<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
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: (619) 625-2633
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE 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 [ ]
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]
As of November 6,1998, 1,122,748 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 SmallCap Market, on November 6, 1998, was $3,648,931.
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 1998 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 wholesale clothing
business since 1973, and imports finished garments manufactured to its
specifications from approximately 10 foreign countries. The Company sells
all-cotton and cotton blend knit and woven clothing primarily for the female
consumer. Retail customers include J. C. Penney, Kohl's, Mervyn's, Price Costco,
Cavendars, 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
the reliability of its delivery and service.
Over the past five years, the apparel market has been marked by deflation and
reduced profit margins in certain markets. The success and consolidation of
retailers has given retailers leverage to attempt to reduce profit margins to
suppliers such as the Company. The Company's response has been to discontinue
product lines in areas where it did not believe it could maintain a reasonable
profit margin. On August 22, 1995, the Company sold various assets associated
with its junior, girls and maternity product lines to a third party buyer. On
October 31, 1995, the Company sold the remaining inventory in such product lines
at cost and granted the buyer an exclusive, worldwide 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. On September 1, 1997, the Company sold its
assets associated with its dress product line to a third party buyer and in
January 1998 the Company discontinued its activewear product line.
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.
The Company currently owns a total of 40 federally registered trademarks.
While trademarks owned by the Company have always been important to its
marketing and competitive strategy, prior to 1995 they were not 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. 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. Sleepwear garments are produced in a variety of fabrics and styles,
including robes, pajamas, nightshirts and nightgowns which are sold under the
Body Drama label and retailers' private labels.
The Company occasionally creates original garment shapes or bodies
(styles). More importantly, the Company produces garments with original fabric
prints and designs. The Company also responds to frequent style changes in the
women's clothing 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 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.
The Company also seeks input from selected customers. The Company then selects
styles, fabrics and colors which it believes reflect current fashion trends.
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With regard to private label sales, the Company's sales personnel meet 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 97% 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. 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 Company. Furthermore, the Company has
production control liaison offices in Sri Lanka, United Arab Emirates, and
India.
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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Percent of Total Purchases
Year ended August 31, 1998 1997 1996
-------------------------- ---- ---- ----
<S> <C> <C> <C>
United Arab Emirates........... 43.7% 39.3% 28.9%
India.......................... 12.4 5.6 5.6
Sri Lanka...................... 11.0 10.2 19.8
Macao.......................... 9.2 11.1 6.5
Hong Kong/China................ 8.2 13.1 8.4
Oman........................... 6.4 12.7 13.7
United States.................. 3.4 .9 11.5
Countries less than 2.5%
each in the current year..... 5.7 7.1 5.6
</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 another manufacturer could replace the loss of any particular manufacturer
in any country 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.
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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.
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 a representative of the Company sign an inspection certificate.
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 10 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 twelve commissioned sales
representative organizations, all of which are independent contractors, and each
of which has been assigned one or more primary areas of responsibility.
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 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.
As a result of the Company's elimination of lower margin product lines, the
Company's business has become more concentrated on certain significant
customers. Two customers accounted for 17.9% and 13.8%, respectively, of the
Company's net sales in fiscal 1998. Two customers accounted for 16.3% and 10.8%,
respectively, of the Company's net sales in fiscal 1997. 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.
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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 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 seven
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 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 Macao,
Singapore and Taiwan. Approximately 8.2% of the Company's garments were produced
in China, Hong Kong, and Macao in fiscal 1998. 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
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.
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BACKLOG
At August 31, 1998, the Company had unfilled customer orders of $15.7
million compared to $12.1 million of such orders at August 31, 1997, with such
orders generally scheduled for delivery by January 1999 and December 1997,
respectively. The increase in backlog is primarily attributable to an increase
in private label 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, 1998.
RAW MATERIALS
A substantial majority of the clothing sold by the Company is made of l00%
cotton, although the Company also utilizes cotton blends, polyester 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 clothing 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,
and the reliability of its service and delivery. In addition, the Company has
developed long-term working relationships with manufacturers and 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 and product
development personnel.
EMPLOYEES
As of October 12, l998, the Company had 48 full-time employees, of whom 12
worked in executive, administrative or clerical capacities and 36 worked in
sales, design, and production. The Company may also employ temporary personnel
on a seasonal basis. None of the Company's employees are 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.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in the annual report on Form 10K under the caption "Business", 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.
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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 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 management 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 leases two showrooms in New York and one in Los Angeles with an
aggregate monthly gross rental of approximately $34,000, excluding monthly
sublease income of approximately $20,000. The Los Angeles showroom lease expires
in July 2000 and the New York leases expire in September 1999 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, 1998.
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 1998.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock trades on The NASDAQ SmallCap Market under the
symbol NICH. The number of record holders of the Common Stock was 132 on
November 6, 1998. 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 6, 1998 was $3 1/4 per
share.
The high and low stock closing sale prices, adjusted for a 2-for-1 stock
split effective on May 4, 1998, for each fiscal quarter of the last two years
were as follows:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
November 30, 1996 4 9/16 2 11/16
February 28, 1997 3 3/8 2 1/2
May 31, 1997 3 11/16 2 9/16
August 31, 1997 2 11/16 3 1/2
November 30, 1997 3 7/16 2 9/32
February 28, 1998 3 13/32 2 1/2
May 31, 1998 3 5/16 2 9/16
August 31, 1998 3 9/16 2 1/8
</TABLE>
The Company paid a special dividend of $.50 per share ($1 adjusted for a
2-for-1 stock split) 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: 1998 1997 1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales(1) $31,041 $48,414 $54,381 $83,846 $119,291
Cost of goods sold 23,776 36,190 40,396 63,274 97,499
------------------------------------------------------
7,265 12,224 13,985 20,572 21,792
Selling, general and
administrative expenses
8,437 11,888 12,547 19,795 27,852
Restructuring charge 1,803
------------------------------------------------------
Income (loss) from operations (1,172) 336 1,438 (1,026) (6,060)
Gain on sale of product lines 563
Other income 178 151 319 355 206
Interest income (expense), net 190 (167) (52) (2) (462)
------------------------------------------------------
Income (loss) before income
taxes (804) 320 1,705 (110) (6,316)
Provision (benefit) for
income taxes (807) 125 279 (269) (1,262)
------------------------------------------------------
Income (loss) before minority
interest 3 195 1,426 159 (5,054)
Minority interest (55) (1,628)
------------------------------------------------------
Net income (loss) $ 3 $ 195 $ 1,426 $ 214 $ (3,426)
======================================================
Earnings (loss) per share:
Basic $ .00 $ .08 $ .57 $ .04 $ (.66)
======================================================
Diluted $ .00 $ .08 $ .55 $ .04 $ (.66)
======================================================
Cash dividends per common
share $ .00 $ .00 $ .50 $ .00 $ .08
======================================================
</TABLE>
(1) See Management's Discussion and Analysis on page 10.
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<TABLE>
<CAPTION>
FINANCIAL POSITION: 1998 1997 1996 1995 1994
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,338 $ 955 $ 2,197 $10,485 $ 6,566
Receivables 5,711 7,029 6,484 10,719 16,941
Income taxes receivable 5 41 261 459 1,596
Inventories 5,340 4,272 7,044 6,680 10,800
Total current assets 12,871 13,886 17,568 29,971 36,732
Total assets 14,058 15,079 18,179 30,966 38,579
Notes and acceptances
payable 276 -- -- -- 3,000
Accounts payable and
accrued expenses 3,211 2,377 5,359 8,433 7,750
Total current liabilities 3,487 2,377 5,359 8,433 10,750
Minority interest 5,747
Shareholders' equity 10,571 11,681 11,724 21,437 20,987
Other Financial Information:
Profitability:
Gross margin 23.4% 25.2% 25.7% 24.5% 18.3%
Operating margin (deficit) (3.8%) .7% 2.6% (1.2%) (5.1%)
Net income (loss) as percent
of net sales -- .4% 2.6% .3% (2.9%)
Liquidity:
Current ratio 3.69 5.84 3.28 3.55 3.42
Working capital $ 9,384 $11,509 $12,209 $21,538 $25,982
Share data:
Weighted average number of
common shares:
Basic 2,218 2,420 2,421 4,954 5,159
Diluted 2,203 2,536 2,491 4,954 5,159
Number of common shares
outstanding at year end 2,012 2,344 2,420 4,796 5,016
</TABLE>
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEARS ENDED AUGUST 31, 1998 AND 1997
Net sales for the fiscal year ended August 31, 1998 decreased approximately
$17.0 million (35.9%) compared to the fiscal year ended August 31, 1997. The
decrease was due primarily to the sale of the dress product line which took
place effective September 1, 1997 and the discontinuance of the activewear
product line in January 1998. These product lines contributed approximately
$14.0 million to net sales in the fiscal year ended August 31, 1997.
Gross margins decreased from 25.2% for the fiscal year ended August 31,
1997 to 23.4% for the fiscal year ended August 31, 1998. The sale of the dress
product line, the discontinuance of the activewear product line, and the reduced
profit margins in the sleepwear product line contributed to the decrease in
gross margins by .3%, .7%, and .8%, respectively.
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 $11.9 million in fiscal 1997 to $8.4 million in fiscal 1998, but increased
as a percent of net sales (24.5% in fiscal 1997 and 27.2% in fiscal 1998). The
decrease in dollar amount was due to the Company's reductions in certain
expenses, such as salaries and commissions, associated with restructuring. The
increase as a percentage of sales is due to the loss in sales volume.
Interest expense decreased in the current year due to a nonrecurring
assessment imposed in fiscal year 1997 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
increased in fiscal 1998 due to payments made on the purchase agreement for the
dress product line which took place effective September 1, 1998.
The Company's benefit for income taxes of $807,000 is primarily a result of
the merger of Body Drama, Inc. into Nitches, Inc. as of August 31, 1998. The
deferred tax liability of $1,021,000, relating to the gain recognized in
connection with a sale of stock an initial stock offering of Body Drama in 1991,
was eliminated and a deferred tax benefit was recorded.
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
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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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital of $9.4 million at August 31, 1998 decreased
from the August 31, 1997 level of $11.5 million, while the Company's current
ratio decreased from 5.84:1 at August 31, 1997 to 3.69:1 at August 31, 1998. The
principal reason for the decrease in working capital and in current ratio was
the Company's stock repurchases aggregating to $1.1 million during the fiscal
year.
At August 31, 1998, 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, 1998 was approximately
$1,099,000 of which approximately $797,000 has been collected through November
6, 1998.
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 $15 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, 1998, the Company had outstanding letters of credit
of $6,313,000 for the purchase of finished goods which had been opened through
the financial institution. Under these agreements, the Company is required to
maintain $5 million in net worth and $5 million in working capital.
Effective August 31, 1998, the Company merged with its wholly owned
subsidiary Body Drama, Inc. The merger resulted in the elimination of a deferred
income tax liability of approximately $973,000. The deferred income tax
liability was generated in 1991 when the Company sold a 49% interest in Body
Drama, Inc. to the public in an initial public offering, and represented a
potential tax liability in the event that the Company were to sell its interest
in its Body Drama, Inc. subsidiary to a third party. Body Drama, Inc.
repurchased the 49% interest in a self tender offer which took place in Fiscal
1995. The merger of the Company with Body Drama, Inc. has resulted in the
elimination of the potential liability and a resulting increase in the book
value of the Company.
Effective October 1, 1998, the Company entered into new agreements with
Congress Talcott Corporation West ("Congress"), including a Discount Factoring
Agreement, Addendum to Discount Factoring Agreement, Trade Financing Agreement,
Inventory Security Agreement, Financial Covenant Agreement and Agreement to
Issue Letter of Credit Guaranties (collectively, the "Discount Factoring
Agreement"). The Company sells substantially all of its trade receivables to
Congress on a pre-approved, non-recourse basis. Payment for such receivables is
made at the time customers make payment to Congress 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 Congress' prime rate
(currently 8.5%) less one-half percent, and open letters of credit through
Congress. 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 president Mr. Wyandt. Under the Discount
Factoring Agreement, the Company is required to maintain $5
11
<PAGE> 12
million of net worth and $5 million of working capital. The Discount Factoring
Agreement can be terminated by Congress on 60-days prior written notice.
On November 18, 1998, the Company purchased and retired 1,050,426 shares of
its outstanding common stock for $4 per share in connection with a self tender
offer. The total cost of the transaction was approximately $4,237,000. The funds
for the transaction came from cash and cash equivalents of the Company in
addition to borrowings of approximately $3 million under the Discount Factoring
Agreement. Borrowings under the Discount Factoring Agreement are expected to be
repaid from cash flow from operations over the next 18 months. The Company has
an additional borrowing capacity of $12,000,000 under the Discount Factoring
Agreement, which management believes is adequate to meet working capital needs.
OTHER INFORMATION
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
August 31, 1998. 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 increased from $4.3 million at August 31, 1997 to
$5.3 million at August 31, 1998. The Company has established an inventory
markdown reserve as of August 31, 1998, 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, 1998 for which customer sales orders have
not yet been received.
IMPACT OF EXCHANGE RATES
While the Company purchased over 97% of its products from foreign
manufacturers in fiscal 1998, 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 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 is expected to put pressure on gross
margins in fiscal year 1999. 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.
YEAR 2000 ISSUE
The worldwide issue which has arisen regarding the arrival of the year 2000
is the result of computer programs being written using two digits rather than
four digits to define the applicable year. Many computer programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. If the Company did not ensure that these were corrected in its
systems, this could result in a system failure or miscalculations causing
disruptions of operations including a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
12
<PAGE> 13
The Company also faces risk from the Year 2000 issues affecting its
suppliers, customers and service providers. This risk can stem from the general
issue of those entities' ability to conduct their business, as well as the
specific issue of communication and integration issued between the Company's
computer systems and those entities' systems. Manufacturers of clothing may be
experiencing power interruptions or the failure of computerized machinery or
machinery with embedded logic as a result of the Year 2000 issue. Management
believes that the risk associated with such problems can be remediated by moving
production to alternate suppliers who are not adversely affected, but there can
be no assurance of their availability or that the change will not result in an
interruption in service or an increase in cost resulting in reduced
profitability. The Company receives electronic purchase orders from certain
large customers. In the event that the system for delivering electronic purchase
orders failed, the customers would have to return to paper purchase orders and
the Company may experience some interruption in the placement of orders for
merchandise.
The Company is in the process of remediating its year 2000 exposure as it
pertains to internal systems, as well as assessing key customer and supplier
compliance. The internal systems include all traditional data processing
computer systems and all control, communication, and reporting equipment such as
security, telephones, and timeclocks. This process is being supervised by the
Company's president. At this time, the Company is in the final testing phase of
its internal systems and plans to have this completed by January 31, 1999.
Because the Company purchases all of its critical systems (hardware and
software) from third parties, it is not incurring any material costs as the
updates are being provided under maintenance contracts.
The Company has initiated communications with all of its key customers and
suppliers to determine the extent to which the Company is vulnerable based upon
those third parties' failure to remediate their own year 2000 issues. The
Company is currently scheduling testing with those third parties (exchanges of
critical information such as orders, purchases, invoices, fund transfers, et
al.) and plans to complete these by June 30, 1999. Part of this process will be
to provide mutual contingency plans; however, at this time, there can be no
assurance that the systems of other companies on which the Company relies will
be converted on a timely basis and would not have material adverse effect on the
Company.
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 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.
13
<PAGE> 14
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>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports 15
Consolidated Balance Sheets at August 31, 1998 and 1997 17
Consolidated Statements of Operations for the years ended
August 31, 1998, 1997 and 1996 18
Consolidated Statements of Shareholders' Equity for the years
ended August 31, 1998, 1997 and 1996 19
Consolidated Statements of Cash Flows for the years ended
August 31, 1998, 1997 and 1996 20
Notes to consolidated financial statements 21
</TABLE>
14
<PAGE> 15
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, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 provide 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, 1998 and 1997 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Moss Adams LLP
Los Angeles, California
October 16, 1998 (except Note 14 for which the
date is November 18, 1998)
15
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Nitches, Inc.
San Diego, California
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Nitches, Inc. and subsidiaries for the
year 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 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, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of Nitches, Inc.
and subsidiaries for the year ended August 31, 1996 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
San Diego, California
October 31, 1996
16
<PAGE> 17
NITCHES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,338,000 $ 955,000
Receivables:
Trade accounts, less allowances ($275,000 in 1998
and $352,000 in 1997) 5,582,000 6,906,000
Income taxes receivable 5,000 41,000
Due from affiliates and employees 124,000 82,000
----------- -----------
5,711,000 7,029,000
Inventories, net 5,340,000 4,272,000
Deferred income taxes 323,000 769,000
Other current assets 159,000 860,000
----------- -----------
Total current assets 12,871,000 13,885,000
Furniture, fixtures and equipment, net 137,000 219,000
Deferred income taxes 987,000 699,000
Other assets 63,000 276,000
----------- -----------
$14,058,000 $15,079,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes and acceptances payable $ 276,000 --
Accounts payable and accrued expenses 3,211,000 $ 2,377,000
----------- -----------
Total current liabilities 3,487,000 2,377,000
Deferred income taxes -- 1,021,000
Shareholders' equity:
Preferred stock, no par value; 25,000,000 shares
authorized, no shares issued or outstanding
Common stock, no par value; 50,000,000 shares
authorized; 2,012,030 shares in 1998 and
2,345,192 shares in 1997 issued and outstanding 1,308,000 2,421,000
Retained earnings 9,263,000 9,260,000
----------- -----------
Total shareholders' equity 10,571,000 11,681,000
----------- -----------
$14,058,000 $15,079,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
17
<PAGE> 18
NITCHES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Net sales $ 31,041,000 $ 48,414,000 $ 54,381,000
Cost of goods sold 23,776,000 36,190,000 40,396,000
--------------------------------------------------
Gross profit 7,265,000 12,224,000 13,985,000
Expenses:
Selling, general
and administrative 8,437,000 11,888,000 12,547,000
--------------------------------------------------
Income (loss) from operations (1,172,000) 336,000 1,438,000
Other income 178,000 151,000 319,000
Interest income (expense), net 190,000 (167,000) (52,000)
--------------------------------------------------
Income (loss) before income taxes (804,000) 320,000 1,705,000
Provision (benefit) for income taxes (807,000) 125,000 279,000
--------------------------------------------------
Net income $ 3,000 $ 195,000 $ 1,426,000
==================================================
Earnings per share:
Basic $ .00 $ .08 $ .57
==================================================
Diluted $ .00 $ .08 $ .55
==================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
18
<PAGE> 19
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, 1995 2,398,224 $12,586,000 $ 8,850,000 $21,436,000
Net income 1,426,000 1,426,000
Purchases and retirement
of subsidiary shares (270,000) (270,000)
Purchases and retirement
of parent common stock (1,187,928) (9,657,000) (9,657,000)
Dividends declared
($1 per share) (1,211,000) (1,211,000)
--------------------------------------------------------------
Balance, August 31, 1996 1,210,296 2,659,000 9,065,000 11,724,000
Net income 195,000 195,000
Purchases and retirement
of parent common stock (37,700) (237,000) (237,000)
Purchases and retirement
of subsidiary shares (1,000) (1,000)
--------------------------------------------------------------
Balance, August 31, 1997 1,172,596 2,421,000 9,260,000 11,681,000
Net income 3,000 3,000
Purchases and retirement
of parent common stock (166,581) (1,113,000) (1,113,000)
Effect of 2 for 1 stock split 1,006,015
--------------------------------------------------------------
Balance, August 31, 1998 2,012,030 $ 1,308,000 $ 9,263,000 $10,571,000
==============================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
19
<PAGE> 20
NITCHES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,000 $ 195,000 $ 1,426,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 200,000 288,000 420,000
Loss on disposal of fixed assets 16,000
(Increase) decrease in trade receivables 1,324,000 (824,000) 4,159,000
Decrease in income taxes receivable 36,000 220,000 197,000
(Increase) decrease in inventories (1,068,000) 2,773,000 (365,000)
Decrease in deferred income taxes (863,000) (43,000) (20,000)
(Increase) decrease in other current assets 659,000 (460,000) 144,000
(Increase) decrease in other assets 162,000 (96,000) 37,000
Increase (decrease) in accounts payable
and accrued expenses 833,000 (1,772,000) (4,285,000)
------------------------------------------------
Net cash provided by operating activities 1,302,000 281,000 1,713,000
------------------------------------------------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (82,000) (75,000) (74,000)
------------------------------------------------
Net cash used by investing activities (82,000) (75,000) (74,000)
------------------------------------------------
Cash flows from financing activities:
Net borrowings under line of credit 276,000
Dividends paid (1,210,000)
Purchases and retirement of parent common stock (1,113,000) (237,000) (9,657,000)
Purchases and retirement of subsidiary shares (1,000) (270,000)
------------------------------------------------
Net cash used by financing activities (837,000) (1,448,000) (9,927,000)
------------------------------------------------
Net increase (decrease) in cash and cash equivalents 383,000 (1,242,000) (8,288,000)
Cash and cash equivalents at beginning of year 955,000 2,197,000 10,485,000
------------------------------------------------
Cash and cash equivalents at end of year $ 1,338,000 $ 955,000 $ 2,197,000
================================================
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest $ 94,000 $ 97,000 $ 53,000
================================================
Income taxes $ 57,000 $ 96,000 $ 199,000
================================================
Noncash investing and financing activities:
Disposition of fixed assets -- -- $ 1,476,000
================================================
Dividend declaration -- -- $ 1,210,000
================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
20
<PAGE> 21
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL 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. 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 Nitches
Far East Limited and Body Drama Far East Limited. Effective August 31, 1998,
Body Drama, Inc. was merged into Nitches, Inc. and Body Drama, Inc. ceased to
exist as a separate legal entity. Prior to August 31, 1998, Body Drama, Inc. was
a wholly owned subsidiary of Nitches, Inc. consolidated in the financial
statements of Nitches, Inc. 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 accounts 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.
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.
21
<PAGE> 22
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 basic and diluted earnings per share as restated to give effect
to a 2-for-1 stock split on May 4, 1998, was 2,218,479 and 2,202,837
respectively, for fiscal 1998; 2,419,559 and 2,535,972 respectively, for fiscal
1997; and 2,420,592 and 2,491,371 respectively, for fiscal 1996.
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 adopted the new method of reporting EPS for the fiscal year ending
August 31, 1998. Earnings per share for fiscal 1997 and 1996 have been restated
to reflect comparative reporting under SFAS No. 128.
Weighted average shares outstanding for the years ended August 31, 1997 and
1996 have been restated to give effect to the split and implementation of SFAS
No. 128.
Revenue Recognition:
The Company recognizes revenue as of the date merchandise is shipped to its
customers.
Income Taxes:
The Company records income taxes using an asset and liability method. Under
this method, deferred Federal and state income taxes assets and liabilities are
provided for temporary differences between the financial reporting basis and the
tax reporting basis of the consolidated assets and liabilities. Income taxes are
further explained in Note 8.
Cash Flow Statement:
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less to
be cash equivalents.
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.
Recently issued accounting pronouncements:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130 (SFAS 130), "Reporting Comprehensive Income," which
establishes standards for reporting comprehensive income and its components
(revenues, expenses, gains and losses) in financial statements. SFAS No. 130
requires classification of other comprehensive income in a financial statement,
and the display of the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital. SFAS No. 130
will be
22
<PAGE> 23
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
effective for the Company in fiscal 1999. Management believes this pronouncement
will not have a material effect on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information." This pronouncement
establishes standards for reporting information about operating segments in
annual financial statements and requires that enterprises report selected
information about operating segments in interim financial reports to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
will be effective for the Company in fiscal 1999. Management believes this
pronouncement will not have a material effect on the Company's financial
statements.
In February 1998, the FASB also issued SFAS No. 132 (SFAS 132), "Employers
Disclosures about Pension and Other Post Retirement Benefits." This
pronouncement revises the requirements for disclosure made by employers
pertaining to pension plans and other post retirement benefits. SFAS will be
effective for the Company in fiscal 2000. Management believes this pronouncement
will not have a material effect on the Company's financial statements.
3. INVENTORIES
<TABLE>
<CAPTION>
AUGUST 31,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Fabric and trim $ 417,000 $ 248,000
Finished goods 4,923,000 4,024,000
----------------------------
$5,340,000 $4,272,000
============================
</TABLE>
4. FURNITURE, FIXTURES AND EQUIPMENT
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Leasehold improvements $259,000 $300,000
Computer equipment 258,000 439,000
Vehicles 46,000 56,000
Furniture, fixtures and other equipment 39,000 102,000
--------------------------
602,000 897,000
Less accumulated depreciation and amortization 465,000 678,000
--------------------------
$137,000 $219,000
==========================
</TABLE>
5. OTHER CURRENT ASSETS
Current assets at August 31, 1997 included an advance of $500,000 to a
licensor, secured by a one year U.S. Treasury Bill. The licensor paid periodic
interest at the annual rate of 1% over the Company's then current borrowing rate
and repayment of the advance at the maturity of the U.S. Treasury Bill. The
licensor repaid the advance during fiscal 1998 including $22,000 in interest.
23
<PAGE> 24
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. Included in trade accounts receivable at
August 31, 1998 and 1997 are non-recourse accounts due from the financial
institution of $4,758,000 and $6,188,000, respectively. Notes payable and
contingent liabilities for irrevocable letters of credit outstanding are as
follows:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Note payable $ 276,000 --
Contingent liabilities for irrevocable
letters of credit 6,313,000 $5,322,000
Weighted average interest rate for the year 8.50% 8.36%
</TABLE>
Effective October 1, 1998, the factoring agreement was modified and renewed
to include provisions whereby the factor is responsible for customer collection
efforts, the Company may borrow up to $15,000,000 under the credit facility, and
the President provides a $1,000,000 personal guarantee. Proceeds for the
increased borrowing availability are intended to be used to purchase tendered
shares under the tender offer (Note 14).
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
AUGUST 31,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Trade accounts and other payables $2,283,000 $1,874,000
Accrued bonuses, commissions and other
payroll related expenses 422,000 503,000
Payable to licensee 506,000 --
----------------------------
$3,211,000 $2,377,000
============================
</TABLE>
8. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Current:
Federal -- $(162,000) $(123,000)
State $ (1,000) (29,000) 22,000
--------- --------- ---------
(1,000) (191,000) (101,000)
--------- --------- ---------
Deferred:
Federal (685,000) 268,000 277,000
State (121,000) 48,000 103,000
--------- --------- ---------
(806,000) 316,000 380,000
--------- --------- ---------
$(807,000) $ 125,000 $ 279,000
========= ========= =========
</TABLE>
24
<PAGE> 25
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Net deferred income tax assets at August 31, 1998 and 1997 consist of the
tax effects of temporary differences related to the following:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Current deferred assets:
Inventories $134,000 $211,000
Sales returns and doubtful
account reserve 123,000 146,000
Accrued vacation and bonuses 59,000 141,000
Tax loss carryforward -- 142,000
All other items 7,000 129,000
--------------------------
$323,000 $769,000
==========================
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1998 1997
---------------------------
<S> <C> <C>
Non-current deferred assets:
Tax loss carryforward $1,283,000 $ 962,000
Fixed asset depreciation 17,000 --
Less valuation allowance (313,000) (263,000)
---------------------------
$ 987,000 $ 699,000
===========================
</TABLE>
The long term deferred income tax liability at August 31, 1997 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. As a result of the
merger of Body Drama, Inc. into Nitches, Inc. as of August 31, 1998, a deferred
tax liability was eliminated and a deferred tax benefit was recorded.
The Company has a federal consolidated net operating loss carryforward of
approximately $3.0 million which expires in 2010. This federal tax loss may be
utilized by Nitches, Inc. but not its foreign subsidiaries.
25
<PAGE> 26
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Differences between the statutory Federal income tax rate and the effective
tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------
1998 1997 1996
-------------------------------
<S> <C> <C> <C>
Statutory rate (34.0)% 34.0% 34.0%
State income taxes, net of
Federal benefit (2.9)% 6.1% 4.8%
Merger of subsidiary, net (75.7)% -- --
Change in valuation
allowance 6.3% -- (28.7)%
Foreign subsidiaries tax effect .8% (.9)% 3.6%
Nondeductible entertainment
expenses 1.4%
Other items 3.7% (.2)% 2.7%
-------------------------------
Effective rate (100.4)% 39.0% 16.4%
===============================
</TABLE>
In 1998, the Company settled an examination by the Internal Revenue Service
for fiscal years 1992 through 1994. The resulting assessments did not have a
material adverse impact on the financial position of the Company.
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 made no
matching contributions to this Plan in fiscal 1998, 1997 or 1996. The Company
made no profit sharing contribution to this Plan in fiscal 1998 or 1997 however
contributed $193,000 in fiscal 1996.
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, 1998. Options were
granted at prices not less than the fair market value of the shares at the date
of grant and generally became exercisable at the rate of twenty percent per year
commencing one year after the date of grant. At August 31, 1998, no options were
outstanding under this Plan. Transactions under this Plan during fiscal 1998,
1997 and 1996 were as follows:
26
<PAGE> 27
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF SHARES OPTION PRICE PER SHARE
-------------------------------------------
<S> <C> <C>
Outstanding options at August 31, 1995 196,800 $3.25 - $4.50
Options expired (121,900) $3.25
Options forfeited (18,230) $3.25 - $4.50
--------
Outstanding options at August 31, 1996 56,670 $3.25 - $4.50
Options forfeited (56,670) $3.25 - $4.50
--------
Outstanding options at August 31, 1997
and 1998 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 600,000 shares for issuance
under these Plans. In fiscal 1996, the Company granted 294,000 options
exercisable at $2.125 per share. Through August 31, 1998, no options were
exercised and no additional options have been granted.
Of the 294,000 outstanding options, 120,000 options vested immediately and
the remaining options vested 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. Subsequent to August 31, 1998, each of the 294,000 options were
exercised, and no options currently remain outstanding.
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 1998, 1997, and 1996 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>
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Net earnings - as reported $ 3,000 $195,000 $1,426,000
Net earnings (loss) - pro forma $(53,000) $139,000 $1,349,000
Earnings per basic share - as reported $ .00 $ .08 $ .57
Earnings (loss) per basic share - pro forma $ (.02) $ .06 $ .56
Earnings per diluted share - as reported $ .00 $ .08 $ .55
Earnings (loss) per diluted share - pro forma $ (.02) $ .05 $ .54
</TABLE>
The assumption regarding the stock options issued to directors, officers,
and key employees was that 100% of such options vested in 1998, 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 through 1998: dividend yield of 0%; expected
volatility of 57.4%; risk-free interest rate of 6.36%; and expected lives of
three years.
The number of options available for grant, granted, exercised, expired,
forfeited, and outstanding disclosed in the financial statements have been
historically restated to give effect to the two for one stock split on May 4,
1998.
27
<PAGE> 28
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 expiring through July 31, 2000. At August 31,
1998, 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>
1999 $491,000
2000 217,000
--------
$708,000
========
</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 $407,000, $582,000, and $742,000, during fiscal 1998, 1997 and
1996, respectively.
12. SIGNIFICANT CUSTOMERS
Mervyn's and JCPenney accounted for 17.9% and 13.8%, respectively, of the
Company's net sales in fiscal 1998. Mervyn's and JCPenney accounted for 16.3%
and 10.8%, respectively, of the Company's net sales in fiscal 1997. JCPenney
accounted for 10.4% of the Company's net sales in fiscal 1996.
Sears, Mervyn's, and JCPenney accounted for 14.7%, 13.0%, and 11.5%,
respectively, of the Company's trade receivable balance at August 31, 1998.
13. SALE OF PRODUCT LINES
The Company holds a $600,000 note receivable relating to the sale of
product lines in 1995. The Company fully reserved the note and is accounting for
it on a cost recovery basis, recording income when the buyer makes payments on
the note. Interest payments of 4% per year are payable until March 15, 2001, at
which time the principal and any unpaid interest are due and payable. Interest
income of $26,000 was received during the year ended August 31, 1998.
14. TENDER OFFERS AND RELATED PARTY TRANSACTIONS
On October 21, 1998, the Company purchased and retired 1,050,426 shares of
its outstanding common stock for $4 per share in connection with a self tender
offer. Of those shares, 436,563 were purchased from officers and directors. The
total cost of the transaction to the Company was approximately $4,237,000. Cash
and cash equivalents, together with proceeds from borrowings under the new
factoring agreement (Note 6) were used to purchase the tendered shares. The
Company's president subsequently purchased 331,748 shares from its chairman and
a director at the $4 per share tender price on approximately November 18, 1998.
On August 27, 1996, the Company purchased and retired 75,400 shares of its
common stock at $3.125 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.
28
<PAGE> 29
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. TENDER OFFERS AND RELATED PARTY TRANSACTIONS (CONTINUED)
On September 1, 1995, the Company purchased and retired approximately
2,400,000 shares of its common stock at $4 per share in connection with a tender
offer by the Company. The tender offer included the repurchase of approximately
916,000 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.
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 the Chairman of
Nitches. The Company pays rent of $15,000, on a month-to-month basis, which
management 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 from Kuma Sport, Inc. for approximately $1.6 million
and $1.8 million in the fiscal years ending August 31, 1998 and 1997,
respectively.
15. EMPLOYMENT AGREEMENTS
The Company has an Employment Agreement expiring on January 1, 2001 with
its President. In addition to a base salary, the President is entitled to
receive a bonus equal to a percentage of pretax income (exclusive of the bonus)
over specified levels for fiscal 1999, 2000 and 2001. In the event that the
President is terminated without cause prior to the expiration of the Employment
Agreement, he 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 annual base salary through January 1, 2001,
excluding bonuses and employee benefits, is $150,000.
The Company had a consulting agreement expiring January 1, 2001 with its
Chairman. This agreement was terminated effective August 31, 1998 as a result of
the tender offer (Note 14).
16. CONTINGENCY
Management has initiated a program to prepare the Company's computer
systems and applications for the year 2000. The Company has incurred internal
staff costs and other expenses related to infrastructure and facilities
enhancements necessary to prepare the systems for the year 2000. Certain
internal applications have already been modified and testing and conversion of
system applications has been sufficiently completed. The Company is also
continuing to assess its vendors, customers and other third parties as to their
year 2000 compliance.
29
<PAGE> 30
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended August 31, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
NOVEMBER 30 FEBRUARY 28 MAY 31 AUGUST 31
-----------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Fiscal 1998:
Net sales $ 9,298 $ 5,959 $ 8,483 $ 7,301
Gross profit 2,465 1,250 2,016 1,534
Net income (loss) 50 (434) 79 308
Net income (loss) per common share .02 (.19) .02 .15
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 .02 .04 .07 (.05)
</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.
The Company made the decision to change auditors based principally on the
cost structure proposed by the two auditors. Deloitte & Touche LLP's report on
the financial statements for the fiscal year ended 1996 did not contain an
adverse opinion or a disclaimer of opinion and did not qualify or modify 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.
30
<PAGE> 31
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 ("1998 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 1998, to be filed with the
Commission in November 1998.
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
1998 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 1998
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 1998
Proxy Statement.
31
<PAGE> 32
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, 1998 and 1997;
Consolidated Statements of Operations for the years ended August 31, 1998,
1997 and 1996;
Consolidated Statements of Shareholders' Equity for the years ended August
31, 1998, 1997 and 1996;
Consolidated Statements of Cash Flows for the years ended August 31, 1998,
1997 and 1996;
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:
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 and Directors(6)
10.12 Employee Stock Purchase Plan(5)
10.28 Management Services Agreement between 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)
32
<PAGE> 33
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)
10.33 Employment Agreement dated January 1, 1998 between the
Company and Arjun Waney(11)
10.34 Employment Agreement dated January 1, 1998 between the
Company and Steven P. Wyandt(11)
10.35 Documents concerning offer to purchase shares pursuant to
a tender offer dated August 18, 1998
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 documents to be filed with
the Commission(5)
27 Financial Data Schedule
(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 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 Statement filed
October 25, 1995 for the fiscal year ended August 31, 1995.
33
<PAGE> 34
(10) Incorporated by reference from Registrant's Form 10-K filed on November 3,
1995 for the fiscal year ended August 31, 1995.
(11) Incorporated by reference in Schedule 13E-4 filed with the SEC on August
18, 1998 and amendments related thereto.
34
<PAGE> 35
SIGNATURES
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 19, 1998
NITCHES, INC.
By: /s/ Steven P. Wyandt
- -------------------------------------
Steven P. Wyandt, President
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>
/s/ Steven P. Wyandt President and Chief Executive November 19, 1998
- ------------------------------- Officer (Principal Executive
Steven P. Wyandt Officer and Principal Financial
Officer) and Director
/s/ Arjun C. Waney Director November 19, 1998
- -------------------------------
Arjun C. Waney
/s/ Eugene B. Price II Director November 19, 1998
- -------------------------------
Eugene B. Price II
/s/ Luther A. Henderson Director November 19, 1998
- -------------------------------
Luther A. Henderson
/s/ William L. Hoese Director November 19, 1998
- -------------------------------
William L. Hoese
</TABLE>
35
<PAGE> 36
Independent Auditor's Report
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 6, 1998 appearing in item 8
in this Annual Report of Form 10-K also included an audit of the August 31, 1998
and 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, 1998
and 1997 and for the year 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 16, 1998
- --------------------------------------------------------------------------------
Independent Auditor's Report
To the Board of Directors and Shareholders
Nitches, Inc., San Diego, California
We have audited the consolidated statement of operations, shareholders'
equity and cash flows of Nitches, Inc. and its subsidiaries for the year ended
August 31, 1996, and have issued our report thereon dated October 31, 1996; such
consolidated financial statements and report are included in your 1998 Annual
Report to Stockholders and are incorporated by reference. Our audit also
included the financial statement schedule of Nitches, Inc. for the year 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 audit. In our opinion, such financial statement schedule,
when considered in relation to the basic 1996 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
36
<PAGE> 37
SCHEDULE II
NITCHES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at
of Year Expenses Accounts Deductions End of Year
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended August 31, 1996
Allowance for doubtful accounts $400,000 $1,247,000 $1,222,000 $425,000
Inventory markdown allowance $427,000 $ 716,000 $ 810,000 $333,000
Note receivable reserve $950,000 $950,000
Year ended August 31, 1997
Allowance for doubtful accounts $425,000 $ 882,000 $ 955,000 $352,000
Inventory markdown allowance $333,000 $ 566,000 $ 695,000 $204,000
Note receivable reserve $950,000 $ 350,000 $600,000
Year ended August 31, 1998
Allowance for doubtful accounts $352,000 $1,292,000 $1,369,000 $275,000
Inventory markdown allowance $204,000 $ 360,000 $ 434,000 $130,000
Note receivable reserve $600,000 $600,000
</TABLE>
37
<PAGE> 38
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
*10.33 Employment Agreement dated January 1, 1998 between the Company and
Arjun C. Waney
*10.34 Employment Agreement dated January 1, 1998 between the Company and
Steven P. Wyandt
*10.35 Documents concerning offer to purchase shares pursuant to a tender
offer dated August 18, 1998
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)
*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 32.
38
<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, 33-44398 and
333-43909) 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
October 30, 1998
- --------------------------------------------------------------------------------
EXHIBIT 23.2
Independent Auditors' Consent
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (Nos. 33-11005, 33-33293, 33-38663, 33-44398 and 333-43909) 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, 1998.
Deloitte & Touche LLP
San Diego, California
November 6, 1998
39
<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, 33-44398 and
333-43909) 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
October 30, 1998
- --------------------------------------------------------------------------------
EXHIBIT 23.2
Independent Auditors' Consent
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (Nos. 33-11005, 33-33293, 33-38663, 33-44398 and 333-43909) 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, 1998.
Deloitte & Touche LLP
San Diego, California
November 6, 1998
39
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<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>
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0
0
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<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
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