UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 30, 2001
NAUTICA ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE
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(State or other jurisdiction of incorporation)
0-6708 95-2431048
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(Commission File Number) (IRS Employer Identification No.)
40 WEST 57TH STREET, NEW YORK, NEW YORK 10019
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(Address of principal executive offices) (Zip code)
(212) 541-5757
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(Registrant's telephone number, including area code)
N/A
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(Former name or former address, if changed since last report)
ITEM 7.
FINANCIAL STATEMENTS AND EXHIBITS
On May 15, 2001, Nautica Enterprises, Inc. (the "Registrant" or "Company")
filed a Current Report on Form 8-K with respect to the acquisition of
substantially all of the assets of Earl Jean, Inc. ("Earl Jean"). Such Form 8-K
was filed without the financial statements and pro forma financial information
required by Items 210.3-05 (a) and (b) of Regulation S-X. This Current Report on
Form 8-K/A provides such required information.
(a) Financial Statements of the Business Acquired
Attached as Exhibit 7.1, are the audited financial statements of Earl Jean
as of December 31, 2000 and the year then ended, and the unaudited financial
statements of Earl Jean as of March 31, 2001 and 2000 and the three months then
ended.
(b) Pro Forma Financial Information
Attached as Exhibit 7.2, are a pro forma unaudited consolidated condensed
balance sheet of the Company as of March 3, 2001 and pro forma unaudited
consolidated condensed statement of earnings for the year ended March 3, 2001,
giving effect to the Company's acquisition on April 30, 2001 of substantially
all of the assets and assumption of certain liabilities of Earl Jean.
(c) Exhibits
EXHIBIT NO. EXHIBIT
----------- -------
7.1 Financial Statements of the Business Acquired
7.2 Pro Forma Financial Information
SIGNATURE
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.
Date: July 13, 2001 (Registrant)
By: /S/ WAYNE A. MARINO
--------------------------------
Name: Wayne A. Marino
Title: Chief Financial Officer
EXHIBIT INDEX
-------------
EXHIBIT NO. EXHIBIT PAGE NO.
----------- ------- --------
7.1 Financial Statements of the Business Acquired 1
7.2 Pro Forma Financial Information 21
EXHIBIT 7.1
FINANCIAL STATEMENTS OF THE BUSINESS ACQUIRED
TABLE OF CONTENTS
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PAGE
FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 2000
Independent Auditors' Report 2
Balance sheet 3
Statement of income 4
Statement of stockholders' equity 5
Statement of cash flows 6
Notes to financial statements 7-11
UNAUDITED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 2001 AND 2000
Balance sheets 12
Statements of income 13
Statements of stockholders' equity 14
Statements of cash flows 15
Notes to financial statements 16-20
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Earl Jean, Inc.
We have audited the accompanying balance sheet of Earl Jean, Inc. as of December
31, 2000 and the related statements of income and stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Earl Jean, Inc. as of December
31, 2000, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
MOSS ADAMS LLP
Los Angeles, California
April 27, 2001
EARL JEAN, INC.
BALANCE SHEET
DECEMBER 31, 2000
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 565,346
Marketable securities 694,839
Accounts receivable, net of allowance
for doubtful accounts of $358,000 2,447,168
Inventories 3,943,619
Prepaid expenses 38,913
-------------------
Total current assets 7,689,885
PROPERTY AND EQUIPMENT, at cost,
net of accumulated depreciation and amortization 334,272
OTHER ASSETS 70,526
-------------------
Total assets $ 8,094,683
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 973,776
Accrued expenses 612,707
Income taxes payable 87,600
Notes payable to stockholders 936,738
-------------------
Total current liabilities 2,610,821
COMMITMENTS
STOCKHOLDERS' EQUITY 5,483,862
-------------------
Total liabilities and stockholders' equity $ 8,094,683
===================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
EARL JEAN, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------------------------
NET SALES $ 28,925,076
COST OF SALES 12,299,050
-----------------
Gross profit 16,626,026
-----------------
OPERATING EXPENSES
Design 1,005,761
Selling 1,808,751
Shipping and handling 904,750
General and administrative 3,401,166
Officers' bonuses 2,698,570
-----------------
9,818,998
-----------------
Income from operations 6,807,028
-----------------
OTHER INCOME (EXPENSE)
Interest on stockholder notes payable (93,674)
Foreign exchange loss (100,267)
Interest income 10,491
Gains on trading securities, net 33,409
Other income 17,000
Gain on settlement of loss contingency 275,000
-----------------
141,959
-----------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 6,948,987
INCOME TAX PROVISION 97,000
-----------------
NET INCOME $ 6,851,987
=================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
EARL JEAN, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------------------------------------------------------------------------
Common Stock, no par value,
100,000 Shares Authorized
-----------------------------------------
Number issued Retained
and outstanding Amount Earnings Total
-------------------- ------------------- -------------------- --------------------
BALANCE,
December 31, 1999 10,000 $ 10,000 $ 1,121,875 $ 1,131,875
Net income - - 6,851,987 6,851,987
Dividends, $250 per
common share - - (2,500,000) (2,500,000)
---------------- ---------------- ---------------- ----------------
BALANCE,
December 31, 2000 10,000 $ 10,000 $ 5,473,862 $ 5,483,862
================ ================ ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
EARL JEAN, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 27,490,229
Cash paid to suppliers, employees and others (23,554,303)
Interest paid (93,674)
Income taxes paid (9,400)
Other (785,482)
-----------------
Net cash provided by operating activities 3,047,370
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (123,216)
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (2,500,000)
-----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 424,154
CASH AND CASH EQUIVALENTS, beginning of year 141,192
-----------------
CASH AND CASH EQUIVALENTS, end of year $ 565,346
=================
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 6,851,987
Depreciation and amortization 223,155
Increase in allowance for doubtful accounts 352,021
Increase in customer credits 134,369
Gain on settlement of loss contingency (275,000)
Increase (decrease) in cash due to
changes in assets and liabilities
Marketable securities (694,839)
Accounts receivable (1,786,868)
Inventories (2,172,102)
Prepaid expenses 59,849
Other assets (51,276)
Accounts payable 95,809
Accrued expenses 222,665
Income taxes payable 87,600
-----------------
$ 3,047,370
=================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
EARL JEAN, INC.
NOTES TO FINANCIAL STATEMENTS
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NOTE 1 - NATURE OF BUSINESS
Earl Jean, Inc. (the "Company") designs, manufactures and sells women's
casual wear to distributors and department and specialty stores throughout the
World, principally the United States, Japan and Europe. The Company also
operates a retail store in Los Angeles, California.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION - The Company recognizes revenue upon delivery of
goods to customers.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out basis), or market.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization of property
and equipment is provided using the straight-line method over estimated useful
lives of five years. Depreciation and amortization of leasehold improvements is
provided using the straight-line method over the life of the lease. Depreciation
and amortization expense for the year ended December 31, 2000 amounted to
$223,155.
INCOME TAXES - The Company has elected "S" corporation status, which
provides for profits and losses to be reported at the individual stockholder
level for income tax purposes. The Company pays the necessary amount of
dividends in order to satisfy the stockholders' estimated personal income tax
liabilities based upon the Company's taxable income. State and local income
taxes are provided using the statutory tax rates applicable to "S" corporations.
ADVERTISING COSTS - Advertising costs are expensed in the period incurred.
Advertising expense amounted to $186,347 for the year ended December 31, 2000.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
and accounts receivable. The Company currently maintains substantially all of
its day-to-day operating cash balances with major financial institutions in the
United States and the United Kingdom. At times, cash balances in the United
States may be in excess of Federal Deposit Insurance Corporation insurance
limits.
Concentration of credit risk, with respect to uncollateralized accounts
receivable, is mitigated due to the Company's large number of geographically
diverse customers. The Company controls credit risk through performing ongoing
credit evaluations, including credit approvals, credit limits and other
monitoring procedures of its customers. The Company's accounts receivable are
reflected net of an allowance for doubtful accounts to cover potential credit
losses.
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EARL JEAN, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - For purposes of cash flows, the Company
considers all highly liquid investments with maturity of three months or less
when purchased by the Company to be cash equivalents.
FOREIGN CURRENCY TRANSACTIONS - The Company makes sales to certain
customers in the customers' local currency. Revenues are recorded by the Company
in U.S. dollars using the exchange rate in effect at the time of sale. At
December 31, 2000 amounts due from these customers included in accounts
receivable are translated at the exchange rate in effect at the balance sheet
date.
MARKETABLE SECURITIES - The Company's securities investments that are
bought through mutual fund investments and held principally for the purpose of
selling them in the near term are classified as trading securities. Trading
securities are recorded at fair value on the balance sheet in current assets,
with the change in fair value during the period included in earnings. For the
year ended December 31, 2000 approximately $28,000 has been charged to earnings
in respect of net unrealized holding losses on trading securities.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - In May 2000, Emerging Issues
Task Force (EITF) No. 00-10, "Accounting for Shipping and Handling Fees and
Costs" was issued. EITF No. 00-10 governs the accounting treatment and
classification of the Company's shipping revenues and certain of its shipping
expenses. The Company adopted EITF No. 00-10 during the fourth quarter of fiscal
2000. The adoption of this EITF did not materially affect the classification of
revenues from shipments to customers and certain expenses related to shipping
and handling of the Company's product for the year ended December 31, 2000. In
addition, there was no effect on the Company's net income.
NOTE 3 - INVENTORIES
Piece goods and trim $ 1,048,844
Work-in-process 603,156
Finished goods 2,291,619
----------------
$ 3,943,619
================
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EARL JEAN, INC.
NOTES TO FINANCIAL STATEMENTS
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NOTE 4 - PROPERTY AND EQUIPMENT
Furniture and equipment $ 179,286
Automobiles 120,300
Leasehold improvements 341,460
----------------
641,046
Accumulated depreciation
and amortization (306,774)
-----------------
$ 334,272
================
NOTE 5 - NOTES PAYABLE TO STOCKHOLDERS
Unsecured notes payable to the stockholders bear interest at 10% per
annum, are due upon demand and are subordinated to the interests of the bank
(Note 6). Included in accrued expenses at December 31, 2000 is an amount due to
the stockholders of $46,837 in respect to interest due on the notes payable.
NOTE 6 - LINE OF CREDIT
At December 31, 2000, the Company had a $1,500,000 revolving line of
credit with a bank providing for working capital advances through May 31, 2001.
Interest was either at the bank's reference rate plus .75% or LIBOR plus 2.25%
at the option of the Company. The agreement was collateralized by all assets of
the Company and was personally guaranteed by the stockholders. The agreement
called for the maintenance of financial ratio covenants. At December 31, 2000,
the Company believes it was in compliance with the financial ratio covenants. As
of December 31, 2000 the Company had no outstanding balance due to the bank
under the line of credit. On April 24, 2001 the Company terminated its line of
credit with the bank and all personal guarantees and security interests in the
Company's assets were released by the bank.
NOTE 7 - COMMITMENTS
The Company leases its operating facilities, showrooms, and retail store
under non-cancelable operating leases expiring on various dates through December
2005. Rent expense amounted to $162,561 for the year ended December 31, 2000.
Several of the leases contain extension options through January 2006. Subsequent
to December 31, 2000 the Company entered into a lease agreement with a related
party. No related party rent expense was incurred in the year.
--------------------------------------------------------------------------------
EARL JEAN, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Future minimum rentals under the leases are as follows for years ending
December 31:
OTHERS RELATED PARTY TOTAL
--------------- --------------- ---------------
2001 $ 262,986 $ 60,000 $ 322,986
2002 161,778 60,000 221,778
2003 138,088 60,000 198,088
2004 96,170 60,000 156,170
2005 55,227 60,000 115,227
--------------- --------------- ---------------
$ 714,249 $ 300,000 $ 1,014,249
=============== =============== ===============
NOTE 8 - SUBSEQUENT EVENT
On April 23, 2001 the Company entered into an agreement with a third party
purchaser whereby the third party will acquire all of the assets, except cash,
and assume certain of the liabilities of the Company on or around April 30,
2001.
The Company was incorporated under the laws of the State of California on
November 26, 1997 as a C corporation and commenced business on December 15, 1997
as the successor entity to Earl Jean, a California general partnership. On
December 1, 1998 the Company converted from taxable C corporation to non-taxable
S corporation status.
It is anticipated that the aforementioned acquisition of the assets will
result in federal tax liabilities in respect of "built-in gains" on the
appreciation of certain of the Company's assets during the period while the
Company was a C corporation.
In order to determine the amount of any federal tax liability, a valuation
of the Company's assets at December 1, 1998 would need to be performed. This
valuation has not yet been performed. As the amounts of any liabilities are not
estimable at this time, the Company has not made provision in these financial
statements for any federal tax liabilities that may arise as a result of the
asset acquisition in accordance with Statement of Financial Accounting Standards
No. 5 "Accounting for Contingencies."
The federal tax liabilities, if any, are the responsibility of the Company
and are not being assumed by the purchaser.
NOTE 9 - PROFIT SHARING PLAN
The Company maintains a profit sharing plan which covers all employees who
are at least 21 years old and have at least one year of service with the
Company. The Company's contributions to the plan are defined in the plan
agreement as percentages of stockholder and employee salaries.
--------------------------------------------------------------------------------
EARL JEAN, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Contribution expense for the year ended December 31, 2000 was $130,594 and is
included in accrued expenses in these financial statements.
NOTE 10 - MAJOR CUSTOMER AND SEGMENT REPORTING
The Company operates in one principal business segment across domestic and
international markets. Revenues from sales in international markets amounted to
approximately $17,960,000 for the year ended December 31, 2000. Included in
accounts receivable at December 31, 2000 was $796,000 due from these customers.
Sales to a major customer amounted to approximately $11,350,000 or 39% of
net sales for the year ended December 31, 2000. Included in accounts receivable
at December 31, 2000 is $20,750 due from this customer, and terms are 30 days
net.
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
and accounts payable approximate their fair values because of the short maturity
of those instruments.
The fair value of the notes payable to stockholders is not estimable
because of the related party nature and subordinated features of the amounts
due.
NOTE 12 - LITIGATION
At December 31, 1998, the Company had provided an amount of $500,000
for potential future losses in connection with a claim against the Company.
Subsequent to December 31, 1998, the claim was settled at an amount below the
Company's original estimate. The excess revenue of $275,000 was taken to
earnings during the first quarter of 2000.
--------------------------------------------------------------------------------
EARL JEAN, INC.
UNAUDITED BALANCE SHEETS
MARCH 31, 2001 2000
--------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,191,894 $ 425,478
Marketable securities 1,911,820 -
Accounts receivable, net of allowances of $358,000 4,372,985 3,161,933
and $5,000, respectively
Inventories 4,524,315 2,333,444
Prepaid expenses 8,610 7,900
----------------- -----------------
Total current assets 12,009,624 5,928,755
PROPERTY AND EQUIPMENT, at cost, 306,641 405,293
net of accumulated depreciation and amortization
OTHER ASSETS 128,309 98,381
----------------- -----------------
Total assets $ 12,444,574 $ 6,432,429
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,703,259 $ 1,541,800
Accrued expenses 488,976 397,467
Income taxes payable 65,600 32,000
Notes payable to stockholders 936,738 936,738
----------------- -----------------
Total current liabilities 3,194,573 2,908,005
COMMITMENTS
STOCKHOLDERS' EQUITY 9,250,001 3,524,424
----------------- -----------------
Total liabilities and stockholders' equity $ 12,444,574 $ 6,432,429
================= =================
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EARL JEAN, INC.
UNAUDITED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2001 2000
--------------------------------------------------------------------------------------------------------------------
NET SALES $ 9,521,579 $ 6,744,663
COST OF SALES 3,494,312 3,228,128
---------------- ----------------
Gross profit 6,027,267 3,516,535
---------------- ----------------
OPERATING EXPENSES
Design 374,238 211,215
Selling 629,880 432,696
Shipping and handling 282,066 156,002
General and administrative 807,329 539,073
---------------- ----------------
2,093,513 1,338,986
---------------- ----------------
Income from operations 3,933,754 2,177,549
---------------- ----------------
OTHER (EXPENSE) INCOME
Interest on stockholder notes payable (23,418) (23,418)
Foreign exchange loss (25,567) (5,208)
Interest income 15,605 626
Losses on trading securities, net (93,416) -
Other income 17,181 -
Gain on settlement of loss contingency - 275,000
---------------- ----------------
(109,615) 247,000
----------------- ----------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 3,824,139 2,424,549
INCOME TAX PROVISION 58,000 32,000
---------------- ----------------
NET INCOME $ 3,766,139 $ 2,392,549
================ ================
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EARL JEAN, INC.
UNAUDITED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
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COMMON SHARES
-------------------------------------------
NO PAR VALUE, 100,000
SHARES AUTHORIZED
-------------------------------------------
NUMBER ISSUED RETAINED
AND OUTSTANDING AMOUNT EARNINGS TOTAL
--------------------- -------------------- -------------------- -------------------
THREE MONTHS THEN ENDED
MARCH 31, 2001:
At December 31, 2000 10,000 $ 10,000 $ 5,473,862 $ 5,483,862
Net income - - 3,766,139 3,766,139
---------------- ---------------- ---------------- ----------------
AT MARCH 31, 2001 10,000 $ 10,000 $ 9,240,001 $ 9,250,001
================ ================ ================ ================
THREE MONTHS THEN ENDED
MARCH 31, 2000:
At December 31, 1999 10,000 $ 10,000 $ 1,121,875 $ 1,131,875
Net income - - 2,392,549 2,392,549
---------------- ---------------- ---------------- ----------------
AT MARCH 31, 2000 10,000 $ 10,000 $ 3,514,424 $ 3,524,424
================ ================ ================ ================
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EARL JEAN, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 2000
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 7,595,763 $ 4,729,422
Cash paid to suppliers, employees and others (5,472,845) (4,377,600)
Interest paid, net (7,813) (22,792)
Income taxes paid (80,000) -
Other (1,376,674) (20,931)
---------------- ----------------
Net cash provided by operating activities 658,431 308,099
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (31,883) (23,813)
---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 626,548 284,286
CASH AND CASH EQUIVALENTS, beginning of period 565,346 141,192
---------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 1,191,894 $ 425,478
================ ================
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 3,766,139 $ 2,392,549
Depreciation and amortization 59,621 52,407
Increase in allowance for doubtful accounts - (945)
Gain on settlement of loss contingency - (275,000)
Increase (decrease) in cash due to
changes in assets and liabilities
Marketable securities (1,216,981) -
Accounts receivable (1,925,817) (2,014,298)
Inventories (580,696) (561,927)
Prepaid expenses 30,303 27,776
Other assets (57,890) (15,721)
Accounts payable 729,483 663,833
Accrued expenses (123,731) 7,425
Income taxes payable (22,000) 32,000
---------------- ----------------
$ 658,431 $ 308,099
================ ================
-------------------------------------------------------------------------------------------------------------------------
EARL JEAN, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - BASIS OF REPORTING
The accompanying financial statements are unaudited and do not include
certain information and note disclosures required by generally accepted
accounting principles for complete financial statements. However, in the opinion
of the Company, all adjustments considered necessary for a fair presentation
have been included.
The financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's financial statements for
the year ended December 31, 2000. The results of operations for the three month
periods ended March 31, 2001 and 2000 are not necessarily indicative of the
results that may be expected for the full fiscal year.
NOTE 2 - NATURE OF BUSINESS
Earl Jean, Inc. (the Company) designs, manufactures and sells women's
casual wear to distributors and department and specialty stores throughout the
World, principally the United States, Japan and Europe. The Company also
operates a retail store in Los Angeles, California.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION - The Company recognizes revenue upon delivery of
goods to customers.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out basis), or market.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization of property
and equipment is provided using the straight-line method over estimated useful
lives of five years. Depreciation and amortization of leasehold improvements is
provided using the straight-line method over the life of the lease. Depreciation
and amortization expense for the three month periods ended March 31, 2001 and
2000 amounted to $59,621 and $ 52,407, respectively.
INCOME TAXES - The Company has elected "S" corporation status, which
provides for profits and losses to be reported at the individual stockholder
level for income tax purposes. The Company pays the necessary amount of
dividends, in order to satisfy the stockholders' estimated personal income tax
liabilities based upon the Company's taxable income. State and local income
taxes are provided using the statutory tax rates applicable to "S" corporations.
ADVERTISING COSTS - Advertising costs are expensed in the period incurred.
Advertising expense amounted to $88,554 and $67,918 for the three month periods
ended March 31, 2001 and 2000, respectively.
--------------------------------------------------------------------------------
EARL JEAN, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
and accounts receivable. The Company currently maintains substantially all of
its day-to-day operating cash balances with major financial institutions in the
United States and the United Kingdom. At times, cash balances in the United
States may be in excess of Federal Deposit Insurance Corporation insurance
limits.
Concentration of credit risk, with respect to uncollateralized accounts
receivable, is mitigated due to the Company's large number of geographically
diverse customers. The Company controls credit risk through performing ongoing
credit evaluations, including credit approvals, credit limits and other
monitoring procedures of its customers. The Company's accounts receivable are
reflected net of an allowance for doubtful accounts to cover potential credit
losses.
CASH AND CASH EQUIVALENTS - For purposes of cash flows, the Company
considers all highly liquid investments with a maturity of three months or less
when purchased by the Company to be cash equivalents.
FOREIGN CURRENCY TRANSACTIONS - The Company makes sales to certain
customers in the customers' local currency. Revenues are recorded by the Company
in U.S. dollars using the exchange rate in effect at the time of sale. At March
31, 2001 and 2000, amounts due from these customers included in accounts
receivable are translated at the exchange rate in effect at the corresponding
balance sheet date.
MARKETABLE SECURITIES - The Company's securities investments that are
bought through mutual fund investments and held principally for the purpose of
selling them in the near term are classified as trading securities. Trading
securities are recorded at fair value on the balance sheets in current assets,
with the change in fair value during the periods included in earnings. For the
three months ended March 31, 2001, $93,416 has been charged to earnings in
respect of net unrealized holding losses on trading securities. The Company had
no transactions in securities for the three months ended March 31, 2000.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - In May 2000, Emerging Issues
Task Force (EITF) No. 00-10, "Accounting for Shipping and Handling Fees and
Costs" was issued. EITF No. 00-10 governs the accounting treatment and
classification of the Company's shipping revenues and certain of its shipping
expenses. The Company adopted EITF No. 00-10 during the fourth quarter of fiscal
2000. The adoption of this EITF did not materially affect the classification of
revenues from shipments to customers and certain expenses related to shipping
and handling of the Company's product for the periods presented. In addition,
there was no effect on the Company's net income.
--------------------------------------------------------------------------------
EARL JEAN, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - INVENTORIES
MARCH 31, 2001 MARCH 31, 2000
-------------- --------------
Piece goods and trim $ 1,397,108 $ 804,023
Work-in-process 592,265 528,054
Finished goods 2,534,942 1,001,367
------------- -------------
$ 4,524,315 $ 2,333,444
============= =============
NOTE 5 - PROPERTY AND EQUIPMENT
MARCH 31, 2001 MARCH 31, 2000
-------------- --------------
Furniture and equipment $ 211,169 $ 92,883
Automobiles 120,300 107,300
Leasehold improvements 341,460 341,460
------------- -------------
672,929 541,643
Accumulated depreciation
and amortization (366,288) (136,350)
------------- -------------
$ 306,641 $ 405,293
============= =============
NOTE 6 - NOTES PAYABLE TO STOCKHOLDERS
Unsecured notes payable to the stockholders bear interest at 10% per
annum, are due upon demand and are subordinated to the interests of the bank
(Note 7). Included in accrued expenses at March 31, 2001 and 2000 is an amount
due to the stockholders of $23,418 in respect to interest due on the notes
payable.
NOTE 7 - LINE OF CREDIT
At March 31, 2001, the Company had a $1,500,000 revolving line of credit
with a bank providing for working capital advances through May 31, 2001.
Interest was either at the bank's reference rate plus .75% or LIBOR plus 2.25%
at the option of the Company. The agreement was collateralized by all assets of
the Company and was personally guaranteed by the stockholders. The agreement
called for the maintenance of financial ratio covenants. At March 31, 2001, the
Company believes it was in compliance with the financial ratio covenants. As of
March 31, 2001 and 2000, the Company had no outstanding balance due to the bank
under the line of credit. On April 24, 2001 the Company terminated its line of
credit with the bank and all personal guarantees and security interests in the
Company's assets were released by the bank.
--------------------------------------------------------------------------------
EARL JEAN, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS
The Company leases its operating facilities, showrooms, and retail store
under non-cancelable operating leases expiring on various dates through December
2005. Rent expense amounted to $79,715 and $24,182 respectively for the three
month periods ended March 31, 2001 and 2000. Several of the leases contain
extension options through January 2006. Related party rent expense for the three
months ended March 31, 2001 amounted to $15,000.
Future minimum rentals under the leases are as follows for years ending
December 31:
OTHERS RELATED PARTY TOTAL
--------------- --------------- ---------------
2001 (Nine months) $ 189,407 $ 45,000 $ 234,407
2002 161,778 60,000 221,778
2003 138,088 60,000 198,088
2004 96,170 60,000 156,170
2005 55,227 60,000 115,227
--------------- --------------- ---------------
$ 640,670 $ 285,000 $ 925,670
=============== =============== ===============
NOTE 9 - SUBSEQUENT EVENT
On April 23, 2001 the Company entered into an agreement with a third party
purchaser whereby the third party will acquire all of the assets, except cash,
and assume certain of the liabilities of the Company on or around April 30,
2001.
The Company was incorporated under the laws of the State of California on
November 26, 1997 as a C corporation and commenced business on December 15, 1997
as the successor entity to Earl Jean, a California general partnership. On
December 1, 1998 the Company converted from taxable C corporation to non-taxable
S corporation status.
It is anticipated that the aforementioned acquisition of the assets will
result in federal tax liabilities in respect of "built-in gains" on the
appreciation of certain of the Company's assets during the period while the
Company was a C corporation.
In order to determine the amount of any federal tax liability, a valuation
of the Company's assets at December 1, 1998 would need to be performed. This
valuation has not yet been performed. As the amounts of any liabilities are not
estimable at this time, the Company has not made provision in these financial
statements for any federal tax liabilities that may arise as a result of the
asset acquisition in accordance with Statement of Financial Accounting Standards
No. 5 "Accounting for Contingencies."
The federal tax liabilities, if any, are the responsibility of the Company
and are not being assumed by the purchaser.
--------------------------------------------------------------------------------
EARL JEAN, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - PROFIT SHARING PLAN
The Company maintains a profit sharing plan which covers all employees who
are at least 21 years old and have at least one year of service with the
Company. The Company's contributions to the plan are defined in the plan
agreement as percentages of stockholder and employee salaries. The Company made
no contributions to the profit sharing plan for the three month periods ended
March 31, 2001 and 2000. Included in accruals at March 31, 2001 and 2000 are
amounts of $130,594 and $82,486, respectively for contributions to be paid to
the plan.
NOTE 11 - MAJOR CUSTOMER AND SEGMENT REPORTING
The Company operates in one principal business segment across domestic and
international markets. Revenues from sales in international markets amounted to
approximately $5,672,000 and $4,603,000 respectively for the periods ended March
31, 2001 and 2000. Included in accounts receivable at March 31, 2001 and 2000 is
$2,345,831 and $1,894,073, respectively due from these customers.
Sales to a major customer amounted to approximately $2,367,000 or 25% and
$3,203,000 or 47% of net sales for the three month periods ended March 31, 2001
and 2000, respectively. Included in accounts receivable at March 31, 2001 and
2000 is $486,507 and $1,344,992, respectively due from this customer, and terms
are 30 days net.
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
and accounts payable approximate their fair values because of the short maturity
of those instruments.
The fair value of the notes payable to stockholders is not estimable
because of the related party nature and subordinated features of the amounts
due.
NOTE 13 - LITIGATION
At December 31, 1998, the Company had provided an amount of $500,000 for
potential future losses in connection with a claim against the Company.
Subsequent to December 31, 1998, the claim was settled at an amount below the
Company's original estimate. The excess revenue of $275,000 was taken to
earnings during the first quarter of 2000.
--------------------------------------------------------------------------------
EXHIBIT 7.2
PRO FORMA FINANCIAL INFORMATION
NAUTICA ENTERPRISES, INC.
PRO FORMA UNAUDITED CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
The following pro forma unaudited consolidated condensed balance sheet has been
prepared by taking the March 3, 2001 balance sheet of Nautica Enterprises, Inc.
(the "Company") and the December 31, 2000 balance sheet of Earl Jean, Inc.
("Earl Jean") and giving effect to the acquisition of substantially all of the
assets and assumption of certain liabilities of Earl Jean by the Company as if
it had occurred on March 3, 2001. The pro forma consolidated condensed balance
sheet has been prepared for information purposes only and does not purport to be
indicative of the financial condition that necessarily would have resulted had
this transaction taken place on March 3, 2001.
The following pro forma unaudited consolidated condensed statement of earnings
for the year ended March 3, 2001 gives effect to the Company's acquisition of
Earl Jean as if it had occurred at the beginning of the period. The revenues and
results of operations included in the following pro forma unaudited consolidated
condensed statement of operations is not considered necessarily indicative of
the results of operations for the period specified had the transaction actually
been completed at the beginning of the period.
These financial statements should be read in conjunction with the notes to the
pro forma unaudited consolidated condensed financial statements, which follow,
the financial statements of the Company and related notes thereto (as previously
filed), and the financial statements of Earl Jean and related notes thereto,
included herewith.
--------------------------------------------------------------------------------
NAUTICA ENTERPRISES, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
MARCH 3, 2001
(AMOUNTS IN THOUSANDS)
NAUTICA EARL JEAN PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS
MARCH 3, DECEMBER 31, INCREASE/
2001 2000 (DECREASE) PRO FORMA
----------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 36,674 $ 565 $ (46,750) (a) $ 19,924
30,000 (a)
(565) (b)
Short-term investments 5,546 695 (695) (b) 5,546
Accounts receivable - net 105,269 2,447 107,716
Inventories 98,021 3,944 101,965
Prepaid expenses and other current assets 7,477 39 7,516
Deferred tax benefit 10,859 10,859
---------------------------------------------- -----------
Total current assets 263,846 7,690 (18,010) 253,526
PROPERTY, PLANT AND EQUIPMENT - AT COST, LESS
ACCUMULATED DEPRECIATION AND AMORTIZATION 101,361 334 (12) (b) 101,683
GOODWILL 59,980 (c) 59,980
OTHER ASSETS 13,099 71 13,170
---------------------------------------------- -----------
$ 378,306 $ 8,095 $ 41,958 $ 428,359
============================================== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 43,881 $ 974 $ 44,855
Accrued expenses and other current
liabilities 37,613 613 38,226
Income taxes payable 11,548 87 $ (87) (b) 11,548
Notes payable 937 30,000 (a) 30,000
(937) (b)
---------------------------------------------- -----------
Total current liabilities 93,042 2,611 28,976 124,629
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock -
Common stock 4,333 10 112 (a) 4,445
(10) (d)
Additional paid-in capital 71,766 18,354 (a) 90,120
Retained earnings 368,148 5,474 (5,474) (d) 368,148
Common stock in treasury (158,983) (158,983)
---------------------------------------------- -----------
285,264 5,484 12,982 303,730
---------------------------------------------- -----------
$ 378,306 $ 8,095 $ 41,958 $ 428,359
============================================== ===========
--------------------------------------------------------------------------------------------------------------------
NAUTICA ENTERPRISES, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
FOR THE YEAR ENDED MARCH 3, 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NAUTICA EARL JEAN PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS
YEAR ENDED YEAR ENDED INCREASE/ PRO
MARCH 3, 2001 DECEMBER 31, 2000 (DECREASE) FORMA
----------------------------------------------------------------------
Net sales $ 627,731 $ 28,925 $ 656,656
Cost of goods sold 367,171 12,299 379,470
---------------------------------------------- -----------
Gross profit 260,560 16,626 - 277,186
Selling, general and administrative expenses 196,927 9,819 $ (2,699) (a) 207,346
300 (b)
2,999 (c)
Net royalty income (8,779) (8,779)
---------------------------------------------- -----------
Operating profit 72,412 6,807 (600) 78,619
Other income 192 192
Investment income, net 2,919 (50) (921) (d) (135)
(2,133) (e)
94 (f)
(44) (g)
---------------------------------------------- -----------
Earnings before provision for income taxes 75,331 6,949 (3,604) 78,676
Provision for income taxes 29,228 97 (1,398) (h) 30,526
2,599 (i)
---------------------------------------------- -----------
NET EARNINGS $ 46,103 $ 6,852 $ (4,805) $ 48,150
============================================== ===========
Net earnings per share of common stock
Basic $ 1.45 $ 1.46
Diluted $ 1.39 $ 1.40
Weighted-average number of common shares
outstanding
Basic 31,862,000 1,122,271 (a) 32,984,271
----------- --------- -----------
Diluted 33,241,000 1,122,271 (a) 34,363,271
----------- --------- -----------
--------------------------------------------------------------------------------------------------------------------
NAUTICA ENTERPRISES, INC.
NOTES TO THE PRO FORMA UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying pro forma unaudited consolidated condensed balance sheet and
statement of earnings present the financial position and results of operations
of Nautica Enterprises, Inc. (the "Company') giving effect to the acquisition on
April 30, 2001 of substantially all of the assets and assumption of certain
liabilities of Earl Jean, Inc. ("Earl Jean").
On April 30, 2001, the Company, through a wholly-owned subsidiary, acquired
substantially all of the assets and assumed certain liabilities of Earl Jean for
a combination of cash consideration of $45,000,000, 1,122,271 newly-issued
shares of the Company's restricted common stock, a working capital adjustment of
approximately $1,800,000 and up to $21,000,000 in contingent payment if certain
performance targets are met between fiscal 2003 and 2012. The source of cash
consideration was a combination of general corporate funds and short-term
borrowings of the Company's existing line of credit made in the ordinary course
of business by certain banks.
The pro forma unaudited consolidated condensed financial statements reflect the
$45,000,000 in cash paid at the closing and the issuance of 1,122,271 shares of
Company's common stock (valued at $18,465,847). The $21,000,000 contingent
purchase price and the $1,800,000 working capital adjustment have not been given
effect in the pro forma unaudited consolidated condensed financial statements
and will be recorded when the contingency is resolved.
Concurrently, with the acquisition, the Company borrowed $30,000,000 under its
existing short-term borrowing facilities to fund a portion of the cash paid for
the acquisition.
Had the contingent amounts been recorded, the cash payment would have increased
by $22,800,000, with a corresponding increase in goodwill of $21,000,000 and a
working capital increase, other than cash, of approximately $1,800,000. In
addition, pro forma earnings before income taxes and pro forma net earnings
after pro forma income taxes would have decreased by $2,350,000 and $1,438,000,
respectively, for the year ended March 3, 2001. In addition, pro forma basic and
diluted earnings per share would have decreased by $.04 for the year ended March
3, 2001.
The adjustments below were prepared based on estimates or approximations. It is
possible that the actual amounts recorded may have an impact on the results of
operations and the balance sheet different from that reflected in the
accompanying pro forma unaudited consolidated condensed financials statements.
It is therefore possible that the entries below will not be the amounts actually
recorded at the closing date.
--------------------------------------------------------------------------------
NAUTICA ENTERPRISES, INC.
NOTES TO PRO FORMA UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET AT MARCH 3, 2001:
(a) To record the acquisition of substantially all the assets and
certain liabilities of Earl Jean for a fixed purchase price of
$63,465,847, plus acquisition expenses of $1,750,000
Purchase price, paid in cash $ 45,000,000
Purchase price paid in Company common stock 18,465,847
Acquisition costs (cash) 1,750,000
-------------
Total purchase price $ 65,215,847
=============
Financed by:
Cash $ 16,750,000
Short-term borrowings 30,000,000
Common stock(1,122,271 shares) 18,465,847
-------------
Total purchase price $ 65,215,847
=============
(b) To eliminate assets and liabilities not included in the
acquisition:
Cash $ 565,346
Short-term investments 694,839
Fixed Assets 12,000
Income taxes payable 87,600
Shareholder note payable 936,738
(c) To allocate excess purchase price to goodwill
(d) To eliminate equity and retained earnings of Earl Jean
STATEMENT OF EARNINGS FOR THE YEAR ENDED MARCH 3, 2001
(a) To eliminate bonuses of the former officers of Earl Jean
(b) To record additional salaries new employment arrangements
(c) To amortize goodwill based upon a twenty-year life
(d) To eliminate interest income received on $16,749,440 at an annual rate of
5.5%
(e) To record interest expense on note payable of $30,000,000 at an average
annual rate of 7.11% to finance cash payment to Earl Jean
(f) To eliminate interest expense on shareholder note of $936,738
(g) To eliminate interest income of $10,491 and gains on trading securities of
$33,409 on Earl Jean cash and marketable securities
(h) To record tax effect of pro forma adjustments at 38.8%
(i) To record additional tax provision on Earl Jean at 38.8% as if it were a C
Corporation which it had not been subject to because it was an S
Corporation
--------------------------------------------------------------------------------