-----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, AHYwybIZ0vjk8nIYq4SnxTdn+731vLlnjtJbK/bgx0+g114yt2IU5wwU2AOwIRvM /Y3FhmnGc79mJixLWDDc/w== 0001000095-98-000003.txt : 19980114 0001000095-98-000003.hdr.sgml : 19980114 ACCESSION NUMBER: 0001000095-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971129 FILED AS OF DATE: 19980113 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-Q SEC ACT: SEC FILE NUMBER: 001-08509 FILM NUMBER: 98505557 BUSINESS ADDRESS: STREET 1: 510 BROADHOLLOW RD STREET 2: STE 300 CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 212-889-56 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-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 29, 1997. Commission File Number: 1-8509 NANTUCKET INDUSTRIES, INC. -------------------------- (Exact name of registrant as specified in its charter) Delaware 58-0962699 -------- ---------- (State of other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 510 Broadhollow Road Suite 300, Melville, New York 11747 ----------------------------- ----- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (516) 293-3172 ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. X YES NO --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: As of January 5, 1998, the Registrant had outstanding 3,238,796 shares of common stock not including 3,052 shares classified as Treasury Stock. NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES QUARTERLY REPORT FOR QUARTER ENDED NOVEMBER 29, 1997 I N D E X Part I.- FINANCIAL INFORMATION PAGE Consolidated balance sheets 3 Consolidated statements of operations 4 Consolidated statements of cash flows 5 Notes to consolidated financial statements 6 - 11 Management's discussion and analysis of financial condition and results of operations 12 - 13 Part II.- OTHER INFORMATION 14 Signature 16 -2- NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
NOVEMBER 29, March 1, 1997 1997 -------------------------------- (unaudited) (1) ASSETS CURRENT ASSETS Cash $13,392 $7,941 Accounts receivable, less reserves of $156,000 and $149,000, respectively 3,885,709 5,872,734 Inventories (Note 4) 5,545,214 7,826,440 Other current assets 325,759 506,171 Total current assets 9,770,074 14,213,286 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT - NET 1,246,895 3,204,037 OTHER ASSETS - NET 465,765 645,880 ----------- ----------- $11,482,734 $18,063,203 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $120,000 $510,864 Current portion of capital lease obligations 50,818 - Accounts payable 1,208,537 1,081,133 Accrued salaries and employee benefits 132,195 348,361 Accrued unusual charge (Note 7) 465,000 465,000 Accrued expenses and other liabilities 661,477 530,850 Accrued royalties 520,596 368,860 Income taxes payable (Note 5) 1,909 1,909 ----------- ----------- Total current liabilities 3,160,532 3,306,977 LONG-TERM DEBT 4,500,654 8,566,011 CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 134,089 ACCRUED UNUSUAL CHARGE (Note 7) 160,526 270,868 CONVERTIBLE SUBORDINATED DEBENTURES (Note 6) 2,052,986 2,760,000 ----------- ----------- 10,008,787 14,903,856 COMMITMENTS AND CONTINGENCIES (Note 8) STOCKHOLDERS' EQUITY (Note 6) Preferred Stock, $.10 par value; 500,000 shares authorized, of which 5,000 shares have been designated as non-voting convertible with 500 500 liquidating preference of $200 per share and are issued and outstanding Common stock, $.10 par value; authorized 20,000,000 shares; issued 3,241,848 at November 29, 1997 and March 1, 1997 324,185 324,185 Additional paid-in capital 12,364,503 12,364,503 Deferred issuance cost (120,320) (183,772) Accumulated deficit (11,074,984) (9,326,132) ----------- ----------- 1,493,884 3,179,284 ----------- ----------- Less 3,052 shares at November 29, 1997 and March 1, 1997 of common stock held in treasury, at cost 19,937 19,937 1,473,947 3,159,347 ----------- ----------- $11,482,734 $18,063,203 =========== ===========
(1) Derived from audited financial statements. The accompanying notes are an integral part of these statements -3- NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Thirty-Nine Weeks Ended Thirteen Weeks Ended ----------------------- -------------------- November 29, 1997 November 30, 1996 November 29, 1997 November 30, 1996 ----------------- ----------------- ----------------- ----------------- Net Sales $17,260,713 $23,098,054 $5,699,425 $8,435,399 Cost of Sales 13,671,952 18,817,782 4,769,433 6,937,651 ----------- ----------- ----------- ----------- Gross Profit 3,588,761 4,280,272 929,992 1,497,748 Selling, General and Administrative Expenses 5,192,418 5,755,925 1,760,576 2,032,391 ----------- ----------- ----------- ----------- Operating Loss (1,603,657) (1,475,653) (830,584) (534,643) Gain on Sale of Building (Note 9) 792,848 - 792,848 - Interest Expense (938,043) (881,256) (295,825) (326,866) ----------- ----------- ----------- ----------- Net Loss ($1,748,852) ($2,356,909) ($333,561) ($861,509) =========== =========== =========== =========== Net Loss Per Share (Note 3) ($0.56) ($0.78) ($0.11) ($0.27) =========== =========== =========== =========== Weighted Average Common Shares Outstanding 3,238,796 3,086,781 3,238,796 3,238,796 =========== =========== =========== ===========
The accompanying notes are an integral part of these statements. -4- NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-Nine Weeks Ended ----------------------- NOVEMBER 29, November 30, 1997 1996 ------------ ------------ Cash flow from operating activities Net (loss) income ($1,748,852) ($2,356,909) Adjustment to reconcile net (loss) income to net cash provided by (used in) operating activities Depreciation and amortization 320,236 229,790 Provisions for doubtful accounts 36,000 90,000 Gain on sale of fixed assets (998,191) - Provision for obsolete and slow moving inventory 513,758 340,000 Decrease (increase) in assets Accounts receivable 1,951,025 (1,391,845) Inventories 1,767,468 1,258,571 Other current assets 180,412 18,299 (Decrease) increase in liabilities Accounts payable 127, 403 (444,644) Accrued expenses and other liabilities 66,197 28,743 Income taxes payable - (1.025) Accrued unusual charge (110,342) (306,007) ----------- ----------- Net cash provided by (used in) operating activities 2,105,114 (2,535,027) ----------- ----------- Cash flows from investing activities Dispositions of property, plant and equipment 2,916,829 72,304 Decrease in other assets 180,115 1,335 ----------- ----------- Net cash providing by investing activities 3,096,944 73,639 ----------- ----------- Cash flows from financing activities Prepayment of short-term debt - (800,000) Payments of capital lease obligations (33,372) - Issuance of common stock - 643,009 Issuance of convertible subordinated debentures - 2,760,000 Increase in deferred finance costs - (304,533) Repayments (borrowings) under revolving credit financing, net (4,456,221) 162,666 Repayments of long-term debt (707,014) 0 ----------- ----------- Net cash (used in) provided by financing activities (5,196,607) 2,461,142 ----------- ----------- NET INCREASE (DECREASE) IN CASH $5,451 ($246) Cash at beginning of period 7,941 15,085 ----------- ----------- Cash at end of period $13,392 $14,839 =========== =========== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid during the period: Interest $631,501 $705,134 =========== =========== Income taxes - - =========== ===========
The accompanying notes are an integral part of these statements. -5- NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THIRTY-NINE WEEKS ENDED NOVEMBER 29, 1997 AND NOVEMBER 30, 1996 (unaudited) NOTE 1-RESTRUCTURING AND LIQUIDITY MATTERS The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 8, Levi Strauss & Co., the parent company of Brittania Sportswear Ltd., a licensor which accounted for 49% of the Company's fiscal 1997 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 accounting for approximately $11 million of the Company's fiscal 1997 sales of Brittania product, advised the Company that it would no longer continue its on-going commitment to the Brittania trademark. In response, the Company filed a $37 million lawsuit against Levi Strauss & Co. In addition, the Company has incurred significant losses which have generally resulted in the Company using rather than providing cash from its operations. As a result of the Brittania matter and the continuing losses, there can be no assurance that the Company can continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue in existence. There can be no assurance that the ultimate impact or resolution of these matters will not have a materially adverse effect on the Company or on its financial condition. In view of the issues described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon the continued operations of the Company, which in turn is dependent upon the Company's ability to maintain the financing of its working capital requirements on a continuing basis and to improve its future operations. 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 in fiscal 1995; (b) the fiscal 1995 sale of treasury stock which increased equity by $2.9 million and (c) the completion, in August, 1996, of a $3.5 million private placement (Note 6). The Company has been implementing a restructuring strategy to improve operating results and enhance its financial resources which included reducing costs, streamlining its operations and closing its Puerto Rico plant. In addition, Management has implemented additional steps to reduce its operating costs which it believes are sufficient to provide the Company with the ability to continue in existence. Major elements of these action plans include: -6- oThe transfer of all domestic manufacturing requirements to foreign manufacturing contracting facilities. The final phase of this program was completed by the middle of the 1998 fiscal year. On October 1, 1997, the Company completed the sale of its 152,000 sq. ft. Cartersville, GA facility and relocated to more appropriate space for its packaging and distribution activities. (See Note 9). oStaff reductions associated with the transfer of manufacturing to offshore contractors, efficiencies and reduced volume. oThe relocation, in May, 1997, of executive offices and showrooms to more appropriate, lower cost facilities. Management believes these action plans will result in a $2.5 million reduction from fiscal 1997 overhead spending levels. NOTE 2-CONSOLIDATED FINANCIAL STATEMENTS The consolidated balance sheet as of November 29, 1997 and the consolidated statements of operations for the thirty-nine and thirteen week periods and statements of cash flows for the thirty-nine weeks ended November 29, 1997 and November 30, 1996 have been prepared by the Company without audit. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the financial position of the Company and its subsidiaries at November 29, 1997 and the results of their operations for the thirty-nine and thirteen week periods and cash flows for the thirty-nine weeks ended November 29, 1997 and November 30, 1996 have been made on a consistent basis. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1997 Annual Report on Form 10-K. The results of operations for the periods presented are not necessarily indicative of the operating results for the full year. NOTE 3-NET LOSS PER COMMON SHARE In February, 1997, the Financial Accounting Standards Board issued a Financial Accounting Standard No. 128, "Earnings per Share", which is effective for financial statements for both interim and annual periods ending after December 15, 1997. Early adoption of the new standard is not permitted. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. The adoption of this standard will not have any impact on the disclosure of per share results in the financial statements. -7- Net loss per common share is computed by dividing net loss by weighted average common shares outstanding during each year. Incremental shares from assumed conversions relating to the Convertible Subordinated Debentures, Stock Options and Warrants are not included since the effect would be antidilutive. NOTE 4-INVENTORIES Inventories are summarized as follows:
November 29, November 30, 1997 1996 ---- ---- Raw Materials $787,525 $1,428,918 Work in Process 1,362,326 4,644,080 Finished Goods 3,395,363 2,485,070 --------- --------- $5,545,214 $8,558,068
NOTE 5-INCOME TAXES At November 29, 1997 the Company had a net deferred tax asset approximating $6,000,000 which is fully reserved until it can be utilized to offset deferred tax liabilities or realized against taxable income. The Company had a net operating loss carry forward for book and tax purposes of approximately $12,500,000. Accordingly, no provision for income taxes has been reflected in the accompanying financial statements. Certain tax regulations relating to the change in ownership may limit the Company's ability to utilize its net operating loss carry forward if the ownership change, as computed under such regulations, exceeds 50%. Through November 29, 1997 the change in ownership was approximately 46%. NOTE 6-PRIVATE PLACEMENT On August 15, 1996, the Company completed a $3.5 million private placement with an investment partnership. Terms of this transaction included the issuance of 250,000 shares and $2,760,000 12.5% convertible subordinated debentures which are due August 15, 2001. The convertible subordinated debentures are secured by a second mortgage on the Company's manufacturing and distribution facility located in Cartersville, GA. In conjunction with the sale of this property completed on October 1, 1997 (Note 9), the Company prepaid $707,000 of these debentures. The debentures, after giving effect to the prepayment related to the sale of the Company's facility referred to above, are convertible into the Company's common stock over the next five years as follows: -8- Conversion Shares 305,000 176,967 Conversion Price $3.83 $5.00 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 aggregated $197,500. This was reflected as deferred issue costs and will be amortized over the expected 5 year term of the subordinated convertible debentures. The prorated portion of these costs associated with the prepaid $707,000 of these debentures were recognized in the accounting period the event occurred. Costs associated with this private placement aggregated $409,000 including $104,000 relating to the shares issued which have been charged to paid in capital. The remaining balance of $305,000 will be amortized over the 5 year term of the debentures. The prorated potion of these costs associated with the prepaid $707,000 of these debentures were recognized in the accounting period the event occurred. The Company utilized $533,333 of the proceeds to prepay all of its obligations pursuant to its Credit Agreement dated March 21, 1994 with Chemical Bank. NOTE 7-UNUSUAL CHARGE In March, 1994, the Company terminated the employment contracts of its Chairman and Vice Chairman. In accordance with the underlying agreement, they are to be paid an aggregate of approximately $400,000 per year in severance, as well as certain other benefits, through February 28, 1999. The present value of these payments, $1,915,000, was accrued at February 26, 1994. As of October 1997, pending negotiation of more favorable terms, payment under this agreement was suspended. (See Note 8). NOTE 8-LITIGATION Phoenix Matter- In September 1993, the Company filed an action against the former owners of Phoenix Associates, Inc. ("Phoenix"). The Company is seeking compensatory damages of approximately $4,000,000 plus declaratory and injunctive relief for acts of alleged securities fraud, fraudulent conveyances, breach of fiduciary trust and unfair competition in connection with the acquisition of the common stock of Phoenix. Additionally, the Company has filed a demand for arbitration which seeks compensatory damages of $4,000,000, rescission of the stock purchase agreement, rescission of an employment agreement and other matters, all on account of alleged breaches of the stock purchase agreement, fraudulent misrepresentation and -9- breach of fiduciary duties. In November 1993, the former owners of Phoenix filed counterclaims against the Company alleging improper termination with regard to their employment agreement and breach of the stock purchase agreement. The former owners have filed for damages of approximately $9,000,000. The actions remain in their preliminary stage. The Company considers the damages in the claim to be insupportable and believes it will likely prevail on its defenses to such counterclaims. Discovery proceedings are nearing completion and the Company anticipates that this matter will be resolved in fiscal year 1999. Donald Gold Matter- On December 9, 1997, Donald Gold, a 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 to him under the March 18, 1994 Severance Agreement. The Answer in this litigation is due January 11, 1998. The Company is subject to other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the Phoenix and Donald Gold litigation, and other legal proceedings and claims will be successfully defended or resolved without a material adverse effect on the consolidated financial position or results of operation to the Company. No provision has been made by the Company with respect to the aforementioned litigation as of November 29, 1997. Brittania Matter- Since September, 1988, the Company has been a licensee of Brittania Sportswear, Ltd., a wholly-owned subsidiary of Levi Strauss & Co. to manufacture and market men's underwear and other products under the trademarks "Brittania" and "Brittania from Levi Strauss & Co.". Sales under this license aggregated $14.9 million in fiscal 1997, $14.6 million in fiscal 1996 and $14.2 million in fiscal 1995. As of January 1, 1997, the license was renewed for a 5 year term, including automatic renewals of 2 years if certain minimum sales levels are achieved. On January 22, 1997, Levi's 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 accounting for approximately $11 million of the Company's fiscal 1997 sales of Brittania product, advised the Company that it would no longer continue its on-going commitment to the Brittania trademark. The Company has filed a $37 million lawsuit against Levi Strauss & Co. and Brittania Sportswear, Ltd. alleging that it was fraudulently induced into entering into the new license agreement by Levi's action, in the spring of 1996, linking Brittania with Levi's including the marketing of a new trademark "Brittania from Levi Strauss & Co." In reliance on these actions and in anticipation of the continuing support by Levi's of the Brittania brand, the Company severed its long-standing relationship with a competing brand and developed new packaging to reflect the new marketing effort. There can be no assurance that the ultimate resolution of these matters will not have a materially adverse impact on the Company or on its financial condition. -10- NOTE 9-SALE OF MANUFACTURING FACILITY On October 1, 1997 the Company completed the consolidation of its facilities and sold its 152,000 sq. foot manufacturing and distribution facility in Cartersville, GA. to Mimms Enterprises, a Real Estate Investment General Partnership, for cash aggregating $2,850,000. The Company reflected a gain on the sale in its third fiscal quarter of $793,000. The proceeds were used to repay the $525,000 financing secured by this property, to prepay $707,000 of the convertible subordinated debentures secured by a second mortgage on this property, and to pay a $176,000 prepayment penalty incurred from the prepayment of the subordinated debt. The remaining net proceeds were utilized to reduce the revolving credit financing. The Company will be leasing 60,000 square feet of this facility through December 31, 1997. This facility was sold in conjunction with the Company's decision to transfer its manufacturing requirements to foreign manufacturing contracting facilities. It is anticipated that the annualized savings from this transaction, comprised of interest and occupancy costs, will exceed $125,000 per year. On December 3, 1997, the Company entered into a lease for approximately 71,000 square feet of space at 435 Industrial Park Road in Cartersville, Georgia, commencing on January 1, 1998. The monthly rental amount will be $15,679 increasing based on an established formula over the five year lease term. NOTE 10-NEW ACCOUNTING PRONOUNCEMENTS In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (SFAS 130) and Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). The Company will implement SFAS 130 and SFAS 131 as required in the fiscal year which will end February, 1999, which require the Company to report and display certain information related to comprehensive income and operating segments, respectively. Adoption of SFAS 130 and SFAS 131 will not impact the Company's financial position or results of operations. -11- NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Sales For the nine months ended November 29, 1997, net sales declined 25% from prior year-levels to $17,260,000. Net sales for the quarter ended November 29, 1997 decreased 32% from prior year levels to $5,699,000. This decline, associated with lower unit volumes, reflects a $1.1 million increase of the Company's GUESS? products and a 51% decline from prior levels of the Company's men's fashion underwear products. The decline in the sales of the men's products is generally related to the phase-out of sales of Brittania product associated with the actions announced by Levi's to dispose of the Brittania brand. The growth in the sales of GUESS? products reflects increased sales as the Company expanded the number of department store locations carrying the product; increased sales from the introduction of new fashion products, and incremental sales associated with the Company's desire to raise cash by reducing inventory levels. Gross Margin Gross profit margins for the nine months ended November 29, 1997 increased from prior year levels fo 19% to 21%. Gross profit margins for the quarter ended November 29, 1997 decreased to 16% from the prior year levels of 18% . This reflects the impact of the Company's decision to manage its supply chain more effectively. By requiring its contract manufacturers to deliver product closer to the Company's forecasted demand, inventory carrying levels can be reduced. The mechanism used to accomplish this reduction is lower margin sales and close-outs. Management believes that this directive will continue to exert downward pressure on gross margins through the end of the fiscal year as inventory's are brought to optimal levels. The current fiscal year reflects reduced levels of factory overhead. Selling, general and administrative expenses Selling, general and administrative expenses for the nine months ended November 29, 1997 were 30% of net sales, and 25% of net sales for the same period, last year. Selling, general and administrative expenses were 31% of sales for the quarter ended November 29, 1997 and 24% of sales for the prior year period. This increase results from the impact of the lower sales volume on fixed cost levels. Selling expenses reflect the impact of the higher variable cost elements associated with the increase in GUESS? product sales. The Company has reduced general and administrative expenses in the third fiscal quarter by over $20,000 from prior year levels, which includes $238,000 of expenses associated with the early retirement of the $707,000 subordinated debentures. Additional improvements will be reflected for the rest of the current fiscal year as the benefits of lower occupancy costs and reduced staffing levels are realized. -12- Interest Expense Interest expense for the third fiscal quarter decreased $31,000 from prior year levels due to reductions of the outstanding credit facility from year end levels of $4.1 million for the nine months to date, and the prepayment of $707,000 of subordinated debentures. LIQUIDITY AND CAPITAL RESOURCES The Company has incurred significant losses in recent years which have generally resulted in the Company using rather than providing cash from its operations. In March, 1994 the Company was successful in refinancing its credit agreements with (i) a three year $15,000,000 revolving credit facility with Congress Financial; (ii) a $2,000,000 Term Loan Agreement with Chemical Bank; and (iii) an additional $1,500,000 Term Loan with Congress replacing the Industrial Revenue Bond financing of the Cartersville, Georgia manufacturing plant. Additionally, the Company has increased its equity over the past three years through (i) a $1,000,000 investment by the Management Group in fiscal 1995; (ii) the $2.9 million sale of 490,000 shares of common treasury stock to GUESS?, Inc. and certain of its affiliates; and (iii) the $3.5 million private placement which included the issuance of 250,000 shares and $2,760,000 convertible subordinated debentures. These transactions, combined with its stronger credit facilities, enhanced the Company's liquidity and capital resources. The Company utilized the proceeds of the $3.5 million private placement to prepay existing debt. Overall, the Company has reduced its total long term and subordinated debt by $4.9 million from levels at March 1, 1997. Working capital levels have declined $4.5 million from March 1, 1997 levels reflecting reductions in receivables and inventories utilized to reduce debt levels. The $2.3 million reduction in inventory levels reflects the benefits of the Company's continuing strategy to manage its supply chain towards delivering inventory closer to forecasted demand. The Company believes that the amended Congress credit facility, combined with the $3.5 million private placement, provides adequate financing flexibility to fund its operations at current levels. Congress Financial Corp. has permanently limited an additional $325,000 of the Company's borrowing availability. In the opinion of the Company's management, this additional reserve will not adversely impact the Company's ability to fund its operations. The Company believes that the moderate rate of inflation over the past few years has not had significant impact on sales or profitability. The Company has fallen below American Stock Exchange guidelines for continuing listing, and as a result there is no assurance that the listing will be continued. Any statements contained in this report which are not historical facts are forward-looking statements that involve risks and uncertainties. Please refer to the business risks and uncertainties discussed elsewhere in this report and in the Company's most recent report on Form 10-K. -13- PART II ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company held a Special Meeting of Stockholders in Lieu of Annual Meeting on October 22, 1997. (b) Not applicable. (c) At the stockholders Meeting: (i) the number of directors constituting the Board of Directors was set at nine (9), by a vote of 2,122,708 shares for and 50,648 shares against; (ii) the Company's nominees for directors were elected by the following votes: Nominee Votes in Favor Votes to Withold Authority Stephen M. Samberg 2,121,969 0 Warren D. Cole 2,122,708 0 Robert M. Rosen 2,122,708 0 (iii) the Stockholders approved a motion to ratify the appointment of Grant Thornton LLP, independent certified accountants, to audit the consolidated financial statements of the Company for the fiscal year ending February 28, 1998. Such motion was approved by a vote of 2,154,199 shares in favor, 17,464 shares against and 1,685 shares abstaining. ITEM 5. OTHER INFORMATION None -14- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Item 6(a) Exhibits 99(t) Letter Agreement dated Filed Herewith September 30, 1997 from Nantucket Industries to NAN Investors, L.P. Item 6(b) Reports on Form 8-K. A Form 8-K was filed on December 22, 1997. Item 27 Financial Data Schedule Filed Herewith -15- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NANTUCKET INDUSTRIES, INC. (Registrant) By: January 13, 1998 /s/ Nicholas Dmytryszyn ------------------------------ Chief Financial Officer (Chief Accounting Officer) -16- EX-99.T 2 LETTER AGREEMENT EXHIBIT 99(t) NANTUCKET INDUSTRIES, INC. September 30, 1997 NAN Investors, L.P. c/o Fundamental Capital Corp. 291 Ocean Avenue Lawrence, New York 11559 Attention: Murray Forman Re: 200 Cook Street, Cartersville, GA (the "Property") Dear Murray: In connection with the delivery by NAN Investors, L.P. ("NAN") of a Quitclaim Deed (the Quitclaim Deed) with respect to the Deed to Secure Debt, Security Agreement and Assignment of Leases and Rents, filed for record as of August 19, 1996 by the Company in favor of NAN (the "Mortgage"), Nantucket Industries, Inc. (the "Company") hereby confirms to you as follows: 1. The Company is currently in default under the two Convertible Subordinated Debentures payable to NAN, dated August 15, 1996 (collectively: the "Debentures"), in the original principal amounts of $1,168,150 and $1,591,850, respectively, among other things for failure by the Company to make timely payment of the interest payment due under the Debentures on August 15, 1997 (the "Interest Payment Default"). 2. Furthermore, the Company acknowledges that it has no right of prepayment under the Debentures and that the proposed sale by the Company of the Property represents an additional Event of Default by the Company under the Debentures (the "Property Sale Default"). Finally, the Company acknowledges that it has no right to demand that NAN release the Mortgage on the Property except in connection with the full and complete repayment and satisfaction of the Debentures. 3. NAN hereby agrees to (a) extend the cure period under Section 8(a)(ii) of each of the Debentures with respect to the Interest Payment Default (but not with respect to any other interest payment due under the Debentures) until November 30, 1997, provided, however, that (i) such extension shall be automatically terminated upon the occurrence of any other default or Event of Default under either of the Debentures, the Common Stock and Convertible Subordinated Debenture Purchase Agreement, dated as of August 13, 1996 (the "Purchase Agreement"), or this agreement, and (ii) the amount of the Interest Payment Default, together with interest thereon calculated at an annual rate of 12.5% per annum, shall be payable upon the expiration of such cure period extension, (b) waive the Property Sale Default by the Company under the Debentures, (c) release of the Mortgage by delivery to the Company of the Quitclaim Deed, and (d) the partial prepayment of one of the Debentures in accordance with the terms of this agreement. 4. In consideration of NAN's aforesaid agreement, the Company agrees as follows: (a) Concurrently with the closing of the Property's sale, the Company shall pay to NAN all of the net sales proceeds from the sale of the Property (the gross sales proceeds less a $1,750,000 payment to Congress Financial Corporation in satisfaction of its first mortgage on the Property, a 6% brokerage commission and transfer taxes and legal fees actually incurred in connection with the sale), provided that (i) the net sales proceeds so delivered to NAN shall be in an amount not less than $883,000 (the "Proceeds Payment"), and (ii) the Proceeds Payment shall be received by NAN no later than by October 1, 1997. The Proceeds Payment shall be made concurrently with the closing of the sale of the Property by means of a wire transfer or transfers of same day funds to an account or accounts specified in writing by NAN to the Company or its representatives. (b) The Proceeds Payment shall be treated as if it were a prepayment under Section 4(b) of the Debenture in the original principal amount of $1,591,850 (the "Prepaid Indenture"), and accordingly, only 80% of the Proceeds Payment shall be applied to the reduction of the principal amount due under the Prepaid Debenture, with the balance to be deemed a prepayment premium pursuant to Section 4(b) of such Prepaid Indenture. (c) Any land not currently being sold by Nantucket shall remain encumbered by the Mortgage. 5. On or before October 31, 1997, the Company shall cause its Board of Directors to be reconstituted to include the following members: Mr. Stephen Samberg, Mr. Robert Rosen, Mr. Warren Cole, Mr, Kenneth Klein, and two other members who shall be satisfactory to NAN in NAN's sole discretion. The Company shall be entitled to add Mr. Richard Ryan, or another person unaffiliated with the Company or its shareholders with standing in the business or financial communities, as an additional Board member. 6. Following October 31, 1997, the Company shall employ only such executive officers (defined as officers earning an annual salary or draws on account of commissions in excess of $100,000), other than the Chief Executive Officer, as shall be reasonably satisfactory to NAN. In addition, the Company shall, by October 31, 1997, cause another person or persons, satisfactory to NAN in NAN's sole discretion (the "Manager"), to become the chief operating officer of the Company and an authorized signatory on all of the Company's bank accounts. All withdrawals from the Company's bank accounts and all agreements, obligations or instruments to which the Company shall become a party or by which any of its assets shall be bound following the Manager's appointment shall require the signature of both the Chief Executive Officer of the Company and the Manager. 7. Within 5 days of resolution or settlement of its litigation against Levi's and receipt of any payment therefrom (the "Trigger Date"), the Company shall offer to prepay all or any portion of the amounts then outstanding under the Debentures at a price equal to 125% of the aggregate principal amount thereof, together with any interest accrued and unpaid thereon up to and including the prepayment date. At the Company's option, up to $500,000 of such amount may be payable in the form of a seven-year debenture on terms otherwise substantially equivalent to those of the Debentures, with the balance to be payable in cash. The provisions of Section 4(b) of the Debentures shall apply, mutatis mutandis, to such offer and prepayment (with the Trigger Date to be treated as a Change of Control under such Section). 8. The Company acknowledges the indebtedness represented by the Debentures and confirms that the Company has no claims or rights of action of any kind against NAN, NAN (GP) Investors, L.P., Fundamental Capital Corp. or any of their respective officers, directors, partners or shareholders. -2- 9. The Company acknowledges that NAN's consent to the arrangements herein shall not be construed as NAN's agreement to any amendment of the terms of the Debentures or the Purchase Agreement, a waiver by NAN of any default by the Company under the Debentures (other than the Property Sale Default) or the Purchase Agreement, or a waiver by NAN of any other of its rights under the Debentures or under the Purchase Agreement. If the foregoing correctly sets forth the terms of our agreement, please so indicate by signing in the space indicated below. Very truly yours, Nantucket Industries, Inc. By:/s/ Stephen Samberg ----------------------------- Title:Chief Executive Officer We agree to the foregoing. NAN Investors, L.P. By: NAN (GP) Investors, L.P. General Partner By: Fundamental Capital Corp. General Partner By:/s/ Murray Forman ---------------------------- Title: -3- EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS INFORMATION FROM THE STATEMENTS DATED NOVEMBER 29, 1997 AS FILED IN FORM 10-Q FOR THE QUARTERLY PERIOD THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS FEB-28-1998 NOV-29-1997 13,392 0 4,041,709 156,000 5,545,214 9,770,074 4,769,069 3,522,174 11,482,734 3,160,532 0 0 500 324,185 1,149,262 11,482,734 5,699,425 5,699,425 4,769,433 4,769,433 1,760,576 12,000 295,825 (333,561) 0 (333,561) 0 0 0 (333,561) (0.11) (0.11)
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