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 September 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 October 15, 2001
was 33,174,490.
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
SEPTEMBER 1, 2001
(unaudited)
INDEX
Page No.
--------
Part I - Financial Information:
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
As at September 1, 2001 and March 3, 2001...........................2
Condensed Consolidated Statements of Earnings
For the Six and Three Month Periods Ended
September 1, 2001 and September 2, 2000.............................3
Condensed Consolidated Statements of Cash Flows
For the Six Month Periods Ended
September 1, 2001 and September 2, 2000.............................4
Notes to Condensed Consolidated Financial Statements................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...14
Part II - Other Information:
Item 4. Submission of Matters to a Vote of Security-Holders..........15
Item 6. Exhibits and Reports on Form 8-K.............................15
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
ASSETS (unaudited)
September 1, 2001 March 3, 2001
--------- ---------
Current assets:
Cash and cash equivalents $ 1,177 $ 36,674
Short-term investments 6,082 5,546
Accounts receivable - net 128,055 105,269
Inventories 144,831 98,021
Prepaid expenses and other current assets 6,889 7,477
Deferred tax benefit 10,859 10,859
--------- ---------
Total current assets 297,893 263,846
Property, plant and equipment - net of
accumulated depreciation and amortization 119,636 101,361
Goodwill, net of accumulated amortization 67,558 5,243
Other assets 10,500 7,856
--------- ---------
$ 495,587 $ 378,306
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 754 $ --
Notes payable 52,500 --
Accounts payable - trade 57,930 43,881
Accrued expenses and other current liabilities 38,848 37,613
Income taxes payable 14,971 11,548
--------- ---------
Total current liabilities 165,003 93,042
Long-term debt - net 12,746 --
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 September 1, 2001 and 43,329,000 shares at
March 3, 2001 4,468 4,333
Additional paid-in capital 92,136 71,766
Retained earnings 380,217 368,148
--------- ---------
476,821 444,247
Less:
Common stock in treasury - at cost;
11,498,000 shares at September 1, 2001
and March 3, 2001 (158,983) (158,983)
--------- ---------
Total stockholders' equity 317,838 285,264
--------- ---------
$ 495,587 $ 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)
------------------------------- -------------------------------
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
September 1, 2001 September 2, 2000 September 1, 2001 September 2, 2000
----------- ----------- ----------- -----------
Net sales $ 334,446 $ 290,899 $ 199,256 $ 169,625
Cost of goods sold 193,679 170,811 116,250 99,673
----------- ----------- ----------- -----------
Gross profit 140,767 120,088 83,006 69,952
Selling, general and administrative expenses 125,635 98,264 70,358 50,839
Net royalty income (4,202) (3,697) (1,857) (1,910)
----------- ----------- ----------- -----------
Operating profit 19,334 25,521 14,505 21,023
Investment income (expense) - net 70 1,450 (202) 892
----------- ----------- ----------- -----------
Earnings before provision for income taxes 19,404 26,971 14,303 21,915
Provision for income taxes 7,335 10,465 5,407 8,503
----------- ----------- ----------- -----------
NET EARNINGS $ 12,069 $ 16,506 $ 8,896 $ 13,412
=========== =========== =========== ===========
Net earnings per share of common stock:
Basic $ 0.37 $ 0.51 $ 0.27 $ 0.43
=========== =========== =========== ===========
Diluted $ 0.35 $ 0.50 $ 0.26 $ 0.41
=========== =========== =========== ===========
Weighted average number of common shares outstanding:
Basic 32,709,000 32,054,000 33,158,000 31,415,000
=========== =========== =========== ===========
Diluted 34,377,000 33,302,000 34,726,000 32,538,000
=========== =========== =========== ===========
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)
-------------------------------------
Six Months Six Months
Ended Ended
September 1, 2001 September 2, 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 12,069 $ 16,506
-------- --------
Adjustments to reconcile net earnings to net cash (used in)
provided by operating activities:
Depreciation and amortization 14,039 11,202
Provision for bad debts 6,320 697
Changes in operating assets and liabilities, net of acquisitions
Short-term investments (536) 28,650
Accounts receivable (25,137) (20,560)
Inventories (36,622) (29,965)
Prepaid expenses and other current assets 612 1,642
Other assets (2,718) (2,553)
Accounts payable - trade 12,134 28,941
Accrued expenses and other current liabilities (2,773) 2,996
Income taxes payable 3,423 2,576
======== ========
Total adjustments (31,258) 23,626
-------- --------
Net cash (used in) provided by operating activities (19,189) 40,132
-------- --------
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 (29,065) (9,105)
-------- --------
Net cash (used in) investing activities (84,347) (9,105)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 13,500 --
Proceeds from notes payable 52,500 --
Purchase of treasury stock -- (28,822)
Proceeds from issuance of common stock 2,039 402
-------- --------
Net cash provided by (used in) financing activities 68,039 (28,420)
-------- --------
(Decrease) increase in cash and cash equivalents (35,497) 2,607
Cash and cash equivalents at beginning of period 36,674 27,143
-------- --------
Cash and cash equivalents at end of period $ 1,177 $ 29,750
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 652 $ --
======== ========
Cash paid during the period for income taxes $ 4,052 $ 8,048
======== ========
The accompanying notes are an integral part of these statements.
-4-
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 six-month period
ended September 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 September
1, 2001.
NOTE 4 - The Company utilized the last-in, first-out "LIFO"
method for certain wholesale inventories as at September 1,
2001 and March 3, 2001 and for the six and three-month periods
ended September 1, 2001 and September 2, 2000. The "LIFO"
inventory for the six and three-month periods ended September
1, 2001 and September 2, 2000 are based upon end of year
estimates. Inventories at September 1, 2001 and March 3, 2001
consist primarily of finished goods.
NOTE 5 - As of September 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 September 1, 2001 and March 3, 2001, letters of credit
outstanding under the lines were $68,100 and $58,600,
respectively. At September 1, 2001, there was $52,500 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
October 28, 2001.
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
2,215,900 and 2,369,700 during the six months ended September
1, 2001 and September 2, 2000, respectively.
-5-
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 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 SIX MONTHS ENDED
SEPTEMBER 1, 2001
Net sales $254,191 $ 80,255 $ -- $ -- $334,446
Segment operating profit (loss) 12,476 7,629 4,201 (4,972) 19,334
Segment assets 384,058 69,649 8,500 33,380 495,587
Depreciation expense 10,115 1,214 215 1,022 12,566
Capital expenditures 20,261 6,886 -- 1,918 29,065
FOR THE SIX MONTHS ENDED
SEPTEMBER 2, 2000
Net sales $219,585 $ 71,314 $ -- $ -- $290,899
Segment operating profit (loss) 16,413 9,948 4,232 (5,072) 25,521
Segment assets 250,480 42,758 8,457 54,017 355,712
Depreciation expense 9,025 822 161 760 10,768
Capital expenditures 5,756 1,281 16 2,052 9,105
All Corporate/
Wholesale Retail other eliminations Totals
-------- -------- -------- -------- --------
FOR THE THREE MONTHS ENDED
SEPTEMBER 1, 2001
Net sales $149,174 $ 50,082 $ -- $ -- $199,256
Segment operating profit (loss) 10,220 5,236 1,857 (2,808) 14,505
Segment assets 384,058 69,649 8,500 33,380 495,587
Depreciation expense 5,409 884 108 509 6,910
Capital expenditures 9,166 1,693 -- 727 11,586
FOR THE THREE MONTHS ENDED
SEPTEMBER 2, 2000
Net sales $125,247 $ 44,378 $ -- $ -- $169,625
Segment operating profit (loss) 13,301 7,730 1,890 (1,898) 21,023
Segment assets 250,480 42,758 8,457 54,017 355,712
Depreciation expense 4,641 443 15 401 5,500
Capital expenditures 1,787 892 11 1,374 4,064
-6-
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 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 $4,717 and
$3,874 for the six months ended September 1, 2001 and
September 2, 2000, respectively.
In the Corporate/eliminations column, the segment
assets primarily consist of the Company's corporate fixed
assets and deferred taxes at September 1, 2001 and cash and
the investment portfolio at September 2, 2000. The segment
operating profit (loss) in the Corporate/eliminations column
consists of corporate overhead expenses.
NOTE 8 - During the six months ended September 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 September 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)
SEPTEMBER 1, 2001
(unaudited)
(amounts in thousands, except share data)
(unaudited)
----------------------------
Six Months Six Months
Ended Ended
September 1, 2001 September 2, 2000
----------- -----------
Pro forma net sales $ 340,582 $ 307,876
Pro forma net earnings 13,068 18,421
Pro forma net earning per share of common stock:
Basic $ .40 $ .56
Diluted .38 .54
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 calls for interest only payments
at the end of each month, commencing August 31, 2001, and is
based on the one-month LIBOR rate plus 1.00%.
On November 30, 2001, the remaining portion of the
loan, $1,575, shall be advanced, at which time the term of the
loan will become seven years. Principal and interest payments
shall be 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 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 this agreement is terminated
prior to maturity, the swap can result in a gain or loss,
based upon the estimated amount that the Company would have to
pay or would receive to terminate the agreement. The loan will
mature on November 28, 2008, at which time the entire
outstanding loan balance of $9,987 will be due and payable.
-8-
NAUTICA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 1, 2001
(unaudited)
(amounts in thousands, except share data)
NOTE 12 - 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.
-9-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (unaudited)
RESULTS OF OPERATIONS
For the Six Months Ended September 1, 2001:
Net sales increased 15.0% to $334.4 million in the six months ended
September 1, 2001 from $290.9 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 15.8% increase in the Wholesale segment
to $254.2 million from $219.6 million and a 12.5% increase in the Retail segment
to $80.3 million from $71.3 million. The growth in the Wholesale segment was
driven by sales in certain product lines, including Men's and Women's Jeans,
Men's and Women'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 18.7%. The increase in Retail
segment sales is primarily a result of sales from fifteen new outlet stores and
two full-price stores opened since the first quarter of last year. Same store
sales for the period were down slightly from the comparable prior year period,
reflecting the difficult retail environment and reduced customer traffic.
Gross profit for the period was 42.1% compared to 41.3% in the
comparable prior year period. The increase is due primarily to strong
regular-price selling in men's and women's denim and John Varvatos, the
continued effort from the Company's operating teams to better source the
products, and the impact of higher margins on certain new product lines,
particularly Earl Jean. This increase was offset in part by additional inventory
reserves taken in the Nautica Europe business unit. Excluding the additional
reserves associated with Nautica Europe, gross profit for the period was 42.7%.
Selling, general and administrative expenses ("SG&A") increased by
$27.3 million to $125.6 million in Fiscal 2002 from $98.3 million in Fiscal
2001. SG&A expenses, as a percentage of net sales, increased to 37.6% in Fiscal
2002 from 33.8% in Fiscal 2001. The increase in the percentage of net sales is
principally due to costs in the Nautica Europe business unit and the continued
construction of the Company's new distribution facility which, once operational,
will reduce the cost to store, process and ship inventory. Additionally, costs
associated with the introduction of a new trademark and integration of new
businesses contributed to the increase. Excluding the costs associated with
Nautica Europe, principally bad debts, SG&A expenses increased $19.5 million
with SG&A expenses, as a percentage of net sales, of 35.2%.
Net royalty income increased by $.5 million to $4.2 million from $3.7
million in the comparable prior year period. The increase is primarily due to
the recognition of a settlement from the termination of the men's footwear
license. In addition, part of the increase was a result of the sales strength in
international, men's fragrance and home products. The increase was 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.
Investment income decreased to $.1 million from $1.4 million in the
comparable prior year period. The decrease is due to interest expense of
approximately $.8 million on the Company's short-term borrowings and lower
average cash balances as a result of the cash paid for the acquisition of Earl
Jean. Increased inventory levels and 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.
-10-
Net earnings were $12.1 million compared to $16.5 million in the prior
year period as a result of the factors discussed above.
For the Three Months Ended September 1, 2001:
Net sales increased 17.5% to $199.3 million in the three months ended
September 1, 2001 from $169.6 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 a 19.1% increase in the Wholesale segment
to $149.2 million from $125.2 million and a 12.9% increase in the Retail segment
to $50.1 million from $44.4 million. The growth in the Wholesale segment was
driven by sales in certain product lines, including Men's and Women's Jeans,
Men's and Women'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 21.4%. The increase in Retail
segment sales is a result of sales from new stores opened since the second
quarter of last year. Same store sales for the period were up slightly from the
comparable prior year period, despite a difficult retail environment.
Gross profit for the period was 41.7% compared to 41.2% in the
comparable prior year period. The increase is due primarily to strong
regular-price selling in men's and women's denim and John Varvatos, the
continued effort from the Company's operating teams to better source the
products, and the impact of higher margins on certain new product lines,
particularly Earl Jean. This increase was offset in part by additional inventory
reserves taken in the Nautica Europe business unit. Excluding the additional
reserves associated with Nautica Europe, gross profit for the period was 42.7%.
Selling, general and administrative expenses ("SG&A") increased by
$19.6 million to $70.4 million in Fiscal 2002 from $50.8 million in Fiscal 2001.
SG&A expenses, as a percentage of net sales, increased to 35.3% in Fiscal 2002
from 30.0% in Fiscal 2001. The increase in the percentage of net sales is
principally due to costs in the Nautica Europe business unit. Additionally,
costs associated with the introduction of a new trademark and integration of new
businesses contributed to the increase. Excluding the costs associated with
Nautica Europe, principally bad debts, SG&A expenses increased $11.7 million
with SG&A expenses, as a percentage of net sales, of 31.4%.
Net royalty income was essentially flat at $1.9 million in Fiscal 2002.
Increases in international, men's fragrance and home products 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 Fiscal 2002.
Investment income (expense) resulted in an expense for the quarter of
$.2 million compared to income of $.9 million in the comparable prior year
period. The decrease is due to interest expense of approximately $.6 million on
the Company's short-term borrowings and lower average cash balances as a result
of the cash paid for the acquisition of Earl Jean. Increased inventory levels
and 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 $8.9 million compared to $13.4 million in the prior
year period as a result of the factors discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
During the six months ended September 1, 2001, the Company used cash in
operating activities of $19.2 million. Increases in inventory and accounts
receivable of $36.6 and $25.1 million, respectively, resulted from increased
sales, and were financed principally by cash generated from net earnings and an
increase in accounts payable and short-term borrowings. Of the inventory
increase, approximately $18.0 million will be used to support wholesale and
retail sales growth, especially in our new businesses. The balance of the
increase is comprised of a year over year increase in basic replenishment, and
excess inventory that the Company expects to sell by year-end. Accounts
receivable was 17.9% higher than the same period in the prior year, which is
consistent with the wholesale sales growth. During the six months ended
September 2, 2000, the Company generated cash from operating activities of $40.1
million, principally from net earnings and a $28.7 million transfer of certain
marketable securities into cash equivalents. Increases in accounts receivable
and inventory of $20.6 and $30.0 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 was 7.7%
higher than the same period in the prior year due to the timing of shipments,
with a greater percentage occurring in the last part of the quarter. Inventory
was 22.8% higher than the same period in the prior year due to increased sales
and the timing of merchandise received.
During the six months ended September 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 continued construction 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 September 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
September 1, 2001 and March 3, 2001, letters of credit outstanding under the
lines were $68.1 million and $58.6 million, respectively. At September 1, 2001,
there were $52.5 million of short-term borrowings outstanding and $13.5 million
of long-term borrowings outstanding.
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.
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. The
Company assumes no obligation to update any forward-looking statements as a
result of new information or future events or developments.
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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 $13.5
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.
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PART II
OTHER INFORMATION
Items 1 through 9. - All items are inapplicable except:
Item 4. Submission of Matters to a Vote of Security-Holders
(a) The Annual Meeting of Stockholders of Nautica Enterprises, Inc. was
held on July 10, 2001.
(b) The directors named in the Proxy Statement constituting the entire
Board of Directors were elected to one-year terms expiring in 2002, as
follows:
FOR WITHHELD
--- --------
Harvey Sanders 27,467,585 2,725,635
David Chu 27,467,969 2,725,251
George Greenberg 29,743,125 450,095
Robert B. Bank 29,751,933 441,287
Israel Rosenzweig 29,751,720 441,500
Charles Scherer 29,345,303 847,917
John Varvatos 27,778,027 2,415,193
Ronald G. Weiner 29,755,976 437,244
The Notice of Annual Meeting of Stockholders and Proxy Statement for
Nautica Enterprises, Inc. dated June 8, 2001 was filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the
Act.
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 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 by
reference from the Registrant's Quarterly Report on Form 10-Q
for the quarter ended May 31, 1996.
10(iii)(a) Registrant's Executive Incentive Stock Option Plan is
incorporated by reference herein 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 by reference herein from the Registrant's
Registration Statement on Form S-8 (Registration Number
33-36040).
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10(iii)(c) Registrant's 1996 Stock Incentive Plan is incorporated by
reference herein from Registrant's Registration Statement on
Form S-8 (Registration Number 333-55711).
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.
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.
During the quarter ended September 1, 2001, the Company filed
a Current Report on Form 8-K/A dated July 13, 2001, in which
the Company filed certain financial statements and pro forma
financial information relating to the acquisition of Earl
Jean, Inc.
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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: October 15, 2001
By: s/ Wayne A. Marino
-----------------------
Wayne A. Marino
Chief Financial Officer
Date: October 15, 2001
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