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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(x) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 1, 2002 or
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission file number 0-6708
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Nautica Enterprises, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-2431048
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
40 West 57th Street, New York, N.Y. 10019
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (212) 541-5757
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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 12 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.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of Common Stock outstanding as of July 16, 2002
was 33,618,350.
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
JUNE 1, 2002
(unaudited)
INDEX
Page No.
--------
Part I - Financial Information:
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
As at June 1, 2002 and March 2, 2002 ........................... 2
Condensed Consolidated Statements of Earnings
For the Three Month Periods Ended
June 1, 2002 and June 2, 2001 .................................. 3
Condensed Consolidated Statements of Cash Flows
For the Three Month Periods Ended
June 1, 2002 and June 2, 2001 .................................. 4
Notes to Condensed Consolidated Financial Statements ........... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II - Other Information ............................................... 17
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
ASSETS (unaudited)
June 1, 2002 March 2, 2002
------------ -------------
Current assets:
Cash and cash equivalents $ 74,061 $ 45,814
Short-term investments 6,794 6,350
Accounts receivable - net 64,453 89,736
Inventories 63,648 66,443
Prepaid expenses and other current assets 7,660 5,599
Deferred tax benefit 18,858 18,912
Assets held for sale 2,842 2,842
--------- ---------
Total current assets 238,316 235,696
Property, plant and equipment, at cost -
less accumulated depreciation and amortization 109,078 111,327
Goodwill, at cost - less accumulated amortization 31,328 31,328
Intangibles, at cost - less accumulated amortization 35,419 35,489
Other assets 10,095 8,230
--------- ---------
$ 424,236 $ 422,070
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 754 $ 754
Accounts payable - trade 32,440 30,402
Accrued expenses and other current liabilities 46,921 44,037
Income taxes payable 7,453 9,289
--------- ---------
Total current liabilities 87,568 84,482
Long-term liabilities:
Long-term debt - net 14,133 14,321
Interest rate swap liability 858 687
--------- ---------
Total long-term liabilities 14,991 15,008
Stockholders' equity:
Preferred stock - par value $.01; authorized,
2,000,000 shares; no shares issued -- --
Common stock - par value $.10; authorized,
100,000,000 shares; issued 45,115,000 shares
at June 1, 2002 and 44,718,000 shares at
March 2, 2002 4,512 4,472
Additional paid-in capital 95,162 93,546
Retained earnings 382,782 385,407
Accumulated other comprehensive (loss) - net of
deferred tax benefit of $1,078 at June 1, 2002
and $1,132 at March 2, 2002 (1,796) (1,862)
--------- ---------
480,660 481,563
Less:
Common stock in treasury, at cost;
11,498,000 shares at June 1, 2002
and March 2, 2002 (158,983) (158,983)
--------- ---------
Total stockholders' equity 321,677 322,580
--------- ---------
$ 424,236 $ 422,070
========= =========
The accompanying notes are an integral part of these statements.
- 2 -
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(amounts in thousands, except share data)
(unaudited)
Three Months Three Months
Ended Ended
June 1, 2002 June 2, 2001
------------ ------------
Net sales $ 125,895 $ 135,190
Cost of goods sold 70,161 77,429
------------ ------------
Gross profit 55,734 57,761
Selling, general and administrative expenses 59,626 55,277
Special charges 3,356 --
Net royalty income (2,372) (2,345)
------------ ------------
Operating (loss) profit (4,876) 4,829
Investment income - net 677 272
------------ ------------
(Loss) earnings before (benefit) provision for income taxes (4,199) 5,101
(Benefit) provision for income taxes (1,574) 1,928
------------ ------------
NET (LOSS) EARNINGS $ (2,625) $ 3,173
============ ============
Net (loss) earnings per share of common stock:
Basic $ (0.08) $ 0.10
============ ============
Diluted $ (0.08) $ 0.09
============ ============
Weighted average number of common shares outstanding:
Basic 33,432,000 32,259,000
============ ============
Diluted 33,432,000 34,025,000
============ ============
Cash dividends per common share none none
============ ============
The accompanying notes are an integral part of these statements.
- 3 -
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
Three Months Three Months
Ended Ended
June 1, 2002 June 2, 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings $ (2,625) $ 3,173
-------- --------
Adjustments to reconcile net (loss) earnings to net cash provided by operating
activities:
Deferred income taxes -- --
Depreciation and amortization 6,651 6,104
Provision for bad debts 128 304
Changes in operating assets and liabilities, net of assets
and liabilities acquired
Short-term investments (444) (227)
Accounts receivable 25,155 21,435
Inventories 2,795 (16,727)
Prepaid expenses and other current assets (2,061) (2,726)
Other assets (1,891) (2,125)
Accounts payable - trade 2,038 2,870
Accrued expenses and other current liabilities 3,174 (3,875)
Income taxes payable (1,836) (256)
-------- --------
Total adjustments 33,709 4,777
-------- --------
Net cash provided by operating activities 31,084 7,950
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (4,305) (17,479)
Acquisitions, net of cash acquired -- (53,430)
-------- --------
Net cash (used in) investing activities (4,305) (70,909)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable -- 35,000
Principal payments on long-term debt (188) --
Proceeds from issuance of common stock 1,656 1,632
-------- --------
Net cash provided by financing activities 1,468 36,632
-------- --------
Increase (decrease) in cash and cash equivalents 28,247 (26,327)
Cash and cash equivalents at beginning of period 45,814 36,674
-------- --------
Cash and cash equivalents at end of period $ 74,061 $ 10,347
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 315 $ --
-------- --------
Cash paid during the period for income taxes $ 219 $ 2,198
-------- --------
The accompanying notes are an integral part of these statements.
- 4 -
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 2002
(unaudited)
(amounts in thousands, except share data)
NOTE 1 - The accompanying financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These statements include all
adjustments, consisting only of normal recurring accruals, considered
necessary for a fair presentation of financial position and results of
operations. The financial statements included herein should be read in
conjunction with the financial statements and notes thereto included in
the latest annual report on Form 10-K.
NOTE 2 - The results of operations for the three-month period ended June 1,
2002 are not necessarily indicative of the results to be expected for
the full year.
NOTE 3 - Certain amounts in the prior year period have been reclassified to
conform with classifications used at June 1, 2002.
NOTE 4 - The Company utilized the last-in, first-out "LIFO" method for
certain wholesale inventories as at June 1, 2002 and March 2, 2002 and
for the three-month periods ended June 1, 2002 and June 2, 2001. The
"LIFO" inventory for the three-month periods ended June 1, 2002 and
June 2, 2001 are based upon end of year estimates. Inventories at June
1, 2002 and March 2, 2002 consist primarily of finished goods.
NOTE 5 - As of June 1, 2002 and March 2, 2002, the Company had $175,000 in
lines of credit with four commercial banks. Such lines of credit are
available for short-term borrowings and letters of credit,
collateralized by imported inventory and accounts receivable. At June
1, 2002, letters of credit outstanding under the lines were $75,597. At
June 1, 2002 and March 2, 2002, there were no short-term borrowings
outstanding.
NOTE 6 - Basic net (loss) earnings per share excludes dilution and is
computed by dividing the (loss) income available to common shareholders
by the weighted-average common shares outstanding for the period.
Diluted net (loss) earnings per share reflects the weighted-average
common shares outstanding plus the potential dilutive effect of
options, which are convertible into common shares. The diluted net loss
per share was the same as basic net loss per share for the three months
ended June 1, 2002, since the effect of any potentially dilutive
securities were excluded because they would be anti-dilutive. Options,
which were excluded from the calculation of diluted net loss per share,
totaled 2,612,300 for the three months ended June 1, 2002. Options
which were excluded from the calculation of diluted net earnings per
share because the exercise prices of the options were greater than the
average market price of the common shares and, therefore, would be
anti-dilutive, were 2,198,900 during the three months ended June 2,
2001.
- 5 -
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 1, 2002
(unaudited)
(amounts in thousands, except share data)
NOTE 7 - The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes reporting and disclosure
standards for an enterprise's operating segments. Operating segments
are defined as components of an enterprise for which separate financial
information is available and regularly reviewed by the Company's senior
management.
The Company has the following two reportable segments: Wholesale
and Retail. The Wholesale segment designs, markets, sources and
distributes the following to retail store customers: sportswear,
activewear, outerwear, a jeans collection, a tailored clothing
collection, robes and sleepwear for men; a jeans collection, robes and
sleepwear for women; and a children's collection. The Retail segment
sells men's, women's and children's apparel and other Nautica-branded
products primarily through its retail store locations directly to
consumers.
The reportable segments are distinct business units, separately
managed with different distribution channels.
All Corporate/
Wholesale Retail other eliminations Totals
--------- ------ ----- ------------ ------
FOR THE THREE MONTHS ENDED
JUNE 1, 2002
Net sales $ 95,337 $ 30,558 $ -- $ -- $ 125,895
Segment operating profit (loss) (626) 225 2,372 (6,847) (4,876)
Segment assets 254,301 49,717 8,673 111,545 424,236
Depreciation expense 5,144 731 106 573 6,554
Capital expenditures 3,916 254 -- 135 4,305
FOR THE THREE MONTHS ENDED
JUNE 2, 2001
Net sales $ 105,017 $ 30,173 $ -- $ -- $ 135,190
Segment operating profit (loss) 2,256 2,393 2,344 (2,164) 4,829
Segment assets 322,962 69,201 8,687 42,189 443,039
Depreciation expense 4,706 330 107 513 5,656
Capital expenditures 11,095 5,193 -- 1,191 17,479
Net sales from external customers represent sales in the United
States, except for foreign sales of $1,009 and $1,970 for the three
months ended June 1, 2002 and June 2, 2001, respectively
Long-lived assets in foreign countries were $3,168 and $4,548 for
the periods ended June 1, 2002 and June 2, 2001, respectively.
The All other column represents activity of the Company's licensing
unit.
- 6 -
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 1, 2002
(unaudited)
(amounts in thousands, except share data)
In the Corporate/eliminations column, the segment
assets primarily consist of the Company's cash and investment
portfolio at June 1, 2002 and June 2, 2001. The segment
operating profit (loss) in the Corporate/eliminations column
consists of corporate overhead expenses and special charges
for the three months ended June 1, 2002 and corporate overhead
expenses for the three months ended June 2, 2001.
NOTE 8 - The Company has a loan agreement with HSBC Bank USA
("HSBC") in the amount of $15,075, the funds of which were
used to finance a portion of the construction and development
of the Company's distribution facility in Martinsville,
Virginia. The loan is secured by a deed of trust on the
distribution facility. The carrying value of the underlying
asset was $18,042 at June 1, 2002.
The term of the loan is seven years. Principal
payments of $188 and interest payments are due at the end of
each calendar quarter. Interest is computed based on the
three-month LIBOR rate plus 1.00%. The loan agreement provides
for various financial and restrictive covenants including,
among others, tangible net worth, minimum fixed charges and
minimum funded debt. The loan will mature on November 28,
2008, at which time the entire outstanding loan balance of
$9,987 will be due and payable.
The Company entered into a swap agreement with HSBC,
effective November 30, 2001, to hedge against interest rate
fluctuations. On March 22, 2002, the Company replaced such
agreement with a "knock-out" swap agreement with Fleet
National Bank ("Fleet"), which expires on November 28, 2008.
The swap settles quarterly and contains a knock-out provision
that is activated when the three-month LIBOR is at or above
7.00%. The swap agreement provides that the Company pay a
fixed interest rate of 6.32% on the notional amount in
exchange for receiving a variable rate based on LIBOR so long
as the three-month LIBOR interest rate does not rise above
7.00%. If the three-month LIBOR rate rises above 7.00%, the
swap knocks out and the Company will not receive any payments
under the agreement until such time as the three-month LIBOR
rate declines below 7.00%. The three-month LIBOR rate was
1.86% at June 1, 2002. The net interest paid or received under
this agreement is included in interest expense.
The Company has adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended,
which requires companies to record all derivative instruments
as assets or liabilities on the balance sheet, measured at
fair value. The recognition of gains or losses resulting from
changes in the values of those derivative instruments is based
on the use of each derivative instrument and whether it
qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or
cash flows.
- 7 -
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 1, 2002
(unaudited)
(amounts in thousands, except share data)
Prior to March 22, 2002 the Company classified the
swap as a cash flow hedge, in accordance with SFAS No. 133.
The fair value of the swap resulted in the Company recording a
long-term liability of $858. The fair value is based upon the
estimated amount that the Company would have to pay to
terminate the agreement, as determined by HSBC at March 22,
2002 and Fleet at June 1, 2002. The "knock-out" swap agreement
no longer qualifies for hedge accounting and the Company began
recording the changes in the fair market value of the swap
from March 22, 2002 as interest expense. The charge to
interest expense for the quarter ended June 1, 2002 was not
material.
The amount of long-term debt maturing in each of the
next five fiscal years is as follows:
Fiscal Year Ended
-----------------
2003 $ 754
2004 754
2005 754
2006 754
2007 754
Thereafter 11,305
------
14,887
Less current maturities (754)
------
Total $ 14,133
======
NOTE 9 - For the three months ended June 1, 2002,
comprehensive income (loss) was as follows:
(unaudited)
Three Months
Ended
June 1, 2002
------------
Net (loss) $(2,625)
Other comprehensive (loss), net of taxes:
Foreign currency translation adjustments 175
Unrealized loss on interest rate swap (109)
-------
Comprehensive income (loss) $(2,559)
=======
- 8 -
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 1, 2002
(unaudited)
(amounts in thousands, except share data)
NOTE 10 - On November 2, 2001, the Company's Board of Directors
adopted a Stockholder Rights Plan that entitled stockholders
of record on November 12, 2001 to receive a dividend
distribution of one Right for each share of common stock held.
The Rights, which expire on November 12, 2011, entitle
stockholders to purchase from the Company a unit consisting of
1/100 of a share of Series A Junior Participating Preferred
Stock at a price of $60 per unit, subject to adjustment. The
Rights will become exercisable only if a person or group,
other than the current Chairman of the Board, acquires 15% or
more of the Company's common stock.
NOTE 11 - In July 2001, the Financial Accounting Standards
Board issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement requires that goodwill, as well as
intangible assets with indefinite lives, acquired after June
30, 2001, will not be amortized. Effective in the first
quarter of the current year, goodwill and intangible assets
with indefinite lives are no longer being amortized, but are
being tested for impairment using the guidance for measuring
impairment set forth in this statement.
The components of other intangible assets are as
follows:
(unaudited)
June 1, 2002 March 2, 2002
------------ -------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized Intangible Assets
Trademarks $ 2,341 $ 1,147 $ 2,327 $ 1,063
Other intangibles 956 258 956 258
------- ------- ------- -------
3,297 1,405 3,283 1,321
Unamortized trademarks 33,527 -- 33,527 --
------- ------- ------- -------
$36,824 $ 1,405 $36,810 $ 1,321
======= ======= ======= =======
Amortization expense for intangible assets subject to amortization in each
of the next five fiscal years is estimated to be $562 in 2003, $527 in
2004, $527 in 2005, $423 in 2006 and $351 in 2007.
- 9 -
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 1, 2002
(unaudited)
(amounts in thousands, except share data)
The following presents a comparison of net (loss) earnings and (loss)
earnings per share for the three months ended June 1, 2002 to the respective
adjusted amounts for the three months ended June 2, 2001 that would have been
reported had SFAS No. 142 been in effect during the prior year:
(unaudited) (unaudited)
June 1, 2002 June 2, 2001
------------ ------------
Reported net (loss) earnings $ (2,625) $ 3,173
Goodwill amortization -- 202
Intangible assets amortization -- 146
--------- ---------
Adjusted net (loss) earnings $ (2,625) $ 3,521
========= =========
Net (loss) earnings per share - basic
Reported net (loss) earnings $ (0.08) $ 0.10
Goodwill amortization -- 0.01
Intangible assets amortization -- --
--------- ---------
Adjusted net (loss) earnings per share - basic $ (0.08) $ 0.11
========= =========
Net (loss) earnings per share - diluted
Reported net (loss) earnings $ (0.08) $ 0.09
Goodwill amortization -- 0.01
Intangible assets amortization -- --
--------- ---------
Adjusted net (loss) earnings per share - diluted $ (0.08) $ 0.10
========= =========
NOTE 12- During the fourth quarter of fiscal 2002, the Company recorded
special charges in connection with its decision to close its
distribution facility in Rockland, Maine and certain other employee
terminations. The Company will be moving the businesses that
currently use this facility to its new distribution and customer
service center in Martinsville, Virginia. This transition is
expected to be completed no later than January 31, 2003. The special
charges related to the closing will total approximately $13,159, of
which $9,803 was recognized in the fourth quarter of fiscal 2002 and
$3,356 was recognized in the first quarter of fiscal 2003. The
special charges are comprised of the write-down of the facility from
its net carrying value of $10,712 to its estimated net realizable
value of $2,842, costs associated with the closure and sale of the
facility and severance related costs associated with the elimination
of approximately 300 union and non-union employees and certain other
employee terminations. These components and the related activity
through June 1, 2002 were as follows:
- 10 -
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 1, 2002
(unaudited)
(amounts in thousands, except share data)
SEVERANCE
ASSET WIND AND
WRITE DOWN TERMINATION
DOWN COSTS BENEFITS TOTALS
---- ----- ----------- ------
Fiscal Year 2002 Provision $ 7,870 $ 868 $ 1,065 $ 9,803
Fiscal Year 2002 Activity (7,870) -- -- (7,870)
------- ------- ------- -------
Balance at March 2, 2002 -- 868 1,065 1,933
Fiscal Year 2003 Provision -- -- 3,356 3,356
Fiscal Year 2003 Activity -- (150) (524) (674)
------- ------- ------- -------
Balance at June 1, 2002 $ -- $ 718 $ 3,897 $ 4,615
======= ======= ======= =======
NOTE 13 - Effective March 3, 2002, the Company adopted Financial
Accounting Standards Board's ("FASB") Emerging Issues Task Force
Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor's Products)." The scope
of Issue 01-9 includes vendor consideration to any purchasers of the
vendor's products at any point along the distribution chain,
regardless of whether the purchaser receiving the consideration is a
direct customer of the vendor. There was no significant impact on
the financial statements upon adoption.
Effective March 3, 2002, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill
and intangible assets with indefinite lives are no longer amortized
but will be reviewed at least annually for impairment. Separable
intangible assets that are not deemed to have an indefinite life
will continue to be amortized over their useful lives. The Company
completed the first of the required impairment tests of goodwill
during the three months ended June 2, 2002 and no adjustment to the
carrying value of goodwill was required.
Effective March 3, 2002 the Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets."
This supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long Lived Assets to be Disposed of,"
while retaining many of the requirements of such statement. There
was no significant impact on the financial statements upon adoption.
The FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," on April 30, 2002. Statement No. 145 rescinds
Statement No.4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax
effect. Upon adoption of Statement No. 145, companies will be
required to apply the criteria in APB Opinion No. 30, "Reporting the
Results of Operations - reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" in determining the classification
of gains and losses resulting from the extinguishments of debt.
Statement No. 145 is effective for fiscal years beginning after May
15, 2002. We are currently evaluating the requirements and impact of
this statement on our consolidated results of operations and
financial position.
- 11 -
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (unaudited)
RESULTS OF OPERATIONS
For the Three Months Ended June 1, 2002:
Net sales decreased 6.9% to $125.9 million in the three months ended
June 1, 2002 from $135.2 million in the comparable prior year period. The
reported sales reflect a 9.2% decrease in the Wholesale segment to $95.3 million
from $105.0 million and a 1.3% increase in the Retail segment to $30.6 million
from $30.2 million. The decline in the Wholesale segment was due primarily to a
decrease in the Company's core sportswear business, offset by strong
performances of Nautica Men's and Women's Jeans, as well as contributions from
newer businesses including Earl Jean and Nautica Men's Underwear. The increase
in Retail segment sales is primarily a result of sales from three new outlet
stores and two full-price stores opened since the first quarter of last year.
Same store sales for the period were down mid-single digits from the comparable
prior year period, as a result of a difficult retail environment.
Gross profit, as a percentage of sales, was 44.3%, compared to 42.7% in
the comparable prior year period. The increase is due primarily to the Company's
inventory management initiatives, improved sourcing of the Nautica Children's
and Nautica Men's and Women's Jeans businesses, and the impact of higher margins
on certain new product lines, particularly Earl Jean.
Selling, general and administrative expenses ("SG&A") increased by $4.3
million to $59.6 million in Fiscal 2003 from $55.3 million in Fiscal 2002. SG&A
expenses, as a percentage of net sales, increased to 47.4% in Fiscal 2003 from
40.9% in Fiscal 2002. The increase as a percentage of net sales is due primarily
to investments in Earl Jean Women's and Men's businesses, the development of the
Nautica Women's Sportwear line and the expansion of the John Varvatos business
into the European market. In addition, the Company incurred a full quarter of
expenses from the Earl Jean business in the current period as opposed to only
one month in the comparable prior year period.
During the first quarter of fiscal 2003, the Company recorded a pre-tax
special charge of $3.4 million ($2.1 million on an after tax basis) or $0.06 on
a per share basis. This charge consists of costs associated with the elimination
of approximately 300 union and non-union employees related to the closing of the
Rockland, Maine distribution facility. These costs are expected to be paid
during the current fiscal year and are anticipated to be funded with cash from
operations. The Company expects annual savings associated with this action to be
between $4.0 and $5.0 million. These savings will be reflected in distribution
costs and reported in selling, general and administrative expenses in the
Company's consolidated financial statements. The Company expects to begin
realizing these cost savings in the fourth quarter of the current fiscal year.
Net royalty income remained essentially flat at $2.4 million in
comparison to the prior year period. Sales strength in home products during the
current year period were offset in part by the recognition of a settlement from
the termination of the men's footwear license during the comparable prior year
period.
Investment income, net of interest expense, increased by $0.4 million
to $0.7 million from $0.3 million in the prior year period. The increase is due
to investment income earned on higher average cash balances during the current
year period, as a result of cash paid during the prior year period for the
acquisition of Earl Jean.
The provision for income taxes decreased to 37.5% from 37.8% of
earnings before income taxes in the comparable prior year period. The decrease
is due primarily to a reduction in the overall effective income tax rates.
Net loss for the current year period was $2.6 million compared to net
earnings of $3.2 million in the comparable prior year period as a result of the
factors discussed above. Excluding the special charge, the net loss for the
current year period would have been $0.5 million.
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LIQUIDITY AND CAPITAL RESOURCES
During the three months ended June 1, 2002, the Company generated cash
from operating activities of $31.1 million, principally from a decrease in
accounts receivable of $25.2 million. Accounts receivable was 26.3% lower than
the same period in the prior year due mainly to the reduction in wholesale
shipments in the current year period. Inventory was $61.3 million or 49.1% lower
than the same period in the prior year due to the Company's ability to better
manage the timing of receipts with customer demand as well as a reduction in its
offerings of replenishment styles.
During the three months ended June 2, 2001, the Company generated cash
from operating activities of $8.0 million principally from net earnings. The
increase in inventory of $16.7 million, to support increased sales levels, was
financed principally by cash generated from net earnings and a decrease of $21.4
million in accounts receivable. Accounts receivable was 30.8% higher than the
same period in the prior year due to increased sales from our new businesses,
and the timing of shipments, with a higher percentage occurring in the last part
of the quarter. Inventory was 43.4% higher than the same period in the prior
year due primarily to increased sales and the timing of merchandise received to
support the new businesses and stores.
During the three months ended June 1, 2002, the Company's principal
investing activities related primarily to the purchase of property, plant and
equipment for the Nautica in-store shop program. The Company expects to continue
to incur capital expenditures to expand the in-store shop program, and to open
additional retail stores.
The Company has a total of $175.0 million in lines of credit with four
commercial banks available for short-term borrowings and letters of credit.
These lines are collateralized by imported inventory and accounts receivable. At
June 1, 2002 and March 2, 2002, letters of credit outstanding under the lines
were $75.6 million and $33.8 million, respectively, and there were no short-term
borrowings outstanding.
The following is a summary of the Company's contractual obligations for
the periods indicated that existed as of June 1, 2002:
(amounts in millions)
Contractual Less than 1 - 3 4 - 5 After
Obligations 1 Year Years Years 5 Years Total
- ----------- --------- ----- ----- ------- -----
Operating leases $ 17.3 $ 32.4 $ 29.3 $ 67.5 $146.5
Letters of credit 75.6 -- -- -- 75.6
Long-term debt 0.8 1.5 1.5 11.1 14.9
------ ------ ------ ------ ------
$ 93.7 $ 33.9 $ 30.8 $ 78.6 $237.0
====== ====== ====== ====== ======
Historically, the Company has experienced its highest level of sales in
the second and third quarters and its lowest level in the first and fourth
quarters due to seasonal patterns. In the future, the timing of seasonal
shipments may vary by quarter. The Company anticipates that internally generated
funds from operations, existing cash balances, short-term investments and the
Company's existing credit lines will be sufficient to satisfy its cash
requirements.
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CURRENCY FLUCTUATIONS AND INFLATION
The Company contracts production with manufacturers located primarily
in Asia. These contracts are denominated in United States dollars. The Company
believes that, to date, the effect of fluctuations of the dollar against foreign
currencies has not had a material effect on the cost of production or the
Company's results of operations. There can be no assurance that costs for the
Company's products will not be affected by future fluctuations in the exchange
rate between the United States dollar and the local currencies of these
manufacturers. Due to the number of currencies involved, the Company cannot
quantify the potential effect of such future fluctuations on future income. The
Company does not engage in hedging activities with respect to such exchange rate
risk.
The Company believes that inflation and the effect of fluctuations of
the dollar against foreign currencies have not had a material effect on the cost
of imports or the Company's results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
Effective March 3, 2002, the Company adopted Financial Accounting
Standards Board's ("FASB") Emerging Issues Task Force Issue No. 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)." The scope of Issue 01-9 includes vendor
consideration to any purchasers of the vendor's products at any point along the
distribution chain, regardless of whether the purchaser receiving the
consideration is a direct customer of the vendor. There was no significant
impact on the financial statements upon adoption.
Effective March 3, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no
longer amortized but will be reviewed at least annually for impairment.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The Company completed the
first of the required impairment tests of goodwill during the three months ended
June 2, 2002 and no adjustment to the carrying value of goodwill was required.
Effective March 3, 2002 the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long Lived Assets." This supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived
Assets to be Disposed of," while retaining many of the requirements of such
statement. There was no significant impact on the financial statements upon
adoption.
The FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections," on April
30, 2002. Statement No. 145 rescinds Statement No.4, which required all gains
and losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. Upon
adoption of Statement No. 145, companies will be required to apply the criteria
in APB Opinion No. 30, "Reporting the Results of Operations - reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" in determining the
classification of gains and losses resulting from the extinguishments of debt.
Statement No. 145 is effective for fiscal years beginning after May 15, 2002. We
are currently evaluating the requirements and impact of this statement on our
consolidated results of operations and financial position.
- 14 -
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in
accordance with accounting principles that are generally accepted in the United
States. The preparation of these consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and revenues and
expenses during the period. Management continually evaluates its estimates and
assumptions including those related to allowances for doubtful accounts, sales
returns and allowances, inventory valuation, accrual for markdowns and the
valuation of long-lived assets. Management bases its estimates and assumptions
on historical experience and other factors that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. Changes in the economic conditions in the
retail industry could have an impact on these estimates and the Company's actual
results. Management believes that the following may involve a higher degree of
judgment or complexity:
Allowances for Doubtful Accounts
In the normal course of business, the Company extends credit, on open
account, to its retail store customers, after a credit analysis based on
financial and other criteria. The Company maintains allowances for doubtful
accounts for estimated losses that result from the inability of its retail store
customers to make their required payments. Management bases its allowances
through analysis of the aging of accounts receivable at the date of the
financial statements, assessments of historical collection trends, and an
evaluation of the impact of current economic conditions.
Sales Returns and Allowances
Costs associated with potential returns of merchandise and charge backs
are recorded as a reduction to net sales, and are included in the allowance for
doubtful accounts. These costs are based upon known returns and allowances,
historic trends and the evaluation of the impact of current economic conditions.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out method for certain wholesale inventories
and by the first-in, first-out method for retail and the remaining wholesale
inventories. The Company marks down inventory for estimated unmarketable
inventory equal to the difference between the cost and the estimated net
realizable value of the inventory. Management continually assesses the valuation
of inventories by reviewing the costing of inventory, the significance of
slow-moving inventory, and the impact of current economic conditions.
Accrual for Markdowns
Costs associated with customer markdowns are recorded as a reduction to
net sales, and are included in the allowance for doubtful accounts. These costs
result from seasonal negotiations with the Company's retail store customers, as
well as historic trends and the evaluation of the impact of current economic
conditions.
Valuation of Long-lived Assets
The Company reviews long-lived assets and certain identifiable
intangibles held and used for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In evaluating the fair value and future benefits of such assets,
the Company performs an analysis of the anticipated undiscounted future net cash
flows of the individual assets over the remaining amortization period. The
Company recognizes an impairment loss if the carrying value of the asset exceeds
the expected future cash flows.
- 15 -
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements in this Form 10-Q and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases, and in oral statements made by or with the approval of authorized
personnel constitute "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. These statements are based on the
Company's current expectations of future events and are subject to a number of
risks and uncertainties that may cause the Company's actual results to differ
materially from those described in the forward-looking statements. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. These factors and uncertainties include,
among others: the risk that new businesses of the Company will not be integrated
successfully; the risk that the Company will experience difficulties with
respect to the transitioning and ramp-up of its new distribution facility; the
overall level of consumer spending on apparel; dependence on sales to a limited
number of large department store customers; risks related to extending credit to
customers; actions of existing or new competitors and changes in economic or
political conditions in the markets where the Company sells or sources its
products; risks associated with consolidations, restructuring and other
ownership changes in the retail industry; changes in trends in the market
segments in which the Company competes; risks associated with uncertainty
relating to the Company's ability to launch, support and implement new product
lines in the United States and Europe; effects of competition; changes in the
costs of raw materials, labor and advertising; and, the ability to secure and
protect trademarks and other intellectual property rights. These and other risks
and uncertainties are disclosed from time to time in the Company's filings with
the Securities and Exchange Commission, including the Company's periodic reports
on Forms 10-K and 10-Q, the Company's press releases and in oral statements made
by or with the approval of authorized personnel. The Company assumes no
obligation to update any forward-looking statements as a result of new
information or future events or developments.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosure about interest rate risk
The Company finances its capital needs through available capital,
future earnings, bank lines of credit and its long-term debt which totals $14.9
million, inclusive of its current portion. The Company's exposure to market risk
for changes in interest rates are primarily in its investment portfolio and its
short and long-term borrowings. The Company, pursuant to investing guidelines,
mitigates exposure on its investments by limiting maturity, placing investments
with high credit quality issuers and limiting the amount of credit exposure to
any one issuer. All of the Company's indebtedness, including borrowings under
its $175 million lines of credit and long-term debt, bear interest at variable
rates. Accordingly, changes in interest rates would impact the Company's results
of operations in future periods. On March 22, 2002, the Company entered into a
"knock-out" swap agreement with Fleet National Bank ("Fleet"), which expires on
November 28, 2008. The swap settles quarterly and contains a knock-out provision
that is activated when the three-month LIBOR is at or above 7.00%. The swap
agreement provides that the Company pay a fixed interest rate of 6.32% on the
notional amount in exchange for receiving a variable rate based on LIBOR so long
as the three-month LIBOR interest rate does not rise above 7.00%. If the
three-month LIBOR rate rises above 7.00%, the swap knocks out and the Company
will receive no payments under the agreement until such time as the three-month
LIBOR rate declines below 7.00%. The three-month LIBOR rate was 1.86% at June 1,
2002. The net interest paid or received under this agreement is included in
interest expense.
- 16 -
PART II
OTHER INFORMATION
Items 1 through 9. - All items are inapplicable except:
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit No.
- -----------
3(a) Registrant's By-laws as currently in effect are incorporated
herein by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 33-21998).
3(b) Registrant's Restated Certificate of Incorporation is
incorporated herein by reference from the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31, 1995,
as amended by a Certificate of Amendment incorporated herein by
reference from the Registrant's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1996.
3(c) Certificate of Designations of Series A Junior Participating
Preferred Stock of Nautica Enterprises, Inc., in the form as
filed with the Secretary of State of the State of Delaware,
included as Exhibit A to the Rights Agreement, dated as of
November 2, 2001, between Nautica Enterprises, Inc. and Mellon
Investor Services LLC, as Rights Agent, is incorporated herein
by reference from the Registrant's Current Report on Form 8-K
filed on November 8, 2001.
4(i)(a) Rights Agreement, dated as of November 2, 2001, between Nautica
Enterprises, Inc. and Mellon Investor Services LLC, as Rights
Agent, which includes the Certificate of Designations of Series
A Junior Participating Preferred Stock as Exhibit A, form of
Right Certificate as Exhibit B and the Summary of Rights to
Purchase Preferred Stock as Exhibit C, is incorporated herein
by reference from the Registrant's Current Report on Form 8-K
filed on November 8, 2001.
10(iii)(a) Registrant's Executive Incentive Stock Option Plan is
incorporated herein by reference from the Registrant's
Registration Statements on Form S-8 (Registration Number
33-1488), as amended by the Company's Registration Statement on
Form S-8 (Registration Number 33-45823).
10(iii)(b) Registrant's 1989 Employee Incentive Stock Plan is incorporated
herein by reference from the Registrant's Registration Statement
on Form S-8 (Registration Number 33-36040).
10(iii)(c) Registrant's 1996 Stock Incentive Plan is incorporated herein by
reference from Registrant's Registration Statement on Form S-8
(Registration Number 333-55711), as amended and restated in
Appendix A to the Registrant's Definitive Proxy Statement filed
on June 7, 2002.
- 17 -
10(iii)(d) Registrant's 1994 Incentive Compensation Plan is incorporated
herein by reference from the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1997.
10(iii)(e) Registrant's Deferred Compensation Plan is incorporated herein by
reference from the Registrant's Annual Report on Form 10-K for
the fiscal year ended February 28, 1998.
10(iii)(f) Option Agreement and Royalty Agreement, each dated July 1, 1987,
by and among the Registrant and David Chu are incorporated herein
by reference from the Registrant's Registration Statement on Form
S-1 (Registration No. 33-21998), and letter agreement dated May
1, 1998 between Mr. Chu and the Registrant is incorporated herein
by reference from the Registrant's Annual Report on Form 10-K for
the fiscal year ended February 28, 1998. Sale and Cancellation
Letter Agreement, dated January 7, 2002, between the Registrant
and Mr. Chu is incorporated herein by reference from the
Registrant's quarterly report on Form 10-Q for the fiscal quarter
ended December 1, 2001.
10(iii)(g) Employment Agreement, dated October 1, 1999, by and between the
Registrant and John Varvatos, and Split Dollar Agreement, dated
May 5, 2000, by and between the Registrant and John Varvatos are
incorporated herein by reference from the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 4, 2000.
(b) Reports on Form 8-K. None
- 18 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NAUTICA ENTERPRISES, INC.
By: s/ Harvey Sanders
---------------------------------
Harvey Sanders
Chairman of the Board
and President
Date: July 16, 2002
---------------------
By: s/ Wayne A. Marino
---------------------------------
Wayne A. Marino
Chief Financial Officer
Date: July 16, 2002
---------------------
- 19 -