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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: August 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
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
------------------- ----------------
<S> <C>
Common stock, no par value NASDAQ
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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As of November 7,1997, 1,171,615 shares of the Registrant's common stock were
outstanding. The aggregate market value of such common stock held by
non-affiliates of the Registrant based on the last sale of such stock in the
NASDAQ National Market, on November 7, 1997, was $5,418,719.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement, to be used in connection
with the solicitation of proxies to be voted at the Registrant's annual meeting
of shareholders to be held in December 1997 to be filed with the Commission, are
incorporated by reference into Part III of this Report on Form 10-K.
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PART I
ITEM 1. BUSINESS.
GENERAL
Nitches, Inc. (the "Company" or "Nitches") has been in the women's
wholesale sportswear business since 1973, and imports finished garments
manufactured to its specifications from approximately 10 foreign countries.
The Company and its subsidiaries sell all-cotton and cotton blend knit
and woven sportswear, western wear, sleepwear and daywear to retailers which
include J. C. Penney, Kohl's, Mervyn's, Price Costco, Sears, and Sheplers. The
Company sells garments to these and other retailers through its own sales force
and through independent sales representatives. Nitches provides fashionable
clothing to the popularly priced market segment which generally retail between
$10 and $35 per item. The Company competes primarily on the basis of price,
quality, the desirability of its fabrics and its ability to adjust rapidly to
changes in style of women's clothing.
PRODUCT LINES AND SUBSIDIARIES
The Company's operating product lines and subsidiaries are organized, in
general, to reflect the organizational buying and marketing structures of its
customers. Each product line's garments are sold under both Company trademark
labels and private retailer labels. From time to time, the Company may add,
consolidate or eliminate certain product lines as a result of increases or
decreases in the demand for the garments sold in a particular product line or in
order to effectuate changes in marketing strategy and personnel.
Ulterior Motives. The Ulterior Motives product line primarily consists of
dresses, jumpsuits and rompers for the regular and plus size market segments.
The primary labels used in this product line include Ulterior Motives, Ulterior
Motives Woman and Avocado. The garments in this product line are also sold to
retailers under the retailers' private labels.
Western Wear. Western wear shirts are sold primarily under the Company labels
Adobe Rose and Southwest Canyon. Western wear fashion jeans are sold under the
label Blaze through a licensing agreement with a third party supplier.
Body Drama, Inc. Subsidiary. The Company owns 100% of the
outstanding shares of Body Drama, Inc. which distributes a broad
range of women's intimate apparel for both the sleepwear and
daywear markets. Sleepwear garments are produced in a variety of
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fabrics and styles, including robes, pajamas, nightshirts and nightgowns which
are sold under the Body Drama and Body Tease labels and retailers' private
labels. Daywear products are sold primarily under the Gaviota trademark and
retailers' private labels, and include panties, teddies, camisoles and body
suits.
Activewear. The Activewear product line, started in fiscal year 1996, markets
primarily jog suits, jackets, and shorts for the missy and plus size market
segments. The primary label is Active Exposure.
Foreign Subsidiary. The Company owns 100% of the outstanding capital stock of a
Hong Kong corporation which performs production coordination, quality control
and sample production services for the various operations of the Company.
SALE OF PRODUCT LINES
On August 22, 1995, the Company sold various assets associated with its
junior, girls and maternity product lines. On October 31, 1995, the Company sold
the remaining inventory in such product lines at cost and granted the buyer an
exclusive, world-wide license to use various tradenames registered by the
Company for these product lines. At that time, the Company also ceased
purchasing garments which had previously been sold under the tradenames licensed
to the buyer.
TRADEMARKS
The Company and its Body Drama subsidiary currently own a total of 38
federally registered trademarks. While trademarks owned by the Company have
always been important to its marketing and competitive strategy, prior to 1995
they have not been central factors influencing its sales. However, subsequent to
its reorganization in fiscal year 1995, its trademarks in sleepwear and western
wear have become more important in identifying the Company's products.
PRODUCT DEVELOPMENT AND DESIGN
The Company develops merchandise lines for production and importation in
two principal ways: (l) it develops its own lines of clothing styles which are
displayed in Company showrooms and which are also shown to retailers by
independent sales representatives ("Company Brand"), and (2) it works with major
retailers in developing product lines which the Company then has manufactured
and imported and which are generally sold under private retailer labels. Styles
developed by the Company are sold under both Company trademarks and private
retailer labels.
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Except for sleepwear and western wear, the Company generally does not
create original garment shapes or bodies. The Company does, however, produce
garments from original fabric prints and designs. The Company also responds to
frequent style changes in the women's sportswear business by maintaining a
continuous program adapting to current trends in style and fabric. In an effort
to continually stay abreast of current fashion trends, representatives of the
Company regularly shop at exclusive department and specialty stores in the
United States, Europe, Japan and other countries which are known to sell
merchandise with advanced styling direction. Sample garments are submitted to
the Company by representatives, along with their evaluation of the styles
expected to be in demand in the United States. The Company also seeks input from
selected customers. The Company then selects styles, fabrics and colors which it
believes reflect current fashion trends.
With regard to private label sales, the Company's sales personnel meet
frequently with buyers representing retailers who custom order products by
style, fabric, and color. These buyers may provide samples to the Company or may
select styles already available in Company showrooms. The Company has an
established reputation for its ability to arrange for foreign manufacture on a
reliable, expeditious and cost-effective basis.
SOURCES OF SUPPLY
Approximately 99% of the garments sold by the Company are manufactured
abroad. Contracting with foreign manufacturers enables the Company to take
advantage of prevailing lower labor rates, with the consequent ability to
produce a quality garment which can be retailed in the popular, value and
moderate price ranges.
As a result of import restrictions on certain garments imposed by
bilateral trade agreements between the United States and certain foreign
countries, the Company has sought diversity in the number of countries in which
it has manufacturing arrangements. The percentage of total purchases from
particular countries varies from period to period based upon quota availability
and price considerations. The Company has arranged, and will continue to
arrange, for production in the United States when economically feasible to meet
special needs.
The following table shows the percentage of the Company's total
purchases, not including freight charges, duties and commissions, from each
country for the years ended August 31, 1997, 1996 and 1995.
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<TABLE>
<CAPTION>
Percent of Total Purchases
Year Ended August 31,
--------------------------
Country 1997 1996 1995
- ------- ---- ---- ----
<S> <C> <C> <C>
Dubai.......................... 39.3% 28.9% 9.2%
Hong Kong/China................ 13.1 8.4 13.9
Oman........................... 12.7 13.7 11.0
Macau.......................... 11.1 6.5 4.2
Sri Lanka...................... 10.2 19.8 13.4
India.......................... 5.6 5.6 13.3
United States.................. .9 11.5 6.9
Bangladesh..................... 7.0
Dominican Republic............. 7.4
Mauritius...................... 3.3
Countries less than
2.5% each in the
current year................. 7.1 5.6 10.4
</TABLE>
The Company arranges for the production of garments with suppliers on a
purchase order basis, with each order generally backed by an irrevocable letter
of credit. The Company does not have any long-term contractual arrangements with
manufacturers. This provides the Company with flexibility regarding the
selection of manufacturers for future production of goods. The Company believes
that the loss of any particular manufacturer in any country could be replaced by
another manufacturer in a reasonable time period. However, in the event of the
loss of a major manufacturer the Company could experience a temporary
interruption in supply.
In some cases, the manufacturer or agent with which the Company contracts
for production may subcontract work. Most of the listed countries have numerous
suppliers which have the technical capability to manufacture garments of the
type sold by the Company.
The Company believes that the production capacity of foreign manufacturers
with which it has developed, or is developing, a relationship is adequate to
meet the Company's production requirements for the foreseeable future. However,
because of existing and potential import restrictions, the Company continues to
attempt to diversify its sources of supply.
When management believes, based on previous experience and market
performance, that additional orders for certain garments will be received, it
may cause production runs to be made in amounts in excess of firm customer
orders. This may allow the Company to achieve overall lower costs as well as to
be able to respond more quickly to customer delivery requirements. The Company
bears the consequent risk if garments purchased in advance of receipt of
customer purchase orders do not sell.
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QUALITY CONTROL
Company representatives regularly visit manufacturers to inspect
garments and monitor production facilities in order to assure timely delivery,
maintain quality control and issue inspection certificates. Furthermore, through
these representatives and independent inspectors from major retailers, the
Company ensures that the factories the Company uses for production adhere to
policies consistent with prevailing labor laws. A sample of garments from a
percentage of each production run is inspected before each shipment. Letters of
credit arranged by the Company require, as a condition to the release of funds
to the supplier, that an inspection certificate be signed by a representative of
the Company.
MARKETING AND DISTRIBUTION
The Company sells its products through an established sales network
consisting of both in-house sales personnel and independent sales representative
organizations. The Company does not generally advertise, although customers
sometimes feature the Company's products in their advertisements. For both
Company Brand and Private Label sales, employees operating in Company showrooms
in New York City and Los Angeles represent the Company in soliciting orders
nationally from approximately 20 major customers. In addition, senior executives
of the Company have primary responsibility for sales to certain key accounts.
The Company's products are also marketed by approximately 29 commissioned sales
representative organizations, all of which are independent contractors, and each
of which has been assigned one or more primary areas of responsibility.
Sales have historically been concentrated in apparel made of cotton and
cotton blend garments for the spring and summer seasons, which sell primarily
from January through July. With the Company's reorganization at the end of
fiscal 1995 and the resultant change in the Company's product mix, a new
seasonal pattern may be developing.
At present, most garments are shipped by suppliers in bulk form to the
Company's warehouse in San Diego, where they are sorted, stored and packed for
distribution to customers. From time to time, the Company may rent additional
short-term warehouse space as needed to accommodate its requirements during peak
shipping periods. In addition, to facilitate shipping to customers, some of its
overseas suppliers perform sorting, price ticketing, hanging, and packing
functions.
Purchase orders may be canceled by the Company's customers in the event
of late delivery or in the event of receipt of nonconforming goods. Late
deliveries usually are attributable to
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production or shipping delays beyond the Company's control. In the event of
canceled purchase orders, rejections or returns, the Company will sell garments
to other retailers, off-price discount stores or garment jobbers. The Company
has, in the past, often been able to recover from its manufacturers some portion
of its expenses or losses associated with sales below cost for causes
attributable to manufacturing problems. However, the Company has also
historically experienced losses on merchandise which is rejected or returned.
Two customers accounted for 16.3% and 10.8%, respectively, of the
Company's net sales in fiscal 1997. One customer accounted for 10.4% of the
Company's net sales in fiscal 1996. While the Company believes its relationships
with its major customers are good, because of competitive changes and
availability of the types of garments sold by the Company from a number of other
suppliers, there is the possibility that any customer could lower, or raise, the
amount of business it does with the Company. If the Company was to experience a
significant decrease in sales to any of its major customers, and was unable to
replace such sales volume with sales to other major customers, there could be a
material adverse financial effect on the Company.
IMPORT RESTRICTIONS
The ability of the Company to import garments is regulated by import
restrictions which limit the specific number of garments that may be imported
from any country for a specific period. Government import quotas of various
types are imposed on substantially all of the products imported by the Company
from substantially all of the countries from which the Company purchases
garments. Because of these quota restrictions, the Company has sought diversity
in the number of countries in which it has garments manufactured.
The Agreement on Textile and Clothing (the "ATC"), which became
effective on January 1, 1995, provides the basic guidelines for administering
import quotas and related matters. The ATC contains three provisions which will
affect the Company's business to varying degrees in the future. First, the ATC
requires that import quotas are to be phased out in four stages over a ten year
period. However, quotas on substantially all of the garments imported by the
Company are not scheduled to be phased out until the year 2005. Second, over the
next eight years, import tariffs will be reduced from an average of 19% to
17.5%. While the tariff reductions apply to most apparel items, the size of the
reductions are extremely small and are not likely to have a material impact on
the Company's overall cost of merchandise. Finally, new rules of origin took
effect on July 1, 1996 whereby the country in which the garment is assembled is
deemed the country of origin instead of the country in which the
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fabric is cut. The biggest impact of the rule change is likely to be on garments
produced in China, which assembles large quantities of apparel cut in nearby
countries such as Macau, Singapore and Taiwan. Approximately 24.2% of the
Company's garments were produced in China, Hong Kong, and Macau in fiscal 1997.
The Company does not expect a significant disruption in its garment purchases as
a result of the country of origin rule change.
The Company closely monitors the status of applicable import quotas and
the extent to which they are being filled. The Company bases its production
decisions, in part, on whether a particular supplier country has entered into an
agreement with the United States restricting trade in certain garments and, if
so, the extent to which the applicable quota imposed for a particular year is
expected to be filled by a scheduled shipment date. In some cases, the Company
has responded to the anticipated exhaustion of a particular quota by having
goods manufactured and shipped prior to the receipt of purchase orders or well
in advance of scheduled delivery dates in order to be assured that garments will
be imported into the United States before the applicable quota is filled. In
these instances, the Company is required to hold garments in inventory,
sometimes for several months, before shipment to customers. This can occur,
normally, toward the end of a calendar year.
Import restrictions have, in some cases, increased the cost of finished
goods to the Company as a result of increased competition for a restricted
supply of goods. The Company's future results may also be affected by additional
bilateral or unilateral trade restrictions, a significant change in existing
quotas, political instability resulting in the disruption of trade from
exporting countries, or the imposition of additional duties, taxes and other
charges on imports.
Because of import restrictions, embargo and utilization of quota, the
Company may be unable, from time to time, to import certain types of garments.
Because of the Company's dependence on foreign suppliers, a significant
tightening or utilization of import quotas for the types of garments imported by
the Company, applicable to a substantial number of countries from which the
Company imports, could force the Company to seek other sources of supply and to
take other actions which could increase costs of production. This could also
cause delays in production and result in cancellation of orders. Any of these
factors could result in an adverse financial impact on the Company.
The Company believes it has the ability to locate, establish
relationships with and develop manufacturing sources in countries where the
Company has not previously operated. Whenever possible, the Company moves
production to countries in which applicable quotas remain unfilled or to
countries in which no
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quotas are imposed. The Company may also shift production to non-quota garments
if a market for such garments exists. The time required to commence contract
production in supplier countries ranges from several weeks in the case of a
country with a relatively well developed garment manufacturing industry to four
months or more for a country in which there are less developed capabilities. The
cost to the Company of arranging for production in a country generally involves
management time and associated travel expenses.
BACKLOG
At August 31, 1997, the Company had unfilled customer orders of $12.1
million compared to $16.7 million of such orders at August 31, 1996, with such
orders generally scheduled for delivery by December 1997 and January 1997,
respectively. The decrease in backlog is primarily attributable to the decline
in demand for non-branded jogsuits and sleepwear. 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 August 31, 1997.
RAW MATERIALS
A substantial majority of the clothing sold by the Company is made of l00%
cotton, although the Company also utilizes cotton blends, acrylic knits and
rayon fabrics. All of these fabrics are readily available in most countries in
which the Company contracts for production and are easily imported to those
countries that do not have an internal supply of such fabric. The Company is not
dependent on a single source of supply for fabric which is not readily
replaceable.
COMPETITION
The women's sportswear business is highly competitive and consists of many
manufacturers and distributors, none of which accounts for a significant
percentage of total sales, but many of which are larger and have substantially
greater resources than the Company. The Company competes with a number of
companies which import clothing from abroad for wholesale distribution, with
domestic retailers having established foreign manufacturing capabilities and
with domestically produced goods. Management believes that the Company competes
upon the basis of price, quality, the desirability of its fabrics and styles,
the reliability of its service and delivery and its ability to adjust rapidly to
changes in style. In addition, the Company has developed long-term working
relationships with manufacturers and
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agents which presently provide the Company with reliable sources of supply. The
Company's ability to compete effectively is dependent, in part, on its ability
to retain managerial personnel with experience in locating, developing and
maintaining reliable sources of supply and to retain experienced sales
personnel.
EMPLOYEES
As of October 15, l997, the Company had 53 full-time employees, of whom
15 worked in executive, administrative or clerical capacities and 38 worked in
sales, design, and production. The Company may also employ temporary personnel
on a seasonal basis. None of the Company's employees is represented by a union.
The Company considers its working relationships with its employees to be good
and has never experienced an interruption of its operations due to any kind of
labor dispute.
ITEM 2. PROPERTIES.
In October 1995, the Company moved its warehouse and administrative
facilities from a 69,000 square foot facility into a 30,000 square foot facility
owned by Kuma Sport, Inc. Kuma Sport, Inc. is 40% owned by Mr. Arjun Waney, the
Chairman of Nitches. The move to smaller warehouse and administrative offices is
consistent with management's efforts to downsize the Company. 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. The Company may lease additional
short-term warehouse space from time to time as needed.
The Company and its Body Drama subsidiary lease two showrooms in New
York and one in Los Angeles with an aggregate monthly gross rental of
approximately $38,000, excluding monthly sublease income of approximately
$20,000. The Los Angeles showroom lease expires in July 2000 and the New York
leases expire in July 1998 and February 2000. The Company has subleased
approximately 80% of the larger New York showroom on substantially the same
terms and at the same lease rate as that paid by the Company to the landlord.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company or any of
its subsidiaries was a party in the fiscal year ended August 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
The Company's Common Stock trades on The NASDAQ National Market under
the symbol NICH. The number of record holders of the Common Stock was 144 on
November 7, 1997. The Company believes that there are a significant number of
beneficial owners of its Common Stock whose shares are held in "street name".
The closing sales price of the Common Stock on November 7, 1997 was $4 5/8 per
share.
The high and low stock closing sale prices for each fiscal quarter of
the last two years were as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
November 30, 1995 $6 1/4 $3 7/8
February 29, 1996 5 3/8 3 3/4
May 31, 1996 8 1/2 3 3/8
August 31, 1996 9 1/8 6 3/8
November 30, 1996 9 1/8 5 3/8
February 28, 1997 6 3/4 5
May 31, 1997 8 1/4 5
August 31, 1997 7 5 3/8
</TABLE>
The Company paid a special dividend of $1.00 per share on September 30,
1996 to the holders of record as of September 13, 1996. However, the Company has
not resumed a quarterly dividend policy.
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ITEM 6. SELECTED FINANCIAL DATA. (In thousands, except per share amounts)
<TABLE>
<CAPTION>
Operating Results: 1997 1996 1995 1994 1993
- ------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales (1) $ 48,414 $ 54,381 $ 83,846 $ 119,291 $ 116,200
Cost of goods sold 36,190 40,396 63,274 97,499 84,993
--------- --------- --------- --------- ---------
12,224 13,985 20,572 21,792 31,207
Selling, general and
administrative expenses 11,888 12,547 19,795 27,852 29,705
Restructuring charge 1,803
--------- --------- --------- --------- ---------
Income (loss) from operations 336 1,438 (1,026) (6,060) 1,502
Gain on sale of product lines 563
Other income 151 319 355 206 379
Interest expense (167) (52) (2) (462) (156)
--------- --------- --------- --------- ---------
Income (loss) before
income taxes 320 1,705 (110) (6,316) 1,725
Provision (benefit) for
income taxes 125 279 (269) (1,262) 719
--------- --------- --------- --------- ---------
Income (loss) before
minority interest 195 1,426 159 (5,054) 1,006
Minority interest (55) (1,628) (318)
--------- --------- --------- --------- ---------
Net income (loss) $ 195 $ 1,426 $ 214 ($ 3,426) $ 1,324
========= ========= ========= ========= =========
Earnings (loss) per share:
Primary $ .16 $ 1.16 $ .09 ($ 1.33) $ .49
========= ========= ========= ========= =========
Fully diluted $ .15 $ 1.13 $ .09 ($ 1.33) $ .49
========= ========= ========= ========= =========
Cash dividends per
common share $ 1.00 $ .16 .29
========= ========= =========
</TABLE>
(1) See Management's Discussion and Analysis on page 15.
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<TABLE>
<CAPTION>
Financial Position: 1997 1996 1995 1994 1993
- ------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 955 $ 2,197 $ 10,485 $ 6,566 $ 4,724
Receivables 7,029 6,484 10,719 16,941 23,041
Inventories 4,272 7,044 6,680 10,800 20,228
Total current assets 13,886 17,568 29,971 36,732 51,222
Total assets 15,079 18,179 30,966 38,579 54,147
Notes and acceptances payable - - - 3,000 7,949
Accounts payable and
accrued expenses 2,376 5,359 8,433 7,750 12,085
Income taxes payable
(receivable) (41) (261) (459) (1,596) (475)
Total current liabilities 2,376 5,359 8,433 10,750 20,034
Minority interest - - - 5,747 7,547
Shareholders' equity 11,681 11,724 21,437 20,987 25,470
Other Financial Information:
- ----------------------------
Profitability:
Gross margin 25.2% 25.7% 24.5% 18.3% 26.9%
Operating margin (deficit) .7% 2.6% (1.2%) (5.1%) 1.3%
Net income (loss) as
percent of net sales .4% 2.6% .3% (2.9%) 1.1%
Liquidity:
Current ratio 5.84 3.28 3.55 3.42 2.56
Working capital $ 11,509 $ 12,209 $ 21,538 $ 25,982 $ 31,188
Share Data:
Weighted average number
of common shares:
Primary 1,254 1,227 2,439 2,573 2,686
Fully diluted 1,266 1,256 2,439 2,573 2,686
Number of common shares
outstanding at year end 1,172 1,210 2,398 2,508 2,542
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
YEARS ENDED AUGUST 31, 1997 AND 1996.
Net sales for the fiscal year ended August 31, 1997 decreased
approximately $6.0 million (11.0%) compared to the fiscal year ended August 31,
1996. The decrease was due primarily to a 14.7% decrease in the number of
garments sold offset by a 5.5% increase in the average selling price per
garment. The decrease in the number of garments sold was primarily attributable
to the decline in demand for dresses during the second and third quarters.
Gross margins decreased from 25.7% for the fiscal year ended August 31,
1996 to 25.2% for the fiscal year ended August 31, 1997 due to a 7.9% increase
in the average cost per garment.
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 $12.5 million in fiscal 1996 to $11.9 million in fiscal 1997, but increased
as a percent of net sales (23.0% in fiscal 1996 and 24.5% in fiscal 1997). The
decrease in dollar amount was due to the lower sales volume in the current
period and, in part, to a reduction in overhead as a result of the Company's
restructuring in the fourth quarter of fiscal year 1995.
Interest expense increased in the current year due to a nonrecurring
assessment imposed by the Internal Revenue Service in connection with the audit
of the Company's federal tax returns for fiscal years 1992 through 1994. The
audit has been completed and the Company has paid all taxes, penalties, and
interest owing as of October 31, 1997. Interest income decreased in fiscal 1997
due to decreases in the Company's average cash balances on hand offset by an
increase in the prime rate of interest during the third quarter of the fiscal
year, and consequently the Company's investment rate for its unutilized cash.
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YEARS ENDED AUGUST 31, 1996 AND 1995.
Net sales for the fiscal year ended August 31, 1996 decreased
approximately $29.5 million (35.1%) compared to the fiscal year ended August 31,
1995. The decrease was due primarily to a 51% decrease in the number of garments
sold offset by a 30% increase in the average selling price per garment. The
decrease in the number of garments sold was primarily attributable to a
restructuring in the fourth quarter of fiscal 1995 resulting in the sale or
discontinuance of certain product lines as part of a concentrated effort to
divest the Company of unprofitable and lower margin lines.
Gross margins increased from 24.5% for the fiscal year ended August 31,
1995 to 25.7% for the fiscal year ended August 31, 1996. While the general
business and market conditions did not improve in fiscal 1996, the Company's
product mix resulted in higher overall gross margins and fewer garments being
sold below cost in fiscal 1996 than in fiscal 1995.
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 $19.8 million in fiscal 1995 to $12.5 million in fiscal 1996, but were
approximately the same as a percent of net sales (23.6% in fiscal 1995 and 23.0%
in fiscal 1996). The decrease in dollar amount was due to the lower sales volume
in fiscal 1996 and, in part, to a reduction in overhead as a result of the
Company's restructuring in the fourth quarter of fiscal year 1995.
Interest expense increased in fiscal 1996 due to the Company's increased
usage of its short term line of credit. Interest income decreased in fiscal 1996
due to decreases in the Company's average cash balances on hand and a decrease
in the prime rate of interest, and consequently the Company's investment rate
for its unutilized cash.
The valuation allowance for deferred tax assets decreased by $541,566 in
fiscal 1996 due to the utilization on a consolidated basis of deferred tax
deductions generated by the Company. Consequently, the Company reported an
income tax provision of $278,717.
16
<PAGE> 17
Liquidity and Capital Resources:
The Company's working capital of $11.5 million at August 31, 1997
decreased from the August 31, 1996 level of $12.2 million, while the Company's
current ratio increased from 3.28 at August 31, 1996 to 5.84 at August 31, 1997.
The principal reasons for the decrease in working capital and the increase in
current ratio was reduced purchases of inventory offset by the payment of a
special dividend on September 30, 1996 of $1.00 per share amounting to
approximately $1.2 million.
At August 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 customers'
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 August 31, 1997 was approximately
$1,114,273 of which $350,428 has been collected through October 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 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 August 31, 1997, the Company had outstanding letters of credit
of $5,321,916 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.
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
approximately $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
which was subsequently settled in 1996. The Company and its subsidiary incurred
$250,000 and approximately $20,000, respectively, of legal costs related to the
class action lawsuit during the twelve months ended August 31, 1996. On
17
<PAGE> 18
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 $405,470.
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 August 31, 1997. 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 $4.3 million at August 31, 1997. The Company has established an inventory
markdown reserve as of August 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 August 31, 1997 for which customer sales orders have
not yet been received.
IMPACT OF EXCHANGE RATES
While the Company purchased over 99% of its products from foreign
manufacturers in fiscal 1997, 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.
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 to
date. However, continued deflation
18
<PAGE> 19
in women's clothing prices is expected to put pressure on gross margins in
fiscal year 1998. 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 the annual report on Form 10K 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 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, including the Company's Annual Report on
Form 10K, for the fiscal year ended August 31, 1997.
19
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
NITCHES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FILED WITH
THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K
<TABLE>
<S> <C>
Independent Auditors' Reports 21
Consolidated Balance Sheets at August 31, 1997 and 1996 23
Consolidated Statements of Operations for the years
ended August 31, 1997, 1996 and 1995 24
Consolidated Statements of Shareholders' Equity for
the years ended August 31, 1997, 1996 and 1995 25
Consolidated Statements of Cash Flows for the
years ended August 31, 1997, 1996 and 1995 26
Notes to consolidated financial statements 27
</TABLE>
20
<PAGE> 21
Independent Auditors' Report
Board of Directors and Shareholders
Nitches, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheet of Nitches, Inc. and
subsidiaries as of August 31, 1997 and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nitches, Inc. and
subsidiaries as of August 31, 1997 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Moss Adams LLP
Los Angeles, California
October 10, 1997
21
<PAGE> 22
Independent Auditors' Report
Board of Directors and Shareholders
Nitches, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheets of Nitches, Inc.
and subsidiaries as of August 31, 1996 and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the two years in
the period ended August 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Nitches, Inc. and subsidiaries as
of August 31, 1996 and the results of their operations and their cash flows for
each of the two years in the period ended August 31, 1996 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
San Diego, California
October 31, 1996
22
<PAGE> 23
NITCHES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
August 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 955,047 $ 2,197,015
Receivables:
Trade accounts, less allowances
($352,000 in 1997 and $425,000
in 1996) 6,905,888 6,081,880
Income taxes receivable 41,103 261,462
Due from affiliates and employees 82,257 140,418
----------- -----------
7,029,248 6,483,760
Inventories, net 4,271,711 7,044,498
Deferred income taxes 769,100 1,500,102
Other current assets 860,439 342,229
----------- -----------
Total current assets 13,885,545 17,567,604
Furniture, fixtures and equipment, net 218,860 314,473
Deferred income taxes 698,681 0
Other assets 275,750 296,608
----------- -----------
$15,078,836 $18,178,685
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses $ 2,376,353 $ 5,359,050
----------- -----------
Total current liabilities 2,376,353 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;
(1,172,596 in 1997 and 1,210,296
in 1996) 2,421,062 2,658,400
Retained earnings 9,260,323 9,065,377
----------- -----------
Total shareholders' equity 11,681,385 11,723,777
----------- -----------
$15,078,836 $18,178,685
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 24
NITCHES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended August 31,
----------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 48,413,652 $ 54,380,645 $ 83,846,253
Cost of goods sold 36,189,590 40,395,659 63,273,806
------------ ------------ ------------
Gross profit 12,224,062 13,984,986 20,572,447
Expenses:
Selling, general
and administrative 11,888,351 12,547,239 19,795,039
Restructuring charge 1,803,113
------------ ------------ ------------
Income (loss) from
operations 335,711 1,437,747 (1,025,705)
Gain on sale of
product lines 563,307
Other income 151,218 319,224 355,078
Interest expense (167,346) (52,295) (2,221)
------------ ------------ ------------
Income (loss) before
income taxes 319,583 1,704,676 (109,541)
Provision (benefit) for
income taxes 124,637 278,717 (269,056)
------------ ------------ ------------
Net income before
minority interest 194,946 1,425,959 159,515
Minority interest (55,100)
------------ ------------ ------------
Net income $ 194,946 $ 1,425,959 $ 214,615
============ ============ ============
Earnings per share:
Primary $ .16 $ 1.16 $ .09
============ ============ ============
Fully diluted $ .15 $ 1.13 $ .09
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 25
NITCHES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Total
------------------------- Retained Shareholders'
Shares Amount Earnings Equity
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, August 31, 1994 2,507,924 $12,351,527 $8,635,099 $20,986,626
Net income 214,615 214,615
Purchases and retirement
of parent common stock (109,700) (436,980) (436,980)
Purchases and retirement
of subsidiary shares 672,246 672,246
---------- ----------- ---------- -----------
Balance, August 31, 1995 2,398,224 12,586,793 8,849,714 21,436,507
Net income 1,425,959 1,425,959
Dividends declared
($1 per share) (1,210,296) (1,210,296)
Purchases and retirement
of subsidiary shares (270,369) (270,369)
Purchases and retirement
of parent common stock (1,187,928) (9,658,024) (9,658,024)
---------- ----------- ---------- -----------
Balance, August 31, 1996 1,210,296 2,658,400 9,065,377 11,723,777
Net income 194,946 194,946
Purchases and retirement
of parent common stock (37,700) (236,756) (236,756)
Purchases and retirement
of subsidiary shares (582) (582)
---------- ----------- ---------- -----------
Balance, August 31, 1997 1,172,596 $2,421,062 $9,260,323 $11,681,385
========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 26
NITCHES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended August 31,
--------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 194,946 $ 1,425,959 $ 214,615
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Minority interest in subsidiary's loss (55,100)
Gain on sale of product lines (563,307)
Asset write off for restructuring charge 240,588
Depreciation and amortization 287,807 419,933 548,702
(Increase) decrease in receivables (824,008) 4,158,984 5,088,368
(Increase) decrease in income taxes receivable 220,359 197,327 1,137,691
(Increase) decrease in inventories 2,772,787 (364,976) 4,120,192
(Increase) decrease in deferred income taxes (42,439) (20,429) 29,621
(Increase) decrease in other current assets (460,049) 144,485 303,868
(Increase) decrease in other assets (95,791) 37,301 126,564
Increase (decrease) in accounts payable
and accrued expenses (1,772,401) (4,284,459) 683,560
------------ ------------ ------------
Net cash provided by operating activities 281,211 1,714,125 11,875,362
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (75,545) (73,906) (249,124)
------------ ------------ ------------
Net cash used by investing activities (75,545) (73,906) (249,124)
------------ ------------ ------------
Cash flows from financing activities:
Net repayments under line of credit (3,000,000)
Proceeds from sale of product line 750,000
Dividends paid (1,210,296)
Purchases and retirement of parent common stock (236,756) (9,658,024) (436,980)
Purchases and retirement of subsidiary shares (582) (270,369) (5,019,882)
------------ ------------ ------------
Net cash used by financing activities (1,447,634) (9,928,393) (7,706,862)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,241,968) (8,288,174) 3,919,376
Cash and cash equivalents at beginning of year 2,197,015 10,485,189 6,565,813
------------ ------------ ------------
Cash and cash equivalents at end of year $ 955,047 $ 2,197,015 $ 10,485,189
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest $ 96,663 $ 53,360 $ 17,750
============ ============ ============
Income taxes $ 96,164 $ 199,138 $ 23,401
============ ============ ============
Noncash activity during the year:
Disposition of fixed assets - $ 1,476,120 -
============
Dividend declaration - $ 1,120,296 -
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 27
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business:
Nitches, Inc. (the "Company") was organized in 1971 and has been a
wholesale importer and distributor primarily of women's sportswear manufactured
to its specifications and distributed in the United States under Company brand
labels and private retailer labels since 1973.
2. Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of Nitches,
Inc. and its subsidiaries. The Company's wholly owned subsidiaries include Body
Drama, Inc., Nitches Far East Limited, and Body Drama Far East Limited. All
significant intercompany transactions and balances are eliminated in
consolidation.
Financial Instruments:
Financial instruments consist of cash and cash equivalents, accounts
receivable, and accounts payable. The carrying amount approximates fair value
because of their short maturity.
Concentration of Credit Risk:
The Company sells a majority of its account receivable to a financial
institution. Under the agreement, the financial institution purchases trade
accounts receivable and assumes substantially all credit risks. The Company is
responsible for following up on adjustments claimed by customers. Accounts which
are not sold remain the credit risk of the Company. Such accounts are diverse
and are subject to credit approval and ongoing evaluation by the Company.
Management considers the credit risk with respect to all receivables to be low.
Historically, the Company has not experienced significant loss due to
uncollectible accounts receivable.
Cash balances are periodically maintained in amounts in excess of FDIC
insured limits in high quality financial institutions. Management considers the
risk of loss to be low.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
27
<PAGE> 28
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Summary of Significant Accounting Policies: (continued)
Furniture, Fixtures and Equipment:
Furniture, fixtures and equipment are stated at cost. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the related assets, which range from three to ten years. Leasehold improvements
are amortized using the straight-line method over the shorter of the estimated
useful lives of the assets or the remaining term of the related lease.
Maintenance and repair costs are charged to expense as incurred. When assets are
retired or sold, the assets and accumulated depreciation are removed from the
respective accounts and any profit or loss on the disposition is credited or
charged to income.
Earnings Per Share:
The computation of net income per common share is based on the weighted
average number of common shares outstanding plus common share equivalents
arising from dilutive stock options.
The weighted average number of common shares and common share
equivalents outstanding for primary and fully diluted earnings per share was
1,254,474 and 1,265,907, respectively, for fiscal 1997, 1,226,774 and 1,256,467,
respectively, for fiscal 1996, and 2,438,874 for fiscal 1995.
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. The Company will be required to adopt the new method of reporting EPS
for the fiscal year ending August 31, 1998. 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.
Revenue Recognition:
The Company recognizes revenue as of the date merchandise is shipped to
its customers.
Cash Flow Statement:
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
28
<PAGE> 29
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Summary of Significant Accounting Policies: (continued)
Reclassifications:
Certain prior amounts have been reclassified to conform with the 1997
presentation.
Estimates:
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.
3. Inventories:
<TABLE>
<CAPTION>
August 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Fabric and trim $ 247,418 $ 818,502
Finished goods 4,024,293 6,225,996
---------- ----------
$4,271,711 $7,044,498
========== ==========
</TABLE>
4. Furniture, Fixtures and Equipment:
<TABLE>
<CAPTION>
August 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Leasehold improvements $299,696 $287,526
Computer equipment 439,320 421,330
Vehicles 55,956 37,956
Furniture, fixtures and
other equipment 101,859 74,476
-------- --------
896,831 821,288
Less accumulated depreciation
and amortization 677,971 506,815
-------- --------
$218,860 $314,473
======== ========
</TABLE>
5. Other Current Assets:
This includes an advance of $500,000 to a licensor, secured by a one
year U.S. Treasury Bill, on June 10, 1997. The licensor will pay Nitches
periodic interest at the annual rate of 1% over the Company's then current
borrowing rate and upon repayment of the advance at the maturity of the U.S.
Treasury Bill. The licensor may repay any or all of the advance on an
accelerated basis. As of October 31, 1997, the Company has received $335,502 on
the principal of the advance and $17,647 in interest.
29
<PAGE> 30
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Notes Payable:
Pursuant to the terms of an agreement between Nitches and a financial
institution, Nitches sells 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 and open letters of
credit through the lender, all of which are collateralized by all of the
Company's assets. Outstanding advances are charged interest at the lender's
prime rate less one half percent. There were no advances outstanding as of
August 31, 1997 and 1996. Included in trade accounts receivable at August 31,
1997 and 1996 are non-recourse accounts due from the financial institution of
$6,187,884 and $4,956,091, respectively. Notes payable and contingent
liabilities for irrevocable letters of credit outstanding are as follows:
<TABLE>
<CAPTION>
August 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Contingent liabilities for
irrevocable letters of credit $ 5,321,916 $ 5,849,134
Weighted average interest rate
for the year 8.36% 8.45%
</TABLE>
7. Accounts Payable and Accrued Expenses:
<TABLE>
<CAPTION>
August 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Trade accounts and other payables $1,873,769 $4,637,741
Accrued bonuses, commissions and
other payroll related expenses 502,584 721,309
---------- ----------
$2,376,353 $5,359,050
========== ==========
</TABLE>
30
<PAGE> 31
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Income Taxes:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended August 31,
-------------------------------------
l997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal ($162,334) ($123,599) ($319,212)
State (28,647) 22,292 (29,808)
--------- --------- ---------
(190,981) (101,307) (349,020)
--------- --------- ---------
Deferred:
Federal 268,275 277,154 32,559
State 47,343 102,870 47,405
--------- --------- ---------
315,618 380,024 79,964
--------- --------- ---------
$124,637 $278,717 ($269,056)
======== ======== =========
</TABLE>
Net deferred income tax assets at August 31, 1997 and 1996 consist of the
tax effects of temporary differences related to the following:
<TABLE>
<CAPTION>
August 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Current deferred assets:
Inventories $ 211,400 $ 317,277
Sales returns and doubtful
account reserve 145,800 165,075
Restructuring reserve - 92,883
Accrued vacation and bonuses 140,700 183,318
Tax loss carryforward 142,000 999,065
All other items 129,200 5,021
Less valuation allowance - (262,537)
----------- -----------
$ 769,100 $ 1,500,102
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
August 31,
-------------------------
1997 1996
--------- --------
<S> <C> <C>
Non-current deferred assets:
Tax loss carryforward $ 961,218 -
Less valuation allowance (262,537) -
--------- --------
$ 698,681 -
========= ========
</TABLE>
31
<PAGE> 32
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Income Taxes: (continued)
The long term deferred income tax liability at August 31, 1997 and 1996
of $1,021,098 and $1,095,858, respectively, relates to the gain recognized for
financial statement purposes in connection with a sale of stock and initial
stock offering of Body Drama in 1991.
Body Drama has a Federal income tax net operating loss carryforward of
approximately $400,000 which expires in 2009. The Federal tax loss may be
utilized only by Body Drama. The Company has a federal consolidated net
operating loss carryforward, which includes Body Drama's net operating loss, of
approximately $2.6 million which expires in 2010. This federal tax loss may be
utilized by the consolidated group.
Differences between the statutory Federal income tax rate and the
effective tax rate are as follows:
<TABLE>
<CAPTION>
Year ended August 31,
------------------------
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of
Federal benefit 6.1 4.8 6.6
(Reduction) increase in valuation
allowance for deferred tax assets (28.7) 197.8
Foreign subsidiaries tax effect (.9) 3.6
Other items (.2) 2.7 7.2
---- ---- -----
Effective rate 39.0% 16.4% 245.6%
==== ==== =====
</TABLE>
During fiscal 1996, the Company received a Revenue Agent's Report ("RAR")
from the Internal Revenue Service in connection with the audit of the Company's
federal income tax returns for fiscal years 1992 through 1994. In the RAR, the
agent has challenged the timing and deductibility of various deductible items,
some of which are significant. The Company has settled on the RAR, and the
Company adjusted its reported taxable income for the years under the audit by a
reduction in the deferred tax liability reflected in the accompanying balance
sheet. Such assessments, exclusive of related interest, did not have a material
adverse impact on the financial position of the Company.
32
<PAGE> 33
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Employee Benefit Plans:
The Company has employee benefit plans, including a 401(k) Savings Plan,
whereby employees may make investments in various independent funds and Company
stock. The Company may match employee contributions to this Plan on a
discretionary basis or contribute on a profit sharing basis. The Company's
matching contributions to this Plan amounted to $0, $0, and $9,696 in fiscal
1997, 1996 and 1995, respectively. The Company's profit sharing contribution to
this Plan amounted to $0, $192,857, and $0 in fiscal 1997, 1996, and 1995,
respectively.
10. Stock Options:
The Company's Incentive Stock Option Plan for Key Employees expired in
May 1995, and no shares were available for grant as of August 31, 1997. Options
were granted at prices not less than the fair market value of the shares at the
date of grant and generally become exercisable at the rate of twenty percent per
year commencing one year after the date of grant. At August 31, 1997, no options
were outstanding under this Plan. Transactions under this Plan during fiscal
1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
------ ---------
<S> <C> <C>
Outstanding options at
September 1, 1994 130,373 $5.00 - $ 9.00
Options forfeited (31,973) $5.00 - $ 9.00
-------
Outstanding options at
August 31, 1995 98,400 $6.50 - $ 9.00
Options expired (60,950) $6.50
Options forfeited (9,115) $6.50 - $ 9.00
-------
Outstanding options at
August 31, 1996 28,335 $6.50 - $ 9.00
Options forfeited (28,335) $6.50 - $ 9.00
-------
Outstanding options at
August 31, 1997 0
=======
</TABLE>
In fiscal 1995, the Company adopted two non-qualified option plans for
directors, officers, and key employees. Options under these Plans were granted
at fair market value and generally become exercisable over a two to five year
period. The Company has reserved an aggregate of 300,000 shares for issuance
under these Plans. In fiscal 1996, the Company granted 147,000 options
exercisable at $4.25 per share. Through August 31, 1997, no
33
<PAGE> 34
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Stock Options: (continued)
options have been exercised and no additional options have been granted.
Of the 147,000 outstanding options, 60,000 options vested immediately
and the remaining options vest on each of the two succeeding anniversaries of
the date of grant provided such directors, officers, and key employees continue
to serve in such capacity. These options expire three years from the date of
vesting.
The Company has adopted the disclosure-only provision of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant date for awards in fiscal
years ended 1997, 1996, and 1995 consistent with the provisions of SFAS No. 123,
the Company's net earnings and earnings per share would have been reduced to the
pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
-------- ---------- --------
<S> <C> <C> <C>
Net earnings - as reported $194,946 $1,425,959 $214,615
Net earnings - pro forma $139,100 $1,349,378 $214,615
Earnings per primary
share - as reported $.16 $1.16 $.09
Earnings per primary
share - pro forma $.11 $1.10 $.09
Earnings per fully diluted
share - as reported $.15 $1.13 $.09
Earnings per fully diluted
share - pro forma $.11 $1.07 $.09
</TABLE>
The assumption regarding the stock options issued to directors,
officers, and key employees was that 100% of such options vested in 1996, rather
than as required by the vesting schedule of the Plan.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996: dividend yield of 0%; expected volatility
of 57.4%; risk-free interest rate of 6.36%; and expected lives of three years.
34
<PAGE> 35
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Leases:
The Company has lease commitments expiring at various dates, principally
for real property and equipment. At August 31, 1997, the aggregate minimum
rental commitments for all non-cancelable leases having initial or remaining
terms of one or more years are as follows:
<TABLE>
<CAPTION>
Year ending August 31,
----------------------
<S> <C>
1998 $ 480,999
1999 388,032
2000 217,296
2001 0
2002 0
----------
$1,086,327
==========
</TABLE>
In connection with the sale of certain product lines in August 1995 (see
Note 13) the Company subleased a portion of one of its New York showroom
facilities. The above schedule of lease commitments excludes sublease income of
approximately $20,000 per month.
The Company's leases for real property are generally subject to rent
escalation based on increases in the consumer price or other indices with
certain minimum and maximum increases. Rent expense, net of sublease income, was
approximately $582,000, $742,000 and $1,431,000, during fiscal 1997, 1996 and
1995, respectively.
12. Significant Customers:
Two customers accounted for 16.3% and 10.8%, respectively, of the
Company's net sales in fiscal 1997. One customer accounted for 10.4% or more of
the Company's net sales in fiscal 1996.
13. Sale of Product Lines:
On August 22, 1995, the Company sold various assets associated with its
junior, girls and maternity product lines for an initial cash payment of
$750,000 and a five-year note of $950,000. The Company recorded a $563,307
pretax gain from the transaction and fully reserved the five-year note. The
Company accounted for the $950,000 note on a cost recovery basis and will record
revenue when the buyer makes payments on the note.
In the quarter ended February 28, 1997, the Company amended the
five-year note associated with the sale of its junior, girls, and maternity
product lines. The Company agreed to reduce the
35
<PAGE> 36
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Sale of Product Lines: (continued)
principal amount to $600,000 and will accept interest only payments of 4% per
year until March 15, 2001. Interest income of $14,000 was received through
August 31, 1997.
14. Restructuring Charge:
In the fourth quarter of fiscal 1995, the Company implemented a strategy
to eliminate unprofitable and marginal product lines, reduce its work force,
dispose of excess equipment and consolidate its operations. As a result of this
strategy, restructuring charges were incurred which reduced pretax operating
income by approximately $1.8 million. The restructuring charges include
approximately $890,000 for employee terminations and related severance packages,
$610,000 for lease write-offs and $300,000 for fixed asset write-offs. At August
31, 1996, the remaining balance in the restructuring reserve, which was included
in trade accounts and other payables, was approximately $232,000. Amounts
charged against this liability during fiscal year ended August 31, 1997 include
employee severance payments ($194,513), lease and related facility payments
($22,704) and other items ($14,988). There was no balance remaining in this
restructuring reserve at August 31, 1997.
15. Acquisition of Subsidiary Shares:
In fiscal 1995, Body Drama acquired 1,446,921 shares of its stock
through a tender offer at $2.93 per share. The total cost of these shares was
approximately $4.9 million, which included 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
(see Note 16). Nitches, Inc. and Body Drama incurred $250,000 and approximately
$20,000, respectively, of legal costs related to the class action lawsuit during
the year ended August 31, 1997. On November 10, 1994, the Company acquired the
remaining 128,079 outstanding shares of Body Drama at $2.93 per share. The
aggregate cost of the shares, which includes legal and other costs incurred in
connection with the purchase, was $405,470.
16. 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
36
<PAGE> 37
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Litigation: (continued)
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.
17. Tender offer and related party transactions:
On September 1, 1995, the Company purchased and retired approximately
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.
On August 27, 1996, the Company purchased and retired 37,700 shares of
its common stock at $6.25 per share in connection with a limited repurchase by
the Company. The stock repurchase plan authorizes management to make purchases
from time to time in the open market or through privately negotiated
transactions. The timing of the future repurchases, if any, and the amount of
shares will be based on management's ongoing assessment of the Company's working
capital requirements and liquidity.
In October 1995, the Company began renting a 30,000 square foot
warehouse and office building from Kuma Sport, Inc., which is 40% owned by Mr.
Arjun Waney, the Chairman of Nitches. 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 services
from Kuma Sport on a monthly basis, as needed, at fair market rates. The Company
purchased labor and administrative services for approximately $1.8 million and
$2.5 million from Kuma Sport, Inc. in the fiscal years ending August 31, 1997
and 1996, respectively.
18. Employment agreements:
In May 1995, the Company entered into Employment Agreements expiring on
August 31, 1998 with two key executives. In addition to a base salary, each
executive is entitled to receive a bonus
37
<PAGE> 38
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Employment agreements: (continued)
equal to a percentage of pretax net income (exclusive of the bonus) over
specified levels for fiscal 1996, 1997 and 1998. In the event that any one of
the executives is terminated without cause prior to the expiration of the
Employment Agreement, the executive will receive the salary remaining through
the end of the term of the Employment Agreement, a pro rata portion of any bonus
and continuation of certain employee benefits. The aggregate base salary of
these executives through August 31, 1998, excluding bonuses and employee
benefits, is $430,000.
19. Quarterly Results of Operations (Unaudited):
The following is a summary of the quarterly results of operations for
the years ended August 31, 1997 and 1996:
<TABLE>
<CAPTION>
Three months ended
-----------------------------------
Nov. 30 Feb. 29 May 31 Aug. 31
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Fiscal 1997:
Net sales $13,666 $11,295 $12,999 $10,454
Gross profit 2,895 3,032 3,594 2,703
Net income (loss) 45 93 183 (126)
Net income (loss) per
common share .04 .07 .15 (.11)
Fiscal 1996:
Net sales $13,334 $16,032 $14,991 $10,024
Gross profit 3,104 4,829 3,936 2,116
Net income (loss) (151) 1,170 519 (111)
Net income (loss)
per common share (.13) .97 .42 (.09)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Upon the recommendation of the Audit Committee, the Board of Directors
of the Company has decided to change its independent auditor effective August
26, 1997. The Company has retained Moss Adams LLP on August 26, 1997 as its new
independent auditor, replacing Deloitte & Touche LLP.
38
<PAGE> 39
The Company made the decision to change auditors based principally on
the cost structure proposed by the two auditors. Deloitte & Touche LLP's reports
on the financial statements of the Company for the past two years did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope, or accounting principles. There were no
disagreements with Deloitte & Touche LLP during the registrant's two most recent
fiscal years or the interim period through August 26, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required as to this Item is incorporated herein by
reference from the data under the caption "Election of the Directors of the
Company and Information Concerning Directors and Executive Officers of the
Company" in the Proxy Statement ("1997 Proxy Statement"), to be used in
connection with the solicitation of proxies to be voted at the Registrant's
annual meeting of shareholders to be held in December 1997, to be filed with the
Commission in November 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The information required as to this Item is incorporated herein by
reference from the data under the caption "Compensation and Benefits" in the
1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required as to this Item is incorporated herein by
reference from the data under the caption "Principal Shareholders" in the 1997
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required as to this Item is incorporated herein by
reference from the data under the caption "Certain Transactions" in the 1997
Proxy Statement.
39
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. The following consolidated financial statements of the Registrant are
included as part of this report:
Consolidated Balance Sheets as of August 31, 1997 and 1996;
Consolidated Statements of Operations for the years ended
August 31, 1997, 1996 and 1995;
Consolidated Statements of Shareholders' Equity for the
years ended August 31, 1997, 1996 and 1995;
Consolidated Statements of Cash Flows for the years ended
August 31, 1997, 1996 and 1995;
Notes to Consolidated Financial Statements; and
Independent Auditors' Reports
2. The following financial statement schedules of the Registrant are
included as part of this report:
Reports of independent auditors on financial statement
schedules
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not required, are inapplicable
or the information is otherwise shown in the financial statements or notes
thereto.
3. The following exhibits are filed herewith or incorporated by reference
as indicated. Exhibit numbers refer to Item 601 of Regulation S-K:
40
<PAGE> 41
<TABLE>
<S> <C>
2.1 Agreements 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
21 Subsidiaries of the Registrant (5)
23 Consent of Independent Certified Public Accountants
23.1 Consent of Independent Certified Public Accountants (Moss Adams LLP)
23.2 Consent of Independent Certified Public Accountants (Deloitte & Touche LLP)
24 Power of Attorney regarding authority to sign documents to be
filed with the Commission (5)
27 Financial Data Schedule
</TABLE>
41
<PAGE> 42
(b) Exhibits and Reports on Form 8-K.
None
- --------------------------
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.
42
<PAGE> 43
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: November 14, 1997
NITCHES, INC.
By: Steven P. Wyandt
------------------------------------
Steven P. Wyandt, President
43
<PAGE> 44
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Steven P. Wyandt President and November 14, 1997
- ------------------------ Chief Executive
Steven P. Wyandt Officer (Principal
Executive Officer and
Principal Financial
Officer) and Director
Arjun C. Waney Director November 14, 1997
- ------------------------
Arjun C. Waney
Eugene B. Price II Director November 14, 1997
- ------------------------
Eugene B. Price II
Luther A. Henderson Director November 14, 1997
- ------------------------
Luther A. Henderson
William L. Hoese Director November 14, 1997
- ------------------------
William L. Hoese
</TABLE>
44
<PAGE> 45
To the Board of Directors and Shareholders
Nitches, Inc. and Subsidiaries
San Diego, California
Our audit of the consolidated financial statements of Nitches, Inc. and
Subsidiaries referred to in our report dated October 10, 1997 appearing in item
8 in this Annual Report of Form 10-K also included an audit of the August 31,
1997 information included in the financial statement schedule listed in item
14(a) of this Form 10-K. In our opinion, the information as of August 31, 1997
and for the period then ended included in the financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
MOSS ADAMS LLP
Los Angeles, California
October 10, 1997
45
<PAGE> 46
To the Board of Directors and Shareholders
Nitches, Inc. and Subsidiaries
San Diego, California
We have audited the consolidated financial statements of Nitches, Inc. and its
subsidiaries as of August 31, 1996, and for each of the two years in the period
ended August 31, 1996 and have issued our report thereon dated October 31, 1996;
such consolidated financial statements and report are included in your 1997
Annual Report to Stockholders and are incorporated by reference. Our audits also
included the financial statement schedule of Nitches, Inc. for each of the two
years ended August 31, 1996, listed in Item 14. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
San Diego, California
October 31, 1996
46
<PAGE> 47
Schedule II
NITCHES, INC.
Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged Balance
Beginning Costs and To Other At End
Of Year Expenses Accounts Deductions Of Year
------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended August 31, 1995
Allowance for doubtful accounts $578,000 $2,315,267 $2,493,267 $400,000
Inventory markdown allowance $1,579,000 $2,975,245 $4,127,245 $427,000
Year ended August 31, 1996
Allowance for doubtful accounts $400,000 $1,247,291 $1,222,291 $425,000
Inventory markdown allowance $427,000 $ 715,910 $ 809,910 $333,000
Year ended August 31, 1997
Allowance for doubtful accounts $425,000 $ 881,798 $ 954,798 $352,000
Inventory markdown allowance $333,000 $ 565,520 $ 695,020 $203,500
</TABLE>
47
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
*2.1 Agreement and Plan of Reorganization dated November 9,
1994 by and among Body Drama, Inc., Beeba's
Acquisition, Inc. and the Company
*3.1 Articles of Incorporation of the Company, as amended
*3.2 Bylaws of the Company, as amended
*4 See 3.1 and 3.2, above
10 Material Contracts:
*10.3.2 Incentive Stock Option Plan as amended October 3, 1989
*10.3.3 Executive Option Plan adopted October 3, 1989, as
amended
*10.5.12 Lease Agreement between the Company and Broadway and 41st Associates
Limited Partnership dated August 17, 1989
*10.6 Form of Indemnification Agreement for Officers and
Directors
*10.12 Employee Stock Purchase Plan
*10.28 Management Services Agreement between the Company and
Body Drama, Inc. dated October 9, 1991
*10.29 Documents concerning offer to purchase Registrant's
shares pursuant to a Tender Offer dated July 20, 1995
*10.30 Asset Purchase Agreement and related agreements between
the Company and Design and Source Holding Company, Ltd.
effective July 1, 1995
*10.31 Employment Agreement dated May 9, 1995 between the
Company and Arjun C. Waney
*10.32 Employment Agreement dated May 9, 1995 between the
Company and Steven P. Wyandt
11 Computation of earnings per share. See Note 2 of Notes
to Consolidated Financial Statements
*21 Subsidiaries of the Registrant
23 Consent of Independent Certified Public Accountants
23.1 Consent of Independent Certified Public Accountants (Moss Adams LLP)
23.2 Consent of Independent Certified Public Accountants (Deloitte & Touche LLP)
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
*24 Power of Attorney regarding authority to sign documents
to be filed with the Commission
27 Financial Data Schedule
</TABLE>
* Incorporated by reference; see page 40.
49
<PAGE> 1
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos.33-11005, 33-33293, 33- 38663 and 33-44398) of
Nitches, Inc. and Subsidiaries, of our report dated October 10, 1997, appearing
in item 8 in this Annual Report on Form 10-K.
MOSS ADAMS LLP
Los Angeles, California
November 10, 1997
50
<PAGE> 1
Exhibit 23.2
Consent of Independent Accountants
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (Nos. 33-11005, 33-33293, 33-38663 and 33- 44398) of Nitches, Inc., of
our report dated October 31, 1996, appearing in this Annual Report on Form 10-K
of Nitches, Inc. for the year ended August 31, 1997.
Deloitte & Touche LLP
San Diego, California
November 10, 1997
51
<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> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 955,047
<SECURITIES> 0
<RECEIVABLES> 7,029,248
<ALLOWANCES> 0
<INVENTORY> 4,271,711
<CURRENT-ASSETS> 13,885,545
<PP&E> 218,860
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,078,836
<CURRENT-LIABILITIES> 2,376,353
<BONDS> 0
0
0
<COMMON> 2,421,062
<OTHER-SE> 11,681,385
<TOTAL-LIABILITY-AND-EQUITY> 15,078,836
<SALES> 48,413,652
<TOTAL-REVENUES> 48,413,652
<CGS> 36,189,590
<TOTAL-COSTS> 36,189,590
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 167,346
<INCOME-PRETAX> 319,583
<INCOME-TAX> 124,637
<INCOME-CONTINUING> 194,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 194,946
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
</TABLE>
