. Depreciation is computed for financial statement purposes, using the straight-line method over the estimated useful life. For income tax purposes, depreciation is computed using statutory rates. f. 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. g. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions, that affect the reported amounts of the assets and liabilities at the date of the financial statements, the revenues and expenses during the period as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. 7 Accutone, Inc. and Subsidiary Notes to Consolidated Financial Statements ================================================================================ h. Long-Lived Assets The company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair value less cost to sell. 2. Property, Plant and Equipment 2001 ----------------------------------------------------------------- Furniture and fixtures $ 13,801 Leasehold improvements 25,000 Machinery and equipment 91,169 Customer list 47,935 ----------------------------------------------------------------- 177,905 Accumulated depreciation (66,182) ----------------------------------------------------------------- $111,723 ================================================================= 3. Long-term debt 2001 ----------------------------------------------------------------- Equipment loan payable to a finance company, collateralized by equipment with monthly installments of $280 including interest at 5.9% maturing in 2002 $ 4,801 Less current maturities 3,183 ----------------------------------------------------------------- $ 1,618 ================================================================= 4. Income taxes At March 31, 2001, the Company had net operating loss carryforwards of approximately $276,000 expiring from 2017 to 2020. 5. Commitment and The Company has incurred fees with certain contingencies stockholders for legal services performed in connection with a proposed reverse acquisition with Nantucket Industries Inc. (debtor in possession). It is anticipated that the transaction will be completed within the next six months. ================================================================================ -----END PRIVACY-ENHANCED MESSAGE-----