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 August 28, 1999.
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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 Identification No.)
incorporation or organization)
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
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.
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
QUARTERLY REPORT
FOR QUARTER ENDED AUGUST 28, 1999
I N D E X
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PAGE
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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
2
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
August 28, February 27,
1999 1999
------------------------------
(unaudited) (1)
ASSETS
CURRENT ASSETS
Cash $ 181,721 $ 622,268
Accounts receivable, reserves of $269,000
and $273,000, respectively 1,428,905 961,989
Inventories (Note 4) 803,820 1,108,860
Other current assets 111,591 67,347
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Total current assets 2,526,037 2,760,464
PROPERTY, PLANT AND EQUIPMENT, NET 444,779 538,522
OTHER ASSETS, NET 153,771 176,601
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$3,124,587 $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 58,465 56,452
Accounts payable 147,855 248,538
Accrued salaries and employee benefits 7,846 80,740
Accrued unusual charge (Note 7) 81,250 95,833
Accrued expenses and other liabilities 918,742 863,271
Accrued royalties 319,048 319,048
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Total current liabilities 3,586,192 3,716,868
CAPITAL LEASE OBLIGATIONS, NET OF
CURRENT PORTION 39,291 64,250
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3,625,483 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 (77,140) (96,425)
Accumulated deficit (13,268,007) (13,053,357)
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(480,959) (285,594)
Less 3,052 shares of common stock held in
treasury, at cost 19,937 19,937
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(500,896) (305,531)
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$3,124,587 $3,475,587
==============================
(1) Derived from audited financial statements.
The accompanying notes are an integral part of these statements
3
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Twenty-six Weeks Ended Thirteen Weeks Ended
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August 28, August 29, August 28, August 29,
1999 1998 1999 1998
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Net sales $3,837,195 $7,344,349 $1,654,920 $3,061,645
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Cost of sales 2,537,853 5,877,765 1,041,244 2,486,525
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Gross profit 1,299,342 1,466,584 613,676 575,120
Selling, general and administrative expenses 1,322,737 1,969,951 663,912 951,734
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Operating loss (23,395) (503,367) (50,236) (376,614)
Other income -- 1,391,313 -- 716,313
Net loss on sale of assets (1,373) (15,411) (1,373) (15,411)
Interest expense (189,887) (299,720) (94,295) (136,987)
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Net (loss) income ($214,655) $572,815 ($145,904) $187,301
============================== ==============================
Net (loss) income per share -
basic and diluted (Note 3) ($0.07) $0.18 ($0.05) $0.06
============================== ==============================
Weighted average common shares outstanding 3,238,796 3,238,796 3,238,796 3,238,796
============================== ==============================
The accompanying notes are an integral part of these statements
4
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Twenty-six Weeks Ended
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August 28, August 29,
1999 1998
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Cash flows from operating activities
Net (loss) income ($214,655) $572,815
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities
Depreciation and amortization 106,143 135,944
Provision for doubtful accounts 12,832 73,165
Loss on sale of fixed assets 1,373 15,411
Provision for obsolete and slow
moving inventory 0 47,498
(Increase) decrease in assets
Accounts receivable (479,748) 1,175,987
Inventories 305,040 1,504,007
Other current assets (44,244) (67,296)
(Decrease) increase in liabilities
Accounts payable (100,678) 144,738
Accrued expenses and other
liabilities (17,423) (287,564)
Accrued unusual charge (14,583) 3,846
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Net cash (used in) provided by
operating activities (445,943) 3,318,551
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Cash flows from investing activities
Removals to property, plant and equipment 4,842 35,340
Proceeds from sale of fixed assets 23,500 27,040
Decrease in other assets 0 666
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Net cash provided by investing
activities 28,342 63,046
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Cash flows from financing activities
Repayments under line of credit
agreement, net 0 (3,124,072)
Payments of capital lease obligations (22,946) (25,403)
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Net cash used in financing activities (22,946) (3,149,475)
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NET (DECREASE) INCREASE IN CASH ($440,547) $232,122
Cash at beginning of period 622,268 8,850
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Cash at end of period $181,721 $240,972
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SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION:
Cash paid during the period:
Interest $5,272 $128,927
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Income taxes -- --
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The accompanying notes are an integral part of these statements
5
NANTUCKET INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWENTY-SIX WEEKS ENDED AUGUST 28, 1999 AND AUGUST 29, 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 3, "Legal Proceedings" of this
report, Levi Strauss & Co., the parent company of Brittania Sportswear
Ltd., a licensor which 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
6
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.
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.
7
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.)
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
8
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 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.
9
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 August 28, 1999 and the consolidated
statements of operations for the twenty-six and thirteen week periods and
statements of cash flows for the twenty-six weeks ended August 28, 1999
and August 29, 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 August 28, 1999 and the
results of their operations for the twenty-six and thirteen week periods
and cash flows for the twenty-six weeks ended August 28, 1999 and August
29, 1998 were made on a consistent basis.
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
10
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:
August 28, August 29,
1999 1998
Raw Materials -- $ 77,869
Work in Process -- 1,185,362
Finished Goods $ 803,820 275,647
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$ 803,820 $1,538,878
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 regulations, exceeds 50%. Through August
28, 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.
11
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 $.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
12
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 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.
13
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 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,
14
respectively. Adoption of SFAS 130 and SFAS 131 did not impact the
Company's financial position or results of operations.
15
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 six months ended August 28, 1999 decreased 48% from prior year
levels to $3,837,000, and in the second quarter of the current fiscal year
declined 46% from prior year levels to $1,655,000. The decline in the sales was
directly related to the discontinuance of the GUESS? product line and the
termination of the Arrow license which resulted in reduced sales of the Arrow
products to Sears.
Gross Margin
Gross profit margins for the six months ended August 28, 1999 increased to 34%
from the prior year levels of 20%. Gross margins for the second quarter
increased from 19% to 37%. These increases reflected the impact of the Company's
strategy to phase-out the GUESS? product line, and the associated closeout of
inventory. These improvements 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 six months ended August 28,
1999 declined by $647,000 from prior year levels to $1,323,000. Second quarter
expenses declined by $288,000 to $664,000. These improvements were 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 six months of the fiscal year decreased $110,000
from prior year levels, reflecting reductions in the outstanding revolving
credit facility.
16
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 have decreased $104,000 from February 27, 1999 levels
reflecting an increase in receivables and a reduction in inventories. The
Company was still 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.
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Please refer to the business risks and uncertainties discussed elsewhere in this
report and in the Company's recent report on Form 10-K.
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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
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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 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
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
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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
22