-----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, PP1ZM5kUKcQ5MdiDv5KAt8JdAYqaKkTFoYqPZiG6NLR2D2sW3pxK2mkWFe01AXDC FivvEELYz5hIbHgcbMILLg== 0000903893-97-000078.txt : 19970123 0000903893-97-000078.hdr.sgml : 19970123 ACCESSION NUMBER: 0000903893-97-000078 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960302 FILED AS OF DATE: 19970122 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NANTUCKET INDUSTRIES INC CENTRAL INDEX KEY: 0000069623 STANDARD INDUSTRIAL CLASSIFICATION: MEN'S & BOYS' FURNISHINGS, WORK CLOTHING, AND ALLIED GARMENTS [2320] IRS NUMBER: 580962699 STATE OF INCORPORATION: DE FISCAL YEAR END: 0225 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-08509 FILM NUMBER: 97508888 BUSINESS ADDRESS: STREET 1: 105 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 212-889-5656 MAIL ADDRESS: STREET 1: 105 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10016 FORMER COMPANY: FORMER CONFORMED NAME: NANTUCKET LINGERIE INC DATE OF NAME CHANGE: 19690715 10-K/A 1 AMENDED FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT TO REPORT Filed pursuant to Section 12, 13, or 15(d) of THE SECURITIES EXCHANGE ACT OF 1934 NANTUCKET INDUSTRIES, INC. AMENDMENT NO. 2 The undersigned registrant hereby amends the following items, financial statements, exhibits or other portions of its Annual Report on Form 10-K for the Fiscal Year ended March 2, 1996, reflecting the complete amended items as set forth in the pages attached hereto: Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 14 Notes to Consolidated Financial Statements. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NANTUCKET INDUSTRIES, INC. January 20, 1997 By: \s\ Ronald S. Hoffman ---------------------- Ronald S. Hoffman, Vice President-Finance and Chief Financial Officer (principal financial and accounting officer) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION General - ------- In recent years, the Company was burdened with an unprofitable Puerto Rico facility and low margin product lines which created challenges in its business, profitability and financial resources. At the end of the 1994 fiscal year the Company began the implementation of a restructuring strategy to improve operating results and enhance its financial resources. During fiscal 1995, the Company implemented strategies which reduced costs, streamlined its operations and closed its Puerto Rico plant. In March, 1994, the Company refinanced its debt and entered into agreements with its principal stockholders and employees to increase its capital, through the sale of $1 million of non-voting convertible preferred stock to management and reduce expenses. In August, 1994, the Company sold treasury stock which increased equity by $2.9 million. Although there can be no assurance that these measures will be successful, the Company believes the steps it has taken provide sufficient liquidity to fund its operations. In April, 1996 the Company signed a letter of intent for a $3.5 Million private placement consisting of 250,000 shares of common stock and $2,625,000 of 12.5% convertible subordinated debentures due August 31, 1996. The debentures will be secured by a second mortgage on the Company's manufacturing and distribution facility in Georgia and are convertible into 467,167 shares of common stock in specified amounts after specified dates at prices ranging from $5.10 to $6.00. Closing of the transaction is expected in early June, 1996. The net proceeds will be used to prepay the balance payable to Chemical Bank. Accordingly, the entire balance is included in current liabilities. The remaining net proceeds will be used to reduce the outstanding balance with Congress. Results of Operation - -------------------- Sales Net sales for the fiscal year ended March 2, 1996 decreased 5% from prior year levels to $35,060,000. Most of this decline was associated with the elimination of unprofitable product lines, including a reduction of $1,024,000 related to the fiscal 1996 elimination of the Company's healthcare line. A soft retail environment contributed to an overall 5.5% decrease in revenues associated with lower unit volumes in the core men's' fashion underwear products. For the current fiscal year, there was a 55% increase in the unit volume sales of the developing GUESS? intimate apparel product line to $4.9 million. For the fiscal year ended February, 1995, net sales declined 11% reflecting $9.5 million reduction related to the elimination of unprofitable product lines. Sales in the Company's core men's' fashion underwear division rose 7%, generally in unit volumes over prior year levels. Sales of the GUESS? products unit volumes resulted in an increase of $2.6 million from prior year levels when the initial shipments began in November, 1993. 17 Net sales in fiscal 1994 decreased 11% to $41.6 million, with declines in the sock and women's divisions and a 28% increase in the Mens' division. The sales decline in the Women's Division of $3.6 million in fiscal 1995 and $7.9 million in fiscal 1994 was predominantly the result of the termination of the Company's business with Avon Products during the third quarter of fiscal 1994. The sales decline in the Sock Division of $3.4 million in fiscal 1995 and $4.3 million in fiscal 1994 was the result of the Company's decision to not renew its license with DANSKIN, and the Company's decision during 1994 to cease operations at this division Gross Margin Gross profit margins continued to improve from prior year levels as follows: Fiscal Year 1996 1995 1994 ---- ---- ---- Gross Margin % 24% 19% 14% Amount- % Increase (Decrease) 18% 21% (39%) This is a result of the improved product mix from the increased sales of the higher margin GUESS? Innerwear line, the elimination of the unprofitable products, improved plant efficiencies and lower cost product sources. The gross profit margin in fiscal 1995 reflects non recurring inventory reserves and write-offs generally associated with discontinued product lines which aggregated $652,000. The decrease in gross profit margin in fiscal 1994 was the result of unfavorable manufacturing variances at both Cartersville and Puerto Rico, unfavorable product mixes and inventory write-downs of $500,000. Selling, general and administrative expenses Selling, general and administrative expenses for the 1996 fiscal year remained at 21% of sales, generally consistent with fiscal 1995 levels. These expenses declined 3% to $7,554,000 from the prior year level, generally due to the variable selling costs related to the decreases in net sales. The current fiscal year has been reduced by a $102,000 recovery of an insurance claim which was expensed in the fourth quarter of the prior fiscal year. Selling, general and administrative expenses in fiscal 1995 were 21% of sales, a decline of $2,028,000 or 21% from prior year levels. This reflects the reduction in senior management salaries resulting from the termination and severance agreements entered into with the former chairman and vice chairman and reduced professional fees. In fiscal 1994, there was a $1.5 million increase in selling, general and administrative costs. This increase was primarily attributable to increased royalties (with licensed brands comprising a higher proportion of the Company's sales), set-up costs incurred in connection with new programs at certain customers and increased accounting, legal and other professional fees, incurred in connection with the refinancing and restructuring described herein and investigation of the Company's fiscal 1993 inventory loss. 18 Selling, general and administrative costs are substantially fixed. In fiscal 1995, the impact of the termination and severance agreements with the former chairman and vice chairman, a significant fixed element in prior years, is reflected in the lower percentage of these costs to sales. Prospective Financial Standard - ------------------------------ Stock-Based Compensation In October, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" which is effective for fiscal years beginning after December 15, 1995. As permitted by FAS 123,. the Company will elect to continue to measure stock option grants in accordance with APB No. 25 and, accordingly, recognizes no compensation expense for these grants Unusual (credit) charge In November, 1992, the Company acquired the Puerto Rico facility, Phoenix Associates, Inc., pursuant to a stock purchase agreement. A portion of the purchase price was 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 variances at the Puerto Rico facility incurred prior to the Company's acquisition of this facility. In connection with the acquisition of the Puerto Rico facility, the Company initiated an action against the former owners of that facility. In the third quarter of the current fiscal year, the Company concluded that its claims against the holder of the subordinated note payable are in excess of the $300,000 due. In the opinion of legal counsel and management, the likelihood of any payment being required on this note is remote. Accordingly, in fiscal 1996, the Company eliminated this payable and reflected such $300,000 reduction as an unusual credit in the accompanying financial statements. The operating loss for fiscal 1995 and 1994 includes an unusual charge of approximately $1.3 million and $5.5 million, respectively. Of the total unusual charge of $1,252,500 in fiscal 1995 and $5,450,000 in fiscal 1994, approximately $160,000 in fiscal 1995 and $300,000 in fiscal 1994 represents expenses incurred during fiscal 1995 in closing the Puerto Rico facility, $1,092,000 in the current fiscal year and $3,085,000 in fiscal 1994 represents write-downs of asset values and other non-cash items and $2.1 million in fiscal 1994 represents employee severance payments. The fiscal 1994 accrual of severance payments for the former Chairman and Vice Chairman of the Board ($1,765,000) will reduce compensation expenses over a five year period which commenced in fiscal 1995. The write-down of asset values is not expected to have a material effect on the Company's liquidity. Interest expense The increase in interest expense of $118,000 for the 1996 fiscal year is primarily due to the higher prime rates in effect during fiscal year 1996 and increased in levels of financing. Interest expense for fiscal year 1995 was $1,195,000 and $795,000 in fiscal 1994 The increase in fiscal 1995 reflects higher borrowing levels associated with the new credit agreements and increases in the prime rate.. Liquidity and Capital Resources - ------------------------------- In March, 1994 the Company refinanced its credit agreements with (i) a three year $15,000,000 revolving credit facility, including a $3,000,000 letter of credit facility, with Congress Financial, (ii) a $2,000,000 Term Loan Agreement with Chemical Bank and (iii) an additional $1,500,000 Term Loan with Congress replacing the Industrial Revenue Bond financing of the Cartersville, Georgia manufacturing plant. Additionally, the $1,000,000 investment in the Company by the Management Group and the sale of 490,000 shares of common treasury stock to GUESS?, Inc. and certain of its affiliates increased the Company's liquidity and capital resources. The net proceeds of $2.9 million from the sales of treasury shares was used to prepay $500,000 of bank debt and the balance provided additional working capital resources. Under the terms of the Term Loan Agreement with Chemical Bank, scheduled installments of $500,000 each were due on December 15, 1995 and March 15, 1996. As of December 15, 1995 the Company agreed to an amendment in which it made payments of $100,000 each on December 31, 1995 and January 31, 1996, with the remaining $800,000 to be paid in 15 equal installments commencing March 31, 1996. The Company believes that the credit facility provides adequate financing flexibility to fund its operations. Working capital decreased $2,003,000 to $10,988,000. This decrease reflects a decrease in receivable levels caused by the lower sales levels experienced in the overall retail environment. Inventory levels declined as the impact of increased offshore sourcing reduced the level of raw materials. Property, plant and equipment additions were $97,000 for fiscal 1996, $388,000 for fiscal 1995 and $216,000 for fiscal 1994. The revolving credit agreement with Congress Financial provides for the Company to borrow purchase money term loans (up to a maximum of $500,000) of up to 75% of the orderly liquidation value of newly acquired and eligible equipment The Company knows of no other trends or uncertainties which have had, or which it expects will have, any material impact on the Company's operations. The Company believes that the moderate rate of inflation over the past few years has not had significant impact on sales or profitability and its future operations are not expected to be affected significantly by inflation. 20 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 2, 1996, February 25, 1995 and February 26, 1994 NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Nantucket Industries, Inc. and its wholly-owned subsidiaries (the "Company") designs, manufactures and sells throughout the United States men's branded and private label fashion undergarments to mass merchandisers and national chains. In addition, the Company designs, manufactures and sells to department and specialty stores GUESS? innerwear for both women and men. For the current fiscal year, sales to the Company's largest customer accounted for 40% of net sales and 43% and 27%, respectively, for the two prior fiscal years. Sales to the second largest customer in the current fiscal year were 21% of net sales and 17% and 15%, respectively, for the two prior fiscal years. Sales in the current fiscal year to the Company's third largest customer represented 13% of net sales and 12% in the prior fiscal year. For the fiscal year ending February, 1994, sales to another customer represented 12% of net sales. In the fourth quarter of fiscal 1994, the Company terminated business with this customer in connection with the shutdown of its Puerto Rico facility (Note 2). Principles of Consolidation The consolidated financial statements include the accounts of Nantucket Industries, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Accounts Receivable An allowance for doubtful accounts is provided based upon historical bad debt experience and periodic evaluations of the aging of the accounts. Substantially all receivables are insured up to 80% of the outstanding balance, subject to certain deductibles. Inventories Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market (net realizable value). 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: 6 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 2, 1996, February 25, 1995 and February 26, 1994 Years Buildings and improvements 20 - 40 Machinery and equipment 3 - 10 Furniture and fixtures 10 Other Assets Other long-term assets consist primarily of capitalized loan origination costs. These costs are being amortized over the term of the related credit agreements. 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. Revenue Recognition Sales are recognized when merchandise is shipped and title passes. Returns and allowances are accrued based on existing terms and historical trends. Net Income (Loss) Per Common Share Net income (loss) per common share is computed by dividing net income (loss) by average common shares outstanding during each year. Stock options and warrants are not included since the effect would be antidilutive or not significant to the computation. Fiscal Year The Company's fiscal year ends on the Saturday nearest to February 28. The year ended March 2, 1996 had 53 weeks and the years ended February 25, 1995 and February 26, 1994 contained 52 weeks. Reclassification Certain prior year amounts have been reclassified in order to conform to the current year's presentation. 7 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 2, 1996, February 25, 1995 and February 26, 1994 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, 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 Impairment of Long-Lived Assets In 1995, the Company adopted 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 cash flows is less than the book value. 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 approximates the carrying value. The carrying value of all other financial instruments potentially subject to valuation risk, principally cash, accounts receivable and accounts payable, also approximate fair value. NOTE 2 - UNUSUAL (CREDIT) CHARGE In November, 1992, the Company acquired a manufacturing facility in Puerto Rico, Phoenix Associates, Inc., pursuant to a stock purchase agreement. Phoenix had been an exclusive contractor for the Company, manufacturing many of the Company's product lines for its men's and ladies' divisions. 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. In connection with the acquisition of the Puerto Rico facility, the Company initiated an action against the former owners of that facility as more fully described in Note 8. In the third quarter of the current fiscal year, the Company concluded that its counterclaims against the former owners of Phoenix, the holder of the subordinated debt payable, are in excess of the $300,000 due and, in the opinion of legal counsel and management, the likelihood of any payment of this note is remote. Accordingly the Company has eliminated this payable and reflected such reduction as an unusual credit in the accompanying financial statements. At the end of fiscal 1994, the Company formulated plans to close its Puerto Rico facility, discontinue a portion of its women's innerwear business, reduce costs and streamline operations. In fiscal 1994, the Company provided for the costs associated with these matters as an unusual charge. The Puerto Rico facility shutdown was completed in July, 1994. A final assessment 8 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 2, 1996, February 25, 1995 and February 26, 1994 associated with this closing required additional write-offs, reflected as an unusual charge of $1,252,400 in fiscal 1995. Simultaneously in 1994, the Company also terminated the employment contracts of its Chairman and Vice-Chairman. In accordance with the underlying agreement, they will be paid an aggregate of approximately $400,000 per year in severance and other benefits, through February 28, 1999. The present value of these payments was accrued at February 26, 1994. For fiscal 1996, 1995 and 1994, the unusual charge (credit) consisted of the following:
1996 1995 1994 ---- ---- ---- Employee severance (Note 8) $ - $ - $2,065,000 Write-off of goodwill - - 1,478,000 Write-down of inventory - 1,092,400 1,000,000 Write-down of property, plant and equipment - - 530,000 Elimination of subordinated note payable (300,000) - Other 160,000 377,000 ----------- ------------ ------------- $ (300,000) $1,252,400 $5,450,000 ----------- ============ =============
Through March 2, 1996, payments of the unusual charges aggregated $1,231,000; $460,000 associated with the shutdown of the Puerto Rico facility and $771,000 representing payments against the present value of the termination payments to the former Chairman and Vice Chairman. NOTE 3 - INVENTORIES Inventories are summarized as follows: 1996 1995 ----------- ----------- Raw materials $1,308,694 $ 1,960,413 Work in process 5,709,573 5,594,387 Finished goods 3,138,372 3,429,396 ----------- ----------- $10,156,639 $10,984,196 ----------- ----------- Inventory valuation allowances and write-downs approximating $453,000 and $1.3 million were provided for the years ended March 2, 1996 and February 25, 1995, respectively. For the fiscal year ended February, 1995 $1,092,400 of such reserves were related to the unusual charge (Note 2). 9 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 2, 1996, February 25, 1995 and February 26, 1994 NOTE 4 - PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment are summarized as follows: 1996 1995 ---------- ---------- Land $ 83,757 $ 83,757 Buildings and improvements 3,157,252 3,139,814 Machinery and equipment 3,400,628 3,332,500 Furniture and fixtures 800,929 788,984 ---------- --------- 7,442,566 7,345,055 Less accumulated depreciation 3,943,741 3,578,184 --------- --------- $3,498,825 $3,766,871 ========= ========= NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE Revolving Credit The company had a $9.5 million secured borrowing facility with Chemical Bank which expired on February 28, 1994. On March 22, 1994, the Company entered into a new $15 million three year revolving credit facility with Congress Financial Corp. 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 1-3/4% to 3% 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. In connection with this refinancing, the Company used $5,090,000 of the proceeds of the revolving credit facility to reduce the balance due to Chemical Bank and simultaneously entered into a $2,000,000 Term Loan Agreement with Chemical Bank. At December 15, 1995 $1,000,000 was outstanding under this loan. Pursuant to an amendment to this agreement, the Company made payments of $100,000 each on December 31, 1995 and January 31, 1996 and agreed to pay the remaining $800,000 in 15 equal installments commencing March 31, 1996. The amendment also requires certain prepayments in the event the Company refinances any existing debt or obtains additional equity or debt financing. Pursuant to the agreement, the Company issued 10,000 treasury common shares related to its decision to defer making the mandatory prepayments. 10 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 2, 1996, February 25, 1995 and February 26, 1994 Real Estate Financing On June 8, 1994 the Company borrowed $1,500,000 under a separate five year term loan with Congress Financial Corp. and repaid a $1,700,000 Industrial Revenue Bond financing. This loan is secured by the Company's facility in Cartersville, Georgia. Annual Maturities Annual maturities of debt are as follows: 1997 $ 1,275,000 1998 7,994,000 1999 345,000 2000 90,000 ----------- $9,704,000 NOTE 6 - INCOME TAXES Effective for fiscal 1994, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The adoption of SFAS No. 109 did not have a material effect on the consolidated financial statements. Therefore, the effect of adopting SFAS No. 109 is included in income tax expense rather than as a cumulative effect of an accounting change. Under the provisions of SFAS No. 109, 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 law. Significant components of the Company's deferred taxes at March 2, 1996 and February 25, 1995 are as follows: 11 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 2, 1996, February 25, 1995 and February 26, 1994
1996 1995 ------------ ----------- DEFERRED TAX ASSETS Net operating loss carryforward $4,256,000 $3,656,000 Accrued severance 460,000 613,000 Excess of tax basis over book basis of inventories 137,000 280,000 Capitalized inventory costs 147,000 177,000 Other 58,000 173,000 ---------- ---------- Total deferred tax assets 5,058,000 4,899,000 Deferred tax liabilities Difference between the book and tax basis of property, plant and equipment 357,000 266,000 ---------- ---------- Net deferred tax asset 4,701,000 4,633,000 Less valuation allowance 4,701,000 4,633,000 ---------- ---------- Net deferred taxes $ - $ - =========== ===========
The Company anticipates utilizing its deferred tax assets only to the extent of its deferred tax liabilities. Accordingly, the Company has fully reserved all remaining deferred tax assets which it cannot presently utilize. Refundable taxes of $558,000 were recorded at February 26, 1994, which reflect carryback of the Company's net operating losses for Federal and state income tax purposes. At March 2, 1996, the net operating loss carryforward for book purposes is $12 million. For tax purposes, at March 2, 1996, the Company's net operating carryforward was $10.6 million, which begins to expire in the year 2009. Certain tax regulations relating to the change in ownership may limit the Company's ability to utilize its net operating loss carryforward if the ownership change, as computed under such regulations, exceeds 50%. Through March, 1996 the change in ownership was approximately 40%. There was no income tax provision (benefit) for the fiscal years 1996 and 1995. The provision (benefit) for income taxes for fiscal year 1994 is comprised of the following: 12 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 2, 1996, February 25, 1995 and February 26, 1994 1994 Current ---------- Federal $(515,102) State and Local 10,194 ---------- (504,908) Deferred (benefit) provision (223,000) ---------- $(727,908) ---------- The following is a reconciliation of the normal expected statutory Federal income tax rate to the effective rate reported in the financial statements:
1996 1995 1994 ------- ------- ----- Computed "expected" provision for Federal income taxes (35.0)% (35.0)% (35.0)% Reversal of prior year deferred taxes (2.2) State taxes - net of Federal income tax benefit Officers' life insurance 1.0 Other (2.0) Valuation allowance 35.0 35.0 31.0 ----- ----- ----- Actual provision for income taxes - % - % (7.2)% ======= ======= ======
NOTE 7 - STOCKHOLDERS' EQUITY Stock Options and Warrants The 1992 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 at the date of grant. Options are exercisable up to ten years from the date of grant. 13 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 2, 1996, February 25, 1995 and February 26, 1994 A summary of option transactions under these plans is as follows:
1996 1995 1994 -------------------- ---------------------- --------------------- Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning $8.10 $5.13 180,000 $5.75 120,000 10.75 260,000 11.00 $3.00- Granted 84,000 3.37 180,000 5.75 $5.13- Exercised - - (110,000) 5.75 $8.10- Canceled or expired - (120,000) 10.75 (30,000) $11.00 -------- -------- Outstanding, end of year $3.00- $8.00- 264,000 5.75 180,000 $5.75 120,000 10.75 ======== ======== ========= Exercisable, end of year - - - ========= Available for grant 76,000 160,000 70,000 ========= ======== =========
In October, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" which is effective for fiscal years beginning after December 15, 1995. As permitted by FAS 123,. the Company has elected to continue to account for stock option grants in accordance with APB No. 25 and, accordingly, recognizes no compensation expense for these grants. 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 and approximate $160,000 at March 2, 1996. Such dividends are convertible into common stock at the rate of $5.00 per share. These shares are redeemable, at the option of the Company, on or after February 28, 1999 and have a liquidation preference of $200 per share. Sale of Treasury Stock On August 22, 1994, the Company sold 490,000 shares of its common treasury stock to GUESS?, Inc. and certain of its affiliates for $6.00 per share. Net proceeds aggregated $2.9 million. The treasury stock issued had an average cost of $6.52 per share. Accordingly, $295,000, representing the difference between the net proceeds and the treasury shares cost of $3,196,000, was charged to the Company's accumulated deficit. 14 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 2, 1996, February 25, 1995 and February 26, 1994 In connection with the Company's refinancing on March 22, 1994 (Note 5), the Company entered into a $2,000,000 Term Loan Agreement with Chemical Bank. Pursuant to the agreement, the Company issued to Chemical Bank 10,000 treasury common shares, 7,500 in the current fiscal year and 2,500 at the end of the prior fiscal year, related to mandatory prepayments which were not made. Stockholders' Rights Plan The Company has a Stockholders' Rights plan which becomes effective when more than 30% of the Company's common shares are acquired by a person or a group. The Company may redeem the rights before such time. NOTE 8- COMMITMENTS,CONTINGENCIES AND RELATED PARTY TRANSACTIONS Lease Commitments Minimum rental commitments under noncancellable leases (excluding renewal options and escalation's) having a term of more than one year as of March 2, 1996, are as follows: Operating Leases ---------- Fiscal year ending 1997 $242,000 1998 60,000 ---------- Total minimum lease payments $302,000 ---------- Rental expense under operating leases, including escalation amounts, was approximately $300,000, $284,000, and $426,000 for the fiscal years ended March 2, 1996, February 25, 1995 and February 26, 1994, respectively. Employment Agreements The Company has entered into employment agreements, as amended, with certain officers providing for minimum salary levels. Certain of these agreements provide for adjusted annual cost-of-living increases, change in control, and termination provisions. In addition, several of these agreements provide for commission payments based on certain sales thresholds, as well as death and disability benefits payable to the respective estate and permanent disability benefits payable to the executives in the amount of one-half the executive's remaining contracted salary and certain retirement health care benefits to certain executives. The Company is insured for the death benefit provision under the executive employment contracts. The aggregate commitment under these agreements at March 2, 1996 is as follows: 15 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 2, 1996, February 25, 1995 and February 26, 1994 Fiscal year ending 1997 $1,110,000 1998 $960,000 1999 $818,000 2000 - Agreements with Principal Stockholders On March 1, 1994, in connection with the restructuring described in Note 2, 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 160,000 shares sold by such shareholders, subject to reductions under certain circumstances. Through March 2, 1996 the principal shareholders have sold 109,875 shares including 51,275 at prices below of $5.00 per share resulting in a charge in the current year operating results of $36,000. Pursuant to the agreement and applicable securities laws, at March 2, 1996 the maximum remaining shares subject to this guarantee, at current market prices, is 50,125 shares. Warrants to purchase up to 160,000 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. The contribution to the Company of approximately $535,000 of cash surrender value of life insurance policies on the lives of the stockholders owned by the Company, in the form of a loan against such policies which is not required to be repaid. The cancellation of the outstanding stock options and incentive awards of the Group members and the principal stockholders and the authorization to issue options to Group members to purchase 150,000 shares of common stock based upon certain terms and conditions. Trademark Licensing Agreements Minimum payments under noncancellable licensing agreements (excluding renewal options) having a term of more than one year as of March 2, 1996, are as follows: 16 -----END PRIVACY-ENHANCED MESSAGE-----