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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended February 28, 2001
Commission File Number: 1-8509
NANTUCKET INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-0962699
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
45 Ludlow Street, Suite 602, Yonkers, New York 10705
(Address of principal executive offices) (Zip Code)
914-375-7591
(Registrant's telephone number, including area code)
73 Fifth Avenue, Suite 6A, New York, NY 10003
(Former Address, since last report)
Common Stock, $.10 par value NASD Supplemental Market
Securities registered pursuant to Name of each exchange on
Section 12(g) of the Act which registered
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 90 days. |X| YES |_| NO
The aggregate market value of the outstanding Common Stock of the registrant
held by non-affiliates of the registrant as of June 1, 2001, based on the
average bid and asked price of the Common Stock on the NASD Supplemental Market
on said date was $194,328.
As of June 1, 2001, the Registrant had outstanding 3,238,796 shares of common
stock not including 3,052 shares classified as Treasury Stock.
DOCUMENTS INCORPORATED BY REFERENCE
into PART I
Annual Report On Form 10-K for the Fiscal Year Ended February 27, 2000.
2
ITEM 1. BUSINESS
Proposed Reorganization
Nantucket Industries, Inc. (the "Company") is currently insolvent. It has
had no business and carried on no business activities since October 1999. On
March 3, 2000, the Company filed a Voluntary Petition under Chapter 11 of the
United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern
District of New York. (Case Name: Nantucket Industries, Inc., Case Number: 00-B
10867). The Company intends to file a Plan of Reorganization and a Disclosure
Statement in June 2001.
The goal of the projected reorganization will be for the Company to be
merged with, or to acquire the assets or the capital stock of an existing
business or to effect a similar business combination. No assurance can be given
that this goal will be achieved. Management will have sole discretion to
determine which business, if any, may be merged or acquired, as well as the
terms of any merger or acquisition. Management has searched and discussed the
possibilities of a business combination with several entities that appeared to
have value potential for a viable combination but each situation was deemed
infeasible after vigorous due diligence done by management. However, Accutone
Inc., a company controlled by John H. Treglia, the Company's current president,
is among the companies and businesses which management has made its candidate
with regard to the possibility of an acquisition or merger transaction with the
Company. If the Company should ultimately acquire a business or property from
any member of management, the terms of such acquisition might not be the result
of arm's length negotiations. While any transaction between the Company and any
of its affiliates could present management with a conflict of interest, it is
the intention of management that is such transaction should occur, the terms
thereof will be no less beneficial tot he Company than if such transactions were
effected on an arms length basis.
The proposed reorganization of the Company and the acquisition of or
merger with a new business can be expected to require the issuance of a
substantial amount t of new shares of common stock or other securities. Any such
stock issuances will significantly reduce the proportionate ownership and voting
power of each other shareholder.
History
Until the end of October 1999, when the Company discontinued all business
activities, it produced and distributed popular priced branded fashion
undergarments for sale, throughout the United States, to mass merchandisers and
national chains. The Company produced and sold its men's underwear products
primarily under licensed labels including "Brittania" and "Arrow" and, until
March 31, 1998, the Company also produced women's innerwear, under the GUESS?
label, for sale to department and specialty stores. Prior to the cessation of
all business activities, all of the Company's produces were manufactured by
offshore production contractors located in Mexico, the Far East and the
Caribbean Basin, packaging and distribution of the Company's produce lines was
based in its leased facility in Cartersville, Georgia. The Company conducted all
of its business activities directly, and indirectly through its four currently
dormant subsidiary corporations, Nantucket Hosiery Mills Inc., a Delaware
Corporation ("NHMI"), Nantucket Mills Inc., a Delaware Corporation, Nantucket
Hosiery Mills Corp. a North Carolina corporation ("NHMC"), and
3
Nantucket Management Corp., a New York corporation. The four currently dormant
subsidiary corporations will be terminated at the time of any acquisition,
merger or other business combination. For a discussion in more detail of the
company's former business operations and the factors leading to the termination
of the company's business, reference is made to Item 1 of Part I of the
company's annual report on Form 10-K for the fiscal year ended February 27,
1999.
Termination of Operations
The Company experienced significant losses from operations in recent year
which resulted in severe cash flow deficits that negatively impacted the ability
of the Company to continue its business as formerly structured. The Company has
been totally inactive since October 1999 and filed for protection under Chapter
11 on March 3, 2000. During fiscal 2000, the effect of sharply decreasing
revenues over the previous four years, continuing losses from operations,
interest payment defaults on outstanding debt, the lack of a long-term credit
facility, and the concentration of almost all sales among only three customers
forced the Company to discontinue all of its business and operations. Prior to
the periods covered by this report, in fiscal 1995 and 1996, the Company had
funded its operations by refinancing its debt and increasing its capital through
(I) the sale of $1 million of non-voting convertible preferred stock to
management; (ii) the sale of treasury stock which increased equity by $2.9
milli8on; and (iii) the completion of a $3.5 million private placement (see the
discussion, below, under the subcaption, "Continuing Default on Outstanding
Debentures"). The Company had also implemented a restructuring strategy aimed at
improving operating results, through the reduction of costs, the streamlining of
operations, and the closing of the Company's Puerto Rico Plant. These effort
failed to bring the Company's operations to a profitable level. Some of the
major factors and occurrences which led to the Company's insolvency and the
termination of its operations are described below. For a discussion in more
detail of each of the matters discussed below, reference is made to the
Company's annual report on Form 10-K for the fiscal year ended February 27, 1999
and to Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations", included in this Report.
Discontinuance of GUESS? Product Line
From December 7, 1992 until the first quarter of the fiscal year ended
February 27, 1999, the Company held the exclusive United States rights to
produce and sell undergarments bearing the "GUESS?" trademark and variations
thereof. The license was subject to termination prior to its expiration if
certain minimum sales goals were not met, with the payment of minimum royalti8es
required in the amounts of $560,000, $700,000 and $840,000 for the contract
years ended May 31, 1997, 1998 and 1999 respectively. Minimum sales goals were
never achieved under this license. During the term of this license, the Company
did not have the capital resources necessary to develop and support the GUESS?
product line at the levels required in the licensing agreement. Therefore, the
Company, with the support of the licensor, GUESS? Inc., initiated a strategy to
discontinue the GUESS? product line, which was finally and completely
discontinued during the first quarter of fiscal year 1999.
4
Termination of "Arrow" License
Pursuant to an agreement, dated October 5, 1992, with Cluett, Peabody &
Co., Inc., the Company held the exclusive United States rights (the "Arrow
License") to produce and sell men's' and boys' fashion underwear, T-shirts,
V-neck shirts, tank tops, briefs and boxer shorts bearing the "ARROW" trademark
during the period commencing January 1, 1993 and expiring, as extended, December
31, 1999. The terms of the Arrow License required that the Company pay a minimum
royalty of $162,500 for each annual period through December 31, 1996, increasing
to $250,000 for each annual period from January 1, 1997 through December 31,
1999. The Company began shipping product under this trademark during the first
quarter of fiscal 1994. Net sales under this license were $4.4 million in fiscal
1999, $4.8 million in fiscal 1998 and $5.7 million in fiscal 1997. Because the
Company was unable to meet the minimum sales vol8ume requirements called for
under the Arrow License, as of march 12, 1999, the Company reached an agreement
with the licensor to terminate the Arrow License.
Failure to Meet Minimum Sales Requirements Under "Botany 300" License
On December 21, 1992, the Company obtained from the McGregor Corporation
the exclusive United States rights (the "Botany 500 License)) trademark during
the period commencing on January 1, 1993 and expiring, pursuant to an extension,
December 31, 2001. Under the terms of the license agreement, the McGregor
Corporation had the right to terminate the Botany 500 License prior to its
expiration if certain minimum sales goals were not met. Minimum sales levels
required under the Botany 500 License for calendar 1996 were $750,000 and $1
million for each calendar year thereafter. The company was never able to meet
the minimum sales requirements under the Botany 500 License with net sales under
the license for fiscal 1997 (which included most of calendar 1996) being
$652,000 and $225,000 for fiscal 1998 (which included most of calendar 1997).
After fiscal 1998, the Company ceased all operations under the Botany 500
License.
Termination of Levi Strauss/Brittania Operations
Commencing in September 1988, the Company held a license (the "Brittania
License") from Brittania Sportswear Ltd. ("Brittania"). Levi Strauss & Co.
("Levi Strauss") was the parent company of Brittania. Under the Brittania
License, the Company had the right to manufacture and market men's underwear and
other products under the trademark "Brittania from Levi Strauss & Co". Sales
under the "Brittania License aggregated $14.9 million in fiscal 1997 and $4.5
million in fiscal 1998, accounting for 49% of the Company's fiscal 1997 sales,
and 21% of the Company's fiscal 1998 sales. During the fiscal year ended
February 27, 1999, the Company made no sales under the Brittania License. As of
January 1, 1997, the Brittania License had been renewed for a five-year term,
including automatic renewals of two years if certain minimum sales levels were
achieved. However, on January 22, 1997, Levi's announced its intention to sell
Brittania. As a result of the action taken by Levi Strauss, K-mart, the largest
retainer of the Brittania brand, and the Company's largest customer (accounting
for sales of Brittania product of approximately $11 million in fiscal year 1997,
and $3 million in fiscal year 1998), advised the Company that it would no longer
continue its commitment to carry the Brittania trademark. In response, the
Company filed a multi-million lawsuit against Levi Strauss and Brittania in
march 1997, alleging that Brittania had breached various obligations under its
license agreement with the Company, including without limitation it's covenant
of good faith and fair dealing. This litigation was settled in June 1998, with
5
the Company realizing approximately $725,000 from such settlement.
Loss of Revolving Credit Line
The Company had a fifteen million dollar revolving credit facility with
Congress Financial Corp. ("Congress"). This facility provided for: (I) loans
based upon eligible accounts receivable and inventory; (ii) a $3,000,000 letter
of credit facility; and (iii) 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 Company's agreement with Congress
required, among other things, that the Company maintain minimum working capital
and net worth levels. Borrowings under the agreement were collateralized by a
lien on substantially all of the assets of the Company. As at February 27, 1999
the Company was not in compliance with the net worth and working capital
covenants and the facility could no longer be utilized. It was subsequently
terminated on October 15, 1999. Because of its poor financial status and
outlook, the Company was not able to replace the Congress credit facility.
Continuing Default on Outstanding Debentures
On August 15, 1996, the Company completed a $3.5 million private placement
with NAN Investors, L.P., an investment partnership ("NAN Investors"). Terms of
this transaction included the issuance of 250,000 shares of the Company's common
stock and two convertible subordinated debentures in the aggregate principal
amount of $2,760,000 (the "NAN Debenture"). The NAN Debentures bore interest at
an annual rate of 12.5%, payable semi-annually, with the principal amount due
and payable on August 15, 2001. Although the NAN Debentures were convertible
into the Company's common stock, NAN Investors eventually waived all conversion
rights.
Beginning in August 1997, the Company was in default on interest payment
due under the NAN Debentures. The NAN Debentures were secured by a second
mortgage on the Company's manufacturing and distribution facility located in
Cartersville, Georgia. This property was sold on October 1, 1997. To release
NAN's security interest in the property and to extend the cure period with
respect to a $172,500 interest payment default on the NAN Debentures, the
Company prepaid $707,000 of the principal amount of the NAN Debentures, plus a
$176,000 prepayment penalty.1 In connection herewith, in September 1997, the
Company entered into an agreement with NAN Investors (the "First NAN Forbearance
Agreement") providing for the extension of the cure period for the default on
the interest payments. The First NAN Forbearance Agreement was extended month by
month until May 1998, at which time, the Company entered into another
forbearance agreement with NAN Investors (the "Second NAN Forbearance
Agreement") to extend, until December 1998, the cure period for interest
payments then in default (totaling $322,551) as well as the interest payments,
which were to fall due in August and December 1998. In consideration for such
extension, the Company agreed to secure the NAN Debentures by a first priority
lien on all the assets of the Company, both tangible and intangible, to the
extent not otherwise prohibited under the Congress revolving credit facility and
to issue to NAN Investors five-year warrants convertible
- ----------
(1) Total proceeds from the sale of the Cartersville facility were $2,850,000.
In addition to the $883,000 paid to NAN Investors by way of a $707,000
prepayment of principal and a $176,000 prepayment penalty, the Company used
$525,000 to pay other financing secured by this property. The remaining proceeds
were utilized to reduce the Company's revolving credit line with Congress.
6
to a total of $16,500,000 shares of the Company's stock at an exercise price of
$.10 per share. Thereafter, the Company remained in default on all interest
payments as they fell due. There was o forbearance agreement in effect for
interest payments which fell due subsequent to December 1998 and, as at February
1999, interest payments in default under the NAN Debentures totaled $2,052,986.
As a consequence of such default, in accordance with their rights under the
terms of the NAN Security Agreement, NAN Investors took possession of all assets
of the Company, which consisted principally of inventory having a value of
$430,000 and outstanding accounts receivable in an amount of approximately
$500,000. On October 12, 1999, the inventory was sold by NAN Investors to
American Basics Company LLC, a third party which was unaffiliated with the
Company or any affiliate of the Company or of NAN Investors. The proceeds of the
inventory sale and the accounts receivable have been applied by NAN Investors
towards the Company's outstanding debt. As at May 31, 2000emaining debt to NAN
was approximately $820,000.
Termination of All Operations
In the years preceding the termination of operations, the Company had
experienced difficulty in filling all of its orders, caused in large part by
recurring cash shortages, the expiration of its financing arrangements with
Congress (and before that with Chemical Bank), and the failure to obtain the
investment necessary to support and develop the GUESS? product line. The Company
had previously addressed its liquidity issues by the infusion of debt and equity
financing, including (I) a refinancing in March 1994; (ii) additional equity of
$3.9 million raised in fiscal 1995; (iii) a $3.5 million private placement
completed August 1996; and (iv) by the reduction in costs associated with the
consolidation and restructuring of the operations in fiscal 1998 and 1999, and
the attempt to more effectively manage working capital. All of these efforts,
however, failed to keep the Company solvent and with the loss of the Brittania
License, continuing losses from operations, interest payment defaults, and the
lack of any credit facilities, the Company was forced to discontinue all
business operations by the end of October 1999. The Company has remained totally
inactive since October 1999 and filed for protection under Chapter 11 on March
3, 2000.
Products and Sales
Since the termination of all business operations in October of 1999, the
Company has not produced any products or made any sales of any kind. Prior to
that time, the company manufactured and sold men's fashion underwear to mass
merchandisers and, in the case of the GUESS? division, ladies' undergarments to
better department and specialty stores, primarily through direct contact by
salaried and commissioned Company sales personnel. For a discussion in detail of
the Company's former products, sales, and operations, reference is made to item
1 of part I of the Company's annual report on Form 10-K for the fiscal year
ended February 27, 1999. With respect to results of operations for the fiscal
year ended February 27, 2000 prior to the cessation of operations, reference is
made to Item 7 of this Report, "Management's Discussion and analysis of
Financial Condition and Results of Operations.
7
Customers
Until the Company ceased operations in October 1999, two of its customers,
Target Stores Inc. and Sears each accounted for more than 10% of consolidated
net sales during the fiscal years ended February 27, 2000 and 1999. These two
customers, as well as K-Mart, each accounted for more than 10% of the Company's
consolidated net sales during fiscal 1998.
Delivery Requirements
Until the Company ceased operations in October 1999, all purchase orders
were taken for current delivery and the Company had no long-term sales contracts
with any customer, or any contract entitling the Company to be the exclusive
supplier of merchandise to a retailer or distributor.
Backlog
After the termination of the GUESS? license, the Company did not, in the
normal course of its business, carry any significant backlog. Orders for the
Company's two major customers were received the same week as the expected ship
date. When the company ceased doing business in October 1999, it had no backlog
of orders and has had no business activity since, including fiscal year ended
February 27, 2001. At the end of the most recent prior fiscal year (year ended
February 27, 1999), its backlog was an immaterial mount, as compared to $1
million at the end of February 1998.
Competition
Until the Company ceased operations, all of its markets were highly
competitive. For a more detailed description of the competitive environment in
which the Company operated and the bases on which it endeavored to compete in
such environment, reference is made to the subtopic "Competition" in Item 1 of
Part I of the company's annual report on Form 10-K for the fiscal year ended
February 27, 1999.
Patents
The Company has developed and patented packaging suitable for its former
products. With the termination of the Company's operations in October 1999, the
Company was no longer in a position to use its patented packaging in its own
business. Present management has explored the possibility of selling or
licensing the right to exploit the Company's packaging patents, but to date has
met with only negative responses because of the wide availability of similar
types of packaging products.
Environmental Matters
Until it ceased operations in October 1999, the company's packaging and
distribution facility was located in Cartersville, GA. The Company believes that
such facility materially conformed to all governmental regulations pertaining to
environmental quality as then promulgated.
8
Employees
Since the termination of its operations in October of 1999, the company
has had no employees other than its president, John H. Treglia and Marsha Ellis,
its Treasurer and Chief Associate Officer. Both such officers devote such time
to the affairs of the Company as is required for the performance of their
duties. None of the Company's former employees were covered by collective
bargaining agreements. The Company never experienced a work stoppage due to
labor difficulties and its former management believed that the relationship of
the Company with its employees was satisfactory. (See Item 13 of this Report,
Certain Relationships and Related Transactions.)
ITEM 2. PROPERTIES
From the time of the termination of business operations until December 31,
2000, the Company's principal headquarters were located at the office of an
unaffiliated company, located at 73 Fifth Avenue, Suite 6A, New York, NY 10003.
The Company utilized desk space and certain office personnel services on these
premises, in a month to month basis at a cost of $250 per month. These rental
costs were waived at the end of calendar year 2000. Since January 1, 2001, the
Company has been utilizing desk, certain office personnel, and filing space at
the offices of Accutone, Inc. at 45 Ludlow Street, Yonkers, New York 10705.
Until October 1999 the Company's executive offices were located at 510
Broadhollow Road, Melville, New York. The Company occupied 2,000 square feet
under a lease which was scheduled to expire July 31, 2002. This lease provided
for aggregate rentals which increased 4% annually from $46,000 to $52,000 plus
increases for certain taxes and energy costs. The Company terminated this lease
agreement effective September 30, 1999 without incurring any penalties. No
monies are owed in respect of this lease.
Until October 31, 1999, the Company occupied a 71,000 square foot
manufacturing and distribution facility in Cartersville, Georgia under a five
year lease. This facility was located at 435 Industrial Park Road, Cartersville,
Georgia. The initial annual rental was $188,148 subject to increases based on an
established formula over the five year lease term which was scheduled to expire
on December 31, 2002. The Company was notified on December 17, 1999 that the
premises was considered abandoned and that in accordance with sections 20 and 21
of the lease, the lease was terminated effective that date. To date, no claims
have been filed against the Company in respect of this property. The leased
Cartersville facility was used for the packaging and distribution of the
Company's products.
ITEM 3. LEGAL PROCEEDINGS
Management is unaware of any pending or threatened legal proceedings to
which the Company is a party or of which any of its assets is the subject. No
director, officer, or affiliate of the company, or any associated of any of
them, is a party to or has a material interest in any proceeding adverse to the
Company, except that George Gold, a director of the company, is a creditor
included in the Chapter 11 proceedings initiated by the Company.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the year ended February 28, 2001 the Company did not submit any matters
to a vote of its shareholders.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock, $. 10 par value, was traded on the American
Stock Exchange under the symbol "NAN" until April 17, 1998. Because the Company
had fallen below American Stock Exchange guidelines for continued listing,
effective April 17, 1998 the Company's Stock was delisted. It is currently
traded in the over-the-counter market and quoted on the OTC Electronic Bulletin
Board maintained by the National Association of Securities Dealers, Inc. (the
"OTC Bulletin Board"). The stock was quoted on the OTC Bulletin Board under the
symbol NANK until march 3, 2000, when the Company filed a Voluntary Petition
under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the
Southern District of New York. After that date, the Company's OTC bulletin Board
Symbol was changed to, NANKQ, which is its current symbol. The following table
sets forth representative high and low bid prices by calendar quarters during
the last two fiscal years and the subsequent interim period through March 31,
2000, as traded on the American Stock Exchange until April 17, 1998 and as
reported in the OTC Bulletin Board since May 21, 1998. The level of trading in
the Company's common stock has been sporadic and limited and the bid prices
reported may not be indicative of the value of the common stock or the existence
of an active market. The OTC market quotations reflect inter-dealer prices
without retail markup, markdown, or other fees or commissions, and may not
necessarily represent actual transactions.
Bid Prices
Period Common Stock
------ ------------
Low High
Fiscal Year Ended February 27, 2000
May 31, 1999 $0.03 $0.08
August 31, 1999 0.02 .625
November 30, 1999 0.02 .625
February 27, 2000 0.01 .11
Fiscal Year Ended February 28, 2001
May 31, 2000 $0.0625 $0.10
August 31, 2000 0.02 0.02
November 30, 2000 0.01 0.02
February 27, 2001 0.001 0.006
As of June 2001, the Company's Common Stock was held by approximately 262
holders of record and approximately 1,100 beneficial owners.
The Company has never paid any cash dividends on its Common Stock, and has no
present intention of so doing in the foreseeable future.
11
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information
with respect to the Company and its subsidiaries for the five fiscal years ended
February 27, 2001.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and in conjunction with the Company's Consolidated Financial
Statements and notes thereto appearing elsewhere in this Report.
For Fiscal Year Ended
---------------------
(In thousands, except per share amounts)
Feb. 27 Feb. 27 Feb. 27 Feb. 28
2001 2000 1999 1998
Summary Statements of Operations
- --------------------------------
Net sales $ -- $ 5,344 $ 11,518 $ 21,683
Gross profit -- 1,625 2,410 3,102
Net (loss) gain sale of asset -- (539) (15) 712
Net gain sale of asset -- -- 712 --
Unusual credit (charge) -- -- -- --
Net income (loss) -- 1,409 937 (4,665)
Net earnings (loss)
per share-basic
and diluted -- (.40) .26 $ (1.47)
Average shares
outstanding -- 3,239 3,239 3,249
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Summary Balance Sheet Data
- --------------------------
Total assets 22 22 3,476 7,208
Working capital (1,680) (1,680) (956) (2,120)
Long-term debt (exclusive
of current maturities) -- -- 64 299
Convertible subordinated
debt 827 827 2,053 2,053
Stockholders' equity (1,680) (1,680) (306) (1,262)
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Termination of Operations
The Company experienced significant losses in recent years which have
generally resulted in severe cash flow issues that have negatively impacted the
ability of the Company to continue its business. During fiscal 2000, the
combined effects of various negative developments, including but not limited to:
(I) sharply decreasing revenues over the previous four years; (ii) continuing
losses from operations; (iii) interest payment defaults on outstanding debt,
(iv) the lack of a long-term credit facility; and (v) the concentration of all
sales among only three customers forced the company to discontinue all of its
business and operations. During the year ended 2001 the Company remained totally
inactive.
Prior to the periods covered by the financial statements included in this
report, in fiscal 1995 and 1996, the Company had funded its operating losses by
refinancing its debt and increasing its capital through: (I) the sale of $1
million of non-voting convertible preferred stock to management; (ii) the sale
of treasury stock which increased equity by $2.9 million; (iii) the completion
of a $3.5 million private placement. During the several years prior to the
termination of its operations, the Company had implemented a restructuring
strategy aimed at improving operating results, through the reduction of costs,
the streamlining of operations, and the closing of the company's Puerto Rico
plant. These efforts failed to bring the Company's operations to a profitable
level. Some of the major factors and occurrences which led to the company's
insolvency and the termination of its operations; are descried below. For a
discussion in more detail of each of the matters discussed below, reference is
made to the company's annual report on Form 10-K for the fiscal year ended
February 27, 1999.
The factors noted about resulted in the termination of all of the
company's business activities in October 1999 and the filing, on March 3, 2000,
of a voluntary Petition under Chapter 11 of the United States Bankruptcy Code in
the U.S. Bankruptcy Court for the southern District of New York. The company
remained inactive during fiscal year ended February 27, 2001. Chief among the
factors leading to the present insolvency of the company were: (I) the loss of
the company's largest customer because of Levi-Strauss's decision, late in
fiscal 1997, to sell its "Brittania" line of men's underwear and other products
which the company was licensed to manufacture and sell; (ii) the failure to meet
sales goals required under various other licenses h3ld by the company and the
resultant loss of such licenses; and (iii) the company's incurrence of
substantial amounts of debt in order to fund losses from operations and the
inability of the company to repay such debt, including the following:
1. Termination of Levi Strauss/Brittania Operations. Commencing in September
1988, the Company held a license (the "Brittania License") from Brittania
Sportswear Ltd. ("Brittania"). Levi Strauss 7 Co. )"Levi Strauss") was the
parent company of Brittania. Under the Brittania License, the Company had the
right to manufacture and market men's underwear and other products under the
trademark "Brittania from Levi Strauss 7 Co.". Sales under the Brittania License
aggregated $14.9 million in fiscal 1997 and $4.5 million in fiscal 1998,
accounting for 49% of the company's fiscal 1997 sales, and 21% of the company's
fiscal 1998 sales. During the fiscal year ended February 27, 1999, the Company
made no sales under the Brittania License. As of January 1, 1997,
14
the Brittania License had been renewed for a five-year term, including automatic
renewals of two years if certain minimum sales levels were achieved. However, on
January 22, 197, Levi's announced its intention to sell Brittania. As a result
of the action taken by Levi Strauss, K-Mart, the largest retailer of the
Brittania brand, and the Company's largest customer (accounting for sales of
Brittania product of approximately $11 million in fiscal year 1997, and $3
million in fiscal year 1998), advised the Company that it would no longer
continue its commitment to carry the Brittania trademark. In response, the
Company filed a multi-million dollar lawsuit against Levi Strauss and Brittania
in march 1997, alleging that Brittania had breached various obligations under
its license agreement with the Company, including without limitation it's
covenant of good faith and fair dealing. This litigation was settled in June
1998, with the Company realizing approximately $725,000 in gross value out of
such settlement.
2. Discontinuance of GUESS" Product Line. From December 7, 1992 until the first
quarter of the fiscal year ended February 27, 1999, the Company held the
exclusive United States rights to produce and sell undergarments bearing the
"GUESS?" trademark and variations thereof. The license was subject to
termination prior to its expiration if certain minimum sales goals were not met,
with the payment of minimum royalties required in the amounts of $560,000,
$700,000 and $840,000 for the contract years ended May 31, 1997, 1998 and 1999
respectively. Minimum sales goals were never achieved under this license. Due to
the lack of capital resources necessary to develop and support the GUESS?
product line at the levels required in the licensing agreement. The Company,
with the support of the licensor, initiated a strategy to terminate the GUESS?
license, and the Company discontinued its GUESS? division during the first
quarter of fiscal year 1999.
3. Termination of "Arrow" License. Pursuant to an agreement, dated October 5,
1992, with Cluett, Peabody & Co., Inc., the Company held the exclusive United
States rights (the "Arrow License") to produce and sell men's and boys' fashion
underwear, T-shirts, V-neck shirts, tank tops, briefs and boxer shorts bearing
the "ARROW" trademark during the period commencing January 1, 1993 and expiring,
pursuant to an extension, December 31, 1999. The terms of the Arrow License
required that the Company pay a minimum royalty of $162,500 for each annual
period through December 31, 1996, increasing to $250,000 for each annual period
from January 1, 1997 through December 31, 1999. Because the Company was unable
to meet the minimum sales requirements under the Arrow License, as of March 12,
1999, the company reached an agreement with the licensor to terminate the Arrow
License.
4. Failure to meet Minimum Sales Requirements Under "Botany 500" License. On
December 21, 1992, the Company obtained from the McGregor corporation, the
exclusive United States rights (the "Botany 500 License") to produce and sell
men's and boys' fashion knit underwear briefs bearing the "BOTANY 500" trademark
during the period commencing on January 1, 1993 and expiring, pursuant to an
extension, December 31, 2001. Under the terms of the license agreement, the
McGregor Corporation had the right to terminate the Botany 500 License prior to
its expiration if certain minimum sales goals were not met. Minimum sales levels
required under the Botany 500 License for calendar 1996 were 4750,000 and $1
million of each calendar year thereafter. The Company was never able to meet the
minimum sales requirements under the Botany 500 License with net sales under the
license for fiscal 1997 (which included most of calendar 1996) being $652,000
and $225,000 for fiscal 1998 (which included most of calendar 1997). After
fiscal 1998, the Company ceased all operations under the Botany 500 License.
15
5. Loss of Revolving Credit Line. Until October 15, 1999, the Company had a
fifteen million dollar revolving credit facility with Congress Financial Corp.
("Congress"). This facility provided for: (I) loans based upon eligible accounts
receivable and inventory; (ii) a $3,000,000 letter of credit facility; and (iii)
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 Company's agreement with Congress required, among other things, that the
Company maintain of minimum working capital and net worth levels. Borrowings
under the agreement were collateralized by a lien on substantially all of the
assets of the company. As at February 27, 1999 the Company was not in compliance
with the net worth and working capital covenants. This credit facility utilized
was terminated by Congress on October 15, 1999 and, because of its poor
financial status and outlook, the Company was not able to replace it.
6. Continuing Default on Outstanding Debentures. On August 15, 1996, the Company
completed a $3.5 million private placement with NAN Investors, L.P., an
investment partnership ("NAN Investors"). Terms of this transaction included the
issuance of 250,000 shares of the Company's common stock and two convertible
subordinated debentures in the aggregate principal amount of $2,760,000 (the
"NAN Debenture"). The NAN Debentures bore interest at an annual rate of 12.5%,
payable semi-annually, with the principal amount due and payable on August 15,
2001. Although the NAN Debentures were convertible into the Company's common
stock, NAN Investors eventually waived all conversion rights.
Beginning in August 1997, the Company was in default on interest payments due
under the NAN Debentures. The NAN Debentures were secured by a second mortgage
on the company's manufacturing and distribution facility located in
Cartersville, Georgia. This property was sold on October 1, 1997. To release
NAN's security interest in the property and to extend the cure period with
respect to a $172,500 interest payment default on the Debentures, the Company
prepaid $707,000 of the principal amount of the NAN Debentures plus a $176,000
prepayment penalty.(2) In connection therewith, in September 1997, the Company
entered into an agreement with NAN Investors (the "First NAN Forbearance
Agreement") providing for the extension of cure period for the default on the
interest payments. The First NAN Forbearance Agreement was extended month by
month until May 1998, at which time, the company entered into another
forbearance agreement with NAN Investors (the "Second NAN Forbearance
Agreement") to extend, until December 1998, the cure period for interest
payments then in default (totaling $322,551) as well as the interest payment,
which was to fall due in August 1998. In consideration for such extension, the
company and NAN Investors entered into a security agreement (The "NAN Security
Agreement), pursuant to which the Company agreed to secure the NAN Debentures by
a first priority lien on all the assets of the Company, both tangible and
intangible, to the extent not otherwise prohibited under the Congress revolving
credit facility and to issue to NAN Investors five-year warrants convertible to
a total of 16,500,000 shares of the Company's tock at an exercise price of $.10
per share. Thereafter, the company remained in default on all interest payments
due after august 1997. There was no forbearance agreement in effect with respect
to interest payments which fell due subsequent to December 1998 and therefore,
at that point, the Company was in default with respect to the full principal
amount of the NAN Debentures and all unpaid interest accrued thereon, which at
that time
- -----------
(2) Total proceeds from the sale of the Cartersville facility were $2,850,000.
In addition to the $883,000 paid to NAN Investors by way of a $707,000
prepayment of principal and a $176,000 prepayment penalty, the Company used
$525,000 to pay other financing secured by this property. The remaining proceeds
were utilized to reduce the Company's revolving credit financing with Congress.
16
totaled $2,052,986. Pursuant to their rights under the NAN Security Agreement,
NAN Investors took possession of all of the Company's assets, subject to the
release of the senior creditor (Congress). These assets consisted entirely of
inventory and receivable. NAN Investors ultimately realized a total of
$1,222,654 from the sale or collection of such assets, reducing the Company's
indebtedness to approximately $826,845 as at the end of fiscal 2000. Further, in
recognition of NAN Investors rights, under the NAN Security Agreement, to any
and all remaining assets of the Company, on February 17, 2000, the Company
surrendered to NAN Investors, all of its right, title, and interest in certain
unasserted claims it believes it had against Target Stores, Inc. and SGS U.S.
Testing Co., Inc. (the "Claims") on the condition that the net amount collected
in respect of the Claims be set off against the amount of the Company's
indebtedness to NAN Investors. Management believed that the value of the Claims
would thus be maximized because the Company lacked the financial resources to
assert the Claims and NAN Investors already had an existing right to any amounts
that the company might collect in respect of the Claims. Management believed
that the Claims consisted of: (I) a claim against Target Stores, Inc. for
unauthorized off-sets and credits taken in a presently undetermined amount to
the best of present management's knowledge, NAN Investors is currently pursuing
all legal remedies available with respect to (ii) a claim against SGS U.S.
Testing Co., Inc. in the approximate amount of $35,000. A claim filed into the
Federal Bankruptcy Court by SGS U.S. attorneys for the Company have filed an
objection and are seeking a set-off of claims. In the years preceding the
termination of operations, the company had experienced difficulty in filling all
of its orders, caused in large part by recurring cash shortages, the expiration
of its working capital financing arrangements, and the failure to obtain the
investment necessary to support and develop the GUESS? product line. From at
least fiscal 1996 onwards, the company had attempted to address its liquidity
issues by the infusion of debt and equity financing, including (I) a refinancing
in March 1994; (ii) additional equity of $3.9 million raised in fiscal 1995;
(iii) an August 1996 $3.5 million private placement, which left the Company with
$2,760,000 in debt under the NAN Debentures, bearing interest an annual rate of
12.5%; and (iv) by the reduction in costs associated with the consolidation and
restructuring of the operations in fiscal 1998 and 1999, and the attempt to more
effective management of working capital. All of these efforts, however, failed
to keep the Company solvent and with the loss of the Brittania License,
continuing losses from operations, interest payment defaults, and the lack of
any credit facilities, the Company was forced to discontinue all business
operations by the end of October 1999. For a discussion in more detail of the
restructuring strategy which the Company implemented in attempts to improve
operating results and enhance its financial resources, reference is made to Item
7 of part II of the Company's annual report on Form 10-K for the fiscal year
ended February 27, 1999.
Operating results for fiscal 1998 reflected $1.8 million in restructuring
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. The operating results for fiscal 1999 included
$1,930,000 in other income all of which was the result of litigation settlements
as discussed earlier. The operating results for fiscal 2000 do not include any
unusual credits or charges. Since the Company has remained inactive there are no
operating results for the fiscal year ended February 27, 2001.
17
Results of Operations
Sales
There were no sales for the year ended February 27, 2001. The Company
remained inactive since it ceased doing business in October of 1999. Total net
sales for the fiscal year ended February 27, 2000 were $5,344,223, which
represented a decrease of approximately 53.6% from fiscal 1999 when total net
sales were approximately $11.5 million. In turn, fiscal 1999 net sales had
represented a decrease of 47% from fiscal 1998, when net sales totaled $21.7
million. Net sales for 1998 also represented a decrease from net sales for 1997
which had totaled $30.4 million.
No sales were generated under the discontinued Brittania license in fiscal
2000 or fiscal 1999 as compared to $4.5 million in fiscal 1998. Sales under the
Brittania license in fiscal 1998, in turn, had represented a decrease of $10.4
million from Brittania sales in fiscal 1997.
Operations under the GUESS? License were completely phased out by the
first quarter of fiscal 1999. There were, therefore, no sales attributable to
this line in fiscal 2000, as compared to $2.4 million in fiscal 1999 and $7
million in fiscal 1998.
Former management of the company has attributed the steady decline in
total net sales, since fiscal 1998, primarily to the phase out of the Brittania
product associated with the actions announced by Levi to dispose of the
Brittania brand, and the loss of certain styles to competitors within the
company's business environment as well as a lack of sufficient working capital.
Selling, General and Administrative Expenses
There were no selling or general and administrative expense in fiscal
2001. The Company remained inactive since it ceased doing business in October
1999. Selling, general and administrative expenses in fiscal 2000 of $2,161,376
were approximately 41% of sales. For fiscal 1999 and 1998, these expenses were
$2.9 million and $2 million respectively, and as a percentage of sales, 25% for
fiscal year 1999, and 33% for fiscal year 1998. General and administrative
expenses for fiscal year 1998 included $691,000 in non-recurring charges
incurred as part of the company's restructuring efforts. While thee efforts were
somewhat successful in reducing expenses as a percentage of sales, the loss of
the Brittania product line ultimately resulted in the Company's becoming
insolvent.
Interest Expense
There was no interest expense in fiscal 2001. The company remained
inactive since it ceased doing business in October 1999. Interest expense
decrease by $172,715 in fiscal 2000, reflecting the payment of interest for only
eight months of the fiscal year as well as the reduction of debt caued by the
application to the outstanding debt of proceeds from the ale and liquidation by
the creditor, NAN Investors, of certain of the company's assets. In fiscal 1999,
interest expense decreased by approximately $805,000, reflecting reductions in
the outstanding revolving credit facility and the subordinated debt. Prior to
that, in fiscal 1998, interest expenses had increased by
18
approximately $112,000, reflecting $175,000 booked as the expense resulting from
the issuance of 16,500,000 warrants.
Liquidity and Capital Resources
The Company incurred significant operating losses in recent years which
resulted in sever cash flow problems which negatively impacted the ability of
the company to conduct its business as structured and ultimately caused it to
become and remain insolvent. The pertinent history in recent years of the
company's liquidity and capital resources is as follows:
Prior to the periods covered by the financial statements included in this
Report, in march, 1994, the company's principal arrangements consisted of (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. The financing arrangements with congress
were covered by a loan and security agreement, dated march 24, 1994 (the
"Congress Loan and Security Agreement"). On May 31, 1996k, the company amended
the Congress Loan and Security Agreement to provide for; (I) $251,000 in
additional equipment term loan financing, (ii) extension of the repayment period
for all outstanding term loans, (iii) supplemental revolving loan availability
from march 1st through June 30th of each year and (iv) extension of the renewal
date to march 20, 1998. In March, May, August and December of 1998, Congress
extended its Loan and Security Agreement with the Company. The agreement was to
expire on December 31, 1998, but was extended to August 31, 1999 and from each
month thereon, on a month to month basis, until October 15, 1999 when it was
mutually terminated by Congress and the company. With the loss of the congress
financing, the Company was left with no credit facility, and became insolvent.
During the several years preceding its ultimate insolvency, the Company
had raised money through the sale of equity securities with: (I) a $1,000,000
investment by a group of investors headed by George Samberg, who was a that
time, the president and CEO of the company; (ii) a $2.9 million sale of 490,000
shares of common treasury stock to GUESS? and certain of its affiliates; and
(iii) a sale of 250,000 shares of the Company's common stock to NAN Investors in
fiscal 1997. The sale of common stock to NAN Investors was tied to the sale of
debt securities consisting of two convertible subordinated debentures in the
aggregate face amount of $2,760,000 bearing interest at an annual rate of 12.5%.
Therefore, while the company realized gross proceeds of $3.5 million from its
sales to NAN Investors, $2,760,000 of this amount actually represented new debt
because it constituted the aggregate principal amount of two NAN Debentures. The
NAN Debentures were secured by a second mortgage on the Company's manufacturing
and distribution facility in Cartersville, Georgia (the "Cartersville
Facility"). The Company utilized the $3.5 in proceeds from its sales to NAN
Investors to prepay existing debt. Therefore, while these transactions had a
positive effect on the company's liquidity and capital resources, the Company
was ultimately left with substantial debt which, after the loss of the Brittania
line, the company was unable to repay or even to service.
During fiscal 1998, on October 1, 1997, the company completed the
consolidation of its facilities and sold the Cartersville facility for cash
aggregating to $2,850,000. The company reflected a gain on the sale of $793,000.
The proceeds were used to (I) repay $525,000 financing secured by this property;
(ii) to prepay 4707,000 of the NAN Debentures; and (iii) to pay a $176,000
prepayment penalty incurred from the prepayment of NAN Debentures. The remaining
net proceeds were utilized to reduce the congress revolving credit financing.
19
During fiscal 2000, working capital levels decreased to $(1,685,573) from
$(956,404) at February 27, 1999 levels reflecting the surrender of the company's
assets NAN Investors pursuant to its rights under the NAN Security Agreement.
Working capital at February 27, 1999, reflected reductions in receivable and
inventories utilized to reduce debt levels. The respective $1,108,860 and
$1,981,523 million reductions in inventory levels, as at the ends of fiscal 2000
and fiscal 1999, reflected the Company's reduction in sales volume, and its
continuing efforts to manage its supply chain towards delivering inventory
closer to forecasted demand. During fiscal 1999, the subordinated debt was
reclassified as short term due to the Company's inability to make interest
payments on the NAN Debentures. During fiscal 2000, on October 11, 1999, the
Board of Directors voted to allow NAN Investors to liquidate the assets covered
by its security agreement.
Outlook
Nantucket Industries, Inc. (the "Company") is currently insolvent. It has
had no business and carried on no business activities since October 1999. On
March 3, 2000, the company filed a Voluntary Petition under Chapter 11 of the
Unites States Bankruptcy Code in the U.S. Bankruptcy court for the Southern
District of New York. (Case Name: Nantucket Industries, Inc., Case Number: 00-B
10867). The company intends to file a Chapter 11 Plan and a Disclosure Statement
in June 2001.
The goal of the projected Chapter 11 reorganization will be for the
Company to effect a merger, acquire the assets or the capital stock of existing
businesses, or to effect another similar business combination. No assurances can
be given that the Company will be successful in doing so. Management will have
sole discretion to determine which businesses, if any, may be formed or
acquired, as well as the terms of any acquisition. Accutone Inc., a company
controlled by John H. Treglia, the Company's current president, has been
identified as a potential company and business which management has considered
with regard to the possibility of an acquisition or merger transaction with the
Company. If the Company should ultimately acquire a business or property from
any member of management, the terms of such acquisition might not be the result
of arm's length negotiations. Any transaction between the Company and any of its
affiliates could present management with a conflict of interest. Therefore, it
is the intention of management that, if such transaction should occur, the terms
thereof will be no less beneficial to the Company than they would be if such
transactions had been effected on an arms length basis.
The proposed reorganization of the Company and the acquisition of or
merger with new businesses can be expected to require the issuance of
substantial amounts of new shares of the Company's common stock or other
securities. Any such stock issuances will significantly reduce the proportionate
ownership and voting power of each other shareholder.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, required to be included in this
Report are set forth below.
21
NANTUCKET INDUSTRIES, INC.
INDEX
PAGE
----
Report of Independent Certified Public Accountants -
Pilotti, Cunzio & Associates LLP 23
Consolidated balance Sheets -
February 28, 2001, February 27, 2000 and February 27, 1999 24
Consolidated Statements of Operations - Years Ended
February 28, 2001, February 27, 2000 and February 27, 1999 25
Consolidated Statements of Stockholders' Equity - Years Ended
February 28, 2001, February 27, 2000 and February 27, 1999 26
Consolidated Statements of Cash Flows - Years Ended
February 28, 2001, February 27, 2000 and February 27, 1999 27
Notes to Consolidated Financial Statements 28
Report of Independent Certified Public Accounts -
Grant Thornton LLP 41
Consolidated Balance Sheets -
February 27, 1999 and February 28, 1998 42
Consolidated Statements of Operations -
Year Ended February 27, 1999, February 28, 1998, and March 1, 1997 44
Consolidated Statements of Stockholders' Equity -
Years Ended February 27, 1999, February 28, 1998 and March 1, 1997 45
Consolidated Statements of Cash Flows - Years Ended
February 27, 1999, February 28, 1998 and March 1, 1997 47
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule 49
22
[Letterhead of Pilotti, Cunzio & Associates LLP]
[LOGO] PC&A
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
23
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.
24
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.
25
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.
26
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.
27
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.
28
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.
29
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).
30
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.
31
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
32
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.
33
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.
34
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 $ -- $ -- $ --
================================================================================
35
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.
36
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.
37
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.
38
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.
39
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.
40
[GRANT THORNTON LETTERHEAD]
Report of Independent Certified Public Accountants
Board of Directors
Nantucket Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Nantucket
Industries, Inc. and Subsidiaries as of February 27, 1999 and February 28,
1998,and the related consolidated statements of operations, stockholders'
deficit and cash flows for each of the three years in the period ended February
27, 1999. 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 audits.
We conducted our audits 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 audits provide 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 as of February 27, 1999 and February 28, 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended February 27, 1999 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 presented in the accompanying
financial statements, the Company has had significant decreases in sales,
operating losses, and defaulted on interest payments. These factors, among
others discussed in Note A 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 A.
These financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
/s/ Grant Thornton LLP
Atlanta, Georgia
May 14, 1999
41
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
February 27, February 28,
1999 1998
------------ ------------
CURRENT ASSETS
Cash $ 622,268 $ 8,850
Accounts receivable, less allowance for doubtful
accounts of $273,000 and $351,000, respectively
(Notes B and H) 961,989 2,879,735
Inventories (Notes F and H) 1,108,860 3,090,383
Other current assets 67,347 71,895
---------- -----------
Total current assets 2,760,464 3,050,863
PROPERTY, PLANT AND EQUIPMENT,
NET (Notes G and H) 538,522 958,075
OTHER ASSETS, NET 176,601 198,786
---------- -----------
$3,475,587 $ 7,207,724
========== ===========
The accompanying notes are an integral part of these statements.
42
LIABILITIES AND STOCKHOLDERS' DEFICIT
February 27, February 28,
1999 1998
------------ ------------
CURRENT LIABILITIES
Current portion of long-term debt (Note H) $ $ 3,161,286
Current portion of capital lease obligations (Note H) 56,452 51,898
Convertible subordinated debt (Note D) 2,052,986 2,052,986
Accounts payable 248,538 722,483
Accrued salaries and employee benefits 80,740 223,031
Accrued unusual charge (Note E) 95,833 465,000
Accrued expenses and other liabilities 863,271 730,478
Accrued royalties 319,048 763,270
---------- -----------
Total current liabilities 3,716,868 8,170,432
CAPITAL LEASE OBLIGATIONS,
NET OF CURRENT PORTION (Note H) 64,250 120,702
ACCRUED UNUSUAL CHARGE (Notes E and L) 78,717
---------- -----------
3,781,118 8,469,851
STOCKHOLDERS' DEFICIT (Notes D and K)
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
Common stock, $.10 par value; authorized 20,000,000 shares;
Issued 3,241,848 324,185 324,185
Additional paid-in capital 12,539,503 12,539,503
Deferred issuance cost (96,425) (115,541)
Accumulated deficit (13,053,357) (13,990,837)
------------ -----------
(285,594) (1,242,190)
Less 3,052 shares of common stock held
in treasury, at cost 9,937 19,937
------------ -----------
(305,531) (1,262,127)
------------ -----------
$ 3,475,587 $ 7,207,724
============ ===========
43
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended
February 27, February 28, March 1,
1999 1998 1997
------------ ------------ -----------
Net sales $11,517,842 $30,394,409
Cost of sales 9,107,947 18,581,718 24,395,054
----------- ----------- -----------
Gross profit 2,409,895 3,101,608 5,999,355
Selling, general and
administrative expenses 2,879,200 7,166,124 7,546,341
----------- ----------- -----------
Operating profit (loss) (469,305) (4,064,516) (1,546,986)
Other (income) expense
Net loss (gain) on sale of assets
(Note G) 15,093 (711,686) --
Interest expense 506,746 1,311,875 1,199,529
Other income (Note L) (1,928,624) -- --
----------- ----------- -----------
Total other (income) expense (1,406,785) 600,189 1,199,529
----------- ----------- -----------
Earnings (loss) before income taxes 937,480 (4,664,705) (2,746,515)
Income taxes (Note J) -- -- --
----------- ----------- -----------
Net earnings (loss) $ 937,480 $(4,664,705) $(2,746,515)
=========== =========== ===========
Net earnings (loss) per share
- basic and diluted $ 0.26 $ (1.47) $ (0.91)
=========== =========== ===========
Weighted average common
shares outstanding 3,238,796 3,238,796 3,124,785
=========== =========== ===========
The accompanying notes are an integral part of these statements.
44
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Years ended February 27, 1999, February 28, 1998 and March 1, 1997
Preferred stock
designated as
non convertible Common stock Additional
---------------- ------------ paid-in
Shares Amount Shares Amount capital
------ ------ ------ ------ -------
Balance at March 2, 1996 5,000 $ 500 2,991,848 $299,185 $11,556,386
Net loss -- -- -- -- --
Common stock issued (Note D) -- -- 250,000 25,000 808,117
Balance at March 1, 1997 5,000 500 3,241,848 324,185 12,364,503
Net loss -- -- -- -- --
Issue of warrants -- -- -- -- 175,000
Amortization of deferred costs -- -- -- -- --
--------- ---------- --------- -------- -----------
Balance at February 28, 1998 5,000 500 3,241,848 324,185 12,539,503
Net earnings -- -- -- -- --
Amortization of deferred costs -- -- -- -- --
--------- ---------- --------- -------- -----------
Balance at February 27, 1999 5,000 $ 500 3,241,848 $324,185 $12,539,503
========= ========== ========= ======== ===========
Deferred Treasury stock
issuance Accumulated --------------
costs deficit Shares Amount Total
----- ------- ------ ------ -----
Balance at March 2, 1996 $ -- $(6,579,617) 3,052 $(19,937) $5,256,517
Net loss -- (2,746,515) -- -- (2,746,515)
Common stock issued (Note D) (183,772) -- -- -- 649,345
-------- ----------- ----- -------- ----------
45
Balance at March 1, 1997 (183,772) (9,326,132) 3,052 (19,937) 3,159,347
Net loss -- (4,664,705) -- (4,664,705)
Issue of warrants -- -- -- -- 175,000
Amortization of deferred costs 68,231 -- -- -- 68,231
--------- ------------ ----- -------- ---------
Balance at February 28, 1998 (115,541) (13,990,837) 3,052 (19,937) (1,262,127)
Net earnings -- 937,480 -- -- 937,480
Amortization of deferred costs 19,116 -- -- -- 19,116
--------- ------------ ----- -------- ----------
Balance at February 27, 1999 $ (96,425) $(13,053,357) 3,052 $(19,937) $ (305,531)
========= ============ ===== ======== ==========
The accompanying notes are an integral part of this statement.
46
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
February 27, February 28, March 1,
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net earnings (loss) $ 937,480 $(4,664,705) $(2,746,515)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities
Depreciation and amortization 397,053 569,121 361,425
Provision for doubtful accounts 11,210 239,982 32,000
Loss (gain) on sale of fixed assets 15,093 (711,686) (44,496)
Provision for obsolete and
slow-moving inventory 77,528 1,175,646 415,000
Issue of warrants -- 175,000 --
Decrease (increase) in assets
Accounts receivable 1,906,536 253,047 (1,487,701)
Inventories 1,903,995 560,411 1,915,199
Other current assets 4,548 419,024 283,886
(Decrease) increase in liabilities
Accounts payable (473,945) (497,380)
Accrued expenses and other liabilities (453,720) 468,708 221,895
Income taxes payable -- (1,909) (1,025)
Accrued unusual charge (547,884) (92,151) (408,011)
--------- --------- ---------
Net cash provided by (used in)
operating activities 3,777,894 3,723,859 (1,955,723)
Cash flows from investing activities:
Additions to property, plant and equipment (59,562) (212,093) (152,516)
Proceeds from sale of fixed assets 51,745 2,808,731 33,756
Decrease (increase) in other assets 56,525 348,724 (396,838)
--------- --------- ---------
Net cash provided by (used in)
investing activities 48,708 2,945,362 (515,598)
47
Nantucket Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
February 27, February 28, March 1,
1999 1998 1997
------------ ------------ ---------
Cash flows from financing activities:
(Repayments) borrowings under line of credit
agreement, net (3,161,286) (5,915,589) 173,093
Payments of short-term debt -- -- (800,000)
Issuance of convertible subordinated debentures,
net of expenses -- -- 2,351,084
Payments of long-term debt and capital lease
obligations (51,898) (752,693) --
Issuance of common stock -- -- 740,000
----------- ----------- ----------
Net cash (used in) provided by
financing activities (3,213,184) (6,668,282) 2,464,177
Net increase (decrease) in cash 613,418 909 (7,144)
Cash at beginning of year 8,850 7,941 15,085
----------- ----------- ----------
Cash at end of year $ 622,268 $ 8,850 $ 7,941
=========== =========== ==========
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid during the year for:
Interest $ 191,440 $ 762,798 $1,173,981
=========== =========== ==========
Income taxes $ -- $ -- $ --
=========== =========== ==========
The accompanying notes are an integral part of these statements.
48
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE A - RESTRUCTURING AND LIQUIDITY MATTERS
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Net sales for the fiscal year ended
February 27, 1999 decreased 47% from the prior year level to $11.5 million.
There were no sales under the Brittania license for the current fiscal year, and
sales under the GUESS? license declined by $4.5 million from prior year levels.
As more fully described in Note L, Levi Strauss & Co., the parent company of
Brittania Sportswear Ltd. a licensor which accounted for $14.9 million of the
Company's fiscal 1997 sales, and $4.5 million of fiscal 1998 sales, announced
their intention to sell Brittania. In light of the actions announced by Levi'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 $11
million in fiscal year 1997, to $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 L).
The Company has experienced significant losses in recent years which have
generally resulted in severe cash flow issues that have negatively impacted the
ability of the Company to conduct its business as presently structured. In
fiscal year 1999 due to the lack of capital resources needed to properly develop
and support the GUESS? product line, the Company has discontinued sales under
the GUESS? license. Sales for this product line in fiscal 1999, 1998, and 1997
aggregated $2.5, $7.0 and $4.7 million, with gross margins of 11.8%, 6.4% and
13.2%, 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 L). 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, and
currently three customers represent 90% of the Company's net sales.
49
As a result of sharply decreasing revenue, the continuing losses, interest
payment default, the lack of a long-term credit facility and the present sales
concentration over three customers, there can be no assurance that the Company
can continue as a going concern. 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.
In view of the issues described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon the continued operations of the Company, which
in turn is dependent upon the Company's ability to maintain the financing of its
working capital requirements on a continuing basis and to improve its future
operations.
50
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE A - RESTRUCTURING AND LIQUIDITY MATTERS - Continued
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 K) 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 D).
The Company has been implementing 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 has implemented additional steps to reduce its operating
costs which it believes are sufficient to provide the Company with the ability
to continue in existence. Major elements of these action plans include:
o The phase-out of the GUESS? product line, completed in the second
quarter of fiscal year 1999.
o The sale of the Company's Cartersville, Georgia location (Note G),
and the relocation to more appropriate space for its packaging and
distribution facilities.
o The transfer of all domestic manufacturing requirements to foreign
manufacturing contract facilities.
o Staff reductions associated with the transfer of manufacturing to
offshore contractors.
o The relocation of executive offices and showrooms to more
appropriate, lower cost facilities.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. The Company
Nantucket Industries, Inc. and its wholly-owned subsidiaries (the
"Company") design and distribute branded and private label fashion undergarments
to mass merchandisers and national chains throughout the United States.
51
2. Principles of Consolidation
The consolidated financial statements include the accounts of Nantucket
Industries, Inc. and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
52
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
3. Accounts Receivable
An allowance for doubtful accounts is provided based upon historical bad
debt experience and periodic evaluations of the aging of the accounts.
4. 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
5. Other Assets
Other long-term assets consist primarily of capitalized loan origination
costs. These costs are being amortized over the term of the related credit
agreements. Other assets includes $196,000 and $151,000 of accumulated
amortization as of February 27, 1999 and February 28, 1998, respectively.
6. Stock Options
As described in Note I, 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.
53
7. Income Taxes
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.
54
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. 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 is based on the weighted
average number of common shares outstanding without consideration of potential
common share equivalents. Diluted earnings per share is 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, 1999, the Company had 106,000 outstanding stock options and
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 I).
9. 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.
10. 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
26, 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
55
relates to disclosure within the financial statements and is not expected to
have a material effect on the Company's financial statements.
11. Fiscal Year
The Company's fiscal year ends on the Sunday nearest to February 28. The
fiscal years ended February 27, 1999, February 28, 1998 and March 1, 1997
contained 52 weeks.
12. Reclassification
Certain prior year amounts have been reclassified in order to conform to
the current year's presentation.
56
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
13. 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.
14. 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
1999, 1998 and 1997.
15. 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.
NOTE C - CONCENTRATION OF RISK
For the current fiscal year, sales to the Company's largest customer
accounted for 38.8% of net sales and 23% and 18%, respectively, for the two
prior fiscal years. Sales to the second largest customer in the current fiscal
year were 33.6% of net sales and 22% and 19%, respectively, for the two prior
fiscal years. As previously described, K mart, which represented $0 of net sales
in the current fiscal year, 16% and 40%, for the two prior fiscal years, advised
the Company it would no longer continue its commitment to the Brittania
trademark
57
and consequently, the Company currently has no business with this customer. No
other customer accounts for more than 10% of the Company's consolidated net
sales for fiscal 1999, 1998 and 1997.
58
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE D - 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
which are due August 15, 2001.
The convertible subordinated debentures are secured by a second mortgage
on the Company's manufacturing and distribution facility located in
Cartersville, Georgia. In conjunction with the sale of this property completed
on October 1, 1997 (see Note G), 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.
59
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE D - PRIVATE PLACEMENT - Continued
The Company was in default in respect to interest payments due on the
subordinated debt in August 1997, and again in February 1998. In September 1997,
the Subordinated debt holder and the Company entered into an agreement to extend
the cure period on the default. This forbearance agreement was extended month by
month until May 1998. In May 1998, the Company entered into an agreement with
the debt holder to extend the cure period, with respect to $322,551 in prior
interest payment defaults and for the interest payment due in August 1998, until
December 1998. In return, the Company agreed to secure the debentures by a first
priority lien on all the assets of the Company, to the extent not otherwise
prohibited under the revolving credit facility (Note H), and to issue five-year
warrants convertible to 16,500,000 shares of the Company's stock at an exercise
price of $.10. The Company obtained an independent valuation of this
transaction, in the amount of $175,000, and this amount was expensed in fiscal
year 1998. To the extent that the Company has insufficient authorized and
unissued shares of common stock to satisfy the exercise of the warrants, the
Company shall use its best efforts to promptly cause its authorized capital to
be increased to the extent necessary to satisfy the conversion rights in full.
The Company can, at its option within the framework of the forbearance
agreement, prepay all or part of the outstanding subordinated debt at a price
equal to 125% of the principal amount paid. 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.
NOTE E - 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
60
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
L. 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 27, 1999, the accued unusual charge of $95,833 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 (see Note L).
61
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE F - 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 27, February 28,
1999 1998
------------ ------------
Raw materials $ -- $ 166,646
Work in process -- 756,959
Finished goods 1,108,860 2,166,778
---------- ----------
$1,108,860 $3,090,383
========== ==========
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
February 27, February 28,
1999 1998
------------ ------------
Land $ -- $ --
Buildings and improvements 26,034 9,130
Machinery and equipment 1,485,090 3,384,115
Furniture and fixtures 142,489 791,242
---------- ----------
1,653,613 4,184,487
Less accumulated
depreciation 1,115,090 3,226,412
---------- ----------
$ 538,523 $ 948,075
========== ==========
62
On October 1, 1997, the Company completed the consolidation if its
facilities and sold its 152,000 square foot manufacturing and distribution
facility in Cartersville, Georgia for cash aggregating $2,850,000. The Company
reflected a gain on the sale in its third fiscal quarter of $793,000. The
proceeds were used to pay the $525,000 financing secured by this property, to
prepay $707,000 of the convertible subordinated debentures secured by a second
mortgage on this property, and to pay a $176,000 prepayment penalty incurred
from the prepayment of the subordinated debt. The remaining proceeds were
utilized to reduce the revolving credit financing.
63
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE H - LONG-TERM DEBT AND NOTES PAYABLE
1. 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 27, 1999, the revolving credit facility was not utilized,
and the Company was not in compliance with the net worth and working capital
covenants.
2. Capital Leases
The Company leases equipment under capital leases. A schedule of the yearly
minimum rental payments is as follows:
February 2000 $ 64,488
February 2001 64,488
February 2002 2,857
--------
Total minimum lease payments 131,833
Less amount representing interest (11,131)
--------
Present value of net minimum lease
payments 120,702
Less current maturities (56,452)
--------
Long-term capital lease obligation $ 64,250
========
At February 27, 1999, the Company has approximately $96,709 of equipment
under capital lease with accumulated depreciation of approximately $29,013.
64
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE I - NET EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted loss
per share:
February 27, February 28, March 1,
1999 1999 1998
------------ ------------- -------------
Net earnings (loss) attributable to common
stockholders $ 937,480 $ (4,664,705) $ (2,746,515)
Accrued dividends on
preference shares (81,103) (84,603) (82,274)
----------- ------------ ------------
Numerator for basic and
diluted net earnings
(loss) per common share
- earnings (loss)
attributable
to common stockholders $ 856,377 $ (4,749,308) $ (2,828,789)
=========== ============ ============
Denominator for basic and diluted net earnings
(loss) per common share - weighted average
shares outstanding $ 3,238,796 3,238,796 $ 4,124,785
=========== ============ ============
Basic and diluted net
earnings (loss) per
share $ $ 0.26 $ (1.47)
=========== ============ ============
65
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE J - 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 27, 1999 and February 28, 1998 are as
follows:
February 27, February 28,
1999 1998
------------ ------------
Deferred tax assets
Net operating loss carryforward $ 6,987,000 $ 7,150,000
Accrued severance 36,000 257,000
Excess of tax basis over book
basis of inventories -- 333,000
Capitalized inventory costs 22,000 63,000
Other 121,000 127,000
----------- -----------
7,166,000 7,930,000
Deferred tax liabilities
Difference between the book
and tax basis of property,
plant and equipment 331,000 366,000
----------- -----------
Net deferred tax asset 6,835,000 7,564,000
Valuation allowance (6,835,000) (7,564,000)
----------- -----------
Net deferred taxes $ -- $ --
66
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.
The decrease in valuation allowance of $729,000 is equal to the decrease in net
deferred tax assets.
For tax purposes at February 27, 1999, the Company's net operating loss
carryforward was $18,405,000, which, if unused, will expire from 2009 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 27, 1999, the change in ownership was less than 50%.
There was no income tax provision (benefit) for the fiscal years 1999,
1998 and 1997.
67
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE J - INCOME TAXES - Continued
The following is a reconciliation of the normal expected statutory federal
income tax rate to the effective rate reported in the financial statements.
February 27, February 28, March 1,
1999 1998 1997
------------ ----------- --------
Computed "expected" provision for
Federal income taxes (35.0)% (35.0)% (35.0)%
Valuation allowance 35.0 35.0 35.0
---- ---- ----
Actual provision for
income taxes --% --% --%
==== ==== ====
NOTE K - STOCKHOLDERS' EQUITY
1. 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 1999, 1998 and 1997 would be $91,000, $91,000 and $91,000,
respectively. In fiscal 1999, 1998 and 1997 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.
68
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE K - STOCKHOLDERS' EQUITY - Continued
A summary of option activity for the years ended February 28, 1999,
February 28, 1998 and March 1, 1997 is as follows:
Number of Weighted Average
Options Exercise Price
--------- ----------------
Balance, March 1, 1997 264,000 $4.95
Forfeited (11,000) $3.37
------- -----
Balance, March 1, 1997 253,000 $5.02
Forfeited (78,500) $5.43
------- -----
Balance, February 28, 1998 174,500 $4.84
Forfeited (68,500) $4.51
------- -----
Balance, February 27, 1999 106,000 $5.05
======= =====
At February 27, 1999 the status of outstanding stock options is summarized
as follows:
Weighted average
Exercise Options remaining Options
Prices Outstanding contractual life exercisable
-------- ----------- ------------------ -----------
$3.37 31,000 6.7 years 18,600
$5.75 75,000 5.7 years 60,000
------- ------
106,000 78,600
======= ======
69
The weighted average fair value at date of grant for those options granted in
fiscal 1996 was $2.34. The fair value of each option at date of grant was
estimated using the Black-Scholes options pricing model utilizing the following
weighted average assumptions:
Dividend yield 0%
Risk-free interest rate 6.23%
Expected life after vesting period 10 years
Expected volatility 58%
70
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE K - STOCKHOLDERS' EQUITY - Continued
3. 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 27, 1999 and February
28, 1998 dividends in arrears were $408,384 and $327,281, respectively.
4. Issuance of Treasury Stock
In connection with the Company's refinancing on March 22, 1994, (Note D),
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.
5. 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.
NOTE L - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
1. Lease Commitments
Minimum rental commitments under noncancellable leases (excluding
escalation) having a term of more than one year are as follows:
71
Fiscal year ending
2000 $ 258,000
2001 260,000
2002 265,000
2003 202,000
2004 3,000
---------
$ 988,000
=========
Rental expense under operating leases, including escalation amounts was
approximately $249,000, $228,007 and $266,000 for the fiscal years ended
February 27, 1999, February 27, 1998 and March 1, 1997, respectively.
72
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE L - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
- - Continued
2. Agreement with Principal Stockholders
On March 1, 1994, in connection with the restructuring described in Note A, 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.
The cancellation of the outstanding stock options and incentive awards of
the Group members and the principal stockholders and the authorization to
issue options to Group members to purchase 150,000 shares of common stock
based upon certain terms and conditions.
73
3. 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, $840,000 in fiscal 1998 and $294,000 in fiscal 1997. 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.
Royalty payments including agreement minimums for product sold under the ARROW
brand aggregated $250,000 in fiscal 1999, $250,000 in fiscal 1998 and $315,000
in fiscal 1997. As of March 12, 1999, the Company reached an agreement with the
licensor to terminate the ARROW license agreement. No payment of sales
royalties, or guaranteed minimum royalties were required to be made after
January 1, 1999. The licensor made payment of $50,000 to the Company to settle
any and all outstanding issues connected with the termination of the licensing
agreement.
74
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE L - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
- - Continued
4. 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.
75
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."
76
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE L - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
- - Continued
4. Litigation - Continued
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, 1999 has made no
provision in the accompanying financial statements.
5. Letters of Credit
At February 27, 1999, the Company had outstanding letters of credit, primarily
with foreign banks of approximately $597,000 for purposes of collateralizing the
Company's obligations for inventory purchases.
NOTE M - RETIREMENT PLAN
The Company has a 401(k) plan for the benefit of all qualified employees. No
contribution was made for fiscal years 1999, 1998 and 1997.
NOTE N - 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, and $14.9 million in fiscal 1997.
As of January 1, 1997, the license was renewed for a five-year term, including
automatic renewals of two years if certain minimum sales levels 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
77
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."
78
Nantucket Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 27, 1999, February 28, 1998 and March 1, 1997
NOTE O - SUBSEQUENT EVENT (UNAUDITED)
Subsequent to year-ended February 27, 1999, the Company ceased all operations
and sold certain inventory and fixed assets as well as turned over the
collection of all accounts receivable to the primary lender of the Company in
order to satisfy a portion of the outstanding debt secured by the assets. The
carrying value of the inventory and fixed assets sold was approximately
$1,000,000. The Company expects to seek relief from the remaining debt
outstanding, to all creditors, through a voluntary petition under Chapter 11 of
the United States Bankruptcy Code in February 2000. Pending Bankruptcy Court
approval of the Disclosure Statement as adequate, the Company intends to solicit
votes on the Plan of Reorganization ("the Plan") from the Company's secured
lenders and stockholders. From the Filing Date of the Plan until the Effective
Date of the Plan, the Company will operate its business as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court.
79
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None in last two years.
80
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors, Executive Officers and Significant Employees
The following sets forth, as of June 1, 2001, the names and ages of all
directors, executive officers, and other significant employees of the Company;
the date when each director was appointed; and all positions and offices in the
Company held by each. Each director will hold office until the next annual
meeting of shareholders and until his or her successor has been elected and
qualified: Name Age Positions Held Date Appointed Director
Date
Positions Appointed
Name Age Held Director
- ---------------------- --- --------------- -------------
John H. Treglia 58 Director, President, Jan. 18, 2000
And Secretary
Dr. Frank J. Castanaro 50 Director Feb. 17, 2000
George D. Gold 79 Director 1966
Marsha Ellis 40 Treasurer and Chief Jan. 18, 2000
Accounting Officer
Set forth below is information regarding the principal occupations of each
current director during the past five years or more. None of the directors or
principal executive officers holds the position of director in any other public
company.
Mr. Treglia is a graduate of Iona College, from which he received a BBA in
Accounting in 1964. Since January 18, 2000 he has served as president,
secretary, and a director of the Company, devoting such time to the business and
affairs of the Company as is required for the performance of his duties. From
1964 until 1971, Mr. Treglia was employed as an accountant by Ernst & Ernst and,
thereafter, founded and operated several businesses in various areas. From 1994
through 1998, Mr. Treglia served as a consultant to several companies which were
in Chapter 11. These included J.R.B. Contracting, Inc., Laguardia Contracting,
and Melli-Borrelli Associates. In 1996, Mr. Treglia founded Accutone In., a
company engaged in the business of manufacturing and distributing hearing aids.
He has served as its president and CEO since such time.
George J. Gold has been a director of the company since 1966. During his
tenure with the Company he has served as its Chairman of the Board, Chief
Executive Officer, and Treasurer of the company. He resigned all positions other
than Director on March 18, 1994.
Dr. Castanaro received a Bachelor of Science degree from the University of
Scranton in 1974. In 1978 he graduated from Georgetown University School of
Dentistry and has been in private practice as a dentist since such time. Dr.
Castanaro was appointed as a director of the company on February 17, 2000. Dr.
Castanaro has assisted two large ophthalmology practices to introduce and expand
their activities in Laser therapy, including, but not limited to, Lasik
81
procedures. Dr. Castanaro presently practices dentistry in partnership with
Dr.'s Joseph C. and John B. Fontana in Peekskill, New York, and has a solo
practice in Yonkers, New York. Dr. Castanaro is a member of the American Dental
Association, the Dental Society of the State of New York, the Ninth District
Dental Society, and the Peekskill-Yorktown Dental Society.
Marsha Ellis has served as treasurer and chief accounting officer of the
Company since January 18, 2000. Miss Ellis attended North Carolina State
University at which she studied accounting and computer sciences. She is
currently employed full time as comptroller of St. Ives Country Club. Miss Ellis
served as assistant controller of the company from 1994 until it ceased doing
business in October of 1999. Since January 18,2000 she has kept that position on
a part time basis devoting much of her time to the business and affairs of the
Company as is required for the performance of her duties. From 1986 until 1993
Ms. Ellis was a manager in the Accounting Department of The British-American
International Services Group of Companies.
Resignations of Officers and Directors
During the Fiscal Year February 2000
On June 22, 1999, during the fiscal year prior to that covered by this
report, Stephen Samberg submitted his resignation as chairman, CEO, and a
director of the Company. As of such date, the Company was left with only one
executive officer, Nicholas J. Dmytryszyn, who served in the positions of
secretary, CFO, and treasurer. Members of the Company's former management have
advised present management that Mr. Dmytryszyn resigned all of his positions
with the Company some time in October 1999. The board of directors did not take
any action to fill the vacancies caused by the resignations of Messrs. Samberg
and Dmytryszyn. Therefore, from October 1999 until January 18, 2000 (see below),
the Company had no executive officers in place.
Resolution to Reorganize the Company Under Chapter 11
And Appointment of John H. Treglia to Administer Same
Prior to the fiscal year covered by this report at a special meeting of
the board of directors, held on January 18, 2000, the Company's board of
directors reviewed the Company's insolvent state, its total absence of business
operations since October 1999 and the lack of prospects to improve its financial
and operational positions. In light of the company's poor position and
prospects, the board approved the filing of a Voluntarily petition under Chapter
11 of the United States Bankruptcy Code in the Federal Court for the Southern
District of New York for the purpose or reorganizing the business and affairs of
the Corporation through a merger with or acquisition of a new and viable
business.
In connection with the projected reorganization of the Company with a new,
viable business, John H. Treglia, was appointed as a director to fill the
vacancy caused by the resignation of James H. Carey, which had occurred on
October 8, 1999. Upon the appointment of Mr. Treglia, the Company's board
consisted of Mr. Treglia and four members of the former management, Steven
Schneider, Marc Feder, Kenneth Klein, and George J. Gold. Mr. Treglia, who is
the president and a controlling shareholder of Accutone Inc., a company engaged
in the business of manufacturing and distributing hearing aids, was also
appointed President and Secretary of the company and of it four subsidiaries.
Management is seeking merger or acquisition candidates in order to continue the
existence of the Company. It management is unsuccessful in finding at least one
appropriate candidate, the company and its subsidiaries will cease to exist.
Management has not identified any specific business or even any specific
industry for the company or any of its
82
subsidiaries and has not made or entered into any definite plans, proposals,
arrangements, or understandings with respect to any possible business
combination or opportunity nor has it made application to the Bankruptcy Court
for approval of any particular merger or acquisition. However, Accutone Inc., a
company controlled by John H. Treglia, the Company's current president, will be
among the companies and businesses which management will consider with regard to
the possibility of an acquisition or merger transaction with the Company. If the
Company should ultimately acquire a business or property from any member of
management, the terms of such acquisition might not be the result of arm's
length negotiations. While any transaction between the Company and any of its
affiliates could present management with a conflict of interest, it is the
intention of management that is such transaction should occur, the terms thereof
will be no less beneficial to the Company than is such transactions were
effected on an arms length basis.
Appointment of Marsha Ellis as Treasurer and Chief Accounting Officer
Prior to the fiscal year covered by this report, at the January 18, 2000
special meeting of the board of directors, Marsha Ellis, the former assistant
comptroller of the company, was appointed treasurer and chief accounting
officer, of the Company.
Resignation of Three Directors and Appointment of Dr. F.J. Castanaro to Board
Prior to the fiscal year covered by this report, at a meeting of the board
of directors held on February 17, 2000, Marc Feder resigned his position as a
director of the Company and the remaining directors present at the meeting
appointed Dr. Frank J. Castanaro to fill the vacancy on the board caused by Mr.
Feder's resignation. Subsequent to the said meeting, two more directors, Steven
Schneider and Kenneth Klein also resigned from the board. The resignation of
Messrs. Feder, Klein, and Schneider were submitted in light of the termination
of the Company's former business and the projected reorganization of the Company
through a Chapter 11 proceeding.
Section 16(a) ownership Reporting Compliance
To the best knowledge of current management and the members of management
who resigned in February 2000, during the fiscal year ended February 27, 2000,
the Company did not receive any Forms 3 or 4 or any amendments thereto, nor did
any director, officer or beneficial owner of more than 10% of the company's
equity securities fail to file, on a timely basis, reports required by Section
16(a) of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
Until June of 2000, when the board of directors eliminated compensation
for directors other than those employed by the Company, such persons were paid
$5,000 annually and an additional $500 for each Board or committee meeting
attended in person. No payments made during the fiscal year ended February
27, 2001.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee was disbanded in May 1998. As of the date
hereof, the
83
Board of Directors has not established a new Compensation Committee and it has
no plans to do so until such time as the financial position and prospects of the
Company improve significantly.
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows compensation information for each of
the fiscal years ended February 28, 2001 and February 27, 2000 for all persons
who served as the Company's chief executive officer. No other executive officers
of the Company received compensation in excess of $100,000 during the fiscal
year ended February 27, 2000.
To the best knowledge of current management, prior to and/or during the
fiscal year ended February 27, 2000 the Company had in effect a 401(k) Profit
Sharing Plan, a Long Term Incentive Plan and one or more Stock Option and SAR
Plans and/or granted stock options outside of specific Plans therefore. As part
of the projected reorganization under chapter 11, all existing compensation
plans and rights to purchase securities of the Company arising thereunder will
be terminated, as will all outstanding stock options; any funds or assets in the
company's 401(k) Profit Sharing Plan and any other compensation plan holding
funds or assets of former employees will be distributed by the Trustees of any
such plans to the beneficial owners thereof and all such Plans will also be
terminated.
ANNUAL COMPENSATION
Name and Principal Position Year Salary
- --------------------------- ---- ------
John H. Treglia 2001 $ -0-
President, Chief Executive 2000 0
Officer, Secretary and 1999 N/A
Director
ITEM NO. 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information as of June 1, 2001, with
respect to the persons known to the Company to be the beneficial owners of more
than 5% of the common stock, $.10 par value of the Company.
PRINCIPAL SHAREHOLDERS
The Company knows of no person, other than those listed in the
Management's Shareholdings Table, below, who owns more than 5% of the common
stock of the Company.
Security Ownership of Management
The following table sets forth information as of June 1, 2001, with
respect to the beneficial ownership of the Common Stock, $. 10 par value, of the
Company by each of the executive officers and directors of the company and all
executive officers and directors as a group:
84
MANAGEMENT SHAREHOLDINGS TABLE
- --------------------------------------------------------------------------------
Name and Amount and
Title Address of Nature of
of Beneficial Beneficial Percent of
Class Owner Ownership Class (1)
- ------- ---------- ---------- -----------
Common George J. Gold 359,078 (2) 11.09%
Stock 209 Sterling Road
Harrison, NY 10528
Common John H. Treglia -0- -0-%
Stock 45 Ludlow Street
Suite 602
Yonkers, NY 10705
Common Dr. Frank J. Castanaro -0- -0-%
Stock 970 North Broadway
Suite 108
Yonkers, NY 10701
Common Marsha Ellis -0- -0-%
Stock 3680 Chartwell Drive
Suwanee, GA 30024
All directors and
Officers as a
Group (4 persons)
- ----------
(Notes to Table Appear on Following Page)
Pursuant to the rules of the Securities and Exchange commission, shares of
Common Stock which an individual or member of a group has right to acquire
within 60 days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the ownership of such individual or
group, but are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person; shown in the table. Accordingly, where
applicable, each individual or group member's rights to acquire shares pursuant
to the exercise of options or warrants are noted below.
(2) All such shares are subject to the Nantucket Industries Stock Voting Trust
u/i/d March 22, 1994 the "Voting Trust"). In addition, the severance
agreement with Mr. Gold provided for the company to issue, as of April 1,
1997, warrants for the purchase of up to a total of $157,875 shares to
George J. Gold and Donald D. Gold. Such warrants have not yet been issued.
85
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of any transactions during the fiscal year ended
February 27, 2001 or any presently proposed transactions, to which the Company
was or is to be a party, in which the amount involved in such transaction (or
series of transactions) was $60,000 or more and which any of the following
persons had or is to have a direct or indirect material interest: (I) any
director or executive officer of the Company; (ii) any person who owns or has
the right to acquire 5% or more of the issued and outstanding common stock of
the Company; and (iii) any member of the immediate family of any such persons.
Current management is not aware of any requirements, which may have been in
effect prior to January 2000, with respect to the approval of related
transactions by independent directors. Because of its current limited management
resources, the company does not presently have any requirement respecting the
necessity for independent directors to approve transactions with related
parties. All transactions are approved by the vote of the majority, or the
unanimous written consent, of the full board of directors. J all member so the
board of directors all members of the board of directors, individually and/or
collectively, could have possible conflicts of interest with respect to
transactions with related parties.
Employment Agreement with John H. Treglia
On April 3, 2000, the Company entered into an employment agreement with John H.
Treglia, its President and CEO. The agreement provides for an annual salary in
the amount of $150,000 and a term of three years. Mr. Treglia has agreed to
waive the right to be paid in cash until, in the opinion of the board of
directors, the Company has sufficient financial resources to make such payments.
In lieu of cash salary payments, Mr. Treglia may accept shares of common stock
at, or at a discount from the market price. His agreements provides for the
possibility of both increases in salary and the payment of bonuses at the sole
discretion of the board of directors, participation in any pension plan,
profit-sharing plan, life insurance, hospitalization of surgical program or
insurance program hereafter adopted by the Company (to the extent that the
employee is eligible to do so under the provisions of such plan or program),
reimbursement of business related expenses, for the non-disclosure of
information which the Company deems to be confidential to it, for
non-competition with the Company for the two-year period following termination
of employment with the company and for various other terms and conditions of
employment. The Company does not intend to provide any of its employees with
medical, hospital or life insurance benefits until the board of directors
determines that it has sufficient financial resources to do so.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
The following is a list of all exhibits and financial statement schedules
filed as part of this report, certain of which documents have been incorporated
by reference to documents previously filed on behalf of the Company.
86
Financial Statements
The financial statements filed as a part of this report are as follows:
Consolidated balance Sheets -
February 28, 2001, February 27, 2000 and February 27, 1999 24
Consolidated Statements of Operations - years Ended
February 28, 2001, February 27, 2000 and February 27, 1999 25
Consolidated Statements of Stockholders' Equity - Years Ended
February 28, 2001, February 27, 2000 and February 27, 1999 26
Consolidated Statements of Cash Flows - Years Ended
February 28, 2001, February 27, 2000 and February 27, 1999 27
Notes to Consolidated Financial Statements 28
Report of Independent Certified Public Accounts -
Grant Thornton LLP 41
Consolidated Balance Sheets -
February 27, 1999 and February 28, 1998 42
Consolidated Statements of Operations -
Year Ended February 27, 1999, February 28, 1998, and March 1, 1997 44
Consolidated Statements of Stockholders' Equity -
Years Ended February 27, 1999, February 28, 1998 and March 1, 1997 45
Consolidated Statements of Cash Flows - Years Ended
February 27, 1999, February 28, 1998 and March 1, 1997 47
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule 49
Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
87
Exhibits
Exhibits which, in their entirety, are incorporated by reference to any
report, exhibit or other filing previously made with the Securities and Exchange
Commission are designated by an asterisk (*) and the location of such material
is included in its description.
Exhibit Page
No. Description No.
(3)(a) Certificate of Incorporation as currently in effect (filed as Exhibit 3 (a) *
to Form 10-K Report for the fiscal year ended February 27, 1988 (the "1988
10-K").
(3)(b) By-laws as currently in effect (filed as Exhibit 3(b) to the Form 8K dated *
August 15, 1996).
(3)(c) Certificate of Incorporation of Nantucket Hosiery Mills Corp. filed March 1,
2000.
(3)(d) Nantucket Hosiery Mills Inc. filed February 25, 2000.
(4)(a) Specimen Stock Certificate (filed as Exhibit 4(b) to Registration *
Statement on Form S-1, No. 2-87229 filed October 17, 1983
(the "1983 Form S-1).
(4)(b) Share Purchase Rights Agreement, dated as of September 6, 1988, between the *
Company and State Street Bank and Trust Company (filed as Exhibit 4(a) to
Form 8-K Report dated as of September 6, 1988), as amended by the following:
Amendment No. 1 dated October 3, 1988 (filed as Exhibit 9 to Schedule 14D-9
Amendment No. I dated October 4, 1988), Amendment No. 2 dated October 18,
1988 (filed as Exhibit 14 to Schedule 14D-9 Amendment No. 2 dated October
19, 1988) and Amendment No. 3 dated November 1, 1988 (filed as Exhibit 4(c)
to Form 10-K Report for the fiscal year ended February 25, 1989 (the " 1989
10K"), Amendment No. 4 dated as of November 17, 1988 (filed as Exhibit 1 to
Amendment No. 1 to Form 8-A, dated November 18, 1988) and Amendment dated as
of August 15, 1994 (filed as Exhibit 4(e) to Form 8-K dated August 19, 1994).
(4)(c) Note Acquisition Rights Agreement dated as of September 6, 1988 between the *
Company and State Street Bank and Trust Company, as amended on September 19,
1988 (filed as Exhibit 4(b) to From 8-K Report dated September 6, 1988) as
amended by the following: Amendment No. 2 dated October 3, 1988 (filed as
Exhibit 10 to Schedule 14D-9 Amendment No. 2 dated October 4, 1988),
Amendment No.3 dated October 18, 1988
88
(filed as Exhibit 15 to Schedule 14D-9 Amendment No. 2 dated October 19,
1988), Amendment No. 4 dated November 1, 1988, (filed as Exhibit 4(d) to the
1989 10-K) and Amendment No. 5 dated as of November 17, 1988 (filed as
Exhibit 2 to Amendment No. 1 to Form 8-A, dated November 18, 1988).
(4)(d) Certificate of Designation, Preferences and Rights of Non-Voting Convertible *
Preferred Stock of Nantucket Industries, Inc. (filed as Exhibit 4 to Form
8-K Current Report dated March 22, 1994 (the "1994 8-K").
(4)(e) Common Stock Purchase Agreement dated as of August 18, 1994 by and among *
Registrant, Guess?, Inc., the Maurice Marciano 1990 Children's Trust, the
Paul Marciano Trust u/t/d 2/20/86, the Armand Marciano Trust u/t/d 2/20/86
and The Samberg Group, L.L.C. (filed as Exhibit 4(d) to Form 8-K dated
August 19, 1994).
(4)(f) Common Stock and Convertible Subordinated Debenture Purchase Agreement dated *
as of August 13, 1996 by and among Nantucket Industries, Inc. and NAN
Investors, L.P. (filed as Exhibit 4(f) to the Form 8-K dated August 15,
1996).
(4)(g) Sixth Amendment dated as of August 15, 1996 to that certain Rights Agreement *
dated as of September 6, 1988 between Nantucket Industries, Inc., and State
Street Bank & Trust Company (filed as Exhibit 4(g) to the Form 8-K dated
August 15, 1996).
(9) Voting Trust Agreement by and among the Samberg Group, L.L.C., George Gold, *
Donald Gold, Stephen Samberg, Stephen Sussman, Robert Polen, Ray Wathen,
Nantucket Industries, Inc., Robert Rosen and Joseph Mazzella dated as of
March 21, 1994 (filed as Exhibit 99(b) to 1994 8-K).
(10)(a) Nantucket Industries, Inc. Savings Plan effective June 1, 1988 by and *
between the Registrant and George Gold and Donald Gold as Trustees,
Amendment No. 1 thereto dated June 22, 1990 and Amendment No. 2 thereto
dated November 19, 1990 (filed as Exhibit (10)(a) to Form 10-K Report for
the fiscal year ended February 29, 1992 (the " 1992 10-K")).
(10)(b) Incentive Stock Option Plan (filed as Exhibit 10(d) to the 1988 10-K). *
(10)(c) 1988 Nantucket Industries, Inc. Nonstatutory Stock Option Plan (filed as *
Exhibit 10(c) to the 1989 10-K).
(10)(e)(i) Trademark Agreement between Registrant and Faberge, *
89
Incorporated dated November 1, 1980 ("Trademark Agreement") regarding the
trademarks "Faberge" and "BRUT" for use with men's and boy's underwear and
bathing suits (filed as Exhibit 10(g)(i) to 1987 10-K); Amendment dated
November 16, 1982 regarding the trademark "BRUT 33" (filed as Exhibit 10(m)
to 1983 S-1); Letter dated August 24, 1983 from Faberge to Registrant with
respect to renewal of the Trademark Agreement for an additional five year
period (filed as Exhibit 10(g)(iii) to 1987 10-K); Amendment dated May 6,
1983 regarding the trademarks "BRUT Medallion Design" and "Brut Royale"
(filed as Exhibit 10(k)(ii) to 1983 S-1; Amendment dated December 5, 1983
(filed as Exhibit 10(g)(iv) to the Form 10-K Report for the fiscal year
ended March 3, 1984 (the " 1984 10-K"); Amendment dated October 3 1, 1984
(filed as Exhibit 10(g)(xiii) to the Form 10-K Report for the fiscal year
ended March 2, 198 5 (the "1985 10-K")); Amendment dated March 14, 1986
extending license to include swimwear tops (filed as Exhibit 10(g)(v) to the
1986 10-K; Amendment dated April 25, 1984 (filed as Exhibit 10(g)(v) to the
1984 10-K); Letter dated December 31, 1987, extending term of Trademark
Agreement for an additional five year period and deleting men's and boy's
bathing suits from coverage (filed as Exhibit 10(g)(iii) to the 1988 10-K);
extension dated February 24, 1989, extending expiration date of the
Trademark Agreement to February 28, 1998 (filed as Exhibit 10(e)(ii) to the
1989 10-K).
(10)(e)(ii) Intentionally omitted.
(10)(e)(iii) License Agreement between the Company and BRITTANIA Sportswear, Ltd. *
(subsidiary of Levi Strauss) dated September 6, 1988 for the manufacture and
sale of men's and ladies' underwear under the "BRITTANIA" trademark (filed
as Exhibit 19 to Form 10-Q for the Quarter ended August 27, 1988).
(10)(e)(iv) License Agreement between the Company and BRITTANIA Sportswear, Ltd. *
(subsidiary of Levi Strauss) dated December 31, 1991 for the manufacture and
sale of men's and ladies' underwear under the "BRITTANIA" trademark (filed
as Exhibit 10(e)(iv) to Form 10-K for the fiscal year ending February 26,
1994.
(10)(e)(v) Amendment dated January 31, 1996 to License Agreement between the Registrant *
and BRITTANIA Sportswear, Ltd. (subsidiary of Levi Strauss) for the
manufacture and sale of men's and ladies' loungewear under the "BRITTANIA"
trademark.
(10)(e)(vi) Intentionally omitted.
90
(10)(e)(vii) 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 (filed as Exhibit 10(e)(iii) to the
Form 10-Q for the quarter ended August 31, 1996).
(10)(f) Modification and Extension of Lease dated November 30, 1982 between *
Registrant and Satti Development Corp. (filed as Exhibit 10(1) to the 1983
10-K); (i) amendment dated February 16, 1988 extending term of lease through
April 30, 1993 (filed as Exhibit 10(h) to the 1988 10-K); (ii) amendment
dated August 15, 1991 expanding dernised premises, extending term of lease
through May 31, 1997 and modifying annual rental (filed as Exhibit 10(f)(ii)
to 1992 Form 10-K).
(10)(f)(i) Intentionally omitted.
(10)(g) Promissory Notes from George J. Gold and Donald D. Gold to Registrant (filed *
as Exhibit 10(s) to 1983 S-1).
(10)(h) Intentionally omitted.
(10)(i) Amended and Restated Credit Agreement dated December 8, 1989, between *
Registrant and Manufacturers Hanover Trust Company ("MHTC") for the
borrowing of up to $11,500,000 of which $8,500,000 is on a revolving credit
basis until March 5, 1993, the balance to be used against letters of credit
issued by NIETC for the benefit of the Registrant; $8,500,000 Note dated
December 8, 1989, from Registrant to MHTC; Continuing Letter of Credit
Security Agreement dated December 8, 1989, between Registrant and MHTC.
(filed as Exhibit 10(i) to the Form 10-K Report for the fiscal year ended
March 3, 1990 (the " 1990 10-K") Omitted exhibits to said Agreement will be
furnished to the Commission upon request. (i) First Amendment dated August
1, 1990 to Loan Agreement between Registrant and M]HTC (filed as Exhibit
10(i)(i) to the Form 10-K Report for the fiscal year ended March 2, 1991);
(ii) Second Amendment and Waiver dated as of May 23, 1991 to Loan Agreement
between Registrant and MHTC (filed as Exhibit (10)(i)(ii) to the 1992 Form
10-K); (iii) Fifth Amendment and Waiver dated as of February 22, 1993, to
Amended and Restated Credit Agreement dated as of December 8, 1989, between
the Registrant and Chemical Bank, as successor by merger to MHTC (filed as
Exhibit (iii) to the Form 8-K dated March 4, 1993); (iv) Sixth Amendment and
Waiver dated as of March 4, 1993, to Amended and Restated Credit Agreement
(filed as Exhibit 10(k)(iv) to 1993 10-K).
91
(10)(j)(i) Revolving Credit Agreement dated as of December 30, 1993 by and between *
Chemical Bank, Nantucket Industries, Inc., Nantucket Mills, Inc. and
Nantucket Management Corporation (the "Credit Agreement") (filed as Exhibit
10(j)(i) to the 1994 Form 10-K).
(10)(j)(ii) First Amendment to Credit Agreement dated as of February 28, 1994 by and *
between Chemical Bank, Nantucket Industries, Inc., Nantucket Mills, Inc. and
Nantucket Management Corporation (filed as Exhibit 10(j)(ii) to the 1994
10-K).
(10)(j)(iii) Second Amendment to Credit Agreement dated as of March 17, 1994 by and *
between Chemical Bank, Nantucket Industries, Inc., Nantucket Mills, Inc. and
Nantucket Management Corporation (filed as Exhibit 10(j)(iii) to the 1994
10-K).
(10)(k) Intentionally omitted.
(10)(n) Intentionally omitted.
(10)(o) Intentionally omitted.
(10)(q) Intentionally omitted.
(10)(s) Intentionally omitted.
(10)(t) Intentionally omitted.
(10)(u) Intentionally omitted.
(10)(v) Sublicense Agreement dated November 20, 1991 by and among Dawson Consumer *
Products, Inc., Registrant and PGH Company regarding the use of the
trademark "Adolfo" on men's high fashion underwear briefs (filed as Exhibit
(10)(v) to the 1992 Form 10-K).
(10(w) Sublicense Agreement dated October 16, 1992 by and among Salant Corporation, *
Dawson Consumer Products, Inc. and the Registrant regarding the use of the
trademark "John Henry" on men's high fashion underwear briefs (filed as
Exhibit (10)(w) to the 1992 Form 10-K).
(10)(x) Employment Agreement dated May 26, 1992 by and between the Registrant and *
Stephen P. Sussman (filed as Exhibit 10(x) to the Form 10Q Report for
November 28, 1992) as amended by the Amendment dated August 8, 1994 (filed
as Exhibit 99(a) to Form 8-K dated August 19, 1994).
92
(10)(x)(i) Amendment No. 2 dated August 9, 1996 to that certain Employment Agreement *
dated as of May 26, 1992 by and between Nantucket Industries, Inc. and
Stephen P. Sussman (filed as Exhibit 99(a) to the Form 8-K dated August 15,
1996).
(10)(y) Purchase and Sale Agreement dated as of July 31, 1997 by and among Mimms *
Investments, a Georgia general partnership and Nantucket Industries, Inc.
regarding the sale of the Registrant's property at 200 Cook St.,
Cartersville, GA.(filed as Exhibit (10)(y) to 10Q report for August 30,
1997).
(10)(y)(i) Amendment dated August 14, 1997 to Purchase and Sale Agreement dated as of *
July 31, 1997 by and among Mimms Investments, a Georgia general partnership
regarding the sale of the Registrants property located at 200 Cook St.,
Cartersville, GA (filed as Exhibit (10)(y)(i) to 10Q report for August 30,
1997).
(10)(y)(ii) Amendment dated August 27, 1997 to Purchase and Sale Agreement dated as of *
July 31, 1997 by and among MimmsInvestments, a Georgia general partnership
regarding the sale of the Registrants property located at 200 Cook St.,
Cartersville, GA (filed as Exhibit (10)(y)(ii) to 10Q report for August
31,1997).
(10)(z)(i) Intentionally omitted.
(10)(z)(ii) Amended and Restated Employment Agreement by and between Nantucket *
Industries, Inc. and Stephen M. Samberg (filed as Exhibit 10(z)(ii) to the
1994 Form 10-K) as amended by the Amendment dated August 8, 1994 (filed as
Exhibit 99(c) to Form 8-K dated August 19, 1994).
(10)(z)(iii) Amendment No. 2 dated August 9, 1996 to that certain Employment Agreement *
dated as of March 18, 1994 by and between Nantucket Industries, Inc. and
Stephen M. Samberg (filed as Exhibit 99(c) to the Form 8-K dated August 15,
1996).
(10)(z)(iv) Amendment No. 3 dated July 1, 1997 to that certain Employment Agreement *
dated as of March 18, 1994 by and between Nantucket Industries, Inc and
Stephen M. Samberg (filed as Exhibit (10)(z)(iv) to 1998 10-K).
(10)(aa) License Agreement dated October 5, 1992 between Cluett Peabody & Co., Inc. *
and Registrant with respect to the ARROW trademark (filed as Exhibit 2 to
Form 10Q Report for November 28, 1992).
93
(10)(bb) License Agreement dated December 9, 1992 between GUESS?, Inc. and Registrant *
with respect to the GUESS? trademark (filed as Exhibit 3 to Form 10Q Report
for November 28, 1992).
(10)(cc) Registrant's 1992 Long-Term Stock Option Plan (filed as Exhibit 4 to Form *
10Q Report for November 28, 1992).
(10)(dd) Registrant's 1992 Executive Performance Benefit Plan (filed as Exhibit 5 to *
Form 10Q for November 28, 1992).
(10)(ee) Management Agreement made as of January 1, 1993 by and between Nantucket *
Management Corp. (a subsidiary of Registrant) and Registrant (filed as
Exhibit 10(ee) to 1993 10-K).
(10)(ff) License Agreement dated December 21, 1992 between Registrant and McGregor *
Corporation with respect to the Botany 500 Trademark (filed as Exhibit
10(ff) to 1993 10-K).
(10)(ff)(I) Letter Agreement dated July 10, 1995 amending License Agreement between the *
Registrant and McGregor Corporation with respect to the Botany 500 Trademark
(filed as Exhibit 10(ff) to 1993 10-K).
(10)(gg) Severance Agreement dated as of March 18, 1994 by and among Nantucket *
Industries George J. Gold and Donald Gold (filed as Exhibit 10(gg)(i) to the
Form 10K Report for the fiscal year ended February 25, 1995). (Filed as
Exhibit 10(gg) to the 1994 Form 10-K) as amended by the Amendment dated
August 17, 1994 (filed as Exhibit 99(b) to Form 8-K dated August 19, 1994).
(10)(gg)(i) Letter dated February 28, 1995 amending Severance Agreement by and among *
Registrant, George J. Gold and Donald D. Gold (filed as Exhibit 10(gg)(i) to
the Form 10-K Report for the fiscal year ended February 25, 1995).
(10)(gg)(ii) Third Amendment dated August 9, 1996 to that certain Severance Agreement *
dated as of March 18, 1994 by and among Nantucket Industries, Inc. George J.
Gold and Donald D. Gold (filed as Exhibit 99(b) to the Form 8-K dated August
15, 1996).
(10)(hh) Agreement dated as of March 1, 1994 by and among the Samberg Group, L.L.C., *
George J. Gold, Donald D. Gold, Stephen M. Samberg, Stephen P. Sussman,
Robert Polen, Raymond L. Wathen and Nantucket Industries, Inc. (filed as
Exhibit 10(hh) to the 1994 Form 10-K).
(10)(ii) Loan and Security Agreement by and between *
94
Nantucket Industries, Inc. and Congress Financial Corp. dated as of March 21,
1994 (filed as Exhibit 99(b) to 1994 8-K).
(10)(ii)(i) Amendment No. 2 dated July 31, 1996, to Loan and Security Agreement dated as *
of March 21, 1994, among Nantucket Industries, Inc. and Congress Financial
Corp. (filed as Exhibit 99(o) to the Form 8-K dated August 15, 1996).
(10)(ii)(ii) Amendment No. 3 dated August 15, 1996, to Loan and Security Agreement dated *
as of March 21, 1994, among Nantucket Industries, Inc. and Congress
Financial Corp. (filed as Exhibit 99(p) to the Form 8-K dated August 15, 1996).
(10)(ii)(iii) Amendment No.4 dated March 18, 1997 to Loan and Security Agreement dated as *
of March 21, 1994 among Nantucket Industries, Inc and Congress Financial
Corp (filed as Exhibit (10)(ii)(ih) to 10Q report for August 30, 1997).
(10)(ii)(iv) Amendment No. 5 dated March 31, 1997 to Loan and Security Agreement dated as *
of March 21, 1994 among Nantucket Industries, Inc and Congress Financial
Corp (filed as Exhibit (10)(ii)(iv) to 10Q report for August 30, 1997).
(10)(ii)(v) Amendment No. 6 dated May 4, 1997, to Loan and Security Agreement dated as *
of March 21, 1994, among Nantucket Industries, Inc and Congress Financial
Corp (filed as Exhibit (10)(ii)(v) to 10Q report for August 30, 1997).
(10)(ii)(vi) Extention dated March 20, 1998 to the Loan and Security Agreement dated as *
of March 21, 1994, among Nantucket Industries, Inc and Congress Financial
Corp.(filed as Exhibit (10)(ii)(vi) to 1998 10-K).
(10)(ii)(vii) Extention No. 2 dated May 20, 1998 to the Loan and Security Agreement dated *
as of March 21, 1994, among Nantucket Industries. Inc and Congress Financial
Corp. (filed as Exhibit (10)(ii)(vii) to 1998 10-K).
(10)(jj) Guaranty by Nantucket Mills, Inc. in favor of Congress Financial Corp. dated *
as of March 21, 1994 (filed as Exhibit 99(c) to 1994 8-K).
(10)(kk) General Security Agreement by Nantucket Mifls, Inc. in favor of Congress *
Financial Corp. dated as of March 21, 1994 (filed as Exhibit 99(d) to 1994
8-K).
(10)(ll) Guarantee of Nantucket Management Corporation in favor of Congress Financial *
Corp. dated as of March 21, 1994 (filed as Exhibit 99(e) to 1994 8-K).
95
(10)(mm) General Security Agreement by Nantucket Management Corporation in favor of *
Congress Financial Corp. dated as of March 21, 1994 (filed as Exhibit 99(f)
to 1994 8-K).
(10)(nn) Amended and Restated Credit Agreement by and among Chemical Bank, Nantucket *
Industries, Inc., Nantucket Nfills, Inc. and Nantucket Management
Corporation dated as of March 21, 1994 (filed as Exhibit 99(g) to 1994 8-K)
and amended by the Amendment dated as of August 18, 1994 (filed as Exhibit
99(e) to the Form 8-K dated August 19, 1994).
(10)(oo) Amended and Restated Security Agreement by and between Nantucket Industries, *
Inc. and Chemical Bank dated as of March 21, 1994 (filed as Exhibit 99(h) to
1994 Form 8-K).
(10)(pp) Amended and Restated Security Agreement by and between Nantucket Mills, Inc. *
and Chemical Bank dated as of March 21 1994 (filed as Exhibit 99(i) to 1994
8-K).
(10)(qq) Security Agreement by and between Management Corporation and Chemical Bank *
dated as of March 21, 1994 (filed as Exhibit 99(j) to 1994 8-K).
(10)(rr) Deed to Secure Debt, Security Agreement and Assignment of Leases and Rents *
by Nantucket Industries, Inc. to Chemical Bank dated as of June 8, 1994
(filed as Exhibit 10(ss) to the 1994 Form 10-K). and Assignment of Leases
and Rents by Nantucket Industries, Inc. to Congress Financial Corporation
dated June 8, 1994 (filed as Exhibit 10(rr) to the 1994 Form 10-K).
(10)(ss) Deed to Secure Debt, Security Agreement and Assignment of Leases and Rents *
by Nantucket Industries, Inc. to Chemical Bank dated as of June 8, 1994
(filed as Exhibit 10(ss) to the 1994 Form 10-K).
(10)(tt) Employment Agreement dated November 23, 1994 by and between Registrant and *
Raymond L. Wathen (filed as Exhibit 10(tt) to Form 10-K Report for the
fiscal year ended February 25, 1995).
(10)(tt)(i) Amendment to Employment Agreement entered into as of January 1, 1996 between *
Registrant and Raymond L. Wathen.
(10)(uu) Employment Agreement dated July 1, 1994 by and between Registrant and Ronald *
S. Hoffman (filed as Exhibit 10(uu) to Form 10-K Report for the fiscal year
ended February 25, 1995).
96
(10)(uu)(i) Letter Agreement dated June 12, 1995 between Registrant and Ronald S. *
Hoffman, extending the term of his employment to June 30, 1996.
(10)(uu)(ii) Letter Agreement dated August 9, 1996 between Registrant and Ronald S. *
Hoffman amending the change of control provision in his employment agreement
(filed as Exhibit 99(e) to the Form 8-K dated August 15, 1996).
(10)(uu)(iv) Letter Agreement dated as of June 30, 1996 between Registrant and Ronald S. *
Hoffman, extending the term of his employment to June 30, 1997 (filed as
Exhibit 99(j) to the Form 8-K dated August 15, 1996).
(10)(vv) Employment Agreement dated as of January 1996 by and between Registrant and *
Joseph Visconti.
(10)(vv)(i) Amendment dated August 9, 1996 to that certain Employment Agreement dated as *
of January 1, 1996 by and between Nantucket Industries, Inc and Joseph
Visconti (filed as Exhibit 99(d) to the Form 8-K dated August 15, 1996).
(10)(vv)(ii) Amendment No. 2 dated as of July 1, 1997 to that certain Employment *
Agreement dated as of January 1, 1996 by and between Nantucket Industries
and Joseph Visconti (filed as Exhibit (10)(vv)(ii) to the 1998 10-K Form).
(10)(ww) First Amendment, dated as of December 15, 1995 to Amended and Restated *
Credit Agreement dated as of March 21, 1994, among Nantucket Industries,
Inc. and its subsidiaries and Chemical Bank (filed as Exhibit (10)(w) to
Form 10-Q Report for the quarter ended November 25, 1995).
(10)(xx) Complaint filed on March 7, 1997 with Superior Court of California for the *
County of San Francisco C.A. No. 985160, Nantucket Industries, Inc. v. Levi
Strauss & Co., and Brittania Sportswear Limited (filed as Exhibit 99(q) to
the Form 8-K dated March 7, 1997).
(10)(zz) Press Release dated March 10, 1997 (filed as Exhibit 99(r) to the Form 8-K *
dated March 7, 1997).
(10)(aaa) Lease between Registrant and First Industrial LP dated December 3, 1997 *
(filed as Exhibit 99(s) to Form 8-K dated November 26, 1997.
(10)(bbb) Letter Agreement dated September 30, 1997 from Nantucket Industries, Inc. to *
NAN Investers, LP (filed as Exhibit 99(t) to the 10Q report for November 29,
1997.)
97
(10)(bbb)(i) Letter Agreement No. 2 dated May 19, 1998 from Nantucket Industries to NAN *
Investers LP (filed as Exhibit (10)(bbb)(i) to 1998 Form 10-K).
(10)(ccc) Termination of License Agreement dated March 25, 1998 between GUESS? Inc. *
and the Registrant (filed as Exhibit (10)(ccc) to 1998 Form 10-K).
(10)(ddd) Employment Agreement, dated April 3, 2000, between John H. Treglia and *
Company.
16(a) Letter, dated June 8, 2000, of Grant Thornton LLP regarding change in *
certifying accountant.
23(a) Consent of Grant Thornton LLP dated June 14, 2000. *
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York.
NANTUCKET INDUSTRIES, INC.
June 7, 2001 By /s/ John Treglia
----------------------------------
John Treglia, President, Secretary
and CFO
June 7, 2001 By /s/ Marsha Ellis
----------------------------------
Marsha Ellis, Treasurer and
Chief Accounting Officer
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
June 7, 2001 /s/ John Treglia
----------------------------------
John H. Treglia, Director
June 7, 2001 /s/ Frank J. Castanaro
----------------------------------
Frank J. Castanaro, Director
June 7, 2001
----------------------------------
George J. Gold, Director
99
Commission File Number 1-8509
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC
-----------------------------------------------
FORM 10-K
Annual Report
For the Fiscal Year Ended
February 27, 2000
-----------------------------------------------
NANTUCKET INDUSTRIES, INC.
(Exact Name of the Company as Specified in Charter)
EXHIBITS
100
INDEX OF EXHIBITS BEING FILED HEREWITH
There are no Exhibits for this period.
101