|SECURITIES
AND EXCHANGE COMMISSIONWashington, D.C. 20549



Form 10-Q


QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended: May 31, 2001


Commission File Number
0-13851


NITCHES, INC.


(Exact name of
registrant as specified in its charter)
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|California(State of Incorporation) | 95-2848021(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:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Title of each class        | Name of eachexchange on which registered
|-------------------------- | ----------------------------------------
|Common Stock, no par value | NASDAQ SmallCap Market                  

|Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]


As of July 12, 2001,
1,064,680 shares of the Registrants common stock were outstanding.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART I
 FINANCIAL INFORMATION


Item 1. Financial Statements


NITCHES, INC. AND
SUBSIDIARIESCondensed Consolidated Balance Sheets
|-----------------------------------------------------------------------------------------------------------------------------------

|                                        | May 31,2001 |                | August 31,2000 |              
|--------------------------------------- | ----------- | -------------- | -------------- | -------------
|
|ASSETS                                  |             |                |                |              
|Current assets:                         |            
|Cash and cash equivalents               |             | $       99,000 |                | $     314,000
|Receivables:                            |            
|Trade accounts, less allowances         |             | 4,487,000      |                | 4,224,000    
|Due from affiliates and employees       |             | 68,000         |                | 38,000       
|                                       
|                                        |             | 4,555,000      |                | 4,262,000    
|Inventories, net                        |             | 4,293,000      |                | 5,055,000    
|Deferred income taxes                   |             | 150,000        |                | 150,000      
|Other current assets                    |             | 114,000        |                | 76,000       
|                                       
|Total current assets                    |             | 9,211,000      |                | 9,857,000    
|Furniture, fixtures and equipment, net  |             | 87,000         |                | 109,000      
|Deferred income taxes                   |             | 28,000         |                | 28,000       
|Other assets                            |             | 19,000         |                | 17,000       
|                                       
|                                        |             | $  9,345,000   |                | $10,011,000  
|                                       
|LIABILITIES AND SHAREHOLDERS EQUITY    |            
|Current liabilities:                    |            
|Accounts payable                        |             | $  1,856,000   |                | $  2,534,000 
|Accrued expenses                        |             | 453,000        |                | 417,000      
|Income tax payable                      |             | 145,000        |                | 98,000       
|                                       
|Total current liabilities               |             | 2,454,000      |                | 3,049,000    
|Shareholders equity:                   |            
|Common stock, no par value,             |            
|50,000,000 shares authorized; 1,064,680 |            
|shares issued and outstanding           |             | 805,000        |                | 805,000      
|Retained earnings                       |             | 6,086,000      |                | 6,157,000    
|                                       
|Total shareholders equity              |             | 6,891,000      |                | 6,962,000    
|                                       
|                                        |             | $  9,345,000   |                | $10,011,000  
|                                       

|The accompanying notes
are an integral part of these financial statements



2
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|NITCHES, INC. AND
SUBSIDIARIESCondensed Consolidated Income Statements(Unaudited)
|---------------------------------------------------------------------------------

|                                       | Third quarter ended |             | Nine months ended |               
|-------------------------------------- | ------------------- | ----------- | ----------------- | --------------
|
|Net sales                              |                     | $8,686,000  |                   | $ 10,601,000  
|Cost of goods sold                     |                     | 6,207,000   |                   | 7,514,000     
|                                      
|Gross profit                           |                     | 2,479,000   |                   | 3,087,000     
|Expenses:                              |                    
|Selling, general and administrative    |                     | 2,007,000   |                   | 2,010,000     
|                                      
|Income from operations                 |                     | 472,000     |                   | 1,077,000     
|Interest & other income (expense), net |                     | 117,000     |                   | (21,000       
|                                      
|Income before income taxes             |                     | 589,000     |                   | 1,056,000     
|Provision for income taxes             |                     | 230,000     |                   | 410,000       
|                                      
|Net income                             |                     | $   359,000 |                   | $      646,000
|                                      
|Earnings per share                     |                     | $.34        |                   | $.61          
|                                      
|Shares outstanding                     |                     | 1,064,680   |                   | 1,064,680     
|                                      

|The accompanying notes
are an integral part of these financial statements



3
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|NITCHES, INC. AND
SUBSIDIARIESCondensed Consolidated Income Statements(Unaudited)
|---------------------------------------------------------------------------------

|                                                     | Nine months ended |              
|---------------------------------------------------- | ----------------- | -------------
|
|Net cash provided (used) by operating activities     |                   | $   (10,000  
|                                                    
|Cash flows from investing activities:                |                  
|Capital expenditures                                 |                   | (2,000       
|                                                    
|Cash flows from financing activities:                |                  
|Advances from factor                                 |                   | 862,000      
|Dividends paid                                       |                   | (1,065,000   
|                                                    
|Net cash provided (used) by financing activities     |                   | (203,000     
|                                                    
|Net increase (decrease) in cash and cash equivalents |                   | (215,000     
|Cash and cash equivalents at beginning of period     |                   | 314,000      
|                                                    
|Cash and cash equivalents at end of period           |                   | $      99,000
|                                                    
|Supplemental disclosures of cash flow information:   |                  
|Cash paid during the period:                         |                  
|Interest                                             |                   | $    149,000 
|Income taxes                                         |                   | $    178,000 

|The accompanying notes
are an integral part of these financial statements




4
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|NITCHES, INC. AND
SUBSIDIARIESCondensed Consolidated Income Statements



1. Description
of Business


Nitches,
Inc. (the Company) is a wholesale importer and distributor primarily of womens
clothing manufactured to its specifications and distributed in the United States under
Company brand labels and private retailer labels.


2. Condensed
Financial Statements:


The
accompanying unaudited consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q. These have been reviewed by the
Companys independent auditors in accordance with the professional
standards and procedures as set forth in Statement of Auditing Standards No. 71
(SAS 71). SAS 71 procedures for conducting a review of interim financial
information generally are limited to inquiries and analytical procedures
concerning significant accounting matters relating to the financial information
to be reported. They do not include all information and footnotes necessary for
a fair presentation of financial position and results of operations and cash
flows in conformity with generally accepted accounting principles. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in the
Companys Annual Report on Form 10-K for the year ended August 31, 2000. In
the opinion of Management, all adjustments considered necessary for a fair
representation have been included in the interim period. Operating results for
the nine months ended May 31, 2001 are not necessarily indicative of the results
that may be expected for the year ending August 31, 2001.


3. Earnings Per share:


At
May 31, 2001, there were no stock options or similar instruments outstanding and
therefore no dilutive effect to the weighted average number of shares
outstanding.


4. Inventories:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                 | May 31,2001 | August 31,2000
|---------------- | ----------- | --------------
|Fabric and Trims |             | $   124,000   
|Finished Goods   |             | 4,169,000     
|                
|                 |             | $4,293,000    
|                

|5. Trade accounts:


Pursuant
to the terms of an agreement between Nitches and a factor, Nitches sells a
majority of its trade accounts receivable to the factor on a pre-approved,
non-recourse basis. The Company may request advances in anticipation of customer
collections and open letters of credit through the factor, all of which are
collateralized by all of the Companys assets. Outstanding advances are
charged interest at the factors prime rate less one half percent. Advances
and contingent liabilities for irrevocable letters of credit outstanding are as
follows:



5
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|NITCHES,
INC. AND SUBSIDIARIES


Notes to Condensed
Consolidated Financial Statement (continued)


5. Trade accounts (continued):
|---------------------------------------------------------------------------------------------------------------------------------

|                                                         | May 31,2001 | August 31,2000
|-------------------------------------------------------- | ----------- | --------------
|Receivables assigned to factor:                          |             |               
|Non-recourse                                             |             | $ 6,224,000   
|Recourse                                                 |             | 278,000       
|Advances from factor                                     |             | (1,858,000    
|                                                        
|Due from factor                                          |             | 4,644,000     
|Non-factored accounts receivable                         |             | 249,000       
|Allowance for customer credits and doubtful accounts     |             | (406,000      
|                                                        
|                                                         |             | $ 4,487,000   
|                                                        
|Contingent liabilities for irrevocable letters of credit |             | $ 2,898,000   
|                                                        

|The
factoring agreement allows the Company to borrow up to $15,000,000, limited by
certain percentages of outstanding accounts receivable and finished goods
inventory owned by the Company. The Companys Chairman has provided a
$1,000,000 personal guarantee in connection with the factoring arrangement.


6. Special dividends and related party transactions:


The
Company paid a dividend of $.25 (twenty-five cents) per share on
November 30, 2000, for a total of approximately $266,000, to the shareholders of
record as of November 6, 2000. Additionally, on February 23, 2001, the Company
paid a dividend of $.50 (fifty cents) per share, for a total of
approximately $532,000, to the shareholders of record as of February 6, 2001.
Furthermore, on May 18, 2001, the Company paid a dividend of $.25
(twenty-five cents), for a total of approximately $266,000, to shareholders of
record as of April 27, 2001. During fiscal 2000, the Company declared and paid
dividends of $1.65 per share.


The
Company purchases labor and administrative services as needed, at fair market
rates, from Kuma Sport, Inc., a company that was 40% owned by a director of
Nitches until December 2000. At that time, the director transferred his
ownership in Kuma Sport to an unrelated party. The Company purchased labor and
administrative services from Kuma Sport for $305,000 through December 2000.


7. Significant Customers:


Sales
to two separate customers (Mervyns and Costco) accounted for 40% and 19.3%,
respectively, of the Companys net sales in the three months ended May 31,
2001. Three customers accounted for 27.4%, 21.1%, and 13.1% of the
Companys net sales in the three months ended May 31, 2000. For the nine months
ended May 31, 2001, three customers (Mervyns, Sears, and Kohls) accounted
for 46.0%, 13.8%, and 13.4%, respectively, of the Companys net sales.


Two
customers (Mervyns and Costco) accounted for 31.2% and 27.3%, respectively, of the
Companys trade receivable balance at May 31, 2001. Three customers
accounted for 26.9%, 24.4%, and 11.1% of the Companys trade receivable
balance at May 31, 2000.




6
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|Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations.


Results of
Operations


Nine Months Ended May
31, 2001 Compared to the Nine Months Ended May 31, 2000


Net
sales for the nine months ended May 31, 2001 decreased approximately $5.0
million (15.9%) as compared to the nine months ended May 31, 2000. This decline
was primarily attributable to a decrease in unit sales in the Companys
sleepwear product line, including the loss of JC Penney as a customer, which accounted for sales of approximately
$1.5 million in fiscal 2000, and the reduction in orders from two major customers. In the present
retail environment, major retailers are not expanding their vendor base, making replacement
of a lost customer very difficult for the Company.


Gross
margin increased to 27.3% for the nine months ended May 31, 2001 from 26.0% in
the year earlier period. The increase was primarily the result of higher gross
margins realized in the Companys sleepwear line. The Companys
product mix constantly changes to reflect customer mix, fashion trends and
changing seasons. Consequently, gross margins are likely to vary on a
quarter-to-quarter basis and in comparison to gross margins generated in the
same period of prior fiscal years.


Selling,
general and administrative expenses for the first nine months of fiscal 2001
increased slightly to $5.7 million from $5.6 million a year ago, and increased
as a percent of net sales from 17.8% last year to 21.4% for the current period.
The primary reason for the increase as a percentage of sales was due to the
decrease in net sales as compared to the earlier period. Additionally, in the
second quarter of fiscal 2001 the Company incurred expenses of
approximately $150,000 related primarily to the direct cost of closing an overseas buying
office in favor of an agency relationship.


The
Company recorded $150,000 of other income in the third quarter of fiscal 2001 as
a result of settling a note receivable, which it held related to the sale of
product lines in 1995. The Company had fully reserved the total note of $600,000
and accounted for it on a cost recovery basis, recording income only upon
receipt of payments. The settlement was reached with the buyer in a credit
workout reorganization. In addition to making interest payments of 4% per year,
the buyer had paid the Company approximately $1.5 million in rent, taxes,
utilities and maintenance for a sublease that ran from July 1995 to July 2000.


Three Months Ended May
31, 2001 Compared to the Three Months Ended May 31, 2000


Net
sales for the three months ended May 31, 2001 decreased approximately $1.9
million (18.1%) as compared to the three months ended May 31, 2000. This decline
was primarily attributable to a decrease in unit sales in the Companys sleepwear product line,
resulting from a reduction in orders from two major customers.


Gross
margin decreased to 28.5% for the three months ended May 31, 2001 from 29.1% for
the year earlier period. The decrease was the result of the Companys
product mix shifting to lower gross margin sleepwear during the current period.
The Companys product mix constantly changes to reflect customer mix,
fashion trends and changing seasons. Consequently, gross margin is likely to
vary on a quarter-to-quarter basis and in comparison to gross margins generated
in the same period of prior fiscal years.


Selling,
general and administrative expenses for the second quarter of fiscal 2001
remained constant at $2.0 million as compared to a year ago, and increased as a
percent of net sales to 23.1% from 19.0% in the year earlier period. The primary
reason for the increase as a percent of sales was due to the decrease in net
sales from the earlier period.


As noted above, the
Company recorded $150,000 of other income in the third quarter of fiscal 2001 as
a result of settling a note receivable.


Liquidity and Capital Resources


Working
capital remained at $6.8 million at May 31, 2001 as compared to August 31, 2000,
and the current ratio increased to 3.75:1 at May 31, 2001 from 3.23:1 at August
31, 2000.


7
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|The
Company paid special dividends of $.25 (twenty-five cents) per share on November
30, 2000, $.50 (fifty cents) per share on February 23, 2001, and $.25
(twenty-five cents) per share on May 18, 2001, for total dividends paid in
fiscal 2001 of approximately $1,065,000.


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 which were recourse and were not
made on a COD basis or supported by commercial or standby letters of credit at
May 31, 2001 was approximately $399,500 of which approximately $12,000 had been
collected through June 20, 2001.


Payment
for non-recourse factored receivables is made at the time customers make payment
to CIT or, if a customer is financially unable to make payment, within
approximately 180 days of the invoice due date. Under the Discount Factoring
Agreement, the Company can request advances in anticipation of customer
collections at CITs prime rate (currently 7.5%) less one-half percent, and
open letters of credit through CIT. The amount of borrowings by the Company,
including a portion of outstanding letters of credit, are limited to certain
percentages of outstanding accounts receivable and finished goods inventory
owned by the Company. Borrowings are collateralized by all of the assets of the
Company as well as a $1 million guaranty of the Companys Chairman, Mr.
Wyandt. At May 31, 2001, the Company had outstanding letters of credit of
approximately $2.9 million for the purchase of finished goods, which had been
opened through CIT. Under the Discount Factoring Agreement, the Company is
required to maintain $5 million of net worth and $5 million of working capital.
The Discount Factoring Agreement can be terminated by CIT on 60-days written
notice.


Inventory


In
its ordinary course of operations, the Company generally makes some sales below
its normal selling prices or below cost. Based on prior experience, management
believes this will be true for some inventory held or acquired after May 31,
2001. The amount of such sales depends on several factors, including general
economic conditions, market conditions within the apparel industry, the
desirability of the styles held in inventory and competitive pressures from
other garment suppliers.


The
Companys inventory decreased from $5.1 million at August 31, 2000 to $4.3 million at May
31, 2001. The Company has established an inventory markdown reserve as of May 31, 2001,
which management believes will be sufficient for current inventory that is expected to be
sold below cost in the future. There can be no assurance that the Company will realize
its expected selling prices, or that the inventory markdown reserve will be adequate, for
items in inventory as of May 31, 2001 for which customer sales orders have not yet been
received. The inventory markdown reserve is calculated based on specific identification
of aged goods and styles that are slow-moving or selling off-price.


Backlog


The
Company had unfilled customer orders of $12.8 million at May 31, 2001 compared to $13.8
million at May 31, 2000, with such orders generally scheduled for delivery by November
2001 and November 2000, respectively. The decrease in the backlog of $1.0 million is
primarily the result of a decrease in western wear orders for the fourth quarter. These
amounts include both confirmed orders and unconfirmed orders that the Company believes,
based on industry practice and past experience, will be confirmed. While cancellations,
rejections and returns have generally not been material in the past, there can be no
assurance that cancellations, rejections and returns will not reduce the amount of sales
realized from the backlog of orders at May 31, 2001.


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.


8
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Impact of Inflation and Deflation


Management
does not believe that inflation has had any material impact upon the
Companys revenues or income from operations to date. However, continued
deflation in womens clothing prices may put pressure on gross margins for
the balance of fiscal 2001. The strong resistance on the part of the consumer to
increases in price and increasing fabric and labor costs lead to an increased
cost of goods on a percentage basis.


Cautionary
Statement Under the Private Securities Litigation Reform Act of 1995


Statements
in the annual report on Form 10K under the caption Managements
Discussion and Analysis of Financial Condition and Results of Operations,
as well as oral statements that may be made by the Company or by officers,
directors or employees of the Company acting on the Companys behalf, that
are not historical fact constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements involve known and unknown risks and uncertainties that may cause the
Companys actual results in future periods to differ materially from
forecasted results. Those risks include a softening of retailer or consumer
acceptance of the Companys products, pricing pressures and other
competitive forces, or unanticipated loss of a major customer. In addition, the
Companys business, operations and financial condition are subject to
reports and statements filed from time to time with the Securities and Exchange
Commission.


PART II.
OTHER INFORMATION


Item 1. Legal Proceedings


There
were no material legal proceedings to which the Company or any of its
subsidiaries was a party in the nine months ended May 31, 2001.


Item 6. Exhibits and Reports on Form
8-K


There
were no reports on Form 8-K during the quarter ended May 31, 2001.



9
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|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                                                                                                                 
|------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|             
|July 16, 2001 | By:                /s/ Steven P. Wyandt         
           Steven P. WyandtAs Principal Financial Officer andon behalf of the Registrant

|10
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