<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MAY 31, 1999
Commission File Number 0-13851
NITCHES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2848021
(State of Incorporation) (I.R.S. Employer Identification No.)
10280 CAMINO SANTA FE, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices)
Registrant's telephone number: (619) 625-2633
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
- -------------------------- ----------------------------
Common Stock, no par value NASDAQ SmallCap Market
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 [ ]
As of July 02, 1999, 1,064,680 shares of the Registrant's common stock were
outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NITCHES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
May 31, August 31,
1999 1998
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 225,000 $ 1,338,000
Receivables:
Trade accounts, less allowances 4,553,000 5,306,000
Income taxes receivable -- 5,000
Due from affiliates and employees 6,000 124,000
----------- -----------
4,559,000 5,435,000
Inventories, net 3,271,000 5,340,000
Deferred income taxes 323,000 323,000
Other current assets 169,000 159,000
----------- -----------
Total current assets 8,547,000 12,595,000
Furniture, fixtures and equipment, net 64,000 137,000
Deferred income taxes 987,000 987,000
Other assets 63,000 63,000
----------- -----------
$ 9,661,000 $13,782,000
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,749,000 $ 3,211,000
Income tax payable 370,000 --
----------- -----------
Total current liabilities 3,119,000 3,211,000
Shareholder's equity:
Common stock, no par value,
50,000,000 shares authorized; issued and
outstanding (1,064,680 at May 31,
1999 and 2,012,030 at August 31, 1998) 1,308,000 1,308,000
Retained earnings 5,234,000 9,263,000
----------- -----------
Total shareholders' equity 6,542,000 10,571,000
----------- -----------
$ 9,661,000 $13,782,000
=========== ===========
</TABLE>
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NITCHES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Third quarter ended Nine months ended
---------------------------- ---------------------------
May 31, May 31, May 31, May 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 9,059,000 $ 8,483,000 $ 24,808,000 $ 23,740,000
Cost of goods sold 6,644,000 6,467,000 18,420,000 18,009,000
------------ ------------ ------------ ------------
Gross profit 2,415,000 2,016,000 6,388,000 5,731,000
Expenses:
Selling, general and administrative 2,209,000 1,948,000 5,581,000 6,437,000
------------ ------------ ------------ ------------
Income (loss) from operations 206,000 68,000 807,000 (706,000)
Interest income (expense) (31,000) 62,000 37,000 205,000
------------ ------------ ------------ ------------
Income (loss) before income taxes 175,000 130,000 844,000 (501,000)
Provision (benefit) from income taxes 68,000 51,000 329,000 (195,000)
------------ ------------ ------------ ------------
Net income (loss) 107,000 $ 79,000 515,000 $ (306,000)
============ ============ ============ ============
Earnings (loss) per basic and diluted
Shares $ .10 $ .04 $ .40 $ (.14)
============ ============ ============ ============
Weighted average number of basic
Shares outstanding 1,098,631 2,013,887 1,280,249 2,167,722
============ ============ ============ ============
Weighted average number of diluted
Shares outstanding 1,098,631 2,085,376 1,280,249 2,243,735
============ ============ ============ ============
</TABLE>
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NITCHES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended May 31
1999 1998
----------- -----------
<S> <C> <C>
Net cash provided by operating activities $ 2,623,000 $ 1,453,000
----------- -----------
Cash flows from investing activities:
Capital expenditures (24,000) (37,000)
----------- -----------
Net cash used by investing activities (24,000) (37,000)
----------- -----------
Cash flows from financing activities:
Advances from factor 832,000
Purchases and retirement of parent common stock (4,544,000) (1,107,000)
----------- -----------
Net cash used by financing activities (3,712,000) (1,107,000)
----------- -----------
Net decrease in cash and cash equivalents (1,113,000) 309,000
Cash and cash equivalents at beginning of period 1,338,000 955,000
----------- -----------
Cash and cash equivalents at end of period $ 225,000 $ 1,264,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 255,000 $ 92,000
Income taxes $ 26,000 $ 54,000
</TABLE>
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NITCHES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Nitches, Inc. (the "Company") is a wholesale importer and distributor
primarily of women's clothing manufactured to its specifications and distributed
in the United States under Company brand labels and private retailer labels.
2. Condensed Financial Statements:
The consolidated balance sheet as of May 31,1999, and the consolidated
statements of operations and the condensed consolidated cash flow statements for
the periods ended May 31, 1999 and 1998 have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the consolidated
financial position, results of operations and cash flows at May 31,1999 and for
all periods presented have been made. The results of operations for the periods
ended May, 1999 and 1998 are not necessarily indicative of the operating results
for the full years.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Company's August 31, 1998 annual report.
Certain account balances as of August 31, 1998 have been reclassified to
conform to the May 31, 1999 condensed financial statement presentation.
3. Earnings Per share:
At May 31, 1999, there were no stock options outstanding and therefore no
dilutive effect to the weighted average number of shares outstanding.
4. Inventories:
<TABLE>
<CAPTION>
May 31, August 31,
1999 1998
---------- ----------
<S> <C> <C>
Fabric and Trims $ 103,000 $ 417,000
Finished Goods 3,167,000 4,923,000
---------- ----------
$3,270,000 $5,340,000
========== ==========
</TABLE>
5. Trade accounts:
Pursuant to the terms of an agreement between Nitches and a factor, Nitches
sells a majority of its trade accounts receivable to the factor on a
pre-approved, non-recourse basis. The Company may request advances in
anticipation of customer collections and open letters of credit through the
factor, all of which are collateralized by all of the Company's assets.
Outstanding advances are charged interest at the factor's prime rate less one
half percent. Advances and contingent liabilities for irrevocable letters of
credit outstanding are as follows:
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NITCHES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statement (continued)
5. Trade accounts (continued):
<TABLE>
<CAPTION>
May 31, August 31,
1999 1998
----------- -----------
<S> <C> <C>
Receivables assigned to factor:
Nonrecourse $ 5,396,000 $ 4,814,000
Recourse 304,000 707,000
Advances from factor (832,000) (276,000)
----------- -----------
Due from factor 4,868,000 5,245,000
Nonfactored accounts receivable 148,000 336,000
Allowance for customer credits and doubtful accounts (463,000) (275,000)
----------- -----------
$ 4,553,000 $ 5,306,000
=========== ===========
Contingent liabilities for irrevocable letters of credit $ 4,779,000 $ 6,313,000
=========== ===========
</TABLE>
The factoring agreement allows the Company to borrow up to
$15,000,000, limited by certain percentages of outstanding accounts receivable
and finished goods inventory owned by the Company. The President has provided a
$1,000,000 personal guarantee in connection with the factoring arrangement.
6. Stock repurchase and related party transactions:
On October 21, 1998, the Company purchased and retired 1,050,426
shares of its outstanding common stock for $4 per share in connection with a
self tender offer. Of those shares, 436,563 were purchased from officers and
directors. The total cost of the transaction to the Company was approximately
$4.3 million. Cash and cash equivalents, together with proceeds from borrowings
under the new factoring agreement, were used to purchase the tendered shares.
The Company's president subsequently purchased 331,748 shares from its chairman
and a director at the $4 per share tender price on November 19, 1998.
During the third quarter of fiscal 1999, the Company purchased, as
part of its ongoing stock purchase program, 56,488 shares at an approximate
average of $3.22 per share for a total of $182,000.
The Company rents a 30,000 square foot warehouse and office building
from Kuma Sport, Inc., which is 40% owned by a director of Nitches. The Company
pays rent of $15,000, on a month-to-month basis, which management believes is
consistent with the fair market value of the facility. Nitches is also
purchasing labor and administrative services from Kuma Sport on a monthly basis,
as needed, at fair market rates. The Company purchased labor and administrative
services from Kuma Sport, Inc. for approximately $161,000 in the third quarter
of fiscal 1999.
7. Operating segments:
The Company's products comprise a single operating segment. Sales are made
to a variety of customers throughout the United States. Sales to three separate
customers accounted for 25.5%, 17.7%, and 12.0%, respectively, of the Company's
net sales in the quarter ended May 31,1999. These same customers accounted for
33.3%, 11.6%, and 11.3%, respectively, of the Company's trade receivable balance
at May 31,1999.
6
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NITCHES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statement (continued)
8. Contingency
Management has initiated a program to prepare the Company's computer
systems and applications for the year 2000. The Company has incurred internal
staff costs and other expenses related to infrastructure and facilities
enhancements necessary to prepare the systems for the year 2000. Certain
internal applications have already been modified and testing and conversion of
system applications has been completed. The Company is also continuing to assess
its vendors, customers and other third parties as to their year 2000 compliance
and prepare contingency plans.
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<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MAY 31, 1999 COMPARED TO THE NINE MONTHS ENDED MAY 31, 1998.
Net sales for the nine months ended May 31, 1999 increased approximately
$1.1 million (4.5%) as compared to the nine months ended May 31, 1998. This
increase is primarily attributable to the Company's increase in private label
sales in the sleepwear product line in the quarter ending November 30,1998.
Gross margins increased from 24.1% for the nine months ended May 31, 1998
to 25.7% for the current nine-month period. The increase was the result of the
Company's product mix shifting to higher gross margin product such as Western
Wear in the quarter ending May 31, 1999. The Company's product mix constantly
changes to reflect customer mix, fashion trends and changing seasons.
Consequently, gross margins are likely to vary on a quarter-to-quarter basis and
in comparison to gross margins generated in the same period of prior fiscal
years.
Selling, general and administrative expenses decreased in dollar amount
from $6.4 million for the first nine months of last year to $5.6 million for the
first nine months of fiscal 1999, and decreased as a percent of net sales from
27.1% last year to 22.5% for the current period. The decrease in dollar amount
and decrease as a percent of net sales is a result of the Company's continued
efforts to decrease overhead.
THREE MONTHS ENDED MAY 31, 1999 COMPARED TO THE THREE MONTHS ENDED MAY 31, 1998.
Net sales for the third quarter of fiscal 1999 increased approximately $.6
million (6.8%) compared to the net sales for the same quarter last year.
Overall, sales increased in the current quarter primarily due to an increase in
private label sleepwear sales.
Gross margins increased from 23.8% for the three months ended May 31, 1998
to 26.7% for the current quarter. The increase is the result of the Company's
product mix shifting to higher gross margin product such as Western Wear. The
Company's product mix constantly changes to reflect customer mix, fashion trends
and changing seasons. Consequently, gross margins are likely to vary on a
quarter-to-quarter basis and in comparison to gross margins generated in the
same period of prior fiscal years.
Selling, general and administrative expenses increased in dollar amount
from $1.9 million for the third quarter of last year to $2.2 million for the
third quarter of fiscal 1999, and increased as a percent of net sales from 23.0%
last year to 24.4% for the current quarter. The increase in dollar amount is
primarily due to nonrecurring restructuring charges related to a product line.
LIQUIDITY AND CAPITAL RESOURCES
Working capital of $5.4 million at May 31,1999 decreased from the August
31, 1998 level of $9.4 million, while the current ratio decreased from 3.92:1 at
August 31, 1998 to 2.74:1 at May 31, 1999. The principal reason for the decrease
in working capital and in current ratio was the Company's stock repurchases
through its tender offer of approximately $4.3 million which was completed in
November 1998.
Effective October 1, 1998, the Company entered into new agreements with
Congress Talcott Corporation West ("Congress"), including a Discount Factoring
Agreement, Addendum to Discount Factoring Agreement, Trade Financing Agreement,
Inventory Security Agreement, Financial Covenant Agreement and Agreement to
Issue Letter of Credit Guaranties (collectively, the "Discount Factoring
Agreement"). Effective March 31,1999, the assets of the Congress factoring
business were purchased by the CIT Group/Commercial Services, Inc. ("CIT"). The
Company sells substantially all of its trade receivables to CIT on a
pre-approved, non-recourse basis. The Company attempts to make the recourse
shipments on a COD basis or ensure that the customers' payments are backed by a
commercial or standby letter of credit issued by the customer's bank. The amount
of the Company's receivables which were recourse
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<PAGE> 9
and were not made on a COD basis or supported by commercial or standby letters
of credit at May 31, 1999 was approximately $406,000 of which approximately
$146,000 has been collected through June 15,1999.
Payment for nonrecourse factored receivables is made at the time customers
make payment to CIT or, if a customer is financially unable to make payment,
within approximately 180 days of the invoice due date. Under the Discount
Factoring Agreement, the Company can request advances in anticipation of
customer collections at CIT's prime rate (currently 7.75%) less one-half
percent, and open letters of credit through CIT. The amount of borrowings by the
Company, including a portion of outstanding letters of credit, are limited to
certain percentages of outstanding accounts receivable and finished goods
inventory owned by the Company. Borrowings are collateralized by all of the
assets of the Company as well as a $1 million guaranty of the Company's
president, Mr. Wyandt. At May 31, 1999, the Company had outstanding letters of
credit of approximately $4.8 million for the purchase of finished goods, which
had been opened, through the financial institution. Under the Discount Factoring
Agreement, the Company is required to maintain $5 million of net worth and $5
million of working capital. The Discount Factoring Agreement can be terminated
by CIT on 60-days prior written notice.
On November 18, 1998, the Company purchased and retired 1,050,426
shares of its outstanding common stock for $4 per share in connection with a
self tender offer. The total cost of the transaction was approximately $4.3
million. The funds for the transaction came from cash and cash equivalents of
the Company in addition to borrowings of approximately $3 million under the
Discount Factoring Agreement.
INVENTORY
In its ordinary course of operations, the Company generally makes some sales
below its normal selling prices or below cost. Based on prior experience,
management believes this will be true for some inventory held or acquired after
May 31,1999. The amount of such sales depends on several factors, including
general economic conditions, market conditions within the apparel industry, the
desirability of the styles held in inventory and competitive pressures from
other garment suppliers.
The Company's inventory decreased from $5.3 million at August 31, 1998 to
$3.3 million at May 31, 1999. The Company has established an inventory markdown
reserve as of May 31, 1999, which management believes will be sufficient for
current inventory that is expected to be sold below cost in the future. There
can be no assurance that the Company will realize its expected selling prices,
or that the inventory markdown reserve will be adequate, for items in inventory
as of May 31, 1999 for which customer sales orders have not yet been received.
BACKLOG
At May 31, 1999, the Company had unfilled customer orders of $13.1
million compared to $13.0 million of unfilled customer orders at May 31,1998,
with such orders generally scheduled for delivery by Oct 1999 and Oct 1998,
respectively. The increase in backlog is primarily attributable to the increase
in sales of private label sleepwear. These amounts include both confirmed orders
and unconfirmed orders which the Company believes, based on industry practice
and past experience, will be confirmed. While cancellations, rejections and
returns have generally not been material in the past, there can be no assurance
that cancellations, rejections and returns will not reduce the amount of sales
realized from the backlog of orders at May 31,1999.
IMPACT OF EXCHANGE RATES
While the Company purchases over 90% of its products from foreign
manufacturers, all of its purchases are denominated in United States dollars.
Because the Company's products are sold primarily in the United States, in
dollar denominated transactions, the Company does not engage in hedging or other
arbitrage to reduce currency risk. A prolonged increase in the value of the
dollar versus foreign currencies could enhance the Company's purchasing power
for new purchase orders and reduce its cost of goods sold. Conversely, a
prolonged decrease in the value of the dollar relative to foreign currencies
could result in an increase in the Company's cost of manufacturing for new
purchase orders and costs of goods sold.
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<PAGE> 10
IMPACT OF INFLATION AND DEFLATION
Management does not believe that inflation has had any material impact upon
the Company's revenues or income from operations to date. However, continued
deflation in women's clothing prices may put pressure on gross margins in the
future. Resistance on the part of the consumer to increases in prices and
increasing fabric and labor costs may lead to an increased cost of goods on a
percentage basis.
YEAR 2000 ISSUE
The worldwide issue which has arisen regarding the arrival of the year
2000 is the result of computer programs being written using two digits rather
than four digits to define the applicable year. Many computer programs that have
time sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. Furthermore, they may not recognize the year 2000 as a leap
year. If the Company did not ensure that these were corrected in its systems,
this could result in a system failure or miscalculations causing disruptions of
operations including a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company also faces risk from the Year 2000 issues affecting its
suppliers, customers and service providers. This risk can stem from the general
issue of those entities' ability to conduct their business, as well as the
specific issue of communication and integration issued between the Company's
computer systems and those entities' systems. Manufacturers of clothing may be
experiencing power interruptions or the failure of computerized machinery or
machinery with embedded logic as a result of the Year 2000 issue. Management
believes that the risk associated with such problems can be remediated by moving
production to alternate suppliers who are not adversely affected, but there can
be no assurance of their availability or that the change will not result in an
interruption in service or an increase in cost resulting in reduced
profitability. The Company receives electronic purchase orders from certain
large customers. In the event that the system for delivering electronic purchase
orders failed, the customers would have to return to paper purchase orders and
the Company may experience some interruption in the placement of orders for
merchandise.
The Company has completed the remediation of its year 2000 exposure as
it pertains to internal systems, and continues to assess key customer and
supplier compliance. The internal systems include all traditional data
processing computer systems and all control, communication, and reporting
equipment such as security, telephones, and timeclocks. Because the Company has
purchased all of its critical systems (hardware and software) from third
parties, it did not incur any material costs as the updates were provided under
maintenance contracts.
The Company has initiated communications with all of its key customers
and suppliers to determine the extent to which the Company is vulnerable based
upon those third parties' failure to remediate their own year 2000 issues. The
Company has completed testing with those third parties (exchanges of critical
information such as orders, purchases, invoices, fund transfers, et al.). Part
of this process will be to provide mutual contingency plans; however, at this
time, there can be no assurance that the systems of other companies on which the
Company relies will be converted on a timely basis and would not have material
adverse effect on the Company.
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CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in the annual report on Form 10K under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations", as
well as oral statements that may be made by the Company or by officers,
directors or employees of the Company acting on the Company's behalf, that are
not historical fact constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements involve
known and unknown risks and uncertainties which may cause the Company's actual
results in future periods to differ materially from forecasted results. Those
risks include a softening of retailer or consumer acceptance of the Company's
products, pricing pressures and other competitive forces, or unanticipated loss
of a major customer. In addition, the Company's business, operations and
financial condition are subject to reports and statements filed from time to
time with the Securities and Exchange Commission.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings to which the Company or any of its
subsidiaries was a party in the quarter ended May 31,1999.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith. Exhibit numbers refer to Item
601 of Regulation S-K:
Exhibit No. 27: Financial Data Schedule
(b) There were no reports on Form 8-K during the quarter ended May 31,1999.
11
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
NITCHES, INC.
---------------------------------------
Registrant
July 09, 1999 By: Steven P. Wyandt
---------------------------------------
Steven P. Wyandt
As Principal Financial Officer and on
behalf of the Registrant
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 225,000
<SECURITIES> 0
<RECEIVABLES> 4,559,000
<ALLOWANCES> 0
<INVENTORY> 3,271,000
<CURRENT-ASSETS> 8,547,000
<PP&E> 64,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,661,000
<CURRENT-LIABILITIES> 3,119,000
<BONDS> 0
0
0
<COMMON> 1,308,000
<OTHER-SE> 6,542,000
<TOTAL-LIABILITY-AND-EQUITY> 9,661,000
<SALES> 24,808,000
<TOTAL-REVENUES> 24,808,000
<CGS> 18,420,000
<TOTAL-COSTS> 18,420,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (37,000)
<INCOME-PRETAX> 844,000
<INCOME-TAX> 329,000
<INCOME-CONTINUING> 515,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 515,000
<EPS-BASIC> .40
<EPS-DILUTED> .40
</TABLE>
