UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31,1996
Commission File Number: 1-8509
NANTUCKET INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-0962699
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(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
105 Madison Avenue, New York, New York 10016
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(Address of principal executive offices) (Zip Code)
(212)889-5656
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. X YES NO
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APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 30, 1996, the Registrant had outstanding 3,238,796 shares of
common stock not including 3,052 shares classified as Treasury Stock.
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
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QUARTERLY REPORT
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QUARTER ENDED AUGUST 31, 1996
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I N D E X
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PAGE
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Part I.- FINANCIAL INFORMATION
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Consolidated balance sheets 3
Consolidated statements of operations 4
Consolidated statements of cash flows 5
Notes to consolidated financial statements 6 - 8
Management's discussion and analysis of
financial condition and results of operations 9 - 10
Part II.- OTHER INFORMATION 11 - 12
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Signature 13
2
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, March 2,
1996 1996
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(unaudited) (1)
ASSETS
CURRENT ASSETS
Cash $15,085 $15,085
Accounts receivable, less allowance for
doubtful accounts of $91,000 and $40,000,
respectively 4,858,194 4,417,033
Inventories (Note 2) 9,186,869 10,156,639
Other current assets 675,659 729,145
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Total current assets 14,735,807 15,317,902
PROPERTY, PLANT AND EQUIPMENT - NET 3,277,938 3,498,825
OTHER ASSETS,NET 292,983 38,413
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$18,306,728 $18,855,140
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (Note 6) $420,000 $1,275,000
Accounts payable 1,094,315 1,721,852
Accrued salaries and employee benefits 280,510 383,595
Accrued unusual charge (Note 5) 465,000 465,000
Accrued expenses and other liabilities 378,555 392,789
Accrued royalties 281,447 249,792
Income taxes payable 1,909 2,934
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Total current liabilities 2,921,736 4,490,962
LONG-TERM DEBT (Note 6) 7,747,580 8,428,782
ACCRUED UNUSUAL CHARGE (Note 5) 474,875 678,879
CONVERTIBLE SUBORDINATED DEBT (Note 4) 2,760,000 -
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13,904,191 13,598,623
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (Note 4)
Preferred stock, $.10 par value; 500,000 shares authorized,
of which 5,000 shares have been designated as non-voting
convertible and are issued and outstanding 500 500
Common stock, $.10 par value; authorized
6,000,000 shares; issued 3,241,848 324,185 299,185
Additional paid-in capital 12,364,503 11,556,386
Deferred issuance cost (191,697)
Accumulated deficit (8,075,017) (6,579,617)
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4,422,474 5,276,454
Less 3,052 shares at August 31, 1996 and 3,052 at March 2, 1996
of common stock held in treasury, at cost 19,937 19,937
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4,402,537 5,256,517
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$18,306,728 $18,855,140
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(1) Derived from audited financial statements
The accompanying notes are an integral part of these statements.
3
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Twenty-six Weeks Ended Thirteen Weeks Ended
--------------------------------- ---------------------------------
AUGUST 31, August 26, AUGUST 31, August 26,
1996 1995 1996 1995
--------------- ---------------- --------------- ----------------
Net sales $14,662,655 $17,853,238 $7,974,742 $7,360,502
Cost of sales 11,880,131 13,121,959 6,168,991 5,235,817
--------------- ---------------- --------------- ----------------
Gross profit 2,782,524 4,731,279 1,805,751 2,124,685
Selling, general and administrative
expenses 3,723,534 3,771,712 1,958,051 1,752,686
--------------- ---------------- --------------- ----------------
Operating (loss) profit (941,010) 959,567 (152,300) 371,999
Interest expense 554,390 655,494 282,701 324,167
--------------- ---------------- --------------- ----------------
Net (loss) income (1,495,400) 304,073 (435,001) 47,832
=============== ================ =============== ================
Net (loss) income per share ($0.51) $0.10 ($0.15) $0.02
=============== ================ =============== ================
Weighted average common shares outstanding 3,010,774 2,982,296 3,032,752 2,983,318
=============== ================ =============== ================
The accompanying notes are an integral part of these statements.
4
NANTUCKET INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six Weeks Ended
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AUGUST 31, August 26,
1996 1995
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Cash flows from operating activities
Net (loss) income ($1,495,400) $304,073
Adjustments to reconcile net (loss) income
to net cash provided by (used in) operating activities
Depreciation and amortization 152,434 181,903
Provision for doubtful accounts 60,000 60,000
Treasury stock issued in compliance with credit agreement - 9,125
Provision for obsolete and slow moving inventory 265,000 120,000
(Increase) decrease in assets
Accounts receivable (501,161) 721,152
Inventories 704,770 (635,885)
Other current assets 53,486 131,968
(Decrease) increase in liabilities
Accounts payable (627,537) (1,199,894)
Accrued expenses and other liabilities (85,663) (464,203)
Income taxes payable (1,025) -
Accrued unusual charge (204,004) (189,585)
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Net cash used in operating activities (1,679,100) (961,346)
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Cash flows from investing activities
Removals (additions) to property, plant and equipment 68,453 (73,115)
Decrease in other assets 990 63,368
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Net cash provided by (used in) investing activities 69,443 (9,747)
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Cash flows from financing activities
Payments of short-term debt (800,000) -
Issuance of common stock 641,419 -
Proceeds from long-term debt 2,760,000 -
Increase in deferred finance costs (255,560) -
Net proceeds from sale of treasury stock - 250
(Repayments) borrowings under line of credit agreement, net (736,202) 970,747
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Net cash provided by financing activities 1,609,657 970,997
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NET INCREASE (DECREASE) IN CASH 0 ($96)
Cash at beginning of period 15,085 32,049
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Cash at end of period $15,085 $31,953
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SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $494,675 $610,601
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Income taxes - -
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The accompanying notes are an integral part of these statements
5
NANTUCKET INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWENTY-SIX WEEKS ENDED AUGUST 31, 1996 AND AUGUST 26, 1995
(unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of August 31, 1996 and the
consolidated statements of operations for the twenty-six and thirteen
week periods and statements of cash flows for the twenty-six weeks
ended August 31, 1996 and August 26, 1995 have been prepared by the
Company without audit. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) necessary for a fair
presentation of the financial position of the Company and its
subsidiaries at August 31, 1996 and the results of their operations for
the twenty-six and thirteen week periods and cash flows for the
twenty-six weeks ended August 31, 1996 and August 26, 1995 have been
made on a consistent basis.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included
in the Company's 1996 Annual Report on Form 10-K.
The results of operations for the periods presented are not necessarily
indicative of the operating results for the full year.
2. INVENTORIES
Inventories are summarized as follows:
August 31, August 26,
1996 1995
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Raw materials $ 1,469,835 $ 1,895,724
Work in process 4,161,763 5,848,226
Finished goods 3,555,271 3,756,131
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$ 9,186,869 $ 11,500,081
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6
NANTUCKET INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWENTY-SIX WEEKS ENDED AUGUST 31, 1996 AND AUGUST 26, 1995
(continued)
(unaudited)
3. INCOME TAXES
At August 31, 1996 the Company had a net deferred tax asset in excess
of $5,500,000 which is fully reserved until it can be utilized to
offset deferred tax liabilities or realized against taxable income. The
Company had a net operating loss carryforward for book and tax purposes
of approximately $12,000,000. Accordingly, no provision for income
taxes has been reflected in the accompanying financial statements.
Certain tax regulations relating to the change in ownership may limit
the Company's ability to utilize its net operating loss carryforward
if the ownership change, as computed under such regulations, exceeds
50%. Through August 31, 1996 the change in ownership was approximately
46%.
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 12.5%
convertible subordinated debentures which are due August 15, 2001.
The convertible subordinated debentures are secured by a second
mortgage on the Company's manufacturing and distribution facility
located in Carterville, GA. The debentures are convertible into the
Company's common stock over the next five years as follows:
Conversion Conversion
Shares Price
Currently Convertible 305,000 $3.83
After June 15, 1997 318,370 $5.00
The agreement grants the investor certain registration rights for the
shares issued and the Conversion Shares to be issued.
The difference between the purchase price of the shares issued and
their fair market value aggregated $197,500. This was reflected as
deferred issue costs and will be amortized over the expected 5 year
term of the subordinated convertible debentures.
Costs associated with this private placement aggregated $360,000
including $104,000 related to the shares issued which have been charged
to paid in capital. The remaining balance of $256,000 will be amortized
over the 5 year term of the debentures
7
The Company utilized $533,333 of the proceeds to prepay all of its
obligations pursuant to its Credit Agreement dated March 21, 1994 with
Chemical Bank.
5. UNUSUAL CHARGE
In March, 1994, the Company terminated the employment contracts of its
Chairman and Vice Chairman. In accordance with the underlying
agreement, they will be paid an aggregate of approximately $400,000 per
year in severance, as well as certain other benefits, through February
28, 1999. The present value of these payments, $1,915,000, was accrued
at February 26, 1994. Through August 31, 1996, $975,000 of this accrual
has been paid; $770,000 through March 2, 1996 and $205,000 in the
current fiscal year through August 31, 1996
6. CREDIT AGREEMENT AMENDMENT
On May 31, 1996, the Company amended its Loan and Security Agreement
with Congress Financial Corporation dated March 24, 1994. This
amendment provided (a) $ 251,000 in additional equipment term loan
financing, (b) extension of the repayment period for all outstanding
equipment term loans, (c) supplemental revolving loan availability from
March 1st through June 30th of each year and (d) extension of the
renewal date to March 20, 1998.
8
NANTUCKET INDUSTRIES, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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Sales
Net sales for the six months ended August 31, 1996 decreased 18% from prior year
levels to $14,663,000. This decline reflects the planned inventory reductions by
Nantucket's customers during the first fiscal quarter of the current fiscal year
in anticipation of the introduction of Brittania by Levi's line. In the second
fiscal quarter, sales increased $738,000 over prior year levels, generally
reflecting the initial shipments of this exciting new product designation. Sales
of the Company's GUESS? products decreased slightly from prior year levels,
reflecting a transition from the close-out of slow moving products to the
Company's new GUESS? Essentials line. In the second quarter of the current
fiscal year, Nantucket shipped two GUESS? Essentials product groups and initial
shipments of the third group were made in September, 1996.
Gross Margin
Gross profit margins for the six months ended August 31, 1996 decreased from
prior year levels of 27% to 19%. Gross profit margins for the second quarter
decreased from 29% to 23%. This decline is a result of increased manufacturing
variances associated with additional processing costs of imported garments
coupled with the impact of fully reserved close-out sales of the GUESS? product
during the first and second quarters.
Selling, general and administrative expenses
Selling, general and administrative expenses for the six months ended August 31,
1996 reflect a slight decrease of $48,000 from prior year levels to $3,724,000.
Increases in fixed expenses for the period of $300,000 were offset by decreases
in variable selling expenses of $348,000. Second quarter expenses increased by
$205,000 to $1,958,000 compared to $1,753,000 from the second quarter of the
prior year. This increase is due to a reduction in prior year expenses of
$102,000 as a result of an insurance claim settlement and an increase in
administrative management staffing in the current year.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
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In March, 1994 the Company was successful in refinancing its credit agreements
with (i) a three year $15,000,000 revolving credit facility with Congress
Financial, (ii) a $2,000,000 Term Loan Agreement with Chemical Bank and (iii) an
additional $1,500,000 Term Loan with Congress replacing the Industrial Revenue
Bond financing of the Cartersville, Georgia manufacturing plant.
Additionally, the Company has increased its equity over the past three years
through (i) a $1,000,000 investment by the Management Group (ii) the $2.9
million sale of 490,000 shares of common treasury stock to GUESS?, Inc. and
certain of its affiliates and (iii) the $3.5 million private placement which
included the issuance of 250,000 shares and $2,760,000 convertible subordinated
debentures. These transactions, combined with its stronger credit facilities
enhanced the Company's liquidity and capital resources.
Under the terms of the $2,000,000 Term Loan Agreement with Chemical Bank,
scheduled installments of $500,000 each were due on December 15, 1995 and March
15, 1996. As of December 15, 1995 the Company agreed to an amendment providing
for payments of $100,000 each on December 31, 1995 and January 31, 1996, with
the remaining $800,000 to be paid in 15 equal installments which commenced March
31, 1996. In August, 1996, the Company utilized $533,333 of the proceeds from
the private placement to prepay all of its obligations with Chemical Bank.
The Company believes that the Congress credit facility provides adequate
financing flexibility to fund its operations at current levels.
Working capital increased $987,000 from year-end levels to $11,814,000. Proceeds
from the issuance of common stock and subordinated convertible debt were used to
prepay the short-term debt to Chemical Bank, reduced accounts payable and reduce
the long term debt under the Congress revolving credit facility. A decrease in
inventory levels of $970,000 was offset by an increase in accounts receivable of
$441,000.
The Company believes that the moderate rate of inflation over the past few years
has not had significant impact on sales or profitability.
10
PART II
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ITEM 1. LEGAL PROCEEDINGS None
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ITEM 2. CHANGES IN SECURITIES None
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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(a) The Company held a Special Meeting of Stockholders in Lieu of
Annual Meeting on October 7, 1996
(b) Not applicable
(c) At the stockholders meeting
(i) the number of directors constituting the Board of
Directors was set at nine (9), by a vote of 2,328,734 shares
for and 203,402 shares against;
(ii) the Company's nominees for director were elected by the
following votes:
Votes Votes to
Nominee in Favor Withhold Authority
------- -------- ------------------
Donald Gold 2,328,734 203,402
Roger A. Williams 2,331,119 201,017
Ronald S. Hoffman 2,330,699 201,437
(iii) the stockholders approved a motion to amend the
Company's Certificate of Incorporation to increase the
authorized shares of Common Stock from six million (6,000,000)
shares with $.10 par value to twenty million (20,000,000)
shares with $.10 par value. Such motion was approved by a vote
of 2,250,130 shares in favor and 272,476 shares against;
(iv) the stockholders approved a motion to amend the Company's
Certificate of Incorporation to reduce certain voting
requirements of the Board of Directors necessary for approval
of a business transaction with Related Persons. Such motion
was approved by a vote of 1,861,007 shares in favor and 51,854
shares against and 619,875 shares abstaining;
(v) the stockholders approved a motion to ratify the
appointment of Grant Thornton LLP, independent certified
accountants, to audit the consolidated financial statements of
11
the Company for the fiscal year ending February, 1997. Such
motion was approved by a vote of 2,519,503 shares in favor and
10,315 shares against and 2,918 shares abstaining.
ITEM 5. OTHER INFORMATION
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As of September 30, 1996 the Company signed a license agreement with
Brittania Sportswear Limited, a subsidiary of Levi Strauss & Co.
effective as of January 1, 1997. This license agreement extended the
Company's license through December 31, 1999 for the manufacture and
sale of men's underwear and loungewear under the "BRITTANIA" trademark.
On October 9, 1996 the Company signed an amendment to its license
agreement with GUESS?, Inc. effective as of June 1, 1996. This
amendment (a) omitted the Company's license for men's underwear
product, (b) formalized certain terms and conditions on the manner the
Company conducts business with the GUESS? owned stores and (c)
established minimum sales levels and royalties for the renewal term
which will expire May 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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Item 6(a) Exhibits
(10)(e)(iii) Filed Herewith
License Agreement between the Company and Brittania Sportswear
Limited, a subsidiary of Levi Strauss & Co. effective as of
January 1, 1997 extending the Company's license through
December 31, 1999 for the manufacture and sale of men's
underwear and loungewear under the "BRITTANIA" trademark
(10)(bb)(i) Filed Herewith
Amendment to License Agreement with GUESS?, Inc. and the
Company effective as of June 1, 1996 with respect to the
"GUESS?" trademark.
(27) Financial Data Schedule Filed Herewith
Item 6(b) Reports on Form 8-K
A report dated August 29, 1996 was filed during the quarter
which ended August 31, 1996. Such report outlined the $3.5
million private placement transaction. No financial statements
were filed as part of that report.
12
SIGNATURE
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Pursuant to the requirements of the `Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NANTUCKET INDUSTRIES, INC.
(Registrant)
By:
October 14, 1996 s/Ronald S. Hoffman
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Vice President - Finance
(Chief Accounting Officer)
13