<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
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, including area code: (619) 625-2633
Registrant's facsimile number, including area code: (619) 625-0746
Registrant's Internet E-mail address: [email protected]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of July 12, 1996, 1,210,296 shares of the Registrant's common stock were
outstanding.
Page 1 of 15
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NITCHES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
May 31, August 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 200,924 $10,485,189
Receivables:
Trade accounts, less allowances
($666,000 at May 31, 1996 and
$333,000 at August 31, 1995) 10,502,053 10,240,864
Income taxes receivable 8,279 458,789
Due from affiliates and employees 17,613 19,006
------------ -----------
10,527,945 10,718,659
Inventories 4,484,477 6,679,522
Deferred income taxes 1,805,152 1,479,673
Other current assets 973,760 608,126
------------ -----------
Total current assets 17,992,258 29,971,169
Furniture, fixtures and equipment 357,229 407,217
Other assets 413,059 587,193
------------ -----------
$18,762,546 $30,965,579
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 270,391
Accounts payable and
accrued expenses 4,351,683 $8,433,214
------------ -----------
Total current liabilities 4,622,074 8,433,214
Deferred income taxes 1,095,858 1,095,858
Shareholders' equity:
Preferred stock, no par value,
25,000,000 shares authorized
Common stock, no par value,
50,000,000 shares authorized;
issued and outstanding (1,210,296
at May 31, 1996 and 2,398,224
at August 31, 1995) 2,657,822 12,586,793
Retained earnings 10,386,792 8,849,714
------------ -----------
Total shareholders' equity 13,044,614 21,436,507
------------ -----------
$18,762,546 $30,965,579
============ ===========
</TABLE>
2
<PAGE> 3
NITCHES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Third quarter ended Nine months ended
--------------------------- --------------------------
May 31, May 31, May 31, May 31,
1996 1995 1996 1995
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $14,991,100 $22,637,221 $44,356,823 $63,676,183
Cost of goods sold 11,055,170 17,445,270 32,488,382 48,219,489
------------- ------------- ------------- ------------
Gross profit 3,935,930 5,191,951 11,868,441 15,456,694
Expenses:
Selling, general
and administrative 3,274,024 5,221,768 10,100,658 15,037,710
------------- ------------- ------------- ------------
Income (loss) from
operations 661,906 (29,817) 1,767,783 418,984
Interest income 13,463 52,078 159,053 156,820
Interest expense (42,776) (52,351) (2,221)
------------- ------------- ------------- -------------
Income (loss) before
income taxes 632,593 22,261 1,874,485 573,583
Provision (benefit)
for income taxes 113,866 (29,217) 337,407 184,577
------------- ------------- ------------- ------------
Net income (loss)
before minority
interest 518,727 51,478 1,537,078 389,006
Minority interest (55,100)
------------- ------------- ------------- -------------
Net income (loss) $518,727 $51,478 $1,537,078 $444,106
============= ============= ============= =============
Net income (loss)
per share:
Primary $.41 $.02 $1.27 $.18
============= ============= ============= ============
Fully diluted $.40 $1.20
============= =============
Weighted average
number of shares
outstanding
Primary 1,254,139 2,417,898 1,210,296 2,452,573
============= ============= ============= ===========
Fully diluted 1,286,243 1,286,243
============= ============= ============= ===========
</TABLE>
3
<PAGE> 4
NITCHES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended May 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net cash provided (used) by
operating activities $ (568,401) $8,300,694
------------ -----------
Cash flows from investing activities:
Capital expenditures ( 57,284) (235,888)
------------ ------------
Net cash provided (used) by
investing activities ( 57,284) (235,888)
------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under
line of credit and short-term 270,391 (3,000,000)
agreements
Proceeds from exercise of
stock options 5,152
Purchases and retirement of
subsidiary shares by subsidiary (19,901) (4,631,536)
Purchases of subsidiary
shares by parent (250,000) (385,099)
Purchases and retirement of
parent common stock (9,664,222) (436,980)
------------ ------------
Net cash provided (used) by
financing activities (9,658,580) (8,453,615)
------------ ------------
Net increase (decrease) in cash and
cash equivalents (10,284,265) (388,809)
Cash and cash equivalents
at beginning of period 10,485,189 6,565,813
------------ -----------
Cash and cash equivalents
at end of period $ 200,924 $6,177,004
============ ===========
</TABLE>
Supplemental disclosures of cash flow information:
<TABLE>
Cash paid during the period:
<S> <C> <C>
Interest $ 53,360 $17,750
Income taxes $196,613 $23,401
</TABLE>
4
<PAGE> 5
NITCHES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Effective December 1, 1995, the Company amended its Articles of Incorporation
to change the Company's name from Beeba's Creations, Inc. to Nitches, Inc.
Effective December 22, 1995, the Company's stock symbol on NASDAQ was changed to
"NICH".
2. Condensed Consolidated Financial Statements:
The consolidated balance sheet as of May 31, 1996, and the consolidated
statements of operations for the three and nine months ended May 31, 1996 and
1995 and the condensed consolidated cash flow statements for the nine months
ended May 31, 1996 and 1995 have been prepared by the Company without audit. In
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the consolidated financial position,
results of operations and cash flows at May 31, 1996 and for all periods
presented have been made. The results of operations for the periods ended May
31, 1996 and 1995 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, 1995 audited financial statements.
3. Earnings Per Share:
At May 31, 1996, 43,843 and 75,947 common stock equivalents for options
were included in the weighted average number of shares outstanding for the three
and nine month periods ended May 31, 1996, respectively. At May 31, 1995,
outstanding options were either antidilutive or diluted earnings per share by
less than 3%, and, accordingly, were not included in the weighted average number
of shares outstanding for the period.
4. Inventories:
<TABLE>
<CAPTION>
May 31, August 31,
1996 1995
---------- -----------
<S> <C> <C>
Fabric and trims $ 964,903 $1,316,292
Finished goods 3,519,574 5,363,230
----------- -----------
$4,484,477 $6,679,522
========== ==========
</TABLE>
5
<PAGE> 6
NITCHES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
5. Notes Payable:
At May 31, 1996, the Company had agreements with a financial institution
pursuant to which the Company normally sells in excess of 80% of its trade
accounts receivable to the financial institution on a pre-approved non-recourse
basis. The Company can request advances in anticipation of customer collections
at the lender's prime rate less one half percent and open letters of credit
through the lender, all of which are collateralized by all of the Company's
assets. Notes payable and contingent liabilities for irrevocable letters of
credit outstanding are as follows:
<TABLE>
<CAPTION>
May 31, August 31,
1996 1995
---------- -----------
<S> <C> <C>
Notes payable $ 270,391
Contingent liabilities for
irrevocable letters of credit $6,720,175 $10,746,558
</TABLE>
6. Litigation:
On August 8, 1994, a class action lawsuit was filed in the San Diego
Superior Court against the Company, its Body Drama subsidiary and certain former
and present directors and officers of Body Drama seeking to enjoin Body Drama's
tender offer for its shares and to recover certain unspecified damages on the
basis of alleged breaches of fiduciary duty by the defendants. The court denied
the plaintiffs' claim for injunctive relief and the tender offer closed on
September 21, 1994. On January 20, 1995, the court dismissed two of the four
causes of action claimed by the plaintiff in the lawsuit.
Although management believes that the remaining allegations of the
complaint are without merit, a settlement has been reached for an amount less
than the projected reasonable cost of defense. A stipulation for the settlement
has been filed with the court. The plaintiff class will be notified, after which
a hearing will be set for final approval of the settlement terms. As of July 12,
1996, the backlog in the court continues to delay the finalization of this
issue.
7. Restructuring Reserve:
In the fourth quarter of fiscal 1995, the Company recorded a
restructuring reserve of $1.8 million, of which approximately
6
<PAGE> 7
$1.5 million was accrued in trade accounts payable and other payables at August
31, 1995 and $300,000 for fixed asset write-offs. Amounts charged against this
liability during the nine months ended May 31, 1996 include employee severance
payments ($730,000), lease and related facility payments ($276,000) and other
items ($147,000). Payment of the remaining lease liability and related payments
for the Company's former office and warehouse facility will extend through
August 1996. The balance of this restructuring reserve was approximately
$386,000 at May 31, 1996.
8. Tender Offer:
On September 1, 1995, the Company purchased and retired 1,200,000
shares of its common stock at $8 per share in connection with a tender offer by
the Company. The aggregate cost of the shares, including legal and other costs
associated with the tender offer, was approximately $9.7 million.
9. Major Customers:
One customer accounted for 11% of the Company's net sales in the nine month
period ended May 31, 1996. Two customers accounted for 11% and 10%,
respectively, of the Company's net sales in the third quarter ended May 31,
1996. No customer accounted for 10% or more of net sales in the nine month
period and quarter ended May 31, 1995.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
NINE MONTHS ENDED MAY 31, 1996 COMPARED TO THE NINE MONTHS ENDED MAY 31, 1995.
Net sales for the nine months ended May 31, 1996 decreased approximately
$19 million (30.3%) compared to the nine months ended May 31, 1995. In August
1995, the Company sold various assets and licensed certain trade names
associated with its junior, girls and maternity product lines. On October 31,
1995 the Company ceased purchasing garments which had previously been sold under
the trade names licensed to the buyer. The Company's sales of these products
amounted to $3.0 million in the nine months ended May 31, 1996 and $15.7 million
in the nine months ended May 31, 1995. Overall, sales decreased due to a 47.6%
decrease in the number of garments sold offset by a 31.2% increase in the
average selling price per garment.
Gross margins increased from 24.3% for the nine months ended May 31, 1995
to 26.8% for the current nine month period as a
7
<PAGE> 8
result of the transition in product mix to higher gross margin products and the
sale of the lower gross margin business described above.
The Company's product mix constantly changes to reflect customer mix,
fashion trends and changing seasons. Consequently, gross margins are likely to
vary on a quarter-to-quarter basis and in comparison to gross margins generated
in the same period of prior fiscal years.
Selling, general and administrative expenses decreased in dollar amount from
$15.0 million for the first nine months of last year to $10.1 million for the
first nine months of fiscal 1996, and decreased as a percent of net sales from
23.6% last year to 22.8% for the current period. The decrease in dollar amount
is attributable in part to a reduction in sales volume and reflects the
reduction in overhead as a result of Company's recent restructuring in the
fourth quarter in 1995.
Interest expense increased in the current period compared to the first
nine months of last year due to the Company's increased usage of its short term
line of credit. Interest income increased in the current period due to increases
in the average daily cash balances.
In the first quarter of fiscal 1995, the Company's Body Drama
subsidiary completed a tender offer and retired 92% of its publicly owned
shares. The Company subsequently purchased the remaining outstanding shares of
Body Drama and thereafter owned 100% of Body Drama. Consequently, there is no
minority interest through the third quarter of fiscal 1996.
THREE MONTHS ENDED MAY 31, 1996 COMPARED TO THE THREE MONTHS ENDED MAY 31, 1995.
Net sales for the third quarter of fiscal 1996 decreased approximately $7.6
million (33.8%) compared to the net sales for the same quarter last year. In
August 1995, the Company sold various assets and licensed certain trade names
associated with its junior, girls and maternity product lines. On October 31,
1995 the Company ceased purchasing garments which had previously been sold under
the trade names licensed to the buyer. The Company ceased sales of these
products in the quarter ended May 31, 1996 and had sales of these products of
$4.9 million in the quarter ended May 31, 1995. Overall, sales decreased in the
current quarter due to a 55.4% decrease in the number of garments sold offset by
a 47.0% increase in the average selling price per garment.
Gross margins increased from 22.9% for the three months ended May 31, 1995
to 26.2% for the current quarter as a result of the sale of the lower gross
margin business described above.
8
<PAGE> 9
Selling, general and administrative expenses decreased in dollar amount from
$5.2 million for the third quarter of last year to $3.3 million for the third
quarter of fiscal 1996, and decreased as a percent of sales from 23.1% last year
to 21.8% for the current quarter. The decrease in dollar amount reflects the
Company's recent restructuring.
The Company utilized its short-term line of credit during the third
quarter of fiscal 1996 and therefore incurred interest expense in the current
quarter. Interest income decreased in the current quarter due to the decrease in
the average daily cash balances.
Liquidity and Capital Resources
Except as described below in "Other Information - Future Customer Credit
Risk", at May 31, 1996, the Company had agreements with a financial institution
pursuant to which the Company normally sells in excess of 80% of its trade
accounts receivable to the financial institution on a pre-approved non-recourse
basis. However, the Company ships a portion of the merchandise to customers and
does not sell the resulting receivables to the financial institution. The
Company attempts to make these shipments on a COD basis or backed by a
commercial or standby letter of credit issued by the customer's bank. The amount
of the Company's receivables which were not sold to the financial institution
and were not made on a COD basis or supported by commercial or standby letters
of credit at May 31, 1996 was approximately $2,042,000 of which $1,134,000 has
been collected through July 12, 1996.
Payment for receivables which are sold to the financial institution is made
at the time customers make payment to the financial institution or, if a
customer is financially unable to make payment, within approximately 180 days of
the invoice due date. The Company may request advances in anticipation of
customer collections at the lender's prime rate less one half percent and open
letters of credit through the lender up to $20 million. The amount of such
borrowings, 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 and are collateralized by all of the assets of
the Company. At May 31, 1996, the Company had outstanding letters of credit of
$6,720,175 for the purchase of finished goods which had been opened through the
financial institution. Under these agreements, the Company is required to
maintain $9 million in net worth and $8.5 million in working capital.
On September 1, 1995, the Company purchased and retired 1,200,000
shares of its common stock at $8 per share in connection with a tender offer by
the Company. The aggregate
9
<PAGE> 10
cost of the shares, including legal and other costs associated with the tender
offer, was approximately $9.7 million, which was funded entirely from the
Company's existing cash balances.
In fiscal 1995, the Company's Body Drama subsidiary acquired 1,446,921
shares of its stock at $2.93 per share. The total cost of these shares was $4.9
million, which includes expenses specifically associated with the tender offer,
including the costs of defense for a related class action suit filed against
Body Drama, the Company and several of its officers and directors. Approximately
$250,000 and $20,000, respectively, of legal costs were paid by the Company and
its subsidiary, respectively, during the nine months ended May 31, 1996. On
November 30, 1994, the Company acquired the remaining 128,079 outstanding shares
of Body Drama at $2.93 per share. The aggregate cost of these shares incurred in
connection with the purchase was $385,000.
The Company is not aware of any trends or other matters which will, or
are reasonably likely to, result in its liquidity materially increasing or
decreasing.
Other Information
INVENTORY
The experience of the Company demonstrates that, in its ordinary course of
operations, a portion of the Company's sales may be made below its normal
selling prices or below cost subsequent to May 31, 1996. However, 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 $8.3 million at May 31, 1995 to $4.5
million at May 31, 1996. The Company has established an inventory markdown
reserve as of May 31, 1996, which management believes will be sufficient for
current inventory that is expected to be sold below cost in the future. There
can be no assurance that the Company will realize its expected selling prices,
or that the inventory markdown reserve will be adequate, for items in inventory
as of May 31, 1996 for which customer sales orders have not yet been received.
BACKLOG
At May 31, 1996, the Company had unfilled customer orders of $13.7
million compared to $30.9 million of such orders at May 31, 1995, with such
orders generally scheduled for delivery by November 1996 and February 1996,
respectively. The decrease in
10
<PAGE> 11
backlog is primarily attributable to the sale of its junior, girls and maternity
product lines discussed above, the termination of other product lines in
connection with the Company's refocusing on higher profit margin product lines,
and a general trend in the retail industry toward shorter order lead times.
These amounts include both confirmed orders and unconfirmed orders which the
Company believes, based on industry practice and past experience, will be
confirmed. The amount of unfilled orders at a particular time is affected by a
number of factors, including the scheduling of the production and shipment of
garments, which in some instances may be delayed or accelerated by customer
request. Accordingly, a comparison of unfilled orders from period to period is
not necessarily meaningful and may not be indicative of eventual actual
shipments. While cancellations, rejections and returns have generally not been
material in the past, there can be no assurance that cancellations, rejections
and returns will not reduce the amount of sales realized from the backlog of
orders at May 31, 1996.
FUTURE QUARTERLY NET SALES
As a result of the Company's efforts to reduce sales of unprofitable
product lines and the sale of its junior, girls and maternity product lines
discussed above, net sales in the remaining quarter of fiscal 1996 are likely to
be significantly lower than the fourth quarter net sales reported in fiscal
1995. The junior, girls and maternity product lines generated $5.2 million of
net sales in the fourth quarter of fiscal 1995.
FUTURE CUSTOMER CREDIT RISK
As of July 12, 1996, the Company had inventory on hand or in process
having an estimated sales value of approximately $108,000 which is expected to
be shipped within the next three months to one of the Company's largest
customers. As of July 12, 1996, the Company also had a receivable due from this
customer of approximately $208,000 which has not been purchased by the Company's
financial institution. This customer is currently experiencing financial
difficulties and, except as noted below, it is unlikely that the Company's
financial institution will purchase the resulting receivables from this customer
when the inventory on hand and in process is shipped to the customer.
The Company's Board of Directors has authorized management to ship
merchandise to this customer at the Company's credit risk without approval from
the Company's financial institution. The Company's financial institution has
indicated that, if the customer files for protection under Chapter 11, the
receivable outstanding at that time may have a value of fifty to sixty percent
of its face value, though realization of this amount cannot be assured.
Subsequent to such a filing, the Company
11
<PAGE> 12
expects that the customer would honor its existing purchase orders with the
Company and that the Company's financial institution would purchase the
resulting receivables at full face value.
RELATED PARTY TRANSACTION
In October 1995, the Company began renting warehouse and office
facilities from Kuma Sport, Inc., which is 40% owned by Mr. Arjun C. Waney, the
Chairman of Nitches. Mr. Waney has also guaranteed payments on an SBA loan which
encumbers the Kuma Sport building. The Company pays, on a month-to-month basis,
rent of $15,000, which it believes is consistent with the fair market value of
the facility. Nitches is also purchasing labor and administrative items from
Kuma Sport on a monthly, as needed, basis at rates it believes are consistent
with fair market rates.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On August 8, 1994, a class action lawsuit was filed in the San Diego
Superior Court against the Company, its Body Drama subsidiary and certain former
and present directors and officers of Body Drama seeking to enjoin Body Drama's
tender offer for its shares and to recover certain unspecified damages on the
basis of alleged breaches of fiduciary duty by the defendants. The court denied
the plaintiffs' claim for injunctive relief and the tender offer closed on
September 21, 1994. On January 20, 1995, the court dismissed two of the four
causes of action claimed by the plaintiff in the lawsuit.
Although management believes that the remaining allegations of the
complaint are without merit, a settlement has been reached for an amount less
than the projected reasonable cost of defense. A stipulation for the settlement
has been filed with the court. The plaintiff class will be notified, after which
a hearing will be set for final approval of the settlement terms. As of July 12,
1996, the backlog in the court continues to delay the finalization of this
issue.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are filed herewith. Exhibit numbers refer to
Item 601 of Regulation S-K:
27. Financial Data Schedule.
(b) There were no reports on Form 8-K filed during this period.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
NITCHES, INC.
--------------------------------------------
Registrant
July 12, 1996 By: Steven P. Wyandt
-----------------------------------------
Steven P. Wyandt
As Principal Financial Officer and
on behalf of the Registrant
13
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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> 9-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 200,924
<SECURITIES> 0
<RECEIVABLES> 10,502,053<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 4,484,477
<CURRENT-ASSETS> 17,992,258
<PP&E> 357,229<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 18,762,546
<CURRENT-LIABILITIES> 4,622,074
<BONDS> 0
<COMMON> 2,657,822
0
0
<OTHER-SE> 10,386,792
<TOTAL-LIABILITY-AND-EQUITY> 18,762,546
<SALES> 44,356,823
<TOTAL-REVENUES> 44,356,823
<CGS> 32,488,382
<TOTAL-COSTS> 32,488,382
<OTHER-EXPENSES> 0
<LOSS PROVISION> 0
<INTEREST-EXPENSE> 52,351
<INCOME-PRETAX> 1,874,485
<INCOME-TAX> 337,407
<INCOME-CONTINUING> 1,537,078
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,537,078
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.20
<FN>
<F1>THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS
NET OF ALLOWANCES AND DEPRECIATION RESPECTIVELY
</FN>
</TABLE>
