<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: November 30, 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
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
As of January 13, 1997, 1,210,296 shares of the Registrant's common stock were
outstanding.
Page 1 of 13
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NITCHES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
November 30, August 31,
1996 1996
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 722,396 $ 2,197,015
Receivables:
Trade accounts, less allowances
($638,000 at November 30, 1996
and $425,000 at August 31, 1996) 7,816,770 6,081,880
Income taxes receivable 89,738 261,462
Due from affiliates and employees 23,116 140,418
----------- -----------
7,929,624 6,483,760
Inventories, net 5,632,885 7,044,498
Deferred income taxes 1,500,102 1,500,102
Other current assets 443,531 342,229
----------- -----------
Total current assets 16,228,538 17,567,604
Furniture, fixtures and equipment, net 298,617 314,473
Other assets 230,886 296,608
----------- -----------
$16,758,041 $18,178,685
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses $ 3,893,594 $ 5,359,050
----------- -----------
Total current liabilities 3,893,594 5,359,050
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 November 30, 1996 and
at August 31, 1996) 2,657,882 2,658,400
Retained earnings 9,110,707 9,065,377
----------- -----------
Total shareholders' equity 11,768,589 11,723,777
----------- -----------
$16,758,041 $18,178,685
=========== ===========
</TABLE>
2
<PAGE> 3
NITCHES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended November 30,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net sales $ 13,666,246 $ 13,333,684
Cost of goods sold 10,771,714 10,229,868
------------ ------------
Gross profit 2,894,532 3,103,816
Expenses:
Selling, general and
administrative 2,848,549 3,430,127
------------ ------------
Income (loss) from operations 45,983 (326,311)
Interest income 23,668 96,827
Interest expense (974)
------------ ------------
Income (loss) before income taxes 68,677 (229,484)
Provision (benefit) for income taxes 23,347 (78,025)
------------ ------------
Net income (loss) $ 45,330 ($ 151,459)
============ ============
Net income (loss) per share $ .04 ($ .13)
============ ============
Weighted average number of
shares outstanding 1,270,214 1,210,296
============ ============
</TABLE>
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NITCHES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended November 30,
-------------------------------
1996 1995
----------- ------------
<S> <C> <C>
Net cash provided (used) by
operating activities $ (238,861) $ 1,055,322
----------- ------------
Cash flows from investing activities:
Capital expenditures (24,944) (53,933)
----------- ------------
Net cash provided (used) by
investing activities (24,944) (53,933)
----------- ------------
Cash flows from financing activities:
Dividends paid (1,210,296)
Proceeds from exercise
of stock options 5,152
Purchases and retirement of
subsidiary shares by subsidiary (518) (10,369)
Purchases and retirement of
parent common stock (9,664,221)
----------- ------------
Net cash provided (used) by
financing activities (1,210,814) (9,669,438)
----------- ------------
Net (decrease) in cash and
cash equivalents (1,474,619) (8,668,049)
Cash and cash equivalents
at beginning of period 2,197,015 10,485,189
----------- ------------
Cash and cash equivalents
at end of period $ 722,396 $ 1,817,140
=========== ============
</TABLE>
Supplemental disclosures of cash flow information:
Cash paid during the period:
<TABLE>
<S> <C> <C>
Interest $ 11,176
Income taxes $ 5,500
</TABLE>
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NITCHES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Effective December 22, 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 trading symbol on
NASDAQ was changed to "NICH".
2. Condensed Financial Statements:
The consolidated balance sheet as of November 30, 1996, and the
consolidated statements of operations and the condensed consolidated cash flow
statements for the three months ended November 30, 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 November 30, 1996 and for all periods presented have been made.
The results of operations for the periods ended November 30, 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, 1996 audited financial statements.
3. Earnings Per Share:
At November 30, 1996, common stock equivalents for options were included in
the weighted average number of shares outstanding. At November 30, 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>
November 30, August 31,
1996 1996
---------- ----------
<S> <C> <C>
Fabric and trims $1,013,182 $ 818,502
Finished goods 4,619,703 6,225,996
---------- ----------
$5,632,885 $7,044,498
========== ==========
</TABLE>
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NITCHES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
5. Contingent Liabilities:
At November 30, 1996, 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
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.
Contingent liabilities for irrevocable letters of credit outstanding are as
follows:
<TABLE>
<CAPTION>
November 30, August 31,
1996 1996
----------- ----------
<S> <C> <C>
Contingent liabilities for
irrevocable letters of credit $5,942,386 $ 5,849,134
</TABLE>
6. Restructuring Reserve:
In the fourth quarter of fiscal 1995, the Company recorded a restructuring
charge of $1.8 million, of which approximately $1.5 million was accrued in trade
accounts and other payables at August 31, 1995 and $300,000 for fixed asset
write-offs. Amounts charged against this liability in the first quarter of
fiscal 1997 include employee severance payments ($4,500) and other miscellaneous
items ($12,500). The balance of this restructuring reserve was approximately
$215,000 at November 30, 1996.
7. Tender Offer and related party transactions:
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 tender offer included the repurchase of approximately 458,000
shares owned by six of the Company's officers and directors. The aggregate cost
of the shares, including legal and other costs associated with the tender offer,
was approximately $9.7 million.
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NITCHES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
7. Tender offer and related party transactions: (continued)
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, Inc. The Company pays rent of $15,000 on a month-to-month basis, 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
basis, as needed, at rates which it believes are consistent with fair market
rates. The Company purchased labor and administrative items for approximately
$440,000 in the first quarter of fiscal 1997.
8. Major Customers:
Three customers accounted for 20.1%, 10.8%, and 10.5%, respectively, of the
Company's net sales in the quarter ended November 30, 1996. One customer
accounted for 16.1% of net sales in the quarter ended November 30, 1995.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Net sales for the three months ended November 30, 1996 increased $332,562,
or 2.5%, as compared to the three months ended November 30, 1995. The increase
in the current quarter was due to a 23% decrease in the number of garments sold
offset by a 40% increase in the average selling price per garment. The higher
selling price per garment is a result of the Company's shifting product mix to
higher priced and cost niche products such as the Activewear Division which
markets jog suits. The quarterly results for the period ended November 30, 1995
included $2.9 million in sales attributable to product lines which the Company
subsequently sold to an unrelated buyer. The Company stopped selling those
garments on October 31, 1995.
The gross margin of 21.2% for the first quarter of fiscal 1997 decreased
from the 23.3% gross margin reported for the first quarter of last year. The
decrease was attributable to a 38.3% increase in the average cost per garment as
a result of the Company's shifting product mix as mentioned above. The Company's
product mix is constantly changing to reflect the changing seasons and fashion
trends. Consequently, gross margins are likely to vary on a quarter-to-quarter
basis and in comparison to gross margins generated in the same quarter of prior
fiscal years.
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Selling, general and administrative expenses decreased in dollar amount
from $3.4 million for the first quarter of last year to $2.8 million for the
current quarter and decreased as a percent of sales from 25.7% for the first
quarter of last year to 20.8% for the current quarter. The decrease in dollar
amount and as a percentage of sales reflects the Company's restructuring to
decrease overhead which resulted in lower salary, commission and rent expense.
Liquidity and Capital Resources
The Company used approximately $239,000 of cash from operations in the
first quarter of fiscal 1997, primarily for the normal seasonal purchase of
inventory, and on September 30, 1996, the Company paid a special dividend of
$1.00 per share amounting to approximately $1.2 million. This accounts for
substantially all the decrease in the Company's cash balance from $2.2 million
at August 31, 1996 to $.7 million at November 30, 1996.
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, which was
funded entirely from the Company's existing cash balance. Primarily as a result
of this transaction, the Company's cash balance decreased from $10.5 million at
August 31, 1995 to $1.8 million at November 30, 1995.
At November 30, 1996, 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 November 30, 1996 was approximately
$3,366,000 of which $1,931,000 has been collected through January 10, 1997.
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
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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 November 30, 1996, the
Company had outstanding letters of credit of $5,942,386 which had been opened
through the financial institution. There were no cash borrowings outstanding
from the financial institution as of November 30, 1996. Under these agreements,
the Company is required to maintain $9 million in net worth and $8.5 million in
working capital. The Company's working capital was $12.3 million as of November
30, 1996.
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.
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 November 30, 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 $7.0 million at November 30, 1995 to
$5.6 million at November 30, 1996. The Company has established an inventory
markdown reserve as of November 30, 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 November 30, 1996 for which customer sales orders have
not yet been received.
Backlog
At November 30, 1996, the Company had unfilled customer orders of $16.1
million compared to $22.1 million of such orders at November 30, 1995, with such
orders generally scheduled for delivery by April 1997 and May 1996,
respectively. These amounts include both confirmed orders and unconfirmed orders
which the Company believes, based on industry practice and past experience, will
be confirmed. While cancellations, rejections and returns have generally not
been material in the past, there can be no assurance that cancellations,
rejections and returns will not reduce the amount of sales realized from the
backlog of orders at November 30, 1996.
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However, in the present quarter, management believes the decrease in
backlog is primarily attributable to a general trend in the retail industry
toward shorter order lead times, particularly in dresses. The Company has
decided not to produce inventory in anticipation of customer orders or in an
amount equaling last year's sales. Therefore, unless the Company receives
significant customer orders over the next two quarters, the shortfall in backlog
will result in a reduction in sales and profits for the rest of the fiscal year
as compared to last fiscal year.
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 Company has
settled this action in exchange for a payment which the Company believes is
equal to the minimum legal fees that it would have incurred if it chose to
defend the litigation to a final verdict. As part of the settlement, the action
was dismissed with prejudice, and the plaintiffs are now prohibited from
bringing a new suit against the Company on the same cause of action, just as if
the action had been prosecuted to a final verdict with judgment against the
plaintiff.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are filed herewith or incorporated by reference as
indicated. Exhibit numbers refer to Item 601 of Regulation S-K:
2.1 Agreement and Plan of Reorganization dated November 9, 1994 by
and among Body Drama, Inc. Beeba's Acquisition, Inc. and the
Company (7)
3.1 Articles of Incorporation of the Company, as amended (5)
3.2 Bylaws of the Company, as amended (1)
4 See 3.1 and 3.2, above
10 Material Contracts:
10.3.2 Incentive Stock Option Plan as amended October 3, 1989 (3)
10.3.3 Executive Option Plan adopted October 3, 1989, as amended (9)
10.5.12 Lease Agreement between the Company and Broadway and 41st
Associates Limited Partnership dated August 17, 1989 (2)
10.6 Form of Indemnification Agreement for Officers and Directors (6)
10.12 Employee Stock Purchase Plan (5)
10.28 Management Services Agreement between the Company and Body Drama,
Inc. dated October 9, 1991 (4)
10.29 Documents concerning offer to purchase Registrant's shares
pursuant to a Tender Offer dated July 20, 1995 (8)
10.30 Asset Purchase Agreement and related agreements between the
Company and Design and Source Holding Company, Ltd. effective
July 1, 1995 (10)
10.31 Employment Agreement dated May 9, 1995 between the Company and
Arjun C. Waney (10)
10.32 Employment Agreement dated May 9, 1995 between the Company and
Steven P. Wyandt (10)
11 Computation of earnings per share. See Note 2 of Notes to
Consolidated Financial Statements
24 Power of Attorney regarding authority to sign documents to be
filed with the Commission (5)
27 Financial Data Schedule
(b) There were no reports on Form 8-K during this period.
11
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Footnotes:
(1) Incorporated by reference from Registrant's Form 10-K filed on November 23,
1988 for the fiscal year ended August 31, 1988.
(2) Incorporated by reference from Registrant's Form 10-K filed on November 21,
1989 for the fiscal year ended August 31, 1989.
(3) Incorporated by reference from Registrant's Definitive Proxy Statement
dated December 12, 1989 and filed on December 14, 1989.
(4) Incorporated by reference from Form S-1 filed on August 26, 1991 by Body
Drama, Inc., Commission file number 33-42417, Exhibit 10.2.
(5) Incorporated by reference from Registrant's Form 10-K filed on November 21,
1991 for the fiscal year ended August 31, 1991.
(6) Incorporated by reference from Registrant's Form 10-K filed on November 23,
1992 for the fiscal year ended August 31, 1992.
(7) Incorporated by reference from Registrant's Form 10-Q filed on January 4,
1995 for the quarter ended November 30, 1994.
(8) Incorporated by reference from Schedule 13E-4 filed on July 20, 1995.
(9) Incorporated by reference from Registrant's Definitive Proxy Statement
filed October 25, 1995 for the fiscal year ended August 31, 1995.
(10) Incorporated by reference from Registrant's Form 10-K filed on November 3,
1995 for the fiscal year ended August 31, 1995.
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
January 13, 1997 By: /s/ Steven P. Wyandt
---------------------------------
Steven P. Wyandt
As Principal Financial Officer and
on behalf of the Registrant
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>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> NOV-30-1996
<EXCHANGE-RATE> 1
<CASH> 722,396
<SECURITIES> 0
<RECEIVABLES> 7,816,770<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 5,632,885
<CURRENT-ASSETS> 16,228,538
<PP&E> 298,617<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 16,758,041
<CURRENT-LIABILITIES> 3,893,594
<BONDS> 0
0
0
<COMMON> 2,657,882
<OTHER-SE> 9,110,707
<TOTAL-LIABILITY-AND-EQUITY> 16,758,041
<SALES> 13,666,246
<TOTAL-REVENUES> 13,666,246
<CGS> 10,771,714
<TOTAL-COSTS> 10,771,714
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 68,677
<INCOME-TAX> 23,347
<INCOME-CONTINUING> 45,330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,330
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<FN>
<F1>THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS NEW OF ALLOWANCES
AND DEPRECIATION RESPECTIVELY
</FN>
</TABLE>
