SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K/A
-------------------
AMENDMENT TO APPLICATION OR REPORT
Filed pursuant to Section 12, 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
NANTUCKET INDUSTRIES, INC.
--------------------------------------------------
(Exact name of registrant as specified in charter)
AMENDMENT NO. 2
---------------
The undersigned Registrant hereby amends the following items,
financial statements, exhibits or other portions of its Annual Report on Form
10-K for the Fiscal Year ended February 28, 1998, as set forth in the pages
attached hereto:
ITEM 6: SELECTED FINANCIAL DATA
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The omitted text of Items 6, 7, 8 and 9 of Registrant's Annual Report
on Form 10-K, for the fiscal year ended February 28, 1998, is set forth in the
attached pages and incorporated into said Annual Report by reference. The text
of Items 10 and 12 also is hereby amended as set forth in the pages attached
hereto.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
NANTUCKET INDUSTRIES, INC.
(Registrant)
Dated: July 17, 1998 By: /s/ Nick J. Dmytryszyn
-------------------------
Nick J. Dmytryszyn
Chief Financial Officer
(Chief Accounting Officer)
-1-
<PAGE>
AMENDED ITEMS 6,7, 8, 9, 10 and 12
OF THE
ANNUAL REPORT ON FORM 10-K 0F
NANTUCKET INDUSTRIES, INC. (the "Company" )
FOR ITS FISCAL YEAR ENDED FEBRUARY 28, 1998
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial
information with respect to the Company and its subsidiaries for the five fiscal
years ended February 28, 1998.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and in conjunction with the Company's Consolidated Financial
Statements and notes thereto appearing elsewhere in this Report.
<TABLE>
<CAPTION>
FOR FISCAL YEAR ENDED
---------------------
(In thousands, except per share amounts)
FEB. 28, MARCH 1, MARCH 2, FEB. 25 FEB. 26,
1998 1997 1996 1995 1994
---------- ---------- ---------- ----------- ------------
SUMMARY STATEMENTS OF OPERATIONS
--------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $21,683 $30,394 $35,060 $37,015 $41,634
Gross profit 3,102 5,999 8,328 7,061 5,854
Net gain sale of asset 712 - - - -
Unusual credit (charge) - - 300 (1,252) (5,450)
Net (loss) (4,665) (2,747) (239) (3,147) (9,450)
Net (loss) per share-basic and
diluted $ (1.47) $ (.91) $ (.08) $ (1.15) $ (3.81)
Average shares
Outstanding 3,239 3,125 2,985 2,743 2,481
SUMMARY BALANCE SHEET DATA
--------------------------
Total assets $ 7,208 $18,063 $18,855 $22,184 $22,195
Working capital (2,120) 10,906 10,827 12,830 10,262
Long-term debt (exclusive of current
maturity's) 299 8,837 9,108 11,300 9,750
Convertible subordinated debt 2,053 2,760
Stockholders' equity (1,262) 3,159 5,257 5,465 4,697
</TABLE>
-2-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESTRUCTURING STRATEGY
----------------------
Levi Strauss & Co., the parent company of Brittania Sportswear Ltd.. a
licensor which accounted for 49% of the Company's fiscal 1997 sales,
announced their intention to sell Brittania. In light of the actions
announced by Levi's, K-Mart, the largest retailer of the Brittania brand and
the Company's largest customer, accounting for approximately $11 million of
the Company's fiscal 1997 sales of Brittania product, advised the Company
that it would no longer continue its on-going commitment to the Brittania
trademark. In response, the Company has filed a lawsuit against Levi Strauss
& Co. alleging that the licensor breached various obligations under the
license agreement, including without limitations its covenant of good faith
and fair dealing. The Company has subsequently agreed to a tentative
settlement to this litigation, which will not have a material impact on the
Company's financial position (see Note 12).
The Company has experienced significant losses in recent years which
have generally resulted in severe cash flow problems, and negative equity,
that have negatively impacted the ability of the Company to conduct its
business as presently structured. The Company has defaulted on interest
payments to its subordinated debt holder, and has no long term credit
facility in place. As a result of the Brittania matter; the continuing
losses; the interest payment default, and the lack of a long term credit
facility, there can be no assurance that the Company can continue as a going
concern, or that the ultimate impact or resolution of these matters will not
have a materially adverse effect on the Company or on its financial
condition.
In view of the issues described in the preceding paragraphs,
recoverability of a major portion of the recorded asset amounts shown in the
accompanying balance sheet is dependent upon the continuing operations of
the Company, which in turn is dependent upon the Company's ability to
maintain the financing of its working capital requirements on a continuing
basis, and to improve its future operations.
At the end of fiscal 1994, the Company began the implementation of a
restructuring strategy to improve operating results and enhance its financial
resources. Specific steps taken included:
o The shutdown of the Puerto Rico facility
o Improving the product mix by eliminating unprofitable lines
(women's products other than those sold under the GUESS? license
and socks) and terminating business with Avon Products, the
principal customer of the Puerto Rico facility
o Terminating the employment contracts of its former chairman and
vice chairman.
-3-
<PAGE>
o Increasing equity through (a) the sale of $1 million of
non-voting convertible preferred stock to management in fiscal
1995; (b) the $ 2.9 million sale of treasury stock to GUESS? in
fiscal 1995 and (c) the completion, in August, 1996, of a
private placement with net proceeds comprised of 250,000 shares
of common stock ($740,000) and .12-1/2% convertible subordinated
debentures ($2,351,000 net of expenses).
o Obtaining additional working capital financing through the
restructuring of credit facilities.
o Implementing additional steps to reduce operating costs believed
to provide the Company with the ability to continue in existence.
Major elements of these action plans, management believes will
result in a $3.5 million savings in overhead spending levels,
include:
* The phase out of the GUESS? Division, with a target
completion date of the first quarter of fiscal year
1999.
* The sale of the Company's Cartersville, GA location,
and the relocation to more appropriate space for its
packaging and distribution facilities (see Note 6).
* The transfer of all domestic manufacturing
requirements to foreign manufacturing contracting
facilities.
* Staff reductions associated with; the transfer of
manufacturing to offshore contractors; closing the
GUESS? Division, efficiencies and reduced volume.
* The relocation of executive offices and showrooms to
more appropriate, lower cost facilities.
In connection with the implementation of these actions, the Company has
reflected, in its financial statements for the fiscal years ended February,
1994 through March, 1, 1996, unusual charges aggregating $6.4 million. These
charges include approximately $760,000 of expenses incurred in fiscal 1995
closing the Puerto Rico facility, write-downs and reserves of asset values
and other non-cash items ($1.5 million write-off of goodwill, $2.1 million
writedowns of inventory, $530,000 writedowns of fixed assets), the accrual
for the severance payments to the former Chairman and Vice Chairman of the
Board ($1,765,000) and , in fiscal 1996, an unusual credit, as described
below, of $300,000 related to the elimination of a subordinated note payable
-4-
<PAGE>
associated with the purchase of the Puerto Rico facility since the
likelihood of payment on such note was considered remote. In the current
fiscal year ending February 28, 1998, the financial statements, through
operating results, reflects $1.8 million in restructuring charges including
$1.2 million associated with the phase out of the GUESS? division ($660,000
inventory write-offs, $540,000 in deferred costs and other charges), with
the balance associated with write-downs, and reserves of asset values, and
other non cash items.
The Company has not yet realized the benefits of this turnaround
strategy and has incurred losses of $4,665,000, $2,747,000 and $239,000 for
the fiscal years ended February 28, 1998, March 1, 1997 and March 2, 1996,
respectively.
RESULTS OF OPERATIONS
- ---------------------
SALES
Net sales for the fiscal year ended February 28, 1998 decreased 29%
from the prior year levels to $21.7 million. Sales under the Brittania
license declined $10.4 million from prior year levels, with the balance of
the men's fashion underwear business off by $609,000. The decline in sales
of the men's products is primarily related to the phase out of the Brittania
product associated with the actions announced by Levi's to dispose of the
Brittania brand, and the loss of certain styles to competitors within the
Companies business environment. GUESS? product sales increased $2.3 million
from prior year levels, which includes $2.7 million in close out sales, and
reflects the Company's efforts to reduce its carrying levels of GUESS?
inventory, and generate cash.
Net sales for the fiscal year ended March 1, 1997 decreased 13% from
the prior year levels to $30.4 million. These declines, associated with
lower unit volumes, reflect inventory reductions by Nantucket's customers.
In addition, the Company canceled customer orders for specialized new
products due to production delays and quality issues experienced by
supplementary foreign manufacturing contractors which were engaged to
assemble these new products. In view of these problems, the Company no
longer uses these contractors.
Net sales for the fiscal year ended March 2, 1996 decreased 5% from
prior year levels to $35,060,000. Most of this decline was associated with
the elimination of unprofitable product lines, including a reduction of
$1,024,000 related to the fiscal 1996 elimination of the Company's
healthcare line. A soft retail environment contributed to an overall 5.5%
decrease in revenues associated with lower unit volumes in the core men's
fashion underwear products. For the 1996 fiscal year, there was a 55%
increase in the unit volume sales of the developing GUESS? intimate apparel
product line to $4.9 million.
-5-
<PAGE>
GROSS MARGIN
Gross profit margin levels are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
FEB. 28, MARCH 1, MARCH 2,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Gross Margin % 14% 20% 24%
$ Amount-% Increase (decrease) (30%) (28%) 18%
</TABLE>
The declines in fiscal year 1998 gross margin reflect non recurring
inventory reserves and write-offs associated with discontinued product
lines, and close out sales used to reduce inventory levels and to generate
cash. In the aggregate this represents approximately $1.2 million, or 6
points of gross margin.
The declines in fiscal 1997 gross margin are the result of increased
manufacturing variances associated with reduced unit volumes and the
additional processing costs of imported garments as operations of the new
contractor base were fine tuned. In addition, gross profit levels reflect
$1.6 million in fully reserved close-out sales of the GUESS? products as the
Company continued to reduce slow moving inventory levels.
The improvement in fiscal 1996 gross margin is a result of the improved
product mix from the increased sales of the higher margin GUESS? Innerwear
line, the elimination of the unprofitable products, improved plant
efficiencies and lower cost product sources.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in fiscal 1998 of $7.2
million were 33% of sales. For fiscal 1997 and 1996, these expenses were
$7.5 million and $7.6 million respectively, and as a percentage of sales,
25% for fiscal year 1997, and 21% for fiscal year 1996. This reflects the
impact of the lower sales volume on fixed cost levels. Variable selling
expenses were 6% higher reflecting the lower sales levels offset by the
impact of the sales mix and the effect of minimum royalty payments under the
GUESS? license. General and administrative expenses for fiscal year 1998
which includes $691,000 in non-recurring charges, were reduced by $515,000
over prior year levels reflecting the benefits of the Company's
restructuring strategies on structural overhead costs.
-6-
<PAGE>
UNUSUAL (CREDIT) CHARGE
In November, 1992, the Company acquired the Puerto Rico facility,
Phoenix Associates, Inc., pursuant to a stock purchase agreement. A portion
of the purchase price was debt payable to the former owners of Phoenix, of
which $300,000 was due February 2, 1998. In April, 1993, the Company
discovered an inventory variance of $1,700,000 principally attributable to
unrecorded manufacturing and material cost variances at the Puerto Rico
facility incurred prior to the Company's acquisition of this facility. In
connection with the acquisition of the Puerto Rico facility, the Company
initiated an action against the former owners of that facility. In the 1996
fiscal year, the Company concluded that its claims against the holder of the
subordinated note payable are in excess of the $300,000 due. In the opinion
of legal counsel and management, the likelihood of any payment being
required on this note is remote. Accordingly, in fiscal 1996, the Company
eliminated this payable and reflected such $300,000 reduction as an unusual
credit in the accompanying financial statements.
Interest expense
Interest expense increased by $112,000 in fiscal 1998, reflecting the
$175,000 booked as the expense resulting from the issuance of 16,500,000
warrants (see Note 3).
The decrease in interest expense in fiscal 1997 of $114,000 reflects
lower borrowing levels as the Company reduced inventory levels. In addition,
the proceeds of the August, 1996 $3.5 million private placement were used to
prepay the remaining $533,000 due to Chemical Bank pursuant to its credit
agreement with Congress Financial Corp. The impact of these reduced
borrowing levels was offset by the 150 basis point higher interest rate of
the $2.7 million Convertible Subordinated Debentures.
The increase in interest expense of $118,000 for the 1996 fiscal year
is primarily due to the higher prime rates in effect during fiscal 1996 and
increased levels of financing.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has incurred significant losses in recent years which have
generally resulted in severe cash flow problems that have negatively
impacted the ability of the Company to conduct its business as presently
structured.
In March, 1994 the Company was successful in refinancing its credit
agreements with (i) a three year $15,000,000 revolving credit facility with
Congress Financial; (ii) a $2,000,000 Term Loan Agreement with Chemical
Bank; and (iii) an additional $1,500,000 Term Loan with Congress replacing
the Industrial Revenue Bond financing of the Cartersville, Georgia
manufacturing plant.
-7-
<PAGE>
On May 31, 1996, the Company amended its Loan and Security Agreement
with Congress Financial Corporation dated March 24, 1994. This amendment
provided (a) $251,000 in additional equipment term loan financing, (b)
extension of the repayment period for all outstanding term loans, (c)
supplemental revolving loan availability from March 1st through June 30th of
each year and (d) extension of the renewal date to March 20, 1998.
In March, and then May 1998 Congress Financial Corporation extended its
Loan and Security Agreement with the Company to August 18, 1998; discussions
are on going, for the Company and Congress to enter into a new, long term
financing facility. In management's opinion, a new agreement will be in
place prior to the expiration of the current extension. As of May 20, 1998,
the most recent measurement date, the Company had excess borrowing
availability of $800,000 pursuant to its credit agreement with Congress
Financial.
Additionally, the Company has increased its equity over the past three
years through (i) a $1,000,000 investment by the Management Group in fiscal
1995; (ii) the $2.9 million sale of 490,000 shares of common treasury stock
to GUESS?, Inc. and certain of its affiliates and; (iii) the $3.5 million
private placement which included the issuance of 250,000 shares and
$2,760,000 convertible subordinated debentures. These transactions, combined
with its stronger credit facilities, enhanced the Company's liquidity and
capital resources.
Under the terms of the $2,000,000 Term Loan Agreement with Chemical
Bank, scheduled installments of $500,000 were due on December 15, 1995 and
March 15, 1996. As of December 15, 1995 the Company agreed to an amendment
providing for payments of $100,000 each on December 31, 1995 and January 31,
1996, with the remaining $800,000 to be paid in 15 equal installments which
commenced March 31, 1996. In August, 1996, the Company utilized $533,333 of
the proceeds from the private placement to prepay all of its obligations
with Chemical Bank.
On October 1, 1997 the Company completed the consolidation of its
facilities and sold its 152,000 sq. foot manufacturing and distribution
facility in Cartersville, Georgia for cash aggregating $2,850,000. The
Company reflected a gain on the sale of $793,000. The proceeds were used to
repay the $525,000 financing secured by this property, to prepay $707,000 of
the convertible subordinated debentures secured by a second mortgage on the
property, and to pay a $176,000 prepayment penalty incurred from the
prepayment of the subordinated debt. The remaining net proceeds were
utilized to reduce the revolving credit financing.
Working capital has declined to $2.1 million, from March 1, 1997 levels
of $10.9 million, reflecting reductions in receivables and inventories
utilized to reduce debt levels, to generate cash, and the reclassification
of $5.3 million of revolving and subordinated debt from long to short term.
Overall, the Company has reduced its total debt by $6.4 million, from March
1, 1997 levels.
The Company in May 1998 has entered into an agreement with its
Subordinated Debt holder to extend the cure period, with respect to $322,551
in prior interest payment defaults and for the interest payment due in
August 1998, until December 1998. In return, the Company agrees to
-8-
<PAGE>
secure the Debentures by a first priority lien on all the assets of the
Company to the extent not otherwise prohibited under the Congress Credit
Facility, to issue to NAN five year warrants to purchase 16,500,000 shares
of Nantucket Industries, Inc. stock at a price of $.10, and to cause certain
members of the Board of Directors of the Company to be retained, reelected,
or removed.
The Company believes that the moderate rate of inflation over the past
few years has not had significant impact on sales or profitability.
YEAR 2000 ISSUES
----------------
The Company has been assured by its software vendor that by
implementing its outside venders current software update, its systems will
be Year 2000 compliant, therefore, the Year 2000 problem will not pose
significant operational issues for the Companies computer systems as so
updated. However, there can be no assurance that the systems of other
companies on which the Company systems rely will be timely converted or that
any such failure to convert by another company would not have an adverse
effect on the Company's systems. The Companies software will be updated by
the 4th quarter of fiscal year 1999, without any incremental costs, as part
of its on going maintenance agreement with its vendor.
OUTLOOK
-------
This form 10-K contains statements which are not historical facts, but
are forward-looking statements which are subject to risks, uncertainties and
unforseen factors that could affect the Company's ability to accomplish its
strategic objectives with respect to acquisitions and developing new
business opportunities, as well as its operations and actual results. All
forward-looking statements contained herein reflect Management's analysis
only as of the date of the filing of this Report. Except as may be required
by law, the Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise
after the date hereof. In addition to the disclosures contained herein,
readers should carefully review risks and uncertainties contained in other
documents which the Company files from time to time with the Securities and
Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto at Page F-1 et seq.
-- ---
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The age of Steven Schneider, one of the Company's Class I directors, is
40. The information regarding Mr. Schneider's principal occupations during
the past five years and other directorships held by him in public companies
is as follows:
Steven Schneider has been President of Urban Marketing and Sales, a
sales and marketing company which represents apparel businesses including
Bear USA, Phat Farm, Changes, Rp-55, and Caretek/Timberline. Mr. Schneider
is also co-owner of two retail apparel stores in New York.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following beneficial share ownership of Steven Schneider is hereby
added to the table set forth in Item 12 of the Company's 10-K/A Amendment
No.1 filed June 29, 1998, and the aggregate beneficial ownership of all
directors and officers as a group set forth in such table also is replaced
as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP PERCENT OF CLASS (1)
- ------------------------------------ ----------------------------------------- --------------------
<S> <C> <C>
Steven Schneider 4,000 *
2016 Linden Blvd. Ste.17
Elmont, NY 11003
All directors and officers as a group 439,081 13.37
(7 persons)
- --------------------------
* Less than 1%
</TABLE>
-9-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
NANTUCKET INDUSTRIES, INC.
We have audited the accompanying consolidated balance sheets of Nantucket
Industries, Inc. and Subsidiaries as of February 28, 1998 and March 1, 1997 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended February 28, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Nantucket
Industries, Inc. and Subsidiaries as of February 28, 1998 and March 1, 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended February 28, 1998 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has significant decreases
in sales in recent years relating in large part to the Brittania license,
continuing losses, negative working capital, defaults on interest payments, and
a lack of a long term credit facility. These factors, among others discussed in
Note 1 to the accompanying financial statements, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
GRANT THORNTON LLP
New York, New York
May 29, 1998 (except for Note 12, for which the date is June 26, 1998)
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, MARCH 1,
1998 1997
---------------- ----------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $8,850 $7,941
Accounts receivable, less reserves of $351,000 and
$149,000, respectively (Note 7) 2,879,735 5,872,734
Inventories (Notes 5 and 7) 3,090,383 7,826,440
Other current assets 71,895 506,171
---------------- ----------------
Total current assets 6,050,863 14,213,286
PROPERTY, PLANT AND EQUIPMENT - NET (Notes 6 and 7) 958,075 3,204,037
OTHER ASSETS - NET 198,786 645,880
---------------- ----------------
$7,207,724 $18,063,203
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (Note 7) $3,161,286 $510,864
Current portion of capital lease obligations (Note 7) 51,898 --
Convertible subordinated debt (Note 3) 2,052,986 --
Accounts payable 722,483 1,081,133
Accrued salaries and employee benefits 223,031 348,361
Accrued unusual charge (Note 4) 465,000 465,000
Accrued expenses and other liabilities 730,478 530,850
Accrued royalties 763,270 368,860
Income taxes payable (Note 8) 1,909
---------------- ----------------
Total current liabilities 8,170,432 3,306,977
LONG-TERM DEBT (Note 7) -- 8,566,011
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION (Note 7) 120,702 --
ACCRUED UNUSUAL CHARGE (Notes 4 and 10) 178,717 270,868
CONVERTIBLE SUBORDINATED DEBT (Note 3) -- 2,760,000
---------------- ----------------
8,469,851 14,903,856
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Notes 3 and 9)
Preferred stock, $.10 par value; 500,000 shares authorized,
of which 5,000 shares have been designated as non-voting
convertible with liquidating preference of $200 per share 500 500
and are issued and outstanding
Common stock, $.10 par value; authorized 20,000,000 shares;
issued 3,241,848 at February 28, 1998 and March 1, 1997 324,185 324,185
Additional paid-in capital 12,539,503 12,364,503
Deferred issuance cost (115,541) (183,772)
Accumulated deficit (13,990,837) (9,326,132)
---------------- ----------------
(1,242,190) 3,179,284
Less 3,052 shares at February 28, 1998 and March 1, 1997
of common stock held in treasury, at cost 19,937 19,937
---------------- ----------------
(1,262,127) 3,159,347
---------------- ----------------
$7,207,724 $18,063,203
================ ================
The accompanying notes are an integral part of these statements.
</TABLE>
F-2
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------
FEBRUARY 28, MARCH 1, MARCH 2,
1998 1997 1996
----------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales $21,683,326 $30,394,409 $35,060,136
Cost of sales 18,581,718 24,395,054 26,732,017
----------------- ---------------- ----------------
Gross profit 3,101,608 5,999,355 8,328,119
Selling, general and administrative
expenses 7,166,124 7,546,341 7,554,057
Unusual (credit) charge (Note 4) -- -- (300,000)
----------------- ---------------- ----------------
Operating profit (loss) (4,064,516) (1,546,986) 1,074,062
Other (income) expense
Net gain on sale of assets (Note 6) (711,686) -- --
Interest expense 1,311,875 1,199,529 1,313,544
----------------- ---------------- ----------------
Total other (income) expense 600,189 1,199,529 1,313,544
Loss before income taxes (4,664,705) (2,746,515) (239,482)
Income taxes (Note 8) -- -- --
----------------- ---------------- ----------------
Net loss ($4,664,705) ($2,746,515) ($239,482)
================= ================ ================
Net loss per share - basic and diluted ($1.47) ($0.91) ($0.08)
================= ================ ================
Weighted average common shares outstanding 3,238,796 3,124,785 2,984,955
================= ================ ================
The accompanying notes are an integral part of these statements.
</TABLE>
F-3
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED FEBRUARY 28, 1998, MARCH 1, 1997 AND MARCH 2, 1996
<TABLE>
<CAPTION>
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, 1995 5,000 $500 2,991,848 $299,185 $11,576,898
Net loss
Issuance of treasury stock in
compliance with credit agreement
prepayment terms (20,512)
------------- ------------- ------------- ------------- --------------- --------------
Balances at March 2, 1996 5,000 $500 2,991,848 $299,185 $11,556,386
------------- ------------- ------------- ------------- ---------------
Net loss
Common stock issued (Note 3) 250,000 25,000 808,117 (183,772)
------------- ------------- ------------- ------------- --------------- --------------
Balances at March 1, 1997 5,000 $500 3,241,848 $324,185 $12,364,503 ($183,772)
------------- ------------- ------------- ------------- --------------- --------------
Net loss
Issue of warrants 175,000
Amortization of deferred costs 68,231
------------- ------------- ------------- ------------- --------------- --------------
Balances at February 28, 1998 5,000 $500 3,241,848 $324,185 $12,539,503 ($115,541)
============= ============= ============= ============= =============== ==============
</TABLE>
<TABLE>
<CAPTION>
RETAINED TREASURY STOCK
EARNINGS --------------------------
(DEFICIT) SHARES AMOUNT TOTAL
---------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Balances at February 26, 1995 ($6,340,135) 10,552 ($71,389) $5,465,059
Net loss (239,482) (239,482)
Issuance of treasury stock in
compliance with credit agreement
prepayment terms (7,500) 51,452 30,940
---------------- ------------ ------------- ---------------
Balances at March 2, 1996 ($6,579,617) 3,052 ($19,937) $5,256,517
---------------- ------------ ------------- ---------------
Net loss (2,746,515) (2,746,515)
Common stock issued (Note 3) 649,345
---------------- ------------ ------------- ---------------
Balances at March 1, 1997 ($9,326,132) 3,052 ($19,937) $3,159,347
---------------- ------------ ------------- ---------------
Net loss (4,664,705) (4,664,705)
Issue of warrants 175,000
Amortization of deferred costs 68,231
---------------- ------------ ------------- ---------------
Balances at February 28, 1998 ($13,990,837) 3,052 ($19,937) ($1,262,127)
================ ============ ============= ===============
The accompanying notes are an integral part of these statements.
</TABLE>
F-4
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------
FEBRUARY 28, MARCH 1, MARCH 2,
1998 1997 1996
----------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss ($4,664,705) ($2,746,515) ($239,482)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities
Depreciation and amortization 569,121 361,425 365,342
Provision for doubtful accounts 239,952 32,000 120,000
Gain on sale of fixed assets (711,686) (44,496) --
Unusual (credit) charge -- -- (300,000)
Treasury stock issued in compliance with credit agreement -- -- 30,190
Provision for obsolete and slow moving inventory 1,175,646 415,000 452,590
Issue of warrants 175,000 -- --
(Increase) decrease in assets
Accounts receivable 2,753,047 (1,487,701) 1,935,115
Refundable income taxes -- -- --
Inventories 3,560,411 1,915,199 374,967
Other current assets 419,024 283,886 30,909
(Decrease) increase in liabilities
Accounts payable (166,629) (497,380) (684,137)
Accrued expenses and other liabilities 468,708 221,895 (543,519)
Income taxes payable (1,909) (1,025) 294
Accrued unusual charge (92,151) (408,011) (379,451)
----------------- --------------- ---------------
Net cash provided by (used in) operating activities 3,723,829 (1,955,723) 1,162,818
----------------- --------------- ---------------
Cash flows from investing activities
Additions to property, plant and equipment (212,093) (152,516) (97,296)
Proceeds from sale of fixed assets 2,808,731 33,756 --
(Increase) decrease in other assets 348,724 (396,838) 129,781
----------------- --------------- ---------------
Net cash provided by (used in) investing activities 2,945,362 (515,598) 32,485
----------------- --------------- ---------------
Cash flows from financing activities
Borrowings (repayments) under line of credit agreement, net (5,915,589) 173,093 (1,013,017)
Payments of short-term debt -- (800,000) --
Issuance of convertible subordinated debentures, net of expenses (Note 3) -- 2,351,084 --
Payments of long-term debt and capital lease obligations (752,693) -- (200,000)
Issuance of common stock (Note 3) -- 740,000 --
Net proceeds from sale of treasury stock -- -- 750
----------------- --------------- ---------------
Net cash provided by (used in) financing activities (6,668,282) 2,464,177 (1,212,267)
----------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH $909 ($7,144) ($16,964)
Cash at beginning of year 7,941 15,085 32,049
----------------- --------------- ---------------
Cash at end of year $8,850 $7,941 $15,085
================= =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $762,798 $1,173,981 $1,320,046
================== =============== ===============
Income taxes -- -- --
================== =============== ================
The accompanying notes are an integral part of these statements
</TABLE>
F-5
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998, MARCH 1, 1997, AND MARCH 2, 1996
NOTE 1 - RESTRUCTURING AND LIQUIDITY MATTERS
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. Net sales for the fiscal
year ended February 28, 1998 decreased 29% from the prior year levels
to $21.7 million. Sales under the Brittania license declined by $10.4
million from prior year levels, with the balance of the men's fashion
underwear business off by $609,000. As more fully described in Note 12,
Levi Strauss & Co., the parent company of Brittania Sportswear Ltd.. a
licensor which accounted for $14.9 million of the Company's fiscal 1997
sales, and $4.5 million of fiscal 1998 sales, announced their intention
to sell Brittania. In light of the actions announced by Levi's, K-Mart,
the largest retailer of the Brittania brand and the Company's largest
customer accounting for approximately $11 million of the Company's
fiscal 1997 sales and approximately $3.0 million in fiscal 1998, of
Brittania product, advised the Company that it would no longer continue
its ongoing commitment to the Brittania trademark. In response, the
Company has filed a lawsuit against Levi Strauss & Co. alleging that
the licensor breach various obligations under the license agreement,
including without limitation its covenant of good faith and fair
dealing. The Company has subsequently agreed to a tentative settlement
of this litigation (see Note 12).
The Company has experienced significant losses in recent years which
have generally resulted in severe cash flow issues, and negative
working capital, that have negatively impacted the ability of the
Company to conduct its business as presently structured. Due to the
lack of capital resources needed to properly develop and support the
GUESS? product line, the Company with the support of GUESS? Inc. has
initiated a strategy to discontinue its GUESS? division. Sales for this
product line in fiscal 1998, 1997 and 1996 aggregated $7.0, $4.7, and
$4.9 million, with gross margins of 6.4%, 13.2% and 23.8%,
respectively. Until April 17, 1998 the Company's Common Stock was
traded on the American Stock Exchange. Because the Company fell below
American Stock Exchange guidelines for continued listing, effective
April 17, 1998, the Company's stock was delisted. It is currently
traded on the NASD Supplemental Market under the symbol "NANK". The
Company has defaulted on interest payments to its subordinated debt
holder, and has no long-term credit facility in place. As a result of
the Brittania matter, the continuing losses, interest payment default,
and the lack of a long-term credit facility, there can be no assurance
that the Company can continue as a going concern. The financial
statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts
and classifications of liabilities that might be necessary should the
Company be unable to continue in existence. There can be no assurance
that the ultimate impact or resolution of these matters will not have a
materially adverse effect on the Company or on its financial condition.
In view of the issues described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon the continued
operations of the Company, which in turn is dependent upon the
Company's ability to maintain the financing of its working capital
requirements on a continuing basis and to improve its future
operations.
The Company has funded its operating losses by refinancing its debt in
fiscal 1995 and increasing its capital through (a) the sale of $1
million of non-voting convertible preferred stock to management (Note
<PAGE>
9) in fiscal 1995; (b) the fiscal 1995 sale of treasury stock which
increased equity by $2.9 million, and (c) the completion, in August,
1996 of a $3.5 million private placement (Note 3).
The Company has been implementing a restructuring strategy to improve
operating results and enhance its financial resources which included
reducing costs, streamlining its operations and closing its Puerto Rico
plant. In addition Management has implemented additional steps to
reduce its operating costs which it believes are sufficient to provide
the Company with the ability to continue in existence. Major elements
of these action plans include:
The phase-out of the Guess? product line, with a target
completion date of the first quarter of fiscal year 1999.
The sale of the Company's Cartersville, GA location (Note 6),
and the relocation to more appropriate space for its packaging
and distribution facilities.
The transfer of all domestic manufacturing requirements to
foreign manufacturing contract facilities.
Staff reductions associated with the transfer of manufacturing
to offshore contractors, closing the Guess? division,
efficiencies and reduced volume.
The relocation of executive offices and showrooms to more
appropriate, lower cost, facilities.
Management believes these action plans will result in an annual $3.5
million reduction in overhead spending levels.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Nantucket Industries, Inc. and its wholly-owned subsidiaries (the
"Company") designs and distributes throughout the United States men's
branded and private label fashion undergarments to mass merchandisers
and national chains. In addition, the Company designs and distributes
to department and specialty stores GUESS? innerwear for women. The
Company does not have the resources to continue to support and develop
the Guess? product line to the levels required in the licensing
agreement. The Company has initiated plans to terminate its licensing
agreement, with the full cooperation and support of Guess? Inc., and to
phase out this line of business in the first quarter of fiscal year
1999.
For the current fiscal year, sales to the Company's largest customer
accounted for 23% of net sales and 18% and 13%, respectively, for the
two prior fiscal years. Sales to the second largest customer in the
current fiscal year were 22% of net sales and 19% and 21%,
respectively, for the two prior fiscal years. Sales in the current
fiscal year to the Company's third largest customer represented 16% of
net sales and 40% and 40%, respectively, for the two prior fiscal
years. As described in Note 12, this customer has advised the Company
that it would no longer continue its ongoing commitment to the
Brittania trademark. Current, ongoing sales to this customer will be
nonmaterial. No other customers account for more than 10% of the
Company's consolidated net sales for fiscal 1998, 1997 or 1996.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Nantucket
Industries, Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
<PAGE>
ACCOUNTS RECEIVABLE
An allowance for doubtful accounts is provided based upon historical
bad debt experience and periodic evaluations of the aging of the
accounts. Substantially all receivables are either insured up to 80% of
the outstanding balance, subject to certain deductibles, or are subject
to factoring arrangements which guarantee payment.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market (net realizable value).
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated at cost. Equipment under
lease is stated at the present value of the minimum lease payments at
the inception of the lease. Depreciation and amortization are provided
by the straight-line method over the estimated useful lives of the
assets as follows:
=====================================================
Years
=====================================================
Buildings and improvements 20 - 40
Machinery and equipment 3 - 10
Furniture and fixtures 10
=====================================================
OTHER ASSETS
Other long-term assets consist primarily of capitalized loan
origination costs. These costs are being amortized over the term of the
related credit agreements.
STOCK OPTIONS
In fiscal 1997, the Company has adopted Statement of Financial
Accounting Standards No. 123, (SFAS No. 123) "Accounting for
Stock-Based Compensation," which is effective for fiscal years
beginning after December 15, 1995. As described in Note 9, the Company
has granted stock options for a fixed number of shares to employees and
officers at an exercise price at the market value of the shares on the
date of grant. Accordingly, as permitted by SFAS No. 123, the Company
has elected to continue to account for stock option grants in
accordance with APB No. 25 and recognizes no compensation expense for
these grants.
INCOME TAXES
The Company and its wholly-owned subsidiaries file a consolidated
Federal income tax return. Deferred income taxes arise as a result of
differences between financial statement and income tax reporting.
EARNINGS (LOSS) PER COMMON SHARE
In fiscal year 1998, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share",
which requires public companies to present basic earnings per share
and,
<PAGE>
if applicable, diluted earnings per share. All comparative periods must
be restated as of February 28, 1998 in accordance with SFAS No. 128.
Basic earnings per share is based on the weighted average number of
common shares outstanding without consideration of potential common
shares. Diluted earnings per share is based on the weighted average
number of common and potential common shares outstanding. The
calculation takes into account the shares that may be issued upon
exercise of stock options, reduced by the shares that may be
repurchased with the funds received from the exercise, based on the
average price during the year. At February 28, 1998, the Company had
174,500 outstanding stock options which could potentially dilute basic
earnings per share but have not been considered as they would have had
an antidilutive impact for all periods presented (see Note 9).
REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS No. 130),
"Reporting Comprehensive Income", which is effective for the Company's
year ending February 27, 1999. SFAS No. 130 addresses the reporting and
displaying of comprehensive income and its components. Earnings per
share will only be reported for net income, and not for comprehensive
income. Adoption of SFAS No. 130 relates to disclosure within the
financial statements and is not expected to have a material effect on
the Company's financial statements.
SEGMENT INFORMATION
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131 (SFAS No. 131), "Disclosure About Segments of an
Enterprise and Related Information", which is effective for the
Company's year ending February 27, 1999. SFAS No. 131 changes the way
public companies report information about segments of their business in
their financial statements and requires them to report selected segment
information in their quarterly reports. Adoption of SFAS No. 131
relates to disclosure within the financial statements and is not
expected to have a material effect on the Company's financial
statements.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to February 28.
The year ended February 28, 1998 had 52 weeks, and the fiscal years
ended March 1, 1997 and March 2, 1996 contained 52 and 53 weeks,
respectively.
RECLASSIFICATION
Certain prior year amounts have been reclassified in order to conform
to the current year's presentation.
USE OF ESTIMATES
In preparing the Company's financial statements, in conformity with
generally accepted accounting principals, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
In fiscal 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of". Accordingly, when
indicators of impairment are present, the Company periodically
evaluates the carrying value of property, plant and equipment and
intangibles in relation to the operating performance and future
undiscounted cash flows of the underlying business. The Company adjusts
<PAGE>
carrying amount of the respective assets if the expected future
undiscounted cash flows are less than their book values. No impairment
loss was required in fiscal years 1998, 1997 and 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of all financial instruments potentially subject to
valuation risk, principally include: cash, accounts receivable,
accounts payable, and long term debt. The carring value of these
financial instruments approximate fair value, except for the long term
debt for which it is not practiable to determine its fair value.
NOTE 3 - PRIVATE PLACEMENT
On August 15, 1996, the Company completed a $3.5 million private
placement with an investment partnership. Terms of this transaction
included the issuance of 250,000 shares and $2,760,000 of 12.5%
convertible subordinated debentures which are due August 15, 2001.
The convertible subordinated debentures are secured by a second
mortgage on the Company's manufacturing and distribution facility
located in Cartersville, GA. In conjunction with the sale of this
property completed on October 1, 1997 (see Note 6), the Company prepaid
$707,000 of these debentures.
The debentures, after giving effect to the prepayment related to the
sale of the Company's facility referred to above, were convertible into
the Company's common stock over the next five years. The investment
partnership waived its conversion rights to convert the following
amounts of shares at the related conversion prices:
Conversion Conversion
Price Shares
---------- ----------
$3.83 305,000
$5.00 176,967
The agreement grants the investor certain registration rights for the
shares issued and the Conversion Shares to be issued.
The difference between the purchase price of the shares issued and
their fair market value on August 15, 1996 aggregated $197,500. This
was reflected as deferred issue costs and will be amortized over the
expected five-year term of the subordinated convertible debentures. The
prorated portion of these costs associated with the prepaid $707,000 of
these debentures was recognized in the accounting period in which the
event occurred.
Costs associated with this private placement aggregated $409,000
including $104,000 related to the shares issued which have been charged
to paid in capital. The remaining balance of $305,000 will be amortized
over the five-year term of the debentures. The prorated portion of
these costs associated with the prepaid $707,000 of these debentures
was recognized in the accounting period in which the event occurred.
The Company was in default in respect to interest payments due on the
subordinated debt in August 1997, and again in February 1998. In
September 1997, the Subordinated Debt holder and the Company entered
into an agreement to extend the cure period on the default; this
forbearance agreement was extended month by month until May 1998. In
May 1998, the Company entered into an agreement with the debt holder to
extend the cure period, with respect to $322,551 in prior interest
payment defaults and for the interest payment due in August 1998, until
December 1998. In return, the Company agreed to secure the Debentures
by a first priority lien on all the assets of the Company, to the
extent not otherwise prohibited
<PAGE>
under the Congress facility, and to issue five-year warrants
convertible to 16,500,000 shares of the Company's stock at an exercise
price of $.10. The Company obtained an independent valuation of this
transaction, in the amount of $175,000, and this amount was expensed in
fiscal year 1998. To the extent that the Company has insufficient
authorized and unissued shares of Common Stock to satisfy the exercise
of the warrants, the Company shall use its best efforts to promptly
cause its authorized capital to be increased to the extent necessary to
satisfy the conversion rights in full. The Company can, at its option
within the framework of the forbearance agreement, prepay all or part
of the outstanding subordinated debt at a price equal to 125% of the
principal amount paid.
NOTE 4 - UNUSUAL (CREDIT) CHARGE
In November, 1992, the Company acquired Phoenix Associates Inc., a
manufacturing facility in Puerto Rico, pursuant to a stock purchase
agreement. Phoenix had been an exclusive contractor for the Company,
manufacturing many of the Company's product lines. A portion of the
purchase price was subordinated debt payable to the former owners of
Phoenix, of which $300,000 was due February 2, 1998. In April, 1993,
the Company discovered an inventory variance of $1,700,000, principally
attributable to unrecorded manufacturing and material cost variance at
the Puerto Rico facility, which were incurred prior to the Company's
acquisition of this facility. In connection with the acquisition of the
Puerto Rico facility, the Company initiated an action against the
former owners of that facility as more fully described in Note 10. In
fiscal 1996, the Company concluded that its counterclaims against the
former owners of Phoenix, the holder of the subordinated debt payable,
are in excess of the $300,000 due and, in the opinion of legal counsel
and management, the likelihood of any payment of this note is remote.
Accordingly, in fiscal 1996 the Company eliminated this payable and
reflected such reduction as an unusual credit in the accompanying
financial statements.
In March of fiscal 1994, the Company terminated the employment
contracts of its Chairman and Vice-Chairman. In accordance with the
underlying agreement, they will be paid an aggregate of approximately
$400,000 per year in severance and other benefits, through February 28,
1999. The present value of these payments, $1,915,000, was accrued at
February 26, 1994.
Through February 28, 1998, payments of the unusual charges aggregated
$1,533,681, and represent payments against the present value of the
termination payments to the former Chairman and Vice Chairman. As of
October 1997, pending negotiation of more favorable terms, payment
under this agreement was suspended (see Note 10).
NOTE 5 - INVENTORIES
INVENTORIES ARE SUMMARIZED AS FOLLOWS:
<TABLE>
<CAPTION>
=========================================================================================
February 28, 1998 March 1, 1997
=========================================================================================
<S> <C> <C>
Raw Materials $ 166,646 $ 1,368,823
Work in Process 756,959 2,857,238
Finished goods 2,166,778 3,600,379
----------- -----------
$ 3,090,383 $ 7,826,440
=========== ===========
=========================================================================================
</TABLE>
Inventory valuation allowances and write-downs approximating $834,000
and $415,000 were provided for the years ended February 28, 1998 and
March 1, 1997, respectively.
<PAGE>
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are summarized as follows:
<TABLE>
<CAPTION>
=========================================================================================
February 28, 1998 March 1, 1997
=========================================================================================
<S> <C> <C>
Land $ - $ 83,757
Buildings and improvements 9,130 3,156,813
Machinery and equipment 3,384,115 3,422,993
Furniture and fixtures 791,242 798,640
---------- ----------
4,184,487 7,462,203
less-accumulated depreciation (3,226,412) (4,258,166)
---------- ----------
$ 958,075 $ 3,204,037
=========== =========
=========================================================================================
</TABLE>
On October 1, 1997, the Company completed the consolidation of its
facilities and sold its 152,000 square foot manufacturing and
distribution facility in Cartersville, GA. to Mimms Enterprises, a Real
Estate Investment General Partnership, for cash aggregating $2,850,000.
The Company reflected a gain on the sale in its third fiscal quarter of
$793,000. The proceeds were used to pay the $525,000 financing secured
by this property, to prepay $707,000 of the convertible subordinated
debentures secured by a second mortgage on this property, and to pay a
$176,000 prepayment penalty incurred from the prepayment of the
subordinated debt. The remaining proceeds were utilized to reduce the
revolving credit financing.
NOTE 7 - LONG-TERM DEBT AND NOTES PAYABLE
REVOLVING CREDIT
The Company has a $15 million revolving credit facility with Congress
Financial Corp. which expired in March, 1998, and has been extended to
August 1998. The revolving credit agreement provides for loans based
upon eligible accounts receivable and inventory, a $3,000,000 letter of
credit facility and purchase money term loans of up to 75% of the
orderly liquidation value of newly acquired and eligible equipment.
Borrowings bear interest at 2-3/4% above prime. The agreement requires,
among other provisions, the maintenance of minimum working capital and
net worth levels and also contains restrictions regarding payment of
dividends. Borrowings under the agreement are collateralized by
substantially all of the assets of the Company. At February 28, 1998,
the Company had excess borrowing availability pursuant to this credit
agreement of $279,000, and was not in compliance for both net worth and
working capital covenants.
In March, and then in May 1998, Congress Financial Corporation extended
its Loan and Security Agreement with the Company to August 18, 1998,
with ongoing discussions for the Company and Congress to enter a new,
long-term financing facility. In management's opinion, a new agreement
will be in place prior to the expiration of the current extension.
In connection with this financing, the Company used $5,090,000 of the
proceeds of the revolving credit facility to reduce the balance due to
Chemical Bank and simultaneously entered into a $2,000,000 Term Loan
Agreement with Chemical Bank. At December 15, 1995, $1,000,000 was
outstanding under this loan. Pursuant to an amendment to this
agreement, the Company made payments of $100,000 each on December 31,
1995 and January 31, 1996 and agreed to pay the remaining $800,000 in
15 equal installments commencing March 31, 1996. In connection with the
$3.5 million private placement concluded in August, 1996 (Note 3), the
Company prepaid the outstanding balance of $500,000 in
<PAGE>
accordance with the terms of this amendment. Pursuant to the agreement,
the Company issued 10,000 treasury common shares related to its
decision to defer making the mandatory prepayments.
REAL ESTATE FINANCING
On June 8, 1994, the Company borrowed $1,500,000 under a separate
10-1/2% five-year term loan with Congress Financial Corp. and repaid a
$1,700,000 Industrial Revenue Bond financing. This loan was secured by
the Company's facility in Cartersville, Georgia, and satisfied fully
upon the sale of the property on October 1, 1997.
Capital Leases
The Company leases equipment under capital leases. A schedule of the
yearly minimum rental payments is as follows:
<TABLE>
<CAPTION>
<S> <C>
February, 1999 $ 64,488
February, 2000 64,488
February, 2001 64,488
February, 2002 2,857
-------
Total minimum lease payments 196,321
Less amount representing interest 23,721
-------
Present value of net minimum lease payments 172,600
Less current maturities 51,898
-------
Long term capital lease obligation $120,720
=======
</TABLE>
At February 28, 1998, the Company had approximately $218,279 of
equipment under capital lease with accumulated amortization of
approximately $21,828.
NOTE 8 - INCOME TAXES
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes.
Deferred tax assets and liabilities are measured using enacted tax law.
Significant components of the Company's deferred taxes at February 28,
1998 and March 1, 1997 are as follows:
<TABLE>
<CAPTION>
=====================================================================================================================
1998 1997
=====================================================================================================================
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward $ 7,150,000 $ 5,471,000
Accrued severance 257,000 294,000
Excess of tax basis over book basis of inventories 333,000 165,000
Capitalized inventory costs 63,000 143,000
Other 127,000 43,000
------------- ------------
Total deferred tax assets $ 7,930,000 $ 6,116,000
<PAGE>
Deferred tax liabilities
Difference between the book and tax basis of property, plant and
equipment 366,000 389,000
------------- ------------
Net deferred tax asset $ 7,564,000 $ 5,727,000
Less valuation allowance 7,564,000 5,727,000
------------- ------------
Net deferred taxes - -
============= ============
=====================================================================================================================
</TABLE>
The Company anticipates utilizing its deferred tax assets only to the
extent of its deferred tax liabilities. Accordingly, the Company has
fully reserved all remaining deferred tax assets which it cannot
presently utilize.
At February 28, 1998, the net operating loss carryforward for book
purposes is $19.0 million. For tax purposes, at February 28, 1998, the
Company's net operating carryforward was $17..9 million, which, if
unused, will expire from 2009 to 2013. Certain tax regulations relating
to the change in ownership may limit the Company's ability to utilize
its net operating loss carryforward if the ownership change, as
computed under such regulations, exceeds 50%. Through February 28,
1998, the change in ownership was less than 50%.
There was no income tax provision (benefit) for the fiscal years 1998,
1997 and 1996.
The following is a reconciliation of the normal expected statutory
Federal income tax rate to the effective rate reported in the financial
statements:
<TABLE>
<CAPTION>
==========================================================================================
1998 1997 1996
==========================================================================================
<S> <C> <C> <C>
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 - % - % - %
===== ===== =====
==========================================================================================
</TABLE>
NOTE 9 - STOCKHOLDERS' EQUITY
STOCK OPTIONS
The 1992 stock option plan, as amended, provides for the issuance of
options to purchase up to 340,000 shares of common stock at the market
value at the date of grant. Options are exercisable up to ten years
from the date of grant and vest at 20% per year.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation costs have been recognized for grants made
under the Company's stock option plan. Had compensation cost been
determined based on the fair value, as determined in accordance with
the requirements of SFAS No. 123, at the date of grant of stock option
awards, the increase in the net loss for fiscal 1998, 1997 and 1996
would be $22,000, $32,000 and $10,000 respectively. In fiscal 1998 and
1997, there were no awards of stock options. During the initial
phase-in period of SFAS No. 123, such compensation may not be
representative of the future effects of applying this statement.
<PAGE>
A summary of option activity for the years ended February 28, 1998,
March 1, 1997, and March 2, 1996 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
=============================================================================================
<S> <C> <C>
Balance, February 25, 1995 180,000 $5.75
Granted 84,000 $3.24
-------- -----
Balance, March 2, 1996 264,000 $4.95
Forfeited (11,000) $3.37
-------- -----
Balance, March 1, 1997 253,000 $5.02
Forfeited (78,500) $5.42
-------- -----
Balance, February 28, 1998 174,500 $4.84
=============================================================================================
</TABLE>
At February 28, 1998 the status of outstanding stock options is
summarized as follows:
<TABLE>
<CAPTION>
=============================================================================================
WEIGHTED
AVERAGE
REMAINING
EXERCISE OPTIONS CONTRACTUAL OPTIONS
PRICES OUTSTANDING LIFE EXERCISABLE
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$3.00 30,000 7.8 Years 12,000
$3.37 32,000 7.7 Years 12,800
$5.75 112,500 6.7 Years 67,500
--------------------- ----------------------
174,500 92,300
===================== ======================
</TABLE>
The weighted average fair value at date of grant for those options
granted in fiscal 1996 was $2.34. The fair value of each option at date
of grant was estimated using the Black-Scholes option pricing model
utilizing the following weighted average assumptions:
Dividend Yield 0%
Risk-free interest rate 6.23%
Expected life after vesting period 10 years
Expected volatility 58%
<PAGE>
ISSUANCE OF PREFERRED STOCK
On March 22, 1994, the Company sold to its Management Group 5,000
shares of non-voting convertible preferred stock for $1,000,000. These
shares are convertible into 200,000 shares of common stock at the rate
of $5.00 per share. These shares provide for cumulative dividends at a
floating rate equal to the prime rate and approximate $327,000 at
February 28, 1998. Such dividends were convertible into common stock at
the rate of $5.00 per share. The conversion rights were waived in May
1998. These shares are redeemable, at the option of the Company, on or
after February 28, 1999 and have a liquidation preference of $200 per
share.
ISSUANCE OF TREASURY STOCK
In connection with the Company's refinancing on March 22, 1994 (Note
7), the Company entered into a $2,000,000 Term Loan Agreement with
Chemical Bank. Pursuant to the agreement, the Company issued to
Chemical Bank 10,000 treasury common shares, related to mandatory
prepayments which were not made.
STOCKHOLDERS' RIGHTS PLAN
The Company has a Stockholders' Rights plan which becomes effective
when more than 30% of the Company's common shares are acquired by a
person or a group. The Company may redeem the rights before such time.
This plan has been repealed as part of the May 19, 1998 forbearance
agreement.
GRANT OF WARRANTS
Warrants granted to NAN Investors LP to purchase 16,500,000 shares of
the Company's Common Stock for $.10 per share, with a five-year term
effective May 21, 1998.
NOTE 10 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY
TRANSACTIONS
LEASE COMMITMENTS
Minimum rental commitments under noncancellable leases (excluding
renewal options and escalation) having a term of more than one year are
as follows:
<TABLE>
<CAPTION>
===========================================================================
FISCAL YEAR ENDING
---------------------------------------------------------------------------
<S> <C> <C>
1999 $248,821
2000 $240,901
2001 $246,199
2002 $251,569
2003 $190,560
===========================================================================
</TABLE>
Rental expense under operating leases, including escalation amounts,
was approximately $228,007, $266,000, and $300,000 for the fiscal years
ended February 28, 1998, March 1, 1997 and March 2, 1996, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, as amended, with
certain officers providing for minimum salary levels. Certain of these
agreements provide for adjusted annual cost-of-living increases, change
in control, and termination provisions. In addition, several of these
agreements provide for commission payments based on certain sales
thresholds, as well as death and disability benefits payable to
<PAGE>
the respective estate and permanent disability benefits payable to the
executives in the amount of one-half the executive's remaining
contracted salary and certain retirement health care benefits to
certain executives. The Company is insured for the death benefit
provision under the executive employment contracts.
The aggregate commitment under these agreements at February 28, 1998
extend through fiscal 1999 and amount to $818,000.
AGREEMENTS WITH PRINCIPAL STOCKHOLDERS
On March 1, 1994, in connection with the restructuring described in
Note 1, the Company entered into agreements with its two principal
stockholders and a group of employees (the "Management Group"). The
agreements provide, among other things, for:
The reimbursement of the principal stockholders, limited to
$1.50 per share to the extent that the gross proceeds per
share from the sale of common stock by the stockholders during
the two-year period beginning September 1, 1994 are less than
$5.00 per share. Such guaranty is applicable to a maximum of
160,000 shares sold by such shareholders, subject to
reductions under certain circumstances. The principal
shareholders sold 157,875 shares including 88,400 at prices
below of $5.00 per share: 42,875 shares in the fiscal year
ended March 1, 1997 and 51,275 shares in the year ended March
2, 1996 which resulted in a charge to operating results of
$12,000 and $36,000, respectively.
Warrants to purchase up to 157,875 shares of common stock
equal to the number of shares sold by the principal
stockholders. The exercise price per share of such warrants
would equal the gross proceeds per share from the
corresponding sale by the principal stockholders. Such
warrants expire on February 28, 2000. As of May 29, 1998 these
warrants have not been requested to be issued, nor have they
been issued.
The contribution to the Company of approximately $535,000 of
cash surrender value of life insurance policies on the lives
of the stockholders owned by the Company, in the form of a
loan against such policies which is not required to be repaid.
The cancellation of the outstanding stock options and
incentive awards of the Group members and the principal
stockholders and the authorization to issue options to Group
members to purchase 150,000 shares of common stock based upon
certain terms and conditions.
TRADEMARK LICENSING AGREEMENTS
Minimum payments under non cancellable licensing agreements (excluding
renewal options) having a term of more than one year as of March 1,
1997, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING AMOUNT
------------------ ----------
<S> <C> <C>
1999 $1,334,000
2000 $668,000
----------
Total minimum licensing payments $2,002,000
==========
</TABLE>
<PAGE>
Royalties to GUESS?, Inc., which owns 23% of the outstanding common
stock of the Company, aggregated $840,000 in fiscal 1998, $294,000 in
fiscal 1997, and $335,000 in fiscal 1996. The Company has informed
GUESS that it will not achieve the minimum net sales of $8 million
required, pursuant to the license agreement, for the twelve-month
period ending May 31, 1997. GUESS has agreed not to terminate the
license agreement as of May 31, 1997 and the Company has agreed that
GUESS, in its sole and subjective discretion, may terminate the license
agreement at any time after December 31, 1997. Due to the lack of
capital resources necessary to develop and support the Guess? Product
line, the Company with the support of Guess? Inc. has initiated a
strategy to discontinue its Guess? Division by the first quarter of
fiscal year 1999. The GUESS? License was terminated as of March 31,
1998. Minimum licensing payments to GUESS? included above for the
period subsequent to December 31, 1997 are $175,000.
As described in Note 12, Levi Strauss & Co., the parent company of
Brittania Sportswear Ltd.., announced their intention to sell
Brittania. In light of the actions announced by Levi's, a customer
accounting for approximately $11 million of the Company's sales of
Brittania product has advised the Company that it would no longer
continue its on-going commitment to the Brittania trademark. In
response, the Company has filed a lawsuit against Levi Strauss & Co.
Minimum licensing commitments to Brittania included above aggregated
$504,000.
LITIGATION
In September 1993, the Company filed an action against the former
owners of Phoenix Associates, Inc. ("Phoenix"). The Company is seeking
compensatory damages of approximately $4,000,000 plus declaratory and
injunctive relief for acts of alleged securities fraud, fraudulent
conveyances, breach of fiduciary trust and unfair competition in
connection with the acquisition of the common stock of Phoenix.
Additionally, the Company has filed a demand for arbitration which
seeks compensatory damages of $4,000,000, rescission of the stock
purchase agreement, rescission of an employment agreement and other
matters, all on account of alleged breaches of the stock purchase
agreement, fraudulent misrepresentation and breach of fiduciary duties.
In November 1993, the former owners of Phoenix filed counterclaims
against the Company alleging improper termination with regard to their
employment agreement and breach of the stock purchase agreement. The
former owners have filed for damages of approximately $9,000,000. The
actions remain in their preliminary stage. The Company considers the
damages in the counterclaim to be unsupportable and believes it will
likely prevail on its defenses to such counterclaims . In the third
quarter of the 1996 fiscal year, the Company concluded that its
counterclaims against the holder of the subordinated note payable to
the former owner of Phoenix, as described in Note 4 above, are in
excess of the $300,000 due and, in the opinion of legal counsel and
management, the likelihood of any payment of this note is remote. The
Company has agreed to settle the Varon/LBA litigation, and will realize
$675,000 from the matter in the first quarter of fiscal year 1999.
On December 9, 1997, Donald Gold, a Director of the Company
(subsequently resigned), filed a complaint against the Company in the
State Court of Fulton County, State of Georgia relating to payments
allegedly due him under the March 18, 1994 Severance Agreement. The
Company has subsequently entered into a settlement agreement, which
will not have a material impact on the Company's financial position.
On January 15, 1998, in the Supreme Court of the State of New York,
Westchester County, George Gold, a Director of the Company, filed a
complaint against the Company for breach of the March 18, 1994
<PAGE>
Severance Agreement, and is seeking damages in the amount of $559,456
plus applicable interest and legal fees. The Company on March 9, 1998
filed counterclaims for a significantly larger amount.
On February 17, 1998, Theresa M. Bohenberger, a former Vice President
and Director of the Company, filed a complaint against the Company in
the United States District Court for the Southern District of New York,
relating to payments due her under the May 2, 1992 Severance Agreement.
The Company has been in discussion with Ms. Bohenberger's counsel
concerning settlement of the issues.
Company is subject to other legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the
George Gold, Theresa M. Bohenberger, and other legal proceedings and
claims in which the Company is defendant will be successfully defended
or resolved without a material adverse effect on the consolidated
financial position or results of operations of the Company. No
provision has been made by the Company with respect to the
aforementioned litigation at February 28, 1998.
LETTERS OF CREDIT
At February 28, 1998, the Company had outstanding letters of credit,
primarily with foreign banks of approximately $200,000 for purposes of
collateralizing the Company's obligations for inventory purchases.
NOTE 11 - RETIREMENT PLAN
The Company has a 401(k) plan for the benefit of all qualified
employees. Under the terms of the plan, the Company for fiscal year
1996 contributed an amount equal to 2%, aggregating $102,000, of the
participant's earnings subject to the maximum contribution levels
established by the Internal Revenue Service. No contribution was made
for fiscal 1998 and 1997.
NOTE 12 - BRITTANIA LITIGATION
Since September, 1988, the Company has been a licensee of Brittania
Sportswear, Ltd., a wholly-owned subsidiary of Levi Strauss & Co. to
manufacture and market men's underwear and other products under the
trademarks "Brittania" and "Brittania from Levi Strauss & Co.". Sales
under this license aggregated $4.5 million in fiscal year 1998, $14.9
million in fiscal 1997, and $14.6 million in fiscal 1996.
As of January 1, 1997, the license was renewed for a five-year term,
including automatic renewals of two years if certain minimum sales
levels are achieved. On January 22, 1997, Levi's announced its
intention to sell Brittania. In light of the actions announced by
Levi's, K-Mart, the largest retailer of the Brittania brand and the
Company's largest customer accounting for approximately $11 million of
the Company's fiscal 1997 sales of Brittania product, advised the
Company that it would no longer continue its on-going commitment to the
Brittania trademark.
The Company had filed a lawsuit against Levi Strauss & Co. and
Brittania Sportswear, Ltd. alledging that the licensor breach various
obligations under the licensing agreement, including without limitation
its covenant of good faith and fair dealing. The Company has
subsequently agreed to a tentative settlement to this litigation, which
will not have a material impact on the Company's financial position.
<PAGE>
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited consolidated quarterly financial data for fiscal years 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA)
==================================================================================================
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
==================================================================================================
<S> <C> <C> <C> <C>
Fiscal 1998
Net Sales $6,357 $5,204 $5,699 $4,423
Gross Profit 1,738 921 930 (487)
Gain (Loss) Asset Sale (Note 6) - - 793 (81)
Net (loss) (490) (925) (334) (2,916)
Net (loss) per share-basic and ($0.16) ($0.29) ($0.11) ($0.91)
diluted
Weighted average shares 3,239 3,239 3,239 3,239
Fiscal 1997
Net Sales $6,687 $7,975 $8,435 $7,296
Gross Profit 977 1,806 1,498 1,719
Net (loss) (1,060) (435) (862) (390)
Net (loss) per share-basic and ($0.35) ($0.15) ($0.27) ($0.13)
diluted
Weighted average shares 2,989 3,033 3,329 3,239
==================================================================================================
</TABLE>
<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 FEBRUARY 28, 1998
ALLOWANCES
ACCOUNTS RECEIVABLE $148,601 $206,388 ($4,454) $350,535
=============================================================================================
Year ended March 1, 1997
Allowances
Accounts receivable $40,076 $119,688 $11,163 $148,601
=============================================================================================
(a) Uncollectible accounts written off (recovered) against the allowance.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS INFORMATION EXTRACTED FROM THE STATEMENTS DATED
FEBRUARY 28, 1998 AS FILED IN FORM 10-K FOR THE YEARLY PERIOD THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<CASH> 8,850
<SECURITIES> 0
<RECEIVABLES> 3,230,735
<ALLOWANCES> 351,000
<INVENTORY> 3,090,383
<CURRENT-ASSETS> 6,050,863
<PP&E> 4,184,487
<DEPRECIATION> 3,226,412
<TOTAL-ASSETS> 7,207,724
<CURRENT-LIABILITIES> 8,170,432
<BONDS> 0
0
500
<COMMON> 324,185
<OTHER-SE> (1,586,812)
<TOTAL-LIABILITY-AND-EQUITY> 7,207,724
<SALES> 21,683,326
<TOTAL-REVENUES> 21,683,326
<CGS> 18,581,718
<TOTAL-COSTS> 18,581,718
<OTHER-EXPENSES> 6,454,438
<LOSS-PROVISION> 145,743
<INTEREST-EXPENSE> 1,311,875
<INCOME-PRETAX> (4,664,705)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,664,705)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,664,705)
<EPS-PRIMARY> (1.47)
<EPS-DILUTED> (1.47)
</TABLE>
