<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
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: (858) 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 5,1999, 1,064,680 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 5, 1999, was $3,992,550.
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 1999 to be filed with the Commission, are
incorporated by reference into Part III of this Report on Form 10-K.
<PAGE> 2
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 12 foreign countries. The Company sells
all-cotton and cotton blend knit and woven clothing primarily for the female
consumer. Retail customers include Mervyns, Sears, J. C. Penney, Costco, Kohl's,
Sheplers, and Cavendars. 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 41 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 99% of the garments sold by the Company are manufactured
abroad. Contracting with foreign manufacturers enables the Company to take
advantage of prevailing lower labor rates, with the consequent ability to
produce a quality garment which can be retailed in the popular, value and
moderate price ranges. 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. No material manufacturing is
performed and no significant assets are maintained outside the United States by
the Company or its subsidiaries. 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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Percent of Total Purchases % % %
Year ended August 31, 1999 1998 1997
-------------------------- ---- ---- ----
<S> <C> <C> <C>
United Arab Emirates ............. 57.0 43.7 39.3
Macao ............................ 12.2 9.2 11.1
India ............................ 8.4 12.4 5.6
Sri Lanka ........................ 8.2 11.0 10.2
Oman ............................. 5.9 6.4 12.7
Hong Kong ........................ 4.6 8.2 13.1
United States .................... .7 3.4 .9
Countries less than 2.5%
each in the current year ....... 3.0 5.7 7.1
</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 nineteen 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 28.5% and 13.0%, respectively, of the
Company's net sales in fiscal 1999. Two customers accounted for 17.9% and 13.8%,
respectively, of the Company's net sales in fiscal 1998. 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, provided 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 first six
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 has been on garments produced in China, which assembles large
quantities of apparel cut in nearby countries such as Macao, Singapore and
Taiwan. Approximately 16.8% of the Company's garments were produced in China,
Hong Kong, and Macao in fiscal 1999. 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, 1999 and August 31, 1998, the Company had unfilled customer
orders of $15.7 million, with such orders generally scheduled for delivery by
January 2000 and 1999, respectively. These amounts include both confirmed orders
and unconfirmed orders which the Company believes, based on industry practice
and past experience, will be confirmed. While cancellations, rejections and
returns have generally not been material in the past, there can be no assurance
that cancellations, rejections and returns will not reduce the amount of sales
realized from the backlog of orders at August 31, 1999.
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 8, l999, the Company had 42 full-time employees, of whom 14
worked in executive, administrative or clerical capacities and 28 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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NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER CURRENT ASSETS
Other current assets at August 31, 1999 included an unsecured non-interest
bearing working capital advance, due on demand, of $420,000 to an unrelated
apparel company.
7. ACCRUED EXPENSES
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Accrued bonuses, commissions and other
payroll related expenses $344,000 $422,000
Payable to licensee -- 506,000
-------- --------
$344,000 $928,000
======== ========
</TABLE>
8. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C>
Current:
Federal $ 333,000 -- $(162,000)
State 90,000 $ (1,000) (29,000)
--------- --------- ---------
423,000 (1,000) (191,000)
--------- --------- ---------
Deferred:
Federal 408,000 (685,000) 268,000
State 72,000 (121,000) 48,000
--------- --------- ---------
480,000 (806,000) 316,000
NOL utilized (493,000) -- --
--------- --------- ---------
(13,000) (806,000) 316,000
--------- --------- ---------
Provision (benefit) $ 410,000 $(807,000) $ 125,000
========= ========= =========
</TABLE>
Net deferred income tax assets at August 31, 1999 and 1998 consist of the
tax effects of temporary differences related to the following:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Current deferred assets:
Inventories $139,000 $134,000
Sales returns and doubtful
account reserves 149,000 123,000
Accrued vacation and bonuses 59,000 59,000
Other items -- 7,000
-------- --------
$347,000 $323,000
======== ========
</TABLE>
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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 15, 1999
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, Chief Executive Officer November 15, 1999
- ------------------------------- (Principal Executive Officer), Chief
Steven P. Wyandt Financial Officer (Principal Financial Officer)
and Director
/s/ Arjun C. Waney Director November 15, 1999
- -------------------------------
Arjun C. Waney
/s/ Eugene B. Price II Director November 15, 1999
- -------------------------------
Eugene B. Price II
/s/ Luther A. Henderson Director November 15, 1999
- -------------------------------
Luther A. Henderson
/s/ William L. Hoese Director November 15, 1999
- -------------------------------
William L. Hoese
</TABLE>
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