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 28, 1998.
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Commission File Number: 1-8509
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NANTUCKET INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-0962699
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(State of other jurisdiction of (IRS Employer
incorporation ororganization) Identification No.)
73 5th Avenue, Suite 6A, New York, New York 10003
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(Address of principal executive offices) (Zip Code)
(917) 853-0475
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(Registrant's telephone number, including area code)
510 Broadhollow Road, Suite 300, Melville, New York 10003
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(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
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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
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QUARTERLY REPORT
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FOR QUARTER ENDED NOVEMBER 28, 1998
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I N D E X
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PAGE
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Part I.- FINANCIAL INFORMATION (unaudited)
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Consolidated balance sheets 3
Consolidated statements of operations 4
Consolidated statements of cash flows 5
Notes to consolidated financial statements 6 - 12
Management's discussion and analysis of
financial condition and results of operations 13 - 14
Part II.- OTHER INFORMATION 15 - 17
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Signature 18
2
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Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 28, February 28,
1998 1998
-----------------------------------
(unaudited) (1)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $53,850 $8,850
Accounts receivable, reserves of $79,000 and
$351,000, respectively 1,441,230 2,879,735
Inventories (Note4) 1,928,321 3,090,383
Other current assets 113,111 71,895
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Total current assets 3,536,512 6,050,863
PROPERTY, PLANT AND EQUIPMENT, NET 698,803 958,075
OTHER ASSETS, NET 108,108 198,786
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$4,343,423 $7,207,724
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $111,138 $3,161,286
Convertible subordinated debentures (Note 6) $2,052,986 2,052,986
Current portion of capital lease obligations 54,894 51,898
Accounts payable 497,551 722,483
Accrued salaries and employee benefits 111,893 223,031
Accrued unusual charge (Note 7) 660,146 465,000
Accrued expenses and other liabilities 935,160 730,478
Accrued royalties 360,715 763,270
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Total current liabilities 4,784,483 8,170,432
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 79,195 120,702
ACCRUED UNUSUAL CHARGE (Note 7) -- 178,717
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4,863,678 8,469,851
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 12,364,503
Deferred issuance cost (101,204) (115,541)
Accumulated deficit (13,263,302) (13,815,837)
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(500,318) (1,242,190)
Less 3,052 shares of common stock held in treasury, at cost 19,937 19,937
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(520,255) (1,262,127)
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$4,343,423 $7,207,724
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</TABLE>
(1) Derived from audited financial statements.
The accompanying notes are an intergral part of these statements
3
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Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended Thirteen Weeks Ended
------------------------------- -----------------------------------
November 28, November 29, November 28, November 29,
1998 1997 1998 1997
------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Net sales $9,602,627 $17,260,713 $2,258,278 $5,699,425
Cost of sales 7,456,000 13,671,952 1,578,235 4,769,433
------------------------------- -----------------------------------
Gross profit 2,146,627 3,588,761 680,043 929,992
Selling, general and administrative expenses 2,389,326 5,192,418 419,375 1,760,576
------------------------------- -----------------------------------
Operating (loss) profit (242,699) (1,603,657) 260,668 (830,584)
Other income 1,391,313 -- -- --
Net (loss) gain on sale of assets (15,093) 792,848 318 792,848
Interest expense (405,986) (938,043) (106,266) (295,825)
------------------------------- -----------------------------------
Net income (loss) $727,535 ($1,748,852) $154,720 ($333,561)
=============================== ===================================
Net income (loss) per share -
basic and diluted (Note 3) $0.22 ($0.56) $0.05 ($0.11)
=============================== ===================================
Weighted average common shares outstanding 3,238,796 3,238,796 3,238,796 3,238,796
=============================== ===================================
</TABLE>
The accompanying notes are an intergral part of these statements
4
<PAGE>
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
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November 28, November 29,
1998 1997
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<S> <C> <C>
Cash flows from operating activities
Net income (loss) $727,535 ($1,748,852)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation and amortization 216,940 320,236
Provision for doubtful accounts 57,082 36,000
Gain on sale of fixed assets 15,093 (998,191)
Provision for obsolete and slow moving inventory 47,498 513,758
Decrease (increase) in assets
Accounts receivable 1,381,423 1,951,025
Inventories 1,114,564 1,767,468
Other current assets (41,216) 180,412
(Decrease) increase in liabilities
Accounts payable (224,932) 127,403
Accrued expenses and other liabilities (309,011) 66,197
Accrued unusual charge 16,429 (110,342)
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Net cash provided by operating activities 3,001,405 2,105,114
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Cash flows from investing activities
Removals to property, plant and equipment 34,731 108,098
Proceeds from sale of fixed assets 41,090 2,808,731
Decrease in other assets 56,433 180,115
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Net cash provided by investing activities 132,254 3,096,944
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Cash flows from financing activities
Repayments under line of credit agreement, net (3,050,148) (4,456,221)
Payments of capital lease obligations (38,511) (33,372)
Repayments of long-term debt -- (707,014)
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Net cash used in financing activities (3,088,659) (5,196,607)
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NET INCREASE IN CASH $45,000 $5,451
Cash at beginning of period 8,850 7,941
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Cash at end of period $53,850 $13,392
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $ 151,190 $ 631,501
=========== ===========
Income taxes -- --
=========== ===========
</TABLE>
5
<PAGE>
NANTUCKET INDUSTRIES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTY-NINE WEEKS ENDED NOVEMBER 28, 1998 AND NOVEMBER 29, 1997
(unaudited)
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 OPERARTIONS AND LIQUIDITY MATTERS
The accompanying financial statements were prepared assuming that the
Company would 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 $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, 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 only approximately $3.0 million in
fiscal 1998, 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 multimillion-dollar lawsuit against Levi
Strauss & Co. alleging that the licensor breached various obligations
under the license agreement, including without limitation its covenant
of good faith and fair dealing. In June 1998, the Company reached an
accord with Levi to settle this litigation (see Note 8 to the financial
statements included in this report).
For the first nine months of the current fiscal year the Company showed
an overall net profit of $728,000, including a loss from continuing
operations of $243,000. The Company experienced significant losses in
recent years, which resulted in severe cash flow issues that negatively
impacted the ability of the Company to conduct its business as
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. 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 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 facility in place. As at the date of this filing, the Company
is insolvent and no longer operating. At a Board of
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Directors meeting on October 11, 1999 the Board voted to allow NAN
Investors to exercise on its security agreement and to liquidate the
remaining assets on its behalf.
As a result of the Brittania matter and the continuing losses from
operations, 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 of
resolution of these matters will not have a materially adverse effect
on the Company or on its financial condition.
The Company 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 (see Note 6 to the financial statements
included in this report).
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 second quarter of fiscal 1999.
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 (see Note 9 to the financial
statements included in this report).
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.
7
<PAGE>
NOTE 2-CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of November 28, 1998 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 28, 1998 and November 29, 1997 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 28, 1998 and the results of their operations
for the thirty-nine and thirteen week periods and cash flows for the
thirty-nine weeks ended November 28, 1998 and November 29, 1997 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 1998 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-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 must be
restated as of February 28, 1998 in accordance with SFAS 128. Basic
earnings per share are 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 upon the average price during the year. The
adoption of this standard will not have any impact on the disclosure of
per share results in the financial statements.
NOTE 4-INVENTORIES
Inventories are summarized as follows:
November 28, November 29,
1998 1997
Raw Materials $77,000 $787,525
Work in Process 1,153,000 1,362,326
Finished Goods 698,321 3,395,363
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$1,928,321 $5,545,214
8
<PAGE>
NOTE 5-INCOME TAXES
At November 28, 1998 the Company had a net deferred tax asset
approximating $7,600,000 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 $17,900,000. 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 regulations, exceeds 50%. Through November
28, 1998 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 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 9 to the
financial statements included in this report), 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 Shares 305,000 176,967
Conversion Price $3.83 $5.00
The agreement granted 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
9
<PAGE>
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 $.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 had insufficient
authorized and unissued shares of Common Stock to satisfy the exercise of
the warrants, the Company caused its authorized capital to be increased to
20,000,000 Common shares during the fiscal year that ended February 27,
1999.
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.
10
<PAGE>
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 agreed to
settle this litigation and realized $675,000 from this matter in the first
quarter of the current 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.
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 has 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
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product, advised the Company that it would no longer continue its on-going
commitment to the Brittania trademark.
The Company has 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 has
agreed to settle the Levi litigation and realized approximately $725,000
in gross value from this matter in the first quarter of fiscal 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.
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 in 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 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.
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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 nine months ended November 28, 1998 decreased 44% from
prior year levels to $9,603,000, and in the third quarter of the current
fiscal year declined 60% from prior year levels to $2,258,000. Included in
this are net sales of GUESS? in the amount of $1,992,000 and $426,000 for
the first and second quarters respectively. The decline in the sales was
directly related to the phase-out of sales of Brittania product associated
with the actions announced by Levi to dispose of the Brittania brand, and
the discontinuance of the GUESS? product line as of the first quarter of
the current fiscal year, 1999.
Gross Margin
Gross profit margins for the nine months ended November 28, 1998 decreased
to 22% from the prior year levels of 23%. Gross profit margins for the
third quarter increased from 16% to 30%. 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 current 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 nine months ended
November 28, 1998 declined by $2,803,000 from prior year levels to
$2,389,000. Third quarter expenses declined by $1,341,000 to $419,375 from
prior year, same period, levels. These improvements were the result of
lower occupancy costs, reduced staffing levels, efficiencies, and
reductions in overhead associated with the phase-out of the GUESS?
division.
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Interest Expense
Interest expense for the first nine months of the fiscal year decreased
$532,000 from prior year levels, and in the third quarter declined
$190,000 from prior year, same period, reflecting reductions in the
outstanding revolving credit facility, and the subordinated debt.
Liquidity and Capital Resources
The Company showed a net profit of $728,000 for the nine months ending
November 28, 1998, and $155,000 in profit for the third fiscal quarter.
Included in this was a loss from operations of $243,000 for the nine
months ended November 28, 1998 and a profit from operations of $261,000
for the third fiscal quarter. The Company had 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 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.
In March, May and August of 1998, Congress Financial Corporation extended
its Loan and Security Agreement with the Company. As of November 28, 1998
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.
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. Working capital levels have increased $872,000 from
February 28, 1998 levels reflecting reductions in receivable and
inventories utilized to reduce debt levels. The $1.2 million reduction in
inventory levels reflects the Company's reduction in sales volume, and its
continuing 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.
Please refer to the business risks and uncertainties discussed elsewhere
in this report and in the Company's recent report on Form 10-K.
14
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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.
15
<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 has 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 has
agreed to settle 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".
Item 4. Submission of Matters to a Vote of Security Holders
None
16
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
17
<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:
January 31, 2000 /s/ John H. Treglia
----------------------------
John H. Treglia
President, Secretary and CFO
January 31, 2000 /s/ Marsha C. Ellis
----------------------------
Marsha C. Ellis
Treasurer and Chief
Accounting Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS INFORMATION EXTRACTED FROM THE STATEMENTS DATED NOVEMBER
28, 1998 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-27-1999
<PERIOD-END> NOV-28-1998
<CASH> 53,850
<SECURITIES> 0
<RECEIVABLES> 1,520,230
<ALLOWANCES> 79,000
<INVENTORY> 1,928,321
<CURRENT-ASSETS> 3,536,512
<PP&E> 3,904,398
<DEPRECIATION> 3,205,595
<TOTAL-ASSETS> 4,343,423
<CURRENT-LIABILITIES> 4,784,483
<BONDS> 0
0
500
<COMMON> 324,185
<OTHER-SE> (844,940)
<TOTAL-LIABILITY-AND-EQUITY> 4,343,423
<SALES> 2,258,278
<TOTAL-REVENUES> 2,258,278
<CGS> 1,578,235
<TOTAL-COSTS> 1,578,235
<OTHER-EXPENSES> 419,060
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 106,266
<INCOME-PRETAX> 154,720
<INCOME-TAX> 0
<INCOME-CONTINUING> 154,720
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 154,720
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
</TABLE>
