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 December 1, 2001 or
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-6708
Nautica Enterprises, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-2431048
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
40 West 57th Street, New York, N.Y. 10019
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (212) 541-5757
(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
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
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of Common Stock outstanding as of January 11, 2002
was 33,174,490.
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
DECEMBER 1, 2001
(unaudited)
INDEX
Page No.
--------
Part I - Financial Information:
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
As at December 1, 2001 and March 3, 2001 .................. 2
Condensed Consolidated Statements of Earnings
For the Nine and Three Month Periods Ended
December 1, 2001 and December 2, 2000 ..................... 3
Condensed Consolidated Statements of Cash Flows
For the Nine Month Periods Ended
December 1, 2001 and December 2, 2000 ..................... 4
Notes to Condensed Consolidated Financial Statements ...... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk .................................................. 15
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K .................... 16
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
ASSETS (unaudited)
December 1, 2001 March 3, 2001
---------------- ---------------
Current assets:
Cash and cash equivalents $ 28,406 $ 36,674
Short-term investments 6,074 5,546
Accounts receivable - net 118,728 105,269
Inventories 91,184 98,021
Prepaid expenses and other current assets 6,030 7,477
Deferred tax benefit 12,016 10,859
--------- ---------
Total current assets 262,438 263,846
Property, plant and equipment - net of
accumulated depreciation and amortization 124,312 101,361
Goodwill - net of accumulated amortization 66,665 5,243
Other assets 9,315 7,856
--------- ---------
$ 462,730 $ 378,306
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 754 $ --
Notes payable 30,000 --
Accounts payable - trade 29,093 43,881
Accrued expenses and other current liabilities 42,992 37,613
Income taxes payable 15,225 11,548
--------- ---------
Total current liabilities 118,064 93,042
--------- ---------
Long-term liabilities:
Long-term debt - net 14,321 --
Interest rate swap liability 822 --
--------- ---------
Total long-term liabilities 15,143 --
--------- ---------
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 44,672,000 shares
at December 1, 2001 and 43,329,000 shares at
March 3, 2001 4,467 4,333
Additional paid-in capital 92,141 71,766
Retained earnings 393,802 368,148
Accumulated other comprehensive (loss) - net of
deferred tax benefit of $1,157 (1,904) --
--------- ---------
488,506 444,247
Less:
Common stock in treasury - at cost;
11,498,000 shares at December 1, 2001
and March 3, 2001 (158,983) (158,983)
--------- ---------
Total stockholders' equity 329,523 285,264
--------- ---------
$ 462,730 $ 378,306
========= =========
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) (unaudited)
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
December 1, 2001 December 2, 2000 December 1, 2001 December 2, 2000
---------------- ---------------- ---------------- ----------------
Net sales $ 535,486 $ 469,527 $ 201,040 $ 178,628
Cost of goods sold 313,544 275,208 119,865 104,397
------------ ------------ ------------ ------------
Gross profit 221,942 194,319 81,175 74,231
Selling, general and administrative expenses 186,595 148,644 60,960 50,380
Net royalty income (6,244) (6,256) (2,042) (2,559)
------------ ------------ ------------ ------------
Operating profit 41,591 51,931 22,257 26,410
Interest income (expense) - net (347) 2,025 (417) 575
------------ ------------ ------------ ------------
Earnings before provision for income taxes 41,244 53,956 21,840 26,985
Provision for income taxes 15,590 20,935 8,255 10,470
------------ ------------ ------------ ------------
NET EARNINGS $ 25,654 $ 33,021 $ 13,585 $ 16,515
============ ============ ============ ============
Net earnings per share of common stock:
Basic $ 0.78 $ 1.03 $ 0.41 $ 0.52
============ ============ ============ ============
Diluted $ 0.75 $ 1.00 $ 0.40 $ 0.50
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic 32,864,000 31,915,000 33,173,000 31,655,000
============ ============ ============ ============
Diluted 34,304,000 33,179,000 34,157,000 32,948,000
============ ============ ============ ============
Cash dividends per common share none none 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)
Nine Months Nine Months
Ended Ended
December 1, 2001 December 2, 2000
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 25,654 $ 33,021
-------- --------
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 21,258 16,866
Provision for bad debts 5,184 2,727
Changes in operating assets and liabilities, net of acquisitions
Short-term investments (528) 28,591
Accounts receivable (14,674) (5,692)
Inventories 17,025 (22,310)
Prepaid expenses and other current assets 1,471 (5,474)
Other assets (1,633) (3,839)
Accounts payable - trade (16,703) 15,848
Accrued expenses and other current liabilities (868) 4,724
Income taxes payable 3,677 3,097
-------- --------
Total adjustments 14,209 34,538
-------- --------
Net cash provided by operating activities 39,863 67,559
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for purchase of Earl Jean, Inc. (48,601) --
Payment for purchase of childrenswear business (6,681) --
Purchase of property, plant and equipment (39,967) (19,693)
-------- --------
Net cash (used in) investing activities (95,249) (19,693)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 15,075 --
Proceeds from notes payable 30,000 --
Purchase of treasury stock -- (28,822)
Proceeds from issuance of common stock 2,043 1,041
-------- --------
Net cash provided by (used in) financing activities 47,118 (27,781)
-------- --------
(Decrease) increase in cash and cash equivalents (8,268) 20,085
Cash and cash equivalents at beginning of period 36,674 27,143
-------- --------
Cash and cash equivalents at end of period $ 28,406 $ 47,228
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,431 $ --
-------- --------
Cash paid during the period for income taxes $ 12,042 $ 17,982
-------- --------
The accompanying notes are an integral part of these statements.
-4-
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 1, 2001
(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 nine-month period ended
December 1, 2001 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 December 1,
2001.
NOTE 4 - The Company utilized the last-in, first-out "LIFO" method for
certain wholesale inventories as at December 1, 2001 and March 3,
2001 and for the nine and three-month periods ended December 1,
2001 and December 2, 2000. The "LIFO" inventory for the nine and
three-month periods ended December 1, 2001 and December 2, 2000 are
based upon end of year estimates. Inventories at December 1, 2001
and March 3, 2001 consist primarily of finished goods.
NOTE 5 - As of December 1, 2001 and March 3, 2001, the Company had
$175,000 and $150,000, respectively, 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 December 1, 2001
and March 3, 2001, letters of credit outstanding under the lines
were $43,272 and $58,600, respectively. At December 1, 2001, there
was $30,000 of short-term borrowings outstanding with the four
commercial banks. The short-term borrowings have various interest
rates ranging from 70 - 100 basis points above the London Interbank
Offered Rate (LIBOR) and mature on various dates through December
31, 2001. Subsequent to December 1, 2001, the $30,000 of
short-term borrowings was repaid.
NOTE 6 - Basic net earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the
weighted-average common shares outstanding for the period. Diluted
net earnings per share reflects the weighted-average common shares
outstanding plus the potential dilutive effect of options, which
are convertible into common shares. Options which were excluded
from the calculation of diluted 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 2,179,600 and 2,357,700 during the nine months ended and
2,635,100 and 2,357,700 during the three months ended December 1,
2001 and December 2, 2000, respectively.
-5-
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 1, 2001
(unaudited)
(amounts in thousands, except share data)
NOTE 7 - The Company has adopted Statement of Financial Accounting
Standards 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 sportswear, activewear, outerwear, a jeans
collection, a tailored clothing collection, robes and sleepwear for
men, and a jeans collection, robes and sleepwear for women, to
retail store customers. The Retail segment sells men's and women's
apparel and other Nautica-branded products primarily through 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 NINE MONTHS ENDED DECEMBER 1, 2001
Net sales $406,977 $128,509 $ -- $ -- $535,486
Segment operating profit (loss) 30,254 12,384 6,243 (7,290) 41,591
Segment assets 320,865 69,784 9,084 62,997 462,730
Depreciation expense 15,015 1,919 321 1,537 18,792
Capital expenditures 27,797 9,961 -- 2,209 39,967
FOR THE NINE MONTHS ENDED DECEMBER 2, 2000
Net sales $356,127 $113,400 $ -- $ -- $469,527
Segment operating profit (loss) 35,187 16,863 6,792 (6,911) 51,931
Segment assets 220,957 56,148 9,014 75,903 362,022
Depreciation expense 13,468 1,295 223 1,135 16,121
Capital expenditures 14,882 1,445 16 3,350 19,693
All Corporate/
Wholesale Retail other eliminations Totals
--------- ------ ----- ------------ ------
FOR THE THREE MONTHS ENDED DECEMBER 1, 2001
Net sales $152,786 $ 48,254 $ -- $ -- $201,040
Segment operating profit (loss) 17,778 4,755 2,042 (2,318) 22,257
Segment assets 320,865 69,784 9,084 62,997 462,730
Depreciation expense 4,900 705 106 515 6,226
Capital expenditures 7,536 3,075 -- 291 10,902
FOR THE THREE MONTHS ENDED DECEMBER 2, 2000
Net sales $136,541 $ 42,087 $ -- $ -- $178,628
Segment operating profit (loss) 18,774 6,915 2,560 (1,839) 26,410
Segment assets 220,957 56,148 9,014 75,903 362,022
Depreciation expense 4,443 473 62 375 5,353
Capital expenditures 9,126 164 -- 1,298 10,588
-6-
NAUTICA ENTERPRISES, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
DECEMBER 1, 2001
(unaudited)
(amounts in thousands, except share data)
Net sales from external customers represent sales in the
United States, except for foreign sales of $6,384 and $6,497 for the
nine months ended December 1, 2001 and December 2, 2000,
respectively.
In the Corporate/eliminations column, the segment assets
primarily consist of the Company's cash and investment portfolio at
December 1, 2001 and December 2, 2000. The segment operating profit
(loss) in the Corporate/eliminations column consists of corporate
overhead expenses.
NOTE 8 - During the nine months ended December 1, 2001, the Company's
licensing unit terminated its license agreement with Hampton
Industries, Inc. ("Hampton") to market Nautica childrenswear, and
established a new business unit to assume certain of its
operations. The Company made a payment to Hampton of approximately
$6,681 for the purchase of inventory and certain other assets
related to the Nautica childrenswear business, and agreed to
forgive specific royalties and other expenses associated with the
license agreement contingent upon Hampton satisfactorily performing
certain distribution and logistics functions for the Company, for a
period of time.
NOTE 9 - On April 30, 2001, the Company, through a wholly-owned
subsidiary, acquired substantially all of the assets and assumed
certain liabilities of Earl Jean, Inc. ("Earl Jean"), a privately
held corporation. Earl Jean is a leading designer, manufacturer,
wholesaler, retailer and marketer of luxury women's jeanswear and
related apparel. The purchase price was $45,000 in cash, 1,122,271
newly issued shares of the Company's restricted common stock
(valued at $18,466) and an additional cash payment of approximately
$1,852 for excess working capital. Furthermore, additional
consideration of up to $21,000 in cash may be earned if certain
performance standards are met during fiscal 2003-2012. The source
of the cash consideration was a combination of general corporate
funds and short-term borrowings from the Company's existing line of
credit made in the ordinary course of business with certain banks.
The acquisition was accounted for under the purchase method of
accounting for business combinations and the results of operations
of Earl Jean have been recorded from the date of acquisition. The
purchase price plus acquisition expenses were allocated to Earl
Jean's assets and liabilities based on their estimated fair value.
The excess of the purchase price over the estimated fair value of
the net assets acquired of $60,011 is being amortized on a
straight-line basis over twenty years.
At December 1, 2001, the Company was still compiling certain
information required to complete the allocation of the purchase
price of Earl Jean. Further adjustments may arise as a result of the
finalization of the ongoing review.
The following unaudited pro forma condensed results of
operations reflect the acquisition of Earl Jean as if it had
occurred on March 4, 2001 and March 5, 2000, respectively. The
revenues and results of operations included in the following pro
forma unaudited condensed statements of operations is not
necessarily considered indicative of the results of operations for
the periods specified had the transaction actually been completed at
the beginning of the period.
-7-
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 1, 2001
(unaudited)
(amounts in thousands, except share data)
(unaudited)
Nine Months Nine Months
Ended Ended
December 1, December 2,
2001 2000
----------- -----------
Pro forma net sales $ 541,622 $ 493,831
Pro forma net earnings 26,653 33,674
Pro forma net earning per share of common stock:
Basic $ 0.81 $ 1.02
Diluted 0.78 0.98
NOTE 10 - A supplemental schedule of non-cash investing and financing
activities to the Company's Statement of Cash Flows is presented
below.
The Company acquired substantially all of the assets of Earl
Jean for $48,601 in cash, including acquisition expenses, and
$18,466 in common stock. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired $ 69,415
Cash paid (48,601)
Common stock issued (18,466)
--------
Liabilities assumed $ 2,348
========
NOTE 11 - On July 31, 2001, the Company entered into a loan agreement
with HSBC Bank USA ("HSBC"). The loan, in the maximum amount of
$15,075, is being used to finance a portion of the construction and
development of the new distribution facility in Martinsville,
Virginia. The loan is secured by a deed of trust on the
distribution facility.
A portion of the loan equal to $13,500 was advanced on July
31,2001. This advance called for interest only payments at the end
of each month, commencing August 31, 2001, and was based on the
one-month LIBOR rate plus 1.00%.
On November 30, 2001, the remaining portion of the loan,
$1,575, was advanced and the term of the loan was fixed at seven
years. Principal payments of $188 and interest payments are due at
the end of each calendar quarter, commencing March 28, 2002.
Interest will be 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. This
agreement effectively converts the loan from a variable interest
rate to a fixed interest rate of 6.95% per annum. If the three-month
LIBOR rate plus 1.00% is more than 6.95%, then HSBC will pay the
difference to the Company. If the three-month LIBOR rate plus 1.00%
is less than 6.95%, then the Company will pay the difference to
HSBC. The net interest paid
-8-
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 1, 2001
(unaudited)
(amounts in thousands, except share data)
or received under this agreement is included in interest expense.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") 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. In
accordance with the guidelines of SFAS 133, the Company classified
the swap as a cash flow hedge. The fair value of the swap resulted
in the Company recording a long-term liability of $822 and a loss in
other comprehensive income, net of taxes, of $511. The fair value is
based upon the estimated amount that the Company would have to pay
to terminate the agreement, as determined by HSBC.
NOTE 12 - For the three and nine months ended December 1, 2001,
comprehensive income was as follows:
(unaudited)
Nine Months Three Months
Ended Ended
December 1, December 1,
2001 2001
--------- ---------
Net earnings $ 25,654 $ 13,585
Other comprehensive (loss), net of taxes:
Foreign currency translation adjustments (1,393) (1,393)
Unrealized loss on interest rate swap (511) (511)
--------- ---------
Comprehensive income $ 23,750 $ 11,681
======== ========
NOTE 13 - 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 14 - In April 2001, the Financial Accounting Standards Board's
Emerging Issues Task Force reached a consensus on Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to
a Reseller of the Vendor's Products." This issue concluded that
consideration from a vendor to a reseller of the vendor's products
is presumed to be a reduction of the selling prices of the vendor's
products and, therefore, should be characterized as a reduction of
revenue when recognized in the vendor's income statement. That
presumption is overcome and the consideration characterized as a
cost incurred if a benefit is or will be received from the
recipient of the consideration if certain conditions are met. This
pronouncement is effective for the Company's first quarter of the
year ending March 1, 2003. The Company has not yet determined the
impact of adopting this pronouncement on its consolidated financial
statements.
-9-
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 1, 2001
(unaudited)
(amounts in thousands, except share data)
In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS")
141, "Business Combinations." This statement requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001, and establishes criteria to
separately recognize intangible assets apart from goodwill. The
Company does not believe that the adoption of this pronouncement
will have a material impact on its consolidated financial
statements.
In July 2001, the Financial Accounting Standards Board issued
SFAS 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 year ending March 1, 2003,
goodwill and intangible assets with indefinite lives will no longer
be amortized and will be tested for impairment using the guidance
for measuring impairment set forth in this statement. The Company
has not yet determined the impact of adopting this pronouncement on
its consolidated financial statements.
In October 2001, the Financial Accounting Standards Board
issued SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment of long-lived assets and assets to
be disposed of. This statement supersedes FASB 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of", however, it retains the fundamental provisions of FASB
121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS 144 is effective
for the Company's first quarter of the year ending March 1, 2003.
The Company has not yet determined the impact of adopting this
pronouncement on its consolidated financial statements.
NOTE 15 - Subsequent to December 1, 2001, the Company entered into a
Sale and Cancellation Agreement with the Vice Chairman of the
Company, to purchase and cancel all rights under a Letter Agreement
dated May 1, 1998 ("1998 Agreement") for $5,600. The 1998 Agreement
entitled the Vice Chairman to receive a payment, subject to certain
limitations, of 1.5% on the net sales of certain merchandise sold by
various subsidiaries of the Company. Under the Sale and Cancellation
Agreement, all current and future obligations arising from the 1998
Agreement have been cancelled, including approximately $1,200 that
the Company has been accruing for the current year. As a result of
the cancellation of the 1998 Agreement, the Company will incur a
one-time charge of approximately $4,600 in the fourth quarter.
-10-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (unaudited)
RESULTS OF OPERATIONS
For the Nine Months Ended December 1, 2001:
Net sales increased 14.0% to $535.5 million in the nine months ended
December 1, 2001 from $469.5 million in the comparable prior year period. The
increase in sales is due primarily to increased unit volume rather than price
increases. The reported sales reflect a 14.3% increase in the Wholesale segment
to $407.0 million from $356.1 million and a 13.3% increase in the Retail segment
to $128.5 million from $113.4 million. The growth in the Wholesale segment,
despite a low single-digit decrease in core sportswear, was driven by sales in
certain product lines, including Men's and Women's Jeans, Men's Sleepwear, Earl
Jean, Nautica Childrenswear and John Varvatos, offset in part by the
discontinuation of the Nautica Sport Tech ("NST") brand. Excluding NST brand
products, which were discontinued in the prior year, Wholesale segment sales
would have increased 16.5%. The increase in Retail segment sales is primarily a
result of sales from six new outlet stores and two full-price stores opened
since the first quarter of last year. Also, the Retail segment was successful in
selling through its excess inventory, resulting in lower inventory levels that
are now in line with the Company's plan. Same store sales for the period were up
1.6% from the comparable prior year period, despite a difficult retail
environment.
Gross profit for the period was 41.4%, equal to the comparable prior year
period. Despite a significant amount of promotional activity and the
sell-through of excess inventory in the retail outlet stores, the Company was
able to keep its gross profit percentage stable due primarily to the continued
effort from the Company's operating teams to better source products, and the
impact of higher margins on certain new product lines, particularly Earl Jean.
In addition, the gross profit for the period included additional inventory
reserves taken in the Nautica Europe business unit.
Selling, general and administrative expenses ("SG&A") increased by $38.0
million to $186.6 million in Fiscal 2002 from $148.7 million in Fiscal 2001.
SG&A expenses, as a percentage of net sales, increased to 34.8% in Fiscal 2002
from 31.7% in Fiscal 2001. The increase as a percentage of net sales is due to
several factors: costs and charges, principally bad debts, associated with the
Nautica Europe business unit; the continued investment in the Company's new
distribution facility in Martinsville, Virginia; costs associated with the
introduction of a new trademark; and investments in new businesses.
Net royalty income remained essentially flat at $6.2 million in
comparison to the prior year period. Sales strength in men's fragrance and home
products plus the recognition of a settlement from the termination of the men's
footwear license were offset in part by the termination of the childrenswear
license, as the Company established a business unit to assume the operations of
the Nautica childrenswear business during the current year period.
Interest income (expense) resulted in an expense of $.3 million compared
to income of $2.0 million in the prior year period. The decrease is due to
interest expense of approximately $1.5 million on the Company's short and
long-term borrowings, and lower average cash balances as a result of the cash
paid for the acquisition of Earl Jean. Working capital needs, particularly to
support the Company's new businesses, also contributed to the lower average cash
balances.
The provision for income taxes decreased to 37.8% from 38.8% of earnings
before income taxes in the comparable prior year period. The decrease is due
primarily to a reduction in the effective state income tax rates.
Net earnings were $25.7 million compared to $33.0 million in the prior
year period as a result of the factors discussed above.
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For the Three Months Ended December 1, 2001:
Net sales increased 12.5% to $201.0 million in the three months ended
December 1, 2001 from $178.6 million in the comparable prior year period. The
increase in sales is due primarily to increased unit volume rather than price
increases. The reported sales reflect an 11.9% increase in the Wholesale segment
to $152.8 million from $136.5 million and a 14.7% increase in the Retail segment
to $48.3 million from $42.1 million. The growth in the Wholesale segment,
despite a mid single-digit decrease in core sportswear, was driven by sales in
certain product lines, including Men's and Women's Jeans, Men's Sleepwear, Earl
Jean and Nautica Childrenswear. The increase in Retail segment sales is a result
of sales from new stores opened since the third quarter of last year plus the
sell-through of excess inventory in the outlet stores. Same store sales for the
period were up 4.6% from the comparable prior year period, reflecting the
sell-through of the excess inventory and despite a difficult retail environment.
Gross profit for the period was 40.4% compared to 41.6% in the comparable
prior year period. The decrease is due primarily to the sell-through of excess
inventory in the retail outlet stores and additional inventory reserves taken in
the Nautica Europe business unit. This decrease was offset in part by the
continued effort from the Company's operating teams to better source products,
and the impact of higher margins on certain new product lines, particularly Earl
Jean.
Selling, general and administrative expenses ("SG&A") increased by $10.6
million to $61.0 million in Fiscal 2002 from $50.3 million in Fiscal 2001. SG&A
expenses, as a percentage of net sales, increased to 30.3% in Fiscal 2002 from
28.2% in Fiscal 2001. The increase as a percentage of net sales is principally
due to the continued investment in the new distribution facility and the
investment in new businesses such as the men's line of Earl Jean scheduled to
launch this fall and Nautica Underwear for men, which was launched in the
current quarter.
Net royalty income decreased $0.6 million to $2.0 million in Fiscal 2002
from $2.6 million in Fiscal 2001. Increases in home products were offset by the
termination of the childrenswear license, as the Company established a business
unit to assume the operations of the Nautica childrenswear business during
Fiscal 2002.
Interest income (expense) resulted in an expense for the quarter of $.4
million compared to income of $.6 million in the comparable prior year period.
The decrease is due to interest expense of approximately $.7 million on the
Company's short and long-term borrowings, and lower average cash balances as a
result of the cash paid for the acquisition of Earl Jean. Working capital needs,
particularly to support the Company's new businesses, also contributed to the
lower average cash balances.
The provision for income taxes decreased to 37.8% from 38.8% of earnings
before income taxes in the comparable prior year period. The decrease is due
primarily to a reduction in the effective state income tax rates.
Net earnings were $13.6 million compared to $16.5 million in the prior
year period as a result of the factors discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended December 1, 2001, the Company generated cash
from operating activities of $39.9 million, principally from net earnings.
Accounts receivable for the nine-month period increased $14.7 million and were
financed principally by cash generated from net earnings and an increase in
short-term borrowings. Accounts receivable were 29.4% higher than the same
period in the prior year due mainly to the increase in wholesale sales and the
timing of shipments, with a higher percentage occurring in the last part of the
quarter. Inventory for the nine-month period decreased $17.0 million due mainly
to the sales of excess inventory through the retail outlets and the Company's
efforts to better manage the timing of receipts with demand and to reduce its
replenishment excess. Inventory was $5.0 million or 5.2% lower than the same
period in the prior year due to these same reasons. During the nine months ended
December 2, 2000, the Company generated cash from operating activities of $67.6
million principally from net earnings and a $28.6 million transfer of certain
marketable securities into cash equivalents. Increases in accounts receivable
and inventory of $5.7 and $22.3 million, respectively, resulted from increased
sales, and were financed principally by cash generated from net earnings, and
increases in accounts payable and accrued expenses. Accounts receivable were
14.5% lower than the same period in the prior year due to the timing of
shipments, with a lower percentage occurring in the last part of the quarter.
Inventory was 38.6% higher than the same period in the prior year due to
increased sales and the timing of merchandise received.
During the nine months ended December 1, 2001, the Company's principal
investing activities related primarily to the acquisitions of Earl Jean and the
Nautica childrenswear business, the purchase of property, plant and equipment
for the Nautica in-store shop program, the completion of the new distribution
facility and the completion of a new full-price retail store in New York's
Rockefeller Plaza. The Company expects to continue to incur capital expenditures
to expand the in-store shop program, and to open additional retail stores. At
December 1, 2001, there were no other material commitments for capital
expenditures.
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
December 1, 2001 and March 3, 2001, letters of credit outstanding under the
lines were $43.3 million and $58.6 million, respectively. At December 1, 2001,
there were $30.0 million of short-term borrowings outstanding and $15.1 million
of long-term borrowings outstanding, inclusive of its current portion.
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.
INFLATION AND CURRENCY FLUCTUATIONS
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.
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NEW ACCOUNTING PRONOUNCEMENTS
In April 2001, the Financial Accounting Standards Board's Emerging Issues
Task Force reached a consensus on Issue No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products."
This issue concluded that consideration from a vendor to a reseller of the
vendor's products is presumed to be a reduction of the selling prices of the
vendor's products and, therefore, should be characterized as a reduction of
revenue when recognized in the vendor's income statement. That presumption is
overcome and the consideration characterized as a cost incurred if a benefit is
or will be received from the recipient of the consideration if certain
conditions are met. This pronouncement is effective for the Company's first
quarter of the year ending March 1, 2003. The Company has not yet determined the
impact of adopting this pronouncement on its consolidated financial statements.
In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") 141, "Business
Combinations." This statement requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001, and
establishes criteria to separately recognize intangible assets apart from
goodwill. The Company does not believe that the adoption of this pronouncement
will have a material impact on its consolidated financial statements.
In July 2001, the Financial Accounting Standards Board issued SFAS 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 year ending
March 1, 2003, goodwill and intangible assets with indefinite lives will no
longer be amortized and will be tested for impairment using the guidance for
measuring impairment set forth in this statement. The Company has not yet
determined the impact of adopting this pronouncement on its consolidated
financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." This statement
addresses financial accounting and reporting for the impairment of long-lived
assets and assets to be disposed of. This statement supersedes FASB 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", however, it retains the fundamental provisions of FASB 121 for
(a) recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of by
sale. SFAS 144 is effective for the Company's first quarter of the year ending
March 1, 2003. The Company has not yet determined the impact of adopting this
pronouncement on its consolidated financial statements.
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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
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, in 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 $15.1
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. The Company entered into a swap agreement,
effective November 30, 2001, to hedge against interest rate fluctuations on its
long-term debt. The swap agreement effectively converts the long-term debt from
a variable interest rate to a fixed interest rate of 6.95% per annum.
-15-
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).
-16-
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.
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.
On November 8, 2001, the Company filed a Current Report on Form
8-K relating to the declaration by the Board of Directors of the
Registrant, on November 2, 2001, of a dividend distribution of
one Right for each outstanding Share of Common Stock, par value
$0.10 per share, of the Registrant, to stockholders of record on
November 12, 2001. The description and terms of the Rights are
set forth in the Rights Agreement, between the Company and Mellon
Investor Services LLC, attached as an exhibit to such Current
Report on Form 8-K.
-17-
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: January 11, 2002
----------------------------
By: s/ Wayne A. Marino
--------------------------
Wayne A. Marino
Chief Financial Officer
Date: January 11, 2002
----------------------------
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