Exhibit 99.5
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- --------------------------------------- In Proceeding for Reorganization under
In re: Chapter 11 of the Bankruptcy Code
NANTUCKET INDUSTRIES, INC., CASE NO. 00 B 10867 (AJG)
Debtor.
Tax ID No. 58-0962699
- ---------------------------------------
DISCLOSURE STATEMENT TO
THE SECOND AMENDED PLAN OF REORGANIZATION
ARTICLE I
PRELIMINARY STATEMENT
NANTUCKET INDUSTRIES, INC. (the "Debtor") and ACCUTONE, INC. submit this
disclosure statement (the "Disclosure Statement") pursuant to Section 1125 of
the Bankruptcy Code (the "Code"), to all known holders of claims against and
interests in the Debtor in order to solicit acceptances or rejections to their
Second Amended Joint Plan of Reorganization dated July 5, 2001 (the "Plan").
The Plan, which is described in greater detail below, provides for the
treatment of secured, priority and general unsecured debt, as well as holders of
equity interests by means of a distribution on account of the allowed amount of
their respective claims and interests of new shares of stock to be issued by the
reorganized entity that will result from the acquisition of Accutone, Inc. by
the Debtor.
The purpose of this Disclosure Statement is to provide the creditors of
and equity interest holders in the Debtor with adequate information to enable
them to make an informed judgment whether to vote to accept or reject the plan
of reorganization that is put before them. The Plan is the document that
contains the exclusive and final statement of the rights of the creditors and
interest holders, including what they will receive, how they are to receive it
and what will become of the Debtor if the Plan is approved by the Bankruptcy
Court. It is strongly recommended that the proposed Plan be read in its
entirety, as the statements in this Disclosure Statement are merely explanations
of the Plan. If the Plan is confirmed by the Bankruptcy Court, it will become
binding on the Debtor, all creditors and interested parties.
Creditors and interest holders whose claims and interests are impaired
have the right to vote to accept or reject the Plan. Generally speaking, a claim
is impaired if the Plan alters the rights to which the holder of the claim would
otherwise be entitled. See Article 7-B below for a definition of "impairment."
Although the Plan may still be confirmed if the creditors comprising a class do
not vote to accept it, the more common way to obtain confirmation of the Plan is
by its acceptance by each voting class of creditors and interest holders. A
class of creditors accepts the Plan when creditors holding at least two thirds
in the dollar amount of claims in such class and more than one-half of the
number of creditors in such class who actually cast their ballots have voted to
accept the Plan. A class of interest holders accepts the Plan when holders of at
least two thirds of the amount of the allowed interests of such class of
interests votes to accept the plan. Therefore, the vote of the creditors and
shareholders is of great importance.
1
This Disclosure Statement has been approved by the Bankruptcy Court 2 as
containing information of a type sufficient to enable creditors and interest
holders to make an informed decision concerning their vote. No other
representations concerning the Debtor, its operations, or the value of its
property has been authorized by the Court or the Debtor and none should be
relied upon by you in arriving at your decision. Approval of this Disclosure
Statement is not to be construed as approval of the Plan by the Court, which
will be considered at the hearing on confirmation. In approving a disclosure
statement, the Bankruptcy Court does not make any independent determination of
the accuracy of the financial information contained therein. That information,
as is the case here, is usually based upon the Debtor's books and records and
the filed claims of creditors.
Along with this Disclosure Statement, the following items are
enclosed:
A. The Plan,
B. The notice and order fixing the time for the filing of
acceptances or rejections of the Plan and a date for the
hearing on the Plan (the "Confirmation Hearing"), and
C. The ballot for accepting or rejecting the Plan (the "Ballot").
THE STATEMENTS AND THE FINANCIAL INFORMATION SET FORTH IN THIS DISCLOSURE
STATEMENT HAVE BEEN MADE AS OF THE DATE HEREOF UNLESS OTHERWISE SPECIFIED.
FURTHERMORE, THE FINANCIAL INFORMATION CONTAINED HEREIN HAS BEEN THE SUBJECT OF
A CERTIFIED AUDIT WHERE INDICATED AND THE AUDITED STATEMENTS HAVE BEEN PREPARED
IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") AND
GENERALLY ACCEPTED AUDITING STANDARDS ("GAAS").
THIS DISCLOSURE STATEMENT WAS PREPARED IN ACCORDANCE WITH SECTION 1125 OF
THE BANKRUPTCY CODE AND NOT IN ACCORDANCE WITH FEDERAL OR STATE SECURITIES LAWS
OR OTHERWISE APPLICABLE NON-BANKRUPTCY LAW. PERSONS OR ENTITIES TRADING IN OR
OTHERWISE PURCHASING, SELLING OR TRANSFERRING SECURITIES OF THE DEBTOR SHOULD
EVALUATE THE PLAN IN LIGHT OF THE PURPOSE FOR WHICH IT WAS PREPARED.
AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER ACTIONS OR
THREATENED ACTIONS, THIS DISCLOSURE STATEMENT SHALL NOT BE CONSTRUED AS AN
ADMISSION OR STIPULATION, BUT RATHER AS A STATEMENT MADE IN SETTLEMENT
NEGOTIATIONS.
THE CREDITORS AND EQUITY INTEREST HOLDERS ARE ENCOURAGED TO READ THE PLAN
OF REORGANIZATION IN FULL. IN THE EVENT OF CONFIRMATION, IT SHALL CONSTITUTE A
LEGALLY BINDING AGREEMENT BETWEEN THE HOLDERS OF CLAIMS AND INTERESTS AND THE
DEBTORS.
VOTING ON THE PLAN
The Bankruptcy Court has scheduled a hearing to consider confirmation of
the Plan for December 10, 2001, at 9:45 a.m., in Room 523 of the Alexander
Hamilton Custom House, 1 Bowling
- ----------
1 See note 1 above
2
Green, New York, N.Y. 10004. Holders of claims and interests that are impaired
by the Plan may vote for or against the Plan by completing and mailing the
enclosed Ballot no later than December 3, 2001 to the attorney for the Debtor,
Koerner Silberberg & Weiner, LLP, Attn: Joseph L. Fox, Esq., 112 Madison Avenue,
3rd Floor, New York, NY 10016.
ARTICLE II
GENERAL BACKGROUND
Nantucket Industries, Inc. is currently a dormant company. 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 to mass merchandisers and national chains throughout the United States.
The Debtor experienced significant continuing losses in recent years which
resulted in severe cash flow issues that negatively impacted the ability of the
Debtor to continue its business as formerly structured. While it did $35,000,000
in gross sales in FYE February 28, 1997, by FYE February 28, 1999, sales had
declined to $11,518,000. For the company's last partial year of operation, sales
totaled approximately $5,000,000. Annexed hereto as Exhibit A is Audited
Financial Statement for the Debtor.
The Debtor produced and sold its products primarily under licensed labels
including Brittania, Arrow, Guess? and others. Disruption in these relationships
caused the loss of substantial portions of the Debtor's business.
For example, Levi Strauss & Co., the parent company of Brittania
Sportswear Ltd., a licensor, accounted for 49% of the Company's fiscal 1997
sales. Levi created a major disruption when it announced its intention to sell
off Brittania. In light of the actions announced by Levi, K-Mart, the largest
retailer of the Brittania brand and the Debtor's largest customer, accounting
for sales of approximately $11 million in fiscal year 1997, advised the Debtor
that it would no longer continue its on-going commitment to the Brittania
trademark. In response, the Debtor filed a lawsuit against Levi Strauss & Co. in
March 1997 alleging that the licensor breached various obligations under the
license agreement, including it's covenant of good faith and fair dealing. The
Debtor ultimately settled this litigation in June 1998 and received $725,000 in
settlement proceeds. However, a major customer was lost, severely undermining
sales.
Nantucket also produced, under the GUESS? label, women's innerwear for
sale to department and specialty stores. In 1998, the Company discontinued its
GUESS? line due to the lack of capital resources needed to properly develop and
support that product line, and sought to focus its resources on its core men's
fashion underwear business. Sales for this product line in fiscal 1999, 1998,
and 1997 aggregated $2.7, $7.0, and $4.7 million respectively.
By mid 1999, the Debtor was informed by Target Stores, one of its four
major clients, that it was being discontinued as a vendor.
Packaging and distribution of the Debtor's product lines was based in its
leased facility in Cartersville, Georgia. From November, 1992 to July 1, 1994,
the Debtor had a manufacturing facility in Rio Grande, Puerto Rico, and until
September 1997 had a manufacturing facility in Cartersville, Georgia. Thereafter
and until prior to the cessation of all business activities, all of the Debtor's
products were manufactured by offshore production contractors located in Mexico,
the Far East and the Caribbean Basin.
3
The Company had 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 in an
effort to provide the Company with the ability to continue in existence. Major
elements of these action plans included the following:
- The Debtor transferred its domestic manufacturing requirements to
foreign manufacturing contract facilities.
- 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.
- The Debtor reduced staff associated with the transfer of manufacturing
to offshore contractors.
- In May, 1997 the Debtor relocated its executive offices and showrooms to
more appropriate, less costly facilities.
- In the first quarter of fiscal 1999, the Debtor completed the phase-out
of the Guess? product line.
In connection with the implementation of these actions, the Debtor
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 write-downs of
inventory, $530,000 write-downs 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 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, reflects
$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.
Financing Arrangements
The Debtor 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 bore 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
Debtor was not in compliance with the net worth and working capital covenants
and the facility was no longer utilized. The agreement was subsequently
terminated by Congress Financial on October 15, 1999 as the line was finally
satisfied. Currently the Debtor has no long-term financing facility.
4
Simultaneously with the financing transactions with Congress Financial, on
March 22, 1994 the Samberg Group, L.L.C., a limited liability company organized
under the laws of Delaware with certain senior managers of the Debtor as
members, purchased for a $1,000,000 investment of new capital 5,000 shares of
the Debtor's Non-Voting Convertible Preferred Stock having a liquidation
preference of $200 per share. The Preferred Stock acquired by the Group was
convertible into shares of Common Stock, $0.10 par value per share, of the
Debtor at the rate of $5.00 per share, and was redeemable by the Debtor at
anytime after March 1999. In May 1998, this conversion right was waived by the
Samberg Group and the Debtor conditionally agreed to redeem the Preferred Stock.
It has not, to date, been redeemed however.
In August, 1996, the Debtor borrowed the sum of $3,500,000 from an entity
called NAN Investors, LP, ("NAN") which was formed by non-insider and
unaffiliated lenders, and issued two debentures as of that date to memorialize
the indebtedness and to reflect its subordination to the credit facility of
Congress Financial Corp. In September, 1997 the Debtor entered into an agreement
with NAN to release a security interest in the manufacturing facility at 200
Cook St., Cartersville, Georgia, to facilitate its sale, and to extend the cure
period with respect to $172,500 interest payment default on the debentures. The
Debtor 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. Because of the condition of
default, a forbearance agreement was entered into and extended from month to
month until May 1998.
In May 1998, the Debtor entered into a new agreement with NAN to further
extend the cure period with respect to $322,551 in prior interest payment
defaults and for the deferral of the interest payment due in August 1998 until
December 1998. In addition, the Debtor then agreed to secure the debentures by a
security interest on all the assets of the Debtor, subject to Congress
Financial's first priority of the revolving credit facility, and to issue
five-year warrants convertible to 16,500,000 shares of the Debtor's stock at an
exercise price of $ 0.10. The Debtor had its authorized capital increased to the
extent necessary to satisfy the conversion rights in full. As of the
commencement of this case, the Debtor remained in default for interest payments
due since August 1997 on the debentures. There was no forbearance agreement in
effect subsequent to December 1998.
In October 1999 the Debtor's board of directors recognized that the
company could no longer continue its operations and it authorized a surrender to
NAN of its assets comprising collateral to the NAN loan. These assets consisted
of inventory having a value of $430,000 and outstanding accounts receivable in
an amount of approximately a half million dollars. On October 12, 1999, the
inventory was sold by NAN to American Basics Company LLC, a third party with no
affiliation to the Debtor, its management or to NAN, by means of a negotiated
sale. The proceeds of this inventory sale and the accounts receivable were
applied by NAN towards its outstanding debt. As of the commencement of the case,
there remained due to NAN the approximate amount of $800,000.00, which is, upon
information and belief, all unsecured. However, if any assets remain in the
Debtor's name, they would be encumbered by the NAN security interest.
In October, 1999 the Debtor terminated all activity at its remaining,
rented, facility in Georgia except to place its books and records in storage.
5
Accutone Proposal
Shortly after the surrender of assets to NAN, the Debtor's board of
directors was apprized of a new business opportunity for the Debtor, i.e. to
explore the entry into a new lines of business, for example, through the
acquisition of Accutone, Inc. Accutone, a Pennsylvania corporation, was
organized in 1996 for the purpose of engaging in the business of the
manufacture, distribution and sale of hearing aids. In 1998 Accutone acquired
100% of the outstanding stock of Interstate Hearing Aid Service, Inc., a
Pennsylvania corporation. Interstate had been in the business of manufacturing
and distributing hearing aids for approximately 35 years. A more thorough
discussion of Accutone's business is contained in Article 4 under the section
entitled "Accutone's Business." Briefly, at present Accutone has six sales and
dispensing offices: two in Pennsylvania; two in Yonkers, New York; and two in
Mt. Vernon, New York. In addition, Accutone expects to open one in New Rochelle,
New York during September, 2001. Accutone has signed a contract to be the sole
provider of hearing aids and audiological services for The Wartburg Senior Care
Facility, Mt. Vernon, New York which has a population of approximately 1200
senior residents. Accutone now has two dispensing office in Wartburg's
Out-Patient Clinic, which currently provides various medical services to
approximately 6000 patients who are treated there annually. It also intends to
utilize these offices to treat Accutone's own patients from the proximately
located Bronx and Southern Westchester areas. Operations at this facility began
on April 1, 2001. Since September, 2000 Accutone has become the preferred
provider of audiology services for St. Joseph's Medical Center in Yonkers, New
York, as well as four nursing homes in Westchester County, New York. As
reflected above, Accutone also operates two sales and dispensing facilities in
Pennsylvania, one located in Forty Fort, and the other in Marshalls Creek. It is
expanding its business base and, as reflected by its acquisition of the
audiology practice of Park Avenue Medical Associates, See New Business
Prospects, Article 4, Accutone is actively investigating the possibility of
combining with or acquiring other small hearing aid dispensing offices in order
to broaden its geographic area of coverage.
Accutone proposes to contribute all of its assets to the Debtor in
exchange for new shares in the reorganized Debtor as more fully set forth in
Article 4 below. Accutone's management believes that the corporate structure of
the Debtor would greatly contribute to its business plan and proposed the
transaction which forms the basis of the Plan.
Organization of the Debtor
The Debtor is a public company that was originally organized under the
laws of the State of Delaware in 1966. It went public in 1969 and today its
stock is held by approximately 1,100 holders.
There are four (4) subsidiary corporations which are wholly owned by the
Debtor. These subsidiaries have been substantially inactive for several years
and these subsidiaries will not be reactivated. The subsidiaries are as follows:
1. Nantucket Hosiery Mills, Inc. is a Delaware corporation that was formed
in 1970.
2. Nantucket Mills, Inc. is a Delaware corporation which was formed in
1992.
3. Nantucket Hosiery Mills Corp. is a North Carolina corporation which was
formed in 1946.
4. Nantucket Management Corp. is a New York corporation that was formed in
1993, but was dissolved and later reincorporated in March, 2000.
The Debtor traditionally filed consolidated financial statements that
incorporated the financials of all the subsidiaries.
6
As explained in greater detail below, the Plan provides for the
cancellation of all outstanding shares of stock in the Debtor and the
re-issuance of new shares of stock by the reorganized Debtor. All stock of the
Subsidiaries will be canceled.
All holders of allowed claims and stock interests in the Debtor are to
receive ratable distribution of the new shares of stock in accordance with the
formulas set forth below in the section on treatment of claims and interests. In
that manner, the creditors and shareholders of the Debtor will be able to
participate in the future growth and expansion of the reorganized Debtor. See
Article 4 below for greater detail.
ARTICLE 3
DESCRIPTION OF THE PLAN
The Plan of Reorganization, jointly proposed by the Debtor and Accutone,
is predicated upon the acquisition by the Debtor corporation of the Accutone
business and its business prospects in exchange for a distribution of new stock
to the current equity holders of Accutone. The resulting combined entity will
likewise issue new shares of its stock to all parties in interest in a manner
that reflects the respective liquidation preferences of the classes of claims
and interests.
ADMINISTRATIVE DEBT
The costs and expenses of the administration of the Debtor in the course
of the reorganization case have priority of distribution pursuant to 11 U.S.C.
ss.503 and must be paid in full upon confirmation, unless other terms are agreed
upon by the holders of such claims and the Debtor.
The expenses of administration consist primarily of the fees of
professional persons retained by the Debtor in the course of this reorganization
and their fees are ultimately subject to allowance and approval by the
Bankruptcy Court. Joseph L. Fox, the attorney for the Debtor was paid a retainer
fee of $10,000 at the outset of this case,3 and by the time of confirmation of
the Plan is anticipated to generate fees totaling approximately $10,000 in
addition to the original retainer.
Frances Katz-Levine, Esq. and Scott Rapfogel, Esq. ("Levine-Rapfogel")
proposed special securities co-counsel, application for which is pending at the
time of the submission of this Disclosure Statement, is anticipated to generate
fees in the approximate sum of $50,000, subject to the allowance of the
Bankruptcy Court.
The firm of Pilotti, Cunzio & Associates has been retained as the
accountants for the Debtor to audit its books and certify its statements. It is
anticipated that its fees will total $20,000 for those services, subject to the
allowance of the Bankruptcy Court. Accutone has advanced the fees for the
Debtor's accountant through the date of this Disclosure Statement and will not
seek reimbursement.
John H. Treglia, president of the Debtor since December, 1999, and Marsha
Ellis, the Debtor's Controller who has been employed by Nantucket for many
years. Mr. Treglia has agreed to waive his compensation and Accutone is taking
responsibility, at this time, for the compensation of Ms. Ellis.
- ----------
2 As the debtor was without funds, the retainer fee was advanced by John
Treglia, the president of the Debtor.
7
CLASS 1 PRIORITY TAX DEBT
Class 1 consists of governmental taxing authorities whose claims would be
entitled to priority of payment pursuant to Section 507(a)(8) of the Bankruptcy
Code. According to the Debtor's records, there are no taxes due to government
agencies other than personal property tax due to Bartow County, Georgia, for
which a claim has been filed in the amount of $71, 187. According to the
Debtor's records, however, the amount should be in the range of $19,000. In
addition, the Internal Revenue Service filed a priority claim in the approximate
amount $745 and the City of New York filed a priority claim in the approximate
amount of $9,300. According to the Debtor these claims are without merit. The
exact amount of each claim may ultimately require determination by the
Bankruptcy Court in a contested proceeding. The allowed amount of these priority
claims, and any other such claims which may ultimately be allowed, will be paid
in full by the reorganized Debtor in the manner permitted by Section
1129(a)(9)(C) by payment, on account of such claims, of deferred cash payments
over a period of six years after the earlier of the date of assessment of such
claim or the Effective Date of the Plan, together with interest at the rate
provided for in the United States Tax Code as of the date of such payments. The
Effective Date is defined in the Plan as the date upon which the order
confirming the Plan is final and no longer subject to an appeal.
The reorganized Debtor will be obligated to make monthly installment
payments of $340 for a period of six years, if the claims are allowed in the
lesser amounts, and approximately $1,450 per month if the claims are allowed in
the amounts for which they are presently filed.
CLASS 2 SECURED DEBT
Class 2 consists of the secured claim of NAN Investors, LP, the entity
that loaned the Debtor through a private placement the original amount of
$3,500,000, of which $2,760,000 was memorialized in two 12.5% convertible
debentures. NAN is still owed, as of the filing date, the approximate sum of
$800,000.00. The claim is secured by the assets of pre-bankruptcy Debtor,
pursuant to the blanket security interest granted NAN in 1998 to assure payment
of the debt. In October, 1999 the assets of the Debtor were surrendered to NAN
in lieu of foreclosure and the Debtor's management believes that there are no
assets remaining in the Debtor. If there should be assets which remain, then NAN
shall be entitled to take possession and liquidate such assets and to apply the
proceeds towards its debt. The unsecured portion of the NAN debt, estimated to
be in the amount of $800,000 will be treated as a Class 3 general unsecured
claim.
The Class 2 claim of NAN is not impaired. A full definition of
"impairment" for purposes of the Bankruptcy Code is set forth below in Section
7B.
CLASS 3 GENERAL UNSECURED DEBT
Class 3 consists of the holders of general unsecured claims against the
Debtor arising from the operations of its business. According to the Debtor's
records, there are general unsecured claims totaling approximately $1,700,000,
which include an allowance for certain claims the amounts of which are disputed.
Holders of Class 3 allowed general unsecured claims shall receive, in full
settlement and satisfaction of their respective claims, one (1) share of stock
in the reorganized Debtor per $5.00 of claim.
The value of the distribution to be made on account of the general
unsecured claims depends upon the value of the shares of stock. As of the date
of issuance, it is anticipated that the per share value of the shares to be
issued to holders of general unsecured claims shall be $0.10, based entirely
upon the book value of the assets and business of Accutone that shall be
acquired by the reorganized
8
Debtor. See Exhibit B annexed hereto, the pro forma balance sheet of the
reorganized Debtor. However, an assessment of the true value of the stock to be
issued must also factor in the value of the prospects of growth and expansion
represented by the new business opportunities that Accutone brings to the Debtor
and its estate. Based upon the business projections of Accutone, a copy of which
is annexed hereto as Exhibit C , the book value of each share is expected to
increase to $0.22 within the next year following confirmation. These projections
are based upon the Debtor obtaining initial (within the first six months)
financing in the approximate amount of $500,000 and the opening of 2 new
facilities, as well as the on-site coverage in approximately 20 nursing homes
and/or adult care facilities, as expected. In the event financing is not
available, the proponents project the value of each share to be $0.14. See
Exhibit D. Beyond this, it is expected that the shares will achieve a trading
value on the public markets which will reflect the prospects of the reorganized
company.
Absent the transaction contemplated under the Plan, the holders of general
unsecured claims could expect to receive $0.00 based upon the fact that there
are no available assets in the Debtor from which to make a meaningful
distribution. See Exhibit E annexed hereto, which is the liquidation analysis of
Nantucket's assets, without the effects of the Plan. Therefore, there will only
be a distribution of any significance in the event that Accutone were to
introduce new value into the estate in the context of the proposed acquisition
envisioned by the Plan.
The general unsecured claims are impaired by the terms of the Plan. Stated
briefly, the claims are "impaired" when they are not paid in full, in cash, upon
the confirmation of the Plan. A full definition of "impairment" for purposes of
the Bankruptcy Code is set forth below in Section 7B.
CLASS 4 PREFERRED STOCK
Class 4 consists of the Samberg Group, as holders of 5,000 shares of
preferred stock issued by the Debtor in 1995. The preferred stock has a
liquidation preference of $200 per share, for a total of $1,000,000 based upon
the election of redemption rights approved in 1997. The preferred stock was
issued in exchange for the investment of additional capital of $1,000,000 by the
Samberg Group in 1994 as described above in Article 2. The Samberg Group is
comprised of Stephen M. Samberg, the former President and Chairman of the Board
of the Debtor (1994 through 1998), Steven Sussman, Raymond Wathen, Robert R.
Polen and the wife of Ronald Hoffman, all of whom are former officers of the
Debtors and/or members of its board.
The Plan provides that the holder of the Class 4 issued and outstanding
shares of preferred stock in the Debtor shall receive, in full settlement and
satisfaction of its liquidation preference and all other rights appurtenant to
such shares, one (1) share of stock in the reorganized Debtor per $20.00 of
liquidation preference currently held. As a result, the Samberg Group will
receive a total of 50,000 shares of common stock in the reorganized Debtor in
full settlement and satisfaction of the redemption claims and all other claims
based upon the preferred shares. The currently outstanding shares of preferred
stock shall be deemed null and void and shall be canceled of record.
The Class 4 holder of preferred shares is impaired by the terms of the
Plan. Stated briefly, the claims are "impaired" when they are not paid in full,
in cash, the liquidation preference to which it is entitled upon the
confirmation of the Plan. A full definition of "impairment" for purposes of the
Bankruptcy Code is set forth below in Section 7B.
9
CLASS 5 COMMON STOCK
Class 5 consists of the holders of shares of common stock in the Debtor
which are issued and outstanding. There are 3,241,848 shares of stock issued and
outstanding that are held by approximately 1,100 holders. The Plan provides for
the preservation of their participation in the Debtor by issuing to them new
shares of stock in the reorganized Debtor at the rate of one (1) new share of
stock in the reorganized Debtor per ten (10) shares of currently issued stock
presently held. The current shares of stock shall be deemed null and void and
Class 5 shareholders are to turn in their present shares for cancellation.
In addition, all outstanding warrants and options to purchase stock and to
convert debt to stock shall also be deemed null and void and canceled of record.
These rights being canceled include those rights granted to NAN Investors in
conjunction with the private placement of 1996 of $3,500,000 by which NAN has
the right to purchase Nantucket common stock at fixed prices.
As a result of the reorganization, the Class 5 shareholders' interests
will be diluted. As a class, their collective interests will be reduced from
100% of the Debtor's outstanding common shares to approximately 5.4%. However,
whereas they now have interests in a dormant company with no assets, they will,
as a result of the Plan, have a lesser interest in a viable operating company
with prospects for the future. The 100% shareholder interest they now possess is
worth $0.00. At confirmation, the per share value of the newly issued shares
will have a book value of approximately $0.10. That value is expected to grow
within the first year following confirmation to $0.22 if the reorganized Debtor
obtains $500,000 in financing and $0.14 if financing is not obtained. See pro
forma projected balance sheet of the reorganized Debtor as at August 31, 2002
annexed hereto as Exhibit C and D. Beyond that, the shares are expected to
attain a tradeable value on the public markets which will reflect the company's
prospects.
The Class 5 holders of shares of common stock are impaired by the terms of
the Plan. Stated briefly, the interests are "impaired" when they are not paid in
full, in cash, the liquidation preference to which they are entitled upon the
confirmation of the Plan. A full definition of "impairment" for purposes of the
Bankruptcy Code is set forth below in Section 7B.
ARTICLE 4
MEANS OF OPERATION OF PLAN
The Plan is predicated upon the premise that creditors and shareholders
will receive a distribution on their respective claims and interests through the
operation of the Plan which is of a greater value than they would receive under
any alternative, such as a liquidation of the Debtor pursuant to Chapter 7 of
the Bankruptcy Code, or through other remedies outside of bankruptcy
jurisdiction. The Debtor's management firmly believes, and the following
information is intended to substantiate this belief, that creditors' and
shareholders' interests are greatly enhanced through the operation of the Plan
as proposed.
The estate will have the benefit of value represented by the assets of
Accutone, which will be acquired by the Debtor. That value comprises assets
consisting of sales and dispensing offices, related audiological testing
equipment, contract rights, patent rights, good will, etc. with a net book value
of $139,211.00. As a going concern, Accutone brings with it added value of its
future prospects.
Performance under the terms of the Plan requires the Debtor to issue
new shares of stock to those entitled to receive shares pursuant to the Plan.
10
The reorganized Debtor will pursue the business of dispensing and
distributing hearing aid products, in Accutone's current and future sales and
dispensing offices. In addition, it intends to engage in a vigorous expansion
plan based upon sales of product in additional dispensing offices and on-site
nursing home venues to be added. This is expected to substantially increase
shareholder equity in the future.
ACCUTONE'S BUSINESS
Accutone, Inc. was formed in October 1996 with the goal of becoming a
leading dispenser and distributor of hearing aids and related products. In
December of 1998 it acquired Interstate Hearing Aid Service, Inc. an FDA
licensed hearing aid manufacturer, which was the first of its planned
acquisitions of independent companies in the industry. Further acquisitions and
mergers are planned and can be made possible with offers of equity participation
by a public company such as the Debtor, whose shares may be tradeable on the
public markets.
A more thorough analysis of Accutone's business is contained in the
supplement annexed hereto as Exhibit F which is available on the Court's
Internet site. This supplement contains information which would more typically
be contained in an SEC Registration Statement filing. It includes a
comprehensive discussion of Risk Factors, an overview of the industry and a
description of Accutone's operations, services, customers and product lines, as
well as projections for expansion. It also lists current contracts and contracts
reasonably anticipated, addition to providing a summary of Accutone's sales
marketing strategy and its prospect for raising funds.
Briefly summarized below are the key points of the supplement, however,
all creditors and parties in interest are encouraged to read the entire
supplement together with this Disclosure Statement.
THE INDUSTRY
There are several reasons why management believes that this time is
appropriate for a concerted effort in this direction. The hearing aid industry
is highly fragmented and consists of many small, independent manufacturers and
distributors. Management believes that this industry is an appropriate focus for
a directed effort at concentration through acquisition. Market share can be
accumulated through careful acquisitions in a step by step fashion.
Moreover, the market for hearing aid products is one with vast potential.
Hearing loss is one of the most prevalent chronic health conditions in the
United States and its incidence is on the rise. According to the National Health
Interview Survey, between 1977 and 1990 cases of hearing loss increased by 26
percent. See Kochkin, S., 1997 MarkeTrak IV: What is the Viable Market for
Hearing Aids?, Also, National Center for Health Statistics. Additionally,
although hearing loss traditionally has been considered an old person's
condition, it is becoming increasingly common among the younger generations. It
is estimated that 10 million Americans between the ages of 45 and 64 have
hearing loss, and this number is growing. Experts predict that among the Baby
Boom generation, hearing loss will reach epidemic proportions. Id.
Only a small percentage, approximately 20% of people with hearing loss,
use hearing aids. It is estimated that 23 million people in the U.S. with a
hearing impairment do not use aids. Thus far, the use of hearing aids has not
increased, as the total number of users has remained unchanged at approximately
5.6 million since 1989. Id. This is expected to change dramatically as managed
care health providers offer reimbursement for hearing aid purchases and
maintenance and as the Baby Boom population awakens to the need.
11
SALES AND DISPENSING OFFICES
Accutone is currently operating six retail sales and dispensing offices,
four in New York, two in Yonkers, two in Mt. Vernon; and two in Pennsylvania one
in Forty Fort and one in Marshall's Creek. It is scheduled to open another
retail sales and dispensing office on Main Street in New Rochelle, New York (see
"Facilities and Services", below).
Accutone leases and operates two on-site retail offices, one at The
Outpatient Health Services Facility of The Wartburg Diagnostic & Treatment
Center located at Wartburg Place, Mount Vernon, New York, another at The
Wartburg Home of The Evangelical Lutheran Church (the Wartburg nursing home
facility.)3
The facilities are staffed by licensed, certified and qualified personnel.
In order to respond to increasing demands at each of the facilities Accutone is
constantly increasing staff and expanding hours of operations.
EXISTING CONTRACTS
In addition to the in-house and on-site programs, Accutone has
successfully expanded its patient referral base by securing appointments as the
sole or primary provider of hearing aids and audiological services to nursing
homes4, out-patient facilities5, and adult group homes. It has signed
- ----------
3 The Wartburg is a 35 acre, full-service, senior care facility
offering a full range of care, from assisted living facilities to
skilled nursing home care.
4 Nursing Home Location Residents
---------------------- -------- -----------
Kings Terrace/Terrace Health Care Bronx, NY 320
Manhattanville Nursing Home Bronx, NY 280
Methodist Church Home Riverdale, NY 240
Riverdale Nursing Home Bronx, NY 300
Tarrytown Hall Care Center Tarrytown, NY 185
Classic Residence by Hyatt Yonkers, NY 277
St. Joseph's Nursing Home Yonkers, NY
5 No. of Patients Seen
Facility Location Annually
------------ -------- --------
Urgi Square Geriatric
Care Clinic Yonkers, NY 4,000
Urgicare Health Care
Clinic Yonkers, NY 7,200
Riverdale Nursing Home
Outpatient Clinic Bronx, NY 2,000
Methodist Nursing Home
Outpatient Clinic Bronx, NY 2,500
12
service contracts with other types of health care organizations, such as HMO's
and PPO's6. Its affiliations with these types of health care organizations and
facilities have grown rapidly since October 1, 2000, when it began marketing our
services to them. Its customers include:
* patients who learn about Accutone through its newspaper
advertisements (see "Sales and Marketing", below);
* patients who are participating members of health care organizations,
who come to it as a result of contractual (or in some cases,
non-contractual) arrangements with such organizations, appointing it
as an approved, preferred, or sole, provider7 of audiological care
to their members. As a provider, it is listed in the organization's
provider manual as a source for audiological services and products
(see "Existing Contracts With Health Care Providers and Third-Party
Payers", below);
* patients who are referred to it by out-patient health care clinics
and hospitals;
* patients who are referred to it, on an out-patient basis, by nursing
homes and senior care facilities at which they reside;
* patients who are referred to it by area physicians with whom it has
established relationships;
- ----------
6 MedicareFederal Health Care Program, Parts A and B;
New York State Medical Assistance (Title XIX) Program/Medicaid;
Independent Health Association;
Magnacare Health Care;
Empire Blue Cross Blue Shield Health Care;
Corvel Corporation;
Oxford Health Plans (New York, Inc.);
Health Insurance Plan of Greater New York and Group;
Community Choice Health Plan, Inc.;
Better Health Advantage, Inc.;
Health Source Westchester Pre-Paid Health Services Plan, Inc.;
Workers Compensation Agreement;
Preferred Choice Management Systems;
Speech and Communications Professionals;
Los Ninos Services, Inc.
7 To date, Accutone has been appointed as sole provider for one
institution, Westchester Prepaid Health Care, Inc., a division of
Health Source Hudson, Westchester County, New York.
13
* patients who are treated on an in-patient basis in nursing homes or
senior care facilities; and
* patients in Pennsylvania who are visited, tested, and fitted in
their homes.
Generally, it has agreements with health insurance or managed care
organizations to provide for services to be offered on three different bases,
including:
(a) fee for service basis based on a contractual rate which it offers to
provider's members (all paid for by the patient); and
(b) an encounter basis where it is paid a fixed fee to Accutone by the
insurance or managed care organization for each hearing aid sold
(with the balance paid by the individual member).
(c) a special Medicare/Medicaid encounter basis where it is paid a fixed
fee by Medicare and/or Medicaid for particular audiological
services, at a price preestablished by Medicare or Medicaid (other
than the "deductible" amount, which is paid either by the patient or
other third-party payers).
NEW BUSINESS PROSPECTS
Accutone is currently in the final stages of negotiations with Park Avenue
Medical Associates, P.C. ("Park Avenue P.C.") and Park Avenue Health Care
Management, Inc.("Park Avenue Management") (collectively referred to as "Park
Avenue"). Park Avenue has been in existence since 1986. Park Avenue Management
manages the business affairs of Park Avenue P.C. Park Avenue P.C. directly
employees medical professional personnel, including physicians in both general
and specialty practices and other health care professionals such as podiatrists,
audiologists, psychologists and psychotherapists. Nursing homes and long term
care facilities contract with Park Avenue for the services of Park Avenue's
Medical professionals, on a pre-determined schedule or on an as-needed basis.
Pursuant to the terms of the agreement, Park Avenue will contribute its entire
audiology practice to Accutone in consideration for approximately 10% of the
outstanding stock in Accutone plus an option to purchase an additional 10% of
Accutone for the sum of $300,000. In turn, this audiology practice will become
part of the reorganized Debtor.
Brad I. Markowitz, the president of Park Avenue Management will join the
Board of Directors for the reorganized Debtor. Mr. Markowitz is a banker by
trade and has been with Park Avenue since 1995. At that time Park Avenue was
servicing approximately seven nursing homes. Under his tutelage Park Avenue has
grown to service over sixty long term care facilities. In addition, Mr.
Markowitz serves on the Board of Trustees of several private companies, and one
publicly traded company, Purchasesoft, Inc.
Park Avenue presently provides staff to approximately sixty nursing homes,
but it only supplies audiological staff to approximately 16 of these nursing
homes. It is the mutual goal that Accutone or the reorganized Debtor will be
able to increase Park Avenue's access to audiological staff to the point where
it can provide such staff to all sixty nursing homes it currently deals with.
The proponents of plan believe they have or will have sufficient staff and
equipment to service all nursing homes which the Park Avenue contract will add
to their clientele.
14
FINANCIAL INFORMATION
Annexed hereto as Exhibit G is a copy of the Accutone audited financial
statements including its balance sheet for the period ending December 31, 2000
which indicates a net stockholders equity of $104,632 and unaudited net
stockholder equity of $139,211 for the period ending March 31, 2001 Exhibit H.
This balance sheet value, plus Accutone's going concern value, as it adds new
institutions and potential locations, does not appear on the balance sheet, will
be incorporated into Nantucket if the Reorganization Plan and the acquisition on
which it is based will be approved. Once combined with the balance sheet of
Nantucket, which is included with its audited financial statements annexed
hereto as Exhibit A, the value of Accutone will benefit the shareholders of the
combined companies. Annexed hereto as Exhibit B is a pro forma balance sheet
showing the effects of the acquisition and provides a snapshot of the
reorganized company after the confirmation of the Plan.
As is shown on Exhibit B (pro forma balance sheet) the combined companies
will have a net stockholders equity of $600,000, which essentially represents
Accutone's value as projected to August 31, 2001 plus the reorganization value
of the reorganized Debtor. The per share book value of the shares of the
reorganized company will equal approximately $0.10. That, does not take into
account the prospective value of the company after one, two or more years of
operations. Moreover, that value is in excess of the value of the shares of
stock in Nantucket today, which is essentially zero. The value is also more than
the liquidation value of Nantucket and the distribution to which holders of
general unsecured claims would be entitled to expect, which is likewise zero.
For an evaluation of the Debtor's liquidation value, see Exhibit E annexed
hereto, which shows that the liquidation value of general unsecured claims
equals $0.00.
SECURITIES LAW AND CONSIDERATIONS
The Plan contemplates the issuance of Common Stock of the reorganized
Debtor to its creditors and existing shareholders. The following, discussion
describes certain considerations relating to such issuance.
The Section 1145 Exemption From Securities Act Registration of Securities
Issued Under the Plan. Section 1145 of the Bankruptcy Code, provides that
federal and state registration requirements do not apply to the issuance of
securities by a debtor under a plan of reorganization to holders of claims or
interests wholly or principally in exchange for those claims or interests. With
certain exceptions, discussed below, recipients of such securities may also
resell them without restriction.
a. Issuance. Section 1145 of the Bankruptcy Code exempts the original
issuance of securities under a plan of reorganization from registration under
the Securities Act and state law. For the original issuance to be exempt, three
principal requirements must be satisfied: (i) the securities must be issued by
the debtor or its successor "under a plan" of reorganization; (ii) the
recipients of the securities must hold a claim against the debtor, an interest
in the debtor or a claim for an administrative expense against debtor, and (iii)
the securities must be issued entirely in exchange for the recipient's claim
against or interest in the debtor or "principally in such exchange and partly
for cash or property."
The proponents of the Plan believe that, subject to certain conditions
described below, the contemplated issuances of the Common Stock, to Creditors
and Interestholders, of Reorganized Debtor will satisfy all three conditions
because: (i) those issuances are specifically required under
15
the Plan; (ii) the recipients are holders of "claims against" or "interests in"
the Debtor; and (iii) the recipients will obtain securities in the reorganized
company in exchange for their claims or interests.
b. Resale. Although the subsequent disposition of the Common Stock of the
reorganized Debtor by their recipients would probably be exempt from
registration and not subject to holding periods in most circumstances, certain
recipients of the securities-those recipients who may be deemed "underwriters"
as defined under Section 1145(b) of the Bankruptcy Code-may be unable to resell
such securities absent registration of those securities under the Securities Act
of 1933, as amended, (the "Securities Act") and applicable state law or absent
exemption therefrom. IT IS RECOMMENDED THAT CREDITORS AND SHAREHOLDERS AFFECTED
BY THIS RISK CONSULT THEIR OWN COUNSEL.
Bankruptcy Code Section 1145(b) defines four types of "underwriters": (i)
a person, who purchases a claim against, or an interest in, or a claim for
administration expenses against the debtor with a view to distributing any
security received in exchange for such a claim or interest; (ii) a person who
offers to sell securities offered under a plan of reorganization for the holders
of such securities; (iii) a person who offers to buy such securities for the
holders of such securities, if the offer is (a) with a view to distributing them
or (b) made under a distribution agreement; and (iv) a person who is an "issuer"
with respect to the security, as the term "issuer" is defined in Section 2(11)
of the Securities Act, an "issuer" includes any person directly or indirectly
controlling or controlled by the Debtor or control, or any person under direct
or indirect common control with the Debtor.
Whether a person is an "issuer," and therefore an "underwriter" for
purposes of Section 1145(b) of the Bankruptcy Code depends on a number of
factors. These include: (i) the person's equity interest in a company; (ii) the
distribution and concentration of other equity interest in a company; (iii)
whether the person is an officer or director of the company; (iv) whether the
person, either alone or acting in concert with others, has a contractual or
other relationship giving that person power over management policies and
decisions of the company; and (v) whether the person actually has such power
notwithstanding the absence of formal indicia of control. An officer or director
of the company may be deemed a controlling person, particularly if his position
is coupled with ownership of a significant percentage of voting stock. In
addition, the legislative history of Section l 145 of the Bankruptcy Code
suggests that a creditor with at least 20% of the securities of a debtor could
be deemed a controlling person.
To the extent that persons deemed "underwriters" receive securities
pursuant to the Plan, resales by such person would not be exempted by Section
1145 of the Bankruptcy Code from registration under the Securities Act. Given
the complex, subjective nature of the question whether a particular holder may
be an underwriter, the Proponents of the Plan make no representation concerning
the right of any person to trade in the Common Stock of the reorganized Debtor.
The Proponents of the Plan recommends that potential recipients of the Common
Stock in the reorganized Debtor consult their own counsel concerning whether
they may freely trade such securities.
ARTICLE 5
POST CONFIRMATION OPERATIONS AND MANAGEMENT
Annexed hereto as Exhibit C is a projection of the business of the
reorganized Debtor for the twelve months following the projected date of
confirmation of its plan of reorganization. These projections anticipate the
reorganized debtor obtaining $500,000 through a private placement
16
offering. However, annexed as Exhibit D is a projection of the reorganized
assuming the private placement is not obtained during that period of time. They
shows that the business done by Accutone and Interstate for the year ended
December 31, 2000 totals $314,038. These projections anticipate a full year of
operations at facilities recently opened or acquired and the funding anticipated
herein. This will be substantially increased in the twelve months following
September 1, 2001 according to management's best estimates.
Based upon either of these projections, it is clear that the reorganized
Debtor will be able to meet its obligations under the Plan and provide value to
holders of the new shares of stock to be issued under the Plan.
The proponents of the Plan anticipate a private placement facility of at
least $500,000. This will enable the reorganized debtor to accelerate its
program of expanding sales and acquisitions and should further position the
reorganized Debtor to obtain financing for further expansion. This private
placement has been conditioned upon the successful confirmation of the Plan,
however, the Plan's success is not deemed conditioned upon obtaining such a
private placement. However, if the reorganized Debtor has not obtained the
anticipated funding through a private placement offering, it will nonetheless
substantially increase the value to holders of Claims and interest holders.
Based upon the projections of the future operations of the combined
companies, as annexed hereto as Exhibit C, the reorganized company can be
expected to net almost $215,527 of profit in its first full year of operations
after confirmation of the Plan on sales of $1,429,182.
FUTURE MANAGEMENT
Following confirmation, the management of the reorganized debtor will
consist of the following:
John H. Treglia, President. John H. Treglia, is the president and chief
operating officer of Accutone, and was named president of Nantucket by its Board
of Directors in January, 2000. Mr. Treglia intends to enter into an employment
contract with the Debtor to be paid a reasonable compensation out of cash flow.
It is anticipated that there will be sufficient cash flow during the second half
of the current fiscal year.
Marsha Ellis is the Treasurer/Controller. Ms. Ellis was assistant
treasurer of Nantucket prior to the bankruptcy. She will remain in such capacity
for the foreseeable future under an employment agreement now being negotiated.
Her salaries since January 2000 have been funded by Mr. Treglia.
Brad I. Markowitz, the president of Park Avenue, will be a member of the
Board of Directors.
The Directors of the Debtor are, and will remain for the foreseeable
future, John H. Treglia, Dr. Frank J. Castanaro, and George Gold. Mr. Gold was a
director of the Debtor while it operated in the clothing business. Directors are
not nor will they be compensated for their services.
The Debtor intends to increase to five, the number of Directors and add
Mr. Markowitz at that time.
ARTICLE 6
ALTERNATIVES TO THE PLAN
As alternatives to the treatment proposed through the Plan, the Debtor
could be (a) administered through the liquidation chapter of the Bankruptcy
Code, Chapter 7, and (b) dismissed from bankruptcy jurisdiction and administered
pursuant to state law remedies.
17
In the event that the Debtor were liquidated through Chapter 7, there is
no meaningful distribution that could be made to creditors by a bankruptcy
trustee as the Debtor has no assets to administer. And, as the next section
indicates, management believes that there are no causes of action for the
recovery of assets under the bankruptcy laws out of which an estate could be
created. Management's recommendation of accepting the Plan and the transaction
it encompasses reflects its belief that only through that course is there a
realistic and meaningful opportunity for creditor recovery.
Outside of the Bankruptcy Court's jurisdiction, there is no viable way in
which the proposed transaction can be accomplished. Only through procedures
available in the Bankruptcy Code can the debt of the Debtor be treated by
conversion to equity through the consent of a majority of claim holders. No
other procedure will be acceptable to Accutone, which could not be expected to
entrust its assets and its business prospects to an entity with the quantum of
debt with which the pre-reorganized Debtor is burdened. In addition, out-of
court settlement procedures are too unwieldy and ineffective to give the
assurance that the investor needs.
Accordingly, it is submitted that the bankruptcy Plan is the best way in
which the creditors and the shareholders of the Debtor can realize value for
their claims and interests. Absent such a proceeding, they could be reasonably
expected to receive no recovery.
ARTICLE 7
MISCELLANEOUS PROVISIONS
A. Preferential and Fraudulent Transfers
Among the assets which could be available for distribution would be the
monies subject to recoupment from creditors who had been paid within the 90 days
prior to the bankruptcy filing (one year, for creditors who are also insiders),
which payment was made while the Debtor was insolvent, on account of antecedent
debts, and not paid within their ordinary business terms.
A review of the transactions of the Debtor over the year preceding the
commencement of this case, supervised by its counsel, indicates that there is no
record of preferential transfers having been made to any creditor, including
insiders, except as follows. In the year prior to the commencement of the case,
the sum of $37,500 was paid to George Gold, a director of the Debtor, in
settlement of a judgment that he had obtained against the Debtor to enforce a
claim for salaries due him under his employment agreement. The settlement amount
was only paid in part, by the time the bankruptcy was filed, and no further
payments were made to him. There were no payments of any kind to creditors after
the surrender of collateral to NAN in October, 1999.
Had there been avoidable transfers, however, it must be considered that in
order to recoup these monies from the affected creditors, lawsuits would have to
be instituted against them and legal fees incurred. It is possible that defenses
to recoupment, as permitted under Section 547 of the Code, exist in favor of any
affected creditors which could generate greater legal costs required to effect
collection, or they may prove to be total defenses. To the extent that monies
are recouped, those creditors' claims on the Debtor's estate will be
enlarged_ their claims are restored where payments on invoices are reversed. The
Debtor does not intend to pursue recovery of the payment made to Mr. Gold.
Similarly, there is no evidence contained in the Debtor's records of any
conveyances having been made to any parties that may be voidable as fraudulent
conveyances under state or federal law.
18
B. Impairment Under the Plan
Only those creditors and interest holders whose claims are impaired may
vote for or against a Plan. The term "impairment" is a special term as it is
used in the Bankruptcy Code. Section 1124 of the Code defines the term as
follows:
"ss.1124. Impairment of claims or interests.
Except as provided in section 1123(a)(4) of this title, a class of claims or
interests is impaired under a plan unless, with respect to each claim or
interest of such class, the plan__
(1) leaves unaltered the legal, equitable, and contractual rights to which such
claim or interest entitles the holder of such claim or interest; or
(2) notwithstanding any contractual provision or applicable law that entitles
the holder of such claim or interest to demand or receive accelerated payment of
such claim or interest after the occurrence of a default__
(A) cures any such default that occurred before or after the commencement of the
case under this title, other than a default of a kind specified in section
365(b)(2) of this title;
(B) reinstates the maturity of such claim or interest as such maturity existed
before such default;
(C) compensates the holder of such claim or interest for any damages incurred as
a result of any reasonable reliance by such holder on such contractual provision
or such applicable law; and
(D) does not otherwise alter the legal, equitable, or contractual rights to
which such claim or interest entitles the holder of such claim or interest.
In this Plan, holders of Class 3, 4 and 5 Claims are deemed "impaired" by
the Plan.
C. Consequences of Acceptance or Rejection
If the Plan is rejected by a class of impaired claims or interests, the
Court may be requested by the Debtor to determine that the Plan be confirmed
regardless. This process is generally referred to as a "cram down" pursuant to
Section 1129(b) of the Bankruptcy Code. However, if the Court does not hold that
the requisites of confirmation have been met irrespective of rejection, then the
case may be converted to a case under Chapter 7 of the Bankruptcy Code which
will provide for its liquidation. It is the belief of the Debtor's management
that in the event of conversion to Chapter 7, the likelihood that any of the
general unsecured creditors will receive any distribution at all will be nil,
based upon the analysis set forth above in Exhibit E. The Plan, in contrast,
offers a distribution to holders of general unsecured claims that is based upon
a program that includes substantial new value that will be injected into the
Debtor, consisting of Accutone's assets and business opportunities.
D. Objections to Claims All objections to the allowance of Claims shall be
served and filed no later than 90 days following the Effective Date.
Notwithstanding any other provisions of this Plan, disputed claims shall be paid
in accordance with the provisions of the Plan upon their allowance by the Court.
A reserve shall be maintained until final disposition by the Court for any claim
to which an objection has been interposed.
ARTICLE 8
TAX IMPLICATION OF THE PLAN
The Plan of reorganization may have tax implications to the creditors
holding claims and shareholders holding interests in the Debtor. As every
person's circumstances are unique, it is not possible to make a general
statement that will have relevance to each party in interest in the Debtor's
19
estate. Therefore, all parties in interest are advised to consult their own tax
advisors to determine how the terms of the Plan may affect their unique
interests.
ARTICLE 9
CONCLUSION
If the creditors accept the Plan, it is likely that it can be confirmed
within approximately five weeks after the approval of the Disclosure Statement,
unless a party interposes serious objections.
Creditors and shareholders are encouraged to speak to each other and to
their own advisors with respect to the Plan and its effects.
BALLOT
All creditors and shareholders are urged to participate in the process and
return their ballots so that they are received on or before the last day for
voting, as indicated thereon, at the offices of Koerner Silberberg & Weiner, LLP
attn: Joseph L. Fox, Esq., 112 Madison Avenue, New York, New York 10016.
All creditors are further urged to read the Plan since it shall constitute
a legally binding agreement if it is confirmed by the Bankruptcy Court.
Dated: New York, N.Y.
July 5, 2001
NANTUCKET INDUSTRIES, INC.
The Debtor and Debtor in Possession
By: s/ John H. Treglia
--------------------------
JOHN H. TREGLIA, President
ACCUTONE, INC.
By: s/ John H. Treglia
---------------------------
JOHN H. TREGLIA, President
KOERNER SILBERBERG & WEINER, LLP
Attorney for Debtor and Debtor in Possession
s/ Joseph L. Fox
- -----------------
JOSEPH L. FOX, ESQ. (JF2313)
112 Madison Avenue
New York, New York 10016
(212) 689-4400
20
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Audited Financial Statements
Years Ended February 28, 2001,
February 27, 2000 and
February 27, 1999
EXHIBIT "A"
NANTUCKET INDUSTRIES, INC.
LIST OF EXHIBITS
Exhibit A Nantucket Industries, Inc., and Subsidiaries
Consolidated Balance Sheet
May 31, 2000
Exhibit B Nantucket Industries, Inc., and Subsidiaries
Projected Balance Sheet (Unaudited)
August 31, 2001
Exhibit C Nantucket Industries, Inc., and Subsidiaries
Projected Balance Sheet (Unaudited)
August 31, 2002 (Assuming Private Placement)
Nantucket Industries, Inc., and Subsidiaries
Projected Statement of Operations and
Retained Earnings (Unaudited)
September 1, 2001-August 31, 2002
Exhibit D Nantucket Industries, Inc., and Subsidiaries
Projected Balance Sheet (Unaudited)
August 31, 2002 (Assuming No Private Placement)
Nantucket Industries, Inc., and Subsidiaries
Projected Statement of Operations and
Retained Earnings (Unaudited)
September 1, 2001-August 31, 2002
Exhibit E Liquidation Analysis of Nantucket Industries, Inc.
and Subsidiaries
December 31, 2001
Exhibit F Accutone, Inc. Securities and Exchange
Commission Disclosure Document
Exhibit G Accutone, Inc. and Subsidiary
Audited Financial Statements
Years ended December 31, 2000, 1999 and 1998
Exhibit H Accutone, Inc. Compiled Financial Statements
Three Months Ended March 31, 2001
Nantucket Industries, Inc.
(Debtor-In-Possession)
Contents
================================================================================
Independent auditors' report 2
Financial statements:
Consolidated balance sheets 3
Consolidated statements of operations 4
Consolidated statement of stockholders' deficit 5
Consolidated statements of cash flows 6
Notes to consolidated financial statements 7-19
Independent Auditors' Report
To the Board of Directors
Nantucket Industries, Inc. and Subsidiaries
(Debtor-In-Possession)
New York, New York
We have audited the accompanying consolidated balance sheet of Nantucket
Industries, Inc. and Subsidiaries (Debtor-In-Possession) for the two years ended
February 28, 2001 and the related consolidated statements of operations,
stockholders' deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements for February 27, 1999 were audited by other
auditors, therefore we do not render an opinion on these financial statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Nantucket
Industries, Inc. and Subsidiaries (Debtor-In-Possession) as of February 28,
2001, and the consolidated results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As represented in the accompanying
financial statements, the Company has a net capital deficiency, operating
losses, and defaulted on interest payments. These factors, among others
discussed in Note 1 to the accompanying financial statements, raise substantial
doubt about the company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. These financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
/s/ Pilotti, Cunzio & Associates LLP
June 6, 2001
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
February 27, February 27,
February 28, 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 1,452 $ 1,452 $ 622,268
Accounts receivable (Notes 2 and 8) -- -- 961,989
Inventories (Notes 6 and 8) -- -- 1,108,860
Other current assets 20,331 20,331 67,347
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 21,783 21,783 2,760,464
- --------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net (Notes 7 and 8) -- -- 538,522
Other assets, net -- -- 176,601
- --------------------------------------------------------------------------------------------------------------------------
$ 21,783 $ 21,783 $ 3,475,587
==========================================================================================================================
Liabilities and Stockholders' Deficit
Current portion of capital lease obligations (Note 8) $ 93,070 $ 93,070 $ 56,452
Convertible subordinated debt (Note 4) 826,845 826,845 2,052,986
Accounts payable 244,764 244,764 248,538
Accrued salaries and employee benefits 11,031 11,031 80,740
Accrued unusual charge (Note 5) 77,083 77,083 95,833
Accrued expenses and other liabilities 129,515 129,515 863,271
Accrued royalties 319,048 319,048 319,048
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,701,356 1,701,356 3,716,868
Capital lease obligations, net of current portion (Note 8) -- -- 64,250
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,701,356 1,701,356 3,781,118
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' deficit (Notes 4 and 11)
Preferred stock, $.10 par value; 500,000 shares authorized, of which
5,000 shares have been designated as non-voting convertible with
liquidating preference of $200 per share and are issued and
outstanding 500 500 500
Common stock, $.10 par value; authorized 20,000,000
shares; issued 3,241,848 324,185 324,185 324,185
Additional paid-in capital 12,539,503 12,539,503 12,539,503
Deferred issuance cost -- (61,069) (96,425)
Accumulated deficit (14,523,824) (14,462,755) (13,053,357)
- --------------------------------------------------------------------------------------------------------------------------
(1,659,636) (1,659,636) (285,594)
Less 3,052 shares of common stock held in treasury, at cost 19,937 19,937 19,937
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (1,679,573) (1,679,573) (305,531)
- --------------------------------------------------------------------------------------------------------------------------
$ 21,783 $ 21,783 $ 3,475,587
==========================================================================================================================
See accompanying notes to financial statements.
3
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
February 27, February 27,
Years ended February 28, 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 5,344,223 $ 11,517,842
Cost of sales -- 3,719,692 9,107,947
- --------------------------------------------------------------------------------------------------------------------------
Gross profit -- 1,624,531 2,409,895
Selling, general and administrative expenses -- 2,161,376 2,879,200
- --------------------------------------------------------------------------------------------------------------------------
(Loss) from operations -- (536,845) (469,305)
Other income (expense):
Net loss (gain) on sale of assets (Note 7) -- 538,522 15,093
Interest expense -- 334,031 506,746
Other income (Note 12) -- -- (1,928,624)
- --------------------------------------------------------------------------------------------------------------------------
Total other (income) expense -- 872,553 (1,406,785)
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes -- (1,409,398) 937,480
Income taxes (Note 10) -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) -- $ (1,409,398) $ 937,480
Net earnings (loss) per share - basic and diluted -- $ (.40) $ 0.26
- --------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 3,238,796 3,238,796 3,238,796
==========================================================================================================================
See accompanying notes to financial statements.
4
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Consolidated Statement of Stockholders' Deficit
- --------------------------------------------------------------------------------------------------------------------------------
Preferred stock
designated as
non-voting convertible Common stock
-------------------------------------------------------------
Additional Deferred
paid-in issuance
Shares Amount Shares Amount capital costs
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 1, 1998 5,000 $500 3,241,848 $324,185 $12,539,503 $(115,541)
Net earnings
Amortization of deferred costs 19,116
-------------------------------------------------------------------------------------------
Balance at February 27, 1999 5,000 500 3,241,848 324,185 12,539,503 (96,425)
Net(loss)
Amortization of deferred costs 35,356
-------------------------------------------------------------------------------------------
Balance at February 27, 2000 5,000 500 3,241,848 324,195 12,539,503 (61,069)
Net earnings (loss)
Amortization of deferred costs 61,069
-------------------------------------------------------------------------------------------
Balance at February 27, 2001 5,000 $500 3,241,848 $324,185 $12,539,503 $ --
================================================================================================================================
Treasury stock
------------------------
Accumulated
deficit Shares Amount Total
- -------------------------------------------------------------------------------------------------
Balance at March 1, 1998 $(13,990,837) 3,052 $(19,937) $(1,262,127)
Net earnings 937,480 937,480
Amortization of deferred costs 19,116
----------------------------------------------------------------
Balance at February 27, 1999 (13,053,357) 3,052 (19,937) (305,531)
Net(loss) (1,409,398) (1,409,398)
Amortization of deferred costs 35,356
----------------------------------------------------------------
Balance at February 27, 2000 (14,462,755) 3,052 (19,937) (1,679,573)
Net earnings (loss)
Amortization of deferred costs (61,069)
----------------------------------------------------------------
Balance at February 27, 2001 $(14,523,824) 3,052 $(19,937) $(1,644,217)
=================================================================================================
See accompanying notes to financial statements.
5
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
February 27, February 27,
Years ended February 28, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ -- $(1,409,398) $ 937,480
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization -- 35,356 397,053
Provision for doubtful accounts -- -- 11,210
Loss (gain) on sale of fixed assets -- 538,522 15,093
Provision for obsolete and slow-moving inventory -- -- 77,528
Issue of warrants -- -- --
Decrease (increase) in assets:
Accounts receivable -- 961,989 1,906,536
Inventories -- 1,108,860 1,903,995
Other current assets -- 47,016 4,548
(Decrease) increase in liabilities:
Accounts payable -- (3,774) (473,945)
Accrued expenses and other liabilities -- (803,465) (453,720)
Income taxes payable -- -- --
Accrued unusual charge -- (18,750) (547,884)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities -- 456,356 3,777,894
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment -- -- (59,562)
Proceeds from sale of fixed assets -- -- 51,745
Decrease in other assets -- 176,601 56,525
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities -- 176,601 48,708
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
(Repayments) borrowings under line of credit agreement, net -- -- (3,161,286)
Payments of short-term debt -- (1,226,141) --
Payments of long-term debt and capital lease obligations -- (27,632) (51,898)
- ----------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities -- (1,253,773) (3,213,184)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents -- (620,816) 613,418
Cash and cash equivalents, beginning of year 1,452 622,268 8,850
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $1,452 $ 1,452 $ 622,268
================================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ -- $ 881,670 $ 191,440
Income taxes $ -- $ -- $ --
See accompanying notes to financial statements.
6
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Restructuring and The accompanying financial statements have
Liquidity Matters been prepared assuming that the Company will
continue as a going concern. There have been
no sales since November 1999 and the Company
has remained inactive for fiscal year 2001.
The Company filed for Chapter 11 bankruptcy
protection in March 2000. Management is
seeking merger candidates in order to
continue the Corporation. If Management is
unsuccessful in its merger search, the
Company will cease to exist. There were no
sales under the Brittania license for the
fiscal years 2001, 2000 and 1999. As more
fully described in Note 3, Levi Strauss &
Co., the parent company of Brittania
Sportswear Ltd. a licensor which accounted
for $4.5 million of the Company's fiscal
1998 sales, announced their intention to
sell Brittania. In light of the actions
announced by Levi's, K mart, the largest
retailer of the Brittania brand and the
Company's largest customer, advised the
Company that it would no longer continue its
on-going commitment to the Brittania
trademark. Sales to this customer decreased
from $3 million in fiscal 1998, to $0 sales
in fiscal year 1999. In response, the
Company filed a 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. The
Company settled this litigation in June 1998
(see Note 12).
The Company experienced significant losses
in fiscal years 1998 and 1999 which resulted
in severe cash flow issues that negatively
impacted the ability of the Company to
conduct its business as then structured. In
fiscal year 1999 due to the lack of capital
resources needed to properly develop and
support the GUESS? product line, the Company
discontinued sales under the GUESS? license.
Sales for this product line in fiscal 2001,
2000, and 1999 aggregated $.0, $.0, and $2.5
million, with gross margins of 0%, 0% and
11.8%, respectively. As of March 1999, the
company reached an agreement with Cluett,
Peabody & Co., the licensor of the ARROW
trademark, to terminate its Arrow license
(see Note 12). 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. The Company has defaulted on
interest payments to its subordinated debt
holder, and has no long-term credit facility
in place. As a result, there can be no
assurance that the Company can continue as a
going concern.
7
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The accompanying 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. The ultimate impact
or resolution of these matters may have a
materially adverse effect on the Company or
on its financial condition.
The Company has funded its operating losses
by refinancing its debt in fiscal 1995 and
increasing its capital through (a) the sale
of $1 million of non-voting convertible
preferred stock to management (Note 11) in
fiscal 1995; (b) the fiscal 1995 sale of
treasury stock which increased equity by
$2.9 million, and (c) the completion in 1996
of a $3.5 million private placement (Note
4).
2. Summary of
Significant
Accounting Policies
a. The Company
Nantucket Industries, Inc. and its
wholly-owned inactive subsidiaries
(debtor-in-possession) (the "Company")
design and distribute branded and private
label fashion undergarments to mass
merchandisers and national chains throughout
the United States, until it ceased doing
business in October 1999.
b. Principles of Consolidation
The consolidated financial statements
include the accounts of Nantucket
Industries, Inc. and its wholly owned
subsidiaries (debtor-in-possession). All
significant intercompany balances and
transactions have been eliminated.
c. Accounts Receivable
An allowance for doubtful accounts is
provided based upon historical bad debt
experience and periodic evaluations of the
aging of the accounts.
8
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
d. Property, Plant and Equipment
Property, plant and equipment are stated at
cost. Equipment under lease is stated at the
present value of the minimum lease payments
at the inception of the lease. Depreciation
and amortization are provided by the
straight-line method over the estimated
useful lives of the assets as follows:
Years
-----
Buildings and improvements 20-40
Machinery and equipment 3-10
Furniture and fixtures 10
e. Stock Options
As described in Note 11, the Company has
granted stock options for a fixed number of
shares to employees and officers at an
exercise price equal to the market value of
the shares on the date of grant. As
permitted by SFAS No. 123, the Company has
elected to continue to account for stock
options grants in accordance with APB No. 25
and recognizes no compensation expense for
these grants.
f. Income Taxes
The Company and its wholly owned
subsidiaries file a consolidated federal
income tax return. Deferred income taxes
arise as a result of differences between
financial statement and income tax
reporting.
g. Earnings (Loss) Per Common Share
In fiscal year 1998, the Company adopted
Statement of Financial Accounting Standards
No. 128 (SFAS No. 128), Earnings Per Share,
which requires public companies to present
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 No. 128. Basic
earnings per share are based on the weighted
average number of common shares outstanding
without consideration of potential common
share equivalents. Diluted 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 on
the average price during the year. At
February 27, 2000, the Company had
outstanding warrants to purchase 16,500,000
shares of common stock which would
potentially dilute basic earnings per share
but have not been considered for the two
prior periods as they would have had an
antidilutive impact (see Note 9).
9
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
h. Reporting Comprehensive Income
In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 130 (SFAS
No. 130), Reporting Comprehensive Income,
which is effective for the Company's year
ending February 27, 1999. SFAS No. 130
addresses the reporting and displaying of
comprehensive income and its components.
Earnings (loss) per share will only be
reported for net earnings (loss), and not
for comprehensive income. Adoption of SFAS
No. 130 relates to disclosure within the
financial statements and is not expected to
have a material effect on the Company's
financial statements.
i. Segment Information
In June 1997, the FASB also issued Statement
of Financial Accounting Standards No. 131
(SFAS No. 131), Disclosure About Segments of
an Enterprise and Related Information, which
is effective for the Company's year ending
February 27, 1999. SFAS No. 131 changes the
way public companies report information
about segments of their business in their
financial statements and requires them to
report selected segment information in their
quarterly reports. Adoption of SFAS No. 131
relates to disclosure within the financial
statements and is not expected to have a
material effect on the Company's financial
statements.
j. Fiscal Year
The Company's fiscal year ends on the Sunday
nearest to February 28, with the exception
of February 28, 2001 an inactive year, the
fiscal years ended February 27, 2000 and
February 27, 1999 contained 52 weeks.
k. Reclassification
Certain prior year amounts have been
reclassified in order to conform to the
current year's presentation.
l. Use of Estimates
In preparing the Company's financial
statements, management is required to make
estimates and assumptions that affect the
reported amounts of assets and liabilities
and the disclosure of contingent assets and
liabilities at the date of the financial
statements, and the reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from
those estimates.
m. Impairment of Long-Lived Assets
The Company applies Statement of Financial
Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of.
Accordingly, when indicators of impairment
are present, the Company periodically
evaluates the carrying value of property,
plant and equipment and intangibles in
relation to the operating performance and
future undiscounted cash flows of the
underlying business. The Company adjusts
carrying amount of the respective assets if
the expected future undiscounted cash flows
are less than their book values. No
impairment loss was required in fiscal years
2001, 2000 and 1999.
10
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
n. Fair Value of Financial Instruments
Based on borrowing rates currently available
to the Company for debt with similar terms
and maturities, the fair value of the
company's long-term debt approximate the
carrying value. The carrying value of all
other financial instruments potentially
subject to valuation risk, principally cash,
accounts receivable and accounts payable,
also approximate fair value.
3. Concentration of Risk For the period ended February 28, 2001,
there were no sales or other business
activities. For February 28, 2000 there were
no sales. For February 27, 2000, sales to
the Company's largest customer accounted for
38.8% of net sales and 23%, respectively,
for the two prior fiscal years. Sales to the
second largest customer in fiscal years 1999
and 1998 were 33.6% of net sales and 22%,
respectively. As previously described, K
Mart, which represented $0 of net sales in
the 1999 fiscal year, and 16% and 40%, for
the two prior fiscal years, advised the
Company it would no longer continue its
commitment to the Brittania trademark and
consequently, the Company currently has no
business with this customer. No other
customer accounted for more than 10% of the
Company's consolidated net sales for fiscal
1999 and 1998.
4. Private Placement On August 15, 1996, the Company completed a
$3.5 million private placement with an
investment partnership. Terms of this
transaction included the issuance of 250,000
shares and $2,760,000 of 12.5% convertible
subordinated debentures that were 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, Georgia.
In conjunction with the sale of this
property completed on October 1, 1997 (see
Note 7), 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 cost and will be amortized over the
expected five-year term of the subordinated
convertible debentures. The prorated portion
of these costs associated with the prepaid
$707,000 of these debentures was recognized
in the accounting period in which the event
occurred.
Costs associated with this private placement
aggregated $409,000 including $104,000
related to the shares issued which have been
charged to paid in capital. The remaining
balance of $305,000 will be amortized over
the five-year term of the debentures.
The Company was in default in respect to
interest payments due on the subordinated
11
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 revolving credit facility (Note 8), and
to issue five-year warrants convertible to
16,5000,000 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 is currently in default
for interest payments due since August 1997
on this note, including the interest payment
due February 1999. There is no forbearance
agreement in effect subsequent to December
1998 and therefore, the outstanding
liability of $2,052,986 is classified as a
current liability. In October 1999, the
Company assigned the accounts receivable,
inventory and all law suits to the
subordinated creditor.
5. Unusual (Credit) Charge In November 1992, the Company acquired
Phoenix Associates, Inc., a manufacturing
facility in Puerto Rico, pursuant to a stock
purchase agreement. Phoenix had been an
exclusive contractor for the Company,
manufacturing many of the Company's product
lines. A portion of the purchase price was
subordinated debt payable to the former
owners of Phoenix, of which $300,000 was due
February 2, 1998. In April 1993, the Company
discovered an inventory variance of
$1,700,000, principally attributable to
unrecorded manufacturing and material cost
variance at the Puerto Rico facility, which
were incurred prior to the Company's
acquisition of this facility. As a result,
the Company initiated an action against the
former owners of the facility as more fully
described in Note 12. Accordingly, in fiscal
1995 the Company eliminated this payable and
reflected such reduction as an unusual
credit in the 1995 financial statements.
In March of fiscal 1994, the Company
terminated the employment contracts of its
Chairman and Vice-Chairman. In accordance
with the underlying agreement, they were
paid in aggregate of approximately $400,000
per year in severance and other benefits,
through February 27, 1999.
As of February 28, 2001 and February 27,
2000, the accrued unusual charge of $77,083
represents payments due under the
termination agreements to the former
Chairman and Vice-chairman. As of October
1997, pending negotiation of more favorable
terms, payment under these agreements was
suspended.
12
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. Inventories Inventories are recorded at the lower of
cost or market value using the first
in-first-out (FIFO) cost flow method, and
are summarized as follows:
February 28, February 27, February 27
2001 2000 1999
---------------------------------------------------------------------
Raw materials $ -- $ -- $ --
Work in process -- -- --
Finished goods -- -- 1,108,860
---------------------------------------------------------------------
$ -- $ -- $1,108,860
=====================================================================
7. Property, Plant and
Equipment Property, plant and equipment are summarized
as follows:
February 28, February 27, February 27
2001 2000 1999
---------------------------------------------------------------------
Land $ -- $ -- $ --
Buildings and improvements -- -- 26,034
Machinery and equipment -- -- 1,485,090
Furniture and fixtures -- -- 142,489
---------------------------------------------------------------------
-- -- 1,653,613
Less accumulated
depreciation -- -- 1,115,090
---------------------------------------------------------------------
$ -- $ -- $ 538,523
=====================================================================
8. Long-Term Debt and Notes
Payable a. Revolving Credit
The Company has a $15 million revolving
credit facility, which expired in March
1998, and has been extended to August 31,
1999. The revolving credit agreement
provides for loans based upon eligible
accounts receivable and inventory, a
$3,000,000 letter of credit facility and
purchase money term loans of up to 75% of
the orderly liquidation value of newly
acquired and eligible equipment. Borrowings
bear interest at 2 3/4% above prime. The
agreement requires, among other provisions,
the maintenance of minimum working capital
and net worth levels and also contains
restrictions regarding payment of dividends.
Borrowings under the agreement are
collateralized by substantially all of the
assets of the Company. At February 28, 2001
and February 27, 2000, the revolving credit
facility was not in place.
13
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
b. Capital Leases
The Company leases equipment under capital
leases. During Fiscal 2000, the Company's
equipment was returned for non-payment.
9. Net Earnings (Loss) Per The following table sets forth the
Common Share computation of basic and diluted loss per
share:
February 28, February 27, February 27
2001 2000 1999
-------------------------------------------------------------------------------
Net earnings (loss) attributable
to common stockholders $ -- $(1,409,398) $ 937,480
Accrued dividends on preference
shares -- $ (81,074) $ (81,103)
Numerator for basic and diluted
net earnings (loss) per common
share - earnings (loss)
attributable to common
stockholders $ -- $ -- $ 856,377
-------------------------------------------------------------------------------
Denominator for basic and diluted
net earnings (loss) per common
share - weighted average shares
outstanding 3,238,796 3,238,796 3,238,796
-------------------------------------------------------------------------------
Basic and diluted net earnings
(loss) per share $ -- $ (.40) $ 0.26
===============================================================================
10. Income Taxes Deferred income taxes reflect the net effect
of temporary differences between the
carrying amounts of assets and liabilities
for financial reporting purposes and the
amount used for income tax purposes.
Deferred tax assets and liabilities are
measured using enacted tax rates.
Significant components of the Company's
deferred taxes at February 28, 2001,
February 27, 2000 and February 27, 1999 are
as follows:
February 28, February 27, February 27
2001 2000 1999
--------------------------------------------------------------------------------
Deferred tax assets
Net operating loss
carryforward $7,215,000 $7,215,000 $6,987,000
Accrued severance -- -- 36,000
Excess of tax basis over
book basis of -- -- --
Capitalized inventory costs -- -- 22,000
Other -- -- 121,000
--------------------------------------------------------------------------------
7,215,000 7,215,000 7,166,000
Deferred tax liabilities
Difference between the book
and tax basis of property,
plant and equipment 331,000 331,000 331,000
--------------------------------------------------------------------------------
Net deferred tax asset 6,884,000 6,884,000 6,835,000
Valuation allowance 6,884,000 6,884,000 (6,835,000)
--------------------------------------------------------------------------------
Net deferred taxes $ -- $ -- $ --
================================================================================
14
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company anticipates utilizing its
deferred tax assets only to the extent of
its deferred tax liabilities. Accordingly,
the Company has fully reserved all remaining
deferred tax assets, which it cannot
presently utilize.
For tax purposes at February 28, 2001, the
Company's net operating loss carryforward
was $20,200,000, which, if unused, will
expire from 2008 to 2013. Certain tax
regulations relating to the change in
ownership may limit the Company's ability to
utilize its net operating loss carryforward
if the ownership change, as computed under
each regulation, exceeds 50%. Through
February 28, 2001, the change in ownership
was less than 50%.
There was no income tax provision (benefit)
for the fiscal years 2001, 2000 and 1999.
The following is a reconciliation of the
normal expected statutory federal income tax
rate to the effective rate reported in the
financial statements.
February 28, February 27, February 27,
2001 2000 1999
---------------------------------------------------------------------------------
Computed "expected" provision for:
Federal income taxes 0% (35.0)% (35.0)%
Valuation allowance 0 35.0 35.0
---------------------------------------------------------------------------------
Actual provision for income taxes 0% -- % -- %
---------------------------------------------------------------------------------
11. Stockholders' Equity a. Stock Options
The 1972 stock option plan, as amended,
provides for the issuance of options to
purchase up to 340,000 shares of common
stock at the market value of the date of
grant. Options are exercisable up to ten
years from the date of grant and vest at 20%
per year.
The Company has adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no
compensation costs have been recognized for
grants made under the Company's stock option
plan. Had compensation cost been determined
based on the fair value, as determined in
accordance with the requirements of SFAS No.
123, at the date of grant of stock option
awards, the increase in the net loss for
fiscal 2001, 2000 and 1999 would be $0, $0
and $91,000, respectively. In fiscal 2001,
2000 and 1999 there were no awards of stock
options. During the initial phase-in period
of SFAS No. 123, such compensation may not
be representative of the future effects of
applying this statement.
15
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
A summary of option activity for the years
ended February 28, 2001, February 27, 2000,
and February 27, 1999 is as follows:
Weighted
Number of Average
Options Exercise Price
-----------------------------------------------------------------------
Balance, February 27, 1999 106,000 $5.05
Forfeited 106,000 $5.05
-----------------------------------------------------------------------
Balance, February 27, 2000 -- --
-----------------------------------------------------------------------
Balance, February 28, 2001 -- --
-----------------------------------------------------------------------
b. Issuance of Preferred Stock
On March 22, 1994, the Company sold to its
management group 5,000 shares of non-voting
convertible preferred stock for $1,000,000.
These shares are convertible into 200,000
shares of common stock at the rate of $5.00
per share. These shares provide for
cumulative dividends at a floating rate
equal to the prime rate. Such dividends were
convertible into common stock at the rate of
$5.00 per share. The conversion rights were
waived in May 1998. These shares are
redeemable, at the option of the Company, on
or after February 27, 1999 and have a
liquidation preference of $200 per share. As
of February 28, 2001, February 27, 2000 and
February 27, 1999 dividends in arrears were
$570,134, $489,484 and $408,384,
respectively.
c. Issuance of Treasury Stock
In connection with the Company's refinancing
on March 22, 1994, the Company entered into
a $2,000,000 term loan agreement with a
financial institution. Pursuant to the
agreement, the Company issued to the bank
10,000 treasury common shares related to
mandatory prepayments, which were not made.
d. Grant of Warrants
Warrants have been granted to NAN Investors
LP to purchase 16,500,000 shares of the
Company's Common Stock for $.10 per share,
with a five-year term effective May 21,
1998.
16
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Commitments, Contingencies
and Related Party
Transactions a. Agreement with Principal Stockholders
On March 1, 1994, in connection with the
restructuring described in Note 4, the
Company entered into agreements with its two
principal stockholders and a group of
employees (the "Management Group"). The
agreements provide, among other things, for:
The reimbursement of the principal
stockholders, limited to $1.50 per share to
the extent that the gross proceeds per share
from the sale of common stock by the
stockholders during the two-year period
beginning September 1, 1994 are less than
$5.00 per share. Such guaranty is applicable
to a maximum of 150,000 shares sold by such
stockholders, subject to reductions under
certain circumstances. The principal
stockholders sold 157,875 shares including
88,400 at prices below $5.00 per share;
37,125 shares in the fiscal year ended March
1, 1997 and 51,275 shares in the year ended
March 2, 1996 which resulted in a charge to
operating results of $12,000 and $35,000,
respectively.
Warrants to purchase up to 157,875 shares of
common stock equal to the number of shares
sold by the principal stockholders. The
exercise price per share of such warrants
would equal the gross proceeds per share
from the corresponding sale by the principal
stockholders. Such warrants expire on
February 28, 2000. As of May 14, 1999, these
warrants have not been requested to be
issued, nor have they been issued.
The contribution to the Company of life
insurance policies with a cash value of
$535,000 which, if borrowed by the Company,
would be repaid by the two principal
stockholders.
b. Trademark Licensing Agreements
Royalties including minimum licensing
payments to GUESS?, Inc. which owns 9.9% of
the outstanding common stock of the Company,
aggregated $74,000 in fiscal 1999, and
$840,000 in fiscal 1998. Due to the lack of
capital resources necessary to develop and
support the GUESS? product line, the company
discontinued its GUESS? division in the
first quarter of fiscal year 1999. The
GUESS? license was terminated as of March
31, 1998.
17
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
c. Litigation
In September 1993, the Company filed an
action against the former owners of Phoenix
Associates, Inc. (Phoenix). The Company
sought compensatory damages of approximately
$4.0 million 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 $4.0 million, rescission of the
stock purchase agreement, rescission of an
employment agreement and other matters, all
on account of alleged breaches of the stock
employment agreement, fraudulent
misrepresentation and breach of fiduciary
duties.
In November 1993, the former owners of
Phoenix filed counter claims against the
Company alleging improper termination with
regard to their employment agreement and
breach of the stock purchase agreement. The
Company settled this litigation and realized
$675,000 from this matter which is included
in the accompanying statement of operations
for 1999 under the caption "Other income."
On December 9, 1997, a former officer and
director of the Company filed a complaint
against the Company in the State Court of
Fulton County, State of Georgia relating to
payments allegedly due him under the March
18, 1994 Severance Agreement, and was
seeking damages in the amount of $219,472.
The Company reached a settlement with the
officer in the amount of $100,000 plus an
amount based on reaching a certain level of
recovery, if any, from the Levi Strauss
litigation. Based on the settlement with
Levi's, no additional accrual to the former
officer and director was necessary.
On January 15, 1998, in the Supreme Court of
the State of New York, Westchester County, a
Director of the Company filed a complaint
against the Company for breach of the March
18, 1994 Severance Agreement, and seeking
damages in the amount of $559,456 plus
applicable interest and legal fees which was
accrued as of February 28, 1998. The Company
on March 9, 1998, filed counterclaims in a
significantly larger amount. In April 1999,
the Company reached a settlement with the
Director for $75,000 which resulted in the
reduction of approximately $530,000 in the
accrued unusual charge this reduction is
included in the accompanying Statement of
Operations under the caption "Other Income."
The Company is subject to other legal
proceedings and claims, which arise, in the
ordinary course of its business. In the
opinion of management, other legal
proceedings and claims in which the Company
is defendant will be successfully defended
or resolved without a material adverse
effect on the consolidated financial
position or results of operations of the
Company. The Company with respect to the
aforementioned litigation at February 27,
2000 has made no provision in the
accompanying financial statements.
18
Nantucket Industries, Inc.
and Subsidiaries
(Debtor-In-Possession)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. Brittania Litigation Beginning in September 1988, the Company
became 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
trademark "Brittania from Levi Strauss &
Co.". Sales under this license aggregated $0
in fiscal year 1999, $4.5 million in fiscal
1998.
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 were achieved. On
January 22, 1997, Levi's announced its
intention to sell Brittania. In light of the
actions announced by Levi's, K Mart, the
largest retailer of the Brittania brand and
the Company's largest customer accounting
for approximately $11 million of the
Company's fiscal 1997 sales of Brittania
product, advised the Company that it would
no longer continue its on-going commitment
to the Britannia trademark.
The Company filed a 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 agreed to settle this litigation in
June 1998 and realized approximately
$725,000 in gross value from this matter
which is included in the accompanying
statement of operations under the caption
"Other income."
14. Subsequent Events On March 3, 2000, the Company filed for
Chapter 11 protection with U.S. Bankruptcy
Court. The Company is involved in discussion
with merger candidates, should these
discussions prove futile, a move to Chapter
7 liquidation is probable.
19
Nantucket Industries Inc., and Subsidiaries
Projected Balance Sheet (Unaudited)
August 31, 2001
Assumes The Following
1. That Nantucket Industries Plan of Reorganization is confirmed and that
Nantucket acaquires Accutone, Inc. and subsidiary.
2. Increase in Accounts Receivable is attributable to the increased volume of
business generated by the twenty-two nursing homes which Accutone began
servicing on June 1, 2001. These facilities are being serviced according
to an executory contract which has not yet been finalized for new
Nantucket/Accutone to purchase the existing audiology practice of Park
Avenue Medical Associates P.C. and Park Avenue Health Care Management,
Inc. (A copy of their year end financials are included herein). The
current audiology practice serves approximately 17 nursing homes. Accutone
as of June 1, 2001 began servicing the homes which are included in this
practice. Park Avenue services an additional 55 facilities most of which
have expressed a desire to have outside audiological services rendered. We
are already in discussion with an additional 12 facilities and intend to
move toward servicing their audiological needs between September and
December of 2001. (See facility list attached).
3. In accordance with Generally Accepted Accounting Principles, the
transaction has been treated as a purchase, as well as the inclusion of
the surviving Chapter 11 non dischargeable debt. Below is an outline of
the accounting for this transaction.
Calculation of Good Will
Purchase of Accutone and Subsidiary $ 528,612
Less: Book Value of Accutone (125,495)
---------
403,117
Less: Valuation of Customer List
(65% of Estimated Current Volume @ $400,000) (260,000)
---------
Good Will $ 143,117
---------
Calculation of Reorganization Value in Excess of
Amount Allocatible to Identifiable Assets
Survival Subsequent to Chapter 11 of
Non Dischargeable Tax Debt $ 92,389
Settle Chapter 11 Debt Utilizing Common Stock 71,388
---------
Settlement of Order $ 163,777
---------
4. In accordance with Generally Accepted Accounting Principles, Good Will is
authorized over 15 years and customer lists are amortized over 7 years.
5. Personal Property Taxes are being paid over six years.
EXHIBIT "B"
NANTUCKET INDUSTRIES INC. AND SUBSIDIARIES
PROJECTED BALANCE SHEET (UNAUDITED)*
AUGUST 31, 2002
ASSETS
CASH $ 685,893
ACCOUNTS RECEIVABLE 154,103
INVENTORY 12,100
----------
TOTAL CURRENT ASSETS 852,096
----------
FIXED ASSETS 123,770
ACCUMULATED DEPRECIATION (43,035)
----------
NET FIXED ASSETS 80,735
----------
OTHER ASSETS
GOODWILL 143,117
AMORTIZATION-GOODWILL (9,541)
REORGANIZATION VALUE IN EXCESS OF AMOUNT
ALLOCATIBLE TO IDENTIFIABLE ASSETS 163,777
AMORTIZATION-REORGANIZATIONAL VALUE (10,918)
CUSTOMER LIST 307,935
AMORTIZATION-CUSTOMER LIST (69,100)
----------
TOTAL OTHER ASSETS 525,270
----------
$1,458,101
==========
LIABILITIES
ACCOUNTS PAYABLE $ 65,170
PERSONAL PROPERTY TAXES 15,398
AUTO LOAN 413
----------
TOTAL CURRENT LIABILITIES 80,981
PERSONAL PROPERTY TAXES 61,593
----------
TOTAL LIABILITIES 142,574
----------
COMMON STOCK 600,000
PAID IN CAPITAL 500,000
RETAINED EARNINGS 215,527
----------
TOTAL STOCKHOLDERS EQUITY 1,315,527
----------
$1,458,101
==========
EXHIBIT "C"
* This projection statement should be read in conjuction with the attached
assumptions
Exhibit E
Nantucket Industries Inc. and Subsidiaries
Projected Balance Sheet (Unlimited)
August 31, 2002
Assumes The Following
1. That a private placement of Nantucket Industries common stock, is
completed during the year ended August 31, 2002 with total proceeds
approximating $500,000.00 adding to the Company's cash position.
2. That the continued increase in sales will cause the total accounts
receivable from Medicare, Medicaid and of the third party payers to
increase.
3. The increase in Paid-in-Capital reflects the completion during the prior
12 months of the $500,000 private placement.
4. The increase in Accounts Payable results from the increase in business
volume and subsequent related expenses.
5. The decrease in personal property taxes result from payments made during
the year on the anticipated 6 year payout of these priority tax claims.
NANTUCKET INDUSTRIES INC. AND
SUBSIDIARIES
PROJECTED BALANCE SHEET (UNAUDITED)*
AUGUST 31, 2001
ASSETS
CASH $ 15,000
ACCOUNTS RECEIVABLE 72,000
INVENTORY 5,000
---------
TOTAL CURRENT ASSETS 92,000
---------
FIXED ASSETS 123,770
ACCUMULATED DEPRECIATION (43,035)
---------
NET FIXED ASSETS 80,735
---------
OTHER ASSETS
GOODWILL 143,117
AMORTIZATION GOODWILL --
REORGANIZATION VALUE IN EXCESS OF AMOUNT
ALLOCATIBLE TO IDENTIFIABLE ASSETS 163,777
AMORTIZATION-REORGANIZATIONAL VALUE --
CUSTOMER LIST 307,935
AMORTIZATION -CUSTOMER LIST (31,957)
---------
TOTAL OTHER ASSETS 582,872
---------
$ 755,607
LIABILITIES
ACCOUNTS PAYABLE $ 59,870
PERSONAL PROPERTY TAXES 15,398
AUTO LOAN 3,348
---------
TOTAL CURRENT LIABILITIES 78,616
PERSONAL PROPERTY TAXES 76,991
---------
TOTAL LIABILITIES 155,607
---------
COMMON STOCK 600,000
PAID IN CAPITAL --
RETAINED DEFICIT --
---------
TOTAL STOCKHOLDERS EQUITY 600,000
---------
$ 755,607
* This projection statement should be read in conjuction with the attached
assumptions
NANTUCKET
INDUSTRIES ACCUTONE INTERSTATE
CASH 10,000 5,000
ACCOUNTS RECEIVABLE 72,000 0
INVENTORY 5,000 0
INVESTMENT-ACCUTONE 528,612 0 0
INVESTMENT-INTERSTATE 60,000 0
LOAN RECEIVABLE-INTERSTATE 8,351 (8,351)
EQUIPMENT 97,920 25,850
ACCUMULATED DEPRECIATION (30,956) (12,079)
CUSTOMER LIST 47,935
(31,957)
GOODWILL 0
AMORTIZATION GOODWILL 0
REORGANIZATION VALUE 163,777 0
AMORTIZATION-REORG 0
ACCOUNTS PAYABLE (14,370) 0
PAYROLL TAX PAYABLE (35,000) (10,500)
PERSONAL PROPERTY TAXES (92,389) 0
AUTO LOAN (3,348) 0
PAID IN CAPITAL (429,461) 0
COMMON STOCK (600,000) (1,000) (60,000)
RETAINED EARNINGS 260,864 44,102
0 0 0
SALES
SALES RETURNS
PURCHASES
LABOR
COMMISSIONS
Sales
Product
Advertising
Labor & benefits
Amortization & Depreciation
Automobile Expense
Bank Charges
Dues & Subscriptions
Insurance (Prop/Comp/Liability)
Miscellaneous Expenses
Office Expense
Postage
Health Insurance
Rent
Administrative Salaries
Payroll taxes
Supplies
Telephone
Professional fees
Selling expense
Travel & Entertainment
PROJECTED ACTIVITY CONSOLIDATION AJE ELIMINATION CONSOLIDATED
170,893 185,893
82,103 154,103
7,100 12,100
(528,612) 0
(60,000) 0
0
123,770
0 (43,035)
260,000 307,935
(37,143) (69,100)
143,117 143,117
(9,541) (9,541)
163,777
(10,918) (10,918)
(30,000) (44,370)
24,700 (20,800)
15,398 (76,991)
2,935 (413)
429,461 0
1,000 60,000 (600,000)
(273,129) (247,364) (215,527)
(0) (0) (0)
(1,429,182) (1,429,182)
266,205 266,205
72,400 72,400
362,949 362,949
21,024 57,602 78,626
12,000 12,000
3,999 3,999
4,801 4,801
8,001 8,001
3,000 3,000
8,200 8,200
2,199 2,199
16,921 16,921
38,856 38,856
237,999 237,999
26,180 26,180
4,801 4,801
17,519 17,519
24,999 24,999
15,000 15,000
9,000 9,000
(273,129) 0 (215,527)
RENT
INSURANCE
MEDICAL INSURANCE
PRINTING
OFFICE EXPENSE
POSTAGE-DELIVERY
TELEPHONE
PROFESSIONAL FEES
AUTO EXPENSE
LICENSES EXPENSE
SALES & PROMOTION
ADVERTISING
TRAVEL & LODGING
CLINIC EXPENSE
INTEREST EXPENSE
MISC EXPENSE
REPAIRS
PAYROLL TAXES
OFFICE SALARIES
DEPRECIATION EXPENSE
BANK CHARGES
NANTUCKET INDUSTRIES INC. AND SUBSIDIARIES
PROJECTED BALANCE SHEET (UNAUDITED)*
AUGUST 31, 2002
ASSETS
CASH $185,893
ACCOUNTS RECEIVABLE 154,103
INVENTORY 12,100
--------
TOTAL CURRENT ASSETS 352,096
--------
FIXED ASSETS 123,770
ACCUMULATED DEPRECIATION (43,035)
--------
NET FIXED ASSETS 80,735
--------
OTHER ASSETS
GOODWILL 143,117
AMORTIZATION-GOODWILL (9,541)
REORGANIZATION VALUE IN EXCESS OF AMOUNT
ALLOCATIBLE TO IDENTIFIABLE ASSETS 163,777
AMORTIZATION-REORGANIZATIONAL VALUE (10,918)
CUSTOMER LIST 307,935
AMORTIZATION -CUSTOMER LIST (69,100)
--------
TOTAL OTHER ASSETS 525,270
--------
$958,101
========
LIABILITIES
ACCOUNTS PAYABLE $ 65,170
PERSONAL PROPERTY TAXES 15,398
AUTO LOAN 413
--------
TOTAL CURRENT LIABILITIES 80,981
PERSONAL PROPERTY TAXES 61,593
--------
TOTAL LIABILITIES 142,574
--------
COMMON STOCK 600,000
PAID IN CAPITAL 0
RETAINED EARNINGS 215,527
--------
TOTAL STOCKHOLDERS EQUITY 815,527
--------
$958,101
========
* This projection statement should be read in conjuction with the attached
assumptions
EXHIBIT "D"
Exhibit F
Nantucket Industries Inc. and Subsidiaries
Projected Balance Sheet (Unaudited)
August 31, 2002
Assumes The Following
1. No private placement of Nantucket Industries common stock, is completed
during the year ended August 31, 2002.
2. That the continued increase in sales will cause the total accounts
receivable from Medicare, Medicaid and of the third party payers to
increase.
3. The increase in Paid-in-Capital reflects the completion during the prior
12 months of the $500,000 private placement.
4. The increase in Accounts Payable results from the increase in business
volume and subsequent related expenses.
5. The decrease in personal property taxes result from payments made during
the year on the anticipated 6 year payout of these priority tax claims.
PROJECTED ACTIVITY CONSOLIDATION AJE ELIMINATION CONSOLIDATED
170,893 185,893
82,103 154,103
7,100 12,100
(528,612) 0
(60,000) 0
0
123,770
0 (43,035)
260,000 307,935
(37,143) (69,100)
143,117 143,117
(9,541) (9,541)
163,777
(10,918) (10,918)
(30,000) (44,370)
24,700 (20,800)
15,398 (76,991)
2,935 (413)
429,461 0
1,000 60,000 (600,000)
(273,129) (247,364) (215,527)
(0) (0) (0)
(1,429,182) (1,429,182)
266,205 266,205
72,400 72,400
362,949 362,949
21,024 57,602 78,626
12,000 12,000
3,999 3,999
4,801 4,801
8,001 8,001
3,000 3,000
8,200 8,200
2,199 2,199
16,921 16,921
38,856 38,856
237,999 237,999
26,180 26,180
4,801 4,801
17,519 17,519
24,999 24,999
15,000 15,000
9,000 9,000
(273,129) 0 (215,527)
NANTUCKET
INDUSTRIES ACCUTONE INTERSTATE
CASH 10,000 5,000
ACCOUNTS RECEIVABLE 72,000 0
INVENTORY 5,000 0
INVESTMENT-ACCUTONE 528,612 0 0
INVESTMENT-INTERSTATE 60,000 0
LOAN RECEIVABLE-INTERSTATE 8,351 (8,351)
EQUIPMENT 97,920 25,850
ACCUMULATED DEPRECIATION (30,956) (12,079)
CUSTOMER LIST 47,935
AMORTIZATION-CUSTOMER LIST (31,957)
GOODWILL 0
AMORTIZATION GOODWILL 0
REORGANIZATION VALUE 163,777 0
AMORTIZATION-REORG 0
ACCOUNTS PAYABLE (14,370) 0
PAYROLL TAX PAYABLE (35,000) (10,500)
PERSONAL PROPERTY TAXES (92,389) 0
AUTO LOAN (3,348) 0
PAID IN CAPITAL (429,461) 0
COMMON STOCK (600,000) (1,000) (60,000)
RETAINED EARNINGS 260,864 44,102
0 0 0
Sales
Product
Advertising
Labor & benefits
Amortization & Depreciation
Automobile Expense
Bank Charges
Dues & Subscriptions
Insurance (Prop/Comp/Liability)
Miscellaneous Expenses
Office Expense
Postage
Health Insurance
Rent
Administrative Salaries
Payroll taxes
Supplies
Telephone
Professional fees
Selling expense
Travel & Entertainment
Increase due to the acquisition of Accutone and related amortization
since depreciation costs.
NANTUCKET INDUSTRIES INC. AND SUBSIDIARIES
PROJECTED STATEMENT OF OPERATIONS & RETAINED EARNINGS (UNAUDITED)*
SEPTEMBER 1, 2001-AUGUST 31, 2002
SALES (NET) $1,429,182
COSTS OF GOODS SOLD
PURCHASES 266,205
ADVERTISING 72,400
LABOR & BENEFITS 362,949
----------
TOTAL COSTS OF GOODS SOLD 701,554
----------
GROSS PROFIT 727,628
GENERAL & ADMINISTRATIVE
AUTOMOBILE EXPENSE 12,000
BANK CHARGES 3,999
DUES & SUBSCRIPTIONS 4,801
INSURANCE 8,001
MISCELLANEOUS EXPENSES 3,000
OFFICE EXPENSE 8,200
POSTAGE 2,199
HEALTH INSURANCE 16,921
RENT 38,856
ADMINISTRATIVE SALARIES 237,999
PAYROLL TAXES 26,180
SUPPLIES 4,801
TELEPHONE 17,519
PROFESSIONAL FEES 24,999
SELLING EXPENSE 15,000
TRAVEL & ENTERTAINMENT 9,000
----------
TOTAL GENERAL & ADMINISTRATIVE 433,475
----------
INCOME BEFORE DEPRECIATION 294,153
DEPRECIATION EXPENSE 78,626
----------
NET INCOME 215,527
BEGINNING RETAINED EARNINGS --
----------
ENDING RETAINED EARNINGS $ 215,527
==========
* This projection statement should be read in conjuction with the attached
assumptions
Nantucket Industries Inc. and Subsidiaries
Projected Statement of Operations & Retained Earnings (Unaudited)
August 31, 2002
Assumes The Following
1. A. Increase in sales at Yonkers locations attributable to the following:
2. Addition of 4 contracts for audiological services for Early
Intervention Programs for children (from 8 months to 12 years
of age)
3. Increase in referrals from local nursing and adult care
facilities
4. Expansion of office hours from 5 to 6 days per week
5. Addition of a St. Joseph's Geriatric Day Care Center contract
for both referrals and on-site clinical evaluations and
hearing aid dispensing. (This facility services the entire
City of Yonkers and parts of lower Westchester).
6. Increase in local doctor referrals.
1. Anticipated addition of a total of at least 30 nursing homes in
Westchester, Dutchess and Ulster counties to which we be the exclusive
provider of audiological services, including the dispensing of hearing
aids (part of Park Avenue contract).
2. Continued growth of sales and revenues in Mount Vernon Wartburg Facility
by expanding office hours and number of days open for service.
3. Addition of a minimum of 4 to 6 new registered hearing aid dispensers and
an additional dispensing office in the Pennsylvania operation.
EXPENDITURES
Cost of Sales - increases due to the addition of at least three NYS
Licensed Audiologists and revised salary and benefits costs.
Purchases increase due to projected greater number of hearing aids sold.
General and Administrative
Increased as a result of projected increase in sales and overall related
costs including but not limited to:
A. Required additional administrative executives and staff.
B. Additional space required to accomodate administrative
offices.
Depreciation Expense
LIQUIDATION ANALYSIS
NANTUCKET INDUSTRIES, INC.
AS AT December 31, 2001
ASSETS:
Cash 1,452.00
Other current assets 20,331.00(1)
------------
Total assets 21,783.00
LIABILITIES:
Secured claims 21,783.00
Balance available to
priority and general claims 0.00
Priority Claims 71,187.00(2)
------------
Balance available for
General creditors 0.00
General unsecured claims 1,701,000.00
------------
Balance available for
Shareholder interests 0.00
Preferred shares liquidation 1,000,000.00
------------
Balance available for
Common stockholders 0.00
EXHIBIT "E"
1.The "Other Current Asset" consists of various security deposits held by third
parties including utilities and the former landlord. It is not certain that
these security deposits have or have not been off-set prior to the bankruptcy by
the relevant creditors.
2. A priority claim has been filed by Bartow County, Georgia for personal
property taxes in the amount of $71,187. This amount is disputed by the Debtor
which filed a tax return indicating that the amount of $19,000 is due.
EXHIBIT "F"
OMITTED AS PER ORDER OF THE COURT
THIS DOCUMENT IS AVAILABLE
ON THE COURT'S ELECTRONIC FILING SYSTEM
Exhibit "F"
Accutone, Inc.
and Subsidiary
Audited Financial Statements
Years Ended December 31, 2000, 1999 and 1998
EXHIBIT "G"
Accutone, Inc.
and Subsidiary
Contents
- --------------------------------------------------------------------------------
Independent auditors' report 2
Financial statements:
Consolidated balance sheets 3
Consolidated statements of operations 4
Consolidated statement of stockholders' deficit 5
Consolidated statements of cash flows 6
Notes to consolidated financial statements 7-8
Independent Auditors' Report
To the Board of Directors
Accutone, Inc. and Subsidiary
Yonkers, New York
We have audited the accompanying consolidated balance sheets of Accutone, Inc.
and Subsidiary as of December 31, 2000, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Accutone, Inc. and
Subsidiary as of December 31, 2000, 1999 and 1998, and the consolidated results
of its operations and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.
May 8, 2001
Accutone, Inc.
and Subsidiary
Consolidated Balance Sheets
=================================================================================================
December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------
Assets
Cash $ 10,860 $ 34,548 $ 11,372
Accounts receivable 19,680 8,500 4,850
Inventories 10,760 13,378 7,500
Deferred costs (Note 5) 70,599 -- --
- -------------------------------------------------------------------------------------------------
Total current assets 111,899 56,426 23,722
- -------------------------------------------------------------------------------------------------
Property, plant and equipment, net (Notes 2 and 3) 87,109 108,133 63,768
- -------------------------------------------------------------------------------------------------
$ 199,008 $ 164,559 $ 87,490
=================================================================================================
Liabilities and Stockholders' Deficit
Current portion of long-term debt (Note 3) $ 3,129 $ 2,935 $ 2,767
Accounts payable 63,807 34,447 18,046
Other liabilities (Note 5) 25,000 -- --
- -------------------------------------------------------------------------------------------------
Total current liabilities 91,936 37,382 20,813
Long term debt (Note 3) 2,440 5,569 8,504
- -------------------------------------------------------------------------------------------------
Total liabilities 94,376 42,951 29,317
- -------------------------------------------------------------------------------------------------
Stockholders' equity (Note 4)
Common stock, $.01 par value; authorized 100,000 shares;
issued and outstanding 1,000 1,000 1,000
Additional paid-in capital 379,504 311,564 216,766
Accumulated deficit (275,872) (190,956) (159,593)
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 104,632 121,608 58,173
- -------------------------------------------------------------------------------------------------
$ 199,008 $ 164,559 $ 87,490
=================================================================================================
See accompanying notes to financial statements.
3
Accutone, Inc.
and Subsidiary
Consolidated Statements of Operations
================================================================================
Years ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Net sales $ 314,028 $ 362,175 $ 267,388
Cost of sales 224,028 232,542 180,702
- --------------------------------------------------------------------------------
Gross profit 90,000 129,633 86,686
Selling, general and administrative
expenses 152,254 135,253 144,013
- --------------------------------------------------------------------------------
Loss from operations (62,254) (5,620) (57,327)
Other expense:
Depreciation 21,024 20,107 11,010
Interest expense 1,638 5,636 3,282
- --------------------------------------------------------------------------------
Total other expense 22,662 25,743 14,292
- --------------------------------------------------------------------------------
Loss before income taxes (84,916) (31,363) (71,619)
Income taxes (Note 4) -- -- --
- --------------------------------------------------------------------------------
Net loss $ (84,916) $ (31,363) $ (71,619)
================================================================================
See accompanying notes to financial statements.
4
Accutone, Inc.
and Subsidiary
Consolidated Statement of Stockholders' Equity
================================================================================
Additional
Common paid-in Accumulated
stock capital deficit Total
- --------------------------------------------------------------------------------
Balance at January 1, 1998 $ 1,000 $ 139,369 $ (87,974) $ 52,395
Net loss (71,619) (71,619)
Capital contribution 77,397 77,397
- --------------------------------------------------------------------------------
Balance at December 31, 1998 1,000 216,766 (159,593) 58,173
Net loss (31,363) (31,363)
Capital contribution 94,798 94,798
- --------------------------------------------------------------------------------
Balance at December 31, 1999 1,000 311,564 (190,956) 121,608
Net loss (84,916) (84,916)
Capital contribution 67,940 67,940
- --------------------------------------------------------------------------------
Balance at December 31, 2000 $ 1,000 $ 379,504 $(275,872) $ 104,632
================================================================================
See accompanying notes to financial statements.
5
Accutone, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
=======================================================================================
Years ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(84,916) $(31,363) $(71,619)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 21,024 20,107 11,010
Changes in assets and liabilities
Accounts receivable (11,180) (3,650) 650
Inventories 2,618 (5,878) 4,569
Deferred costs (70,599) -- --
Accounts payable 29,360 16,401 (5,054)
Other liabilities 25,000 -- --
- ---------------------------------------------------------------------------------------
Net cash used by operating activities (88,693) (4,383) (60,444)
- ---------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment -- (64,472) (22,251)
- ---------------------------------------------------------------------------------------
Net cash used by investing activities -- (64,472) (22,251)
- ---------------------------------------------------------------------------------------
Cash flows from financing activities:
Capital contribution 67,940 94,798 77,397
Proceeds from equipment loan -- -- 12,377
Payments on long-term debt (2,935) (2,767) (1,106)
- ---------------------------------------------------------------------------------------
Net cash provided by
financing activities 65,005 92,031 88,668
- ---------------------------------------------------------------------------------------
Net increase (decrease) in cash (23,688) 23,176 5,973
Cash, beginning of year 34,548 11,372 5,399
- ---------------------------------------------------------------------------------------
Cash, end of year $ 10,860 $ 34,548 $ 11,372
=======================================================================================
See accompanying notes to financial statements.
6
Accutone, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
1. Summary of
Significant
Accounting Policies
a. The Company
Accutone, Inc. and its wholly-owned
subsidiary (the "Company") distribute
hearing aids.
b. Principles of Consolidation
The consolidated financial statements
include the accounts of Accutone, Inc. and
its wholly-owned subsidiary. All significant
intercompany balances and transactions have
been eliminated.
c. Revenue Recognition
Revenue is recognized when the merchandise
is shipped.
d. Inventories
Inventories are stated at the lower of cost
(first-in, first-out method) or market.
e. Property and Equipment
Property and equipment are stated at cost.
Depreciation is computed for financial
statement purposes, using the straight-line
method over the estimated useful life. For
income tax purposes, depreciation is
computed using statutory rates.
f. Income Taxes
The Company and its wholly owned
subsidiaries file a consolidated federal
income tax return. Deferred income taxes
arise as a result of differences between
financial statement and income tax
reporting.
g. Estimates
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management to
make estimates and assumptions, that affect
the reported amounts of the assets and
liabilities at the date of the financial
statements, the revenues and expenses during
the period as well as the disclosure of
contingent assets and liabilities. Actual
results could differ from those estimates.
7
Accutone, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
h. Long-Lived Assets
The company reviews the carrying values of
its long-lived and identifiable intangible
assets for possible impairment whenever
events or changes in circumstances indicate
that the carrying amount of the assets may
not be recoverable. Any long-lived assets
held for disposal are reported at the lower
of their carrying amounts or fair value less
cost to sell.
2. Property, Plant and
Equipment
2000 1999 1998
---------------------------------------------------------------
Furniture and fixtures $ 13,801 $ 13,801 $ 13,801
Leasehold improvements 25,000 25,000 --
Machinery and equipment 61,269 61,269 21,797
Customer list 47,935 47,935 47,935
------------------------------------
148,005 148,005 83,533
Accumulated depreciation (60,896) (39,872) (19,765)
---------------------------------------------------------------
$ 87,109 $ 108,133 $ 63,768
===============================================================
3. Long-term debt
2000 1999 1998
---------------------------------------------------------------
Equipment loan payable to a finance
company, collateralized by equipment
with monthly installments of $280
including interest at 5.9%
maturing in 2002 $5,569 $8,504 $1,998
Less current maturities 3,129 2,935 2,767
---------------------------------------------------------------
$2,440 $5,569 $8,504
===============================================================
4. Income taxes
At December 31, 2000, the Company had net
operating loss carryforwards of
approximately $276,000 expiring from 2017 to
2020.
5. Commitment and The Company has incurred fees with certain
contingencies stockholders for legal services performed in
connection with a proposed reverse
acquisition with Nantucket Industries Inc.
(debtor in possession). It is anticipated
that the transaction will be completed
within the next six months.
================================================================================
See accompanying notes to financial statements.
8
Accutone, Inc.
and Subsidiary
Compiled Financial Statements
Three Months Ended March 31, 2001
EXHIBIT "H"
Accutone, Inc.
Contents
- --------------------------------------------------------------------------------
Independent accountant's compilation report 2
Financial statements:
Consolidated balance sheets 3
Consolidated statement of operation 4
Consolidated statement of stockholders' equity 5
Consolidated statement of cash flows 6
Notes to consolidated financial statements 7-8
Independent Accountants' Compilation Report
To the Board of Directors
Accutone, Inc. and Subsidiary
Yonkers, New York
We have compiled the accompanying consolidated balance sheet of Accutone, Inc.
and Subsidiary as of March 31, 2001 and the related consolidated statements of
operations, stockholders' equity and cash flows for the three months then ended,
in accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
May 10, 2001
Accutone, Inc.
and Subsidiary
Consolidated Balance Sheet
================================================================================
March 31, 2001
- --------------------------------------------------------------------------------
Assets
Cash $ 7,315
Accounts receivable 31,270
Inventories 9,940
Deferred costs (Note 5) 71,199
- --------------------------------------------------------------------------------
Total current assets 119,724
- --------------------------------------------------------------------------------
Property, plant and equipment, net (Notes 2 and 3) 111,723
- --------------------------------------------------------------------------------
$ 231,447
================================================================================
Liabilities and Stockholders' Equity
Current portion of long-term debt (Note 3) $ 3,183
Accounts payable 62,435
Other liabilities (Note 5) 25,000
- --------------------------------------------------------------------------------
Total current liabilities 90,618
Long term debt (Note 3) 1,618
- --------------------------------------------------------------------------------
Total liabilities 92,236
- --------------------------------------------------------------------------------
Commitments and contingencies (Note 5)
Stockholders' equity
Common stock, $.01 par value; authorized 100,000
shares, issued and outstanding 1,000
Additional paid-in capital 399,461
Accumulated deficit (261,250)
- --------------------------------------------------------------------------------
Total stockholders' equity 139,211
- --------------------------------------------------------------------------------
$ 231,447
================================================================================
See accompanying notes to compiled financial statements
3
Accutone, Inc.
and Subsidiary
Consolidated Statement of Operations
================================================================================
Three months ended March 31, 2001
- --------------------------------------------------------------------------------
Net sales $113,219
Cost of sales 65,293
- --------------------------------------------------------------------------------
Gross profit 47,926
Selling, general and administrative expenses 27,232
- --------------------------------------------------------------------------------
Income from operations 20,694
Other expense:
Depreciation 5,286
Interest expense 786
- --------------------------------------------------------------------------------
Total other expense 6,072
- --------------------------------------------------------------------------------
Income before income taxes 14,622
Income taxes (Note 4) --
- --------------------------------------------------------------------------------
Net income $ 14,622
================================================================================
See accompanying notes to compiled financial statements.
4
Accutone, Inc.
and Subsidiary
Consolidated Statement of Stockholders' Equity
================================================================================
Additional
Common paid-in Accumulated
stock capital deficit Total
- --------------------------------------------------------------------------------
Balance at January 1, 2001 $1,000 $379,504 $(275,872) $104,632
Net income -- -- 14,622 14,622
Capital contribution -- 19,957 -- 19,957
- --------------------------------------------------------------------------------
Balance at March 31, 2001 $1,000 $399,461 $(261,250) $139,211
================================================================================
See accompanying notes to compiled financial statements.
5
Accutone, Inc.
and Subsidiary
Consolidated Statement of Cash Flows
================================================================================
Three months ended March 31, 2001
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 14,622
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,286
Changes in assets and liabilities:
Accounts receivable (11,590)
Inventories 820
Deferred costs (600)
Accounts payable (1,372)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 7,166
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to equipment (29,900)
- --------------------------------------------------------------------------------
Net cash used by investing activities (29,900)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Capital contribution 19,957
Payments on long-term debt (768)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 19,189
- --------------------------------------------------------------------------------
Net decrease in cash (3,545)
Cash, beginning of period 10,860
- --------------------------------------------------------------------------------
Cash, end of period $ 7,315
================================================================================
See accompanying notes to compiled financial statements.
6
Accutone, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
1. Summary of
Significant
Accounting Policies
a. The Company
Accutone, Inc. and its wholly-owned
subsidiary (the "Company") distribute
hearing aids.
b. Principles of Consolidation
The consolidated financial statements
include the accounts of Accutone, Inc. and
its wholly-owned subsidiary. All significant
intercompany balances and transactions have
been eliminated.
c. Revenue Recognition
Revenue is recognized when the merchandise
is shipped.
d. Inventories
Inventories are stated at the lower of cost
(first-in, first-out method) or market.
e. Property and Equipment
Property and equipment are stated at cost.
Depreciation is computed for financial
statement purposes, using the straight-line
method over the estimated useful life. For
income tax purposes, depreciation is
computed using statutory rates.
f. Income Taxes
The Company and its wholly owned
subsidiaries file a consolidated federal
income tax return. Deferred income taxes
arise as a result of differences between
financial statement and income tax
reporting.
g. Estimates
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management to
make estimates and assumptions, that affect
the reported amounts of the assets and
liabilities at the date of the financial
statements, the revenues and expenses during
the period as well as the disclosure of
contingent assets and liabilities. Actual
results could differ from those estimates.
7
Accutone, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
h. Long-Lived Assets
The company reviews the carrying values of
its long-lived and identifiable intangible
assets for possible impairment whenever
events or changes in circumstances indicate
that the carrying amount of the assets may
not be recoverable. Any long-lived assets
held for disposal are reported at the lower
of their carrying amounts or fair value less
cost to sell.
2. Property, Plant and
Equipment
2001
-----------------------------------------------------------------
Furniture and fixtures $ 13,801
Leasehold improvements 25,000
Machinery and equipment 91,169
Customer list 47,935
-----------------------------------------------------------------
177,905
Accumulated depreciation (66,182)
-----------------------------------------------------------------
$111,723
=================================================================
3. Long-term debt
2001
-----------------------------------------------------------------
Equipment loan payable to a finance
company, collateralized by equipment
with monthly installments of $280
including interest at 5.9% maturing
in 2002 $ 4,801
Less current maturities 3,183
-----------------------------------------------------------------
$ 1,618
=================================================================
4. Income taxes At March 31, 2001, the Company had net
operating loss carryforwards of
approximately $276,000 expiring from 2017 to
2020.
5. Commitment and The Company has incurred fees with certain
contingencies stockholders for legal services performed in
connection with a proposed reverse
acquisition with Nantucket Industries Inc.
(debtor in possession). It is anticipated
that the transaction will be completed
within the next six months.
================================================================================