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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 1O-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 1, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-0708
NAUTICA ENTERPRISES, INC.
(Exact name of Registrant as Specified in Its Charter)
DELAWARE 95-2431048
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
40 WEST 57TH STREET, NEW YORK, NEW YORK 10019
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 541-5757
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
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Common Stock, Preferred Stock
par value $.10 per share Purchase Rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filed
(as defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
On May 28, 2003, the aggregate market value of the voting stock held by
non-affiliates of the registrant, using the average bid and asked prices of the
registrant's stock on such date, was $303,191,226. As of May 28, 2003 there were
issued and outstanding 33,590,100 shares of the Company's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Identification of Document Part into which Incorporated
-------------------------- ----------------------------
Proxy Statement for Annual Meeting
of Stockholders to be held July 8, 2003. Part III
PART I
ITEM 1. BUSINESS.
Nautica Enterprises, Inc., a Delaware corporation (together
with its subsidiaries, the "Company"), through its subsidiaries, designs,
sources, markets and distributes apparel under the following brands: Nautica;
Nautica Competition; Nautica Jeans Company; Earl Jean; John Varvatos; E.
Magrath; and Byron Nelson. These products feature innovative designs, classic
and contemporary styling, quality fabrics and functionality. The Company
operates in three primary segments: wholesale, retail and licensing.
Through its wholesale business, the Company sells Nautica
branded apparel primarily to leading department and specialty stores in over
2,300 retail locations throughout the United States. Earl Jean and John Varvatos
products are sold primarily to high-end department stores, upscale specialty
retailers and fashion forward boutiques in over 1,100 and 85 retail locations,
respectively, primarily throughout the United States and certain European
markets.
The Company's in-store shop programs for the Nautica, Nautica
Competition, Nautica Jeans Company and Nautica Children's Company collections
are an integral part of the Company's marketing strategy for its wholesale
business. Through this program, the Company and a department store customer
create a specific area within the store dedicated to the exclusive merchandising
and sale of the Nautica, Nautica Competition, Nautica Jeans Company or Nautica
Children's Company collections, as the case may be. Each of these shops are
outfitted with signature fixtures consistent with the image of each of the
brands and present the collections in an integrated, visually attractive
environment. At the end of the fiscal year 2003, the number of Nautica in-store
shops was approximately 1,400. Since its introduction in 1999, the number of
Nautica Jeans shops has grown to approximately 1,300. The continued development
of these shop programs is dependent on general apparel industry conditions,
continued participation of retail customers and continued demand by consumers
for the Nautica collections. Nautica Children's Company shops were first
introduced in 2002.
In addition to its wholesale business, the Company operates
100 Nautica, nine Nautica Jeans, one Earl Jean and one John Varvatos outlet
stores. The stores provide a sales channel for the Company's products for value
oriented consumers and allows for the organized distribution of excess and
out-of-season merchandise. The Company also operates six full-price stores, as
follows: one Nautica store, three Earl Jean stores and two John Varvatos stores.
The Company strategically extends the Nautica brands and
broadens the international distribution of the Nautica apparel collection
through license arrangements. The Nautica name and trademarks are currently
licensed for a range of products consistent with Nautica's design concepts and
image. They are also licensed globally to companies for distribution of the
Nautica collection. In addition, John Varvatos Company licenses its name and
trademarks for a number of products.
BRANDS AND PRODUCTS
Nautica
Through the Nautica brand the Company offers a collection of
men's sportswear, outerwear and activewear. The Nautica collection features
innovative designs, classic styling and quality fabrics. The Nautica name and
trademarks are displayed on Nautica products to promote brand awareness and
maintain consumer loyalty. While Nautica products are targeted to the 25-55 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 generally priced at a range of price points within the better
men's collection category.
The Nautica collection is designed, like all of the Company's
brands, by an in-house design and merchandising staff. Products in the Nautica
collection include the following: sportswear and business casual -- sweaters,
woven shirts and pants; outerwear -- parkas, anoraks, bomber jackets and
inclement weather gear in various fabrications; activewear -- fleece tops and
bottoms, tee shirts and swimwear; and, caps. The Nautica collection is sold
through the Company's wholly-owned subsidiary, Nautica International, Inc.
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Nautica maintains an inventory of basic, year-round items in
order to allow for the continuous replenishment of such stock to its retail
customers. Such items include pants, cotton knit polo shirts, cotton sweaters,
tee shirts, lightweight jackets and swimwear. Retail customers are able to
reorder these products throughout the year via electronic data interchange.
The Nautica collections are presented during Nautica's four
merchandising/selling seasons, with approximately three deliveries in each
season. Core and key items are delivered throughout each delivery season along
with fashion merchandise based on seasonal themes developed by Nautica's design
and merchandising teams. These themed groups are distinguished by their
distinctive use of color, novelty prints, innovative fabrics and unique design
elements. The four merchandising/selling seasons consist of Spring, Summer, Fall
and Holiday.
Nautica Competition
The Nautica Competition brand features active-inspired apparel
products using performance and activewear fabrics. The Company believes that
while these products are aimed at a younger age group (18-40) and provide a
"bridge" between Nautica Jeans Company and Nautica, they also appeal to the
Nautica core customer.
The Nautica Competition collection includes activewear
inspired knit tops, knit bottoms, sweaters, tee shirts and outwear, including
parkas, anoraks, bomber jackets and inclement weather gear. The collection is
sold through the Company's wholly-owned subsidiary, Nautica International, Inc.
The Nautica Competition collections are presented during four
merchandising/selling seasons, with approximately two deliveries in each season.
All deliveries are based on seasonal athletic themes developed by the Company's
in-house design and merchandising staffs and are distinguished by the use of
graphics, color and innovative fabrics and styling details.
Nautica Jeans Company
Through the Nautica Jeans Company brand, the Company offers a
denim-based collection of men's and women's apparel. The products of the Nautica
Jeans Company are targeted to the 16-25 year old age group and feature various
themes.
The Nautica Mens Jeans collection includes jeans, woven
shirts, knits, bottoms and outerwear. Knits include sweaters, tee shirts and
activewear; bottoms include denim jeans, casual pants, denim shorts and casual
shorts; and, outerwear includes jean jackets and lightweight, transitional
weight and down outerwear. The Nautica Mens Jeans collection is offered through
approximately 1,900 doors.
The Nautica Womens Jeans collection includes a full range of
products including jeans, woven shirts, knits, bottoms and outerwear. Knits
include sweaters, tee shirts and activewear; bottoms include denim jeans, casual
pants, denim skirts, casual skirts, denim dresses, casual dresses, denim shorts
and casual shorts; and, outerwear includes jean jackets and lightweight,
transitional weight and down outerwear. The Nautica Womens Jeans collection is
offered through approximately 300 doors.
The Nautica Jeans Company collections are presented in twelve
fashion deliveries with four key item deliveries. Each delivery includes
products that are merchandised together, using colorations, labels, patches and
intriguing fabrics. The Nautica Jeans Company products that are offered on a
year round basis through the Company's automatic replenishment program include
the following: for Nautica Mens Jeans, five basic jeans offered in five
different fits and three to five different washes/rinses, tee shirts, twill
cargo pants and, seasonally, three denim shorts and a twill cargo short; and,
for Nautica Womens Jeans, four basic jeans offered in four different fits and
three different washes/rinses, tee shirts, twill pants and, seasonally, two
denim shorts in three washes/rinses. The collections are sold through the
Company's wholly-owned subsidiary, Nautica Jeans Company.
Nautica Children's Company
Through Nautica Children's Company, a wholly-owned subsidiary
of the Company which commenced operations in April 2001, the Company offers an
active-inspired, denim-based collection of boys apparel for infants and the 4-20
year old age group. The collection includes jeans, woven shirts, knits, bottoms
and outerwear. Knits include sweaters, tee shirts
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and activewear; bottoms include denim jeans, casual pants, denim shorts and
casual shorts; and, outerwear includes jean jackets, lightweight, transitional
weight and down outerwear.
The Children's collection is presented in twelve fashion
deliveries with four key item deliveries. Each delivery includes products that
are merchandised together, using coloration, labels, patches and intriguing
fabrics. The Nautica Children's Company products that are offered on a
year-round basis through the Company's automatic replenishment program include
three different fits, three different washes/rinses, tee shirts, twill cargo
pants and, seasonally, two denim shorts in three washes/rinses.
Nautica Sleepwear
The Nautica robes and sleepwear collections and Nautica
underwear are sold to men and women, and the Nautica Blue collection to juniors,
through the Company's wholly-owned subsidiary, Nautica Furnishings, Inc. The
Nautica robes and sleepwear collection for men includes robes, boxer shorts,
jams, henley camp shirts, nightshirts and pull-on pants. The Nautica robes and
sleepwear collection for women includes pajamas, knit tops and pants, drawstring
shorts, chemise, gowns, nightshirts and robes. Nautica underwear includes woven
boxer shorts, knit boxers, knit briefs, tee shirts and athletic shorts. Product
sold to juniors is marketed under the Nautica Blue brand.
The Nautica robes and sleepwear collections are presented in
four merchandising seasons for men and five merchandising seasons for women and
juniors, with monthly deliveries. The deliveries are distinguished by
fabrications, use of color, pattern and prints, and styling. In addition,
certain of the products are offered through the Company's automatic
replenishment program. Nautica underwear is presented in two merchandising
seasons.
Earl Jean
The Earl Jean business was acquired by the Company in April
2001. Earl Jean, Inc., a wholly owned subsidiary of the Company, designs,
sources, markets and distributes high-end contemporary denim products, related
apparel and accessories for women and men. The brand's core customers are urban
professionals and affluent teens ages 18-35, with price points at the high-end
of the retail market.
The Earl Jean collection includes women's and men's jeans in a
variety of washes and fabrications, woven shirts, skirts, tee shirts, leather
outerwear, handbags, footwear and belts. It is presented in four merchandising
seasons with two to three deliveries in each season. Earl Jean primarily
distributes products through leading upscale specialty and department stores
across the United States, selected countries in Europe, Japan and Canada.
John Varvatos Company
In 2000, the Company launched the John Varvatos men's
contemporary designer collection. The collection is sold to luxury department
stores and better specialty stores, domestically and internationally. The
collection consists of sportswear, tailored clothing, furnishings, accessories
and footwear at men's designer price points. Sportswear includes sweaters,
knits, wovens, pants, outerwear and leather; tailored clothing includes suits,
jackets, dress pants and top coats; furnishings includes dress shirts and
neckwear; and, accessories include scarves, hats, belts, footwear and bags. The
collection is presented in three merchandising seasons with two to three
deliveries in each season. The John Varvatos collection is sold through the
Company's wholly-owned subsidiary, John Varvatos Company.
E. Magrath and Byron Nelson
Through the E. Magrath Apparel Company, a wholly-owned
subsidiary of the Company, the Company offers the E. Magrath and Byron Nelson
golf sportswear collections. Each collection includes knit shirts, woven shirts,
trousers, shorts, lightweight outerwear and windshirts, and are targeted to
consumers for on and off golf course wear. The Byron Nelson label, which is
licensed by the Company, is displayed on the products offered in the Byron
Nelson collections. The Byron Nelson products target an older and more affluent
consumer. These collections are presented in two lines each year and are sold in
better country clubs and resorts nationwide.
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Other Activities
The Company also licenses the Nautica name and related
trademarks for a range of products consistent with Nautica's design concepts and
image through Nautica Apparel, Inc., a wholly-owned subsidiary of the Company
("Nautica Licensing"), and the John Varvatos name and related trademarks for
hosiery, fragrance and a limited edition sneaker collection. See "Licensing."
DIRECT RETAILING
Outlet Stores
The Company operates 100 Nautica, nine Nautica Jeans, one Earl
Jean and one John Varvatos outlet stores located in outlet centers throughout
the United States. Such operations are primarily 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 its
products were not previously available and reach consumers who favor
value-oriented retailers. They also provide opportunities for the Company to
sell excess and out-of-season merchandise, thereby reducing the need to sell
such merchandise to discounters at excessively low prices. The Company's outlet
stores are geographically positioned to minimize potential conflict with the
Company's retail customers. Outlet stores purchase products directly from the
Company and its suppliers, and source basic products and styles through the
Company.
Full-Price Stores
The Company, through wholly-owned subsidiaries, operates six
full-price retail stores, as follows: one Nautica store, three Earl Jean stores
and two John Varvatos stores. In fiscal 2003, the Company announced, given that
the Nautica full-price retail store located in Rockefeller Plaza had been
performing below expectations, it is evaluating its long-term strategy with
respect to such store. The Earl Jean stores are located in New York's Soho
neighborhood, Larchmont, California and South Beach, Miami, Florida. The John
Varvatos stores are located in New York's Soho neighborhood and West Hollywood,
California. The Company's full-price stores display the breadth of each of the
respective Nautica, Earl Jean and John Varvatos collections.
LICENSING
The Company strategically extends the Nautica product line and
broadens the international distribution of the Nautica brand 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 Nautica Licensing.
Nautica Licensing currently licenses products for wholesale
and/or retail distribution in the following product categories: fragrances,
tailored clothing, dress shirts, neckwear, watches, hosiery, eyewear, women's
swimwear, leather belts, wallets and accessories, top coats, gloves, scarves,
umbrellas, beach towels, and the Nautica Home Collection featuring bedding, bath
linens and accessories, tableware and furniture. Except for fragrances, eyewear
and watches, which are licensed for sale globally, these products are licensed
for sale primarily in the United States.
Internationally, Nautica apparel currently is licensed for
sale in over 100 countries, including, among others, Australia, Bahamas,
Bermuda, Bulgaria, Canada, Chile, China, Colombia, Cyprus, Ecuador, Greece,
Guatemala, Honduras, Hong Kong, Hungary, Indonesia, Japan, Korea, Malaysia,
Mexico, New Zealand, Nicaragua, Panama, Paraguay, Peru, Philippines, Puerto
Rico, Romania, Singapore, Taiwan, Thailand, Turkey, 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, Vice Chairman of the Company, 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.
4
The Company also licenses the John Varvatos name and
trademarks for hosiery, fragrance and skin care products and a limited edition
sneaker collection. The John Varvatos apparel collection is also distributed in
Japan.
MARKETING
The Company's in-store shop programs for the Nautica, Nautica
Competition, Nautica Jeans Company and Nautica Children's Company collections
are an integral part of the Company's marketing strategy of its Nautica
wholesale business. Through this program, the Company and a department store
customer create a specific area within the store dedicated to the exclusive
merchandising and sale of the Nautica, Nautica Competition, Nautica Jeans
Company or Nautica Children's Company collections, as the case may be. Each of
these shops, strategically located in the collections departments of leading
department stores, are outfitted with signature fixtures consistent with the
image of each of the brands and present the collections in an integrated,
visually attractive environment.
The Company plans to continue its efforts to expand and update
its in-store shops in department stores which currently sell the Nautica,
Nautica Competition, Nautica Jeans Company and Nautica Children's Company
collections and to install such shops in additional retail locations. The
continued development of the Company's in-store shop program is dependent on
general apparel industry conditions, continued participation by retail customers
and continued demand by consumers for the Company's collections, and no
assurance can be given that the Company will be able to continue to expand and
update its in-store shops.
In order to maximize the effectiveness of the Company's
in-store shop program, the Company operates a merchandise coordinator program.
Each of the Company'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
the Company's 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 product features, sales
methods and shop management. In addition, they provide sales information to the
Company's retail analysts who monitor retail performance and develop plans to
assist these retail customers with future purchases of Company products.
Management believes that the performance of the Company's in-store shops is
enhanced by the close interaction of its merchandise coordinators with its
retail customers.
Company products are marketed by a regional sales force and
sales representatives through its showrooms in New York City, Dallas, Texas, Los
Angeles, California and London, England to leading department and specialty
stores. In fiscal year 2003, May Department Stores Company, Federated Department
Stores, Inc. and Dillard Department Stores, Inc. accounted for approximately
27%, 20% and 17%, respectively, of the Company's total wholesale sales. No other
customer of the Company accounted for 10% or more of the Company's sales during
that period.
The Company implements, on an annual basis, marketing
strategies that support and extend brand awareness, build sales and develop the
Company's customer base, both geographically and demographically. Targeted
marketing initiatives are developed and executed for each of the Company's
business units. These marketing initiatives comprise an integrated matrix of
communication vehicles that include national and regional print advertising,
outdoor and radio advertising, consumer promotions, corporate sponsorships,
retail events, in-store merchandising and visual presentations, seasonal fashion
shows, brand websites and on-going public relations and consumer outreach
programs. Brand communication continues at the in-store level with advertising
and brand imagery prominently featured in signature brand fixtures.
The Nautica brands' advertising campaigns, featured in
national and regional consumer magazines, newspapers and trade publications,
deliver appropriate brand messages to the desired audiences. Publications
featuring Company advertising campaigns reflect the diversification of the
Company's businesses with titles that include, among others, GQ, Sports
Illustrated, Cosmopolitan, Vanity Fair, DNR, WWD, House & Garden, The New York
Times Magazine, Maxim, Vibe, Vogue and Details. Outdoor advertising media,
utilized on a regional basis, includes bus panels, billboards, commuter rail
cards and telephone kiosks.
Strategically planned retail events, consumer promotions and
sponsorships, such as acting as the official apparel sponsor of the No. 1 ranked
Men's Professional Beach Volleyball Team, bring attention to the Company's
brands on a global basis while supporting local retail sales and reinforcing the
brand's authentic and active image.
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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 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, the Company
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. During fiscal 2003, a
significant portion of the Company's products were produced in Asia and other
foreign countries, with the remaining portion produced in the United States. In
the United States, suppliers operate under the close supervision of the
Company's production departments. The Company's agent and sourcing office, based
in Hong Kong and Taiwan, respectively, monitor foreign 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
visit with the manufacturers to monitor production. The Company has curtailed
travel to certain parts of the world due to Severe Acute Respiratory Syndrome
("SARS"), and is monitoring the situation and reviewing its travel policies on a
current basis.
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 fabrics 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 risks associated with foreign suppliers, including ,
without limitation, economic, political and health risks, including with respect
to SARS.
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. Applications to
register the Nautica Marks in other product categories have been filed by the
Company in the United States. In addition, Nautica Licensing has registered or
is in the process of registering the Nautica Marks in over 100 countries
throughout the world for apparel and other complementary product categories.
In addition to the Nautica Marks, the Company and its
subsidiaries have registered, or are in the process of registering, the
following trademarks, among other related marks, in the United States and
certain other countries for apparel and certain other products: Nautica
Competition; Nautica Jeans Company; Earl Jean; and, John Varvatos Company.
The Company regards its trademarks and other proprietary
rights as valuable assets and actively manages its trademark portfolio,
maintaining long-standing trademarks as well as obtaining trademark
registrations for new brands. The
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Company polices its trademark portfolio against infringement but there can be no
assurance that these efforts will be successful or that the Company will have
adequate remedies for any such infringement.
BACKLOG AND SEASONALITY
On March 1, 2003, the Company had unfilled customer orders of
approximately $295.7 million of merchandise, compared to approximately $ 295.1
million of such orders at March 2, 2002. These amounts include both confirmed
and unconfirmed orders which, the Company believes, based on industry practice
and past experience, will be confirmed. We expect that substantially all such
orders will be filled within the 2004 fiscal year. Backlog may be materially
affected by a number of factors, including seasonal factors, the mix of product,
the timing of the receipt and processing of customer orders and the timing of
shipment. Accordingly, order book data should not be taken as providing
meaningful period-to-period comparisons.
Historically, the Company has experienced its highest level of
sales in the second and third quarters and its lowest level in the first and
fourth quarters. In the future, the timing of seasonal shipments may vary by
quarter.
COMPETITION
The apparel industry is highly competitive. The Company
encounters substantial competition from brands such as Polo/Ralph Lauren, Tommy
Hilfiger, Claiborne, Lucky Jeans, Polo Jeans, DKNY Jeans, Kenneth Cole, Diesel,
Seven, Juicy Couture and Joie, 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 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 March 1, 2003, the Company had approximately 3,300
employees. Approximately 225 of such employees are parties to a collective
bargaining agreement. The Company considers its relations with its employees to
be good.
ACCESS TO COMPANY REPORTS ON THE INTERNET
Copies of the Company's filings with the Securities and
Exchange Commission (including annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K) are available free of charge through
the investor relations section of the Company's website at www.nautica.com. The
Company's filings are available on the same day they are electronically filed
with the SEC.
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ITEM 2. PROPERTIES.
The general location of the primary properties of the Company
and its subsidiaries, whether they are owned or leased, their use and
approximate square footage, are as follows:
LOCATION OWNED/LEASED USE APPROX. SQUARE FOOTAGE
Martinsville, VA Owned Warehouse and Customer 500,000
Service Center,
Information Systems
New York, NY Leased Corporate, Administrative, 110,000
Showroom and Sales,
Design and Production
Offices
New York, NY Leased Design, Production, Sales 44,000
and Administrative
Offices
New York, NY Leased Design and Production 16,000
Offices
New York, NY Leased Design and Administrative 9,000
Offices
Los Angeles, CA Leased Showroom and Sales 2,100
Offices
Dallas, TX Leased Warehouse and 40,000
Administrative Offices
Dallas, TX Leased Showroom and Sales 2,100
Offices
London, England Leased Showroom and Sales 2,000
Offices
London, England Leased Showroom and Sales 2,000
Offices
The Company also leases 111 outlet stores and six full-price
retail stores in locations 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. The full-price retail stores range in size from approximately
1,100 square feet to approximately 5,000 square feet, except for the Nautica
full-price retail store, which is approximately 12,000 square feet and located
in New York's Rockefeller Plaza.
Given that the Company's Martinsville, Virginia facility is
completed and fully operational, the Company has ceased operations at its
350,000 square foot distribution facility in Rockland, Maine. Accordingly, the
Company is actively marketing the property for sale. In addition, the Company is
seeking to sublet or terminate leases in Paris, France, Madrid, Spain and
London, England, in view of the Company's decision to transition its Nautica
Europe business to licensing or other key arrangements.
The Company believes that its existing facilities are well
maintained, in good operating condition and adequate for the purposes utilized.
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ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation that
arises from the ordinary operations of its business. In the event of an adverse
outcome of any of these proceedings, the Company believes that the resulting
liabilities would not have a material adverse effect on its financial condition
or results of operations
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 2003.
PART II
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 reported on
the NASDAQ National Market System:
HIGH LOW
FISCAL 2002
First Quarter Ended June 2, 2001 $21.20 $14.47
Second Quarter Ended September 1, 2001 21.65 12.83
Third Quarter Ended December 1, 2001 14.76 10.46
Fourth Quarter Ended March 2, 2002 14.49 12.57
FISCAL 2003
First Quarter Ended June 1, 2002 $16.22 $12.94
Second Quarter Ended August 31, 2002 13.75 10.98
Third Quarter Ended November 30, 2002 12.38 8.06
Fourth Quarter Ended March 1, 2003 12.37 9.45
FISCAL 2004
First Quarter (through May 23, 2003) $11.50 $ 9.02
As of May 23, 2003, there were approximately 300 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 amount thereof will be dependent upon the Company's
earnings, financial requirement, and other factors deemed relevant by the
Company's Board of Directors.
9
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information with respect to compensation
plans under which equity securities of the Company are authorized for issuance
as of the end of the 2003 fiscal year:
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF NUMBER OF SECURITIES
SECURITIES TO BE REMAINING AVAILABLE
ISSUED UPON FOR FUTURE ISSUANCE
EXERCISE OF WEIGHTED-AVERAGE UNDER EQUITY
OUTSTANDING EXERCISE PRICE OF COMPENSATION PLANS
OPTIONS, OUTSTANDING (EXCLUDING SECURITIES
WARRANTS AND OPTIONS, WARRANTS REFLECTED IN COLUMN
RIGHTS AND RIGHTS (a))
PLAN CATEGORY COLUMN (a) COLUMN (b) COLUMN (c)
------------- ---------------- ----------------- ---------------------
Equity compensation plans 4,439,000 $ 14.97 896,700
approved by security holders*
Equity compensation plans not 281,940 $ 0.87 -
approved by security holders** --------- -------
Total........... 4,720,940 896,700
========= =======
* Represents options granted under the 1996 Stock Incentive Plan, the 1989
Employee Incentive Stock Plan and the Executive Incentive Stock Option Plan. The
number reflected in Column (c) represents additional options available for
issuance under the 1996 Stock Incentive Plan. No additional options may be
granted under the 1989 Employee Incentive Stock Plan and the Executive Incentive
Stock Option Plan.
** Represents options granted on July 1, 1987 to the Vice Chairman of the
Company. The Option Agreement representing such grant provided, as adjusted for
stock splits (and subject to future adjustments), for the Vice Chairman to
purchase up to an aggregate of 2,262,064 shares of the Company's Common Stock at
a purchase price of $0.87 per share. The options expire 60 days after the
earlier of (i) July 1, 2007, or (ii) 10 months following the date that the Vice
Chairman ceases to be employed by the Company. At March 1, 2003, 281,940 options
exercisable at $0.87 per share remain outstanding.
10
ITEM 6. SELECTED FINANCIAL DATA.
Year ended
--------------------------------------------------------------------
March 1, March 2, March 3, March 4, February 27,
Amounts in thousands, except per share data 2003 2002 2001 2000 1999
- ------------------------------------------- ----------- ----------- ----------- ----------- ------------
Selected consolidated statements of earnings data
Net sales $ 693,715 $ 692,092 $ 627,731 $ 564,888 $ 509,128
Net earnings $ 20,698 $ 17,259 $ 46,103 $ 46,163 $ 58,708
Net earnings per share of common stock
Basic $ 0.62 $ 0.52 $ 1.45 $ 1.33 $ 1.53
Diluted $ 0.60 $ 0.50 $ 1.39 $ 1.26 $ 1.45
Cash dividends per share of common stock None None None None None
Selected consolidated balance sheet data
Total assets $ 468,127 $ 422,070 $ 378,306 $ 333,113 $ 319,304
Long-term debt, excluding current portion 13,567 14,321 - - 50
Working capital 191,240 151,214 170,804 168,231 179,566
Stockholders' equity 346,226 322,580 285,264 263,713 255,817
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company operates in three primary business segments,
Wholesale, Retail and Licensing. The Wholesale segment consists of businesses
that design, market, source and distribute the following to retail store
customers: sportswear, activewear, outerwear, a jeans collection, a tailored
clothing collection, robes and sleepwear for men; a jeans collection, robes and
sleepwear for women; and, a children's collection. The Retail segment sells
men's, women's and children's apparel and other Nautica-branded products
primarily through its retail store locations directly to consumers. The
Licensing segment licenses the Company's trademarks for the manufacture and sale
of various products for distribution throughout the world.
Fiscal year ended March 1, 2003 compared to March 2, 2002:
Net sales increased slightly to $693.7 million in the fiscal
year ended March 1, 2003 from $692.1 million in the prior year. Wholesale sales
increased 1.0% to $519.9 million from $516.5 million. Strong performances of
Nautica Men's and Women's Jeans, Nautica Men's and Women's Sleepwear, and the
contribution of the new Nautica Men's Underwear business were offset by a 9.2%
decrease in the Nautica Men's Sportwear business. For fiscal 2004, the Company
expects net sales to remain essentially flat to fiscal 2003, with growth in
Nautica Sleepwear, Nautica Children's, Earl Jean and John Varvatos being offset
by an estimated decrease in the Nautica Men's Sportswear business of
approximately 13%-15%, due to, in part, the ongoing pressure facing the overall
men's collection business in department stores. Retail sales decreased 1.0% to
$173.8 million from $175.6 million primarily as a result of reduced consumer
traffic in outlet malls due to the continued sluggish economy.
Gross profit, as a percentage of sales, was 42.7% compared to
41.1% in the prior year. The increase is due primarily to the Company's ability
to better source products, improved full-price sales of Nautica Men's Jeans,
Nautica Men's and Women's Sleepwear and Nautica Children's, as well as improved
margins the Company achieved on sales to discount retailers.
11
Selling, general and administrative expenses increased by $5.3
million to $254.9 million from $249.6 million in the prior year. Selling,
general and administrative expenses as a percentage of net sales increased to
36.7% from 36.1% in the prior year. The increase in the percentage of net sales
is due primarily to investments in the Earl Jean Women's and Men's businesses,
the development of the Nautica Women's Sportswear line and the expansion of the
John Varvatos business into the European market and through new John Varvatos
retail stores.
During the first quarter of fiscal 2003, the Company recorded
a pre-tax special charge of $3.4 million ($2.1 million on an after tax basis) or
$0.06 on a per share basis. This charge consisted of costs associated with the
elimination of approximately 300 union and non-union employees related to the
closing of the Rockland, Maine distribution facility. Approximately $2.6 million
of this charge was paid during the current fiscal year, with the balance
expected to be paid during the first quarter of the next fiscal year and is
anticipated to be funded with cash from operations. The Company expects annual
savings associated with this action to be between $3.5 and $4.0 million. These
savings will be reflected in distribution costs and reported in selling, general
and administrative expenses in the Company's consolidated financial statements.
The Company began realizing a portion of these cost savings in the fourth
quarter of the current fiscal year.
During the third quarter of fiscal 2003, the Company recorded
a pre-tax special charge of $10.3 million ($6.5 million on an after tax basis)
or $0.19 per diluted share. This charge consisted of the impairment of fixed
assets of the Company's Rockefeller Plaza store, based on the performance and
anticipated outlook of the store in accordance with SFAS No. 144.
During the fourth quarter of fiscal 2003, the Company recorded
a pre-tax special charge of $2.6 million ($1.6 million on an after tax basis) or
$0.05 per diluted share. This charge relates to the Company's decision to
transition its Nautica business in Europe to licensing or other arrangements.
The charge consists of $1.3 million in wind-down costs, the write-down of fixed
assets and lease termination costs and $1.3 million for the impairment of
goodwill in accordance with SFAS No. 142.
Net royalty income increased by $1.4 million to $9.3 million
from $7.9 million in the prior year. The increase is due primarily to the sales
strength in home products during the current fiscal year. The prior year's
income included the recognition of a settlement from the termination of the
men's footwear license. Excluding this settlement, net royalty income increased
$3.6 million from the prior year.
Investment income decreased by $0.9 million to $0.6 million
from $1.5 million in the prior year. During the current year, the Company sold
its short-term investments due to poor performance. Conversely, the prior year's
income on these investments included unrealized capital gains. The decrease in
income from short-term investments was offset, in part, by an increase in
interest income earned on higher average cash balances during the current year,
as a result of cash paid during the prior year for the acquisition of Earl Jean.
Interest expense remained essentially flat compared to last year at $2.0
million.
The provision for income taxes decreased to 37.5% from 37.8%
of earnings before income taxes in the prior year. The decrease is due primarily
to a reduction in the overall effective income tax rates.
Net earnings increased $3.4 million to $20.7 million from
$17.3 million in the prior year as a result of the factors discussed above.
Excluding special charges taken in both the current and prior year, net earnings
for the current year would have been $30.9 million compared to $26.2 million in
the prior year.
Fiscal year ended March 2, 2002 compared to March 3, 2001:
Net sales increased 10.3% to $692.1 million in the fiscal
year ended March 2, 2002 from $627.7 million in the prior year. Wholesale sales
increased 8.7% to $516.5 million from $475.2 million due primarily to the
strong performance of Nautica Men's and Women's Jeans and the contribution of
new businesses, including Earl Jean and Nautica Children's. These increases
were offset by higher markdown allowances and returns in the Nautica Men's
Sportswear business. Retail sales increased 15.1% to $175.6 million from
$152.5 million as a result of sales from new stores opened during the year and
full year sales of stores opened in the prior year. Also, the Retail segment
was successful in selling through its excess inventory, resulting in lower
inventory levels. Same store sales for the year were up 3.0% from the prior
year, despite a difficult retail environment.
Gross profit, as a percentage of sales, was 41.1% compared to
41.5% in the prior year. The decrease is due primarily to higher markdown
allowances and returns in the Wholesale segment, an aggressive push to sell
through excess inventory in the Retail segment, and additional inventory
reserves taken in the Nautica Europe business unit. This decrease was offset,
in part, by the
12
continued effort from the Company's operating teams to better source products,
and the impact of higher margins on certain new product lines, particularly Earl
Jean.
Selling, general and administrative expenses increased by
$52.7 million to $249.6 million from $196.9 million in the prior year. Selling,
general and administrative expenses as a percentage of net sales increased to
36.1% from 31.4% in the prior year. The increase in the percentage of net sales
is due primarily to the following: costs and charges, principally bad debts and
marketing, associated with the Nautica Europe business unit; costs associated
with operating additional distribution facilities while the Company transitions
its distribution operations to its new facility in Martinsville, Virginia; costs
associated with updating store displays to reflect the Company's new icon (the
J-class(TM) sailboat); the integration of newer businesses; and several new
brand extensions.
In the fourth quarter of fiscal year 2002, the Company
recorded pre-tax special charges of $14.4 million ($9.0 million on an after tax
basis) or $0.26 per diluted share. These charges consisted of costs related to
the closing of the Rockland, Maine distribution facility of approximately $8.7
million, costs of approximately $4.6 million relating to a payment made to the
Company's Vice Chairman, net of accrued obligations and certain other costs
associated with the cancellation of a 1998 Letter Agreement, and charges
relating to certain employee terminations of approximately $1.1 million.
The Company moved its distribution facility from Rockland,
Maine to a new distribution and customer service center in Martinsville,
Virginia. The charges relating to the distribution facility, which were
recognized in the fourth quarter of fiscal 2002, included approximately $7.9
million for the write-down of the facility to its estimated net realizable
value and approximately $0.8 million for costs associated with the closure and
sale of the facility. Of the $0.8 million, approximately $0.4 million was paid
in fiscal 2003 and the balance is expected to be paid in fiscal 2004 with cash
from operations. Additional severance related costs associated with the
elimination of approximately 300 union and non-union employees in Rockland,
Maine totaling approximately $3.4 million on a pre-tax basis was recognized in
the first quarter of fiscal 2003 of which, approximately $2.6 million was paid
during fiscal 2003 and the balance is expected to be paid during fiscal 2004
with cash from operations. The Company expects annual savings associated with
these actions to be between $3.5 and $4.0 million. These savings will be
reflected in distribution costs and reported in selling, general and
administrative expenses in the Company's consolidated financial statements. The
Company began realizing these cost savings in the fourth quarter of fiscal 2003.
The costs associated with the cancellation of a 1998 Letter
Agreement were paid in the fourth quarter of fiscal 2002. The Company expects
annual savings to be between $1.0 and $2.0 million. These savings will be
reflected in selling, general and administrative expenses in the Company's
consolidated financial statements and began being realized in the fourth
quarter of fiscal 2002.
Approximately $0.8 million of the costs associated with
charges relating to certain employee terminations recorded in the fourth
quarter of fiscal 2002 were paid during fiscal 2003. The balance is expected to
be paid during fiscal 2004 with cash from operations.
Net royalty income decreased by $0.9 million to $7.9 million
from $8.8 million in the prior year. The decrease is due primarily to the
following: the termination of its childrenswear license agreement, the
operations of which the Company assumed in the current year; payments received
in the prior year as a result of royalty audits; and the termination of its
footwear license agreement. This decrease was offset, in part, by sales
strength in existing licensed products, particularly home products and small
leather goods and accessories.
Investment income decreased by $1.6 million to $1.5 million
from $3.1 million in the prior year. The decrease was due to lower average cash
balances during the year as a result of the cash paid for the acquisition of
Earl Jean and additional working capital needs, particularly to support the
Company's new businesses. Interest expense increased $1.8 million to $2.0
million from $0.2 million in the prior year as a result of interest incurred on
the Company's short and long-term borrowings.
The provision for income taxes decreased to 37.8% from 38.8%
of earnings before income taxes in the prior year. The decrease is due
primarily to a reduction in the overall effective income tax rates.
Net earnings decreased $28.8 million to $17.3 million from
$46.1 million in the prior year as a result of the factors discussed above.
Excluding special charges recorded in fiscal 2002, net earnings for the current
year would have been $26.2 million.
13
LIQUIDITY AND CAPITAL RESOURCES
During the year ended March 1, 2003, the Company generated
cash from operating activities of $60.9 million, principally from net earnings
and an increase in accounts payable and accrued expenses of $18.4 million,
offset by increases in accounts receivable and inventory of $10.6 and $21.2
million, respectively. Accounts receivable was 10.0% higher than the prior year
due to a $22.7 million increase in wholesale sales in the fourth quarter
compared to last year. Inventory was higher than the prior year due to a number
of factors including: an increase to support backlog for the upcoming summer
season; an increase in replenishment inventory for certain businesses, as it
can take six to nine months to produce the product; the expansion of the
Nautica Children's business into more of the Company's outlet stores; and the
receipt of spring product earlier than in the prior year to support a more
timely transition from the fall season. Accounts payable and accrued expenses
increased due to the increase in inventory.
During the year ended March 2, 2002, the Company generated
cash from operating activities of $91.1 million, principally from net earnings
and decreases in accounts receivable and inventory of $14.3 and $41.8 million,
respectively, offset by a decrease in accounts payable of $15.4 million.
Accounts receivable was 14.8% lower than the prior year due to a reduction in
wholesale shipments in the fourth quarter. Inventory was 32.2% lower than the
prior year due to the Company's aggressive sell-through of inventory through
its Retail outlets, ability to better manage the timing of receipts with
customer demand, and reduction in its offerings of replenishment styles.
Accounts payable was 30.7% lower than the prior year due to the reduction in
inventory.
During the year ended March 1, 2003, cash used in investing
activities was $24.5 million. This amount was primarily for the purchase of
property, plant and equipment for the Nautica in-store shop program and the
build-out of retail stores. The Company expects to continue to incur capital
expenditures to expand and update its in-store shop program, and to open
additional retail stores.
During the year ended March 2, 2002, cash used in investing
activities was $99.6 million. This amount related primarily to the acquisitions
of Earl Jean and the Nautica childrenswear business, the purchase of property,
plant and equipment for the Nautica in-store shop program, the completion of
the new distribution facility in Martinsville, Virginia and the completion of
a new full-price retail store in New York's Rockefeller Plaza. The Company
expects to continue to incur capital expenditures to expand and update the
in-store shop program, and to open additional retail stores.
During the year ended March 1, 2003, cash provided by
financing activities was $0.7 million. This amount consisted of proceeds from
the issuance of common stock through the Company's Employee Incentive Stock
Option Plan, offset by cash used to pay down the principal balance on its
long-term debt. During fiscal year 2001, the Board of Directors authorized the
Company to repurchase up to 4,000,000 shares of its outstanding stock on the
open market. Under this authorization and a previous authorization, the Company
purchased 36,000 shares at a cost of $0.3 million during 2003 and 2,533,000
shares at a cost of $28.8 million during 2001.
As of March 1, 2003 and March 2, 2002, the Company had $175.0
million in lines of credit with four commercial banks. Such lines of credit are
available for short-term borrowings and letters of credit, collateralized by
imported inventory and accounts receivable. At March 1, 2003 and March 2, 2002,
letters of credit outstanding under the lines were $46.5 and $33.8 million,
respectively, and there were no short-term borrowings outstanding.
The following is a summary of the Company's contractual
obligations for the periods indicated that existed as of March 1, 2003, and is
based on information appearing in the Notes to Consolidated Financial
Statements:
(amounts in millions)
Contractual Less than 1 - 3 4 - 5 After
Obligations 1 Year Years Years 5 Years Total
- -------------------------------------------------------------------------
Operating leases $ 18.7 $ 34.6 $ 29.8 $ 65.0 $ 148.1
Letters of credit 46.5 - - - 46.5
Long-term debt 0.8 1.5 1.5 10.5 14.3
-----------------------------------------------------
$ 66.0 $ 36.1 $ 31.3 $ 75.5 $ 208.9
=====================================================
14
Historically, the Company has experienced its highest level of
sales in the second and third quarters and its lowest level in the first and
fourth quarters due to seasonal patterns. In the future, the timing of seasonal
shipments may vary by quarter. The Company anticipates that internally generated
funds from operations, existing cash balances 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 and the effect of
fluctuations of the dollar against foreign currencies have not had a material
effect on the cost of imports or the Company's results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." Statement No. 145 rescinds Statement No.4, which
required all gains and losses from extinguishments of debt to be aggregated
and, if material, classified as an extraordinary item, net of related income
tax effect. Upon adoption of Statement No. 145, companies will be required to
apply the criteria in APB Opinion No. 30, "Reporting the Results of Operations
- - reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" in
determining the classification of gains and losses resulting from the
extinguishments of debt. The Company adopted the provisions of SFAS No. 145
upon its effective date, which did not have a material impact on the
consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or
disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company is expecting
a pre-tax special charge between $7.0 and $8.6 million in the first half of the
next fiscal year based on the adoption of this pronouncement.
In November 2002, the FASB issued FASB Interpretation No. 45
("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that an
entity has issued. The disclosure provisions of FIN 45 are effective for the
Company's first quarter of the year ending February 28, 2004. The Company is
currently in the process of evaluating the potential impact that this
pronouncement will have on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS
No. 123." This standard provides alternative methods for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in annual financial statements
about the method of accounting for stock-based employee compensation and the
pro forma effect on reported results of applying the fair value based method
for entities that use the intrinsic value method of accounting. The pro forma
effect disclosures are also required to be prominently disclosed in interim
period financial statements. This statement is effective for financial
statements for fiscal years ending after December 15, 2002 and is effective for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002, with earlier application permitted. The
Company does not plan a change to the fair value based method
15
of accounting for stock-based employee compensation and has included the
disclosure requirements of SFAS No. 148 in the accompanying financial
statements.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared
in accordance with accounting principles that are generally accepted in the
United States. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
revenues and expenses during the period. Management continually evaluates its
estimates and assumptions including those related to allowances for doubtful
accounts, sales returns and allowances, inventory valuation, accrual for
markdowns and the valuation of long-lived assets. Management bases its estimates
and assumptions on historical experience and other factors that are believed to
be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. Changes in the economic
conditions in the retail industry could have an impact on these estimates and
the Company's actual results. Management believes that the following may involve
a higher degree of judgment or complexity:
Allowances for Doubtful Accounts
In the normal course of business, the Company extends credit,
on open account, to its retail store customers, after a credit analysis based on
financial and other criteria. The Company maintains allowances for doubtful
accounts for estimated losses that result from the inability of its retail store
customers to make their required payments. Management bases its allowances
through analysis of the aging of accounts receivable at the date of the
financial statements, assessments of historical collection trends, and an
evaluation of the impact of current economic conditions.
Sales Returns and Allowances
Costs associated with potential returns of merchandise and
charge backs are recorded as a reduction to net sales, and are included in the
allowance for doubtful accounts. These costs are based upon known returns and
allowances, historic trends and the evaluation of the impact of current
economic conditions.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost
is determined by the last-in, first-out method for certain wholesale
inventories and by the first-in, first-out method for retail and the remaining
wholesale inventories. The Company marks down inventory for estimated
unmarketable inventory equal to the difference between the cost and the
estimated net realizable value of the inventory. Management continually
assesses the valuation of inventories by reviewing the costing of inventory,
the significance of slow-moving inventory, and the impact of current economic
conditions.
Accrual for Markdowns
Costs associated with customer markdowns are recorded as a
reduction to net sales, and are included in the allowance for doubtful
accounts. These costs result from seasonal negotiations with the Company's
retail store customers, as well as historic trends and the evaluation of the
impact of current economic conditions.
Valuation of Long-lived Assets
The Company reviews long-lived assets and certain
identifiable intangibles held and used for possible impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In evaluating the fair value and future benefits of such as
sets, the Company performs an analysis of the anticipated undiscounted future
net cash flows of the individual assets over the remaining amortization period.
The Company recognizes an impairment loss if the carrying value of the asset
exceeds the expected future cash flows.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This Annual Report contains "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical fact, including, without limitation, the
statements under "Management's
16
Discussion and Analysis of Financial Condition and Results of Operations" are
"forward-looking statements." Forward-looking statements may include the words
"believes," "expects," "plans," "intends," "anticipates," "continues" or other
similar expressions. These statements are based on the Company's current
expectations of future events and are subject to a number of risks and
uncertainties that may cause the Company's actual results to differ materially
from those described in the forward-looking statements. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. These factors and uncertainties include, among others: the risk
that new businesses of the Company will not be integrated successfully; the risk
that the Company will experience operational difficulties with its distribution
facility; the overall level of consumer spending on apparel; dependence on sales
to a limited number of large department store customers; risks related to
extending credit to customers; actions of existing or new competitors and
changes in economic, political or health conditions in the markets where the
Company sells or sources its products, including with respect to SARS; downturn
or generally reduced shopping activity caused by public safety concerns; risks
associated with consolidations, restructurings and other ownership changes in
the retail industry; changes in trends in the market segments in which the
Company competes; risks associated with uncertainty relating to the Company's
ability to launch, support and implement new product lines; effects of
competition; changes in the costs of raw materials, labor and advertising; the
ability to secure and protect trademarks and other intellectual property rights;
risks associated with the relocation of Earl Jean, Inc.; the risk that the cost
of transitioning the Nautica Europe business to licensing or other key
arrangements will be more than anticipated or that the Company will not be able
to negotiate acceptable terms; and, the impact that any labor disruption at the
Company's ports of entry could have on timely product deliveries. These and
other risks and uncertainties are disclosed from time to time in the Company's
filings with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made by or with the approval of authorized
personnel. The Company assumes no obligation to update any forward-looking
statements as a result of new information or future events or developments.
ACCESS TO COMPANY REPORTS ON THE INTERNET
Copies of the Company's filings with the Securities and
Exchange Commission (including annual reports on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K) are available free of charge in
the investor relations section of the Company's website at www.nautica.com. The
Company's filings are available on the same day they are electronically filed
with the SEC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company finances its capital needs through available
capital, future earnings, bank lines of credit and its long-term debt which
totals $14.3 million, inclusive of its current portion. The Company's exposure
to market risk for changes in interest rates is primarily in its investment
portfolio and its short and long-term borrowings. The Company, pursuant to
investing guidelines, mitigates exposure on its investments by limiting
maturity, placing investments with high credit quality issuers and limiting the
amount of credit exposure to any one issuer. All of the Company's indebtedness,
including borrowings under its $175.0 million lines of credit and long-term
debt, bear interest at variable rates. Accordingly, changes in interest rates
would impact the Company's results of operations in future periods. The Company
entered into a swap agreement, effective November 30, 2001, to hedge against
interest rate fluctuations on its long-term debt. The swap agreement effectively
converts the long-term debt from a variable interest rate to a fixed interest
rate of 6.32% per annum. The swap contains a knock-out provision that is
activated when the three-month LIBOR rate is at or above 7.00%. If the
three-month LIBOR rate rises above 7.00%, the swap knocks out and the Company
will not receive any payments under the agreement until such time as the
three-month LIBOR rate declines below 7.00%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements required by Part II, Item 8 are included
in Part IV, Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
17
PART III
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 8, 2003.
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 8, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
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 8, 2003.
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 8, 2003, and by reference to Footnotes I, K and T of the
Consolidated Financial Statements included in this report and referred to at
Part IV, Item 15.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this Annual
Report on Form 10-K, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, conducted an evaluation (the "Evaluation")
of the effectiveness of the design and operation of its disclosure controls and
procedures, as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934.
The Company's management, including its Chief Executive
Officer and Chief Financial Officer, does not expect that its disclosure
controls and procedures will prevent all error and all fraud. A control system,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system's objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. The inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with its policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Based upon the Evaluation of disclosure controls and
procedures, the Chief Executive Officer and Chief Financial Officer of the
Company have concluded that, subject to the limitations noted above, the
Company's disclosure controls and procedures were effective to ensure that
material information relating to the Company and the Company's consolidated
subsidiaries would be made known to them by others within those entities to
allow timely decisions regarding required disclosures.
18
There have been no significant changes in internal controls,
or in other factors that could significantly affect internal controls,
subsequent to the date the Chief Executive Officer and the Chief Financial
Officer completed their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
PART IV
ITEM 15. 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:
Page
----
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets at March 1, 2003 and March 2, 2002 F-2 - F-3
Consolidated Statements of Earnings for each of the three years in the
period ended March 1, 2003 F-4
Consolidated Statements of Stockholders' Equity for each of the three years
in the period ended March 1, 2003 F-5 - F-6
Consolidated Statements of Cash Flows for each of the three years in the
period ended March 1, 2003 F-7
Notes to Consolidated Financial Statements F-8 - F-28
2. Financial Statement Schedule
Included in Part IV of this report:
Schedule for each of the three years in the period ended March 1, 2003:
II - Valuation and Qualifying Accounts F-29
3. Exhibits
2 Asset Purchase Agreement, dated as of April 23, 2001, by and
among the Registrant, EJI Acquisition Subsidiary, Inc., Earl
Jean, Inc., Benjamin Freiwald and Suzanne Costas Freiwald is
incorporated herein by reference to Registrant's Current Report
on Form 8-K dated April 30, 2001.
3(a) Registrant's By-laws as currently in effect are incorporated
herein by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 33-21998).
3(b) Registrant's Restated Certificate of Incorporation is
incorporated herein by reference from the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31, 1995,
as amended by a Certificate of Amendment incorporated herein by
reference from the Registrant's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1996.
19
3(c) Certificate of Designations of Series A Junior Participating
Preferred Stock of Nautica Enterprises, Inc., in the form as
filed with the Secretary of State of the State of Delaware,
included as Exhibit A to the Rights Agreement, dated as of
November 2, 2001, between Nautica Enterprises, Inc. and Mellon
Investor Services LLC, as Rights Agent, is incorporated herein by
reference from the Registrant's Current Report on Form 8-K filed
on November 8, 2001.
4(i)(a) Rights Agreement, dated as of November 2, 2001, between Nautica
Enterprises, Inc. and Mellon Investor Services LLC, as Rights
Agent, which includes the Certificate of Designations of Series A
Junior Participating Preferred Stock as Exhibit A, form of Right
Certificate as Exhibit B and the Summary of Rights to Purchase
Preferred Stock as Exhibit C, is incorporated herein by reference
from the Registrant's Current Report on Form 8-K filed on
November 8, 2001.
10(iii)(a) Registrant's Executive Incentive Stock Option Plan is
incorporated herein by reference from the Registrant's
Registration Statements on Form S-8 (Registration Number
33-1488), as amended by the Company's Registration Statement on
Form S-8 (Registration Number 33-45823).
10(iii)(b) Registrant's 1989 Employee Incentive Stock Plan is incorporated
herein by reference from the Registrant's Registration Statement
on Form S-8 (Registration Number 33-36040).
10(iii)(c) Registrant's 1996 Stock Incentive Plan is incorporated herein by
reference from the Registrant's Registration Statement on Form
S-8 (Registration Number 333-55711), as amended and restated in
Appendix A to the Registrant's definitive Proxy Statement filed
June 7, 2002.
10(iii)(d) Registrant's 1994 Incentive Compensation Plan is incorporated
herein by reference from the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1997.
10(iii)(e) Registrant's Deferred Compensation Plan is incorporated herein by
reference from the Registrant's Annual Report on Form 10-K for
the fiscal year ended February 28, 1998.
10(iii)(f) Option Agreement and Royalty Agreement, each dated July 1, 1987,
by and among the Registrant and David Chu are incorporated herein
by reference from the Registrant's Registration Statement on Form
S-1 (Registration No. 33-21998), and letter agreement dated May
1, 1998 between Mr. Chu and the Registrant is incorporated herein
by reference from the Registrant's Annual Report on Form 10-K for
the fiscal year ended February 28, 1998. Sale and Cancellation
Letter Agreement, dated January 7, 2002, between the Registrant
and Mr. Chu is incorporated herein by reference from the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 1, 2001.
10(iii)(g) Employment Agreement, dated October 1, 1999, by and between the
Registrant and John Varvatos, and Split Dollar Agreement, dated
May 5, 2000, by and between the Registrant and John Varvatos are
incorporated herein by reference from the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 4, 2000.
21 Subsidiaries of Registrant
22 Consent of Independent Certified Public Accountants
99(a) Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350.
99(b) Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350.
(b) Reports on Form 8-K - None
20
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 March 1, 2003 and March 2, 2002, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the three years in the period ended March 1, 2003. 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 auditing standards generally accepted
in the United States of America. 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 March 1, 2003 and March 2, 2002, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended March 1, 2003, in conformity
with accounting principles generally accepted in the United States of America.
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 March 1, 2003. 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 16, 2003
F-1
Nautica Enterprises, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
MARCH 1, March 2,
ASSETS 2003 2002
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 82,953 $ 45,814
Short-term investments - 6,350
Accounts receivable - net of allowances of $45,432 in
2003 and $42,525 in 2002 98,713 89,736
Inventories 87,630 66,443
Prepaid expenses and other current assets 3,428 5,599
Deferred tax benefit 22,229 18,912
Assets held for sale 2,842 2,842
-------- --------
Total current assets 297,795 235,696
PROPERTY, PLANT AND EQUIPMENT, at cost - less accumulated
depreciation and amortization 96,427 111,327
GOODWILL, at cost 30,054 31,328
OTHER INTANGIBLES, at cost - less accumulated amortization 34,972 35,489
OTHER ASSETS 8,879 8,230
-------- --------
$468,127 $422,070
======== ========
The accompanying notes are an integral part of these statements.
F-2
Nautica Enterprises, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(amounts in thousands, except share data)
MARCH 1, March 2,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
-------- --------
CURRENT LIABILITIES
Current maturities of long-term debt $ 754 $ 754
Accounts payable - trade 34,690 30,402
Accrued expenses and other current liabilities 57,017 44,037
Income taxes payable 14,094 9,289
-------- --------
Total current liabilities 106,555 84,482
LONG-TERM LIABILITIES
Long-term debt - net 13,567 14,321
Interest rate swap liability 1,779 687
-------- --------
Total long-term liabilities 15,346 15,008
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - par value $.01; authorized, 2,000,000
shares; no shares issued - -
Common stock - par value $.10; authorized, 100,000,000
shares; issued, 45,136,000 shares in 2003 and
44,718,000 shares in 2002 4,514 4,472
Additional paid-in capital 96,216 93,546
Retained earnings 406,105 385,407
Accumulated other comprehensive loss - net of
deferred tax benefit of $772 at March 1, 2003
and $1,132 at March 2, 2002 (1,287) (1,862)
Common stock in treasury at cost; 11,534,000 shares at
March 1, 2003 and 11,498,000 shares at March 2, 2002 (159,322) (158,983)
-------- --------
346,226 322,580
-------- --------
$468,127 $422,070
======== ========
The accompanying notes are an integral part of these statements.
F-3
Nautica Enterprises, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(amounts in thousands, except share data)
YEAR ENDED Year ended Year ended
MARCH 1, March 2, March 3,
2003 2002 2001
------------ ------------ ------------
Net sales $ 693,715 $ 692,092 $ 627,731
Cost of goods sold 397,348 407,677 367,171
------------ ------------ ------------
Gross profit 296,367 284,415 260,560
Selling, general and administrative expenses 254,933 249,593 196,927
Special charges 16,282 14,442 -
Net royalty income (9,329) (7,860) (8,779)
------------ ------------ ------------
Operating profit 34,481 28,240 72,412
Investment income 604 1,471 3,075
Interest expense (1,968) (1,959) (156)
------------ ------------ ------------
Earnings before provision for income taxes 33,117 27,752 75,331
Provision for income taxes 12,419 10,493 29,228
------------ ------------ ------------
NET EARNINGS $ 20,698 $ 17,259 $ 46,103
============ ============ ============
Net earnings per share of common stock:
Basic $ 0.62 $ 0.52 $ 1.45
============ ============ ============
Diluted $ 0.60 $ 0.50 $ 1.39
============ ============ ============
Weighted-average number of common shares outstanding:
Basic 33,567,000 32,946,000 31,862,000
============ ============ ============
Diluted 34,307,000 34,319,000 33,241,000
============ ============ ============
The accompanying notes are an integral part of these statements.
F-4
Nautica Enterprises, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended March 1, 2003, March 2, 2002 and March 3, 2001
(amounts in thousands, except share data)
Accumulated
other
Common stock Additional comprehensive
--------------------- paid-in Retained income Treasury
Shares Amount capital earnings (loss) stock Total
----------- -------- -------- -------- ------------- --------- --------
Balance at March 4, 2000 42,696,000 $ 4,270 $ 67,559 $322,045 $ - $(130,161) $263,713
Common stock issued on exercise of stock options 633,000 63 2,183 2,246
Income tax benefit from stock options 2,024 2,024
Purchase of treasury stock (28,822) (28,822)
Net earnings 46,103 46,103
----------- -------- -------- -------- ------- --------- --------
Balance at March 3, 2001 43,329,000 4,333 71,766 368,148 - (158,983) 285,264
Common stock issued in connection with the
acquisition of Earl Jean, Inc. 1,122,000 112 18,354 18,466
Common stock issued on exercise of stock options 267,000 27 2,531 2,558
Income tax benefit from stock options 895 895
Comprehensive income
Net earnings 17,259 17,259
Other comprehensive (loss), net of taxes:
Foreign currency translation adjustments (1,435) (1,435)
Unrealized loss on interest rate swap (427) (427)
----------- -------- -------- -------- ------- --------- --------
Total comprehensive income 15,397
--------
Balance at March 2, 2002 (carried forward) 44,718,000 $ 4,472 $ 93,546 $385,407 $(1,862) $(158,983) $322,580
The accompanying notes are an integral part of these statements.
F-5
Nautica Enterprises, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
Years ended March 1, 2003, March 2, 2002 and March 3, 2001
(amounts in thousands, except share data)
Accumulated
other
Common stock Additional comprehensive
--------------------- paid-in Retained income Treasury
Shares Amount capital earnings (loss) stock Total
----------- -------- -------- -------- ------------- --------- --------
Balance at March 2, 2002 (brought forward) 44,718,000 $ 4,472 $93,546 $385,407 $(1,862) $(158,983) $322,580
Common stock issued on exercise of stock options 418,000 42 1,787 1,829
Income tax benefit from stock options 883 883
Purchase of treasury stock (339) (339)
Comprehensive income
Net earnings 20,698 20,698
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments 684 684
Unrealized loss on interest rate swap (109) (109)
----------- -------- ------- -------- ------- --------- --------
Total comprehensive income 21,273
--------
Balance at March 1, 2003 45,136,000 $ 4,514 $96,216 $406,105 $(1,287) $(159,322) $346,226
=========== ======== ======= ======== ======= ========= ========
The accompanying notes are an integral part of these statements.
F-6
Nautica Enterprises, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
YEAR ENDED Year ended Year ended
MARCH 1, March 2, March 3,
2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities
Net earnings $ 20,698 $ 17,259 $ 46,103
Adjustments to reconcile net earnings to net cash
provided by operating activities
Deferred income taxes (3,676) (6,921) (2,478)
Depreciation and amortization 28,970 29,045 22,968
Provision for bad debts 1,667 5,161 1,451
Loss on impairment of long-lived assets 10,964 7,870 -
Loss on impairment of goodwill 1,275 - -
Increase in interest rate swap liability 921 - -
Changes in operating assets and liabilities, net
of assets and liabilities acquired
Short-term investments 6,350 (804) 28,445
Accounts receivable (10,644) 14,342 (17,935)
Inventories (21,187) 41,766 (24,142)
Prepaid expenses and other current assets 2,170 1,902 (2,024)
Other assets (693) (1,824) (36)
Accounts payable - trade 4,287 (15,394) 14,833
Accrued expenses and other current liabilities 14,086 109 7,054
Income taxes payable 5,687 (1,363) 3,779
-------- -------- --------
Net cash provided by operating activities 60,875 91,148 78,018
-------- -------- --------
Cash flows from investing activities
Purchase of property, plant and equipment (24,427) (44,268) (41,712)
Acquisitions, net of cash acquired - (55,282) -
Payments to register trademark (45) (91) (199)
-------- -------- --------
Net cash used in investing activities (24,472) (99,641) (41,911)
-------- -------- --------
Cash flows from financing activities
Proceeds from long-term debt - 15,075 -
Principal payments on long-term debt (754) - -
Proceeds from issuance of common stock 1,829 2,558 2,246
Purchase of treasury stock (339) - (28,822)
-------- -------- --------
Net cash provided by (used in) financing activities 736 17,633 (26,576)
-------- -------- --------
INCREASE IN CASH AND
CASH EQUIVALENTS 37,139 9,140 9,531
Cash and cash equivalents at beginning of year 45,814 36,674 27,143
-------- -------- --------
Cash and cash equivalents at end of year $ 82,953 $ 45,814 $ 36,674
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 1,033 $ 1,844 $ -
Cash paid during the year for income taxes $ 10,326 $ 18,724 $ 27,829
The accompanying notes are an integral part of these statements.
F-7
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1, 2003, March 2, 2002 and March 3, 2001
(amounts in thousands, except share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nautica Enterprises, Inc. (the "Company") and its subsidiaries are
primarily engaged in the design, marketing, sourcing, distributing and sale
of men's, women's and children's apparel. The principal market for the
Company's products is the United States of America.
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 and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
2. Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America,
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.
3. Fair Value of Financial Instruments
The fair value of cash and cash equivalents, accounts receivable and
accounts payable approximates their carrying value due to their
short-term maturities. The fair value of long-term debt approximates
the carrying value and is estimated based on the current interest rates
offered to the Company for debt of similar maturity.
4. 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 municipal bonds that have been called for redemption and
short-term notes. The market value of the cash equivalents approximates
cost.
5. Short-Term Investments
Short-term investments are classified as trading securities and are
adjusted to market value at the end of each accounting period.
Unrealized market gains and losses are included in earnings. Realized
gains and losses on sales of investments are determined on a specific
identification basis, and are included in earnings.
F-8
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 1, 2003, March 2, 2002 and March 3, 2001
(amounts in thousands, except share data)
NOTE A (CONTINUED)
6. Accounts Receivable
The majority of the Company's accounts receivable are due from
customers in the retail industry. Credit is extended based on
evaluation of a customer's financial condition and, generally,
collateral is not required. Accounts receivable are stated at amounts
due from customers net of an allowance for doubtful accounts. Accounts
outstanding longer than the contractual payment terms are considered
past due. The Company determines its allowance by considering a number
of factors, including the length of time accounts receivable are past
due, the Company's previous loss history, the customer's current
ability to pay its obligation to the Company, and the condition of the
general economy and the retail industry as a whole.
7. 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 and the remaining wholesale inventories.
Inventories valued using the LIFO method, consisting primarily of
finished goods, comprised 33% and 34% of consolidated inventories
before LIFO adjustment at March 1, 2003 and March 2, 2002,
respectively. Had the Company utilized the FIFO method of accounting
for all inventory, inventories would have been higher by $2,317 and
$2,285 at March 1, 2003 and March 2, 2002, respectively.
8. 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 twenty to thirty-nine 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.
9. Goodwill and Other Intangibles
Goodwill represents the excess of cost over the fair value of net
assets acquired. Goodwill recorded in connection with acquisitions had
been amortized using the straight-line method over a ten- to forty-year
period through March 2, 2002. Other intangibles with determinable lives
are amortized on a straight-line basis over the estimated useful lives
of the assets. Other intangibles without determinable lives represent
trademarks that had been amortized using the straight-line method over
the estimated useful lives of the assets through March 2, 2002.
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets," changed the accounting for goodwill and
other intangible assets without determinable lives from an amortization
method to an impairment-only approach and, accordingly, the Company
tests goodwill and other intangible assets without determinable lives
for impairment through the use of independent third-party appraisals.
F-9
Nautica Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 1, 2003, March 2, 2002 and March 3, 2001
(amounts in thousands, except share data)
NOTE A (CONTINUED)
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. In evaluating the fair value and
future benefits of such assets, the Company performs an analysis of the
anticipated undiscounted future net cash flows of the individual assets
over the remaining amortization period and recognizes an impairment
loss if the carrying value exceeds the expected future cash flows. The
impairment loss is measured based upon the difference between the fair
value of the asset and its recorded carrying value.
11. 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. Allowances for estimated returns and
discounts are provided when sales are recorded.
12. Shipping and Handling Fees and Costs
Shipping and handling fees billed to customers are recorded as revenue.
The costs associated with shipping goods to customers are recorded as a
cost of sales.
13. 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 $25,900, $31,300 and
$29,200 in 2003, 2002 and 2001, respectively.
14. 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.
15. Earnings Per Share
Basic net earnings per share excludes