UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 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
incorporation or organization) Identification No.)
510 Broadhollow Road, Suite 300, Melville, New York 11747
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(516) 293-3172
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. |X| YES |_| NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 10, 1997, the Registrant had outstanding 3,238,796 shares of common
stock not including 3,052 shares classified as Treasury Stock.
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
QUARTERLY REPORT
FOR QUARTER ENDED MAY 31,1997
INDEX
PAGE
----
Part I.- FINANCIAL INFORMATION
Consolidated balance sheets 3
Consolidated statements of operations 4
Consolidated statements of cash flows 5
Notes to consolidated financial statements 6 - 10
Management's discussion and analysis of
financial condition and results of operations 11 - 12
Part II.- OTHER INFORMATION 13
Signature 14
<PAGE>
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, March 1,
1997 1997
--------------------------
ASSETS (unaudited) (1)
<S> <C> <C>
CURRENT ASSETS
Cash $25,445 $7,941
Accounts receivable, less reserves of $129,000 and
$149,000, respectively 3,359,369 5,872,734
Inventories (Note 4) 7,472,027 7,826,440
Other current assets 519,473 506,171
--------------------------
Total current assets 11,376,314 14,213,286
PROPERTY, PLANT AND EQUIPMENT - NET 3,350,102 3,204,037
OTHER ASSETS - NET 593,532 645,880
--------------------------
$15,319,948 $18,063,203
===========---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $420,000 $510,864
Current portion of capital lease obligations 47,919 --
Accounts payable 1,377,244 1,081,133
Accrued salaries and employee benefits 222,505 348,361
Accrued unusual charge (Note 7) 465,000 465,000
Accrued expenses and other liabilities 447,909 530,850
Accrued royalties 472,347 368,860
Income taxes payable (Note 5) 1,909 1,909
--------------------------
Total current liabilities 3,454,833 3,306,977
LONG-TERM DEBT 6,099,556 8,566,011
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 160,140
ACCRUED UNUSUAL CHARGE (Note 7) 168,866 270,868
CONVERTIBLE SUBORDINATED DEBENTURES (Note 6) 2,760,000 2,760,000
--------------------------
12,643,395 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
liquidating preference of $200 per share
and are issued and outstanding 500 500
Common stock, $.10 par value; authorized 20,000,000 shares;
issued 3,241,848 at May 31, 1997 and March 1, 1997 324,185 324,185
Additional paid-in capital 12,364,503 12,364,503
Deferred issuance cost (176,616) (183,772)
Accumulated deficit (9,816,082) (9,326,132)
--------------------------
2,696,490 3,179,284
Less 3,052 shares at May 31, 1997 and March 1, 1997
of common stock held in treasury, at cost 19,937 19,937
--------------------------
2,676,553 3,159,347
--------------------------
$15,319,948 $18,063,203
==========================
</TABLE>
(1) Derived from audited financial statements.
The accompanying notes are an intergral part of these statements.
3
<PAGE>
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Thirteen Weeks Ended
-------------------------
May 31, June l,
1997 1996
-------------------------
Net sales $6,357,336 $6,687,913
Cost of sales 4,619,599 5,711,140
-------------------------
Gross profit 1,737,737 976,773
Selling, general and administrative
expenses 1,901,024 1,765,483
-------------------------
Operating loss (163,287) (788,710)
Interest expense 326,662 27l,689
-------------------------
Net loss ($489,949) ($1,060,399)
=========================
Net loss per share (Note 3) ($0.16) ($0.36)
=========================
Weighted average common shares outstanding 3,238,796 2,988,796
=========================
The accompanying notes are an integral part of these statements.
4
<PAGE>
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-------------------------
May 31, June 1
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net (loss) income ($489,949) ($1,060,399)
Adjustments to reconcile net (loss) income
to net cash provided by (used in) operating activities
Depreciation and amortization 118,498 76,218
Provision for doubtful accounts 12,000 30,000
Gain on sale of fixed assets (3,775)
Provision for obsolete and slow moving inventory 60,000 235,000
Decrease (increase) in assets
Accounts receivable 2,501,365 365,484
Inventories 294,412 713,951
Other current assets (13,302) (76,080)
(Decrease) increase in liabilities
Accounts payable 296,110 (424,467)
Accrued expenses and other liabilities (105,310) 98,216
Income taxes payable (1,026)
Accrued unusual charge (102,002) (102,001)
----------- -----------
Net cash used in operating activities 2,568,047 (145,104)
----------- -----------
Cash flows from investing activities
Removals (additions) to property, plant and equipment (35,352) 3,615
Decrease in other assets 52,348 2,607
----------- -----------
Net cash provided by (used in) investing activities 16,996 6,222
----------- -----------
Cash flows from financing activities
Payments of short-term debt (2,557,319) (160,000)
Payments of capital lease obligations (10,220)
Borrowings under line of credit agreement, net 298,882
----------- -----------
Net cash provided by financing activities (2,567,539) 138,882
----------- -----------
NET DECREASE IN CASH $17,504 0
Cash at beginning of period 7,941 15,085
----------- -----------
Cash at end of period $25,445 $15,085
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $235,586 $165,884
=========== ===========
Income taxes -- --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
NANTUCKET INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED MAY 31, 1997 AND JUNE 1, 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
6
<PAGE>
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 transfer of all domestic manufacturing requirements to foreign
manufacturing contracting facilities. The final phase of this program will
be completed by the middle of the 1998 fiscal year.
Staff reductions associated with the transfer of manufacturing to offshore
contractors, efficiencies and reduced volume.
The 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 May 31, 1997 and the consolidated
statements of operations and statements of cash flows for the thirteen weeks
ended May 31, 1997 and June 1, 1996 have been prepared by the Company without
audit. In the opinion of management, all adjustments necessary for a fair
presentation of the financial position of the Company and its subsidiaries at
May 31, 1997 and the results of their operations and cash flows for the thirteen
weeks ended May 31, 1997 and June 1, 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
7
<PAGE>
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.
Net loss per common share is computed by dividing net income (loss) by weighted
average common shares outstanding during each year. Incremental shares from
assumed conversions relating 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:
May 31, June 1,
1997 1996
Raw Materials $1,386,661 $1,252,006
Work in Process 1,974,004 3,993,808
Finished Goods 4,111,362 3,961,874
---------- ----------
$7,472,027 $9,207,688
NOTE 5-INCOME TAXES
At May 31, 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 carryforward 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 carryforward if the ownership change, as computed under such regulations,
exceeds 50%. Through May 31, 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.
The
8
<PAGE>
debentures are convertible into the Company's common stock over the next five
years as follows:
Conversion Conversion
Shares Price
Currently convertible 305,000 $3.83
Convertible after June 15, 1997 318,370 $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.
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 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.
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.
9
<PAGE>
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 claim to be insupportable and
believes it will likely prevail on its defenses to such counterclaims.
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
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 May 31, 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
$1.1 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
<PAGE>
NANTUCKET INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Sales
Net sales for the quarter ended May 31, 1997 decreased 5% from prior year levels
to $6,357,000. This decline, associated with lower unit volumes, reflects an
increase of 31% of the Company's GUESS? products and a 7% 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 increase in the sales of GUESS? products reflects
increased sales as the Company increased the number of department store
locations carrying the product and increased sales from the introduction of new
fashion products. In addition, the GUESS? sales in the prior year fiscal quarter
included $525,000 in non-recurring close-out sales.
Gross Margin
Gross profit margins for the quarter ended May 31, 1997 increased to 27% from
the prior year levels of 14%. This improvement reflects the benefit of increased
utilization of the lower cost off-shore manufacturing facilities. In addition,
gross profit levels in the prior fiscal year reflect the fully reserved
close-out sales of the GUESS? products. Also, the current fiscal year reflects
reduced levels of factory overhead.
Selling, general and administrative expenses
Selling, general and administrative expenses were 30% of sales for the quarter
ended May 31, 1997 and 26% of sales for the prior year period. This considers
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. For the first fiscal quarter, the Company
reduced general and administrative expenses by $140,000 from prior year levels.
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.
11
<PAGE>
Interest Expense
Interest expense for the first fiscal quarter increased $55,000 from prior year
levels reflecting increases in the prime rate and the higher rates associated
with the $2.7 million Convertible 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 debt
by $543,000 from levels at June 1, 1996. Working capital levels have declined
$2.1 million from June 1, 1996 levels reflecting reductions in receivables and
inventories utilized to reduce debt levels. The $1.7 million reduction in
inventory levels reflects the Company's continuing strategy of replacing
domestic manufacturing with off shore contractors. This change has also reduced
accounts payable by virtue of the receipt of goods payment terms inherent in
such offshore manufacturing activities. Overall, the current ratio has remained
in excess of the 3:1 level.
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.
The Company believes that the moderate rate of inflation over the past few years
has not had significant impact on sales or profitability.
12
<PAGE>
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 None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K None
13
<PAGE>
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:
July 15, 1997
s/ Ronald S. Hoffman
--------------------
Vice President - Finance
(Chief Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS INFORMATION EXTRACTED FROM THE STATEMENTS DATED MAY 31,
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-01-1997
<PERIOD-END> MAY-31-1997
<CASH> 25,445
<SECURITIES> 0
<RECEIVABLES> 3,488,369
<ALLOWANCES> 129,000
<INVENTORY> 7,472,027
<CURRENT-ASSETS> 11,376,314
<PP&E> 7,719,615
<DEPRECIATION> 4,369,508
<TOTAL-ASSETS> 15,319,948
<CURRENT-LIABILITIES> 3,454,833
<BONDS> 0
0
500
<COMMON> 324,185
<OTHER-SE> 2,351,868
<TOTAL-LIABILITY-AND-EQUITY> 15,319,948
<SALES> 6,357,336
<TOTAL-REVENUES> 6,357,336
<CGS> 4,619,599
<TOTAL-COSTS> 4,619,599
<OTHER-EXPENSES> 1,901,024
<LOSS-PROVISION> 12,000
<INTEREST-EXPENSE> 326,662
<INCOME-PRETAX> (489,949)
<INCOME-TAX> 0
<INCOME-CONTINUING> (489,949)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (489,949)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
