SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT TO REPORT
Filed pursuant to Section 12, 13, or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
NANTUCKET INDUSTRIES, INC.
AMENDMENT NO. 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Annual Report on Form 10-K for the
Fiscal Year ended March 2, 1996, reflecting the complete amended items as set
forth in the pages attached hereto:
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Item 14 Notes to Consolidated Financial Statements.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NANTUCKET INDUSTRIES, INC.
January 20, 1997 By: \s\ Ronald S. Hoffman
----------------------
Ronald S. Hoffman,
Vice President-Finance and Chief Financial Officer
(principal financial and accounting officer)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
General
- -------
In recent years, the Company was burdened with an unprofitable Puerto
Rico facility and low margin product lines which created challenges in its
business, profitability and financial resources. At the end of the 1994 fiscal
year the Company began the implementation of a restructuring strategy to improve
operating results and enhance its financial resources. During fiscal 1995, the
Company implemented strategies which reduced costs, streamlined its operations
and closed its Puerto Rico plant.
In March, 1994, the Company refinanced its debt and entered into
agreements with its principal stockholders and employees to increase its
capital, through the sale of $1 million of non-voting convertible preferred
stock to management and reduce expenses. In August, 1994, the Company sold
treasury stock which increased equity by $2.9 million. Although there can be no
assurance that these measures will be successful, the Company believes the steps
it has taken provide sufficient liquidity to fund its operations.
In April, 1996 the Company signed a letter of intent for a $3.5 Million
private placement consisting of 250,000 shares of common stock and $2,625,000 of
12.5% convertible subordinated debentures due August 31, 1996. The debentures
will be secured by a second mortgage on the Company's manufacturing and
distribution facility in Georgia and are convertible into 467,167 shares of
common stock in specified amounts after specified dates at prices ranging from
$5.10 to $6.00. Closing of the transaction is expected in early June, 1996. The
net proceeds will be used to prepay the balance payable to Chemical Bank.
Accordingly, the entire balance is included in current liabilities. The
remaining net proceeds will be used to reduce the outstanding balance with
Congress.
Results of Operation
- --------------------
Sales
Net sales for the fiscal year ended March 2, 1996 decreased 5% from
prior year levels to $35,060,000. Most of this decline was associated with the
elimination of unprofitable product lines, including a reduction of $1,024,000
related to the fiscal 1996 elimination of the Company's healthcare line. A soft
retail environment contributed to an overall 5.5% decrease in revenues
associated with lower unit volumes in the core men's' fashion underwear
products. For the current fiscal year, there was a 55% increase in the unit
volume sales of the developing GUESS? intimate apparel product line to $4.9
million.
For the fiscal year ended February, 1995, net sales declined 11%
reflecting $9.5 million reduction related to the elimination of unprofitable
product lines. Sales in the Company's core men's' fashion underwear division
rose 7%, generally in unit volumes over prior year levels. Sales of the GUESS?
products unit volumes resulted in an increase of $2.6 million from prior year
levels when the initial shipments began in November, 1993.
17
Net sales in fiscal 1994 decreased 11% to $41.6 million, with declines
in the sock and women's divisions and a 28% increase in the Mens' division.
The sales decline in the Women's Division of $3.6 million in fiscal
1995 and $7.9 million in fiscal 1994 was predominantly the result of the
termination of the Company's business with Avon Products during the third
quarter of fiscal 1994. The sales decline in the Sock Division of $3.4 million
in fiscal 1995 and $4.3 million in fiscal 1994 was the result of the Company's
decision to not renew its license with DANSKIN, and the Company's decision
during 1994 to cease operations at this division
Gross Margin
Gross profit margins continued to improve from prior year levels as
follows:
Fiscal Year
1996 1995 1994
---- ---- ----
Gross Margin % 24% 19% 14%
Amount- % Increase (Decrease) 18% 21% (39%)
This is a result of the improved product mix from the increased sales
of the higher margin GUESS? Innerwear line, the elimination of the unprofitable
products, improved plant efficiencies and lower cost product sources. The gross
profit margin in fiscal 1995 reflects non recurring inventory reserves and
write-offs generally associated with discontinued product lines which aggregated
$652,000. The decrease in gross profit margin in fiscal 1994 was the result of
unfavorable manufacturing variances at both Cartersville and Puerto Rico,
unfavorable product mixes and inventory write-downs of $500,000.
Selling, general and administrative expenses
Selling, general and administrative expenses for the 1996 fiscal year
remained at 21% of sales, generally consistent with fiscal 1995 levels. These
expenses declined 3% to $7,554,000 from the prior year level, generally due to
the variable selling costs related to the decreases in net sales. The current
fiscal year has been reduced by a $102,000 recovery of an insurance claim which
was expensed in the fourth quarter of the prior fiscal year.
Selling, general and administrative expenses in fiscal 1995 were 21% of
sales, a decline of $2,028,000 or 21% from prior year levels. This reflects the
reduction in senior management salaries resulting from the termination and
severance agreements entered into with the former chairman and vice chairman and
reduced professional fees. In fiscal 1994, there was a $1.5 million increase in
selling, general and administrative costs. This increase was primarily
attributable to increased royalties (with licensed brands comprising a higher
proportion of the Company's sales), set-up costs incurred in connection with new
programs at certain customers and increased accounting, legal and other
professional fees, incurred in connection with the refinancing and restructuring
described herein and investigation of the Company's fiscal 1993 inventory loss.
18
Selling, general and administrative costs are substantially fixed. In
fiscal 1995, the impact of the termination and severance agreements with the
former chairman and vice chairman, a significant fixed element in prior years,
is reflected in the lower percentage of these costs to sales.
Prospective Financial Standard
- ------------------------------
Stock-Based Compensation
In October, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" which is effective for fiscal years beginning after December 15,
1995. As permitted by FAS 123,. the Company will elect to continue to measure
stock option grants in accordance with APB No. 25 and, accordingly, recognizes
no compensation expense for these grants
Unusual (credit) charge
In November, 1992, the Company acquired the Puerto Rico facility,
Phoenix Associates, Inc., pursuant to a stock purchase agreement. A portion of
the purchase price was debt payable to the former owners of Phoenix, of which
$300,000 was due February 2, 1998. In April, 1993, the Company discovered an
inventory variance of $1,700,000 principally attributable to unrecorded
manufacturing and material cost variances at the Puerto Rico facility incurred
prior to the Company's acquisition of this facility. In connection with the
acquisition of the Puerto Rico facility, the Company initiated an action against
the former owners of that facility. In the third quarter of the current fiscal
year, the Company concluded that its claims against the holder of the
subordinated note payable are in excess of the $300,000 due. In the opinion of
legal counsel and management, the likelihood of any payment being required on
this note is remote. Accordingly, in fiscal 1996, the Company eliminated this
payable and reflected such $300,000 reduction as an unusual credit in the
accompanying financial statements.
The operating loss for fiscal 1995 and 1994 includes an unusual charge
of approximately $1.3 million and $5.5 million, respectively. Of the total
unusual charge of $1,252,500 in fiscal 1995 and $5,450,000 in fiscal 1994,
approximately $160,000 in fiscal 1995 and $300,000 in fiscal 1994 represents
expenses incurred during fiscal 1995 in closing the Puerto Rico facility,
$1,092,000 in the current fiscal year and $3,085,000 in fiscal 1994 represents
write-downs of asset values and other non-cash items and $2.1 million in fiscal
1994 represents employee severance payments. The fiscal 1994 accrual of
severance payments for the former Chairman and Vice Chairman of the Board
($1,765,000) will reduce compensation expenses over a five year period which
commenced in fiscal 1995. The write-down of asset values is not expected to have
a material effect on the Company's liquidity.
Interest expense
The increase in interest expense of $118,000 for the 1996 fiscal year
is primarily due to the higher prime rates in effect during fiscal year 1996 and
increased in levels of financing.
Interest expense for fiscal year 1995 was $1,195,000 and $795,000 in
fiscal 1994 The increase in fiscal 1995 reflects higher borrowing levels
associated with the new credit agreements and increases in the prime rate..
Liquidity and Capital Resources
- -------------------------------
In March, 1994 the Company refinanced its credit agreements with (i) a
three year $15,000,000 revolving credit facility, including a $3,000,000 letter
of credit facility, with Congress Financial, (ii) a $2,000,000 Term Loan
Agreement with Chemical Bank and (iii) an additional $1,500,000 Term Loan with
Congress replacing the Industrial Revenue Bond financing of the Cartersville,
Georgia manufacturing plant. Additionally, the $1,000,000 investment in the
Company by the Management Group and the sale of 490,000 shares of common
treasury stock to GUESS?, Inc. and certain of its affiliates increased the
Company's liquidity and capital resources. The net proceeds of $2.9 million from
the sales of treasury shares was used to prepay $500,000 of bank debt and the
balance provided additional working capital resources.
Under the terms of the Term Loan Agreement with Chemical Bank,
scheduled installments of $500,000 each were due on December 15, 1995 and March
15, 1996. As of December 15, 1995 the Company agreed to an amendment in which it
made payments of $100,000 each on December 31, 1995 and January 31, 1996, with
the remaining $800,000 to be paid in 15 equal installments commencing March 31,
1996.
The Company believes that the credit facility provides adequate
financing flexibility to fund its operations.
Working capital decreased $2,003,000 to $10,988,000. This decrease
reflects a decrease in receivable levels caused by the lower sales levels
experienced in the overall retail environment. Inventory levels declined as the
impact of increased offshore sourcing reduced the level of raw materials.
Property, plant and equipment additions were $97,000 for fiscal 1996,
$388,000 for fiscal 1995 and $216,000 for fiscal 1994. The revolving credit
agreement with Congress Financial provides for the Company to borrow purchase
money term loans (up to a maximum of $500,000) of up to 75% of the orderly
liquidation value of newly acquired and eligible equipment
The Company knows of no other trends or uncertainties which have had, or
which it expects will have, any material impact on the Company's operations. The
Company believes that the moderate rate of inflation over the past few years has
not had significant impact on sales or profitability and its future operations
are not expected to be affected significantly by inflation.
20
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 2, 1996, February 25, 1995 and February 26, 1994
NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Nantucket Industries, Inc. and its wholly-owned subsidiaries (the
"Company") designs, manufactures and sells throughout the United
States men's branded and private label fashion undergarments to mass
merchandisers and national chains. In addition, the Company designs,
manufactures and sells to department and specialty stores GUESS?
innerwear for both women and men.
For the current fiscal year, sales to the Company's largest customer
accounted for 40% of net sales and 43% and 27%, respectively, for the
two prior fiscal years. Sales to the second largest customer in the
current fiscal year were 21% of net sales and 17% and 15%,
respectively, for the two prior fiscal years. Sales in the current
fiscal year to the Company's third largest customer represented 13% of
net sales and 12% in the prior fiscal year. For the fiscal year ending
February, 1994, sales to another customer represented 12% of net
sales. In the fourth quarter of fiscal 1994, the Company terminated
business with this customer in connection with the shutdown of its
Puerto Rico facility (Note 2).
Principles of Consolidation
The consolidated financial statements include the accounts of
Nantucket Industries, Inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated.
Accounts Receivable
An allowance for doubtful accounts is provided based upon historical
bad debt experience and periodic evaluations of the aging of the
accounts. Substantially all receivables are insured up to 80% of the
outstanding balance, subject to certain deductibles.
Inventories
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market (net realizable value).
Property, Plant and Equipment
Property, plant, and equipment are stated at cost. Equipment under
lease is stated at the present value of the minimum lease payments at
the inception of the lease. Depreciation and amortization are provided
by the straight-line method over the estimated useful lives of the
assets as follows:
6
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 2, 1996, February 25, 1995 and February 26, 1994
Years
Buildings and improvements 20 - 40
Machinery and equipment 3 - 10
Furniture and fixtures 10
Other Assets
Other long-term assets consist primarily of capitalized loan
origination costs. These costs are being amortized over the term of
the related credit agreements.
Income Taxes
The Company and its wholly-owned subsidiaries file a consolidated
Federal income tax return. Deferred income taxes arise as a result of
differences between financial statement and income tax reporting.
Revenue Recognition
Sales are recognized when merchandise is shipped and title passes.
Returns and allowances are accrued based on existing terms and
historical trends.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed by dividing net income
(loss) by average common shares outstanding during each year. Stock
options and warrants are not included since the effect would be
antidilutive or not significant to the computation.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest to February 28.
The year ended March 2, 1996 had 53 weeks and the years ended February
25, 1995 and February 26, 1994 contained 52 weeks.
Reclassification
Certain prior year amounts have been reclassified in order to conform
to the current year's presentation.
7
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 2, 1996, February 25, 1995 and February 26, 1994
Use of Estimates
In preparing the Company's financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates
Impairment of Long-Lived Assets
In 1995, the Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of". Accordingly, when
indicators of impairment are present, the Company periodically
evaluates the carrying value of property, plant and equipment and
intangibles in relation to the operating performance and future
undiscounted cash flows of the underlying business. The Company
adjusts carrying amount of the respective assets if the expected
future cash flows is less than the book value.
Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company for debt
with similar terms and maturities, the fair value of the Company's
long-term debt approximates the carrying value. The carrying value of
all other financial instruments potentially subject to valuation risk,
principally cash, accounts receivable and accounts payable, also
approximate fair value.
NOTE 2 - UNUSUAL (CREDIT) CHARGE
In November, 1992, the Company acquired a manufacturing facility in
Puerto Rico, Phoenix Associates, Inc., pursuant to a stock purchase
agreement. Phoenix had been an exclusive contractor for the Company,
manufacturing many of the Company's product lines for its men's and
ladies' divisions. A portion of the purchase price was subordinated
debt payable to the former owners of Phoenix, of which $300,000 was
due February 2, 1998. In April, 1993, the Company discovered an
inventory variance of $1,700,000, principally attributable to
unrecorded manufacturing and material cost variance at the Puerto Rico
facility, which were incurred prior to the Company's acquisition of
this facility. In connection with the acquisition of the Puerto Rico
facility, the Company initiated an action against the former owners of
that facility as more fully described in Note 8. In the third quarter
of the current fiscal year, the Company concluded that its
counterclaims against the former owners of Phoenix, the holder of the
subordinated debt payable, are in excess of the $300,000 due and, in
the opinion of legal counsel and management, the likelihood of any
payment of this note is remote. Accordingly the Company has eliminated
this payable and reflected such reduction as an unusual credit in the
accompanying financial statements.
At the end of fiscal 1994, the Company formulated plans to close its
Puerto Rico facility, discontinue a portion of its women's innerwear
business, reduce costs and streamline operations. In fiscal 1994, the
Company provided for the costs associated with these matters as an
unusual charge. The Puerto Rico facility shutdown was completed in
July, 1994. A final assessment
8
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 2, 1996, February 25, 1995 and February 26, 1994
associated with this closing required additional write-offs, reflected
as an unusual charge of $1,252,400 in fiscal 1995.
Simultaneously in 1994, the Company also terminated the employment
contracts of its Chairman and Vice-Chairman. In accordance with the
underlying agreement, they will be paid an aggregate of approximately
$400,000 per year in severance and other benefits, through February
28, 1999. The present value of these payments was accrued at February
26, 1994.
For fiscal 1996, 1995 and 1994, the unusual charge (credit) consisted
of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Employee severance (Note 8) $ - $ - $2,065,000
Write-off of goodwill - - 1,478,000
Write-down of inventory - 1,092,400 1,000,000
Write-down of property, plant and equipment - - 530,000
Elimination of subordinated note payable (300,000) -
Other 160,000 377,000
----------- ------------ -------------
$ (300,000) $1,252,400 $5,450,000
----------- ============ =============
</TABLE>
Through March 2, 1996, payments of the unusual charges aggregated
$1,231,000; $460,000 associated with the shutdown of the Puerto Rico
facility and $771,000 representing payments against the present value
of the termination payments to the former Chairman and Vice Chairman.
NOTE 3 - INVENTORIES
Inventories are summarized as follows:
1996 1995
----------- -----------
Raw materials $1,308,694 $ 1,960,413
Work in process 5,709,573 5,594,387
Finished goods 3,138,372 3,429,396
----------- -----------
$10,156,639 $10,984,196
----------- -----------
Inventory valuation allowances and write-downs approximating $453,000
and $1.3 million were provided for the years ended March 2, 1996 and
February 25, 1995, respectively. For the fiscal year ended February,
1995 $1,092,400 of such reserves were related to the unusual charge
(Note 2).
9
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 2, 1996, February 25, 1995 and February 26, 1994
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are summarized as follows:
1996 1995
---------- ----------
Land $ 83,757 $ 83,757
Buildings and improvements 3,157,252 3,139,814
Machinery and equipment 3,400,628 3,332,500
Furniture and fixtures 800,929 788,984
---------- ---------
7,442,566 7,345,055
Less accumulated depreciation 3,943,741 3,578,184
--------- ---------
$3,498,825 $3,766,871
========= =========
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
Revolving Credit
The company had a $9.5 million secured borrowing facility with
Chemical Bank which expired on February 28, 1994. On March 22, 1994,
the Company entered into a new $15 million three year revolving credit
facility with Congress Financial Corp. The revolving credit agreement
provides for loans based upon eligible accounts receivable and
inventory, a $3,000,000 letter of credit facility and purchase money
term loans of up to 75% of the orderly liquidation value of newly
acquired and eligible equipment. Borrowings bear interest at 1-3/4% to
3% above prime. The agreement requires, among other provisions, the
maintenance of minimum working capital and net worth levels and also
contains restrictions regarding payment of dividends. Borrowings under
the agreement are collateralized by substantially all of the assets of
the Company.
In connection with this refinancing, the Company used $5,090,000 of
the proceeds of the revolving credit facility to reduce the balance
due to Chemical Bank and simultaneously entered into a $2,000,000 Term
Loan Agreement with Chemical Bank. At December 15, 1995 $1,000,000 was
outstanding under this loan. Pursuant to an amendment to this
agreement, the Company made payments of $100,000 each on December 31,
1995 and January 31, 1996 and agreed to pay the remaining $800,000 in
15 equal installments commencing March 31, 1996. The amendment also
requires certain prepayments in the event the Company refinances any
existing debt or obtains additional equity or debt financing. Pursuant
to the agreement, the Company issued 10,000 treasury common shares
related to its decision to defer making the mandatory prepayments.
10
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 2, 1996, February 25, 1995 and February 26, 1994
Real Estate Financing
On June 8, 1994 the Company borrowed $1,500,000 under a separate five
year term loan with Congress Financial Corp. and repaid a $1,700,000
Industrial Revenue Bond financing. This loan is secured by the
Company's facility in Cartersville, Georgia.
Annual Maturities
Annual maturities of debt are as follows:
1997 $ 1,275,000
1998 7,994,000
1999 345,000
2000 90,000
-----------
$9,704,000
NOTE 6 - INCOME TAXES
Effective for fiscal 1994, the Company adopted SFAS No. 109,
"Accounting for Income Taxes." The adoption of SFAS No. 109 did not
have a material effect on the consolidated financial statements.
Therefore, the effect of adopting SFAS No. 109 is included in income
tax expense rather than as a cumulative effect of an accounting
change.
Under the provisions of SFAS No. 109, deferred income taxes reflect
the net effect of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the
amount used for income tax purposes. Deferred tax assets and
liabilities are measured using enacted tax law. Significant components
of the Company's deferred taxes at March 2, 1996 and February 25, 1995
are as follows:
11
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 2, 1996, February 25, 1995 and February 26, 1994
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
DEFERRED TAX ASSETS
Net operating loss carryforward $4,256,000 $3,656,000
Accrued severance 460,000 613,000
Excess of tax basis over book basis of
inventories 137,000 280,000
Capitalized inventory costs 147,000 177,000
Other 58,000 173,000
---------- ----------
Total deferred tax assets 5,058,000 4,899,000
Deferred tax liabilities
Difference between the book and tax basis of
property, plant and equipment 357,000 266,000
---------- ----------
Net deferred tax asset 4,701,000 4,633,000
Less valuation allowance 4,701,000 4,633,000
---------- ----------
Net deferred taxes $ - $ -
=========== ===========
</TABLE>
The Company anticipates utilizing its deferred tax assets only to the
extent of its deferred tax liabilities. Accordingly, the Company has
fully reserved all remaining deferred tax assets which it cannot
presently utilize.
Refundable taxes of $558,000 were recorded at February 26, 1994, which
reflect carryback of the Company's net operating losses for Federal
and state income tax purposes. At March 2, 1996, the net operating
loss carryforward for book purposes is $12 million. For tax purposes,
at March 2, 1996, the Company's net operating carryforward was $10.6
million, which begins to expire in the year 2009. Certain tax
regulations relating to the change in ownership may limit the
Company's ability to utilize its net operating loss carryforward if
the ownership change, as computed under such regulations, exceeds 50%.
Through March, 1996 the change in ownership was approximately 40%.
There was no income tax provision (benefit) for the fiscal years 1996
and 1995. The provision (benefit) for income taxes for fiscal year
1994 is comprised of the following:
12
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 2, 1996, February 25, 1995 and February 26, 1994
1994
Current ----------
Federal $(515,102)
State and Local 10,194
----------
(504,908)
Deferred (benefit) provision (223,000)
----------
$(727,908)
----------
The following is a reconciliation of the normal expected statutory
Federal income tax rate to the effective rate reported in the
financial statements:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -----
<S> <C> <C> <C>
Computed "expected" provision for
Federal income taxes (35.0)% (35.0)% (35.0)%
Reversal of prior year deferred taxes (2.2)
State taxes - net of Federal income tax
benefit
Officers' life insurance 1.0
Other (2.0)
Valuation allowance 35.0 35.0 31.0
----- ----- -----
Actual provision for income taxes - % - % (7.2)%
======= ======= ======
</TABLE>
NOTE 7 - STOCKHOLDERS' EQUITY
Stock Options and Warrants
The 1992 stock option plan, as amended, provides for the issuance of
options to purchase up to 340,000 shares of common stock at the market
value at the date of grant. Options are exercisable up to ten years
from the date of grant.
13
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 2, 1996, February 25, 1995 and February 26, 1994
A summary of option transactions under these plans is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning $8.10 $5.13
180,000 $5.75 120,000 10.75 260,000 11.00
$3.00-
Granted 84,000 3.37 180,000 5.75
$5.13-
Exercised - - (110,000) 5.75
$8.10-
Canceled or expired - (120,000) 10.75 (30,000) $11.00
-------- --------
Outstanding, end of year $3.00- $8.00-
264,000 5.75 180,000 $5.75 120,000 10.75
======== ======== =========
Exercisable, end of year - - -
=========
Available for grant 76,000 160,000 70,000
========= ======== =========
</TABLE>
In October, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" which is effective for fiscal years
beginning after December 15, 1995. As permitted by FAS 123,. the
Company has elected to continue to account for stock option grants in
accordance with APB No. 25 and, accordingly, recognizes no
compensation expense for these grants.
Issuance of Preferred Stock
On March 22, 1994, the Company sold to its Management Group 5,000
shares of non-voting convertible preferred stock for $1,000,000. These
shares are convertible into 200,000 shares of common stock at the rate
of $5.00 per share. These shares provide for cumulative dividends at a
floating rate equal to the prime rate and approximate $160,000 at
March 2, 1996. Such dividends are convertible into common stock at the
rate of $5.00 per share. These shares are redeemable, at the option of
the Company, on or after February 28, 1999 and have a liquidation
preference of $200 per share.
Sale of Treasury Stock
On August 22, 1994, the Company sold 490,000 shares of its common
treasury stock to GUESS?, Inc. and certain of its affiliates for $6.00
per share. Net proceeds aggregated $2.9 million. The treasury stock
issued had an average cost of $6.52 per share. Accordingly, $295,000,
representing the difference between the net proceeds and the treasury
shares cost of $3,196,000, was charged to the Company's accumulated
deficit.
14
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 2, 1996, February 25, 1995 and February 26, 1994
In connection with the Company's refinancing on March 22, 1994 (Note
5), the Company entered into a $2,000,000 Term Loan Agreement with
Chemical Bank. Pursuant to the agreement, the Company issued to
Chemical Bank 10,000 treasury common shares, 7,500 in the current
fiscal year and 2,500 at the end of the prior fiscal year, related to
mandatory prepayments which were not made.
Stockholders' Rights Plan
The Company has a Stockholders' Rights plan which becomes effective
when more than 30% of the Company's common shares are acquired by a
person or a group. The Company may redeem the rights before such time.
NOTE 8- COMMITMENTS,CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Lease Commitments
Minimum rental commitments under noncancellable leases (excluding
renewal options and escalation's) having a term of more than one year
as of March 2, 1996, are as follows:
Operating
Leases
----------
Fiscal year ending
1997 $242,000
1998 60,000
----------
Total minimum lease payments $302,000
----------
Rental expense under operating leases, including escalation amounts,
was approximately $300,000, $284,000, and $426,000 for the fiscal
years ended March 2, 1996, February 25, 1995 and February 26, 1994,
respectively.
Employment Agreements
The Company has entered into employment agreements, as amended, with
certain officers providing for minimum salary levels. Certain of these
agreements provide for adjusted annual cost-of-living increases,
change in control, and termination provisions. In addition, several of
these agreements provide for commission payments based on certain
sales thresholds, as well as death and disability benefits payable to
the respective estate and permanent disability benefits payable to the
executives in the amount of one-half the executive's remaining
contracted salary and certain retirement health care benefits to
certain executives. The Company is insured for the death benefit
provision under the executive employment contracts.
The aggregate commitment under these agreements at March 2, 1996 is as
follows:
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NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 2, 1996, February 25, 1995 and February 26, 1994
Fiscal year ending
1997 $1,110,000
1998 $960,000
1999 $818,000
2000 -
Agreements with Principal Stockholders
On March 1, 1994, in connection with the restructuring described in
Note 2, the Company entered into agreements with its two principal
stockholders and a group of employees (the "Management Group"). The
agreements provide, among other things, for:
The reimbursement of the principal stockholders, limited to
$1.50 per share to the extent that the gross proceeds per
share from the sale of common stock by the stockholders
during the two-year period beginning September 1, 1994 are
less than $5.00 per share. Such guaranty is applicable to a
maximum of 160,000 shares sold by such shareholders, subject
to reductions under certain circumstances. Through March 2,
1996 the principal shareholders have sold 109,875 shares
including 51,275 at prices below of $5.00 per share resulting
in a charge in the current year operating results of $36,000.
Pursuant to the agreement and applicable securities laws, at
March 2, 1996 the maximum remaining shares subject to this
guarantee, at current market prices, is 50,125 shares.
Warrants to purchase up to 160,000 shares of common stock
equal to the number of shares sold by the principal
stockholders. The exercise price per share of such warrants
would equal the gross proceeds per share from the
corresponding sale by the principal stockholders. Such
warrants expire on February 28, 2000.
The contribution to the Company of approximately $535,000 of
cash surrender value of life insurance policies on the lives
of the stockholders owned by the Company, in the form of a
loan against such policies which is not required to be
repaid.
The cancellation of the outstanding stock options and
incentive awards of the Group members and the principal
stockholders and the authorization to issue options to Group
members to purchase 150,000 shares of common stock based upon
certain terms and conditions.
Trademark Licensing Agreements
Minimum payments under noncancellable licensing agreements (excluding
renewal options) having a term of more than one year as of March 2,
1996, are as follows:
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