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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 1, 1997
Commission file number 1-8509
NANTUCKET INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-0962699
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
510 Broadhollow Road Melville, New York 11747
(Address of principal executive offices) (Zip Code)
(516) 293-3172
(registrant's telephone number)
Common Stock, $.10 par value American Stock Exchange
Securities registered pursuant Name of each exchange on which registered
to Section 12(g) of the Act:
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 12 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 90 days. Yes X No
--- ---
The aggregate market value of the outstanding Common Stock of the registrant
held by non-affiliates of the registrant as of May 22, 1997, based on the
closing price of the Common Stock on the American Stock Exchange on said date
was $2,202,000.
AS OF MAY 22, 1997, THE REGISTRANT HAD OUTSTANDING 3,238,796 SHARES OF COMMON
STOCK NOT INCLUDING 3,052 SHARES CLASSIFIED AS TREASURY STOCK.
DOCUMENTS INCORPORATED BY REFERENCE.
THE FOLLOWING ITEMS ARE INCORPORATED BY REFERENCE FROM THE PROXY STATEMENT FOR
THE FISCAL YEAR ENDED MARCH 1, 1997:
PART III - ITEMS 10, 11, 12, 13.
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PART I
ITEM 1. BUSINESS
GENERAL
Nantucket Industries, Inc. (the "Company") produces and distributes
popular priced branded men's fashion undergarments for sale, throughout the
United States, to mass merchandisers and national chains. Nantucket also
produces, under the GUESS? label, women's innerwear which it sells to department
and specialty stores. This allows the Company to be a major supply source for
men's and women's undergarments and intimate apparel covering many retail price
points. Production and distribution of the Company's product lines is based in
its facility in Cartersville, Georgia. From November, 1992 to July 1, 1994, when
it was closed, the Company had a manufacturing facility in Rio Grande, Puerto
Rico. In addition, substantial quantities of the Company's products are
manufactured by offshore production contractors located in Mexico, the Far East
and the Caribbean Basin.
Since its founding in 1947, the Company has gradually evolved into a major
producer of high fashion, creatively styled men's and ladies' undergarments.
With this transition has come an increased emphasis upon quality control,
creative fashion design, innovative marketing and brand name recognition. With
the commencement in fiscal 1994 of the GUESS? Division, the Company has expanded
its customer base from mass merchandisers and chain stores, to better department
stores and specialty stores.
RESTRUCTURING STRATEGY
As more fully described in Note 12, 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 $37 million lawsuit
against Levi Strauss & Co. In addition, these financial statements reflect
significant losses in recent years which have generally resulted in the Company
using rather than providing cash from its operations. 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.
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:
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- The shutdown of the Puerto Rico facility
- 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
- Terminating the employment contracts of its former chairman and vice
chairman.
- 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).
- Obtaining additional working capital financing through the
restructuring of credit facilities.
- Establishing additional steps to reduce operating costs believed to
provide the Company with the ability to continue in existence. Major
elements of these action plans, which will result in a $2.5 million
reduction from fiscal 1997 overhead spending levels, 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 of executive offices and showrooms, upon the
expiration of the current lease in May, 1997, to more
appropriate 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 combined
charges include approximately $760,000 of expenses incurred in 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
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credit, as described below, of $300,000 related to the elimination of a
subordinated note payable associated with the purchase of the Puerto Rico
facility since the likelihood of payment on such note was considered remote.
The Company has not yet realized the benefits of this turnaround strategy
and has incurred losses of $2,747,000, $239,000 and $3,147,000 for the fiscal
years ended March 1, 1997, March 2, 1996 and February 25, 1995, respectively.
RECENT DEVELOPMENTS
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 Straus & 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 that it was seeking purchasers
of its Brittania subsidiary. Nantucket's largest customer and the largest
retailer of the Brittania brand, K-Mart, has advised the Company that, in light
of the actions announced by Levi's, 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 of the Company or on its financial condition.
PHOENIX ASSOCIATES, INC.-THE PUERTO RICO FACILITY
As of November, 1992, the Company acquired all of the stock of Phoenix
Associates, Inc. ("Phoenix") located in Puerto Rico. Phoenix manufactured men's
and ladies' undergarments and ladies' apparel as an exclusive contractor of the
Company. The purchase price was $1,500,000 plus contingent payments based on
sales and margins of products sold to Avon Products, Inc., a major customer of
Phoenix. In April, 1993, in connection with the annual audit of the Company's
fiscal 1993 financial statements, the Company discovered an inventory variance
of $1,700,000 at the Phoenix facility. The Company determined that this was
principally attributable to previously unrecorded manufacturing and material
cost variances at the Phoenix facility. The ongoing manufacturing inefficiencies
and cost variances continued and in July, 1994, this facility was closed. A
final assessment associated with this closing required write-
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offs, reflected as an unusual charge, of $1,252,400 in fiscal 1995. Fiscal 1994
charges aggregated $3.3 million.
In 1993, the Company, and its wholly-owned subsidiary, Nantucket Mills,
Inc. initiated an action against the former owners of the Puerto Rico facility.
In the 1996 fiscal year, the Company concluded that its claims against the
holder of a note payable from Mills 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 being required is remote. Accordingly the Company has eliminated this
payable and reflected such reduction as an unusual credit in the accompanying
financial statements.
FINANCING ARRANGEMENTS
REVOLVING CREDIT
The Company has a $15 million revolving credit facility with Congress
Financial Corp. which expires in March, 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.
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, 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 is secured by the
Company's facility in Cartersville, Georgia.
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CAPITAL INVESTMENT AND CHANGE OF MANAGEMENT
Simultaneously with the financing transactions described above, on March
22, 1994 the Samberg Group, L.L.C. (the "Group"), a limited liability company
organized under the laws of Delaware with certain senior managers of the Company
as members (the "Group Members") purchased 5,000 shares of the Company's
Non-Voting Convertible Preferred Stock ("Preferred Stock") for $1,000,000. The
Preferred Stock acquired by the Group is convertible into shares of Common
Stock, $.10 par value per share, of the Company ("Common Stock") at the rate of
$5.00 per share.
Also, on March 22, 1994, Stephen Samberg, who was then the President of the
Company, was elected Chairman of the Board, Chief Executive Officer and
Treasurer of the Company by the board of directors of the Company (the "Board").
Concurrently, George J. Gold resigned as Chairman of the Board and Treasurer of
the Company and Donald D. Gold resigned as Vice Chairman of the Board and
Secretary of the Company. (George J. Gold and Donald D. Gold are referred to
herein collectively as the "Golds".)
The Golds' existing employment contracts (the terms of which were scheduled
to expire on February 28, 1999) have been canceled and replaced by a Termination
and Severance Agreement pursuant to which the Golds are scheduled to receive
aggregate payments for severance of approximately $400,000 per year and other
benefits for five years. In fiscal 1994, $1.8 million, representing the present
value of this amount was accrued.
Finally, all of the Golds, The Group, the Group Members and the Company
have entered into a voting trust agreement (the "Voting Trust Agreement") for a
term of five years, providing for the Voting Trustee thereunder to vote shares
owned by such parties as follows:
(i) in all elections for director through the 1996 election, in
favor of the two Golds, the Group Non-Employee Director (as defined in
the Voting Trust Agreement generally to mean a nominee of the Group
who is not an employee of the Company), Samberg, Wathen (or
replacements therefor designated by the Group), and Robert M. Rosen
and/or one or more other directors who are neither employees of the
Company nor affiliates or close associates of a competitor or licensor
of the Company ("Non-Employee Directors") nominated in accordance with
the Voting Trust Agreement (if any directors so elected fail to finish
their respective three-year terms, the election of their successor
would be subject to the same requirements);
(ii) in all elections for director through the remaining term of the
Voting Trust Agreement, in favor of the two Golds, Samberg and one
other nominee designated by the Group, and with respect to other
nominees in accordance with the direction of the beneficial owners of
the shares in the voting trust with respect to their respective
shares, provided that any such owner wishing to vote against any
nominee must give notice thereof at least 15 days prior to the vote;
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(iii) with respect to any merger, sale of assets, share issuance
requiring shareholder approval or similar transaction outside of the
ordinary course of business, as directed by the beneficial holders of
the shares held in the voting trust with respect to their respective
shares; and
(iv) with respect to any other matter in accordance with the vote of
a plurality of the holders of Common Stock other than the shares held
in the voting trust, provided that if fewer than 50% of such shares in
the aggregate are voted (either for or against) with respect to such
matter, the Trustee shall abstain from voting with respect to such
matter.
The total number of shares of Common Stock subject to the Voting Trust
Agreement as of the date hereof is 708,923 which represents approximately 22% of
the outstanding Common Stock and which does not include shares of non-voting
Preferred Stock owned by the Group and convertible to Common Stock.
PRODUCTS AND SALES
The Company manufactures and sells men's fashion underwear to mass
merchandisers and, in the case of the GUESS? division, men's and ladies'
undergarments to better department and specialty stores, primarily through
direct contact by salaried and commissioned Company sales personnel. All sales
are made to customers generally not affiliated with the Company. These goods
are sold under various licensed trademarks as well as under the private label of
the customer. The Company promotes its brand name undergarments with seasonal
marketing programs and sales events.
The Company operates as a single business segment. Net sales and operating
profits or losses for each of fiscal years ending March, 1997, March, 1996 and
February, 1995 are presented in the accompanying financial statement captioned
"Consolidated Statements of Operations".
MENS' UNDERGARMENTS
The Company's men's fashion briefs are sold primarily under the licensed
trademarks "BRITTANIA", "ARROW" and "BOTANY 500". The Company targets
undergarments marketed under each of these trademarks to different segments of
the market.
GUESS? DIVISION
The Company sells ladies' innerwear under the licensed trademark "GUESS?".
These products are distributed through better department and specialty stores.
Sales of GUESS? products commenced at the end of the third fiscal quarter of
fiscal 1994. Sales in fiscal 1997, 1996 and 1995 of GUESS? products aggregated
$4.0, $ 4.9 million and $3.1 million, respectively.
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SOURCES OF MATERIALS
The Company purchases substantially all of its production requirements as
complete garments from foreign manufacturers located in Mexico, the Far East and
the Caribbean Basin. Such foreign manufacturers account for production of
approximately 70% of the Company's products. After June, 1998, the Company
expects that all of its production requirements will be satisfied by such
foreign manufacturers.
The Company does not have any long term contracts with any of its foreign
manufacturers.
LICENSES AND TRADEMARKS
On December 7, 1992, the Company signed an agreement with GUESS?, Inc. for
the exclusive United States rights to produce and sell undergarments bearing the
"GUESS?" trademark and variations thereof. Effective May 31, 1996, the license
was extended through the period ended May 31, 1999. The license is subject to
termination prior to its expiration if certain minimum sales goals are not met.
For the contract year ending May 31, 1997, minimum sales of $8 million are
required. 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. For each contract year ending in May thereafter,
the minimum sales goal increases by $2,000,000. Minimum royalties are $560,000,
$700,000 and $840,000 for the contract years ended May 31, 1997, 1998 and 1999
respectively. The Company began shipping product under this trademark during the
third quarter of fiscal 1994.
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 that it was seeking purchasers
of its Brittania subsidiary. Nantucket's largest customer and the largest
retailer of the Brittania brand, K-Mart, has advised the Company that, in light
of the actions announced by Levi's, 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
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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.
On October 5, 1992, the Company signed an agreement with Cluett, Peabody &
Co., Inc. for the exclusive United States rights to produce and sell men's and
boys' fashion underwear, T-shirts, V-neck shirts, tank tops, briefs and boxer
shorts bearing the "ARROW" trademark during the period commencing January 1,
1993 and expiring, as extended, December 31, 1999. A minimum royalty of $162,500
is guaranteed under the license for each annual period through December 31,
1996; increasing to $250,000 for each annual period from January 1, 1997 through
December 31, 1999. The Company began shipping product under this trademark
during the first quarter of fiscal 1994. Net sales under this license were $5.7
million in fiscal 1997, $4.8 million in fiscal 1996 and $4.3 million in fiscal
1995.
On December 21, 1992, the Company signed an agreement with McGregor
Corporation for the exclusive United States rights to produce and sell men's and
boys' fashion knit underwear briefs bearing the "BOTANY 500" trademark during
the period commencing on January 1, 1993 and expiring, pursuant to an extension,
December 31, 2001. McGregor Corporation may, at its option, terminate the
license prior to its expiration if certain minimum sales goals are not met.
Minimum sales levels for calendar 1996 are $750,000 and $1 million for each
calendar year thereafter through December 31, 1998. Net sales under this license
were $652,000 in fiscal 1997, $1.1 million in fiscal 1996 and $1.1 million in
fiscal 1995. McGregor Corporation has not terminated this license in view of the
fiscal 1997 sales levels.
The loss of the right to sell products under these labels would have a
material adverse effect on the Company.
SEASONALITY
Sales of the Company's products are traditionally highest in the third
fiscal quarter, which extends through autumn, when many of the pre-Christmas
sales are made, and are typically lowest in the fourth fiscal quarter.
CUSTOMERS
Three of the Company's customers each accounted for more than 10% of the
Company's consolidated net sales during fiscal 1997, 1996 and 1995.
For the fiscal years ended March 1, 1997 and March 2, 1996, approximately
40% of the Company's consolidated net sales were made to K-Mart, as compared to
43% for fiscal 1995. As described above, K-Mart, the largest retailer of the
Brittania brand, has advised the Company that, in light of Levi's announced
decision to sell the Brittania brand, K-Mart would no longer
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continue its on-going commitment to the Brittania trademark While the pending
lawsuit against Levi's may ultimately mitigate the effect of K-Mart's decision
on the Company, there can be no assurance that the ultimate resolution of this
matter will not have a materially adverse impact on the Company or its financial
condition.
For the fiscal year ended March 1, 1997, approximately 19% of the Company's
consolidated net sales were made to were made to Target Stores, as compared to
21% for fiscal 1996 and 17% for fiscal 1995.
For the fiscal year ended March 1, 1997, approximately 18% of the Company's
consolidated net sales were made to Sears, as compared to sales in the prior
fiscal year of 13%. Sales in fiscal 1995 were 12% of consolidated sales.
The Company had long standing relationships with these customers and
believes that, with the exception of K-Mart, such relationships will continue.
However, the loss of any of the other customers could have a material adverse
effect on the Company.
No other customer accounted for more than 10% of the Company's consolidated
net sales for fiscal 1997, 1996 or 1995.
DELIVERY REQUIREMENTS
All purchase orders are taken for current delivery and the Company has no
long-term sales contracts with any customer, or any contract entitling the
Company to be the exclusive supplier of merchandise to a retailer or
distributor.
BACKLOG
The backlog of orders for the Company's products at February, 1997 and 1996
was in excess of $2 million. The backlog at the beginning of each fiscal year
is traditionally lower than at other times during the year, and is not
necessarily indicative of sales prospects for an entire year. Although
substantially all of such orders are subject to cancellation, the Company
expects them to be filled within the current fiscal year.
Backlog levels have decreased due to the Company's continuing
implementation of "just in time" delivery through EDI (electronic data
interchange) with most of the Company's major customers. For fiscal 1997
approximately 95% of the orders for the men's division were received through
EDI. All EDI orders are received and shipped on a weekly basis, and industry
wide adoption of EDI has reduced the time between order and delivery. Coupled
with the large size of many of the Company's customers, this has tended to
increase the levels of inventory that the Company is required to maintain in
order to fulfill its customers' requirements. The Company has recognized the
need to more closely monitor inventory levels as well as its purchasing
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function and will seek to obtain from its suppliers and foreign manufacturers
the same short term delivery commitments that it affords to its customers.
COMPETITION
All of the Company's markets are highly competitive.
During the past several years there has occurred a reduction in the number
of retailers available to purchase the Company's products. The remaining
retailers are relatively larger and possess strengthened negotiating positions.
It has become increasingly important that the Company cooperate closely with its
customers, who are among the largest retailers in the United States, in the
development of products, programs and packaging and that it be able to quickly
and completely ship orders which it receives through EDI. In prior years the
Company experienced difficulty in filling all of its orders, caused in large
part by the cash shortage resulting from losses at its Puerto Rico facility and
the expiration of its financing arrangement with Chemical Bank. The Company's
liquidity has been significantly improved by the refinancing in March 1994, the
additional equity of $3.9 million raised in fiscal 1995 and the $3.5 million
private placement completed in August, 1996. In addition, the Company has
improved its liquidity as inventory levels have decreased.
The Company competes in the manufacture of its products with numerous other
companies, many of which have substantially greater financial resources than the
Company. The Company's competitors include manufacturers of retailers' private
label, designer label and unbranded merchandise, as well as manufacturers which
produce goods for sale under their own recognized name brands.
Although the largest producers of branded men's underwear are Fruit of the
Loom, Inc. and Hanes, the Company does not consider these large national brands
to be its direct competition. The Company primarily produces and sells fashion
underwear either under licensed brands which have consumer recognition in areas
other than undergarments or under so-called "private labels" for specific
retailers.
The Company's largest competition in the GUESS? Division's business are
Calvin Klein and Jockey.
The Company has succeeded in licensing brand names which are potentially
very significant, primarily as a result of its past successes in extending brand
names to its products. The successful implementation of a typical brand name
program requires close coordination between the licensor of the trademark (who
is concerned about the design and quality of product to be sold under its mark
as well as the type of retail outlet in which the products will be sold), the
manufacturer and the retailer. The Company considers that it has particular
expertise in developing such programs. Other competitive considerations include
product design expertise, packaging and shipping reliability, all of which are
strong areas for the Company. Of course, there is no assurance that the Company
will continue to be successful in acquiring or retaining
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licenses to use desirable brand names or that, once acquired, such brand names
will be attractive to consumers.
The Company has developed and patented packaging which it believes makes
its products more attractive to the consumer and more theft and damage resistant
than its competitors' packaging. It involves a transparent plastic blister pack
which allows single or multiple garments to be visible in a package which is
heat sealed. Unlike the typical cardboard box with only a small transparent
window, all garments are visible without the need to open the package and, in
fact, the package cannot be opened without a cutting implement. As a result,
the Company has received fewer returns of damaged merchandise. This new
packaging continues to receive strong acceptance.
IMPORTS
Effective June, 1998 the Company expects that it will achieve all of its
production requirements through imported merchandise produced in factories in
Mexico, the Caribbean Basin and the Far East. The Company has determined that,
as a result of the high labor content of its products and the reduced delivery
times due to the proximity of Mexico and the Caribbean Basin, the importing of
all the Company's production requirements is advantageous.
ENVIRONMENTAL MATTERS
The Company believes that its manufacturing facility materially conforms to
all governmental regulations pertaining to environmental quality as presently
promulgated.
EMPLOYEES
On March 1, 1997, the Company had 214 employees, of which 193 were located
in Cartersville, Georgia. This represents a 40% reduction from the prior year's
level of 356 employees reflecting the Company's decision to continue to transfer
domestic production to offshore contracting facilities and expand distribution
activities at the Cartersville facility.
None of the Company's employees is covered by a collective bargaining
agreement. The Company has never experienced a work stoppage due to labor
difficulties and believes that its relations with its employees are
satisfactory.
ITEM 2. PROPERTIES
The Company's executive offices and showrooms, containing an aggregate of
10,000 square feet of floor area, are located at 105 Madison Avenue, New York,
New York. The Company occupies these premises under a lease which expires in
May, 1997 and provides for aggregate
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annual rentals of approximately $242,000, plus increases for certain taxes,
energy costs, and any legally required safety improvements.
Effective June 1, 1997 the Company will be moving its executive offices to
510 Broadhollow Road, Melville, New York. The Company will occupy 2,000 square
feet under a lease which will expire July 31, 2002. This lease provides for
aggregate rentals which increase 4% annually from $46,000 to $52,000 plus
increases for certain taxes and energy costs. The Company will move its showroom
and design facility to a 2,300 square foot location at 180 Madison Avenue, New
York, New York effective June 1, 1997. The lease for these premises will expire
May 31, 2002 and provide for annual rentals of $52,000.
The Company owns a 160,000 square foot manufacturing and distribution
facility in Cartersville, Georgia. The Cartersville facility is subject to a
first mortgage lien to Congress Financial and a second mortgage lien to NAN
Investors pursuant to the 12-1/2% Convertible Subordinated Debentures issued as
part of the August, 1996 $3.5 Million private placement. The Cartersville
facility is suitable for the packaging and distribution of the Company's
products.
ITEM 3. LEGAL PROCEEDINGS
On September 27, 1993, a civil action (case No. 93-6766) was instituted by
the Company and its wholly-owned subsidiary, Nantucket Mills, Inc. ("Mills") in
the United States District Court, Southern District of New York, against Stanley
R. Varon and others, seeking compensatory damages of approximately $4,000,000
plus declaratory and injuctive relief for acts of alleged securities fraud,
fraudulent conveyance, breach of fiduciary trust and unfair competition. The
action arises out of the acquisition by Mills of all of the common stock of
Phoenix Associates, Inc. ("Phoenix") from Mr. Varon and Armando Lugo on February
22, 1993. Certain claims against Mr. Varon arise from facts which predate the
acquisition of Phoenix as well as from his former positions as a director,
officer and employee of Nantucket.
On September 27, 1993 the Company and Mills filed a Demand for Arbitration
and Notice to Arbitrate with the American Arbitration Association Commercial
Arbitration Tribunal, with respect to a dispute between the Company and Mills,
as claimants, and Mr. Varon and Mr. Lugo, as Respondents. The Demand for
Arbitration seeks rescission of the stock purchase agreement, rescission of the
employment agreement between Nantucket and Varon, as well as compensatory
damages of approximately $4,000,000, all on account of alleged breaches of
representations and warranties contained in said stock purchase agreement,
fraudulent misrepresentations with respect to Phoenix, and breach of fiduciary
trust.
On November 16, 1993 in connection with such civil action and arbitration
proceeding, Mr. Varon filed certain counterclaims against the Company and Mills
alleging improper termination and breach of his Employment Agreement with the
Company and breach by the Company and
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Mills of the Stock Purchase Agreement pursuant to which all of the stock of
Phoenix was acquired from Messrs. Varon and Lugo. In his counterclaims Mr.
Varon is also seeking indemnification and contribution from the Company, Mills
and their respective principal officers, directors and employees. Total damages
alleged in the counterclaim are approximately $9,000,000. The Company considers
the damages in the counterclaims to be unsupportable and believes it will likely
prevail in its defenses to all such counterclaims. In the 1996 fiscal year, the
Company concluded that its counterclaims against the holder of the note payable
from a related party, as described 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.
On March 29, 1996, the Company and Mills filed an amended Complaint and
Demand for Jury Trial which added certain parties as defendants and alleges
certain fraudulent activities which constitute a pattern of racketeering
activity under the Racketeering Influenced Corrupt Organization Act.
Levi Strauss & Co., the parent company of Brittania Sportswear Ltd. a
licensor which accounted for 49% of the Company's fiscal 1997 sales, announced,
in January, 1997, 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 $37 million lawsuit against Levi Strauss & Co. and
Brittania Sportswear Ltd.
These actions remain in their preliminary stage, with discovery now being
conducted.
The Company is subject to other legal proceedings and claims which are in
the ordinary course of its business. In the Company's opinion, the Phoenix
litigation and other legal proceedings will be successfully defended or resolved
without a material adverse effect on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock, $.10 par value, is traded on the American Stock
Exchange under the symbol "NAN".
Set forth below are the reported high and low prices of the Common Stock
for each quarterly period during the past two years, as reported by the American
Stock Exchange:
High Low
Fiscal 1997
First Quarter $7 $2-3/4
Second Quarter 7-1/4 4
Third Quarter 5 3-3/8
Fourth Quarter 2-11/16 2
Fiscal 1996
First Quarter $5-5/8 $3-1/2
Second Quarter 5-1/2 3-7/8
Third Quarter 5-1/4 3-1/16
Fourth Quarter 3-3/16 2-5/8
As of May 23, 1997, the Company's Common Stock was held by approximately
289 holders of record.
The Company has never paid any cash dividends on its Common Stock, and has
no present intention of so doing in the foreseeable future. The Company is
prohibited from declaring and paying cash dividends on its Common Stock by the
terms of its credit agreements with Congress Financial Corporation dated March
22, 1994.
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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
March 1, 1997.
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)
MARCH 1, MARCH 2, FEB. 25 FEB. 26 FEB. 27,
1997 1996 1995 1994 1993
SUMMARY STATEMENTS OF OPERATIONS
Net sales $30,394 $35,060 $37,015 $41,634 $46,851
Gross profit 5,999 8,328 7,061 5,854 9,652
Unusual credit (charge) 300 (1,252) (5,450)
Net (loss) income (2,747) (239) (3,147) (9,450) . 359
Net (loss) income per
share $(0.91) $(.08) $(1.15) $(3.81) $.15
Average shares
outstanding 3,125 2,985 2,743 2,481 2,439
SUMMARY BALANCE SHEET DATA
Total assets $18,063 $18,855 $22,184 $22,195 $30,927
Working capital 10,906 10,827 12,830 10,262 7,876
Long-term debt (exclusive
of current maturities) 8,837 9,108 11,300 9,750 300
Convertible subordinated
debt 2,760
Stockholders' equity 3,159 5,257 5,465 4,697 13,611
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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 $37 million
lawsuit against Levi Strauss & Co. In addition, the financial statements
reflect significant losses in recent years 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.
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:
- The shutdown of the Puerto Rico facility
- 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
- Terminating the employment contracts of its former chairman and
vice chairman.
- 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).
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- Obtaining additional working capital financing through the
restructuring of credit facilities.
- Establishing additional steps to reduce operating costs believed
to provide the Company with the ability to continue in existence.
Major elements of these action plans, which will result in a $2.5
million reduction from fiscal 1997 overhead spending levels,
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 of executive offices and showrooms, upon the
expiration of the current lease in May, 1997, to more
appropriate 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 associated with the purchase of
the Puerto Rico facility since the likelihood of payment on such note was
considered remote.
The Company has not yet realized the benefits of this turnaround strategy
and has incurred losses of $2,747,000, $239,000 and $3,147,000 for the fiscal
years ended March 1, 1997, March 2, 1996 and February 25, 1995, respectively.
RESULTS OF OPERATIONS
SALES
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
18
<PAGE>
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.
For the fiscal year ended February, 1995, net sales declined 11% reflecting
$9.5 million reduction related to the elimination of unprofitable product lines
including the termination of the Company's business with Avon Products, a major
customer of the closed Puerto Rico facility and the fiscal 1994 elimination of
the sock division. 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.
GROSS MARGIN
Gross profit margins levels are summarized as follows:
Fiscal Year Ending
March 1, March 2, February 25,
1997 1996 1995
Gross Margin % 20% 24% 19%
$ Amount-% Increase (decrease) (28%) 18% 21%
The declines in fiscal 1997 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 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.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in fiscal 1997 of $7.5 million
were 25% of sales. For fiscal 1996 and 1995, these expenses were $7.6 million
and $7.8 million, respectively representing 21% for both fiscal years. This
reflects the impact of the lower sales volume on fixed cost levels. Variable
selling expenses were 6% lower reflecting the lower sales levels offset by the
impact of the sales mix.
Selling, general and administrative expenses in fiscal 1995 declined
$2,028,000 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.
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-EARNINGS PER SHARE
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share", which
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of this
standard will not have any impact on the disclosure of per share results in the
financial statements.
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.
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<PAGE>
The operating loss for fiscal 1995 includes an unusual charge of
approximately $1.3 million comprised of approximately $160,000 representing
expenses incurred in closing the Puerto Rico facility, and $1,092,000
representing write-downs of asset values. The write-down of asset values is not
expected to have a material effect on the Company's liquidity.
INTEREST EXPENSE
The decrease in interest expense in fiscal 1997 of $113,000 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 and
reduce the balance outstanding under its revolving 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.
The increase in interest expense in fiscal 1995 reflects higher borrowing
levels associated with the new credit agreements and increases in the prime
rate.
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.
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 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
21
<PAGE>
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.
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. As of May 2, 1997, the
most recent measurement date, the Company was in compliance with all of the
covenants and had excess borrowing availability of $686,000 pursuant to its
credit agreement with Congress Financial.
Working capital increased $79,000 from year-end levels to $10,906,000. The
Company has improved its working capital position as it was successful in
reducing inventory levels by $1.9 million as a result of its continuing strategy
of replacing domestic manufacturing by using off shore contractors. This has
also reduced accounts payable by virtue of the receipt of goods payment terms
inherent in such offshore manufacturing activities. 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. The decrease in
inventory levels was offset by an increase in accounts receivable of $1,488,000
due to a special program shipped to K-Mart in February, 1997.
The Company believes that the moderate rate of inflation over the past few
years has not had significant impact on sales or profitability.
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
22
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to Directors and Executive Officers is set forth on
the Proxy Statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth in the Proxy
Statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, and is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and
Management is set forth in the Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended, and is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is
set forth in the Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, and is hereby incorporated by reference.
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PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
The following is a list of all exhibits and financial statement
schedules filed as part of this report, certain of which documents have
been incorporated by reference to documents previously filed on behalf of
the Registrant.
(a)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF NANTUCKET INDUSTRIES,
INC.
PAGE
Report of Independent Certified Public Accounts - Grant Thornton LLP F-1
Consolidated Balance Sheets-
March 1, 1997 and March 2, 1996 F-2
Consolidated Statements of Operations - Years Ended
March 1, 1997, March 2, 1996 and February 25, 1995 F-3
Consolidated Statements of Stockholders' Equity -Years Ended
March 1, 1997, March 2, 1996 and February 25, 1995 F-4
Consolidated Statements of Cash Flows - Years Ended
March 1, 1997, March 2, 1996 and February 25, 1995 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) FINANCIAL STATEMENT SCHEDULE
Schedule II - Consolidated valuation and qualifying accounts F-20
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(A) (3) EXHIBITS
Exhibits which, in their entirety, are incorporated by reference to any
report, exhibit or other filing previously made with the Securities and Exchange
Commission are designated by an asterisk (*) and the location of such material
is included in its description.
<TABLE>
<CAPTION>
Exhibit Page
No. Description No.
- -----------------------------------------------------------------------------------------
<S> <C> <C>
(3)(a) Certificate of Incorporation as currently in effect (filed as *
Exhibit 3(a) to Form 10-K Report for the fiscal year ended
February 27, 1988 (the "1988 10-K").
(3)(b) By-Laws as currently in effect (filed as Exhibit 3(b) to the Form *
8-K dated August 15, 1996).
(4)(a) Specimen Stock Certificate (filed as Exhibit 4(b) to Registration *
Statement on Form S-1, No. 2-87229 filed October 17, 1983 (the
"1983 Form S-1").
(4)(b) Share Purchase Rights Agreement, dated as of September 6, 1988, *
between the Company and State Street Bank and Trust Company
(filed as Exhibit 4(a) to Form 8-K Report dated as of September
6, 1988), as amended by the following: Amendment No. 1 dated
October 3, 1988 (filed as Exhibit 9 to Schedule 14D-9 Amendment
No. 1 dated October 4, 1988), Amendment No. 2 dated October 18,
1988 (filed as Exhibit 14 to Schedule 14D-9 Amendment No. 2 dated
October 19, 1988) and Amendment No. 3 dated November 1, 1988
(filed as Exhibit 4(c) to Form 10-K Report for the fiscal year
ended February 25, 1989 (the "1989 10-K"), Amendment No. 4 dated
as of November 17, 1988 (filed as Exhibit 1 to Amendment No. 1 to
Form 8-A, dated November 18, 1988) and Amendment dated as of
August 15, 1994 (filed as Exhibit 4(e) to Form 8-K dated August
19, 1994).
(4)(c) Note Acquisition Rights Agreement dated as of September 6, 1988 *
between the Company and State Street Bank and Trust Company, as
amended on September 19, 1988 (filed as Exhibit 4(b) to Form 8-K
Report dated September 6, 1988) as amended by the following:
Amendment No. 2 dated October 3, 1988 (filed as Exhibit 10 to
Schedule 14D-9 Amendment No. 2 dated October 4, 1988), Amendment
No. 3 dated October 18, 1988 (filed as Exhibit 15 to Schedule
14D-9 Amendment No. 2 dated October 19, 1988), Amendment No. 4
dated November 1, 1988,
</TABLE>
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<TABLE>
<S> <C> <C>
(filed as Exhibit 4(d) to the 1989 10-K) and Amendment No. 5
dated as of November 17, 1988 (filed as Exhibit 2 to Amendment
No. 1 to Form 8-A, dated November 18, 1988).
(4)(d) Certificate of Designation, Preferences and Rights of Non-Voting *
Convertible Preferred Stock of Nantucket Industries, Inc. (filed
as Exhibit 4 to Form 8-K Current Report dated March 22, 1994 (the
"1994 8-K").
(4)(e) Common Stock Purchase Agreement dated as of August 18, 1994 by *
and among Registrant, Guess ?, Inc., the Maurice Marciano 1990
Children's Trust, the Paul Marciano Trust u/t/d 2/20/86, the
Armand Marciano Trust u/t/d 2/20/86 and The Samberg Group, L.L.C.
(filed as Exhibit 4(d) to Form 8-K dated August 19, 1994).
(4)(f) Common Stock and Convertible Subordinated Debenture Purchase *
Agreement dated as of August 13, 1996 by and among Nantucket
Industries, Inc. and NAN Investors, L.P. (filed as Exhibit 4(f)
to the Form 8-K dated August 15, 1996).
(4)(g) Sixth Amendment dated as of August 15, 1996 to that certain *
Rights Agreement dated as of September 6, 1988 between Nantucket
Industries, Inc., and State Street Bank & Trust Company (filed as
Exhibit 4(g) to the Form 8-K dated August 15, 1996).
(9) Voting Trust Agreement by and among the Samberg Group, L.L.C., *
George Gold, Donald Gold, Stephen Samberg, Stephen Sussman,
Robert Polen, Ray Wathen, Nantucket Industries, Inc., Robert
Rosen and Joseph Mazzella dated as of March 21, 1994 (filed as
Exhibit 99(b) to 1994 8-K).
(10)(a) Nantucket Industries, Inc. Savings Plan effective June 1, 1988 by *
and between the Registrant and George Gold and Donald Gold as
Trustees, Amendment No. 1 thereto dated June 22, 1990 and
Amendment No. 2 thereto dated November 19, 1990 (filed as Exhibit
(10)(a) to Form 10-K Report for the fiscal year ended February
29, 1992 (the "1992 10-K")).
(10)(b) Incentive Stock Option Plan (filed as Exhibit10(d) to the 1988 *
10-K).
</TABLE>
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<TABLE>
<S> <C> <C>
(10)(c) 1988 Nantucket Industries, Inc. Nonstatutory Stock Option Plan *
(filed as Exhibit 10(c) to the 1989 10-K).
(10)(e)(i) Trademark Agreement between Registrant and Faberge, Incorporated *
dated November 1, 1980 ("Trademark Agreement") regarding the
trademarks "Faberge" and "BRUT" for use with men's and boy's
underwear and bathing suits (filed as Exhibit 10(g)(i) to 1987
10-K); Amendment dated November 16, 1982 regarding the trademark
"BRUT 33" (filed as Exhibit 10(m) to 1983 S-1); Letter dated
August 24, 1983 from Faberge to Registrant with respect to
renewal of the Trademark Agreement for an additional five year
period (filed as Exhibit 10(g)(iii) to 1987 10-K); Amendment
dated May 6, 1983 regarding the trademarks "BRUT Medallion
Design" and "Brut Royale" (filed as Exhibit 10(k)(ii) to 1983
S-1; Amendment dated December 5, 1983 (filed as Exhibit 10(g)(iv)
to the Form 10-K Report for the fiscal year ended March 3, 1984
(the "1984 10-K"); Amendment dated October 31, 1984 (filed as
Exhibit 10(g)(xiii) to the Form 10-K Report for the fiscal year
ended March 2, 1985 (the "1985 10-K")); Amendment dated March 14,
1986 extending license to include swimwear tops (filed as Exhibit
10(g)(v) to the 1986 10-K; Amendment dated April 25, 1984 (filed
as Exhibit 10(g)(v) to the 1984 10-K); Letter dated December 31,
1987, extending term of Trademark Agreement for an additional
five year period and deleting men's and boy's bathing suits from
coverage (filed as Exhibit 10(g)(iii) to the 1988 10-K);
extension dated February 24, 1989, extending expiration date of
the Trademark Agreement to February 28, 1998 (filed as Exhibit
10(e)(ii) to the 1989 10-K).
(10)(e)(ii) Intentionally Omitted.
(10)(e)(iii) License Agreement between the Company and BRITTANIA Sportswear, *
Ltd. (subsidiary of Levi Strauss) dated September 6, 1988 for the
manufacture and sale of men's and ladies' underwear under the
"BRITTANIA" trademark (filed as Exhibit 19 to Form 10-Q for the
Quarter ended August 27, 1988).
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
(10)(e)(iv) License Agreement between the Company and BRITTANIA Sportswear, *
Ltd. (subsidiary of Levi Strauss) dated December 31, 1991 for the
manufacture and sale of men's and ladies' underwear under the
"BRITTANIA" trademark (filed as Exhibit 10(e)(iv) to Form 10-K for
the fiscal year ending February 26, 1994.
(10)(e)(v) Amendment dated January 31, 1996 to License Agreement between the *
Registrant and BRITTANIA Sportswear, Ltd. (subsidiary of Levi
Strauss) for the manufacture and sale of men's and ladies'
loungewear under the "BRITTANIA" trademark.
(10)(e)(vi) Intentionally omitted.
(10)(e)(vii) License Agreement between the Company and Brittania Sportswear *
Limited, a subsidiary of Levi Strauss & Co. effective as of
January 1, 1997, extending the Company's license through December
31, 1999, for the manufacture and sale of men's underwear and
loungewear under the "BRITTANIA" trademark (filed as Exhibit
10(e)(iii) to the Form 10-Q for the quarter ended August 31,
1996).
(10)(f) Modification and Extention of Lease dated November 30, 1982 *
between Registrant and Satti Development Corp. (filed as Exhibit
10(1) to the 1983 10-K);(i) amendment dated February 16,
1988extending term of lease through April 30, 1993 (filed as
Exhibit 10(h) to the 1988 10-K);(ii) amendment dated August 15,
1991 expanding demised premises, extending term of lease through
May 31, 1997 and modifying annual rental (filed as Exhibit
10(f)(ii) to 1992 Form 10-K).
10(f)(i) Intentionally omitted.
(10)(g) Promissory Notes from George J. Gold and Donald D. Gold to *
Registrant (filed as Exhibit 10(s) to 1983 S-1).
(10)(h) Intentionally omitted.
(10)(i) Amended and Restated Credit Agreement dated December 8, 1989, *
between Registrant and Manufacturers Hanover Trust
</TABLE>
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<TABLE>
<S> <C> <C>
Company ("MHTC") for the borrowing of up to $11,500,000 of which
$8,500,000 is on a revolving credit basis until March 5, 1993,
the balance to be used against letters of credit issued by MHTC
for the benefit of the Registrant; $8,500,000 Note dated December
8, 1989, from Registrant to MHTC; Continuing Letter of Credit
Security Agreement dated December 8, 1989, between Registrant and
MHTC. (filed as Exhibit 10(i) to the Form 10-K Report for the
fiscal year ended March 3, 1990 (the "1990 10-K") Omitted
exhibits to said Agreement will be furnished to the Commission
upon request.
(i) First Amendment dated August 1, 1990to Loan Agreement
between Registrant and MHTC (filed as Exhibit 10(i)(i) to the
Form 10-K Report for the fiscal year ended March 2, 1991);
(ii) Second Amendment and Waiver dated as of May 23, 1991 to
Loan Agreement between Registrant and MHTC (filed as Exhibit
(10)(i)(ii) to the 1992 Form 10-K);
(iii) Fifth Amendment and Waiver dated as of February 22, 1993,
to Amended and Restated Credit Agreement dated as of December 8,
1989, between the Registrant and Chemical Bank, as successor by
merger to MHTC (filed as Exhibit (iii) to the Form 8-K dated
March 4, 1993);
(iv) Sixth Amendment and Waiver datedas of March 4, 1993, to
Amended and Restated Credit Agreement (filed as Exhibit 10(k)(iv)
to 1993 10-K).
(10)(j)(i) Revolving Credit Agreement dated as ofDecember 30, 1993 by and *
between Chemical Bank, Nantucket Industries, Inc., Nantucket
Mills, Inc. and Nantucket Management Corporation (the "Credit
Agreement") (filed as Exhibit 10(j)(i) to the 1994 Form 10-K).
10(j)(ii) First Amendment to Credit Agreement dated as of February 28, 1994 *
by and betweenChemical Bank, Nantucket Industries, Inc.,
Nantucket Mills, Inc. and Nantucket Management Corporation (filed
as Exhibit 10(j)(ii) to the 1994 10-K).
(10)(j)(iii) Second Amendment to Credit Agreement dated as of March 17, 1994 *
by and between Chemical
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C>
Bank, Nantucket Industries, Inc., Nantucket Mills, Inc. and
Nantucket Management Corporation (filed as Exhibit 10(j)(iii) to
the 1994 10-K).
(10(k) Intentionally omitted.
(10)(n) Intentionally omitted.
(10)(o) Intentionally omitted.
(10)(q) Intentionally omitted.
(10)(s) Intentionally omitted.
(10)(t) Intentionally omitted.
(10)(u) Intentionally omitted.
(10)(v) Sublicense Agreement dated November 20, 1991 by and among Dawson *
Consumer Products, Inc., Registrant and PGH Company regarding the
use of the trademark "Adolfo" on men's high fashion underwear
briefs (filed as Exhibit (10)(v) to the 1992 Form 10-K).
(10)(w) Sublicense Agreement dated October 16, 1992 by and among Salant *
Corporation, Dawson Consumer Products, Inc. and the Registrant
regarding the use of the trademark "John Henry" on men's high
fashion underwear briefs (filed as Exhibit (10)(w) to the 1992
Form 10-K).
(10)(x) Employment Agreement dated May 26, 1992 by and between the *
Registrant and Stephen P. Sussman (filed as Exhibit 10(x) to the
Form 10Q Report for November 28, 1992) as amended by the Amendment
dated August 8, 1994 (filed as Exhibit 99(a) to Form 8-K dated
August 19, 1994).
(10)(x)(i) Amendment No. 2 dated August 9, 1996 to that certain Employment *
Agreement dated as of May 26, 1992 by and between Nantucket
Industries, Inc. and Stephen P. Sussman (filed as Exhibit 99(a)
to the Form 8-K dated August 15, 1996).
(10)(y) Intentionally omitted.
(10)(z)(i) Intentionally omitted.
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C>
(10)(z)(ii) Amended and Restated Employment Agreement by and between *
Nantucket Industries, Inc. and Stephen M. Samberg (filed as
Exhibit 10(z)(ii) to the 1994 Form 10-K) as amended by the
Amendment dated August 8, 1994 (filed as Exhibit 99(c) to Form
8-K dated August 19, 1994).
(10)(z)(iii) Amendment No. 2 dated August 9, 1996 to that certain Employment *
Agreement dated as of March 18, 1994 by and between Nantucket
Industries, Inc. and Stephen M. Samberg (filed as Exhibit 99(c)
to the Form 8-K dated August 15, 1996).
(10)(aa) License Agreement dated October 5, 1992 between Cluett Peabody & *
Co., Inc. and Registrant with respect to the ARROW trademark
(filed as Exhibit 2 to Form 10Q Report for November 28, 1992).
(10)(bb) License Agreement dated December 9, 1992 between GUESS?, Inc. and *
Registrant with respect to the GUESS? trademark (filed as Exhibit
3 to Form 10Q Report for November 28, 1992).
(10)(cc) Registrant's 1992 Long-Term Stock Option Plan (filed as Exhibit 4 *
to Form 10Q Report for November 28, 1992).
(10)(dd) Registrant's 1992 Executive Performance Benefit Plan (filed as *
Exhibit 5 to Form 10Q for November 28, 1992).
(10)(ee) Management Agreement made as of January 1, 1993 by and between *
Nantucket Management Corp. (a subsidiary of Registrant) and
Registrant (filed as Exhibit 10(ee) to 1993 10-K).
(10)(ff) License Agreement dated December 21, 1992 between Registrant and *
McGregor Corporation with respect to the Botany 500 Trademark
(filed as Exhibit 10(ff) to 1993 10-K).
(10)(ff)(i) Letter Agreement dated July 10, 1995 amending License Agreement *
between the Registrant and McGregor Corporation with respect to
the Botany 500 Trademark (filed as Exhibit 10(ff) to 1993 10-K.
(10)(gg) Severance Agreement dated as of March 18, 1994 by and among *
Nantucket Industries George J. Gold and Donald Gold (filed as
</TABLE>
31
<PAGE>
<TABLE>
<S> <C> <C>
Exhibit 10(gg)(i) to the Form 10K Report for the fiscal year
ended February 25, 1995). (Filed as Exhibit 10(gg) to the 1994
Form 10-K) as amended by the Amendment dated August 17, 1994
(filed as Exhibit 99(b) to Form 8-K dated August.
(10)(gg)(i) Letter dated February 28, 1995 amending Severance Agreement by *
and among Registrant, George J. Gold and Donald D. Gold (filed as
Exhibit 10(gg)(i) to the Form 10-K Report for the fiscal year
ended February 25, 1995).
(10)(gg)(ii) Third Amendment dated August 9, 1996 to that certain Severance *
Agreement dated as of March 18, 1994 by and among Nantucket
Industries, Inc. George J. Gold and Donald D. Gold (filed as
Exhibit 99(b) to the Form 8-K dated August 15, 1996).
(10)(hh) Agreement dated as of March 1, 1994 by and among the Samberg *
Group, L.L.C., George J. Gold, Donald D. Gold, Stephen M.
Samberg, Stephen P. Sussman, Robert Polen, Raymond L. Wathen and
Nantucket Industries, Inc. (filed as Exhibit 10(hh) to the 1994
Form 10-K).
(10)(ii) Loan and Security Agreement by and between Nantucket Industries, *
Inc. and Congress Financial Corp. dated as of March 21, 1994
(filed as Exhibit 99(b) to 1994 8-K).
(10)(ii)(i) Amendment No. 2 dated July 31, 1996, to Loan and Security *
Agreement dated as of March 21, 1994, among Nantucket Industries,
Inc. and Congress Financial Corp. (filed as Exhibit 99(o) to the
Form 8-K dated August 15, 1996).
(10)(ii)(ii) Amendment No. 3 dated August 15, 1996, to Loan and Security *
Agreement dated as of March 21, 1994, among Nantucket Industries,
Inc. and Congress Financial Corp. (filed as Exhibit 99(p) to the
Form 8-K dated August 15, 1996).
(10)(jj) Guaranty by Nantucket Mills, Inc. in favor of Congress Financial *
Corp. dated as of March 21, 1994 (filed as Exhibit 99(c) to 1994
8-K).
(10)(kk) General Security Agreement by Nantucket Mills, Inc. in favor of *
Congress Financial Corp. dated as of March 21, 1994 (filed as
Exhibit 99(d) to 1994 8-K).
(10)(ll) Guarantee of Nantucket Management Corporation in favor of *
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C>
Congress Financial Corp. dated as of March 21, 1994 (filed as
Exhibit 99(e) to 1994 8-K).
(10)(mm) General Security Agreement by Nantucket Management Corporation *
in favor of Congress Financial Corp. dated as of March 21, 1994
(filed as Exhibit 99(f) to 1994 8-K).
(10)(nn) Amended and Restated Credit Agreement by and among Chemical Bank, *
Nantucket Industries, Inc., Nantucket Mills, Inc. and Nantucket
Management Corporation dated as of March 21, 1994 (filed as
Exhibit 99(g) to 1994 8-K) and amended by the Amendment dated as
of August 18, 1994 (filed as Exhibit 99(e) to the Form 8-K dated
August 19, 1994).
(10)(oo) Amended and Restated Security Agreement by and between Nantucket *
Industries, Inc. and Chemical Bank dated as of March 21, 1994
(filed as Exhibit 99(h) to 1994 Form 8-K).
(10)(pp) Amended and Restated Security Agreement by and between Nantucket *
Mills, Inc. and Chemical Bank dated as of March 21, 1994 (filed as
Exhibit 99(i) to 1994 8-K).
(10)(qq) Security Agreement by and between Management Corporation and *
Chemical Bank dated as of March 21, 1994 (filed as Exhibit 99(j)
to 1994 8-K).
(10)(rr) Deed to Secure Debt, Security Agreement and Assignment of Leases *
and Rents by Nantucket Industries, Inc. to Chemical Bank dated as
of June 8, 1994 (filed as Exhibit 10(ss) to the 1994 Form 10-K).
and Assignment of Leases and Rents by Nantucket Industries, Inc.
to Congress Financial Corporation dated June 8, 1994 (filed as
Exhibit 10(rr) to the 1994 Form 10-K).
(10)(ss) Deed to Secure Debt, Security Agreement and Assignment of Leases *
and Rents by Nantucket Industries, Inc. to Chemical Bank dated as
of June 8, 1994 (filed as Exhibit 10(ss) to the 1994 Form 10-K).
(10)(tt) Employment Agreement dated November 23, 1994 by and between *
Registrant and Raymond L. Wathen (filed as Exhibit 10(tt) to Form
10-K Report for the fiscal year ended February 25, 1995).
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C>
(10)(tt)(i) Amendment to Employment Agreement entered into as of January 1, *
1996 between Registrant and Raymond L. Wathen.
(10)(uu) Employment Agreement dated July 1, 1994 by and between Registrant *
and Ronald S. Hoffman (filed as Exhibit 10(uu) to Form 10-K
Report for the fiscal year ended February 25, 1995).
(10)(uu)(i) Letter Agreement dated June 12, 1995 between Registrant and *
Ronald S. Hoffman, extending the term of his employment to June
30, 1996.
(10)(uu)(ii) Letter Agreement dated August 9, 1996 between Registrant and *
Ronald S. Hoffman amending the change of control provision in his
employment agreement (filed as Exhibit 99(e) to the Form 8-K
dated August 15, 1996).
(10)(uu)(iv) Letter Agreement dated as of June 30, 1996 between Registrant and *
Ronald S. Hoffman, extending the term of his employment to June
30, 1997 (filed as Exhibit 99(j) to the Form 8-K dated August 15,
1996).
(10)(vv) Employment Agreement dated as of January 1996 by and between *
Registrant and Joseph Visconti.
(10)(vv)(i) Amendment dated August 9, 1996 to that certain Employment *
Agreement dated as of January 1, 1996 by and between Nantucket
Industries, Inc. and Joseph Visconti (filed as Exhibit 99(d) to
the Form 8-K dated August 15, 1996).
(10)(ww) First Amendment, dated as of December 15, 1995 to Amended and *
Restated Credit Agreement dated as of March 21, 1994, among
Nantucket Industries, Inc. and its subsidiaries and Chemical Bank
(filed as Exhibit (10)(vv) to Form 10-Q Report for the quarter
ended November 25, 1995.
</TABLE>
34
<PAGE>
<TABLE>
<S> <C> <C>
(10)(xx) Complaint filed on March 7, 1997 with Superior Court of *
California for the County of San Francisco C.A. No. 985160,
Nantucket Industries, Inc. v. Levi Strauss & Co., and Brittania
Sportswear Limited (filed as Exhibit 99(q) to the Form 8-K dated
March 7, 1997).
(10)(zz) Press Release dated March 10, 1997 (filed as Exhibit 99(r) to the *
Form 8-K dated March 7, 1997).
</TABLE>
35
<PAGE>
(c) SUBSIDIARIES OF THE COMPANY
STATE OF DOING BUSINESS
NAME INCORPORATION NAME
Nantucket Mills, Inc. Delaware Phoenix Associates,
Inc. (in Puerto Rico)
Nantucket Management Corp.* New York N/A
* Dissolved as of December, 1995, pursuant to vote dated October 17, 1995
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York.
NANTUCKET INDUSTRIES, INC.
May 22, 1997 By: \s\ Stephen M. Samberg
----------------------------------------------
Stephen M. Samberg, Chairman of the Board and
Chief Executive Officer/
(principal executive officer)
May 22, 1997 By: \s\ Ronald S. Hoffman
----------------------------------------------
Ronald S. Hoffman, Vice President-Finance and
Chief Financial Officer
(principal financial and accounting officer)
36
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
May 22, 1997 \s\ Stephen M. Samberg
---------------------------------------------
Stephen M. Samberg, Chairman of the Board and
Chief Executive Officer
May 22, 1997 \s\ Joseph Visconti
---------------------------------------------
Joseph Visconti, President and Director
May 22, 1997 \s\ Ronald S. Hoffman
---------------------------------------------
Ronald S. Hoffman, Vice President-Finance and
Chief Financial Officer, Secretary and Director
May 22, 1997
---------------------------------------------
Warren C. Cole, Director
May 22, 1997 \s\ Donald D. Gold
---------------------------------------------
Donald D. Gold, Director
May 22, 1997
---------------------------------------------
George J. Gold, Director
May 22, 1997 \s\ Kenneth Klein
---------------------------------------------
Kenneth Klein Director
May 22, 1997 \s\ Robert M. Rosen
---------------------------------------------
Robert M. Rosen, Director
May 22, 1997
---------------------------------------------
Roger Williams, Director
37
<PAGE>
38
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTS
Board of Directors and Stockholders
Nantucket Industries, Inc.
We have audited the accompanying consolidated balance sheets of Nantucket
Industries, Inc. and Subsidiaries as of March 2, 1996 and February 25, 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended March 2, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Nantucket Industries, Inc. and Subsidiaries as of March 2, 1996 and February 25,
1995, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended March 2, 1996, in
conformity with generally accepted accounting principles.
We have also audited Schedule II of Nantucket Industries, Inc. and Subsidiaries
as of March 2, 1996 and February 25, 1995 and for the periods then ended. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON
New York, New York
April 25, 1996
F-1
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 1, March 2,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $7,941 $15,085
Accounts receivable, less reserves of $149,000 and
$40,000, respectively (Note 7) 5,872,734 4,417,033
Inventories (Notes 5 and 7) 7,826,440 10,156,639
Other current assets 506,171 729,145
------------ -----------
Total current assets 14,213,286 15,317,902
PROPERTY, PLANT AND EQUIPMENT - NET (Notes 6 and 7) 3,204,037 3,498,825
OTHER ASSETS - NET 645,880 38,413
------------ -----------
$18,063,203 $18,855,140
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (Note 7) 510,864 1,275,000
Accounts payable 1,081,133 1,721,852
Accrued salaries and employee benefits 348,361 383,595
Accrued unusual charge (Note 4) 465,000 465,000
Accrued expenses and other liabilities 530,850 392,789
Accrued royalties 368,860 249,792
Income taxes payable (Note 8) 1,909 2,934
------------ -----------
Total current liabilities 3,306,977 4,490,962
LONG-TERM DEBT (Note 7) 8,566,011 8,428,782
ACCRUED UNUSUAL CHARGE (Notes 4 and 10) 270,868 678,879
CONVERTIBLE SUBORDINATED DEBT (Note 3) 2,760,000 -
------------ -----------
14,903,856 13,598,623
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 March 1, 1997 and 2,991,848 at March 2, 1996 324,185 299,185
Additional paid-in capital 12,364,503 11,556,386
Deferred issuance cost (183,772) -
Accumulated deficit (9,326,132) (6,579,617)
------------ -----------
3,179,284 5,276,454
Less 3,052 shares at March 1, 1997 and March 2, 1996
of common stock held in treasury, at cost 19,937 19,937
------------ -----------
3,159,347 5,256,517
------------ -----------
18,063,203 18,855,140
------------ -----------
------------ -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-2
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
----------------------------------------------
MARCH 1, March 2, February 25,
1997 1996 1995
------------ ------------ --------------
<S> <C> <C> <C>
Net sales $30,394,409 $35,060,136 $37,015,167
Cost of sales 24,395,054 26,732,017 29,953,922
------------ ------------ ------------
Gross profit 5,999,355 8,328,119 7,061,245
Selling, general and administrative
expenses 7,546,341 7,554,057 7,759,955
Unusual (credit) charge (Note 4) - (300,000) 1,252,400
------------ ------------ ------------
Operating profit (loss) (1,546,986) 1,074,062 (1,951,110)
Interest expense 1,199,529 1,313,544 1,195,541
------------ ------------ ------------
Loss before income taxes (2,746,515) (239,482) (3,146,651)
Income taxes (Note 8) - - -
------------ ------------ ------------
Net loss ($2,746,515) ($239,482) ($3,146,651)
------------ ------------ ------------
------------ ------------ ------------
Net loss per share ($0.91) ($0.08) ($1.15)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding 3,124,785 2,984,955 2,742,520
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended March 1, 1997, March 2, 1996 and February 25, 1995
Preferred stock
designated as
non-voting convertible Common stock Additional Deferred
---------------------- ------------------ paid-in Issuance
Shares Amount Shares Amount Capital Costs
------ ------ ------ ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at February 26, 1994 2,991,848 $299,185 $10,577,398
Net loss
Issuance of Preferred stock 5,000 500 999,500
Sale of treasury stock 294,952
Issuance of treasury stock in
compliance with credit agreement
prepayment terms
------- ------- --------- ------- ---------- ---------
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 $3,241,84 $324,185 $12,364,503 ($183,772)
------- ------- --------- ------- ---------- ---------
------- ------- --------- ------- ---------- ---------
<CAPTION>
Retained Treasury stock
earnings ----------------------
(deficit) Shares Amount Total
--------- ------ ------ -----
<S> <C> <C> <C> <C>
Balances at February 26, 1994 ($2,898,532) 503,052 ($3,281,442) $4,696,609
Net loss (3,146,651) (3,146,651)
Issuance of Preferred stock 1,000,000
Sale of treasury stock (490,000) 3,196,303 2,901,351
Issuance of treasury stock in
compliance with credit agreement
prepayment terms (2,500) 13,750 13,750
---------- ------- --------- ---------
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
---------- ------- --------- ---------
---------- ------- --------- ---------
The accompanying notes are an integral part of these statements.
</TABLE>
F-4
<PAGE>
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
------------------------------------------
March 1, March 2, February 25,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss ($2,746,515) ($239,482) ($3,146,651)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities
Depreciation and amortization 361,425 365,342 393,148
Provision for doubtful accounts 32,000 120,000 90,000
Gain on sale of fixed assets (44,496) - -
Unusual (credit) charge - (300,000) 1,091,929
Treasury stock issued in compliance with credit - 30,190 13,750
Provision for obsolete and slow moving inventor 415,000 452,590 688,510
(Increase) decrease in assets
Accounts receivable (1,487,701) 1,935,115 (1,633,875)
Refundable income taxes - - 558,000
Inventories 1,915,199 374,967 (1,373,776)
Other current assets 283,886 30,909 (221,991)
(Decrease) increase in liabilities
Accounts payable (497,380) (684,137) (1,287,921)
Accrued expenses and other liabilities 221,895 (543,519) (1,010,199)
Income taxes payable (1,025) 294 (7,544)
Accrued unusual charge (408,011) (379,451) (691,670)
---------- ---------- ----------
Net cash (used in) provided by operating activities (1,955,723) (1,162,818) (6,538,290)
---------- ---------- ----------
Cash flows from investing activities
Additions to property, plant and equipment (152,516) (97,296) (388,011)
Proceeds from sale of fixed assets 33,756 - -
(Increase) decrease in other assets (396,838) 129,781 244,130
---------- ---------- ----------
Net cash (used in) provided by investing activities (515,598) 32,485 (143,881)
---------- ---------- ----------
Cash flows from financing activities
Payments of previous line of credit agreement - - 5,090,294
Borrowings (repayments) under line of credit agreement 173,093 (1,013,017) 8,307,245
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 - (200,000) (1,000,000)
Issuance of common stock (Note 3) 740,000 - -
Issuance of convertible preferred stock - - 1,000,000
Net proceeds from sale of treasury stock - 750 2,901,351
---------- ---------- ----------
Net cash provided by (used in) financing activities 2,464,177 (1,212,267) 6,118,302
NET DECREASE IN CASH ($7,144) ($16,964) ($563,869)
Cash at beginning of period 15,085 32,049 595,918
---------- ---------- ----------
Cash at end of period $7,941 $15,085 $32,049
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest 1,173,981 1,320,046 1,708,384
---------- ---------- ----------
---------- ---------- ----------
Income taxes - - -
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements
F-5
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
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
12, 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 $37 million
lawsuit against Levi Strauss & Co. In addition, these financial statements
reflect significant losses in recent years which have generally resulted in
the Company using rather than providing cash from its operations.
As a result of the 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 (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 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 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 of executive offices and showrooms, upon the expiration
of the current lease in May, 1997, to more appropriate facilities.
Management believes these action plans will result in a $2.5 million
reduction from fiscal 1997 overhead spending levels.
F-6
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
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.
For the current fiscal year, sales to the Company's largest customer
accounted for 40% of net sales and 40% and 43%, respectively, for the two
prior fiscal years. As described in Note 12, this customer has advised the
Company that, in light of the announcement by Levi Strauss & Co. of its
desire to sell its Brittania subsidiary, the customer would no longer
continue its on-going commitment to the Brittania trademark Sales to the
second largest customer in the current fiscal year were 19% of net sales
and 21% and 17%, respectively, for the two prior fiscal years. Sales in
the current fiscal year to the Company's third largest customer represented
18% of net sales and 13% and 12% respectively for the two prior fiscal
years.
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
F-7
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
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, "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 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.
NET LOSS PER COMMON SHARE
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share",
which is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Early adoption of the new standard
is not permitted. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings
per share together with disclosure of how the per share amounts were
computed. The adoption of this standard will not have any impact on the
disclosure of per share results in the financial statements.
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 to Convertible Subordinated
Debentures, Stock Options and Warrants are not included since the effect
would be antidilutive.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to February 28. The
year ended March 1, 1997 had 52 weeks and the fiscal years ended March 2,
1996 and February 25, 1995 contained 53 and 52 weeks respectively.
RECLASSIFICATION
Certain prior year amounts have been reclassified in order to conform to
the current year's presentation.
USE OF ESTIMATES
F-8
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
In preparing the Company's financial statements, 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 is less than the book value.
No impairment loss was required in fiscal years 1997 and 1996.
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 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 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 on August 15, 1996 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.
F-9
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
NOTE 4 - 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. 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 fiscal 1994, the Company provided over $5 million for the costs
associated with the shutdown of the Puerto Rico facility's as an unusual
charge. The Puerto Rico facility shutdown was completed in July, 1994. A
final assessment associated with this closing required additional
write-offs, reflected as an unusual charge of $1,252,400 in fiscal 1995.
Simultaneously in 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 was accrued at February 26,
1994.
Through March 1, 1997, payments of the unusual charges aggregated $1,639,000;
$460,000 associated with the shutdown of the Puerto Rico facility and $1,179,000
representing payments against the present value of the termination payments to
the former Chairman and Vice Chairman.
NOTE 5 - INVENTORIES
Inventories are summarized as follows:
---------------------------------------------------------
March 1, 1997 March 2, 1996
---------------------------------------------------------
Raw Materials $ 1,368,823 $ 1,308,694
Work in Process 2,857,238 5,709,573
Finished goods 3,600,379 3,138,372
$7,826,440 $10,156,639
---------------------------------------------------------
Inventory valuation allowances and write-downs approximating $415,000 and
$453,000 were provided for the years ended March 1, 1997 and March 2, 1996,
respectively.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
F-10
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
Property, plant, and equipment are summarized as follows:
---------------------------------------------------------------------
March 1, 1997 March 2, 1996
---------------------------------------------------------------------
Land $ 83,757 $ 83,757
Buildings and improvements 3,156,813 3,157,252
Machinery and equipment 3,422,993 3,400,628
Furniture and fixtures 798,640 800,929
7,462,203 7,442,566
less-accumulated depreciation (4,258,166) (3,943,741)
$3,204,307 $3,498,825
---------------------------------------------------------------------
NOTE 7 - LONG-TERM DEBT AND NOTES PAYABLE
REVOLVING CREDIT
The Company has a $15 million revolving credit facility with Congress
Financial Corp. which expires in March, 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 March
1, 1997 the Company had excess borrowing availability pursuant to this
credit agreement of $425,000.
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 is secured by the Company's
facility in Cartersville, Georgia.
ANNUAL MATURITIES
F-11
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
Annual maturities of long term debt are as follows:
February, 1998 $ 510,864
February, 1999 8,286,875
February, 2000 220,000
February, 2001 51,261
February, 2002 7,875
----------
$9,076,875
----------
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 March 1, 1997 and March 2,
1996 are as follows:
1997 1996
--------------------------------------------------------------------
Deferred tax assets
Net operating loss carryforward $5,471,000 $4,256,000
Accrued severance 294,000 460,000
Excess of tax basis over book basis
of inventories 165,000 137,000
Capitalized inventory costs 143,000 147,000
Other 43,000 58,000
---------- ----------
Total deferred tax assets $6,116,000 $5,058,000
Deferred tax liabilities
Difference between the book and tax
basis of property, plant and
equipment 389,000 357,000
---------- ----------
Net deferred tax asset $5,727,000 $4,701,000
Less valuation allowance 5,727,000 4,701,000
---------- ----------
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 March 1, 1997, the net operating loss carryforward for book purposes is
$14.3 million. For tax purposes, at March 1, 1997, the Company's net
operating carryforward was $13.7 million, which, if unused, will expire
from 2009 to 2012. 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 1, 1997 the change in ownership was 46%.
There was no income tax provision (benefit) for the fiscal years 1997, 1996
and 1995.
F-12
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
The following is a reconciliation of the normal expected statutory Federal
income tax rate to the effective rate reported in the financial statements:
----------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------
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 1997, 1996 and 1995 would not be
materially impacted. In fiscal 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 March 1, 1997, March 2,
1996 and February 25, 1995 is as follows:
-------------------------------------------------------------
Number of Weighted Average
Options Exercise Price
-------------------------------------------------------------
Balance, February 27, 1994 120,000 $9.42
Granted 180,000 $5.75
Expired (120,000) $9.42
--------- -----
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
--------- -----
-------------------------------------------------------------
At March 2, 1997 the status of outstanding stock options is summarized as
follows:
F-13
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
---------------------------------------------
Weighted
average
remaining
Exercise contractual Shares
prices life exercisable
---------------------------------------------
$3.00 8.8 Years 6,000
$3.37 8.7 Years 8,600
$5.75 7.7 Years 72,000
---------------------------------------------
The weighted average fair value at date of grant for those options granted
in fiscal 1996 and 1995 was $2.34 and $4.80 respectively. 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:
Options Granted in Fiscal Year
1996 1995
Dividend Yield 0% 0%
Risk-free interest rate 6.23% 5.82%
Expected life after vesting period 10 years 10 years
Expected volatility 58% 75%
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 $243,000 at March 1, 1997. 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.
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.
NOTE 10-COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
F-14
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
LEASE COMMITMENTS
Minimum rental commitments under noncancellable leases (excluding renewal
options and escalations) having a term of more than one year are as
follows:
-------------------------------------------------
Fiscal Year Ending
-------------------------------------------------
1998 $134,000
1999 $100,000
2000 $101,000
2001 $103,000
2002 $105,000
-------------------------------------------------
Rental expense under operating leases, including escalation amounts, was
approximately $266,000, $300,000, and $284,000 for the fiscal years ended
March 1, 1997, March 2, 1996 and February 25, 1995, 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 1, 1997 is as
follows:
-------------------------------------------------
Fiscal Year Ending
-------------------------------------------------
1998 $960,000
1999 $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 shares; 42,875 shares in the fiscal year ended March 1, 1997
and 51,275 shares in the
F-15
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
year ended March 2, 1996 which resulted in a charge in 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.
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 1, 1997,
are as follows:
Fiscal year ending Amount
------------------ ----------
1998 $1,286,000
1999 $1,334,000
2000 $760,000
----------
Total minimum licensing payments $3,380,000
----------
Royalties to GUESS?, Inc., which owns 23% of the outstanding common stock
of the Company, aggregated $294,000 in fiscal 1997, $335,000 in fiscal 1996
and $220,000 in fiscal 1995. 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.
Minimum licensing payments to GUESS included above for the period
subsequent to December 31, 1997 is $1,132,000.
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 $37 million lawsuit against Levi Strauss & Co. Minimum
licensing payments to Brittania included above aggregated $745,000.
LITIGATION
F-16
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
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 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 operations of the Company. No provision has been made by the Company
with respect to the aforementioned litigation at March 1, 1997.
LETTERS OF CREDIT
At March 1, 1997, the Company had outstanding letters of credit, primarily
with foreign banks of $455,000 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 contributed an amount equal to 1%
for fiscal years 1995 and 2% for fiscal year 1996, aggregating $105,000 and
$102,000 respectively, of the participant's earnings subject to the maximum
contribution levels established by the Internal Revenue Service. No
contribution was made for fiscal 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 $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
F-17
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
to sell Brittania. In light of the actions announced by Levi's, K-Mart, the
largest retailer of the Brittania brand and the Company's largest customer
accounting for approximately $11 million of the Company's fiscal 1997 sales
of Brittania product advised the Company that it would no longer continue
its on-going commitment to the Brittania trademark.
The Company has filed a $37 million lawsuit against Levi Strauss & Co.
and Brittania Sportswear, Ltd. alleging that it was fraudulently induced
into entering into the new license agreement by Levi's action, in the
spring of 1996, linking Brittania with Levi's including the marketing of a
new trademark "Brittania from Levi Strauss & Co." In reliance on these
actions and in anticipation of the continuing support by Levi's of the
Brittania brand, the Company severed its long-standing relationship with a
competing brand and developed new packaging to reflect the new marketing
effort. There can be no assurance that the ultimate resolution of these
matters will not have a materially adverse impact of the Company or on its
financial condition.
F-18
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 1997, March 2, 1996 and February 25, 1995
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited consolidated quarterly financial data for fiscal years 1997 and
1996 is as follows:
(in thousands except per share data)
----------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------------------------------
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 ($0.35) ($0.15) ($0.27) ($0.13)
Weighted average shares 2,989 3,033 3,239 3,239
Fiscal 1996
Net Sales $10,493 $7,361 $9,849 $7,357
Gross Profit 2,607 2,125 2,515 1,081
Unusual credit (note a) 300
Net income (loss) 256 48 498 ($1,041)
Net income (loss) per share $0.09 $0.02 $0.17 ($0.35)
Weighted average shares 2,981 2,983 2,986 2,989
----------------------------------------------------------------------------
(a) At the end of fiscal 1994, the Company formulated plans to close its
Puerto Rico facility. This was completed July 1994. A final assessment
associated with this closing required write-offs, reflected as an unusual
charge of $1,252,400 for the year ended February 1995. As a result, the
Company restated its results for its second fiscal quarter which ended
August 1994. In the third quarter of the 1996 fiscal year, the Company
eliminated the $300,000 subordinated note payable to the former owner of
Phoenix which created an unusual credit for fiscal year 1996. Both
transactions are more fully described in Note 4.
F-19
<PAGE>
Schedule II
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
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
----------- ------- -------- ------------ -------
<S> <C> <C> <C> <C>
Year ended March 1, 1997
Allowances
Accounts receivable $40,076 $119,688 $11,163 $148,601
-----------------------------------------------------
-----------------------------------------------------
Year ended March 2, 1996
Allowances
Accounts receivable $193,964 $120,000 $273,888 $40,076
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
(a) Uncollectible accounts written off against the allowance.
F-20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS INFORMATION EXTRACTED FROM THE STATEMENTS DATED MARCH 1,
1997 AS FILED IN FORM 10-K 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> 12-MOS
<FISCAL-YEAR-END> MAR-01-1997
<PERIOD-END> MAR-01-1997
<CASH> 7,941
<SECURITIES> 0
<RECEIVABLES> 6,021,734
<ALLOWANCES> 149,000
<INVENTORY> 7,826,440
<CURRENT-ASSETS> 14,213,286
<PP&E> 7,462,203
<DEPRECIATION> 4,258,166
<TOTAL-ASSETS> 18,063,203
<CURRENT-LIABILITIES> 3,306,977
<BONDS> 0
0
500
<COMMON> 324,185
<OTHER-SE> 2,834,662
<TOTAL-LIABILITY-AND-EQUITY> 18,063,203
<SALES> 30,394,409
<TOTAL-REVENUES> 30,349,409
<CGS> 24,395,054
<TOTAL-COSTS> 24,395,054
<OTHER-EXPENSES> 7,546,341
<LOSS-PROVISION> 120,000
<INTEREST-EXPENSE> 1,199,529
<INCOME-PRETAX> (2,746,515)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,746,515)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,746,515)
<EPS-PRIMARY> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
