UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 29, 1997.
Commission File Number: 1-8509
NANTUCKET INDUSTRIES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-0962699
-------- ----------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
510 Broadhollow Road
Suite 300, Melville, New York 11747
----------------------------- -----
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (516) 293-3172
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. X YES NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of January 5, 1998, the Registrant had outstanding 3,238,796 shares of common
stock not including 3,052 shares classified as Treasury Stock.
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
QUARTERLY REPORT
FOR QUARTER ENDED NOVEMBER 29, 1997
I N D E X
Part I.- FINANCIAL INFORMATION PAGE
Consolidated balance sheets 3
Consolidated statements of operations 4
Consolidated statements of cash flows 5
Notes to consolidated financial statements 6 - 11
Management's discussion and analysis of
financial condition and results of operations 12 - 13
Part II.- OTHER INFORMATION 14
Signature 16
-2-
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 29, March 1,
1997 1997
--------------------------------
(unaudited) (1)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $13,392 $7,941
Accounts receivable, less reserves of $156,000 and
$149,000, respectively 3,885,709 5,872,734
Inventories (Note 4) 5,545,214 7,826,440
Other current assets 325,759 506,171
Total current assets 9,770,074 14,213,286
----------- -----------
PROPERTY, PLANT AND EQUIPMENT - NET 1,246,895 3,204,037
OTHER ASSETS - NET 465,765 645,880
----------- -----------
$11,482,734 $18,063,203
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $120,000 $510,864
Current portion of capital lease obligations 50,818 -
Accounts payable 1,208,537 1,081,133
Accrued salaries and employee benefits 132,195 348,361
Accrued unusual charge (Note 7) 465,000 465,000
Accrued expenses and other liabilities 661,477 530,850
Accrued royalties 520,596 368,860
Income taxes payable (Note 5) 1,909 1,909
----------- -----------
Total current liabilities 3,160,532 3,306,977
LONG-TERM DEBT 4,500,654 8,566,011
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 134,089
ACCRUED UNUSUAL CHARGE (Note 7) 160,526 270,868
CONVERTIBLE SUBORDINATED DEBENTURES (Note 6) 2,052,986 2,760,000
----------- -----------
10,008,787 14,903,856
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Note 6)
Preferred Stock, $.10 par value; 500,000 shares authorized, of which
5,000 shares have been designated as non-voting convertible with 500 500
liquidating preference of $200 per share
and are issued and outstanding
Common stock, $.10 par value; authorized 20,000,000 shares; issued
3,241,848 at November 29, 1997 and March 1, 1997 324,185 324,185
Additional paid-in capital 12,364,503 12,364,503
Deferred issuance cost (120,320) (183,772)
Accumulated deficit (11,074,984) (9,326,132)
----------- -----------
1,493,884 3,179,284
----------- -----------
Less 3,052 shares at November 29, 1997 and March 1, 1997
of common stock held in treasury, at cost 19,937 19,937
1,473,947 3,159,347
----------- -----------
$11,482,734 $18,063,203
=========== ===========
</TABLE>
(1) Derived from audited financial statements.
The accompanying notes are an integral part of these statements
-3-
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended Thirteen Weeks Ended
----------------------- --------------------
November 29, 1997 November 30, 1996 November 29, 1997 November 30, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Sales $17,260,713 $23,098,054 $5,699,425 $8,435,399
Cost of Sales 13,671,952 18,817,782 4,769,433 6,937,651
----------- ----------- ----------- -----------
Gross Profit 3,588,761 4,280,272 929,992 1,497,748
Selling, General and Administrative
Expenses 5,192,418 5,755,925 1,760,576 2,032,391
----------- ----------- ----------- -----------
Operating Loss (1,603,657) (1,475,653) (830,584) (534,643)
Gain on Sale of Building (Note 9) 792,848 - 792,848 -
Interest Expense (938,043) (881,256) (295,825) (326,866)
----------- ----------- ----------- -----------
Net Loss ($1,748,852) ($2,356,909) ($333,561) ($861,509)
=========== =========== =========== ===========
Net Loss Per Share (Note 3) ($0.56) ($0.78) ($0.11) ($0.27)
=========== =========== =========== ===========
Weighted Average Common Shares
Outstanding 3,238,796 3,086,781 3,238,796 3,238,796
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------
NOVEMBER 29, November 30,
1997 1996
------------ ------------
Cash flow from operating activities
<S> <C> <C>
Net (loss) income ($1,748,852) ($2,356,909)
Adjustment to reconcile net (loss) income
to net cash provided by (used in) operating activities
Depreciation and amortization 320,236 229,790
Provisions for doubtful accounts 36,000 90,000
Gain on sale of fixed assets (998,191) -
Provision for obsolete and slow moving inventory 513,758 340,000
Decrease (increase) in assets
Accounts receivable 1,951,025 (1,391,845)
Inventories 1,767,468 1,258,571
Other current assets 180,412 18,299
(Decrease) increase in liabilities
Accounts payable 127, 403 (444,644)
Accrued expenses and other liabilities 66,197 28,743
Income taxes payable - (1.025)
Accrued unusual charge (110,342) (306,007)
----------- -----------
Net cash provided by (used in) operating activities 2,105,114 (2,535,027)
----------- -----------
Cash flows from investing activities
Dispositions of property, plant and equipment 2,916,829 72,304
Decrease in other assets 180,115 1,335
----------- -----------
Net cash providing by investing activities 3,096,944 73,639
----------- -----------
Cash flows from financing activities
Prepayment of short-term debt - (800,000)
Payments of capital lease obligations (33,372) -
Issuance of common stock - 643,009
Issuance of convertible subordinated debentures - 2,760,000
Increase in deferred finance costs - (304,533)
Repayments (borrowings) under revolving credit financing, net (4,456,221) 162,666
Repayments of long-term debt (707,014) 0
----------- -----------
Net cash (used in) provided by financing activities (5,196,607) 2,461,142
----------- -----------
NET INCREASE (DECREASE) IN CASH $5,451 ($246)
Cash at beginning of period 7,941 15,085
----------- -----------
Cash at end of period $13,392 $14,839
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid during the period:
Interest $631,501 $705,134
=========== ===========
Income taxes - -
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
NANTUCKET INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTY-NINE WEEKS ENDED NOVEMBER 29, 1997 AND NOVEMBER 30, 1996
(unaudited)
NOTE 1-RESTRUCTURING AND LIQUIDITY MATTERS
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 8,
Levi Strauss & Co., the parent company of Brittania Sportswear Ltd., a licensor
which accounted for 49% of the Company's fiscal 1997 sales, announced their
intention to sell Brittania. In light of the actions announced by Levi's,
K-Mart, the largest retailer of the Brittania brand and the Company's largest
customer accounting for approximately $11 million of the Company's fiscal 1997
sales of Brittania product, advised the Company that it would no longer continue
its on-going commitment to the Brittania trademark. In response, the Company
filed a $37 million lawsuit against Levi Strauss & Co. In addition, the Company
has incurred significant losses which have generally resulted in the Company
using rather than providing cash from its operations.
As a result of the Brittania matter and the continuing losses, there can be no
assurance that the Company can continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and classifications of
liabilities that might be necessary should the Company be unable to continue in
existence. There can be no assurance that the ultimate impact or resolution of
these matters will not have a materially adverse effect on the Company or on its
financial condition.
In view of the issues described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon the continued operations of the Company, which in turn
is dependent upon the Company's ability to maintain the financing of its working
capital requirements on a continuing basis and to improve its future operations.
The Company has funded its operating losses by refinancing its debt in fiscal
1995 and increasing its capital through (a) the sale of $1 million of non-voting
convertible preferred stock to management in fiscal 1995; (b) the fiscal 1995
sale of treasury stock which increased equity by $2.9 million and (c) the
completion, in August, 1996, of a $3.5 million private placement (Note 6).
The Company has been implementing a restructuring strategy to improve operating
results and enhance its financial resources which included reducing costs,
streamlining its 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:
-6-
<PAGE>
oThe transfer of all domestic manufacturing requirements to foreign
manufacturing contracting facilities. The final phase of this program was
completed by the middle of the 1998 fiscal year. On October 1, 1997, the Company
completed the sale of its 152,000 sq. ft. Cartersville, GA facility and
relocated to more appropriate space for its packaging and distribution
activities. (See Note 9).
oStaff reductions associated with the transfer of manufacturing to
offshore contractors, efficiencies and reduced volume.
oThe relocation, in May, 1997, of executive offices and showrooms to
more appropriate, lower cost facilities.
Management believes these action plans will result in a $2.5 million reduction
from fiscal 1997 overhead spending levels.
NOTE 2-CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of November 29, 1997 and the consolidated
statements of operations for the thirty-nine and thirteen week periods and
statements of cash flows for the thirty-nine weeks ended November 29, 1997 and
November 30, 1996 have been prepared by the Company without audit. In the
opinion of management, all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the financial position of the
Company and its subsidiaries at November 29, 1997 and the results of their
operations for the thirty-nine and thirteen week periods and cash flows for the
thirty-nine weeks ended November 29, 1997 and November 30, 1996 have been made
on a consistent basis.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 1997 Annual Report on
Form 10-K.
The results of operations for the periods presented are not necessarily
indicative of the operating results for the full year.
NOTE 3-NET LOSS PER COMMON SHARE
In February, 1997, the Financial Accounting Standards Board issued a Financial
Accounting Standard No. 128, "Earnings per Share", which is effective for
financial statements for both interim and annual periods ending after December
15, 1997. Early adoption of the new standard is not permitted. The new standard
eliminates primary and 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.
-7-
<PAGE>
Net loss per common share is computed by dividing net loss by weighted average
common shares outstanding during each year. Incremental shares from assumed
conversions relating to the Convertible Subordinated Debentures, Stock Options
and Warrants are not included since the effect would be antidilutive.
NOTE 4-INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
November 29, November 30,
1997 1996
---- ----
<S> <C> <C>
Raw Materials $787,525 $1,428,918
Work in Process 1,362,326 4,644,080
Finished Goods 3,395,363 2,485,070
--------- ---------
$5,545,214 $8,558,068
</TABLE>
NOTE 5-INCOME TAXES
At November 29, 1997 the Company had a net deferred tax asset approximating
$6,000,000 which is fully reserved until it can be utilized to offset deferred
tax liabilities or realized against taxable income. The Company had a net
operating loss carry forward for book and tax purposes of approximately
$12,500,000. Accordingly, no provision for income taxes has been reflected in
the accompanying financial statements. Certain tax regulations relating to the
change in ownership may limit the Company's ability to utilize its net operating
loss carry forward if the ownership change, as computed under such regulations,
exceeds 50%. Through November 29, 1997 the change in ownership was approximately
46%.
NOTE 6-PRIVATE PLACEMENT
On August 15, 1996, the Company completed a $3.5 million private placement with
an investment partnership. Terms of this transaction included the issuance of
250,000 shares and $2,760,000 12.5% convertible subordinated debentures which
are due August 15, 2001. The convertible subordinated debentures are secured by
a second mortgage on the Company's manufacturing and distribution facility
located in Cartersville, GA. In conjunction with the sale of this property
completed on October 1, 1997 (Note 9), 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, are convertible into the Company's common
stock over the next five years as follows:
-8-
<PAGE>
Conversion Shares 305,000 176,967
Conversion Price $3.83 $5.00
The agreement grants the investor certain registration rights for the shares
issued and the Conversion Shares to be issued.
The difference between the purchase price of the shares issued and their fair
market value aggregated $197,500. This was reflected as deferred issue costs and
will be amortized over the expected 5 year term of the subordinated convertible
debentures. The prorated portion of these costs associated with the prepaid
$707,000 of these debentures were recognized in the accounting period the event
occurred.
Costs associated with this private placement aggregated $409,000 including
$104,000 relating to the shares issued which have been charged to paid in
capital. The remaining balance of $305,000 will be amortized over the 5 year
term of the debentures. The prorated potion of these costs associated with the
prepaid $707,000 of these debentures were recognized in the accounting period
the event occurred.
The Company utilized $533,333 of the proceeds to prepay all of its obligations
pursuant to its Credit Agreement dated March 21, 1994 with Chemical Bank.
NOTE 7-UNUSUAL CHARGE
In March, 1994, the Company terminated the employment contracts of its Chairman
and Vice Chairman. In accordance with the underlying agreement, they are to be
paid an aggregate of approximately $400,000 per year in severance, as well as
certain other benefits, through February 28, 1999. The present value of these
payments, $1,915,000, was accrued at February 26, 1994. As of October 1997,
pending negotiation of more favorable terms, payment under this agreement was
suspended. (See Note 8).
NOTE 8-LITIGATION
Phoenix Matter-
In September 1993, the Company filed an action against the former owners of
Phoenix Associates, Inc. ("Phoenix"). The Company is seeking compensatory
damages of approximately $4,000,000 plus declaratory and injunctive relief for
acts of alleged securities fraud, fraudulent conveyances, breach of fiduciary
trust and unfair competition in connection with the acquisition of the common
stock of Phoenix.
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
-9-
<PAGE>
breach of fiduciary duties.
In November 1993, the former owners of Phoenix filed counterclaims against the
Company alleging improper termination with regard to their employment agreement
and breach of the stock purchase agreement. The former owners have filed for
damages of approximately $9,000,000. The actions remain in their preliminary
stage. The Company considers the damages in the claim to be insupportable and
believes it will likely prevail on its defenses to such counterclaims.
Discovery proceedings are nearing completion and the Company anticipates that
this matter will be resolved in fiscal year 1999.
Donald Gold Matter-
On December 9, 1997, Donald Gold, a Director of the Company, filed a Complaint
against the Company in the State Court of Fulton County, State of Georgia
relating to payments allegedly due to him under the March 18, 1994 Severance
Agreement. The Answer in this litigation is due January 11, 1998.
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 and
Donald Gold litigation, and other legal proceedings and claims will be
successfully defended or resolved without a material adverse effect on the
consolidated financial position or results of operation to the Company. No
provision has been made by the Company with respect to the aforementioned
litigation as of November 29, 1997.
Brittania Matter-
Since September, 1988, the Company has been a licensee of Brittania Sportswear,
Ltd., a wholly-owned subsidiary of Levi Strauss & Co. to manufacture and market
men's underwear and other products under the trademarks "Brittania" and
"Brittania from Levi Strauss & Co.". Sales under this license aggregated $14.9
million in fiscal 1997, $14.6 million in fiscal 1996 and $14.2 million in fiscal
1995.
As of January 1, 1997, the license was renewed for a 5 year term, including
automatic renewals of 2 years if certain minimum sales levels are achieved. On
January 22, 1997, Levi's announced their intention to sell Brittania. In light
of the actions announced by Levi's, K-Mart, the largest retailer of the
Brittania brand and the Company's largest customer accounting for approximately
$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 on the Company or on its financial condition.
-10-
<PAGE>
NOTE 9-SALE OF MANUFACTURING FACILITY
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, 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
repay 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 net proceeds were utilized to reduce the
revolving credit financing.
The Company will be leasing 60,000 square feet of this facility through December
31, 1997. This facility was sold in conjunction with the Company's decision to
transfer its manufacturing requirements to foreign manufacturing contracting
facilities. It is anticipated that the annualized savings from this transaction,
comprised of interest and occupancy costs, will exceed $125,000 per year.
On December 3, 1997, the Company entered into a lease for approximately 71,000
square feet of space at 435 Industrial Park Road in Cartersville, Georgia,
commencing on January 1, 1998. The monthly rental amount will be $15,679
increasing based on an established formula over the five year lease term.
NOTE 10-NEW ACCOUNTING PRONOUNCEMENTS
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (SFAS
130) and Statement of Financial Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). The Company will
implement SFAS 130 and SFAS 131 as required in the fiscal year which will end
February, 1999, which require the Company to report and display certain
information related to comprehensive income and operating segments,
respectively. Adoption of SFAS 130 and SFAS 131 will not impact the Company's
financial position or results of operations.
-11-
<PAGE>
NANTUCKET INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales
For the nine months ended November 29, 1997, net sales declined 25% from prior
year-levels to $17,260,000. Net sales for the quarter ended November 29, 1997
decreased 32% from prior year levels to $5,699,000. This decline, associated
with lower unit volumes, reflects a $1.1 million increase of the Company's
GUESS? products and a 51% decline from prior levels of the Company's men's
fashion underwear products. The decline in the sales of the men's products is
generally related to the phase-out of sales of Brittania product associated with
the actions announced by Levi's to dispose of the Brittania brand. The growth in
the sales of GUESS? products reflects increased sales as the Company expanded
the number of department store locations carrying the product; increased sales
from the introduction of new fashion products, and incremental sales associated
with the Company's desire to raise cash by reducing inventory levels.
Gross Margin
Gross profit margins for the nine months ended November 29, 1997 increased from
prior year levels fo 19% to 21%. Gross profit margins for the quarter ended
November 29, 1997 decreased to 16% from the prior year levels of 18% . This
reflects the impact of the Company's decision to manage its supply chain more
effectively. By requiring its contract manufacturers to deliver product closer
to the Company's forecasted demand, inventory carrying levels can be reduced.
The mechanism used to accomplish this reduction is lower margin sales and
close-outs. Management believes that this directive will continue to exert
downward pressure on gross margins through the end of the fiscal year as
inventory's are brought to optimal levels. The current fiscal year reflects
reduced levels of factory overhead.
Selling, general and administrative expenses
Selling, general and administrative expenses for the nine months ended November
29, 1997 were 30% of net sales, and 25% of net sales for the same period, last
year. Selling, general and administrative expenses were 31% of sales for the
quarter ended November 29, 1997 and 24% of sales for the prior year period. This
increase results from the impact of the lower sales volume on fixed cost levels.
Selling expenses reflect the impact of the higher variable cost elements
associated with the increase in GUESS? product sales. The Company has reduced
general and administrative expenses in the third fiscal quarter by over $20,000
from prior year levels, which includes $238,000 of expenses associated with the
early retirement of the $707,000 subordinated debentures. Additional
improvements will be reflected for the rest of the current fiscal year as the
benefits of lower occupancy costs and reduced staffing levels are realized.
-12-
<PAGE>
Interest Expense
Interest expense for the third fiscal quarter decreased $31,000 from prior year
levels due to reductions of the outstanding credit facility from year end levels
of $4.1 million for the nine months to date, and the prepayment of $707,000 of
subordinated debentures.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant losses in recent years which have generally
resulted in the Company using rather than providing cash from its operations.
In March, 1994 the Company was successful in refinancing its credit agreements
with (i) a three year $15,000,000 revolving credit facility with Congress
Financial; (ii) a $2,000,000 Term Loan Agreement with Chemical Bank; and (iii)
an additional $1,500,000 Term Loan with Congress replacing the Industrial
Revenue Bond financing of the Cartersville, Georgia manufacturing plant.
Additionally, the Company has increased its equity over the past three years
through (i) a $1,000,000 investment by the Management Group in fiscal 1995; (ii)
the $2.9 million sale of 490,000 shares of common treasury stock to GUESS?, Inc.
and certain of its affiliates; and (iii) the $3.5 million private placement
which included the issuance of 250,000 shares and $2,760,000 convertible
subordinated debentures. These transactions, combined with its stronger credit
facilities, enhanced the Company's liquidity and capital resources.
The Company utilized the proceeds of the $3.5 million private placement to
prepay existing debt. Overall, the Company has reduced its total long term and
subordinated debt by $4.9 million from levels at March 1, 1997. Working capital
levels have declined $4.5 million from March 1, 1997 levels reflecting
reductions in receivables and inventories utilized to reduce debt levels. The
$2.3 million reduction in inventory levels reflects the benefits of the
Company's continuing strategy to manage its supply chain towards delivering
inventory closer to forecasted demand.
The Company believes that the amended Congress credit facility, combined with
the $3.5 million private placement, provides adequate financing flexibility to
fund its operations at current levels. Congress Financial Corp. has permanently
limited an additional $325,000 of the Company's borrowing availability. In the
opinion of the Company's management, this additional reserve will not adversely
impact the Company's ability to fund its operations.
The Company believes that the moderate rate of inflation over the past few years
has not had significant impact on sales or profitability.
The Company has fallen below American Stock Exchange guidelines for continuing
listing, and as a result there is no assurance that the listing will be
continued.
Any statements contained in this report which are not historical facts are
forward-looking statements that involve risks and uncertainties. Please refer to
the business risks and uncertainties discussed elsewhere in this report and in
the Company's most recent report on Form 10-K.
-13-
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS None
ITEM 2. CHANGES IN SECURITIES None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held a Special Meeting of Stockholders in Lieu
of Annual Meeting on October 22, 1997.
(b) Not applicable.
(c) At the stockholders Meeting:
(i) the number of directors constituting the Board of
Directors was set at nine (9), by a vote of 2,122,708 shares for and
50,648 shares against;
(ii) the Company's nominees for directors were elected by the
following votes:
Nominee Votes in Favor Votes to Withold
Authority
Stephen M. Samberg 2,121,969 0
Warren D. Cole 2,122,708 0
Robert M. Rosen 2,122,708 0
(iii) the Stockholders approved a motion to ratify the
appointment of Grant Thornton LLP, independent certified accountants,
to audit the consolidated financial statements of the Company for the
fiscal year ending February 28, 1998. Such motion was approved by a
vote of 2,154,199 shares in favor, 17,464 shares against and 1,685
shares abstaining.
ITEM 5. OTHER INFORMATION None
-14-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Item 6(a) Exhibits
99(t) Letter Agreement dated Filed Herewith
September 30, 1997 from Nantucket
Industries to NAN Investors, L.P.
Item 6(b) Reports on Form 8-K. A Form 8-K was filed on December 22, 1997.
Item 27 Financial Data Schedule Filed Herewith
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NANTUCKET INDUSTRIES, INC.
(Registrant)
By:
January 13, 1998 /s/ Nicholas Dmytryszyn
------------------------------
Chief Financial Officer
(Chief Accounting Officer)
-16-
EXHIBIT 99(t)
NANTUCKET INDUSTRIES, INC.
September 30, 1997
NAN Investors, L.P.
c/o Fundamental Capital Corp.
291 Ocean Avenue
Lawrence, New York 11559
Attention: Murray Forman
Re: 200 Cook Street, Cartersville, GA (the "Property")
Dear Murray:
In connection with the delivery by NAN Investors, L.P. ("NAN") of a
Quitclaim Deed (the Quitclaim Deed) with respect to the Deed to Secure Debt,
Security Agreement and Assignment of Leases and Rents, filed for record as of
August 19, 1996 by the Company in favor of NAN (the "Mortgage"), Nantucket
Industries, Inc. (the "Company") hereby confirms to you as follows:
1. The Company is currently in default under the two Convertible
Subordinated Debentures payable to NAN, dated August 15, 1996 (collectively: the
"Debentures"), in the original principal amounts of $1,168,150 and $1,591,850,
respectively, among other things for failure by the Company to make timely
payment of the interest payment due under the Debentures on August 15, 1997 (the
"Interest Payment Default").
2. Furthermore, the Company acknowledges that it has no right of
prepayment under the Debentures and that the proposed sale by the Company of the
Property represents an additional Event of Default by the Company under the
Debentures (the "Property Sale Default"). Finally, the Company acknowledges that
it has no right to demand that NAN release the Mortgage on the Property except
in connection with the full and complete repayment and satisfaction of the
Debentures.
3. NAN hereby agrees to (a) extend the cure period under Section
8(a)(ii) of each of the Debentures with respect to the Interest Payment Default
(but not with respect to any other interest payment due under the Debentures)
until November 30, 1997, provided, however, that (i) such extension shall be
automatically terminated upon the occurrence of any other default or Event of
Default under either of the Debentures, the Common Stock and Convertible
Subordinated Debenture Purchase Agreement, dated as of August 13, 1996 (the
"Purchase Agreement"), or this agreement, and (ii) the amount of the Interest
Payment Default, together with interest thereon calculated at an annual rate of
12.5% per annum, shall be payable upon the expiration of such cure period
extension, (b) waive the Property Sale Default by the Company under the
Debentures, (c) release of the Mortgage by delivery to the Company of the
Quitclaim Deed, and (d) the partial prepayment of one of the Debentures in
accordance with the terms of this agreement.
4. In consideration of NAN's aforesaid agreement, the Company agrees as
follows:
(a) Concurrently with the closing of the Property's sale, the
Company shall pay to NAN all of the net sales proceeds from the sale of the
Property (the gross sales proceeds less a $1,750,000 payment to Congress
Financial Corporation in satisfaction of its first mortgage on the Property, a
6% brokerage commission and transfer taxes and legal fees actually incurred in
<PAGE>
connection with the sale), provided that (i) the net sales proceeds so delivered
to NAN shall be in an amount not less than $883,000 (the "Proceeds Payment"),
and (ii) the Proceeds Payment shall be received by NAN no later than by October
1, 1997. The Proceeds Payment shall be made concurrently with the closing of the
sale of the Property by means of a wire transfer or transfers of same day funds
to an account or accounts specified in writing by NAN to the Company or its
representatives.
(b) The Proceeds Payment shall be treated as if it were a
prepayment under Section 4(b) of the Debenture in the original principal amount
of $1,591,850 (the "Prepaid Indenture"), and accordingly, only 80% of the
Proceeds Payment shall be applied to the reduction of the principal amount due
under the Prepaid Debenture, with the balance to be deemed a prepayment premium
pursuant to Section 4(b) of such Prepaid Indenture.
(c) Any land not currently being sold by Nantucket shall remain
encumbered by the Mortgage.
5. On or before October 31, 1997, the Company shall cause its Board of
Directors to be reconstituted to include the following members: Mr. Stephen
Samberg, Mr. Robert Rosen, Mr. Warren Cole, Mr, Kenneth Klein, and two other
members who shall be satisfactory to NAN in NAN's sole discretion. The Company
shall be entitled to add Mr. Richard Ryan, or another person unaffiliated with
the Company or its shareholders with standing in the business or financial
communities, as an additional Board member.
6. Following October 31, 1997, the Company shall employ only such
executive officers (defined as officers earning an annual salary or draws on
account of commissions in excess of $100,000), other than the Chief Executive
Officer, as shall be reasonably satisfactory to NAN. In addition, the Company
shall, by October 31, 1997, cause another person or persons, satisfactory to NAN
in NAN's sole discretion (the "Manager"), to become the chief operating officer
of the Company and an authorized signatory on all of the Company's bank
accounts. All withdrawals from the Company's bank accounts and all agreements,
obligations or instruments to which the Company shall become a party or by which
any of its assets shall be bound following the Manager's appointment shall
require the signature of both the Chief Executive Officer of the Company and the
Manager.
7. Within 5 days of resolution or settlement of its litigation against
Levi's and receipt of any payment therefrom (the "Trigger Date"), the Company
shall offer to prepay all or any portion of the amounts then outstanding under
the Debentures at a price equal to 125% of the aggregate principal amount
thereof, together with any interest accrued and unpaid thereon up to and
including the prepayment date. At the Company's option, up to $500,000 of such
amount may be payable in the form of a seven-year debenture on terms otherwise
substantially equivalent to those of the Debentures, with the balance to be
payable in cash. The provisions of Section 4(b) of the Debentures shall apply,
mutatis mutandis, to such offer and prepayment (with the Trigger Date to be
treated as a Change of Control under such Section).
8. The Company acknowledges the indebtedness represented by the
Debentures and confirms that the Company has no claims or rights of action of
any kind against NAN, NAN (GP) Investors, L.P., Fundamental Capital Corp.
or any of their respective officers, directors, partners or shareholders.
-2-
<PAGE>
9. The Company acknowledges that NAN's consent to the arrangements
herein shall not be construed as NAN's agreement to any amendment of the terms
of the Debentures or the Purchase Agreement, a waiver by NAN of any default by
the Company under the Debentures (other than the Property Sale Default) or the
Purchase Agreement, or a waiver by NAN of any other of its rights under the
Debentures or under the Purchase Agreement.
If the foregoing correctly sets forth the terms of our agreement, please
so indicate by signing in the space indicated below.
Very truly yours,
Nantucket Industries, Inc.
By:/s/ Stephen Samberg
-----------------------------
Title:Chief Executive Officer
We agree to the foregoing.
NAN Investors, L.P.
By: NAN (GP) Investors, L.P.
General Partner
By: Fundamental Capital Corp.
General Partner
By:/s/ Murray Forman
----------------------------
Title:
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS INFORMATION FROM THE STATEMENTS DATED NOVEMBER 29, 1997
AS FILED IN FORM 10-Q FOR THE QUARTERLY PERIOD THEN ENDED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> NOV-29-1997
<CASH> 13,392
<SECURITIES> 0
<RECEIVABLES> 4,041,709
<ALLOWANCES> 156,000
<INVENTORY> 5,545,214
<CURRENT-ASSETS> 9,770,074
<PP&E> 4,769,069
<DEPRECIATION> 3,522,174
<TOTAL-ASSETS> 11,482,734
<CURRENT-LIABILITIES> 3,160,532
<BONDS> 0
0
500
<COMMON> 324,185
<OTHER-SE> 1,149,262
<TOTAL-LIABILITY-AND-EQUITY> 11,482,734
<SALES> 5,699,425
<TOTAL-REVENUES> 5,699,425
<CGS> 4,769,433
<TOTAL-COSTS> 4,769,433
<OTHER-EXPENSES> 1,760,576
<LOSS-PROVISION> 12,000
<INTEREST-EXPENSE> 295,825
<INCOME-PRETAX> (333,561)
<INCOME-TAX> 0
<INCOME-CONTINUING> (333,561)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (333,561)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
