<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: NOVEMBER 30, 1998
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 January 8, 1998, 1,122,748 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>
November 30, August 31,
1998 1998
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 450,000 $ 1,338,000
Receivables:
Trade accounts, less allowances 3,253,000 5,306,000
Income taxes receivable -- 5,000
Due from affiliates and employees 128,000 124,000
----------- -----------
3,381,000 5,435,000
Inventories, net 4,459,000 5,340,000
Deferred income taxes 323,000 323,000
Other current assets 253,000 159,000
----------- -----------
Total current assets 8,866,000 12,595,000
Furniture, fixtures and equipment, net 122,000 137,000
Deferred income taxes 987,000 987,000
Other assets 62,000 63,000
----------- -----------
$10,037,000 $13,782,000
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,123,000 $ 3,211,000
Income tax payable 277,000 --
----------- -----------
Total current liabilities 3,400,000 3,211,000
Shareholder's equity:
Common stock, no par value,
50,000,000 shares authorized;
issued and outstanding (1,122,748
at November 30, 1998 and 2,345,192
at August 31, 1998) 1,308,000 1,308,000
Retained earnings 5,329,000 9,263,000
----------- -----------
Total shareholders' equity 6,637,000 10,571,000
----------- -----------
$10,037,000 $13,782,000
=========== ===========
</TABLE>
2
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NITCHES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended November 30,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales $10,318,000 $ 9,298,000
Cost of goods sold 7,807,000 6,833,000
----------- -----------
Gross profit 2,511,000 2,465,000
Expenses:
Selling, general and administrative 1,931,000 2,430,000
----------- -----------
Income from operations 580,000 35,000
Interest income (expense), net 26,000 47,000
----------- -----------
Income before income taxes 606,000 82,000
Provision for income taxes 236,000 32,000
----------- -----------
Net income $ 370,000 $ 50,000
=========== ===========
Earning per basic and diluted share: $ .23 $ .02
=========== ===========
Weighted average number of basic shares
outstanding 1,621,137 2,420,592
=========== ===========
Weighted average number of diluted
shares outstanding 1,621,137 2,531,792
=========== ===========
</TABLE>
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NITCHES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended November 30,
1998 1997
------------ -----------
<S> <C> <C>
Net cash used by operating activities $ (904,000) $ (77,000)
Cash flows from investing activities:
Capital expenditures (14,000) (11,000)
----------- -----------
Net cash used by investing activities (14,000) (11,000)
----------- -----------
Cash flows from financing activities:
Advances 4,334,000
Purchases and retirement of parent
common stock (4,304,000) (23,000)
----------- -----------
Net cash provided by financing activities 30,000 (23,000)
----------- -----------
Net decrease in cash and cash equivalents (888,000) (111,000)
Cash and cash equivalents at beginning of
period 1,338,000 955,000
----------- -----------
Cash and cash equivalents at end of period $ 450,000 $ 844,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 39,040 $ 67,000
Income taxes -- $ 49,000
</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 November 30,1998, and the consolidated
statements of operations and the condensed consolidated cash flow statements for
the three months ended November 30,1998 and 1997 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
November 30,1998 and for all periods presented have been made. The results of
operations for the periods ended November 30, 1998 and 1997 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 November 30, 1998 condensed financial statement presentation.
3. Earnings Per share:
At November 30, 1998, there were no stock options outstanding and therefore
no dilutive effect to the weighted average number of shares outstanding.
4. Inventories:
<TABLE>
<CAPTION>
November 30, August 31,
1998 1998
----------- ----------
<S> <C> <C>
Fabric and Trims $ 1,592,000 $ 417,000
Finished Goods 2,867,000 4,923,000
----------- ----------
$ 4,459,000 $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>
November 30, August 31,
1998 1998
----------- -----------
<S> <C> <C>
Receivables assigned to factor:
Nonrecourse $ 7,518,000 $ 4,814,000
Recourse 403,000 707,000
Advances from factor (4,334,000) (276,000)
----------- -----------
Due from factor 3,587,000 5,245,000
Nonfactored accounts receivable 235,000 336,000
Allowance for customer credits and doubtful
accounts (569,000) (275,000)
----------- -----------
$ 3,253,000 $ 5,306,000
=========== ===========
Contingent liabilities for irrevocable
letters of credit $ 5,029,000 $ 6,313,000
=========== ===========
</TABLE>
Effective October 1, 1998, the factoring agreement was modified and renewed
to include provisions whereby the factor is responsible for customer collection
efforts, the Company may borrow up to $15,000,000, limited by certain
percentages of outstanding accounts receivable and finished goods inventory
owned by the Company, under the credit facility, and the President provides a
$1,000,000 personal guarantee.
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.
The Company rents a 30,000 square foot warehouse and office building
from Kuma Sport, Inc., which is 40% owned by the Chairman 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 $280,000 in the first quarter
of fiscal 1999.
7. Significant Customers:
Mervyn's, JCPenney, and Costco accounted for 29.6%, 25.4%, and 13.0%,
respectively, of the Company's net sales in the quarter ended November 30, 1998.
Mervyn's and JCPenney accounted for 25.6% and 11.2%, respectively, of the
Company's net sales in the quarter ended November 30, 1997.
JCPenney, Mervyn's, and Costco accounted for 25.0%, 21.6%, and 18.7%,
respectively, of the Company's trade receivable balance at November 30, 1998.
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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 sufficiently completed. The Company is also continuing to
assess its vendors, customers and other third parties as to their year 2000
compliance.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Net sales for the three months ended November 30, 1998 increased
approximately $1,020,000, or 11.0%, as compared to the three months ended
November 30, 1997. This increase is primarily attributable to the Company's
increase in private label sales in the sleepwear product line which accounted
for over fifty percent of the sales for the quarter to major customers such as
JCPenney and Mervyn's. Private label sales are the result of a joint product
development effort and the use of the retailers' label on the product.
Therefore, the Company performs more as a manufacturer and does not attain the
gross margin that it would on its proprietary designs and the use of Company
owned labels.
The gross margin of 24.3% for the first quarter of fiscal 1999 decreased
from the 26.5% gross margin reported for the first quarter of last year. The
decrease was primarily attributable to the lower gross margins attained on
private label sales of the sleepwear product line which contributed
significantly to the sales for the quarter. The Company's product mix is
constantly changing to reflect the changing seasons and fashion trends.
Consequently, gross margins are likely to vary on a quarter-to-quarter basis and
in comparison to gross margins generated in the same quarter of prior fiscal
years.
Selling, general and administrative expenses decreased in dollar amount from
$2.4 million for the first quarter of last year to $1.9 million for the current
quarter and decreased as a percent of sales from 26.1% for the first quarter of
last year to 18.7% for the current quarter. The decrease in dollar amount and
the decrease as a percentage of sales reflects the Company's increased sales
volume and its restructuring to decrease overhead which resulted in lower
salary, commission and rent expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital of $5.5 million at November 30, 1998 decreased
from the August 31, 1998 level of $9.4 million, while the Company's current
ratio decreased from 3.92:1 at August 31, 1998 to 2.61:1 at November 30, 1998.
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"). The Company sells substantially all of its trade receivables to
Congress 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 nonrecourse and were
not made on a COD basis or supported by commercial or standby letters of credit
at November 30, 1998 was approximately $638,000 of which approximately $271,000
has been collected through December 31, 1998.
Payment for such receivables is made at the time customers make payment to
Congress 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 Congress' prime rate (currently 7.75%) less one-half percent, and
open letters of credit through Congress. 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 November 30, 1998, the Company had outstanding letters
of credit of $5,029,000 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 Congress
on 60-days prior written notice.
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<PAGE> 9
Effective August 31, 1998, the Company merged with its wholly owned
subsidiary Body Drama, Inc. The merger resulted in the elimination of a deferred
income tax liability of approximately $973,000. The deferred income tax
liability was generated in 1991 when the Company sold a 49% interest in Body
Drama, Inc. to the public in an initial public offering, and represented a
potential tax liability in the event that the Company were to sell its interest
in its Body Drama, Inc. subsidiary to a third party. Body Drama, Inc.
repurchased the 49% interest in a self tender offer which took place in Fiscal
1995. The merger of the Company with Body Drama, Inc. has resulted in the
elimination of the potential liability and an increase in the book value of the
Company.
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. Borrowings under the Discount Factoring Agreement are expected to be
repaid from cash flow from operations over the next 18 months. The Company has
an additional borrowing capacity of $12,000,000, limited by certain percentages
of outstanding accounts receivable and finished goods inventory owned by the
Company, under the Discount Factoring Agreement, which management believes is
adequate to meet working capital needs.
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
November 30, 1998. 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
$4.5 million at November 30, 1998. The Company has established an inventory
markdown reserve as of November 30, 1998, 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 November 30, 1998 for which customer sales orders have
not yet been received.
BACKLOG
At November 30, 1998, the Company had unfilled customer orders of $13.5
million compared to $9.6 million of unfilled customer orders at November 30,
1997, with such orders generally scheduled for delivery by April 1999 and April
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 November 30, 1998.
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. An 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 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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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 is expected to put pressure on gross
margins in fiscal year 1999. The strong resistance on the part of the consumer
to increases in price and the increasing fabric and labor costs 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. 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 is in the process of remediating its year 2000 exposure as it
pertains to internal systems, as well as assessing 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. This process is being supervised by the
Company's president. At this time, the Company is in the final testing phase of
its internal systems and plans to have this completed by January 31, 1999.
Because the Company purchases all of its critical systems (hardware and
software) from third parties, it is not incurring any material costs as the
updates are being 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 is currently scheduling testing with those third parties (exchanges of
critical information such as orders, purchases, invoices, fund transfers, et
al.) and plans to complete these by June 30, 1999. 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.
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
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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 November 30, 1998.
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
November 30, 1998.
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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
January 19, 1999 By: /s/ 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> NOV-30-1998
<CASH> 450,000
<SECURITIES> 0
<RECEIVABLES> 3,381,000
<ALLOWANCES> 0
<INVENTORY> 4,459,000
<CURRENT-ASSETS> 8,866,000
<PP&E> 122,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,037,000
<CURRENT-LIABILITIES> 3,400,000
<BONDS> 0
0
0
<COMMON> 1,308,000
<OTHER-SE> 6,637,000
<TOTAL-LIABILITY-AND-EQUITY> 10,037,000
<SALES> 10,318,000
<TOTAL-REVENUES> 10,318,000
<CGS> 7,807,000
<TOTAL-COSTS> 7,807,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (26,000)
<INCOME-PRETAX> 606,000
<INCOME-TAX> 236,000
<INCOME-CONTINUING> 370,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 370,000
<EPS-PRIMARY> .23<F1>
<EPS-DILUTED> .23
<FN>
<F1> For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
