-----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, TjqUvBeZ2V100G5+YGq0+g5XxlG6WK3WSKgZZ/4li0xnxj3YGlkDpI6jXO98l2IX 7acnSgZpg6sqQ6NmDjyruQ== 0001058217-98-000036.txt : 19980723 0001058217-98-000036.hdr.sgml : 19980723 ACCESSION NUMBER: 0001058217-98-000036 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980722 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: SEC FILE NUMBER: 001-08509 FILM NUMBER: 98669658 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-K/A 1 AMENDMENT NO. 2 TO FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K/A ------------------- AMENDMENT TO APPLICATION OR REPORT Filed pursuant to Section 12, 13 or 15(d) of THE SECURITIES EXCHANGE ACT OF 1934 NANTUCKET INDUSTRIES, INC. -------------------------------------------------- (Exact name of registrant as specified in charter) 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 February 28, 1998, as set forth in the pages attached hereto: ITEM 6: SELECTED FINANCIAL DATA ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The omitted text of Items 6, 7, 8 and 9 of Registrant's Annual Report on Form 10-K, for the fiscal year ended February 28, 1998, is set forth in the attached pages and incorporated into said Annual Report by reference. The text of Items 10 and 12 also is hereby amended as set forth in the pages attached hereto. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. NANTUCKET INDUSTRIES, INC. (Registrant) Dated: July 17, 1998 By: /s/ Nick J. Dmytryszyn ------------------------- Nick J. Dmytryszyn Chief Financial Officer (Chief Accounting Officer) -1- AMENDED ITEMS 6,7, 8, 9, 10 and 12 OF THE ANNUAL REPORT ON FORM 10-K 0F NANTUCKET INDUSTRIES, INC. (the "Company" ) FOR ITS FISCAL YEAR ENDED FEBRUARY 28, 1998 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial information with respect to the Company and its subsidiaries for the five fiscal years ended February 28, 1998. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and in conjunction with the Company's Consolidated Financial Statements and notes thereto appearing elsewhere in this Report.
FOR FISCAL YEAR ENDED --------------------- (In thousands, except per share amounts) FEB. 28, MARCH 1, MARCH 2, FEB. 25 FEB. 26, 1998 1997 1996 1995 1994 ---------- ---------- ---------- ----------- ------------ SUMMARY STATEMENTS OF OPERATIONS -------------------------------- Net sales $21,683 $30,394 $35,060 $37,015 $41,634 Gross profit 3,102 5,999 8,328 7,061 5,854 Net gain sale of asset 712 - - - - Unusual credit (charge) - - 300 (1,252) (5,450) Net (loss) (4,665) (2,747) (239) (3,147) (9,450) Net (loss) per share-basic and diluted $ (1.47) $ (.91) $ (.08) $ (1.15) $ (3.81) Average shares Outstanding 3,239 3,125 2,985 2,743 2,481 SUMMARY BALANCE SHEET DATA -------------------------- Total assets $ 7,208 $18,063 $18,855 $22,184 $22,195 Working capital (2,120) 10,906 10,827 12,830 10,262 Long-term debt (exclusive of current maturity's) 299 8,837 9,108 11,300 9,750 Convertible subordinated debt 2,053 2,760 Stockholders' equity (1,262) 3,159 5,257 5,465 4,697
-2- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION RESTRUCTURING STRATEGY ---------------------- 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 has filed a lawsuit against Levi Strauss & Co. alleging that the licensor breached various obligations under the license agreement, including without limitations its covenant of good faith and fair dealing. The Company has subsequently agreed to a tentative settlement to this litigation, which will not have a material impact on the Company's financial position (see Note 12). The Company has experienced significant losses in recent years which have generally resulted in severe cash flow problems, and negative equity, that have negatively impacted the ability of the Company to conduct its business as presently structured. The Company has defaulted on interest payments to its subordinated debt holder, and has no long term credit facility in place. As a result of the Brittania matter; the continuing losses; the interest payment default, and the lack of a long term credit facility, there can be no assurance that the Company can continue as a going concern, or 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 paragraphs, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon the continuing 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. At the end of fiscal 1994, the Company began the implementation of a restructuring strategy to improve operating results and enhance its financial resources. Specific steps taken included: o The shutdown of the Puerto Rico facility o Improving the product mix by eliminating unprofitable lines (women's products other than those sold under the GUESS? license and socks) and terminating business with Avon Products, the principal customer of the Puerto Rico facility o Terminating the employment contracts of its former chairman and vice chairman. -3- o Increasing equity through (a) the sale of $1 million of non-voting convertible preferred stock to management in fiscal 1995; (b) the $ 2.9 million sale of treasury stock to GUESS? in fiscal 1995 and (c) the completion, in August, 1996, of a private placement with net proceeds comprised of 250,000 shares of common stock ($740,000) and .12-1/2% convertible subordinated debentures ($2,351,000 net of expenses). o Obtaining additional working capital financing through the restructuring of credit facilities. o Implementing additional steps to reduce operating costs believed to provide the Company with the ability to continue in existence. Major elements of these action plans, management believes will result in a $3.5 million savings in overhead spending levels, include: * The phase out of the GUESS? Division, with a target completion date of the first quarter of fiscal year 1999. * The sale of the Company's Cartersville, GA location, and the relocation to more appropriate space for its packaging and distribution facilities (see Note 6). * The transfer of all domestic manufacturing requirements to foreign manufacturing contracting facilities. * Staff reductions associated with; the transfer of manufacturing to offshore contractors; closing the GUESS? Division, efficiencies and reduced volume. * The relocation of executive offices and showrooms to more appropriate, lower cost facilities. In connection with the implementation of these actions, the Company has reflected, in its financial statements for the fiscal years ended February, 1994 through March, 1, 1996, unusual charges aggregating $6.4 million. These charges include approximately $760,000 of expenses incurred in fiscal 1995 closing the Puerto Rico facility, write-downs and reserves of asset values and other non-cash items ($1.5 million write-off of goodwill, $2.1 million writedowns of inventory, $530,000 writedowns of fixed assets), the accrual for the severance payments to the former Chairman and Vice Chairman of the Board ($1,765,000) and , in fiscal 1996, an unusual credit, as described below, of $300,000 related to the elimination of a subordinated note payable -4- associated with the purchase of the Puerto Rico facility since the likelihood of payment on such note was considered remote. In the current fiscal year ending February 28, 1998, the financial statements, through operating results, reflects $1.8 million in restructuring 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. The Company has not yet realized the benefits of this turnaround strategy and has incurred losses of $4,665,000, $2,747,000 and $239,000 for the fiscal years ended February 28, 1998, March 1, 1997 and March 2, 1996, respectively. RESULTS OF OPERATIONS - --------------------- SALES Net sales for the fiscal year ended February 28, 1998 decreased 29% from the prior year levels to $21.7 million. Sales under the Brittania license declined $10.4 million from prior year levels, with the balance of the men's fashion underwear business off by $609,000. The decline in sales of the men's products is primarily related to the phase out of the Brittania product associated with the actions announced by Levi's to dispose of the Brittania brand, and the loss of certain styles to competitors within the Companies business environment. GUESS? product sales increased $2.3 million from prior year levels, which includes $2.7 million in close out sales, and reflects the Company's efforts to reduce its carrying levels of GUESS? inventory, and generate cash. Net sales for the fiscal year ended March 1, 1997 decreased 13% from the prior year levels to $30.4 million. These declines, associated with lower unit volumes, reflect inventory reductions by Nantucket's customers. In addition, the Company canceled customer orders for specialized new products due to production delays and quality issues experienced by supplementary foreign manufacturing contractors which were engaged to assemble these new products. In view of these problems, the Company no longer uses these contractors. 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 1996 fiscal year, there was a 55% increase in the unit volume sales of the developing GUESS? intimate apparel product line to $4.9 million. -5- GROSS MARGIN Gross profit margin levels are summarized as follows:
FISCAL YEAR ENDING FEB. 28, MARCH 1, MARCH 2, 1998 1997 1996 -------- -------- -------- Gross Margin % 14% 20% 24% $ Amount-% Increase (decrease) (30%) (28%) 18%
The declines in fiscal year 1998 gross margin reflect non recurring inventory reserves and write-offs associated with discontinued product lines, and close out sales used to reduce inventory levels and to generate cash. In the aggregate this represents approximately $1.2 million, or 6 points of gross margin. The declines in fiscal 1997 gross margin are the result of increased manufacturing variances associated with reduced unit volumes and the additional processing costs of imported garments as operations of the new contractor base were fine tuned. In addition, gross profit levels reflect $1.6 million in fully reserved close-out sales of the GUESS? products as the Company continued to reduce slow moving inventory levels. The improvement in fiscal 1996 gross margin 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. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses in fiscal 1998 of $7.2 million were 33% of sales. For fiscal 1997 and 1996, these expenses were $7.5 million and $7.6 million respectively, and as a percentage of sales, 25% for fiscal year 1997, and 21% for fiscal year 1996. This reflects the impact of the lower sales volume on fixed cost levels. Variable selling expenses were 6% higher reflecting the lower sales levels offset by the impact of the sales mix and the effect of minimum royalty payments under the GUESS? license. General and administrative expenses for fiscal year 1998 which includes $691,000 in non-recurring charges, were reduced by $515,000 over prior year levels reflecting the benefits of the Company's restructuring strategies on structural overhead costs. -6- 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 1996 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. Interest expense Interest expense increased by $112,000 in fiscal 1998, reflecting the $175,000 booked as the expense resulting from the issuance of 16,500,000 warrants (see Note 3). The decrease in interest expense in fiscal 1997 of $114,000 reflects lower borrowing levels as the Company reduced inventory levels. In addition, the proceeds of the August, 1996 $3.5 million private placement were used to prepay the remaining $533,000 due to Chemical Bank pursuant to its credit agreement with Congress Financial Corp. The impact of these reduced borrowing levels was offset by the 150 basis point higher interest rate of the $2.7 million Convertible Subordinated Debentures. 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 1996 and increased levels of financing. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company has incurred significant losses in recent years which have generally resulted in severe cash flow problems that have negatively impacted the ability of the Company to conduct its business as presently structured. In March, 1994 the Company was successful in refinancing its credit agreements with (i) a three year $15,000,000 revolving credit facility with Congress Financial; (ii) a $2,000,000 Term Loan Agreement with Chemical Bank; and (iii) an additional $1,500,000 Term Loan with Congress replacing the Industrial Revenue Bond financing of the Cartersville, Georgia manufacturing plant. -7- On May 31, 1996, the Company amended its Loan and Security Agreement with Congress Financial Corporation dated March 24, 1994. This amendment provided (a) $251,000 in additional equipment term loan financing, (b) extension of the repayment period for all outstanding term loans, (c) supplemental revolving loan availability from March 1st through June 30th of each year and (d) extension of the renewal date to March 20, 1998. In March, and then May 1998 Congress Financial Corporation extended its Loan and Security Agreement with the Company to August 18, 1998; discussions are on going, for the Company and Congress to enter into a new, long term financing facility. In management's opinion, a new agreement will be in place prior to the expiration of the current extension. As of May 20, 1998, the most recent measurement date, the Company had excess borrowing availability of $800,000 pursuant to its credit agreement with Congress Financial. 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. Under the terms of the $2,000,000 Term Loan Agreement with Chemical Bank, scheduled installments of $500,000 were due on December 15, 1995 and March 15, 1996. As of December 15, 1995 the Company agreed to an amendment providing for 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 which commenced March 31, 1996. In August, 1996, the Company utilized $533,333 of the proceeds from the private placement to prepay all of its obligations with Chemical Bank. On October 1, 1997 the Company completed the consolidation of its facilities and sold its 152,000 sq. foot manufacturing and distribution facility in Cartersville, Georgia for cash aggregating $2,850,000. The Company reflected a gain on the sale of $793,000. The proceeds were used to repay the $525,000 financing secured by this property, to prepay $707,000 of the convertible subordinated debentures secured by a second mortgage on the property, and to pay a $176,000 prepayment penalty incurred from the prepayment of the subordinated debt. The remaining net proceeds were utilized to reduce the revolving credit financing. Working capital has declined to $2.1 million, from March 1, 1997 levels of $10.9 million, reflecting reductions in receivables and inventories utilized to reduce debt levels, to generate cash, and the reclassification of $5.3 million of revolving and subordinated debt from long to short term. Overall, the Company has reduced its total debt by $6.4 million, from March 1, 1997 levels. The Company in May 1998 has entered into an agreement with its Subordinated 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 agrees to -8- secure the Debentures by a first priority lien on all the assets of the Company to the extent not otherwise prohibited under the Congress Credit Facility, to issue to NAN five year warrants to purchase 16,500,000 shares of Nantucket Industries, Inc. stock at a price of $.10, and to cause certain members of the Board of Directors of the Company to be retained, reelected, or removed. The Company believes that the moderate rate of inflation over the past few years has not had significant impact on sales or profitability. YEAR 2000 ISSUES ---------------- The Company has been assured by its software vendor that by implementing its outside venders current software update, its systems will be Year 2000 compliant, therefore, the Year 2000 problem will not pose significant operational issues for the Companies computer systems as so updated. However, there can be no assurance that the systems of other companies on which the Company systems rely will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems. The Companies software will be updated by the 4th quarter of fiscal year 1999, without any incremental costs, as part of its on going maintenance agreement with its vendor. OUTLOOK ------- This form 10-K contains statements which are not historical facts, but are forward-looking statements which are subject to risks, uncertainties and unforseen factors that could affect the Company's ability to accomplish its strategic objectives with respect to acquisitions and developing new business opportunities, as well as its operations and actual results. All forward-looking statements contained herein reflect Management's analysis only as of the date of the filing of this Report. Except as may be required by law, the Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. In addition to the disclosures contained herein, readers should carefully review risks and uncertainties contained in other documents which the Company files from time to time with the Securities and Exchange Commission. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached hereto at Page F-1 et seq. -- --- ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The age of Steven Schneider, one of the Company's Class I directors, is 40. The information regarding Mr. Schneider's principal occupations during the past five years and other directorships held by him in public companies is as follows: Steven Schneider has been President of Urban Marketing and Sales, a sales and marketing company which represents apparel businesses including Bear USA, Phat Farm, Changes, Rp-55, and Caretek/Timberline. Mr. Schneider is also co-owner of two retail apparel stores in New York. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following beneficial share ownership of Steven Schneider is hereby added to the table set forth in Item 12 of the Company's 10-K/A Amendment No.1 filed June 29, 1998, and the aggregate beneficial ownership of all directors and officers as a group set forth in such table also is replaced as follows:
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP PERCENT OF CLASS (1) - ------------------------------------ ----------------------------------------- -------------------- Steven Schneider 4,000 * 2016 Linden Blvd. Ste.17 Elmont, NY 11003 All directors and officers as a group 439,081 13.37 (7 persons) - -------------------------- * Less than 1%
-9- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors NANTUCKET INDUSTRIES, INC. We have audited the accompanying consolidated balance sheets of Nantucket Industries, Inc. and Subsidiaries as of February 28, 1998 and March 1, 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended February 28, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nantucket Industries, Inc. and Subsidiaries as of February 28, 1998 and March 1, 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 28, 1998 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has significant decreases in sales in recent years relating in large part to the Brittania license, continuing losses, negative working capital, defaults on interest payments, and a lack of a long term credit facility. 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. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. GRANT THORNTON LLP New York, New York May 29, 1998 (except for Note 12, for which the date is June 26, 1998) NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, MARCH 1, 1998 1997 ---------------- ---------------- ASSETS CURRENT ASSETS Cash $8,850 $7,941 Accounts receivable, less reserves of $351,000 and $149,000, respectively (Note 7) 2,879,735 5,872,734 Inventories (Notes 5 and 7) 3,090,383 7,826,440 Other current assets 71,895 506,171 ---------------- ---------------- Total current assets 6,050,863 14,213,286 PROPERTY, PLANT AND EQUIPMENT - NET (Notes 6 and 7) 958,075 3,204,037 OTHER ASSETS - NET 198,786 645,880 ---------------- ---------------- $7,207,724 $18,063,203 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt (Note 7) $3,161,286 $510,864 Current portion of capital lease obligations (Note 7) 51,898 -- Convertible subordinated debt (Note 3) 2,052,986 -- Accounts payable 722,483 1,081,133 Accrued salaries and employee benefits 223,031 348,361 Accrued unusual charge (Note 4) 465,000 465,000 Accrued expenses and other liabilities 730,478 530,850 Accrued royalties 763,270 368,860 Income taxes payable (Note 8) 1,909 ---------------- ---------------- Total current liabilities 8,170,432 3,306,977 LONG-TERM DEBT (Note 7) -- 8,566,011 CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION (Note 7) 120,702 -- ACCRUED UNUSUAL CHARGE (Notes 4 and 10) 178,717 270,868 CONVERTIBLE SUBORDINATED DEBT (Note 3) -- 2,760,000 ---------------- ---------------- 8,469,851 14,903,856 COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' EQUITY (Notes 3 and 9) 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 500 500 and are issued and outstanding Common stock, $.10 par value; authorized 20,000,000 shares; issued 3,241,848 at February 28, 1998 and March 1, 1997 324,185 324,185 Additional paid-in capital 12,539,503 12,364,503 Deferred issuance cost (115,541) (183,772) Accumulated deficit (13,990,837) (9,326,132) ---------------- ---------------- (1,242,190) 3,179,284 Less 3,052 shares at February 28, 1998 and March 1, 1997 of common stock held in treasury, at cost 19,937 19,937 ---------------- ---------------- (1,262,127) 3,159,347 ---------------- ---------------- $7,207,724 $18,063,203 ================ ================ The accompanying notes are an integral part of these statements.
F-2 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED -------------------------------------------------------- FEBRUARY 28, MARCH 1, MARCH 2, 1998 1997 1996 ----------------- ---------------- ---------------- Net sales $21,683,326 $30,394,409 $35,060,136 Cost of sales 18,581,718 24,395,054 26,732,017 ----------------- ---------------- ---------------- Gross profit 3,101,608 5,999,355 8,328,119 Selling, general and administrative expenses 7,166,124 7,546,341 7,554,057 Unusual (credit) charge (Note 4) -- -- (300,000) ----------------- ---------------- ---------------- Operating profit (loss) (4,064,516) (1,546,986) 1,074,062 Other (income) expense Net gain on sale of assets (Note 6) (711,686) -- -- Interest expense 1,311,875 1,199,529 1,313,544 ----------------- ---------------- ---------------- Total other (income) expense 600,189 1,199,529 1,313,544 Loss before income taxes (4,664,705) (2,746,515) (239,482) Income taxes (Note 8) -- -- -- ----------------- ---------------- ---------------- Net loss ($4,664,705) ($2,746,515) ($239,482) ================= ================ ================ Net loss per share - basic and diluted ($1.47) ($0.91) ($0.08) ================= ================ ================ Weighted average common shares outstanding 3,238,796 3,124,785 2,984,955 ================= ================ ================ The accompanying notes are an integral part of these statements.
F-3 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED FEBRUARY 28, 1998, MARCH 1, 1997 AND MARCH 2, 1996
PREFERRED STOCK DESIGNATED AS NON-VOTING CONVERTIBLE COMMON STOCK ADDITIONAL DEFERRED ---------------------------- ---------------------------- PAID-IN ISSUANCE SHARES AMOUNT SHARES AMOUNT CAPITAL COSTS ------------- ------------- ------------- ------------- --------------- -------------- Balances at February 26, 1995 5,000 $500 2,991,848 $299,185 $11,576,898 Net loss Issuance of treasury stock in compliance with credit agreement prepayment terms (20,512) ------------- ------------- ------------- ------------- --------------- -------------- Balances at March 2, 1996 5,000 $500 2,991,848 $299,185 $11,556,386 ------------- ------------- ------------- ------------- --------------- Net loss Common stock issued (Note 3) 250,000 25,000 808,117 (183,772) ------------- ------------- ------------- ------------- --------------- -------------- Balances at March 1, 1997 5,000 $500 3,241,848 $324,185 $12,364,503 ($183,772) ------------- ------------- ------------- ------------- --------------- -------------- Net loss Issue of warrants 175,000 Amortization of deferred costs 68,231 ------------- ------------- ------------- ------------- --------------- -------------- Balances at February 28, 1998 5,000 $500 3,241,848 $324,185 $12,539,503 ($115,541) ============= ============= ============= ============= =============== ==============
RETAINED TREASURY STOCK EARNINGS -------------------------- (DEFICIT) SHARES AMOUNT TOTAL ---------------- ------------ ------------- --------------- Balances at February 26, 1995 ($6,340,135) 10,552 ($71,389) $5,465,059 Net loss (239,482) (239,482) Issuance of treasury stock in compliance with credit agreement prepayment terms (7,500) 51,452 30,940 ---------------- ------------ ------------- --------------- Balances at March 2, 1996 ($6,579,617) 3,052 ($19,937) $5,256,517 ---------------- ------------ ------------- --------------- Net loss (2,746,515) (2,746,515) Common stock issued (Note 3) 649,345 ---------------- ------------ ------------- --------------- Balances at March 1, 1997 ($9,326,132) 3,052 ($19,937) $3,159,347 ---------------- ------------ ------------- --------------- Net loss (4,664,705) (4,664,705) Issue of warrants 175,000 Amortization of deferred costs 68,231 ---------------- ------------ ------------- --------------- Balances at February 28, 1998 ($13,990,837) 3,052 ($19,937) ($1,262,127) ================ ============ ============= =============== The accompanying notes are an integral part of these statements.
F-4 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED ---------------------------------------------------- FEBRUARY 28, MARCH 1, MARCH 2, 1998 1997 1996 ----------------- --------------- --------------- Cash flows from operating activities Net loss ($4,664,705) ($2,746,515) ($239,482) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 569,121 361,425 365,342 Provision for doubtful accounts 239,952 32,000 120,000 Gain on sale of fixed assets (711,686) (44,496) -- Unusual (credit) charge -- -- (300,000) Treasury stock issued in compliance with credit agreement -- -- 30,190 Provision for obsolete and slow moving inventory 1,175,646 415,000 452,590 Issue of warrants 175,000 -- -- (Increase) decrease in assets Accounts receivable 2,753,047 (1,487,701) 1,935,115 Refundable income taxes -- -- -- Inventories 3,560,411 1,915,199 374,967 Other current assets 419,024 283,886 30,909 (Decrease) increase in liabilities Accounts payable (166,629) (497,380) (684,137) Accrued expenses and other liabilities 468,708 221,895 (543,519) Income taxes payable (1,909) (1,025) 294 Accrued unusual charge (92,151) (408,011) (379,451) ----------------- --------------- --------------- Net cash provided by (used in) operating activities 3,723,829 (1,955,723) 1,162,818 ----------------- --------------- --------------- Cash flows from investing activities Additions to property, plant and equipment (212,093) (152,516) (97,296) Proceeds from sale of fixed assets 2,808,731 33,756 -- (Increase) decrease in other assets 348,724 (396,838) 129,781 ----------------- --------------- --------------- Net cash provided by (used in) investing activities 2,945,362 (515,598) 32,485 ----------------- --------------- --------------- Cash flows from financing activities Borrowings (repayments) under line of credit agreement, net (5,915,589) 173,093 (1,013,017) Payments of short-term debt -- (800,000) -- Issuance of convertible subordinated debentures, net of expenses (Note 3) -- 2,351,084 -- Payments of long-term debt and capital lease obligations (752,693) -- (200,000) Issuance of common stock (Note 3) -- 740,000 -- Net proceeds from sale of treasury stock -- -- 750 ----------------- --------------- --------------- Net cash provided by (used in) financing activities (6,668,282) 2,464,177 (1,212,267) ----------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH $909 ($7,144) ($16,964) Cash at beginning of year 7,941 15,085 32,049 ----------------- --------------- --------------- Cash at end of year $8,850 $7,941 $15,085 ================= =============== =============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $762,798 $1,173,981 $1,320,046 ================== =============== =============== Income taxes -- -- -- ================== =============== ================ The accompanying notes are an integral part of these statements
F-5 NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998, MARCH 1, 1997, AND MARCH 2, 1996 NOTE 1 - RESTRUCTURING AND LIQUIDITY MATTERS The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Net sales for the fiscal year ended February 28, 1998 decreased 29% from the prior year levels to $21.7 million. Sales under the Brittania license declined by $10.4 million from prior year levels, with the balance of the men's fashion underwear business off by $609,000. As more fully described in Note 12, Levi Strauss & Co., the parent company of Brittania Sportswear Ltd.. a licensor which accounted for $14.9 million of the Company's fiscal 1997 sales, and $4.5 million of fiscal 1998 sales, announced their intention to sell Brittania. In light of the actions announced by Levi's, K-Mart, the largest retailer of the Brittania brand and the Company's largest customer accounting for approximately $11 million of the Company's fiscal 1997 sales and approximately $3.0 million in fiscal 1998, of Brittania product, advised the Company that it would no longer continue its ongoing commitment to the Brittania trademark. In response, the Company has filed a lawsuit against Levi Strauss & Co. alleging that the licensor breach various obligations under the license agreement, including without limitation its covenant of good faith and fair dealing. The Company has subsequently agreed to a tentative settlement of this litigation (see Note 12). The Company has experienced significant losses in recent years which have generally resulted in severe cash flow issues, and negative working capital, that have negatively impacted the ability of the Company to conduct its business as presently structured. Due to the lack of capital resources needed to properly develop and support the GUESS? product line, the Company with the support of GUESS? Inc. has initiated a strategy to discontinue its GUESS? division. Sales for this product line in fiscal 1998, 1997 and 1996 aggregated $7.0, $4.7, and $4.9 million, with gross margins of 6.4%, 13.2% and 23.8%, respectively. Until April 17, 1998 the Company's Common Stock was traded on the American Stock Exchange. Because the Company fell below American Stock Exchange guidelines for continued listing, effective April 17, 1998, the Company's stock was delisted. It is currently traded on the NASD Supplemental Market under the symbol "NANK". The Company has defaulted on interest payments to its subordinated debt holder, and has no long-term credit facility in place. As a result of the Brittania matter, the continuing losses, interest payment default, and the lack of a long-term credit facility, 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 (Note 9) 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 3). 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: The phase-out of the Guess? product line, with a target completion date of the first quarter of fiscal year 1999. The sale of the Company's Cartersville, GA location (Note 6), and the relocation to more appropriate space for its packaging and distribution facilities. The transfer of all domestic manufacturing requirements to foreign manufacturing contract facilities. Staff reductions associated with the transfer of manufacturing to offshore contractors, closing the Guess? division, efficiencies and reduced volume. The relocation of executive offices and showrooms to more appropriate, lower cost, facilities. Management believes these action plans will result in an annual $3.5 million reduction in overhead spending levels. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Nantucket Industries, Inc. and its wholly-owned subsidiaries (the "Company") designs and distributes throughout the United States men's branded and private label fashion undergarments to mass merchandisers and national chains. In addition, the Company designs and distributes to department and specialty stores GUESS? innerwear for women. The Company does not have the resources to continue to support and develop the Guess? product line to the levels required in the licensing agreement. The Company has initiated plans to terminate its licensing agreement, with the full cooperation and support of Guess? Inc., and to phase out this line of business in the first quarter of fiscal year 1999. For the current fiscal year, sales to the Company's largest customer accounted for 23% of net sales and 18% and 13%, respectively, for the two prior fiscal years. Sales to the second largest customer in the current fiscal year were 22% of net sales and 19% and 21%, respectively, for the two prior fiscal years. Sales in the current fiscal year to the Company's third largest customer represented 16% of net sales and 40% and 40%, respectively, for the two prior fiscal years. As described in Note 12, this customer has advised the Company that it would no longer continue its ongoing commitment to the Brittania trademark. Current, ongoing sales to this customer will be nonmaterial. No other customers account for more than 10% of the Company's consolidated net sales for fiscal 1998, 1997 or 1996. 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 either insured up to 80% of the outstanding balance, subject to certain deductibles, or are subject to factoring arrangements which guarantee payment. 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: ===================================================== 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. STOCK OPTIONS In fiscal 1997, the Company has adopted Statement of Financial Accounting Standards No. 123, (SFAS No. 123) "Accounting for Stock-Based Compensation," which is effective for fiscal years beginning after December 15, 1995. As described in Note 9, the Company has granted stock options for a fixed number of shares to employees and officers at an exercise price at the market value of the shares on the date of grant. Accordingly, as permitted by SFAS No. 123, the Company has elected to continue to account for stock option grants in accordance with APB No. 25 and recognizes no compensation expense for these grants. 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. 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 basic earnings per share and, if applicable, diluted earnings per share. All comparative periods must be restated as of February 28, 1998 in accordance with SFAS No. 128. Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of potential common shares. Diluted earnings per share is based on the weighted average number of common and potential common shares outstanding. The calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the year. At February 28, 1998, the Company had 174,500 outstanding stock options which could potentially dilute basic earnings per share but have not been considered as they would have had an antidilutive impact for all periods presented (see Note 9). REPORTING COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income", which is effective for the Company's year ending February 27, 1999. SFAS No. 130 addresses the reporting and displaying of comprehensive income and its components. Earnings per share will only be reported for net income, 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. 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. FISCAL YEAR The Company's fiscal year ends on the Saturday nearest to February 28. The year ended February 28, 1998 had 52 weeks, and the fiscal years ended March 1, 1997 and March 2, 1996 contained 52 and 53 weeks, respectively. RECLASSIFICATION Certain prior year amounts have been reclassified in order to conform to the current year's presentation. USE OF ESTIMATES In preparing the Company's financial statements, in conformity with generally accepted accounting principals, 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. IMPAIRMENT OF LONG-LIVED ASSETS In fiscal 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 undiscounted cash flows are less than their book values. No impairment loss was required in fiscal years 1998, 1997 and 1996. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of all financial instruments potentially subject to valuation risk, principally include: cash, accounts receivable, accounts payable, and long term debt. The carring value of these financial instruments approximate fair value, except for the long term debt for which it is not practiable to determine its fair value. NOTE 3 - PRIVATE PLACEMENT On August 15, 1996, the Company completed a $3.5 million private placement with an investment partnership. Terms of this transaction included the issuance of 250,000 shares and $2,760,000 of 12.5% convertible subordinated debentures which are due August 15, 2001. The convertible subordinated debentures are secured by a second mortgage on the Company's manufacturing and distribution facility located in Cartersville, GA. In conjunction with the sale of this property completed on October 1, 1997 (see Note 6), 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 its conversion rights to convert the following amounts of shares at the related conversion prices: Conversion Conversion Price Shares ---------- ---------- $3.83 305,000 $5.00 176,967 The agreement grants the investor certain registration rights for the shares issued and the Conversion Shares to be issued. The difference between the purchase price of the shares issued and their fair market value on August 15, 1996 aggregated $197,500. This was reflected as deferred issue costs and will be amortized over the expected 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 prorated portion of these costs associated with the prepaid $707,000 of these debentures was recognized in the accounting period in which the event occurred. The Company was in default in respect to interest payments due on the subordinated debt in August 1997, and again in February 1998. In September 1997, the Subordinated Debt holder and the Company entered into an agreement to extend the cure period on the default; this forbearance agreement was extended month by month until May 1998. In May 1998, the Company entered into an agreement with the debt holder to extend the cure period, with respect to $322,551 in prior interest payment defaults and for the interest payment due in August 1998, until December 1998. In return, the Company agreed to secure the Debentures by a first priority lien on all the assets of the Company, to the extent not otherwise prohibited under the Congress facility, and to issue five-year warrants convertible to 16,500,000 shares of the Company's stock at an exercise price of $.10. The Company obtained an independent valuation of this transaction, in the amount of $175,000, and this amount was expensed in fiscal year 1998. To the extent that the Company has insufficient authorized and unissued shares of Common Stock to satisfy the exercise of the warrants, the Company shall use its best efforts to promptly cause its authorized capital to be increased to the extent necessary to satisfy the conversion rights in full. The Company can, at its option within the framework of the forbearance agreement, prepay all or part of the outstanding subordinated debt at a price equal to 125% of the principal amount paid. NOTE 4 - 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. 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 10. In fiscal 1996, 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, in fiscal 1996 the Company eliminated this payable and reflected such reduction as an unusual credit in the accompanying 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 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, $1,915,000, was accrued at February 26, 1994. Through February 28, 1998, payments of the unusual charges aggregated $1,533,681, and represent payments against the present value of the termination payments to the former Chairman and Vice Chairman. As of October 1997, pending negotiation of more favorable terms, payment under this agreement was suspended (see Note 10). NOTE 5 - INVENTORIES INVENTORIES ARE SUMMARIZED AS FOLLOWS:
========================================================================================= February 28, 1998 March 1, 1997 ========================================================================================= Raw Materials $ 166,646 $ 1,368,823 Work in Process 756,959 2,857,238 Finished goods 2,166,778 3,600,379 ----------- ----------- $ 3,090,383 $ 7,826,440 =========== =========== =========================================================================================
Inventory valuation allowances and write-downs approximating $834,000 and $415,000 were provided for the years ended February 28, 1998 and March 1, 1997, respectively. NOTE 6 - PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment are summarized as follows:
========================================================================================= February 28, 1998 March 1, 1997 ========================================================================================= Land $ - $ 83,757 Buildings and improvements 9,130 3,156,813 Machinery and equipment 3,384,115 3,422,993 Furniture and fixtures 791,242 798,640 ---------- ---------- 4,184,487 7,462,203 less-accumulated depreciation (3,226,412) (4,258,166) ---------- ---------- $ 958,075 $ 3,204,037 =========== ========= =========================================================================================
On October 1, 1997, the Company completed the consolidation of its facilities and sold its 152,000 square 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 pay the $525,000 financing secured by this property, to prepay $707,000 of the convertible subordinated debentures secured by a second mortgage on this property, and to pay a $176,000 prepayment penalty incurred from the prepayment of the subordinated debt. The remaining proceeds were utilized to reduce the revolving credit financing. NOTE 7 - LONG-TERM DEBT AND NOTES PAYABLE REVOLVING CREDIT The Company has a $15 million revolving credit facility with Congress Financial Corp. which expired in March, 1998, and has been extended to August 1998. 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, 1998, the Company had excess borrowing availability pursuant to this credit agreement of $279,000, and was not in compliance for both net worth and working capital covenants. In March, and then in May 1998, Congress Financial Corporation extended its Loan and Security Agreement with the Company to August 18, 1998, with ongoing discussions for the Company and Congress to enter a new, long-term financing facility. In management's opinion, a new agreement will be in place prior to the expiration of the current extension. In connection with this financing, 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. In connection with the $3.5 million private placement concluded in August, 1996 (Note 3), the Company prepaid the outstanding balance of $500,000 in accordance with the terms of this amendment. Pursuant to the agreement, the Company issued 10,000 treasury common shares related to its decision to defer making the mandatory prepayments. REAL ESTATE FINANCING On June 8, 1994, the Company borrowed $1,500,000 under a separate 10-1/2% five-year term loan with Congress Financial Corp. and repaid a $1,700,000 Industrial Revenue Bond financing. This loan was secured by the Company's facility in Cartersville, Georgia, and satisfied fully upon the sale of the property on October 1, 1997. Capital Leases The Company leases equipment under capital leases. A schedule of the yearly minimum rental payments is as follows:
February, 1999 $ 64,488 February, 2000 64,488 February, 2001 64,488 February, 2002 2,857 ------- Total minimum lease payments 196,321 Less amount representing interest 23,721 ------- Present value of net minimum lease payments 172,600 Less current maturities 51,898 ------- Long term capital lease obligation $120,720 =======
At February 28, 1998, the Company had approximately $218,279 of equipment under capital lease with accumulated amortization of approximately $21,828. NOTE 8 - 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 law. Significant components of the Company's deferred taxes at February 28, 1998 and March 1, 1997 are as follows:
===================================================================================================================== 1998 1997 ===================================================================================================================== Deferred tax assets Net operating loss carryforward $ 7,150,000 $ 5,471,000 Accrued severance 257,000 294,000 Excess of tax basis over book basis of inventories 333,000 165,000 Capitalized inventory costs 63,000 143,000 Other 127,000 43,000 ------------- ------------ Total deferred tax assets $ 7,930,000 $ 6,116,000 Deferred tax liabilities Difference between the book and tax basis of property, plant and equipment 366,000 389,000 ------------- ------------ Net deferred tax asset $ 7,564,000 $ 5,727,000 Less valuation allowance 7,564,000 5,727,000 ------------- ------------ 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. At February 28, 1998, the net operating loss carryforward for book purposes is $19.0 million. For tax purposes, at February 28, 1998, the Company's net operating carryforward was $17..9 million, which, if unused, will expire from 2009 to 2013. Certain tax regulations relating to the change in ownership may limit the Company's ability to utilize its net operating loss carryforward if the ownership change, as computed under such regulations, exceeds 50%. Through February 28, 1998, the change in ownership was less than 50%. There was no income tax provision (benefit) for the fiscal years 1998, 1997 and 1996. The following is a reconciliation of the normal expected statutory Federal income tax rate to the effective rate reported in the financial statements:
========================================================================================== 1998 1997 1996 ========================================================================================== Computed "expected" provision for Federal income taxes (35.0)% (35.0)% (35.0)% Valuation allowance 35.0 35.0 35.0 ----- ----- ----- Actual provision for income taxes - % - % - % ===== ===== ===== ==========================================================================================
NOTE 9 - STOCKHOLDERS' EQUITY STOCK OPTIONS 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 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 1998, 1997 and 1996 would be $22,000, $32,000 and $10,000 respectively. In fiscal 1998 and 1997, there were no awards of stock options. During the initial phase-in period of SFAS No. 123, such compensation may not be representative of the future effects of applying this statement. A summary of option activity for the years ended February 28, 1998, March 1, 1997, and March 2, 1996 is as follows:
NUMBER OF WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ============================================================================================= Balance, February 25, 1995 180,000 $5.75 Granted 84,000 $3.24 -------- ----- Balance, March 2, 1996 264,000 $4.95 Forfeited (11,000) $3.37 -------- ----- Balance, March 1, 1997 253,000 $5.02 Forfeited (78,500) $5.42 -------- ----- Balance, February 28, 1998 174,500 $4.84 =============================================================================================
At February 28, 1998 the status of outstanding stock options is summarized as follows:
============================================================================================= WEIGHTED AVERAGE REMAINING EXERCISE OPTIONS CONTRACTUAL OPTIONS PRICES OUTSTANDING LIFE EXERCISABLE --------------------------------------------------------------------------------------------- $3.00 30,000 7.8 Years 12,000 $3.37 32,000 7.7 Years 12,800 $5.75 112,500 6.7 Years 67,500 --------------------- ---------------------- 174,500 92,300 ===================== ======================
The weighted average fair value at date of grant for those options granted in fiscal 1996 was $2.34. The fair value of each option at date of grant was estimated using the Black-Scholes option pricing model utilizing the following weighted average assumptions: Dividend Yield 0% Risk-free interest rate 6.23% Expected life after vesting period 10 years Expected volatility 58% 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 $327,000 at February 28, 1998. 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 28, 1999 and have a liquidation preference of $200 per share. ISSUANCE OF TREASURY STOCK In connection with the Company's refinancing on March 22, 1994 (Note 7), 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, 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. This plan has been repealed as part of the May 19, 1998 forbearance agreement. GRANT OF WARRANTS Warrants granted to NAN Investors LP to purchase 16,500,000 shares of the Company's Common Stock for $.10 per share, with a five-year term effective May 21, 1998. NOTE 10 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS LEASE COMMITMENTS Minimum rental commitments under noncancellable leases (excluding renewal options and escalation) having a term of more than one year are as follows:
=========================================================================== FISCAL YEAR ENDING --------------------------------------------------------------------------- 1999 $248,821 2000 $240,901 2001 $246,199 2002 $251,569 2003 $190,560 ===========================================================================
Rental expense under operating leases, including escalation amounts, was approximately $228,007, $266,000, and $300,000 for the fiscal years ended February 28, 1998, March 1, 1997 and March 2, 1996, 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 February 28, 1998 extend through fiscal 1999 and amount to $818,000. AGREEMENTS WITH PRINCIPAL STOCKHOLDERS On March 1, 1994, in connection with the restructuring described in Note 1, 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. The principal shareholders sold 157,875 shares including 88,400 at prices below of $5.00 per share: 42,875 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 $36,000, 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 29, 1998 these warrants have not been requested to be issued, nor have they been issued. 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 non cancellable licensing agreements (excluding renewal options) having a term of more than one year as of March 1, 1997, are as follows:
FISCAL YEAR ENDING AMOUNT ------------------ ---------- 1999 $1,334,000 2000 $668,000 ---------- Total minimum licensing payments $2,002,000 ==========
Royalties to GUESS?, Inc., which owns 23% of the outstanding common stock of the Company, aggregated $840,000 in fiscal 1998, $294,000 in fiscal 1997, and $335,000 in fiscal 1996. The Company has informed GUESS that it will not achieve the minimum net sales of $8 million required, pursuant to the license agreement, for the twelve-month period ending May 31, 1997. GUESS has agreed not to terminate the license agreement as of May 31, 1997 and the Company has agreed that GUESS, in its sole and subjective discretion, may terminate the license agreement at any time after December 31, 1997. Due to the lack of capital resources necessary to develop and support the Guess? Product line, the Company with the support of Guess? Inc. has initiated a strategy to discontinue its Guess? Division by the first quarter of fiscal year 1999. The GUESS? License was terminated as of March 31, 1998. Minimum licensing payments to GUESS? included above for the period subsequent to December 31, 1997 are $175,000. As described in Note 12, Levi Strauss & Co., the parent company of Brittania Sportswear Ltd.., announced their intention to sell Brittania. In light of the actions announced by Levi's, a customer accounting for approximately $11 million of the Company's sales of Brittania product has advised the Company that it would no longer continue its on-going commitment to the Brittania trademark. In response, the Company has filed a lawsuit against Levi Strauss & Co. Minimum licensing commitments to Brittania included above aggregated $504,000. LITIGATION In September 1993, the Company filed an action against the former owners of Phoenix Associates, Inc. ("Phoenix"). The Company is seeking compensatory damages of approximately $4,000,000 plus declaratory and injunctive relief for acts of alleged securities fraud, fraudulent conveyances, breach of fiduciary trust and unfair competition in connection with the acquisition of the common stock of Phoenix. Additionally, the Company has filed a demand for arbitration which seeks compensatory damages of $4,000,000, rescission of the stock purchase agreement, rescission of an employment agreement and other matters, all on account of alleged breaches of the stock purchase agreement, fraudulent misrepresentation and breach of fiduciary duties. In November 1993, the former owners of Phoenix filed counterclaims against the Company alleging improper termination with regard to their employment agreement and breach of the stock purchase agreement. The former owners have filed for damages of approximately $9,000,000. The actions remain in their preliminary stage. The Company considers the damages in the counterclaim to be unsupportable and believes it will likely prevail on its defenses to such counterclaims . In the third quarter of the 1996 fiscal year, the Company concluded that its counterclaims against the holder of the subordinated note payable to the former owner of Phoenix, as described in Note 4 above, 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. The Company has agreed to settle the Varon/LBA litigation, and will realize $675,000 from the matter in the first quarter of fiscal year 1999. On December 9, 1997, Donald Gold, a Director of the Company (subsequently resigned), 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. The Company has subsequently entered into a settlement agreement, which will not have a material impact on the Company's financial position. On January 15, 1998, in the Supreme Court of the State of New York, Westchester County, George Gold, a Director of the Company, filed a complaint against the Company for breach of the March 18, 1994 Severance Agreement, and is seeking damages in the amount of $559,456 plus applicable interest and legal fees. The Company on March 9, 1998 filed counterclaims for a significantly larger amount. On February 17, 1998, Theresa M. Bohenberger, a former Vice President and Director of the Company, filed a complaint against the Company in the United States District Court for the Southern District of New York, relating to payments due her under the May 2, 1992 Severance Agreement. The Company has been in discussion with Ms. Bohenberger's counsel concerning settlement of the issues. Company is subject to other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the George Gold, Theresa M. Bohenberger, and 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. No provision has been made by the Company with respect to the aforementioned litigation at February 28, 1998. LETTERS OF CREDIT At February 28, 1998, the Company had outstanding letters of credit, primarily with foreign banks of approximately $200,000 for purposes of collateralizing the Company's obligations for inventory purchases. NOTE 11 - RETIREMENT PLAN The Company has a 401(k) plan for the benefit of all qualified employees. Under the terms of the plan, the Company for fiscal year 1996 contributed an amount equal to 2%, aggregating $102,000, of the participant's earnings subject to the maximum contribution levels established by the Internal Revenue Service. No contribution was made for fiscal 1998 and 1997. NOTE 12 - BRITTANIA LITIGATION Since September, 1988, the Company has been a licensee of Brittania Sportswear, Ltd., a wholly-owned subsidiary of Levi Strauss & Co. to manufacture and market men's underwear and other products under the trademarks "Brittania" and "Brittania from Levi Strauss & Co.". Sales under this license aggregated $4.5 million in fiscal year 1998, $14.9 million in fiscal 1997, and $14.6 million in fiscal 1996. As of January 1, 1997, the license was renewed for a five-year term, including automatic renewals of two years if certain minimum sales levels are achieved. On January 22, 1997, Levi'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 Brittania trademark. The Company had filed a lawsuit against Levi Strauss & Co. and Brittania Sportswear, Ltd. alledging that the licensor breach various obligations under the licensing agreement, including without limitation its covenant of good faith and fair dealing. The Company has subsequently agreed to a tentative settlement to this litigation, which will not have a material impact on the Company's financial position. NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED) Unaudited consolidated quarterly financial data for fiscal years 1998 and 1997 is as follows:
(IN THOUSANDS EXCEPT PER SHARE DATA) ================================================================================================== FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ================================================================================================== Fiscal 1998 Net Sales $6,357 $5,204 $5,699 $4,423 Gross Profit 1,738 921 930 (487) Gain (Loss) Asset Sale (Note 6) - - 793 (81) Net (loss) (490) (925) (334) (2,916) Net (loss) per share-basic and ($0.16) ($0.29) ($0.11) ($0.91) diluted Weighted average shares 3,239 3,239 3,239 3,239 Fiscal 1997 Net Sales $6,687 $7,975 $8,435 $7,296 Gross Profit 977 1,806 1,498 1,719 Net (loss) (1,060) (435) (862) (390) Net (loss) per share-basic and ($0.35) ($0.15) ($0.27) ($0.13) diluted Weighted average shares 2,989 3,033 3,329 3,239 ==================================================================================================
SCHEDULE II NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- ADDITIONS DEDUCTIONS BALANCE AT CHARGED TO FROM BALANCE AT BEGINNING COSTS AND RESERVES CLOSE DESCRIPTION OF YEAR EXPENSES DESCRIBED (A) OF YEAR ----------- ---------- ---------- ------------- ---------- YEAR ENDED FEBRUARY 28, 1998 ALLOWANCES ACCOUNTS RECEIVABLE $148,601 $206,388 ($4,454) $350,535 ============================================================================================= Year ended March 1, 1997 Allowances Accounts receivable $40,076 $119,688 $11,163 $148,601 ============================================================================================= (a) Uncollectible accounts written off (recovered) against the allowance.
EX-27 2 ART.5 FDS FOR FISCAL YEAR 10-K
5 THIS SCHEDULE CONTAINS INFORMATION EXTRACTED FROM THE STATEMENTS DATED FEBRUARY 28, 1998 AS FILED IN FORM 10-K FOR THE YEARLY PERIOD THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1 12-MOS FEB-28-1998 FEB-28-1998 8,850 0 3,230,735 351,000 3,090,383 6,050,863 4,184,487 3,226,412 7,207,724 8,170,432 0 0 500 324,185 (1,586,812) 7,207,724 21,683,326 21,683,326 18,581,718 18,581,718 6,454,438 145,743 1,311,875 (4,664,705) 0 (4,664,705) 0 0 0 (4,664,705) (1.47) (1.47)
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