<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, 1997
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
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 11, 1997, 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,
1997 1996
------------ -----------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,491,627 $2,197,015
Receivables:
Trade accounts, less allowances
($421,000 at May 31, 1997 and
$425,000 at August 31, 1996) 6,812,310 6,081,880
Income taxes receivable 261,462
Due from affiliates and employees 90,800 140,418
------------ -----------
6,903,110 6,483,760
Inventories, net 5,246,391 7,044,498
Deferred income taxes 1,500,102 1,500,102
Other current assets 470,267 342,229
------------ -----------
Total current assets 15,611,497 17,567,604
Furniture, fixtures and equipment, net 253,289 314,473
Other assets 99,445 296,608
----------- -----------
$15,964,231 $18,178,685
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses $2,896,883 $5,359,050
Income taxes payable 1,880
------------ -----------
Total current liabilities 2,898,763 5,359,050
Deferred income taxes 1,021,098 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;
1,210,296 issued and outstanding 2,657,818 2,658,400
Retained earnings 9,386,552 9,065,377
------------ -----------
Total shareholders' equity 12,044,370 11,723,777
------------ -----------
$15,964,231 $18,178,685
============ ===========
</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,
1997 1996 1997 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $12,998,971 $14,991,100 $37,960,675 $44,356,823
Cost of goods sold 9,405,106 11,055,170 28,440,522 32,488,382
------------ ------------ ------------ -----------
Gross profit 3,593,865 3,935,930 9,520,153 11,868,441
Expenses:
Selling, general
and administrative 3,353,132 3,274,024 9,042,430 10,100,658
------------ ------------ ------------ -----------
Income from operations 240,733 661,906 477,723 1,767,783
Interest income 12,488 13,463 70,448 159,053
Interest expense (10,479) (42,776) (95,811) (52,351)
------------ ------------ ------------ -----------
Income before income
taxes 242,742 632,593 452,360 1,874,485
Provision for income
taxes 59,914 113,866 131,185 337,407
------------ ------------ ------------ -----------
Net income $ 182,828 $ 518,727 $ 321,175 $1,537,078
============ ============ ============ ===========
Earnings per share:
Primary $.15 $.42 $.26 $1.26
============ ============ ============ ===========
Fully diluted $.15 $.41 $.26 $1.24
============ ============ ============ ===========
Weighted average
number of shares
outstanding:
Primary 1,254,476 1,247,939 1,257,488 1,216,303
============ ============ ============ ===========
Fully diluted 1,254,476 1,276,161 1,257,488 1,235,466
============ ============ ============ ===========
</TABLE>
3
<PAGE> 4
NITCHES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended May 31
--------------------------------
1997 1996
------------- ------------
<S> <C> <C>
Net cash provided (used) by
operating activities $ 568,971 $ (568,401)
------------- ------------
Cash flows from investing activities:
Capital expenditures (63,481) (57,284)
------------ ------------
Net cash used by investing
activities (63,481) (57,284)
------------ ------------
Cash flows from financing activities:
Dividends paid (1,210,296)
Net borrowings under line of
credit and short-term loan
agreements 270,391
Proceed from exercise of stock
options 5,152
Purchases and retirement of
subsidiary shares (582) (269,901)
Purchases and retirement of
parent common stock (9,664,222)
------------ ------------
Net cash used by financing
activities (1,210,878) (9,658,580)
------------ ------------
Net decrease in cash and
cash equivalents (705,388) (10,284,265)
Cash and cash equivalents
at beginning of period 2,197,015 10,485,189
------------ -----------
Cash and cash equivalents
at end of period $ 1,491,627 $ 200,924
============ ===========
</TABLE>
Supplemental disclosures of cash flow information:
Cash paid during the period:
<TABLE>
<S> <C> <C>
Interest $95,810 $53,360
Income taxes $92,664 $196,613
</TABLE>
4
<PAGE> 5
NITCHES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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, 1997, and the consolidated
statements of operations for the three and nine months ended May 31,1997 and the
condensed consolidated cash flow statements for the nine months ended May 31,
1997 have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the consolidated financial position, results of
operations and cash flows at May 31, 1997 and for all periods presented have
been made. The results of operations for the periods ended May 31, 1997 are not
necessarily indicative of the operating results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The following methods and assumptions were used to estimate fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents, accounts receivable, and accounts payable
The carrying amount approximates fair value because of the short maturity of
those instruments.
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, 1996 audited financial statements.
5
<PAGE> 6
NITCHES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. Earnings Per Share:
For the three months ended May 31, 1997, 44,180 common stock
equivalents for options were included in the weighted average number of primary
and fully diluted shares outstanding. For the three months ended May 31, 1996,
37,643 and 65,865 common stock equivalents for options were included in the
weighted average number of primary and fully diluted shares outstanding,
respectively. For the nine months ended May 31, 1997, 47,192 common stock
equivalents for options were included in the weighted average number of primary
and fully diluted shares outstanding. For the nine months ended May 31, 1996,
6,007 and 25,170 common stock equivalents for options were included in the
weighted average number of primary and fully diluted shares outstanding,
respectively.
In February of 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share (EPS). This statement requires the presentation of earnings per share to
reflect both "Basic EPS" as well as "Diluted EPS" on the face of the income
statement. In general, Basic EPS excludes dilution created by stock equivalents
and is a function of the weighted average number of common shares outstanding
for the period. Diluted EPS does reflect the potential dilution created by stock
equivalents as if such equivalents are converted into common stock and is
calculated in substantially the same manner as Fully Diluted EPS illustrated in
Accounting Principles Board Opinion No. 15 "Earnings Per Share" ("APB No. 15").
The Company will be required to adopt the new method of reporting EPS
for the fiscal year ending August 31, 1997. Based on the Company's capital
structure, the anticipated results of implementing SFAS No. 128 would reflect
EPS in materially the same manner as currently reported.
4. Inventories:
<TABLE>
<CAPTION>
May 31, August 31,
1997 1996
------------ ------------
<S> <C> <C>
Fabric and trims $ 272,881 $ 818,502
Finished goods 4,973,510 6,225,996
------------ ------------
$5,246,391 $7,044,498
============ ============
</TABLE>
6
<PAGE> 7
NITCHES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
5. Notes Payable and Contingent Liabilities:
At May 31, 1997, the Company had agreements with a financial
institution pursuant to which the Company sold a majority of its trade accounts
receivable to the financial institution on a pre-approved non-recourse basis.
The Company may request advances in anticipation of customer collections at the
financial institution'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. Contingent liabilities for irrevocable letters of credit
outstanding with the financial institution are as follows:
<TABLE>
<CAPTION>
May 31, August 31,
1997 1996
----------- -----------
<S> <C> <C>
Contingent liabilities for
irrevocable letters of credit $ 5,957,932 $ 5,849,134
</TABLE>
6. Major Customers:
Two customers accounted for 15% and 12%, respectively, of the Company's
net sales in the nine months ended May 31, 1997. These same two customers
accounted for 13% and 16%, respectively, of the Company's net sales in the
quarter ended May 31, 1997, respectively. Two customers each accounted for 11%
of the Company's net sales in the nine months ended May 31, 1996 and these same
two customers accounted for 11% and 10%, respectively, of total sales in the
quarter ended May 31, 1996.
Two customers accounted for 11% and 10%, respectively, of the Company's
trade accounts receivable balance at May 31, 1997. One customer accounted for
22% of the Company's trade accounts receivable balance at August 31, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
NINE MONTHS ENDED MAY 31, 1997 COMPARED TO THE NINE MONTHS ENDED MAY 31, 1996.
Net sales for the nine months ended May 31, 1997 decreased
approximately $6.4 million (14.4%) as compared to the nine months ended May 31,
1996. Overall, sales decreased due to a 19.7% decrease in the number of garments
sold offset by a 6.8%
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<PAGE> 8
increase in the average selling price per garment. The decrease in the number of
garments sold was primarily attributable to a decline in sales of dresses. The
higher selling price per garment is a result of the Company's shifting product
mix to higher priced niche products.
Gross margins decreased from 26.8% for the nine months ended May 31,
1996 to 25.1% for the current nine month period. The decrease was attributable
to an 8.8% increase in the average cost per garment as a result of the Company's
shifting product mix. As discussed above, the decrease in the number of garments
sold was primarily in dresses, which in the past contributed a higher than
average gross margin to the product mix. In addition, the activewear divisions
which market swimsuits, jog suits, and jackets experienced higher than
anticipated costs, reducing the gross margin on those products as well.
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 from $10.1
million for the first nine months of fiscal 1996 to $9.0 million for the first
nine months of fiscal 1997, and increased as a percentage of net sales from
22.8% last year to 23.8% for the current period. The decrease in dollar amount
is a result of the Company's restructuring to decrease overhead which resulted
in lower salary, commission and rent expense; however, the increase as a
percentage of sales is due to the loss in sales volume.
Interest expense increased in the nine months ended May 31, 1997 due to
an assessment of $84,625 imposed by the Internal Revenue Service in connection
with the audit of the Company's federal tax returns for the fiscal years 1992
through 1994. Interest income decreased in the nine months ended May 31, 1997
due to the decrease in average daily cash balances compared to the same period
last year.
THREE MONTHS ENDED MAY 31, 1997 COMPARED TO THE THREE MONTHS ENDED MAY 31, 1996.
Net sales for the third quarter of fiscal 1997 decreased approximately
$2.0 million (13.3%) compared to the net sales for the same quarter last year.
Overall, sales decreased in the current quarter due to a 11.3% decrease in the
number of garments sold along with a 3.6% decrease in the average selling price
per garment. The lower average selling price per garment is a result of the loss
in volume in dresses, which were a significant factor in net sales during the
same period last year.
8
<PAGE> 9
Gross margins increased from 26.2% for the three months ended May 31,
1996 to 27.6% for the current quarter. The increase was attributable to a 5.2%
decrease in the average cost per garment as a result of the Company's shifting
product mix.
Selling, general and administrative expenses increased from $3.3
million for the third quarter of last year to $3.4 million for the third quarter
of fiscal 1997, and increased as a percentage of net sales from 21.8% last year
to 25.8% for the current quarter. The increase in dollar amount is primarily the
result of the activewear divisions' overhead whose product primarily ships in
the August to October time frame, and the increase as a percentage of sales is
due to the loss in sales volume as mentioned above.
Interest expense decreased in the current quarter due to the Company's
decreased usage of its short term line of credit. Interest income decreased in
the current quarter due to the decrease in the average daily cash balances
compared to the same period last year.
Liquidity and Capital Resources
The Company generated approximately $.6 million of cash from operations
in the nine months ended May 31, 1997, primarily due to the decreased purchase
of inventory offset by payment of a special dividend on September 30, 1996 of
$1.00 per share amounting to approximately $1.2 million. This accounts for the
decrease in the Company's cash balance from $2.2 million at August 31, 1996 to
approximately $1.5 million at May 31, 1997.
At May 31, 1997, the Company had agreements with a financial
institution pursuant to which the Company sold a majority of its trade accounts
receivable to the financial institution on a pre-approved non-recourse basis.
The Company ships the non-financed portion of the merchandise to customers and
attempts to make those 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
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, 1997 was approximately $1.4
million of which approximately $.5 million has been collected through July 10,
1997.
Payment for receivables which are sold to the financial institution is
received 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
9
<PAGE> 10
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, 1997, the Company had no borrowings;
however, the Company had outstanding letters of credit of approximately $6.0
million which had been opened through the financial institution. Under these
agreements, the Company is required to maintain $9.0 million in net worth and
$8.5 million in working capital.
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. However, the Company expects its cash position to increase during
the last quarter of the fiscal year due to an expected decrease in purchasing
inventory, particularly in dresses. The Company does not anticipate making any
significant capital expenditures during the last quarter of fiscal 1997.
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, 1997. 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 $7.0 million at August 31, 1996
to $5.2 million at May 31, 1997. The Company has established an inventory
markdown reserve as of May 31, 1997 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, 1997 for which customer sales orders have not yet been
received.
BACKLOG
At May 31, 1997, the Company had unfilled customer orders of $15.3
million compared to $13.7 million of such orders at May 31, 1996, with such
orders generally scheduled for delivery by October 1997 and November 1996,
respectively. These amounts include both confirmed orders and unconfirmed orders
which the Company believes, based on industry practice and past experience,
10
<PAGE> 11
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 May 31, 1997. The increase in backlog is primarily
attributable to orders from activewear products which are expected to ship in
the August to October time frame.
IMPACT OF EXCHANGE RATES
All the Company's purchases are denominated in United States dollars.
Because the Company's products are sold exclusively 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 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 and costs of goods sold.
IMPACT OF INFLATION, DEFLATION, AND CHANGING PRICES
Management does not believe that inflation and changing prices have had
any material impact upon the Company's revenues or income from operations.
However, continued deflation in women's clothing prices may put pressure on
gross margins. 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.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this Quarterly Report on Form 10Q under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the "Notes to Consolidated Financial Statements", 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 factors, 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
11
<PAGE> 12
Exchange Commission, including the Company's Annual Report on Form 10-K, for the
fiscal year ended August 31, 1996 and this Quarterly Report on Form 10Q.
PART II. OTHER INFORMATION
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 filed during the quarter ended May 31,
1997.
12
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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
<TABLE>
<S> <C>
July 11, 1997 By: Steven P. Wyandt
---------------------------------
Steven P. Wyandt
As Principal Financial Officer and
on behalf of the Registrant
</TABLE>
13
<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-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 1,491,627
<SECURITIES> 0
<RECEIVABLES> 6,812,310<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 5,246,391
<CURRENT-ASSETS> 15,611,497
<PP&E> 253,289<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 15,964,231
<CURRENT-LIABILITIES> 2,898,763
<BONDS> 0
0
0
<COMMON> 2,657,818
<OTHER-SE> 9,386,552
<TOTAL-LIABILITY-AND-EQUITY> 15,964,231
<SALES> 37,960,675
<TOTAL-REVENUES> 37,960,675
<CGS> 28,440,522
<TOTAL-COSTS> 28,440,522
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,811
<INCOME-PRETAX> 452,360
<INCOME-TAX> 131,185
<INCOME-CONTINUING> 321,175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 321,175
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
<FN>
<F1>THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS NET OF
ALLOWANCES AND DEPRECIATION RESPECTIVELY.
</FN>
</TABLE>
