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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 29, 2004
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of February 29, 2004 the Registrant had 1,171,169 shares of common stock
outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NITCHES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
ASSETS
February 29, August 31,
2004 2003
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 205,000 $ 110,000
Receivables:
Trade accounts, less allowances 1,767,000 894,000
Due from affiliates and employees 11,000 28,000
------------ ------------
Total receivables 1,778,000 922,000
Refundable income taxes -- 466,000
Inventories 6,042,000 4,974,000
Deferred income taxes 192,000 192,000
Other current assets 39,000 57,000
------------ ------------
Total current assets 8,256,000 6,721,000
Investment in Designer Intimates, Inc. 174,000 --
Furniture, fixtures and equipment, net 47,000 56,000
Deferred income taxes 53,000 53,000
Other assets 17,000 17,000
------------ ------------
$ 8,547,000 $ 6,847,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,707,000 $ 1,525,000
Accrued expenses 936,000 182,000
Due to affiliates 15,000 --
Income taxes payable 211,000 --
------------ ------------
Total current liabilities 2,869,000 1,707,000
Long term liabilities:
Loss on investment in Designer Intimates, Inc. 236,000
Shareholders' equity:
Preferred stock, no par value; 25,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock, no par value; 50,000,000 shares authorized;
1,171,169 shares issued and outstanding 1,495,000 1,495,000
Retained earnings 4,183,000 3,409,000
------------ ------------
Total shareholders' equity 5,678,000 4,904,000
------------ ------------
$ 8,547,000 $ 6,847,000
============ ============
The accompanying notes are an integral part of these financial statements.
2
NITCHES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 9,683,000 $ 6,699,000 $ 16,479,000 $ 17,156,000
Cost of goods sold 6,623,000 4,958,000 11,687,000 13,485,000
------------ ------------ ------------ ------------
Gross profit 3,060,000 1,741,000 4,792,000 3,671,000
Selling, general and administrative expenses 2,458,000 1,865,000 4,145,000 3,662,000
------------ ------------ ------------ ------------
Income/(loss) from operations 602,000 (124,000) 647,000 9,000
Interest and other income -- 3,000 -- 3,000
Interest expense (32,000) (33,000) (43,000) (62,000)
Income/(loss) from unconsolidated subsidiary (58,000) (61,000) 410,000 227,000
------------ ------------ ------------ ------------
Income/(loss) before income taxes 512,000 (215,000) 1,014,000 177,000
Provision/(benefit) for income taxes 227,000 (60,000) 240,000 (128,000)
------------ ------------ ------------ ------------
Net income/(loss) $ 285,000 $ (155,000) $ 774,000 $ 305,000
============ ============ ============ ============
Earnings per share $ 0.24 $ (0.13) $ 0.66 $ 0.26
============ ============ ============ ============
Shares outstanding 1,171,169 1,171,169 1,171,169 1,171,169
============ ============ ============ ============
Dividends per share $ -- $ 0.15 $ -- $ 0.20
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
3
NITCHES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
February 29, February 28,
2004 2003
------------ ------------
Net income $ 774,000 $ 305,000
Cash flows from operating activities:
Depreciation and amortization 13,000 17,000
(Increase) decrease in accounts receivable (856,000) 1,038,000
(Increase) decrease in inventories and other current assets (584,000) 1,804,000
Increase (decrease) in trade payables and accrued expenses 1,162,000 (2,611,000)
Non-cash income from unconsolidated subsidiary (410,000) (227,000)
------------ ------------
Net cash provided by operating activities $ 99,000 $ 326,000
Cash flows from investing activities:
Capital expenditures (4,000) (4,000)
Cash flows from financing activities:
Dividends paid -- (234,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 95,000 88,000
Cash and cash equivalents at beginning of period 110,000 182,000
------------ ------------
Cash and cash equivalents at end of period $ 205,000 $ 270,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid (received) during the period:
Interest $ 43,000 $ 62,000
Income taxes (436,000) --
Non-cash investing activity:
Accrued earnings of unconsolidated subsidiary $ 410,000 $ 227,000
The accompanying notes are an integral part of these financial statements.
4
NITCHES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. Description of Business
Nitches, Inc. (the "Company") is a wholesale importer and distributor of
clothing manufactured to its specifications and distributed in the United States
under Company brand labels and private retailer labels. The Company's product
lines include women's sleepwear and western wear, men's casual wear and men's
and women's performance apparel.
2. Condensed Financial Statements:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q. 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 in the United States of America. 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, 2003. In the opinion of
Management, all adjustments considered necessary for a fair presentation have
been included in the interim period. Operating results for the six months ended
February 29, 2004 are not necessarily indicative of the results that may be
expected for the year ending August 31, 2004.
3. Earnings Per share:
At February 29, 2004, there were no stock options or similar instruments
outstanding and therefore no dilutive effect to the number of shares
outstanding.
4. Inventories:
February 29, August 31,
2004 2003
------------ ----------
Fabric and trim $ 369,000 $ 320,000
Work in progress 1,204,000 1,254,000
Finished goods 4,469,000 3,400,000
---------- ----------
$6,042,000 $4,974,000
========== ==========
5. Trade accounts receivable:
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 price at which the accounts are sold is
the invoice amount reduced by the factor commission (.3% of the invoice amount)
and all selling discounts. For accounts sold to the factor without recourse, the
factor is responsible for collection, assumes all credit risk, and obtains all
of the rights and remedies against the company's customers. For such accounts,
payment is due from the factor upon the earlier of the payment of the receivable
to the factor by the customer, or the maturity of the receivable (generally 180
days from the date of shipment to the customer). As of February 29, 2004,
non-recourse receivables totaled $1,999,000.
Trade accounts receivable not sold to the factor remain in the custody and
control of the Company and the Company maintains all credit risk on those
accounts as well as accounts which are sold to the factor with recourse. The
combined credit risk for non-factored and recourse receivables as of February
29, 2004, totaled $256,000.
The Company may request payment from the factor in advance of the
collection date or maturity. Any such advance payments are assessed an interest
charge through the collection date or maturity at the factor's prime rate less
1.5% (one and one half percent) per annum. The company's obligations with
respect to advances from the factor are limited to the interest charges thereon.
Advance payments are limited to a maximum of 85% (eighty-five percent) of
eligible accounts receivable. The factoring agreement also provides for the
issuance of irrevocable letters of credit for the Company's purchase of
inventory in the normal course of its business. Letters of credit are subject to
a $6 million limit. All assets of the company collateralize the advances and
letters of credit. The Company's Chairman has also provided a personal guaranty
in connection with the factoring arrangement.
5
NITCHES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statement (continued)
5. Trade accounts receivable (continued):
The status of the trade accounts receivable and letters of credit are as
follows:
February 29, August 31,
2004 2003
------------ ------------
Receivables assigned to factor:
Non-recourse $ 9,154,000 $ 2,599,000
Recourse 4,000 16,000
Advance payments from factor (7,155,000) (1,542,000)
------------ ------------
Due from factor 2,003,000 1,073,000
Non-factored accounts receivable 265,000 370,000
Allowance for customer credits and doubtful accounts (501,000) (549,000)
------------ ------------
$ 1,767,000 $ 894,000
============ ============
Contingent liabilities for irrevocable letters of credit $ 1,456,000 $ 2,401,000
============ ============
6. Dividends:
The Company did not pay any dividends during the current period. During
fiscal 2003 the Company declared and paid dividends of $.30 per share.
7. Significant Customers:
Sales to Wal-Mart and Kohl's accounted for 45.4% and 22.8%, respectively,
of the company's net sales in the three months ended February 29, 2004. By
comparison, sales to Kohl's, Mervyn's and Sears accounted for 28.1%, 24.1% and
10.4%, respectively, of the Company's net sales in the three months ended
February 28, 2003. For the six months ended February 29, 2004, sales to Kohl's
and Wal-Mart accounted for 34.0% and 26.7%, respectively, of the Company's net
sales. Kohl's, Mervyn's and Sears accounted for 34.6%, 25.0% and 20.0%,
respectively, of the Company's net sales for the six months ended February 28,
2003.
Two customers, Wal-Mart and Kohl's, accounted for 59.1% and 16.5%
respectively of the Company's trade receivable balance as of February 29, 2004.
Two customers, Kohl's and Mervyn's, accounted for 30.1% and 25.0%, respectively,
of the Company's trade receivable balance at February 28, 2003.
8. Minority Interest:
In October 2002 the Company acquired a 28% interest in Designer Intimates,
Inc., which owns 100% of NAP, Inc., a New York-based intimate apparel company.
Designer Intimates had acquired NAP from its founders and obtained a credit line
of approximately $12 million from HSBC, secured by the inventory and accounts
receivable of NAP and the guarantees of shareholders of Designer Intimates.
Nitches guaranteed $3 million of this credit line and this guarantee formed the
consideration from Nitches for its 28% ownership interest in Designer Intimates.
Nitches reports any income or loss from the ongoing operation of Designer
Intimates using the equity method of accounting, whereby Nitches' 28% interest
in Designer Intimates is reported as a single line item on the Consolidated
Statement of Income. For the six months ended February 29, 2004, the Company
recognized $410,000 in income from the unconsolidated subsidiary. This income is
reported net of tax and is not taxable to the Company. For that same period,
Designer Intimates had net income of $1,465,000 on sales of $49.2 million.
6
Following are the unaudited condensed financial statements of Designer
Intimates, Inc. as of February 29, 2004 for the 6-month period then ended:
Designer Intimates, Inc.
Consolidated Balance Sheet
(Unaudited)
ASSETS
February 29,
2004
------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 403,000
Trade accounts receivable, less allowances 1,385,000
Inventories 2,849,000
Deferred income taxes 200,000
Other current assets 84,000
------------
Total current assets 4,921,000
Furniture, fixtures and equipment, net 727,000
Goodwill 2,548,000
Other intangibles, subject to amortization 295,000
Other assets 95,000
------------
$ 8,586,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loan payable $ 505,000
Accounts payable 5,369,000
Accrued expenses 859,000
Income taxes payable 1,227,000
------------
Total current liabilities 7,960,000
Shareholders' equity:
Common stock 3,000
Retained earnings 623,000
------------
Total shareholders' equity 626,000
------------
$ 8,586,000
============
7
Designer Intimates, Inc.
Consolidated Income Statement
(Unaudited)
Six Months Ended
February 29, 2004
-----------------
Net Sales $ 49,225,000
Cost of sales 39,105,000
------------
Gross profit 10,120,000
Operating expenses 7,333,000
Amortization of intangible assets 93,000
------------
Income from operations 2,694,000
Interest expenses 145,000
Other (income) (16,000)
------------
Income/(loss) before income taxes 2,565,000
Provision/(benefit) for income taxes 1,100,000
------------
Net income/(loss) $ 1,465,000
============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition. The Company recognizes revenue at the time products
are shipped based on its terms of F.O.B. shipping point, where risk of loss and
title transfer to the buyer at time of shipment. The Company records sales in
accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements. Under these guidelines, revenue is recognized when all of
the following exist: persuasive evidence of a sale arrangement exists, delivery
of the product has occurred, the price is fixed or determinable and payment is
reasonably assured. Provisions are made currently for estimated product returns
and sales allowances.
Allowances for Sales Returns, Doubtful Accounts and Other. Sales are
recorded net of estimated future returns, uncollectible accounts receivable and
other customer related allowances. Management analyzes historical returns and
bad debt expense, current economic trends, changes in customer demand and
sell-through of our products when evaluating the adequacy of these allowances.
In addition, the Company may provide warehousing credits and other allowances to
certain customers in accordance with industry practice. These reserves are
determined based on historical experience, budgeted customer allowances and
existing commitments to customers. Although management believes it has
established adequate reserves with respect to these items, actual activity could
vary from management's estimates and such variances could have a material impact
on reported results. At February 29, 2004, trade accounts receivable balance was
$1.8 million, net of allowances of $501,000, as compared to the balance of $0.9
million, net of allowances of $549,000 at August 31, 2003. At February 28, 2003,
the trade accounts receivable balance was $3.4 million, net of allowances for
doubtful accounts of $222,000.
Inventory. The Company marks down its inventory for estimated obsolescence
or unmarketable inventory equal to the difference between the cost of inventory
and the estimated net realizable value based on assumptions about age of the
inventory, future demand and market conditions. This process provides for a new
basis for the inventory until it is sold. If actual market conditions are less
favorable than those projected by management, additional inventory markdowns may
be required. The Company's inventory balance was $6.0 million, net of inventory
markdowns of $203,000, at February 29, 2004, as compared to an inventory balance
of $5.0 million, net of inventory write-downs of $140,000, at August 31, 2003.
At February 28, 2003, the inventory balance was $3.4 million, net of inventory
write-downs of $155,000.
8
Results of Operations
Six Months Ended February 29, 2004 Compared to the Six Months Ended February 28,
2003
Net sales of $16.5 million for the six months ended February 29, 2004,
decreased approximately $677,000 (3.9%) as compared to net sales of $17.2
million for the six months ended February 28, 2003. This decrease was
attributable to a decrease in unit sales of the Company's sleepwear product
line, offset partially by an increase in unit sales of the Company's men's wear
product line.
Cost of sales as a percent of net sales declined 7.7%, generating a higher
gross profit margin of 29.1% for the six months ended February 29, 2004, as
compared to 21.4% for the year earlier period. The Company realized higher gross
margins due to increased sales of higher margin branded men's product and
decreased sales of lower margin private label women's sleepwear. However, 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 first half of fiscal
2004 increased $483,000 as compared to a year ago, due primarily to an increase
in sales commissions and selling related expenses incurred in the second
quarter, in line with an increase in men's wear product sales. Selling, general
and administrative expenses include costs and expenses pertaining to selling,
merchandising, warehousing, and shipping of products. For the six months ended
February 29, 2004, this category included $2,411,000 of selling and
merchandising expenses and $625,000 of shipping and warehousing expenses. This
compares with $1,555,000 of selling and merchandising expenses and $705,000 of
shipping and warehousing expenses incurred for the six months ended February 28,
2003. Expenses increased as a percent of net sales to 25.2% from 21.3% in the
year earlier period, due to the increase in sales commissions and selling
expenses for the men's wear product line.
Interest expense declined $19,000 for the current period to $43,000 as
compared to $62,000 for the six months ended February 28, 2003. This decrease
was due to the lower interest rate charged on advances made under the Company's
factoring agreement.
The Company's income tax provision for the six months of fiscal 2004
reflects the effect of a $240,000 tax expense accrued at an estimated 39% tax
rate, in line with the actual tax rate experienced by the Company. The tax
provision for the six months of fiscal 2003 reflects the effect of a $19,000 tax
benefit accrued at an estimated 39% tax rate, less the elimination of a deferred
tax reserve in the amount of $109,000, for a net tax benefit of $128,000.
Three Months Ended February 29, 2004 Compared to the Three Months Ended February
28, 2003
Net sales of $9.7 million for the three months ended February 29, 2004,
increased approximately $3.0 million (44.5%) over net sales of $6.7 million for
the three months ended February 28, 2003. This increase was attributable to an
increase in unit sales in the Company's men's wear product line.
Cost of sales as a percent of net sales declined 5.6%, generating a higher
gross profit margin of 31.6% for the three months ended February 29, 2004 as
compared to 26.0% for the year earlier period. The increase came as the result
of increased sales volume in higher margin men's wear product. 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 2004 rose $593,000 as compared to a year ago, due primarily to an
increase in sales commissions and selling related expenses in line with the
higher sales volume in the Company's men's wear product line. Expenses included
$1,350,000 of selling and merchandising expenses and $348,000 of shipping and
warehousing expenses. This compares with $831,000 of selling and merchandising
expenses and $315,000 of shipping and warehousing expenses incurred during the
quarter ended February 28, 2003. Expenses decreased as a percent of net sales to
25.4% from 27.8% in the year earlier period, due to the proportionally larger
increase in sales from the earlier period.
9
Interest expense decreased $1,000 in the current quarter to $32,000 as
compared to $33,000 for the three months ended February 28, 2003. This slight
decline was due to the lower interest rate charged on advances made under the
Company's factoring agreement.
The Company's income tax provision for the three months ended February 29,
2004, reflects a $227,000 tax expense accrued at an estimated 39.8% tax rate on
pretax income for the quarter of $571,000, which excludes the $58,000 loss on
the investment in Designer Intimates because this loss is reported net of tax
and is not taxable to the Company. The Company also utilized an estimated tax
rate of 39% for the three months ended February 28, 2003. There were no tax
reserve write-offs or other tax adjustments in either period.
Investment in Unconsolidated Subsidiary
In October 2002, the Company acquired a 28% interest in Designer
Intimates, Inc., which owns 100% of NAP, Inc., a New York-based intimate apparel
company. Designer Intimates had acquired NAP from its founders and obtained a
credit line of approximately $12 million from HSBC, secured by the inventory and
accounts receivable of NAP and the guarantees of shareholders of Designer
Intimates. Nitches guaranteed $3 million of this credit line and this guarantee
formed the consideration from Nitches for its 28% ownership interest in Designer
Intimates. Nitches reports any income or loss from the ongoing operation of
Designer Intimates using the equity method of accounting, whereby Nitches' 28%
interest in Designer Intimates is reported as a single line item on the
Consolidated Statement of Income. For the six months ended February 29, 2004,
the Company recognized $410,000 in income from the unconsolidated subsidiary.
This income is reported net of tax and is not taxable to the Company. For that
same period, Designer Intimates had net income of $1,465,000 on sales of $49.2
million.
Liquidity and Capital Resources
Working capital increased $373,000 to $5.4 million at February 29, 2004,
from $5.0 million at August 31, 2003. However, the current ratio decreased to
2.9:1 at February 29, 2004, from 3.9:1 at August 31, 2003, due to a higher
percentage increase in current liabilities, 68.1% versus a 22.8% rise in current
assets, in line with increased inventory purchases and operating expenses for
the current period. At February 29, 2004, the Company's trade receivables
balance was $1.8 million, an increase of $900,000 from the receivables balance
at August 31, 2003, reflecting the increased sales volume for the current
period.
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 customers' payments are
backed by a commercial or standby letter of credit issued by the customers'
bank. The amount of the Company's receivables that were recourse and were not
made on a COD basis or supported by commercial or standby letters of credit at
February 29, 2004 was approximately $256,000, of which approximately $48,000 had
been collected through March 31, 2004.
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
factoring agreement, the Company can request advances in anticipation of
customer collections at the prime rate offered by CIT (currently 4.00%) less one
and one-half percent (1.5%). The amount of advances available to the Company is
limited to eighty-five percent (85%) of non-recourse factored receivables.
The Company may issue import letters of credit through HSBC for the
purchase of inventory from overseas suppliers in the normal course of its
operations. Letters of credit are subjected to a limit of $6 million. At
February 29, 2004, the Company had outstanding letters of credit of
approximately $1.5 million for the purchase of finished goods, which had been
opened through HSBC.
The factoring agreement does not contain any financial covenants to which
the Company must adhere. Advances are collateralized by all of the assets of the
Company as well as a personal guaranty of the Company's Chairman. The factoring
agreement can be terminated by CIT on 30-days written notice. The company
believes the factoring agreement with CIT, the letter of credit agreement with
HSBC, along with expected cash flow from operating activities and current levels
of working capital, are adequate to fulfill the Company's liquidity needs for
the foreseeable future.
10
Contractual Obligations and Commercial Commitments
Payments due/Commitments expiring per period
Total Less than Over
Committed 1 year 1-3 years 4-5 years 5 years
-----------------------------------------------------------------------
Operating leases $ 134,000 $ 88,000 $ 46,000
Letters of credit 1,456,000 1,456,000
Guarantees 3,000,000 3,000,000
-----------------------------------------------------------------------
Total obligations & commitments $4,590,000 $1,544,000 $ 46,000 $3,000,000 $ --
=======================================================================
Inventory
The Company's inventory increased 21.5% to $6.0 million at February 29,
2004, from $5.0 million at August 31, 2003. Compared to inventories of $3.4
million at February 28, 2003, inventories ending the current period increased
76%, primarily due to increased order backlog in the Company's men's wear line.
The Company believes that its current inventory mix and amounts are appropriate
to respond to anticipated market demand.
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 on or acquired
after February 29, 2004. 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 has established an inventory markdown reserve as of February
29, 2004, which management believes will be sufficient for current inventory
that is expected to sell 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 29,
2004 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 $8.8 million at February 29,
2004 compared to $8.4 million at February 28, 2003, with such orders generally
scheduled for delivery by August 2004 and August 2003, respectively. These
amounts include both confirmed 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
29, 2004.
Increased orders in the Company's men's wear product line contributed to
the increase in backlog of $400,000, offset partially by a decrease in orders
for the Company's sleepwear line. Because of the Company's reliance upon a few
major accounts, any deteriorating financial performance by one or more of these
customers could lead to the cancellation of existing orders and/or an inability
to secure future orders, which would have a material adverse financial effect on
the Company.
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.
11
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. Management
believes that the apparel sector in which the Company operates has been in a
period of deflation, contrary to the modest inflation experienced in the economy
in general. The persistence of the consumer to buy "on sale" merchandise has put
pressure on retail gross margins, which in turn has led to downward pressure
from retailers on wholesale gross margins, in the form of selling cost
adjustments taken as deductions against invoices issued by the Company. In the
apparel industry, these are commonly referred to as markdown allowances or
chargebacks. The company experienced a doubling of these allowances in fiscal
2003 to $1.2 million, contributing to the operating loss incurred for that
period. Without a corresponding decrease in fabric and labor prices, these
markdown allowances have led to a decline in wholesale gross margins. Management
believes these deflationary pressures will continue into the foreseeable future.
Future Operating Results
Business conditions in the apparel sector continue to be characterized by
weak consumer demand and heavy discounting of merchandise by retailers. The
continuing conflict in Iraq, coupled with the ongoing uncertainty of the overall
economy has led most retailers to use significant discounting to encourage
sales. In general, retailers have to sell more units in order to achieve sales
equal to last year. The Company does not expect significant improvement in
business conditions in the apparel sector for the remainder of the current
calendar year. Given these uncertainties, the Company remains cautious and
conservative regarding the remainder of fiscal 2004 and early fiscal 2005.
Item 4. Controls and Procedures
As of February 29, 2004, the Chief Executive and Financial Officer
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, he concluded that the disclosure controls and procedures
of the Company are effective in timely alerting of the material information
required to be included in the periodic filings with the Securities and Exchange
Commission and that the information required to be disclosed in these filings is
recorded, processed, summarized, and reported within the time periods specified
in the rules and forms of the Commission.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of this evaluation.
Cautionary Statement under the Private Securities Litigation Reform Act of 1995
Statements in the quarterly report on Form 10-Q 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.
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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 29, 2004.
Item 6. Exhibits and Reports on Form 8-K
The Company filed a Current Report on Form 8-K on November 28, 2003, for
its earnings press release dated November 28, 2003. Additionally, the Company
filed a Current Report on Form 8-K on January 14, 2004, for its earnings press
release dated January 14, 2004.
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
April 14, 2004 By: /s/ Steven P. Wyandt
---------------------------------------
Steven P. Wyandt
As Principal Financial Officer and on
behalf of the Registrant
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------ -------
31 Certification required under Section 302
32 Certification required under Section 906
13