UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1996
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Commission File Number: 1-8509
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NANTUCKET INDUSTRIES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-0962699
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(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
105 Madison Avenue, New York, New York 10016
- -------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(212)889-5656
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(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 January 2, 1997, the Registrant had outstanding 3,238,796 shares of common
stock not including 3,052 shares classified as Treasury Stock.
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
-------------------------------------------
QUARTERLY REPORT
----------------
QUARTER ENDED NOVEMBER 30, 1996
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I N D E X
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PAGE
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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 - 9
Management's discussion and analysis of
financial condition and results of operations 10 - 12
Part II.- OTHER INFORMATION 13
Signature 14
2
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, March 2,
1996 1996
--------------------- ---------------------
(unaudited) (1)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $14,839 $15,085
Accounts receivable, less allowance for
doubtful accounts of $122,000 and $40,000,
respectively 5,718,878 4,417,033
Inventories (Note 2) 8,558,068 10,156,639
Other current assets 710,846 729,145
--------------------- ---------------------
PROPERTY, PLANT AND EQUIPMENT - NET 3,196,731 3,498,825
OTHER ASSETS, NET 341,611 38,413
--------------------- ---------------------
$18,540,973 $18,855,140
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (Note 6) $420,000 $1,275,000
Accounts payable 1,277,208 1,721,852
Accrued salaries and employee benefits 274,066 383,595
Accrued unusual charge (Note 5) 465,000 465,000
Accrued expenses and other liabilities 533,454 392,789
Accrued royalties 247,399 249,792
Income taxes payable 1,909 2,934
--------------------- ---------------------
Total current liabilities 3,219,036 4,490,962
LONG-TERM DEBT (Note 6) 8,646,448 8,428,782
ACCRUED UNUSUAL CHARGE (Note 5) 372,872 678,879
CONVERTIBLE SUBORDINATED DEBT (Note 4) 2,760,000 -
--------------------- ---------------------
14,998,356 13,598,623
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (Note 4)
Preferred stock, $.10 par value; 500,000 shares authorized,
of which 5,000 shares have been designated as non-voting
convertible and are issued and outstanding 500 500
Common stock, $.10 par value; authorized
6,000,000 shares; issued 3,241,848 324,185 299,185
Additional paid-in capital 12,364,503 11,556,386
Deferred issuance cost (190,108)
Accumulated deficit (8,936,526) (6,579,617)
--------------------- ---------------------
3,562,554 5,276,454
Less 3,052 shares at November 30, 1996 and 3,052 at March 2, 1996
of common stock held in treasury, at cost 19,937 19,937
--------------------- ---------------------
3,542,617 5,256,517
--------------------- ---------------------
$18,540,973 $18,855,140
===================== =====================
(1) Derived from audited financial statements
The accompanying notes are an integral part of these statements.
</TABLE>
3
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended Thirteen Weeks Ended
--------------------------------- ---------------------------------
November 30, November 25, November 30, November 25,
1996 1995 1996 1995
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net sales $23,098,054 $27,701,932 $8,435,399 $9,848,694
Cost of sales 18,817,782 20,455,527 6,937,651 7,333,568
--------------- ---------------- --------------- ----------------
Gross profit 4,280,272 7,246,405 1,497,748 2,515,126
Selling, general and administrative
expenses 5,755,925 5,746,473 2,032,391 1,974,761
Unusual charge (credit) (Note 5) - (300,000) - (300,000)
--------------- ---------------- --------------- ----------------
Operating (loss) profit (1,475,653) 1,799,932 (534,643) 840,365
Interest expense 881,256 998,029 326,866 342,535
--------------- ---------------- --------------- ----------------
Net (loss) income (2,356,909) 801,903 (861,509) 497,830
=============== ================ =============== ================
Net (loss) income per share ($0.78) $0.27 ($0.27) $0.17
=============== ================ =============== ================
Weighted average common shares outstanding 3,086,781 2,983,576 3,238,796 2,986,159
=============== ================ =============== ================
The accompanying notes are an integral part of these statements.
</TABLE>
4
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
------------------------------------------
November 30, November 25,
1996 1995
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities
Net (loss) income ($2,356,909) $801,903
Adjustments to reconcile net (loss) income
to net cash provided by (used in) operating activities
Depreciation and amortization 229,790 271,908
Provision for doubtful accounts 90,000 90,000
Unusual charge - (300,000)
Treasury stock issued in compliance with credit agreement - 30,190
Provision for obsolete and slow moving inventory 340,000 180,000
(Increase) decrease in assets
Accounts receivable (1,391,845) (604,099)
Inventories 1,258,571 (617,998)
Other current assets 18,299 293,960
(Decrease) increase in liabilities
Accounts payable (444,644) (824,835)
Accrued expenses and other liabilities 28,743 (513,399)
Income taxes payable (1,025) 42,554
Accrued unusual charge (306,007) (269,216)
------------------- -------------------
Net cash used in operating activities (2,535,027) (1,419,032)
------------------- -------------------
Cash flows from investing activities
Removals (additions) to property, plant and equipment 72,304 (75,800)
Decrease in other assets 1,335 97,315
------------------- -------------------
Net cash provided by investing activities 73,639 21,515
------------------- -------------------
Cash flows from financing activities
Payments of short-term debt (800,000) -
Issuance of common stock 643,009 -
Proceeds from long-term debt 2,760,000 -
Increase in deferred finance costs (304,533) -
Net proceeds from sale of treasury stock - 750
Borrowings under line of credit agreement, net 162,666 1,390,496
------------------- -------------------
Net cash provided by financing activities 2,461,142 1,391,246
------------------- -------------------
NET DECREASE IN CASH (246) ($6,271)
Cash at beginning of period 15,085 32,049
------------------- -------------------
Cash at end of period $14,839 $25,778
=================== ===================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $705,134 $920,411
=================== ===================
Income taxes - -
=================== ===================
The accompanying notes are an integral part of these statements
</TABLE>
5
NANTUCKET INDUSTRIES, INC.
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AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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THIRTY-NINE WEEKS ENDED NOVEMBER 30, 1996 AND NOVEMBER 25, 1995
---------------------------------------------------------------
(unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of November 30, 1996 and the
consolidated statements of operations for the thirty-nine and thirteen
week periods and statements of cash flows for the thirty-nine weeks
ended November 30, 1996 and November 25, 1995 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 November 30, 1996 and the results of
their operations for the thirty-nine and thirteen week periods and cash
flows for the thirty-nine weeks ended November 30, 1996 and November
25, 1995 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 1996 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.
2. INVENTORIES
Inventories are summarized as follows:
November 30, November 25,
1996 1995
------------ ------------
Raw materials $ 1,428,918 $ 1,564,510
Work in process 4,644,080 6,984,183
Finished goods 2,485,070 2,873,501
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$ 8,558,068 $ 11,422,194
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6
NANTUCKET INDUSTRIES, INC.
--------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THIRTY-NINE WEEKS ENDED NOVEMBER 30, 1996 AND NOVEMBER 25, 1995
---------------------------------------------------------------
(continued)
(unaudited)
3. INCOME TAXES
At November 30, 1996 the Company had a net deferred tax asset in excess
of $5,500,000 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 $12,000,000. 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 it's net operating loss carryforward
if the ownership change, as computed under such regulations, exceeds
50%. Through November 30, 1996 the change in ownership was
approximately 46%.
4. 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 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
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 related 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.
7
NANTUCKET INDUSTRIES, INC.
--------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THIRTY-NINE WEEKS ENDED NOVEMBER 30, 1996 AND NOVEMBER 25, 1995
---------------------------------------------------------------
(continued)
(unaudited)
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.
5. UNUSUAL CHARGE
In March, 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, 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. Through November 30, 1996, $1,078,000 of this
accrual has been paid; $770,000 through March 2, 1996 and $308,000 in
the current fiscal year through November 30, 1996
6. CREDIT AGREEMENT AMENDMENT
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
equipment 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.
7. 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
8
NANTUCKET INDUSTRIES, INC.
--------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THIRTY-NINE WEEKS ENDED NOVEMBER 30, 1996 AND NOVEMBER 25, 1995
---------------------------------------------------------------
(continued)
(unaudited)
$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. 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, 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 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
November 30, 1996.
9
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 nine months ended November 30, 1996 decreased 17% from prior
year levels to $23,098,000. In the third fiscal quarter, sales decreased
$1,413,000 from prior year levels, a 14% decline. These declines, associated
with lower unit volumes, reflects inventory reductions by Nantucket's customers.
The third fiscal quarter declines are generally the result of the Company
canceling customer orders for new products due to production delays and quality
issues experienced by the Company's foreign manufacturing contractors.
Gross Margin
Gross profit margins for the nine months ended November 30, 1996 decreased from
prior year levels of 26% to 19%. Gross profit margins for the third quarter
decreased from 26% to 18%. These declines are a result of increased
manufacturing variances associated with reduced unit volumes and additional
processing costs of imported garments. In addition, gross profit levels reflect
the fully reserved close-out sales of the GUESS? products in the first fiscal
quarter.
Selling, general and administrative expenses
Selling, general and administrative expenses were 25% of sales for the nine
months ended November 30, 1996 and 21% of sales for the prior year nine month
period. This change considers the impact of the lower sales volume on fixed cost
levels. The increase in fixed expenses for the nine month period of $220,000 was
generally associated with the addition of executive management and a $102,000
credit during the second quarter of the prior year related to a recovery of a
previously expensed insurance claim. Such increases were offset by decreases in
variable selling expenses of $221,000 associated with lower sales levels.
In the third quarter, selling, general and administrative expenses were 24% and
21% of sales in 1996 and 1995 respectively. Third quarter expenses include an
increase in advertising expenses reflecting a retroactive charge pursuant to
licensing agreement requirements.
10
NANTUCKET INDUSTRIES, INC.
--------------------------
AND SUBSIDIARIES
----------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(continued)
Unusual 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 a related party, 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
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 the
Company's 1996 Annual Report on Form 10-K and in Note 7 of the accompanying
consolidated financial statements. In the third quarter of the prior fiscal
year, the Company concluded that its counterclaims against the holder of the
note payable from a related party incurred in connection with the acquisition of
the Puerto Rico facility in November, 1992 are in excess of the $300,000 due. In
the opinion of legal counsel and management the likelihood of any payment of
this note is remote. Accordingly the Company eliminated this payable and
reflected such $300,000 reduction as an unusual credit.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
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.
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.
Additionally, the Company has increased its equity over the past three years
through (i) a $1,000,000 investment by the Management Group (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.
11
NANTUCKET INDUSTRIES, INC.
--------------------------
AND SUBSIDIARIES
----------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(continued)
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.
The Company believes that the Congress credit facility, as amended, combined
with the $3.5 million private placement, provides adequate financing flexibility
to fund its operations at current levels.
Working capital increased $957,000 from year-end levels to $11,784,000. Proceeds
from the issuance of common stock and subordinated convertible debt were used to
prepay the short-term debt to Chemical Bank, reduce accounts payable and reduce
the long term debt under the Congress revolving credit facility. A decrease in
inventory levels of $1,599,000 was offset by an increase in accounts receivable
of $1,302,000 due to holiday sales.
The Company believes that the moderate rate of inflation over the past few years
has not had significant impact on sales or profitability.
12
PART II
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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
Information with respect to the Company's Special
Meeting in Lieu of Annual Meeting of Security
Holders held on October 7, 1996 was reported on the
Company's Form 10Q for the Quarterly period ended
August 31, 1996.
ITEM 5. OTHER INFORMATION None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None
13
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)
January 13, 1997 By: /s/ Ronald S. Hoffman
------------------------
Vice President - Finance
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS INFORMATION EXTRACTED FROM THE STATEMENTS
DATED AUGUST 31, 1996 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>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-02-1996
<PERIOD-END> NOV-30-1996
<CASH> 14,839
<SECURITIES> 0
<RECEIVABLES> 5,840,878
<ALLOWANCES> 122,000
<INVENTORY> 8,558,068
<CURRENT-ASSETS> 15,002,631
<PP&E> 7,370,051
<DEPRECIATION> 4,173,318
<TOTAL-ASSETS> 18,540,973
<CURRENT-LIABILITIES> 3,219,036
<BONDS> 0
0
500
<COMMON> 324,185
<OTHER-SE> 3,237,869
<TOTAL-LIABILITY-AND-EQUITY> 18,540,973
<SALES> 8,435,399
<TOTAL-REVENUES> 8,435,399
<CGS> 6,937,651
<TOTAL-COSTS> 6,168,991
<OTHER-EXPENSES> 2,032,391
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 326,866
<INCOME-PRETAX> (861,509)
<INCOME-TAX> 0
<INCOME-CONTINUING> (861,509)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (861,509)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
