ITEM 1. BUSINESS
Nautica Enterprises, Inc., a Delaware corporation (the "Company") designs, sources and markets men's apparel. Men's casual sportswear, outerwear, activewear, sleepwear and robes are sold under the Nautica brand. Golf sportswear is sold under the E. Magrath and Byron Nelson brands. These products feature innovative designs, classic styling, quality fabrics and functionality.
Nautica's in-store shop program is a significant component of the Company's wholesale business. Through this program, Nautica and a department store customer create a specific area within the store dedicated to the exclusive merchandising and sale of the Nautica collections. Each of these shops (referred to herein as a "Nautica Shop") is outfitted with signature Nautica fixtures and presents the Nautica collection in a visually attractive environment consistent with the Nautica image.
In addition to Nautica's wholesale business, the Company operates outlet stores which provide an additional sales channel for Nautica products and allows for the organized distribution of excess and out-of-season merchandise.
The Company strategically extends the Nautica product lines and broadens the international distribution of the Nautica apparel collection through license arrangements. The Nautica name is currently licensed for a range of products consistent with Nautica's design concepts and image. The Nautica name is also licensed globally to agents or companies for distribution of the Nautica collection in international regions.
The Company is a majority partner in a limited liability company to market and distribute Nautica apparel throughout Europe.
PRODUCTS
Nautica
Nautica offers a collection of men's sportswear, outerwear, activewear, sleepwear and robes. The collection, sold under the Nautica brand, features innovative designs, classic styling, and quality fabrics. The Nautica name and trademarks are prominently displayed on Nautica products to promote brand awareness and maintain consumer loyalty. While Nautica products are targeted to the 25-54 year old age group, the Company believes that its products appeal to both younger and older consumers who identify with the Nautica lifestyle and image.
The Nautica collection is designed by Nautica's in-house staff and is offered in three principal groups: Anchor, Crew and Fashion. Each of the groups include sportswear, outerwear and activewear. Sportswear includes sweaters, cardigans, woven shirts, knit shirts, rugbys, pants and shorts. Outerwear includes parkas, anoraks, bomber jackets and inclement weather gear. Activewear includes fleece and french terry tops, french terry pants and shorts, tee shirts and swimwear. The Nautica collection is sold through the Company's wholly-owned subsidiary, Nautica International, Inc.
The Anchor group consists of basic all season items, including oxford shirts, cotton pique knit shirts, cotton twill pants, lightweight jackets and swimwear which are available to retail customers throughout the
year. The Company maintains an inventory of Anchor products in order to continuously replenish the stock of its retail customers. Retail customers are able to reorder Anchor products through electronic data interchange (EDI).
The Crew and Fashion groups are usually presented in twelve deliveries during Nautica's four merchandising seasons. Crew is typically the first collection delivery of the Spring, Transitional, Fall and Holiday seasons. The Crew collections reinterpret Anchor basics by introducing seasonal colors and offering additional items and styles. Fashion deliveries consist of three to five small groups within each merchandising season. The Fashion collections are based on seasonal themes developed by Nautica's design and merchandising staffs and is distinguished by its distinctive use of color, novelty prints and innovative fabrics and unique design elements. The Anchor, Crew and Fashion groups are developed to be merchandised together as a cohesive Nautica collection.
Nautica robes and sleepwear target the same consumer base as the Nautica sportswear collection, but are typically sold and displayed in the men's furnishings department of leading department and specialty stores. This line features quality fabrics, classic styling and design concepts inspired by the Nautica collections.
The "Nautica Competition" performance apparel collection features innovative products engineered for both athletes and fitness-oriented consumers.
The Company also licenses the Nautica name and related trademarks for a range of products consistent with Nautica's design concepts and image. See "Licensing."
MARKETING
Nautica's in-store shop program anchors the marketing strategy of the wholesale business. Through this program, Nautica and a department store customer create a specific area within the store dedicated to the exclusive merchandising and sale of the Nautica collection. These Nautica Shops, strategically located in the men's collections departments of leading department stores, provide a distinctive selling environment and are designed to reflect the Nautica image and lifestyle.
Nautica plans to continue to expand Nautica Shops in department stores which currently sell the Nautica collection and to install Nautica Shops in additional retail locations. The continued development of the Nautica Shop program is dependent on general apparel industry conditions, continued participation by retail customers and continued demand by consumers for the Nautica collection.
In fiscal 1997, the Company expanded the Nautica Shop program to include shops featuring the Nautica Competition brand of performance apparel. The shops feature high tech materials accented with aluminum and glass and athletic inspired photographs.
In order to maximize the effectiveness of the Nautica Shop program, Nautica operates a merchandise coordinator program. Each of Nautica's merchandise coordinators services a group of retail customers within a common geographic region. They communicate with and visit each of their customers on a regular basis to ensure proper visual display of Nautica merchandise, analyze inventory requirements, and provide selling and merchandising support to the sales staff. Merchandise coordinators also train certain department store employees with regard to Nautica's product features, sales methods and shop management. They also provide sales information to the Company's retail analysts who monitor retail customer performance and develop plans to
assist these retail customers with future purchases of Nautica products. Management believes that the performance of Nautica Shops is enhanced by the close interaction of its merchandise coordinators with its retail customers.
Nautica concentrates its marketing efforts on national and regional print advertising. The advertising captures the Nautica image in environments that reflect the Nautica lifestyle collection. The Nautica advertising campaign is featured throughout the year in national magazines including GQ, George, L'Uomo Vogue, Men's Health, Men's Journal, The New Yorker, The New York Times Magazine and Sports Illustrated; and, in regional magazines. In addition, Nautica participates with its retail customers in a cooperative advertising program. The print advertising is supplemented by a series of special events and sports sponsorships.
Products are marketed by a regional sales force and sales representatives through its showrooms in New York City and Dallas, Texas to leading department and specialty stores. In fiscal year 1998, Dillard Department Stores, Federated Department Stores and May Department Stores Company each accounted for approximately 17%, 21% and 24%, respectively, of the Company's total gross sales. No other customer of the Company accounted for 10% or more of the Company's sales during that period.
PRODUCT DESIGN AND SOURCING
The Company manages the development of its apparel from initial product concept through color and pattern design, fabric identification and testing and garment manufacturing. Products are designed by its in-house design staffs. The design teams work in conjunction with the sales and production teams to determine the apparel styles for a particular season based upon an evaluation of current style trends, prior year's sales and consultations with retail customers. In conjunction with agents located in foreign countries, Nautica arranges fabric sourcing and garment production to ensure that final products satisfy detailed specifications and quality standards.
The Company contracts for the manufacture of its products and does not own or operate any manufacturing facilities. The Company's contract manufacturers are located primarily in Asia. The Company's agent and sourcing office, based in Hong Kong and Taiwan, respectively, monitor production to ensure compliance with design specifications, quality standards and timely delivery of finished garments. They are assisted by Company employees based in New York who regularly visit with the manufacturers to monitor production. To date, the Company has not experienced difficulty in obtaining manufacturing services. Management believes that many alternate manufacturing sources exist. However, the inability of current sources to satisfy the Company's manufacturing requirements, the loss of certain manufacturers, the loss of an agent of the Company or a delay in locating manufacturing capacity following termination of a manufacturing relationship, could have a material adverse effect on the Company's business and operating results. While the Company has long standing relationships with many of its manufacturers and believes its relations to be good, it does not have long-term commitments with manufacturers.
The Company sources for many of its manufacturers a broad range of natural and synthetic fabrics primarily from foreign textile mills and converters. The Company separately negotiates with fabric suppliers for the sale of required fabric which is then purchased by its manufacturers in accordance with the Company's specifications. To date, the Company has not experienced difficulty in sourcing fabrics for its manufacturers. Management believes that many alternate sources of supplies exist. However, the inability of current sources to satisfy the Company's fabric requirements, the loss of certain fabric vendors, or a delay in manufacturers obtaining fabric from certain vendors, could have a material adverse effect on the Company's business and operating results. The Company does not have any long-term commitments with fabric suppliers.
The Company contracts to purchase its goods in United States dollars and has not experienced material difficulties as a result of foreign political, economic or social instability. However, the Company's business remains subject to the usual risks associated with foreign suppliers.
LICENSING
The Company strategically extends the Nautica product line and broadens the international distribution of the Nautica apparel collection through license arrangements. These license arrangements allow the Company to enter new businesses and countries with minimal capital commitments and to benefit from the experience of the licensee with the licensed product or the local market. The Nautica name and related trademarks are licensed through the Company's wholly-owned subsidiary, Nautica Apparel, Inc. ("Nautica Licensing").
Nautica Licensing currently licenses products for wholesale distribution in the following product categories: fragrances for men and women, neckwear, tailored clothing, rainwear, women's, boys', girls' and infants' apparel, footwear, luggage, watches, caps, men's hosiery, eyewear, belts and small leather goods, umbrellas, a home furnishings collection, a denim collection and a Lincoln-Mercury Villager minivan.
Internationally, Nautica apparel is licensed for sale in, among other areas and countries, Australia, Brazil, Canada, the Caribbean, Chile, Colombia, Greece, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Panama, Peru, Philippines, Singapore, Taiwan, Thailand and Venezuela. In addition to wholesale distribution of Nautica apparel, international licensees operate Nautica retail stores in certain of these markets.
As a provision of the agreement by which the Company acquired the Nautica brand in 1984, David Chu, Executive Vice President of the Company and President of Nautica Licensing, is entitled to receive 50% of the net royalty income from licensing the Nautica name and trademarks. The Company receives the remaining 50% of such net royalty income. In addition, Mr. Chu is entitled to receive up to 1.5% of the net sales of certain new products.
RETAIL
The Company operates 58 outlet stores generally located in outlet centers throughout the United States. The Company's retail operations are conducted through its wholly-owned subsidiary, Nautica Retail USA, Inc. These outlet stores have enabled the Company to increase sales in certain geographic markets where Nautica products were not previously available and reach consumers who favor value-oriented retailers. They also provide opportunities for Nautica to sell excess and out-of-season merchandise, thereby reducing the need to sell such merchandise to discounters at excessively low prices. Nautica outlet stores are geographically positioned to minimize potential conflict with the Company's retail customers.
SEASONALITY
Historically, the Company has experienced its highest level of sales in the third quarter and its lowest level in the first quarter. This pattern has resulted primarily from the timing of shipments to retail customers for Spring and Fall seasons. In the future, the timing of seasonal shipments may vary by quarter.
TRADEMARKS
Nautica and its related trademarks (the "Nautica Marks") are registered trademarks of Nautica Licensing in the United States for apparel and certain other products, including all licensed products. Application to register the Nautica Marks in other product categories have been filed by the Company in the United States. In addition, the Company has registered or is in the process of registering the Nautica Marks in over 70 countries throughout the world for apparel and in other complementary product categories.
The Company regards its trademarks and other proprietary rights as valuable assets.
COMPETITION
The apparel industry is highly competitive. The Company encounters substantial competition from brands such as Polo/Ralph Lauren, Tommy Hilfiger and Claiborne, as well as from certain non-designer lines. In addition, department stores, including some of the Company's major retail customers, have increased in recent years the amount of goods manufactured specifically for them and sold under their own labels. Some of the Company's competitors are significantly larger and more diversified than the Company and have substantially greater resources available for marketing their products. The Company believes that its ability to compete effectively depends upon the continuing appeal of Nautica apparel and the Company's other products to its retail customers and consumers as well as the Company's ability to continue to offer high quality apparel at appropriate price points.
EMPLOYEES
At February 28, 1998, the Company had approximately 1,700 employees. Approximately 240 of such employees are parties to a collective bargaining agreement. The Company considers its relations with its employees to be good.
ITEM 2.
ITEM 2. PROPERTIES
The Company operates four warehouse and distribution facilities in Rockland, Maine and one in Irving, Texas. A 350,000 square foot facility, owned by the Company, is used for receiving, shipping and warehousing Nautica apparel. A 100,000 square foot facility, also owned by the Company, is used primarily for receiving, shipping and warehousing Nautica Retail merchandise. Two leased facilities of approximately 60,000 square feet each and one leased facility of approximately 25,000 square feet are used for warehousing a range of the Company's products.
The Company has administrative and sales offices at 40 West 57th Street, New York, New York, where it occupies under lease approximately 48,000 square feet. It also leases a design studio of approximately 44,000 square feet located at 11 East 19th Street, New York, New York. The Company or its affiliates also leases sales offices in Dallas, Texas and London, England, one full price retail store and 58 Nautica outlet stores located throughout the United States. The outlet stores range in size from approximately 2,400 to 9,300 square feet, and average approximately 3,800 square feet. All of the Company's facilities are deemed by it to be adequate for the purposes utilized.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security-holders during the fourth quarter of fiscal 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is publicly quoted on the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the trading symbol "NAUT".
The following table sets forth for the periods indicated the high and low reported sales prices per share for the common stock as quoted by the NASDAQ National Market System.
As of May 15, 1998, there were approximately 403 holders of record of the Company's common stock.
The policy of the Company is to retain earnings to provide funds for the operation and expansion of its business and, accordingly, the Company has paid no cash dividends on its Common Stock. Any payment of future cash dividends and the amounts thereof will be dependent upon the Company's earnings, financial requirements, and other factors deemed relevant by the Company's Board of Directors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
All share data has been adjusted to reflect stock splits.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal year ended February 28, 1998 compared to February 28, 1997:
Net sales increased 25.4% to $484.8 million in the fiscal year ended February 28, 1998 from $386.6 million in the prior fiscal year. This increase is primarily a result of increased sales of Nautica products. Wholesale sales increased due to the expansion of Nautica's in-store shop program, including both new and expanded shops as well as increases in existing shops. Nautica retail sales increased as a result of opening additional outlet stores during the current year, the full year effect of stores opened in the prior year and an increase in comparable store sales. The increase in sales is due primarily to increased unit volume rather than price increases
Gross profit for the year was 47.9% compared to 46.8% of net sales in the prior year. The increase resulted primarily from a shift to higher margin wholesale products and to an increase in retail outlet store sales.
Selling, general and administrative expenses as a percentage of net sales increased to 30.7% from 29.9% in the prior year. The increase is due primarily to higher general marketing and retail development costs.
Net royalty income increased $1,935,000 to $5,738,000 from $3,803,000 in the prior year. The increased royalty revenue was generated from both new and existing licensees.
Investment income increased $786,000 to $3,781,000 from $2,995,000 in the prior year. The increase is primarily the result of higher rates of return on investments.
The provision for income taxes of 39.6% was comparable to 39.4% in the prior year.
Net earnings increased 28.1% to $56.4 million from $44.0 million in the prior year as a result of the factors discussed above.
Fiscal year ended February 28, 1997 compared to February 29, 1996:
Net sales increased 27.8% to $386.6 million from $302.5 million in the prior year. This increase is the result of increased sales of Nautica products. Wholesale sales increased due to the expansion of Nautica's in-store shop program, sales to new retail customers and from sales to additional locations of existing customers. Retail sales increased as a result of opening additional outlet stores during the current year, the full year effect of stores opened in the prior year and an increase in comparable store sales. The increase in sales is due primarily to increased unit volume rather than price increases.
Gross profit during the year was 46.8% compared to 45.3% of net sales in the prior year. The increase resulted primarily from a shift to higher margin wholesale products and to growth in retail outlet operations.
Selling, general and administrative expenses as a percentage of net sales increased to 29.9% from 29.4% in the prior year. The increase resulted primarily from the transition into expanded warehouse and distribution facilities and higher general marketing and retail development costs.
Net royalty income increased $1,555,000 to $3,803,000 from $2,248,000 in the prior year. The increase is a result of increased royalty revenue from new and existing licensees.
Investment income increased $474,000 to $2,995,000 from $2,251,000 in the prior year. The increase is primarily the result of higher cash and cash equivalent balances.
The provision for income taxes of 39.4% was comparable to 39.6% in the prior year.
Net earnings increased 37.7% to $44.0 million from $32.0 million in the prior year as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended February 28, 1998 and February 28, 1997, the Company generated cash from operating activities of $55.3 million and $39.5 million, respectively. Such cash was principally from net earnings and increases in accrued expenses and income taxes payable offset by inventory increases in 1998 and 1997 of $4.2 and $7.1 million, respectively, and increases in accounts receivable of $23.0 and $16.3 million, respectively. The increases in inventory and accounts receivable in 1998 and 1997 are primarily attributable to the increased sales volume.
During the year ended February 28, 1998, the Company's principal investing activities related to the continued expansion of the in-store shop program and the purchase of short-term investments. The Company expects to continue to incur capital expenditures to expand the in-store shop program. At February 28, 1998, there were no other material commitments for capital expenditures. During the year ended February 28, 1997, the Company's principal investing activities related to the expansion of the Company's warehouse and distribution facilities and the continued expansion of the in-store shop program.
During the year ended February 28, 1998, the Board of Directors approved a stock repurchase program, authorizing the Company to repurchase up to 1,000,000 shares of its common stock from time to time in open market brokerage transactions. During such year, no repurchases were made under this plan. During the year ended February 28, 1997, the Board of Directors approved a stock repurchase program, authorizing the Company to repurchase up to 1,500,000 shares of its common stock. Repurchases of 800,000 shares at a cost of $17.9 million and 700,000 shares at a cost of $16.8 million were made during the years ended February 28, 1998 and 1997, respectively.
The Company has $100.0 million in lines of credit with two commercial banks available for short-term borrowings and letters of credit. These lines are collateralized by imported inventory and accounts receivable. At February 28, 1998 letters of credit outstanding under the lines were $42.3 million and there were no short-term borrowings outstanding.
Historically, the Company has experienced its highest level of sales in the third quarter and its lowest level in the first quarter. This pattern has resulted primarily from the timing of shipments to retail customers for Spring and Fall seasons. In the future, the timing of seasonal shipments may vary by quarter. The Company anticipates that internally generated funds from operations, existing cash balances and the Company's existing credit lines will be sufficient to satisfy its cash requirements.
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 has not had a material effect on the cost of imports or the Company's results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows, and will be limited to the form and content of its disclosures. These statements are effective for fiscal years beginning after December 15, 1997.
YEAR 2000
The Company recognizes the need to ensure that its systems, applications and hardware will recognize and process transactions for the year 2000 and beyond. The Company expects to implement successfully the systems and programming changes necessary to address year 2000 issues with respect to its internal systems and does not believe that the cost of such actions will have a material adverse effect on its results of operations or financial condition. The Company also has initiated discussions with its significant suppliers, customers and financial institutions to ensure that those parties have appropriate plans to remediate year 2000 issues when their systems interface with the Company's systems or may otherwise impact operations. Although the Company is not aware of any material operational issues or costs associated with preparing its internal systems for the year 2000, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the necessary systems and changes to address the year 2000 issues. The Company and it's significant suppliers, customers, and financial institutions' inability to implement such systems and changes could have an adverse effect on future results of operations.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements included in this Annual Report, including the words "believes," "anticipates," "expects," "will" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the company in this report, as well as the Company's periodic reports on Forms 10-K and 10-Q and other filings with the Securities and Exchange Commission.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements required by Part II, Item 8 are included in Part IV, Item 14.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required is incorporated by reference from the Proxy Statement prepared with respect to the Annual Meeting of Stockholders to be held on July 1, 1998.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated by reference from the Proxy Statement prepared with respect to the Annual Meeting of Stockholders to be held on July 1, 1998.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required is incorporated by reference from the Proxy Statement prepared with respect to the Annual Meeting of Stockholders to be held on July 1, 1998.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is incorporated by reference from the Proxy Statement prepared with respect to the Annual Meeting of Stockholders to be held on July 1, 1998 and by reference to Footnotes F, G, and I of the Consolidated Financial Statements included in this report and referred to at Part IV, Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The following Consolidated Financial Statements of Nautica Enterprises, Inc. and Subsidiaries required by Part II, Item 8, are included in Part IV of this report:
3. Exhibits
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 Certificate of Incorporation is incorporated by reference to the Registration Statement on Form S-3 (Registration No. 33-71926), as amended by a Certificate of Amendment dated June 29, 1995.
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).
10(iii)(c) Registrant's 1994 Incentive Compensation Plan is incorporated herein from the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997.
10(iii)(d) Registrant's Deferred Compensation Plan.
10(iii)(e) 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.
21 Subsidiaries of Registrant
23.1 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
(b) Reports on Form 8-K. None
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders NAUTICA ENTERPRISES, INC.
We have audited the accompanying consolidated balance sheets of Nautica Enterprises, Inc. and Subsidiaries as of February 28, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended February 28, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nautica Enterprises, Inc. and Subsidiaries as of February 28, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended February 28, 1998, in conformity with generally accepted accounting principles.
We have also audited the schedule listed in the accompanying index at Item 14(a)2. for each of the three years in the period ended February 28, 1998. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
New York, New York April 17, 1998
Nautica Enterprises, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share data)
The accompanying notes are an integral part of these statements.
Nautica Enterprises, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (CONTINUED) (amounts in thousands, except share data)
The accompanying notes are an integral part of these statements.
Nautica Enterprises, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (amounts in thousands, except share data)
The accompanying notes are an integral part of these statements.
Nautica Enterprises, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
The accompanying notes are an integral part of this statement.
Nautica Enterprises, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands)
The accompanying notes are an integral part of these statements.
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Nautica Enterprises, Inc. (the "Company") and Subsidiaries are primarily engaged in the design, manufacture and sale of men's apparel. The principal market for the Company's products is the United States. In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and a 51% investment in a limited liability company formed during the year ended February 28, 1997 to market the Company's products in Europe. All material intercompany balances and transactions have been eliminated in consolidation.
2. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. Cash equivalents consist principally of money market funds, demand notes and short-term tax-exempt notes and bonds. The market value of the cash equivalents approximates cost.
3. Short-term Investments
Short-term investments consist primarily of government and agency bonds, tax-exempt municipal bonds and corporate bonds. The Company accounts for the marketable securities using Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and Equity Securities." This standard requires that certain debt and equity securities be adjusted to market value at the end of each accounting period. Unrealized market gains and losses are reported in stockholders' equity. Realized gains and losses on sales of investments are determined on a specific identification basis, and are included in the consolidated statements of earnings.
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE A (CONTINUED)
4. Revenue Recognition
Revenue within wholesale operations is recognized at the time merchandise is shipped to customers. Retail store revenues are recognized at the time of sale.
5. Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out ("LIFO") method for certain wholesale inventories and by the first-in, first-out ("FIFO") method for retail inventories.
Inventories valued using the LIFO method consisting primarily of finished goods comprised 71% and 85% of consolidated inventories before LIFO adjustment at February 28, 1998 and 1997, respectively. Had the Company utilized the FIFO method of accounting for inventory, inventories would have been higher by $2,757 and $2,419 at February 28, 1998 and 1997, respectively.
6. Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Buildings and improvements are depreciated using the straight-line method over their estimated useful lives of 20 to 39 years. Machinery, equipment and fixtures are depreciated using the straight-line method over their estimated useful lives of three to ten years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets.
7. Other Assets
Included in other assets is an excess of cost over net assets acquired of approximately $5,234 and $2,272 at February 28, 1998 and 1997, respectively. These assets are being amortized on a straight-line basis over twenty- and forty-year periods. Accumulated amortization at February 28, 1998 and 1997 was $635 and $494, respectively.
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE A (CONTINUED)
8. Income Taxes
The Company and its wholly-owned subsidiaries file a consolidated Federal income tax return. Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Deferred tax assets and liabilities are measured using enacted tax law.
9. Earnings Per Share
As of February 28, 1998, the Company has adopted the provisions of Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share." 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 (giving retroactive effect to the stock splits as described in Note F). 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. SFAS No. 128 requires restatement of all prior period earnings per share data presented. The Company's financial statements reflect this adoption. Dilutive stock options included in the calculation of diluted weighted average shares were 2,648,000, 3,009,000 and 2,716,000 in 1998, 1997 and 1996, respectively. The effect of stock options which were excluded from the calculation of diluted weighted average shares was not material to the financial statements.
10. Valuation of Long-Lived Assets
The Company continually 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. The Company has determined that no provision is necessary for the impairment of long-lived assets at February 28, 1998.
11. Advertising
All costs associated with advertising products are expensed when the advertising takes place. Costs associated with cooperative advertising programs, under which the Company generally shares the cost of a customer's advertising expenditures, are expensed when the related revenues are recognized. Advertising expenses were $20.2 million in 1998, $15.1 million in 1997 and $12.1 million in 1996.
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE A (CONTINUED)
12. Reclassifications
Certain amounts in prior years have been reclassified to conform with classifications used in 1998.
NOTE B - SHORT-TERM INVESTMENTS
Short-term investments consist of securities available for sale at February 28, 1998 and are summarized as follows:
Net unrealized investment gains of $337 (less deferred tax of $135) were credited to stockholders' equity.
The amortized cost and estimated fair value of investments in debt securities at February 28, 1998, by contractual maturity, were as follows:
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE B (CONTINUED)
Included in investment income are sales of investments, which resulted in gross realized gains of $232 and gross realized losses of $3 in 1998.
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
NOTE D - SHORT-TERM BORROWINGS
As of February 28, 1998 and 1997, the Company had $100,000 in lines of credit, with two commercial banks, available for short-term borrowings and letters of credit collateralized by imported inventory and accounts receivable. At February 28, 1998, letters of credit outstanding under the lines were $42,318 and there were no short-term borrowings outstanding.
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE E - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
NOTE F - STOCKHOLDERS' EQUITY
On January 8, 1998, the Board of Directors adopted a stock purchase plan pursuant to which the officers of the Company have been authorized to purchase up to 1,000,000 shares on the open market. At February 28, 1998, no repurchases were made under this plan. Under a previously adopted plan, the Company repurchased 1,500,000 shares during 1998 and 1997.
On April 29, 1996, the Board of Directors declared a two-for-one stock split of the Company's common stock to be effected in the form of a stock dividend payable on May 28, 1996 to stockholders of record on May 13, 1996. Amounts equal to par value of the shares of common stock to be issued were transferred from additional paid-in capital to the common stock account. All prior year stock options and per share disclosures have been restated to reflect the stock split.
The Certificate of Incorporation, as amended, authorizes the Board of Directors to issue Preferred Stock, from time to time, in one or more series, with such voting powers, designations, preferences, and relative, participating, optional, conversion or other special rights, and such qualifications, limitations and restrictions, as the Board of Directors may, in their sole discretion, determine.
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE G - COMMITMENTS AND CONTINGENCIES
1. Leases
The Company leases real property and equipment, under operating leases expiring at various dates through 2009. Rent expense amounted to approximately $7,440 in 1998, $5,604 in 1997 and $4,654 in 1996. At February 28, 1998, minimum rental commitments under noncancellable leases are as follows:
2. Stock Purchase Agreement and Life Insurance Proceeds
The Company is a party to an agreement with the President and the Executive Vice President of the Company, which provides, upon the death of either of the aforementioned stockholders, and at the request of their respective estates, that the Company will purchase a part of the common shares of the deceased stockholder. The Company has obtained policies of life insurance on the lives of the stockholders for the purpose of utilizing the proceeds from such insurance for the purchase of the shares of the Company's common stock. The agreement provides for the Company to purchase the deceased stockholder's shares of common stock at a defined market value on the date of death. The Company's obligation to purchase the common shares of the deceased stockholder is limited to the life insurance proceeds received by the Company on the death of such stockholder. The agreement also provides, as soon after the death of the stockholder as is practicable and upon the request of the estate of the deceased stockholder, for the filing of a registration statement with the Securities and Exchange Commission for an offering of the shares of common stock, if any, not purchased by the Company.
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE G (CONTINUED)
3. Executive Compensation
In the event of a change in control of the Company as defined in the agreement, certain senior management has the right to receive a lump-sum payment upon termination of employment other than for cause or permanent disability or resignation for good reason within three years. Such payments are to be equal to the excess of (i) the product of 2.90 multiplied by the "base amount" as determined within the meaning of Section 280G of the Internal Revenue Code over (ii) the value on the date of the Change of Control Event of non-cash benefits as defined in the agreement. At February 28, 1998, the maximum amount payable, applicable to three individuals, would be approximately $11,500.
4. Other
The Company is subject to claims and suits in the ordinary course of business. Management believes that the ultimate resolution of all such proceedings will not have a material adverse effect on the Company.
5. Concentrations
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. May Department Stores Company, Federated Department Stores, Inc. and Dillard Department Stores, Inc. accounted for approximately 24%, 21% and 17%, respectively, of sales in 1998, 22%, 19% and 16%, respectively, of sales in 1997, and 18%, 14% and 15%, respectively, of sales in 1996. The Company does not believe that this concentration of sales and credit risks represents a material risk of loss with respect to its financial position as of February 28, 1998.
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE H - NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows, and will be limited to the form and content of its disclosures. These statements are effective for fiscal years beginning after December 15, 1997.
NOTE I - INCOME TAXES
Significant components of the Company's deferred taxes at February 28, 1998 and 1997 are as follows:
The provision for income taxes is comprised of the following:
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE I (CONTINUED)
The following is a reconciliation of the normal expected statutory Federal income tax rate to the effective rate reported in the financial statements:
NOTE J - TRANSACTIONS WITH RELATED PARTIES
Nautica has the exclusive right to use, exploit and license others to so use and exploit the Nautica name and trademarks. The Executive Vice President of the Company receives 50% of the net royalties received by the Company with respect to the use of the Nautica name and trademarks. The Executive Vice President earned royalties of approximately $5,738, $3,803, and $2,248 in 1998, 1997 and 1996, respectively. In addition, the Executive Vice President is entitled to receive up to 1.5% of the net sales of certain new products. At February 28, 1998 and 1997, the amount due to the Executive Vice President included in accrued expenses and other current liabilities was approximately $1,630 and $994, respectively. The Executive Vice President has the right of first refusal to purchase the Company's right and interests in the name "Nautica" in the event the Company abandons, sells or disposes its interest in the name.
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE K - MULTIEMPLOYER PENSION PLAN
The Company contributed approximately $165 in 1998, $145 in 1997 and $85 in 1996 to a multiemployer pension plan for employees covered under a collective bargaining agreement. The plan is not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. The Multiemployer Pension Plan Amendments Act of 1980 (the "Act") significantly increased the pension responsibilities of participating employers. Under the provisions of the Act, if the plan terminates or the Company withdraws, the Company could be subject to a "withdrawal liability." As of February 28, 1998, the Company's share of unfunded vested benefits, if any, was not available from the plan's administrators.
NOTE L - PROFIT-SHARING RETIREMENT AND SAVINGS PLAN
The Company has a contributory retirement savings plan (Section 401(k) of the Internal Revenue Code) for all full-time employees. Under the provisions of the plan, eligible employees are permitted to contribute up to 15% of their salary subject to specified limits. The plan provides for discretionary employer matching contributions not to exceed the lesser of 100% of the employee's contribution or 6% of the employee's compensation. The amount of Company contributions to the plan charged to expense was $178 in 1998, $169, in 1997 and $173 in 1996.
NOTE M - STOCK OPTION PLANS AND OPTION AGREEMENT
On January 4, 1996, the Board of Directors adopted the Nautica Enterprises, Inc. Stock Incentive Plan (the "1996 Plan"), which was approved by the Company's stockholders at the 1996 Annual Meeting of Stockholders. The 1996 Plan authorizes the Compensation Committee to administer the plan and to grant to eligible participants stock options of the Company and its affiliates, stock appreciation rights, restricted stock, deferred stock, bonus stock, cash bonuses and loans. The 1996 Plan provides for the reservation and availability of 4,000,000 shares of common stock of the Company, subject to adjustment for future stock splits, stock dividends, reorganizations and similar events.
In addition, stock options are outstanding under the Nautica Enterprises, Inc. 1989 Employee Incentive Plan and the 1984 Executive Incentive Stock Plan, for which options can no longer be granted.
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE M (CONTINUED)
On July 1, 1987, the Company entered into an Option Agreement (the "Agreement") with the president of Nautica. The Agreement granted the president the option to purchase up to an aggregate of 2,262,000 shares, subject to adjustments, of the Company's common stock at a purchase price of $.87 per share. The options shall expire 60 days after the earlier of (i) July 1, 2007, or (ii) 10 months following the date that the President of Nautica ceases to be employed by the Company. At February 28, 1998, 682,000 options exercisable at $.87 per share remain outstanding.
For financial reporting purposes, the tax benefit resulting from compensation expense allowable for income tax purposes in excess of the expense recorded in the financial statements, amounting to $6,348, $1,661, and $939 during the years ended February 28, 1998, February 28, 1997 and February 29, 1996, respectively, has been credited to additional paid-in capital.
The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). It applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans other than for restricted stock. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed by SFAS No. 123, the Company's net earnings and net earnings per share would be reduced to the pro forma amounts as follows:
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (Amounts in thousands, except share data)
NOTE M (CONTINUED)
These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expenses related to grants made before fiscal 1996. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the years ended February 28, 1998, February 28, 1997 and February 29, 1996, respectively: expected volatility of 50 percent, 47.7 percent and 46.5 percent; risk-free interest rates of 5.8 percent, 5.8 percent and 7.1 percent; and expected lives of seven years.
The table below summarizes the activity in the plans, as adjusted for the stock splits referred to in Note F:
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE M (CONTINUED)
The following table summarizes information concerning currently outstanding and exercisable stock options at February 28, 1998:
NOTE N - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
February 28, 1998, February 28, 1997 and February 29, 1996 (amounts in thousands, except share data)
NOTE N (CONTINUED)
Nautica Enterprises, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (amounts in thousands)
(a) Accounts written off as uncollectible.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. (Registrant)
By: /s/ Harvey Sanders Harvey Sanders Chairman (May 28, 1998)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.