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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: FEBRUARY 28, 2001
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 April 12, 2001, 1,064,680 shares of the Registrant's common stock were
outstanding.
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INDEPENDENT ACCOUNTANT'S REPORT
Board of Directors and Shareholders
Nitches, Inc.
We have reviewed the accompanying condensed consolidated balance sheets of
Nitches, Inc. and Subsidiaries as of February 28, 2001, and the related
condensed consolidated statements of income for three and six months ended and
cash flows for the six months ended February 28, 2001. These financial
statements are the responsibility of management of Nitches, Inc.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Nitches, Inc. and Subsidiaries as
of August 31, 2000, and the related consolidated statements of income,
shareholders' equity and cash flows for the year then ended not presented
herein; and in our report dated October 13, 2000, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of August 31, 2000, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
Moss Adams, LLP
Los Angeles, California
April 5, 2001
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NITCHES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
February 28, August 31,
2001 2000
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 174,000 $ 314,000
Receivables:
Trade accounts, less allowances 3,848,000 4,224,000
Due from affiliates and employees 92,000 38,000
----------- -----------
3,940,000 4,262,000
Inventories, net 4,527,000 5,055,000
Deferred income taxes 150,000 150,000
Other current assets 46,000 76,000
----------- -----------
Total current assets 8,837,000 9,857,000
Furniture, fixtures and equipment, net 95,000 109,000
Deferred income taxes 28,000 28,000
Other assets 19,000 17,000
----------- -----------
$ 8,979,000 $10,011,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,952,000 $ 2,534,000
Accrued expenses 136,000 417,000
Income tax payable 93,000 98,000
----------- -----------
Total current liabilities 2,181,000 3,049,000
Shareholders' equity:
Common stock, no par value,
50,000,000 shares authorized; 1,064,680
shares issued and outstanding 805,000 805,000
Retained earnings 5,993,000 6,157,000
----------- -----------
Total shareholders' equity 6,798,000 6,962,000
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$ 8,979,000 $10,011,000
=========== ===========
The accompanying notes are an integral part of these financial statements
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NITCHES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Three months ended Six months ended
-------------------------------- ---------------------------------
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
------------ ----------- ----------- -----------
Net sales $7,073,000 $9,664,000 $18,066,000 $21,191,000
Cost of goods sold 5,132,000 7,365,000 13,254,000 16,022,000
---------- ---------- ----------- -----------
Gross profit 1,941,000 2,299,000 4,812,000 5,169,000
Expenses:
Selling, general and administrative 1,771,000 1,706,000 3,735,000 3,634,000
---------- ---------- ----------- -----------
Income from operations 167,000 593,000 1,077,000 1,535,000
Interest and other income (expense), net 22,000 (20,000) (31,000) (48,000)
---------- ---------- ----------- -----------
Income before income taxes 189,000 573,000 1,046,000 1,487,000
Provision (benefit) for income taxes 70,000 225,000 408,000 582,000
---------- ---------- ----------- -----------
Net income $ 119,000 $ 348,000 $ 638,000 $ 905,000
========== ========== =========== ===========
Earnings per share $ .11 $ .33 $ .60 $ .85
========== ========== =========== ===========
Shares outstanding 1,064,680 1,064,680 1,064,680 1,064,680
========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements
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NITCHES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
-----------------------------
February 28, February 29,
2001 2000
------------ ------------
Net cash provided (used) by operating activities $(238,000) $ 582,000
--------- ---------
Cash flows from investing activities:
Capital expenditures (2,000) (42,000)
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Cash flows from financing activities:
Advances from factor 898,000 300,000
Dividends paid (798,000) (798,000)
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Net cash provided (used) by financing activities 100,000 (498,000)
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Net increase (decrease) in cash and cash equivalents (140,000) 42,000
Cash and cash equivalents at beginning of period 314,000 201,000
--------- ---------
Cash and cash equivalents at end of period $ 174,000 $ 243,000
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 108,000 $ 64,000
Income taxes $ 300,000 $ 32,000
The accompanying notes are an integral part of these financial statements
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NITCHES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
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 accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q. These have been
reviewed by the Company's independent auditors in accordance with the
professional standards and procedures as set forth in Statement of Auditing
Standards No. 71 (SAS 71). SAS 71 procedures for conducting a review of interim
financial information generally are limited to inquiries and analytical
procedures concerning significant accounting matters relating to the financial
information to be reported. They do not include all information and footnotes
necessary for a fair presentation of financial position and results of
operations and cash flows in conformity with generally accepted accounting
principles. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's Annual Report on Form 10-K for the year ended August
31, 2000. In the opinion of Management, all adjustments considered necessary for
a fair representation have been included in the interim period. Operating
results for the six months ended February 28, 2001 are not necessarily
indicative of the results that may be expected for the year ending August 31,
2001.
3. EARNINGS PER SHARE:
At February 28, 2001, there were no stock options or similar instruments
outstanding and therefore no dilutive effect to the weighted average number of
shares outstanding.
4. INVENTORIES:
February 28, August 31,
2001 2000
------------ ----------
Fabric and Trims $ 148,000 $ 126,000
Finished Goods 4,379,000 4,929,000
---------- ----------
$4,527,000 $5,055,000
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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 Condensed Consolidated Financial Statement (continued)
5. TRADE ACCOUNTS (CONTINUED):
February 28, August 31,
2001 2000
------------ -----------
Receivables assigned to factor:
Non-recourse $ 5,676,000 $ 4,986,000
Recourse 278,000 239,000
Advances from factor (1,894,000) (996,000)
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Due from factor 4,060,000 4,229,000
Non-factored accounts receivable 173,000 220,000
Allowance for customer credits and doubtful accounts (385,000) (225,000)
----------- -----------
$ 3,848,000 $ 4,224,000
=========== ===========
Contingent liabilities for irrevocable letters of credit $ 3,139,000 $ 4,510,000
=========== ===========
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 Company's President has provided a
$1,000,000 personal guarantee in connection with the factoring arrangement.
6. SPECIAL DIVIDENDS AND RELATED PARTY TRANSACTIONS:
The Company paid a special dividend of $.25 (twenty-five cents) per
share on November 30, 2000, for a total of approximately $266,000, to the
shareholders of record as of November 6, 2000. Furthermore, on February 23,
2001, the Company paid a special dividend of $.50 (fifty cents) per share, for a
total of approximately $532,000, to the shareholders of record as of February 6,
2001. During fiscal 2000, the Company declared and paid special dividends of
$1.65 per share.
The Company purchases labor and administrative services as needed, at
fair market rates, from Kuma Sport, Inc., a company that was 40% owned by a
director of Nitches until December 2000. At that time, the director transferred
his ownership in Kuma Sport to an unrelated party. The Company purchased labor
and administrative services from Kuma Sport for $305,000 through December 2000.
7. SIGNIFICANT CUSTOMERS:
Sales to three separate customers (Mervyn's, Sears, and Kohl's)
accounted for 30.6%, 24.7%, and 14.5% respectively, of the Company's net sales
in the three months ended February 28, 2001. Three customers accounted for
27.5%, 20.9%, and 15.0% of the Company's net sales in the three months ended
February 29, 2000.
These same customers accounted for 28.5%, 30.3%, and 11.7%,
respectively, of the Company's trade receivable balance at February 28, 2001.
Three customers accounted for 35.6%, 23.6%, and 15.2% of the Company's trade
receivable balance at February 29, 2000.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 2001 COMPARED TO THE SIX MONTHS ENDED FEBRUARY 29,
2000
Net sales for the six months ended February 28, 2001 decreased
approximately $3.1 million (14.7%) as compared to the six months ended February
29, 2000. This decline was primarily attributable to a decrease in unit sales in
the Company's sleepwear product line, including the lack of orders from a major
customer which accounted for sales of $1.5 million in fiscal 2000 (see BACKLOG
from 10-Q for period ended May 31, 2000) and the delay of shipments into the
third quarter by customers due to the slowing of retail sales.
Gross margin increased from 24.4% for the six months ended February 29,
2000 to 26.6% for the current six-month period. The increase was the result of
the Company's product mix shifting to higher gross margin western wear product
during the current quarter. 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 for the first six months of
fiscal 2001 were equal to the $3.6 million from last year, and increased as a
percent of net sales from 17.1% last year to 20.7% for the current period. The
primary reason for the increase as a percentage of sales was due to the decrease
in net sales from the earlier period. However, in the second quarter of fiscal
2001 the Company incurred reorganization expenses of approximately $150,000
related primarily to the closing of an overseas buying office in favor of an
agency relationship.
THREE MONTHS ENDED FEBRUARY 28, 2001 COMPARED TO THE THREE MONTHS ENDED FEBRUARY
29, 2000
Net sales for the three months ended February 28, 2001 decreased
approximately $2.6 million (26.8%) as compared to the three months ended
February 29, 2000. This decline was primarily attributable to a decrease in unit
sales in the Company's sleepwear product line, including the lack of orders from
a major customer which accounted for sales of $1.5 million in fiscal 2000 (see
BACKLOG, 10-Q for period ended May 31,2000) and the delay of shipments into the
third quarter by customers due to the slowing of retail sales.
Gross margin increased from 23.8% for the three months ended February
29, 2000 to 27.4% for the current three-month period. The increase was the
result of the Company's product mix shifting to higher gross margin western wear
product during this period. The Company's product mix constantly changes to
reflect customer mix, fashion trends and changing seasons. Consequently, gross
margin is 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 for the second quarter of
fiscal 2001 were slightly higher at $1.8 million as compared to $1.7 million a
year ago, and increased as a percent of net sales from 17.7% last year to 25.1%
for the current period. The primary reason for the increase as a percentage of
sales was due to the decrease in net sales from the earlier period. However, in
the second quarter of fiscal 2001 the Company incurred reorganization expenses
of approximately $150,000 related primarily to the closing of an overseas buying
office in favor of an agency relationship.
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LIQUIDITY AND CAPITAL RESOURCES
Working capital declined slightly to $6.7 million at February 28, 2001
as compared to $6.8 at August 31, 2000, and the current ratio increased to
4.05:1 at February 28, 2001 from 3.23:1 at August 31, 2000.
The Company paid a special dividend of $.25 (twenty-five cents) per
share on November 30, 2000, for a total of approximately $266,000, to the
shareholders of record as of November 6, 2000. Furthermore, on February 23,
2001, the Company paid a special dividend of $.50 (fifty cents) per share, for a
total of approximately $532,000, to the shareholders of record as of February 6,
2001.
The Company sells substantially all of its trade receivables to a factor
(CIT) on a pre-approved, non-recourse basis. The Company attempts to make any
recourse shipments on a COD basis or ensure that the customer's payments are
backed by a commercial or standby letter of credit issued by the customers'
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
February 28,2001 was approximately $451,000 of which approximately $142,000 had
been collected through March 31, 2001.
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 9.0%) 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 February 28, 2001, the Company had outstanding letters
of credit of approximately $3.1 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 written notice.
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
February 28, 2001. 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 $5.1 million at August 31, 2000
to $4.5 million at February 28, 2001. The Company has established an inventory
markdown reserve as of February 28, 2001, 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 February 28, 2001 for which customer sales orders have
not yet been received. The inventory markdown reserve is calculated based on
specific identification of aged goods and styles that are slow-moving or selling
off-price.
BACKLOG
The Company had unfilled customer orders of $13.6 million at February
28, 2001 compared to $14.0 million at February 29, 2000, with such orders
generally scheduled for delivery by August 2001 and August 2000, respectively.
The decrease in the backlog of $0.4 million is primarily the result of a
decrease in new private label sleepwear sales for the third quarter, offset by
the shifting of some orders from the second quarter due to the slowing of retail
sales. These amounts include both confirmed orders and unconfirmed orders that
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 February 28, 2001.
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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
for the balance of fiscal 2001. The strong resistance on the part of the
consumer to increases in price and increasing fabric and labor costs lead to an
increased cost of goods on a percentage basis.
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 that 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 were no material legal proceedings to which the Company or any of
its subsidiaries was a party in the six months ended February 28, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of shareholders of the Company was held on December 5,
2000. At the meeting, the shareholders approved the following:
(1) the appointment of Moss Adams LLP as the Company's independent certified
public accountants for the fiscal year ending August 31, 2001 by votes of
980,665 for, 500 against, and 102 abstentions, and
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(2) the election of directors as follows:
Name Votes For Withheld
---- --------- --------
Arjun C. Waney 980,567 700
Steven P. Wyandt 980,767 500
Luther A. Henderson 980,167 1,100
Eugene B. Price II 980,767 500
William L. Hoese 980,767 500
Item 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K during the quarter ended February 28,
2001.
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.
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Registrant
April 12, 2001 By:
/s/ Steven P. Wyandt
------------------------------------
Steven P. Wyandt
As Principal Financial Officer and
on behalf of the Registrant
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