<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, 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: (858) 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 10, 2000, 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>
November 30, August 31,
1999 1999
------------ -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 243,000 $ 201,000
Receivables:
Trade accounts, less allowances 4,850,000 3,267,000
Due from affiliates and employees 31,000 35,000
----------- -----------
4,881,000 3,302,000
Inventories, net 4,626,000 4,553,000
Deferred income taxes 347,000 347,000
Other current assets 676,000 590,000
----------- -----------
Total current assets 10,773,000 8,993,000
Furniture, fixtures and equipment, net 72,000 83,000
Deferred income taxes 647,000 647,000
Other assets 79,000 63,000
----------- -----------
$11,571,000 $ 9,786,000
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 3,661,000 $ 2,610,000
Accrued expenses 443,000 344,000
Income taxes payable 343,000 --
----------- -----------
Total current liabilities 4,447,000 2,954,000
Shareholders' equity:
Common stock, no par value,
50,000,000 shares authorized;
issued and outstanding (1,064,680 at
November 30, 1999 and 1,064,680 at August 31,1999) 805,000 805,000
Retained earnings 6,319,000 6,027,000
----------- -----------
Total shareholders' equity 7,124,000 6,832,000
----------- -----------
$11,571,000 $ 9,786,000
=========== ===========
</TABLE>
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NITCHES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended November 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 11,527,000 $ 10,318,000
Cost of goods sold 8,657,000 7,807,000
------------ ------------
Gross profit 2,870,000 2,511,000
Expenses:
Selling, general and administrative 1,913,000 1,931,000
------------ ------------
Income from operations 957,000 580,000
Interest income (expense), net (28,000) 26,000
------------ ------------
Income before income taxes 914,000 606,000
Provision for income taxes 356,000 236,000
------------ ------------
Net income $ 558,000 $ 370,000
============ ============
Earning per basic and diluted share: $ .52 $ .23
============ ============
Weighted average number of basic shares
Outstanding 1,064,680 1,621,137
============ ============
Weighted average number of diluted
shares Outstanding 1,064,680 1,621,137
============ ============
</TABLE>
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NITCHES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended November 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net cash used by operating activities $(1,220,000) $ (904,000)
Cash flows from investing activities:
Capital expenditures -- (14,000)
----------- -----------
Net cash used by investing activities -- (14,000)
----------- -----------
Cash flows from financing activities:
Advances 1,528,000 4,334,000
Purchases and retirement of common stock (4,304,000)
Dividend (266,000) --
----------- -----------
Net cash provided by financing activities 1,262,000 30,000
----------- -----------
Net increase (decrease) in cash and cash
equivalents 42,000 (888,000)
Cash and cash equivalents at beginning of period 201,000 1,338,000
----------- -----------
Cash and cash equivalents at end of period 243,000 $ 450,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 38,000 $ 39,040
Income taxes 32,000 --
</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 30,1999, and the
consolidated statements of operations and the condensed consolidated cash flow
statements for the three months ended November 30, 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 November 30,1999 and for all periods presented have been made. The
results of operations for the periods ended November 30, 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, 1999 annual report.
3. Earnings Per share:
At November 30, 1999, there were no stock options or other such
financial instruments outstanding and therefore there is no dilutive effect to
the weighted average number of shares outstanding.
4. Inventories:
<TABLE>
<CAPTION>
November 30, August 31,
1999 1999
------------ ----------
<S> <C> <C>
Fabric and Trims 355,000 76,000
Finished Goods 4,271,000 4,477,000
--------- ---------
4,626,000 4,553,000
========= =========
</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,
1999 1999
------------ ----------
<S> <C> <C>
Receivables assigned to factor:
Nonrecourse 6,465,000 4,487,000
Recourse 146,000 36,000
Advances from factor (1,528,000) (1,166,000)
---------- ----------
Due from factor 5,083,000 3,357,000
Nonfactored accounts receivable 134,000 284,000
Allowance for customer credits and doubtful accounts (367,000) (374,000)
---------- ----------
4,850,000 3,267,000
========== ==========
Contingent liabilities for irrevocable letters credit 4,587,000 5,885,000
========== ==========
</TABLE>
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. Dividend, stock repurchase, and related party transactions:
The Company announced the distribution of a special dividend of $.25
(twenty five cents) per share, for a total of approximately $266,000, to the
shareholders of record as of November 17, 1999 and to be paid December 1, 1999.
On October 21, 1998, the Company purchased and retired approximately
1,049,500 shares of its outstanding common stock for $4 per share in connection
with a self-tender offer. Additionally, during the third quarter of fiscal year
1999, the Company purchased, as part of its ongoing stock repurchase program,
60,350 shares at an average price of $3.22 per share. The total cost of the
transactions to the Company was approximately $4,500,000. The stock repurchase
plan authorizes management to make purchases from time to time in the open
market or through privately negotiated transactions. The timing of the future
repurchases, if any, and the amount of shares will be based on management's
ongoing assessment of the Company's working capital requirements and liquidity.
The Company purchases labor and administrative services, as needed, at
fair market rates, from Kuma Sport, Inc. which is 40% owned by a director of
Nitches. The Company purchased labor and administrative services from Kuma
Sport, Inc. for $181,000 in the first quarter of fiscal 2000.
7. Significant Customers:
Sales to two customers accounted for 46.3% and 17.1%, respectively, of
the Company's net sales in the quarter ended November 30, 1999. Three customers
accounted for 29.6%, 25.4%, and 13%, respectively, of the Company's net sales in
the quarter ended November 30, 1998.
Three customers accounted for 48.1%, 13.1%, and 8.1%, respectively, of
the Company's trade receivable balance at November 30, 1999.
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NITCHES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statement (continued)
8. Contingency
Management has completed 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 been modified and tested and conversion of system
applications has been completed. The Company has assessed its vendors, customers
and other third parties as to their year 2000 compliance; contingency plans have
been prepared.
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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, 1999 increased
approximately $1,209,000, or 11.7%, as compared to the three months ended
November 30, 1998. 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, Mervyn's, and Sears. Private label sales are the result of a joint
product development effort and the use of the retailers' label on the product.
The gross margin for the first quarter of fiscal 2000 was 24.9% compared
to 24.3% reported for the first quarter of last year. 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 remained at $1.9 million
for the current quarter compared to the first quarter of last year and decreased
as a percent of sales from 18.7% for the first quarter of last year to 16.6% for
the current quarter. The decrease as a percentage of sales reflects the
Company's increased sales volume without a corresponding increase in overhead.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital of $6.3 million at November 30, 1999
increased from the August 31, 1999 level of $6.0 million, while the Company's
current ratio decreased from 3.04:1 at August 31, 1999 to 2.42:1 at November 30,
1999.
The Company announced the distribution of a special dividend of $.25
(twenty five cents) per share, for a total of approximately $266,000, to the
shareholders of record as of November 17, 1999 and to be paid December 1, 1999.
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 shipments for
non-factored customer sales 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 and
were not made on a COD basis or supported by commercial or standby letters of
credit at November 30, 1999 was approximately $270,000 of which approximately
$148,000 has been collected through January 10, 2000.
Payment for non-recourse 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 8.5%) 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 November 30, 1999, the Company had outstanding letters
of credit of approximately $4.6 million for the purchase of finished goods,
which had been opened through CIT. 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.
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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, 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 $5.0 million at August 31, 1999
to $4.6 million at November 30, 1999. The Company has established an inventory
markdown reserve as of November 30, 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 November 30, 1999 for which customer sales orders have
not yet been received.
BACKLOG
At November 30, 1999, the Company had unfilled customer orders of $14.5
million compared to $13.5 million of unfilled customer orders at November 30,
1998, with such orders generally scheduled for delivery by April 2000 and April
1999, 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, 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. 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.
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 fiscal year 2000. 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
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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 is to provide mutual contingency plans. Formal contingency plans
covering approximately 90% of the Company's backlog were in place as of December
31,1999; however, at this time, there can be no assurance that the systems of
other companies on which the Company relies were converted on a timely basis and
would not have material adverse effect on the Company.
As of January 10, 2000, the Company is not aware of any system failures
or miscalculations resulting in a disruption of its operations caused by arrival
of the Year 2000, or similar adverse effects experienced by its customers or
suppliers. The Company continues to monitor for any such failures or
disruptions.
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 November 30, 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 November 30,
1999.
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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 10, 2000 By: Steven P. Wyandt
--------------------------------
Steven P. Wyandt
As Principal Financial Officer
and on behalf of the Registrant
11
<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-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 243,000
<SECURITIES> 0
<RECEIVABLES> 4,881,000
<ALLOWANCES> 0
<INVENTORY> 4,626,000
<CURRENT-ASSETS> 10,773,000
<PP&E> 635,000
<DEPRECIATION> 563,000
<TOTAL-ASSETS> 11,571,000
<CURRENT-LIABILITIES> 4,447,000
<BONDS> 0
0
0
<COMMON> 805,000
<OTHER-SE> 6,319,000
<TOTAL-LIABILITY-AND-EQUITY> 7,124,000
<SALES> 11,527,000
<TOTAL-REVENUES> 11,527,000
<CGS> 8,657,000
<TOTAL-COSTS> 9,132,000
<OTHER-EXPENSES> 1,438,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,000
<INCOME-PRETAX> 914,000
<INCOME-TAX> 356,000
<INCOME-CONTINUING> 558,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 558,000
<EPS-BASIC> .52
<EPS-DILUTED> .52
</TABLE>
