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 May 29, 1999.
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)
73 5th Avenue, Suite 6A, New York, New York 10003
------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(917) 853-0475
--------------
(Registrant's telephone number, including area code)
510 Broadhollow Road, Suite 300, Melville, New York 10003
--------------------------------------------------- ----------
(Former Address, since last report) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. X YES ___NO
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of January 14, 2000, 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 MAY 29, 1999
I N D E X
----------
PAGE
----
Part I.- FINANCIAL INFORMATION
Consolidated balance sheets 3
Consolidated statements of operations 4
Consolidated statements of cash flows 5
Notes to consolidated financial statements 6 - 15
Management's discussion and analysis of
financial condition and results of operations 16 - 18
Part II.- OTHER INFORMATION 19 - 21
Signature 22
<PAGE>
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 29, February 27,
1999 1999
--------------------------------
(unaudited) (1)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 200,844 $ 622,268
Accounts receivable, reserves of $279,000 and
$273,000, respectively 1,773,714 961,989
Inventories (Note 4) 730,751 1,108,860
Other current assets 133,839 67,347
--------------------------------
Total current assets 2,839,148 2,760,464
PROPERTY, PLANT AND EQUIPMENT, NET 506,313 538,522
OTHER ASSETS, NET 165,186 176,601
--------------------------------
$3,510,647 $3,475,587
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Convertible subordinated debentures (Note 6) $2,052,986 2,052,986
Current portion of capital lease obligations 57,651 56,452
Accounts payable 446,377 248,538
Accrued salaries and employee benefits 27,127 80,740
Accrued unusual charge (Note 7) 87,500 95,833
Accrued expenses and other liabilities 835,213 863,271
Accrued royalties 319,048 319,048
--------------------------------
Total current liabilities 3,825,902 3,716,868
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 49,380 64,250
--------------------------------
3,875,282 3,781,118
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value; 500,000 shares authorized,
of which 5,000 shares have been designated as non-voting
with liquidating preference of $200 per share and are issued 500 500
outstanding
Common stock, $.10 par value; authorized 20,000,000 shares;
issued 3,241,848 324,185 324,185
Additional paid-in capital 12,539,503 12,539,503
Deferred issuance cost (86,783) (96,425)
Accumulated deficit (13,122,103) (13,053,357)
--------------------------------
(344,698) (285,594)
Less 3,052 shares of common stock held in treasury, at cost 19,937 19,937
--------------------------------
(364,635) (305,531)
--------------------------------
$3,510,647 $3,475,587
================================
</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>
Thirteen Weeks Ended
---------------------------------
May 29, May 30,
1999 1998
---------------------------------
<S> <C> <C>
Net sales $2,182,275 $4,282,704
Cost of sales 1,496,609 3,391,240
---------------------------------
Gross profit 685,666 891,464
Selling, general and administrative expenses 658,825 1,018,217
---------------------------------
Operating (loss) profit 26,841 (126,753)
Other income - 675,000
Interest expense (95,592) (162,733)
---------------------------------
Net income (loss) ($68,751) $385,514
=================================
Net income (loss) per share -
basic and diluted (Note 3) ($0.02) $0.12
=================================
Weighted average common shares outstanding 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
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------
May 29, May 30,
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities
Net (loss) income ($68,751) $385,514
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating activities
Depreciation and amortization 58,453 93,219
Provision for doubtful accounts 7,489 80,287
Gain on sale of fixed assets 0 -
Provision for obsolete and slow moving inventory 0 -
(Increase) decrease in assets
Accounts receivable (819,214) 472,218
Inventories 378,109 1,452,511
Other current assets (66,492) (50,411)
Increase (decrease) increase in liabilities
Accounts payable 197,843 (118,522)
Accrued expenses and other liabilities (81,671) (118,889)
Accrued unusual charge (8,333) 16,749
------------ -----------
Net cash (used in) provided by operating activities (402,567) 2,212,676
------------ -----------
Cash flows from investing activities
(Additions) removals to property, plant and equipment (5,186) (25,967)
Proceeds from sale of fixed assets 0 19,040
Decrease in other assets 0 666
------------ -----------
Net cash used in investing activities (5,186) (6,261)
------------ -----------
Cash flows from financing activities
Repayments under line of credit agreement, net 0 (2,193,847)
Payments of capital lease obligations (13,671) (12,568)
Repayments of long-term debt 0 0
------------ -----------
Net cash used in financing activities (13,671) (2,206,415)
------------ -----------
NET (DECREASE) INCREASE IN CASH ($421,424) $0
Cash at beginning of period 622,268 8,850
------------ -----------
Cash at end of period $200,844 $8,850
============ ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $3,119 $77,846
============ ===========
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
THIRTEEN WEEKS ENDED MAY 29, 1999 AND MAY 30, 1998
(unaudited)
The following notes to the consolidated financial statements should be
read in light of the following:
The Company is an insolvent, currently dormant company, which is
presently exploring the advisability of filing a voluntary petition
under Chapter 11 of the federal bankruptcy laws, with the goal of
reorganizing its management and searching for a new business
opportunity, which will potentially allow the Company to successfully
reorganize.
NOTE 1-TERMINATION OF OPERATIONS AND LIQUIDITY MATTERS
General
Nantucket Industries, Inc. (the "Company") is an insolvent, currently
dormant company which is presently exploring the advisability of filing
a voluntary petition under Chapter 11 of the federal bankruptcy laws,
with the goal of reorganizing its management and searching for a new
business opportunity which will potentially allow the Company to
successfully reorganize. Until the end of October 1999, when the
Company discontinued all business activities, it produced and
distributed popular priced branded men's fashion undergarments for
sale, throughout the United States, to mass merchandisers and national
chains. Until March 31, 1998, Nantucket also produced, under the GUESS?
label, women's innerwear for sale to department and specialty stores.
Packaging and distribution of the Company's product lines was based in
its leased facility in Cartersville, Georgia. From November, 1992 to
July 1, 1994, the Company had a manufacturing facility in Rio Grande,
Puerto Rico, and until September 1997 had a manufacturing facility in
Cartersville, Georgia. Prior to the cessation of all business
activities, all of the Company's products were manufactured by offshore
production contractors located in Mexico, the Far East and the
Caribbean Basin.
Due to the lack of capital resources needed to properly develop and
support the GUESS? product line, the Company initiated a strategy to
discontinue its GUESS? division to focus its resources on its core mens
fashion underwear business.
Termination of Operations
As more fully described in Part II, Item 1, "Legal Proceedings" of this
report, Levi Strauss & Co., the parent company of Brittania Sportswear
Ltd., a licensor which
6
<PAGE>
accounted for 49% of the Company's fiscal 1997 sales, and 21% of the
Company's fiscal 1998 sales, announced their intention to sell
Brittania. In light of the actions announced by Levi, K-Mart, the
largest retailer of the Brittania brand and the Company's largest
customer, accounting for sales of Brittania product of approximately
$11 million in fiscal year 1997, and $3 million in fiscal year 1998,
advised the Company that it would no longer continue its on-going
commitment to the Brittania trademark. In response, the Company filed a
multi-million lawsuit against Levi Strauss & Co in March 1997 alleging
that the licensor breached various obligations under the license
agreement, including without limitation it's covenant of good faith and
fair dealing. The Company settled this litigation in June 1998 (see
Part II, Item 1 "Legal Proceedings").
The Company experienced significant losses in recent years which
resulted in severe cash flow issues that negatively impacted the
ability of the Company to continue its business as formerly 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., agreed in March 1998, to discontinue its GUESS? division. This
was completed during the first quarter of the fiscal year ended
February 27, 1999. Sales for this product line in fiscal 1999, 1998,
and 1997 aggregated $2.7, $7.0, and $4.7 million 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 in the
over-the-counter market and quoted on the OTC electronic bulletin board
of the NASD Supplemental Market under the symbol "NANK". The Company
defaulted on interest payments to its subordinated debt holder, and has
no credit facilities of any kind in place.
As a result of the Brittania matter and the continuing losses from
operations, interest payment default, and the lack of any credit
facilities, the Company was forced to discontinue all business
operations by the end of October 1999. The Company intends to seek
protection and to initiate reorganization under Chapter 11 of the
federal bankruptcy laws. Present plans include the possibility of
changing the Company's capitalization, business, and management. There
can be no assurance that the ultimate impact of resolution of these
matters will not have a materially adverse effect on the Company and
its shareholders.
The Company implemented 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 implemented additional steps to reduce its
operating costs which it believed were sufficient to provide the
Company with the ability to continue in existence. Major elements of
these action plans included:
The phase-out of the Guess? product line, which was completed in
the first quarter of fiscal 1999.
7
<PAGE>
The sale of the Company's Cartersville, GA location, competed in
October 1997, 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, in May 1997, of executive offices and showrooms
to more appropriate, lower cost facilities.
In connection with the implementation of these actions, the Company
reflected, in its financial statements for the fiscal years ended
February 26, 1994 through March 2, 1996, unusual charges aggregating
$6.4 million. These combined charges include approximately $760,000 of
expenses incurred in closing the Puerto Rico facility, write-downs and
reserves of asset values and other non-cash items ($1.5 million
write-off of goodwill, $2.1 million writedowns of inventory, $530,000
writedowns of fixed assets), the accrual for the severance payments to
the former Chairman and Vice Chairman of the Board ($1,765,000) and, in
fiscal 1996, an unusual credit, as described below, of $300,000 related
to the elimination of a subordinated note payable associated with the
purchase of the Puerto Rico facility since the likelihood of payment on
such note was considered remote. In fiscal year 1998, the financial
statements, through operating results, reflect $1.8 million in 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.
Recent Developments
The Company experienced significant losses in recent years which
resulted in severe cash flow problems that negatively impacted the
ability of the Company continue to conduct its business. Due to the
lack of capital resources necessary to develop and support the GUESS?
product line, the Company with the support of GUESS? Inc. agreed in
March 1998 to discontinue its GUESS? division. This was completed
during the first quarter of the fiscal year ended February 27, 1999. At
the date of this filing the Company is no longer operating and is
insolvent.
On October 1, 1997 the Company sold its 152,000 sq. ft. 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 of $793,000, and used the
proceeds to repay financing secured by the property, and to reduce long
term debt. (See note 9 to the financial statements included in this
report.)
8
<PAGE>
From September 1988, the Company was a licensee of Brittania
Sportswear, Ltd., a wholly owned subsidiary of Levi Strauss & Co.
pursuant to which manufactured and marketed men's underwear and other
products under the trademarks "Brittania" and "Brittania from Levi
Straus & Co.". Sales under this license aggregated $4.5 million in
fiscal 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 5-year term,
including automatic renewals of 2 years if certain minimum sales levels
were achieved. On January 22, 1997, Levi's announced that it was
seeking purchasers of its Brittania subsidiary. In January 1997,
K-Mart, the Company's largest customer and the largest retailer of the
Brittania brand, advised the Company that in light of the actions
announced by Levi's it would no longer continue its on-going commitment
to the Brittania trademark.
The Company filed a multimillion lawsuit dollar against Levi Strauss &
Co. and Brittania Sportswear, Ltd. alleging that the licensor breached
various obligations under the licensing agreement, including without
limitation, its covenant of good faith and fair dealing. In June 1998,
the Company reached an accord with Levi and settled this litigation
(see Part II, Item 1 "Legal Proceedings").
Financing Arrangements
The Company had a $15 million revolving credit facility with Congress
Financial Corp., which expired in March 1998, and was extended to
August 31, 1999. The revolving credit agreement provided 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 required,
among other provisions, the maintenance of minimum working capital and
net worth levels and also contained restrictions regarding payment of
dividends. Borrowings under the agreement were collateralized by
substantially all of the assets of the Company. As at February 27, 1999
the company was not in compliance with the net worth and working
capital covenants nor was the facility utilized. Congress Financial and
the Company subsequently, on October 15, 1999, terminated the
agreement. Currently the Company has no financing facility.
Capital Investment and Change of Management
In September, 1997 the Company entered into an agreement with NAN
Investors LP, the holder of two Convertible Subordinated Debentures in
the aggregate principal amount of $2,760,000, to release a security
interest in the property sold at 200 Cook St., Cartersville, Georgia,
and to extend the cure period with respect to an $172,500 interest
payment default on the debentures. Nantucket agreed to pay a portion of
the net proceeds from the sale of the property to retire an amount of
the subordinated debt ($707,000), a prepayment premium of $176,000, and
to place a person, satisfactory to NAN, as a senior
operations/financial manager with the company. The forbearance
agreement was
9
<PAGE>
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 under the revolving credit 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 had its authorized capital
increased to the extent necessary to satisfy the conversion rights in
full. The Company had an option, within the framework of the
forbearance agreement, to prepay all or part of the outstanding
subordinated debt at a price equal to 125% of the principal amount. The
Company is currently in default for interest payments due since August
1997 on this note. There was no forbearance agreement in effect
subsequent to December 1998.
Simultaneously with the financing transactions with Congress Financial,
on March 22, 1994 the Samberg Group, L.L.C. (the "Group"), a limited
liability company organized under the laws of Delaware with certain
senior managers of the Company as members (the "Group Members")
purchased 5,000 shares of the Company's Non-Voting Convertible
Preferred Stock ("Preferred Stock") for $1,000,000. The Preferred Stock
acquired by the Group was convertible into shares of Common Stock, $.
10 par value per share, of the Company ("Common Stock") at the rate of
$5.00 per share, and was redeemable by the Company at anytime after
March 1999. In May 1998, this conversion right was waived by the
Samberg Group and the Company conditionally agreed to redeem the
Perferred Stock.
The Gold's existing employment contracts (the terms of which were
scheduled to expire on February 28, 1999) have been canceled and
replaced by a Termination and Severance Agreement pursuant to which the
Gold's are scheduled to receive aggregate payments for severance of
approximately $400,000 per year and other benefits for five years. In
fiscal 1994, $1.8 million, representing the present value of this
amount was accrued.
NOTE 2-CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of May 29, 1999 and the consolidated
statements of operations for the thirteen week period and statements of
cash flows for the thirteen weeks ended May 29, 1999 and May 30, 1998
were 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 May 29, 1999 and the results of
their operations for the thirteen week period and cash flows for the
thirteen weeks ended May 29, 1999 and May 30, 1998 were made on a
consistent basis.
10
<PAGE>
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles were 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 1999 Annual Report on Form 10-K.
The results of operations for the periods presented were not
necessarily indicative of the operating results for the full year.
NOTE 3-EARNINGS (LOSS) PER COMMON SHARE
In fiscal year 1998, the Company adopted the Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings per Share", which
requires public companies to present earnings per share and, if
applicable, diluted earnings per share. All comparative periods had to
be restated as of February 28, 1998 in accordance with SFAS 128. Basic
earnings per share were based on the weighted average number of common
and potential common shares outstanding. The calculation took into
account the shares that might have been be issued upon exercise of
stock options, reduced by the shares that might have been repurchased
with the funds received from the exercise, based upon the average price
during that year. The adoption of this standard did not have any impact
on the disclosure of per share results in the financial statements.
NOTE 4-INVENTORIES
Inventories are summarized as follows:
May 29, May 28,
1999 1998
Raw Materials - $346,517
Work in Process - 776,492
Finished Goods $730,751 925,234
-------- -------
$730,751 $2,048,243
NOTE 5-INCOME TAXES
At February 27, 1999 the Company had a net deferred tax asset
approximating $7,166,000 which is fully reserved until it can be
utilized to offset deferred tax liabilities or realized against taxable
income. The Company had a net operating loss carryforward for book and
tax purposes of approximately $18,405,000. 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
carryforward if the ownership change, as computed under such
11
<PAGE>
regulations, exceeds 50%. Through May 29, 1999 the change in ownership
was less than 50%.
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 were due August 15, 2001.
The convertible subordinated debentures were 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, were convertible into
the Company's common stock over the next five years. The investment
partnership waived all conversion rights.
The agreement grants the investor certain registration rights for the
shares issued and the conversion shares to be issued.
The difference between the purchase price of the shares issued and
their fair market value on August 15, 1996 aggregated $197,500. This
was reflected as deferred issue costs and will be amortized over the
expected 5-year term of the subordinated convertible debentures. 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 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 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 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
12
<PAGE>
$.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. The Company had its authorized capital increased to
the extent necessary to satisfy the conversion rights in full. The
Company had an option, within the framework of the forbearance
agreement, to prepay all or part of the outstanding subordinated debt
at a price equal to 125% of the principal amount. The Company is
currently in default for interest payments due since August 1997 on
this note. There was no forbearance agreement in effect subsequent to
December 1998.
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 to the financial statements included in this report).
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 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
Company settled this litigation and realized $675,000 from this matter
in the first quarter of fiscal year 1999.
Donald Gold Matter-
On December 9, 1997, Donald Gold, a former director of the Company,
filed a complaint against the Company in the State Court of Fulton
County, Sate of Georgia relating to
13
<PAGE>
payments allegedly due him under the March 18, 1994 Severance
Agreement, and is seeking damages in the amount of $219,472. The
Company has subsequently reached a settlement with Mr. Gold in the
amount of $100,000 plus an amount based on a reaching of a certain
level of recovery, if any, from the Levi Strauss litigation. Based on
the settlement with Levi's this provision has no value.
Gorge Gold Matter-
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
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 in a significantly larger amount. On July 30, 1998
the court granted a summary judgement on behalf of George Gold.
Subsequently, in April 1999, the Company reached a settlement with the
Director for $75,000, which resulted in a reduction of approximately
$530,000 in the accrued unusual charge in the fourth quarter of fiscal
year 1999.
Theresa M. Bohenberger Matter-
On February 17, 1998 Theresa M. Bohenberger, a former 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
reached a settlement with Ms. Bohenberger.
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 $0 in fiscal 1999, $4.5 million in fiscal
1998 and $14.9 million in fiscal 1997.
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 announced their
intention to sell Brittania. In light of the actions announced by Levi,
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 filed a multimillion-dollar lawsuit against Levi Strauss &
Co. and Brittania Sportswear, Ltd. alleging that the licensor breached
various obligations under the licensing agreement, including without
limitation its covenant of good faith and fair dealing. The Company
settled the Levi litigation and realized approximately $725,000 in
14
<PAGE>
gross value from this matter in the second quarter of fiscal year 1999,
which is included in the accompanying statement of operations under the
caption "Other Income."
To existing management's best knowledge, there is only one outstanding
litigation with SGS U.S. Testing Co., Inc. In the Company's opinion, it
will prevail in its counter-suit against SGS.
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
fiscal 1998 of $793,000. The proceeds were used to repay the $525,000
financing secured by this property and to prepay $707,000 of the
convertible subordinated debentures secured by a second mortgage on
this property. The remaining net proceeds were utilized to reduce the
revolving credit financing.
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 implemented SFAS 130 and SFAS 131
as required in the fiscal year which ended February 1999, which
required the Company to report and display certain information related
to comprehensive income and operating segments, respectively. Adoption
of SFAS 130 and SFAS 131 did not impact the Company's financial
position or results of operations.
15
<PAGE>
NANTUCKET INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following results of operations should be read in light of the following:
The Company is an insolvent, currently dormant company, which is presently
exploring the advisability of filing a voluntary petition under Chapter 11 of
the federal bankruptcy laws, with the goal of reorganizing its management and
searching for a new business opportunity, which will potentially allow the
Company to successfully reorganize.
Sales
Net sales for the three months ended May 29, 1999 decreased 49% from prior year
levels to $2,182,000. The decline in the sales was directly related to the
discontinuance of the GUESS? product line as of the first quarter of the prior
fiscal year. GUESS? products accounted for $1,992,000 of the prior year net
sales.
Gross Margin
Gross profit margins for the three months ended May 29, 1999 increased to 31.42%
from the prior year levels of 21%. This reflected the impact of the Company's
strategy to phase-out the GUESS? product line, and the associated closeout of
inventory which was substantially accomplished in the first quarter of the prior
fiscal year. This improvement also reflected the benefit of increased
utilization of the lower cost offshore manufacturing facilities.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended May 29,
1999 declined by $359,000 from prior year levels to $659,000. This improvement
was the result of reduced staffing levels, efficiencies, and reductions in
overhead associated with the phase-out of the GUESS? division.
Interest Expense
Interest expense for the first three months of the fiscal year decreased $67,000
from prior year levels, reflecting reductions in the outstanding revolving
credit facility.
16
<PAGE>
Liquidity and Capital Resources
The Company incurred significant losses in recent years which resulted in severe
cash flow problems that negatively impacted the ability of the Company to
conduct its business as 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.
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 30the of each year and (d) extension of
the renewal date to March 20, 1998. In March, May, August and December of 1998,
Congress Financial Corporation extended its Loan and Security Agreement with the
Company. As of February 27, 1999 the agreement was set to expire on December 31,
1998. Subsequently the agreement was renewed to August 31, 1999 and from each
month thereon extended on a month to month basis until October 15, 1999 when the
agreement was mutually terminated by Congress Financial and the Company.
Currently the Company has no financing facility, is insolvent and has
discontinued all business operations.
The Company 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 had a positive effect on the Company's liquidity
and capital resources. The Company utilized the proceeds of the $3.5 million
private placement to prepay existing debt.
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 levels decreased $30,000 from February 27, 1999 levels which
reflected an increase in receivables and a reduction in inventories. The Company
was continuing its efforts to manage its supply chain towards delivering
inventory closer to forecasted demand. The subordinated debt was reclassified to
short term due to the Company's inability to make interest payments to the
subordinated debt holder. Subsequent to the period covered by this report the
Board of Directors, on October 11, 1999, voted to allow the subordinated debt
holder to liquidate the assets covered by its security agreement.
17
<PAGE>
Please refer to the business risks and uncertainties discussed elsewhere in this
report and in the Company's recent report on Form 10-K.
18
<PAGE>
PART II
Item 1. Legal Proceedings
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 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
Company settled this litigation and realized $675,000 from this matter
in the first quarter of fiscal year, 1999.
Donald Gold Matter-
On December 9, 1997, Donald Gold, a former director of the Company,
filed a complaint against the Company in the State Court of Fulton
County, Sate of Georgia relating to payments allegedly due him under
the March 18, 1994 Severance Agreement, and is seeking damages in the
amount of $219,472. The Company has subsequently reached a settlement
with Mr. Gold in the amount of $100,000 plus an amount based on a
reaching of a certain level of recovery, if any, from the Levi Strauss
litigation. Based on the settlement with Levi's this provision has no
value.
Gorge Gold Matter-
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
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 in a significantly larger amount. On July 30, 1998
the court granted a summary judgement on behalf of George Gold.
Subsequently, in April 1999, the Company reached a settlement with the
Director for $75,000, which resulted in a reduction of approximately
$530,000 in the accrued unusual charge in fiscal year 1999.
19
<PAGE>
Theresa M. Bohenberger Matter-
On February 17, 1998 Theresa M. Bohenberger, a former 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
reached a settlement with Ms. Bohenberger.
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 $4,5 million in fiscal 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 announced their
intention to sell Brittania. In light of the actions announced by Levi,
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 filed a multimillion-dollar lawsuit against Levi Strauss &
Co. and Brittania Sportswear, Ltd. alleging that the licensor breached
various obligations under the licensing agreement, including without
limitation its covenant of good faith and fair dealing. The Company
settled the Levi litigation and realized approximately $725,000 in
gross value from this matter in fiscal year 1999.
The Company is subject to other legal proceedings and claims, which
arise, in the ordinary course of its business. In the opinion of
management, these legal proceedings and claims will be successfully
defended and the Company will prevail.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
During the quarter contained in this report, the Company remained in
default with regards to certain senior security holders as discuss more fully in
Part I, Item 2 of this report "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
20
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
21
<PAGE>
SIGNATURES
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.
By:
/s/ John H.Treglia
January 31, 2000 -------------------------------
John H.Treglia
President, Secretary and CFO
/s/ Marsha C. Ellis
January 31, 2000 -------------------------------
Marsha C. Ellis
Treasurer and Chief Accounting Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS INFORMATION EXTRACTED FROM THE STATEMENTS DATED MAY 29,
1999 AS FILED IN FORM 10-Q FOR THE QUARTERLY PERIOD THEN ENDED AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-26-2000
<PERIOD-END> MAY-29-1999
<CASH> 200,844
<SECURITIES> 0
<RECEIVABLES> 2,052,714
<ALLOWANCES> 279,000
<INVENTORY> 730,751
<CURRENT-ASSETS> 2,839,148
<PP&E> 1,413,441
<DEPRECIATION> 907,128
<TOTAL-ASSETS> 3,510,647
<CURRENT-LIABILITIES> 3,825,902
<BONDS> 0
0
500
<COMMON> 324,185
<OTHER-SE> (689,320)
<TOTAL-LIABILITY-AND-EQUITY> 3,510,647
<SALES> 2,182,275
<TOTAL-REVENUES> 2,182,275
<CGS> 1,496,609
<TOTAL-COSTS> 1,496,609
<OTHER-EXPENSES> 658,825
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,592
<INCOME-PRETAX> (68,751)
<INCOME-TAX> 0
<INCOME-CONTINUING> (68,751)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (68,751)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
