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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, 2000
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:
<TABLE>
<CAPTION>
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
------------------- ----------------------------
<S> <C>
Common Stock, no par value NASDAQ SmallCap Market
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of October 12, 2000, 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 October 12, 2000, was $5,955,820.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement, to be filed with the Commission and
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 November 2000, 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 12 foreign countries. The Company sells
all-cotton and cotton blend knit and woven clothing primarily for the female
consumer. Retail customers include Cavendars, Costco, Kohl's, Mervyns, Sears,
and Sheplers. The Company sells garments to these and other retailers through
its own sales force and through independent sales representatives. Nitches
provides fashionable clothing to the popularly priced market segment that
generally retails 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 that 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 jeans are sold
under the label Posted 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 that it believes reflect current fashion trends.
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.
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SOURCES OF SUPPLY
Approximately 98% 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, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
Percent of Total Purchases % % %
Year ended August 31, 2000 1999 1998
-------------------------- ------ ------ ------
<S> <C> <C> <C>
United Arab Emirates ............ 58.94 57.0 43.7
Macao ........................... 16.51 12.2 9.2
India ........................... 7.66 8.4 12.4
Sri Lanka ....................... 5.66 8.2 11.0
Hong Kong ....................... 4.14 4.6 8.2
Pakistan ........................ 2.18 .91 --
United States ................... 2.14 .7 3.4
Countries less than 2.5%
each in the current year ...... 2.77 7.99 12.1
</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.
The Company believes that the production capacity of foreign manufacturers
with which it has developed, or is developing, a relationship is adequate to
meet the Company's production requirements for the foreseeable future. However,
because of existing and potential import restrictions, the Company continues to
attempt to diversify its sources of supply.
When management believes, based on previous experience and market
performance, that additional orders for certain garments will be received, it
may cause production runs to be made in amounts in excess of firm customer
orders. This may allow the Company to achieve overall lower costs as well as to
be able to respond more quickly to customer delivery requirements. The Company
bears the consequent risk if garments purchased in advance of receipt of
customer purchase orders do not sell.
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QUALITY CONTROL
Company representatives regularly visit manufacturers to inspect garments
and monitor production facilities in order to assure timely delivery, maintain
quality control and issue inspection certificates. Furthermore, through these
representatives and independent inspectors from major retailers, the Company
ensures that the factories the Company uses for production adhere to policies
consistent with prevailing labor laws. A sample of garments from a percentage of
each production run is inspected before each shipment. Letters of credit
arranged by the Company require, as a condition to the release of funds to the
supplier, that 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 a primary area 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 that 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 (Mervyn's and Sears) accounted for 33.4% and 15.7%,
respectively, of the Company's net sales in fiscal 2000. The same customers
accounted for 28.5% and 13.0%, respectively, of the Company's net sales in
fiscal 1999. 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 experiences a significant decrease in
sales to any of its major customers, and is unable to replace such sales volume
with sales to other major customers, there could be a material adverse financial
effect on the Company.
IMPORT RESTRICTIONS
The ability of the Company to import garments is regulated by import
restrictions that 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 that 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
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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
20.65% of the Company's garments were produced in China, Hong Kong, and Macao in
fiscal 2000. 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.
BACKLOG
At August 31, 2000 and August 31, 1999, the Company had unfilled customer
orders of $16.2 million and $15.7 million, respectively, with such orders
generally scheduled for delivery by January 2001 and 2000, respectively. The
increase in backlog is primarily in the western wear product lines. 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, 2000.
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 that is not readily replaceable.
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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 7, 2000, the Company had 35 full-time employees, of whom nine
worked in executive, administrative or clerical capacities and 26 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 10-K 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.
ITEM 2 - PROPERTIES
The Company leases one showroom in New York and one in Los Angeles with an
aggregate monthly gross rental of approximately $14,000. The Los Angeles
showroom lease expires in July, 2001 and the New York lease expires in
September, 2002. The Company leases a 30,000 square foot warehouse with
administrative offices in San Diego with a monthly lease payment of
approximately $17,000. The lease expires in September 2002. The Company may
lease additional short-term warehouse space from time to time as needed.
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, 2000.
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 2000.
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PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock trades on The NASDAQ SmallCap Market under the
symbol NICH. The number of record holders of the Common Stock was 131 on October
12, 2000. 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 October 12, 2000 was $5.594 per share.
The high and low stock closing sale prices, for each fiscal quarter of the
last two years were as follows:
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
November 30, 1998 3.375 2.625
February 28, 1999 3.75 2.625
May 31, 1999 3.719 2.5625
August 31, 1999 4.00 3.25
November 30, 1999 3.75 2.6875
February 28, 2000 6.3125 3.50
May 31, 2000 6.25 4.125
August 31, 2000 7.25 4.875
</TABLE>
The Company does not have a quarterly dividend policy. However, during
fiscal year 2000, the Company declared and paid the following special dividends:
<TABLE>
<CAPTION>
DATE PAID DIVIDEND PER SHARE
<S> <C>
December 1, 1999 $.25
February 17, 2000 $.50
May 16, 2000 $.30
August 15, 2000 $.60
</TABLE>
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ITEM 6 - SELECTED FINANCIAL DATA (In thousands, except per share amounts)
<TABLE>
<CAPTION>
OPERATING RESULTS: 2000 1999 1998 1997 1996
------------------ --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales (1) $ 39,471 $ 31,473 $ 31,041 $ 48,414 $ 54,381
Cost of goods sold 29,156 23,275 23,776 36,190 40,396
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10,315 8,198 7,265 12,224 13,985
Selling, general and
administrative expenses 7,403 7,267 8,437 11,888 12,547
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Income (loss) from operations 2,912 931 (1,172) 336 1,438
Other income 20 164 178 151 319
Interest income (expense), net (100) (44) 190 (167) (52)
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Income (loss) before income taxes 2,832 1,051 (804) 320 1,705
Provision (benefit) for
income taxes 946 410 (807) 125 279
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Net income $ 1,886 $ 641 $ 3 $ 195 $ 1,426
====================================================================
Earnings per share:
Basic $ 1.77 $ .52 $ .00 $ .08 $ .57
====================================================================
Diluted $ 1.77 $ .52 $ .00 $ .08 $ .55
====================================================================
Cash dividends per
common share $ 1.65 $ .00 $ .00 $ .00 $ .50
====================================================================
</TABLE>
(1) See Management's Discussion and Analysis on page 10.
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<TABLE>
<CAPTION>
FINANCIAL POSITION: 2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 314 $ 201 $ 1,338 $ 955 $ 2,197
Receivables 4,262 3,302 5,435 7,029 6,484
Income taxes receivable -- -- 5 41 261
Inventories 5,055 4,553 5,340 4,272 7,044
Total current assets 9,857 8,993 12,595 13,886 17,568
Total assets 10,011 9,786 13,782 15,079 18,179
Accounts payable and
accrued expenses 2,951 2,954 3,211 2,377 5,359
Total current liabilities 3,081 2,954 3,211 2,377 5,359
Shareholders' equity 6,962 6,832 10,571 11,681 11,724
Other Financial Information:
Profitability:
Gross margin 26.1% 26.0% 23.4% 25.2% 25.7%
Operating margin (deficit) 7.4% 3.0% (3.8%) .7% 2.6%
Net income as percent
of net sales 4.8% 2.0% -- .4% 2.6%
Liquidity:
Current ratio 3.23 3.04 3.92 5.84 3.28
Working capital $ 6,808 $ 6,039 $ 9,384 $ 11,509 $ 12,209
Share data:
Weighted average number of
common shares (000's):
Basic 1,065 1,226 2,218 2,420 2,421
Diluted 1,065 1,226 2,203 2,536 2,491
Number of common shares
outstanding at year end 1,065 1,065 2,012 2,344 2,420
</TABLE>
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YEARS ENDED AUGUST 31, 2000 AND 1999
Net sales for the fiscal year ended August 31, 2000 increased approximately
$7.9 million or 25.1% compared to the fiscal year ended August 31, 1999 due to
an increase of unit sales, primarily in the Company's sleepwear product lines.
Overall, sales returns and allowances decreased by 2%, while cost of sales as a
percentage of net sales increased by 2%. Thus, the gross profit margin in the
aggregate remained relatively consistent from fiscal 1999 to fiscal 2000.
Selling, general and administrative expenses increased in dollar amount
from $7.3 million in fiscal 1999 to $7.4 million in fiscal 2000, and decreased
as a percent of net sales (23.1% in fiscal 1999 to 18.8% in fiscal 2000). The
increase in dollar amount was due to primarily salaries and commissions.
YEARS ENDED AUGUST 31, 1999 AND 1998
Net sales for the fiscal year ended August 31, 1999 increased approximately
$432,000 or 1.4% compared to the fiscal year ended August 31, 1998. The increase
was due primarily to an increase in private label sleepwear sales, which offset
the effect of the discontinuance of the activewear product line in fiscal year
1998 and a decrease in sales of the western wear product line in the fourth
quarter of fiscal year 1999.
Gross margins increased from 23.4% for the fiscal year ended August 31,
1998 to 26.0% for the fiscal year ended August 31, 1999. This increase was the
result of private label sleepwear customers selecting more fashionable styles
with higher gross margins for shipment during the fourth quarter and
significantly improved inventory control in all product lines resulting in fewer
goods being sold off-price. Improving inventory control results in less excess
inventory or aged goods, which generally have to be sold off-price.
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 $8.4 million in fiscal 1998 to $7.3 million in fiscal 1999, and decreased
as a percent of net sales (27.2% in fiscal 1998 to 23.1% in fiscal 1999). The
decrease in dollar amount and percentage of sales was due to the Company's
reductions in certain expenses, primarily salaries and commissions.
Interest expense increased in the current year due to a nonrecurring
assessment imposed in fiscal year 1999 by the California Franchise Tax Board 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 February 1999. Interest income
decreased in fiscal 1999 due to payments received on the purchase agreement for
the dress product line effective September 1, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital of $6.8 million at August 31, 2000 increased
from the August 31, 1999 level of $6.0 million, while the Company's current
ratio increased from 3.04:1 at August 31, 1999 to 3.23:1 at August 31, 2000. The
principal reason for the increase in working capital and in current ratio was
the utilization of the Company's loss carryforwards as reflected in the income
tax receivable at August 31, 1999.
On October 21, 1998, the Company purchased and retired approximately
1,050,000 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
$4.3 million. Additionally, the Company purchased during fiscal year 1999, as
part of its ongoing stock repurchase program, approximately 60,000 shares at an
average price of $3.22 per share.
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
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Financing Agreement, Inventory Security Agreement, Financial Covenant Agreement
and Agreement to Issue Letter of Credit Guaranties (collectively, the "Discount
Factoring Agreement"). Effective March 31,1999, the assets of the Congress
factoring business were purchased by the CIT Group/Commercial Services, Inc.
("CIT"). The Company sells substantially all of its trade receivables to CIT on
a pre-approved, non-recourse basis. The Company attempts to make the shipments
for non-factored customer sales 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 recourse and
were not made on a COD basis or supported by commercial or standby letters of
credit at August 31,2000 was approximately $460,000 of which approximately
$255,000 has been collected through October 31, 2000.
Payment for non-recourse factored receivables is made at the time customers
make payment to CIT or, if a customer is financially unable to make payment,
within approximately 180 days of the invoice due date. Under the Discount
Factoring Agreement, the Company can request advances in anticipation of
customer collections at CIT's prime rate (currently 9.5%) less one-half percent,
and open letters of credit through CIT. The amount of borrowings by the Company,
including a portion of outstanding letters of credit, are limited to certain
percentages of outstanding accounts receivable and finished goods inventory
owned by the Company. Borrowings are collateralized by all of the assets of the
Company as well as a $1 million guaranty by the Company's president, Mr. Wyandt.
At August 31, 2000, the Company had outstanding letters of credit of
approximately $4.5 million for the purchase of finished goods, which had been
opened, through CIT. Under the Discount Factoring Agreement, the Company is
required to maintain $5 million of net worth and $5 million of working capital.
The Discount Factoring Agreement can be terminated by CIT on 60-days prior
written notice.
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. resulted in the
elimination of the potential liability and a resulting increase in the book
value of the Company.
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, 2000. 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 $5.0 million at August 31, 1999 to
$5.1 million at August 31, 2000. The Company has established an inventory
markdown reserve as of August 31, 2000, 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, 2000 for which customer sales orders have
not yet been received. The inventory markdown reserve is calculated based on
specific identification of aged goods and styles that are slow moving or selling
off-price.
IMPACT OF EXCHANGE RATES
While the Company purchased over 90% of its products from foreign
manufacturers in fiscal 2000, 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. A prolonged 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 prolonged 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.
11
<PAGE> 12
IMPACT OF INFLATION AND DEFLATION
Management does not believe that inflation has had any material impact upon
the Company's revenues or income from operations to date. However, continued
deflation in women's clothing prices may put pressure on gross margins in the
future. Resistance on the part of the consumer to increases in prices and the
increasing fabric and labor costs may lead to an increased cost of goods on a
percentage basis.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in the annual report on Form 10-K 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, among others, 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.
12
<PAGE> 13
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 Auditor's Report 14
Consolidated Balance Sheets at August 31, 2000 and 1999 15
Consolidated Statements of Income for the years ended August 31, 2000,
1999 and 1998 16
Consolidated Statements of Shareholders' Equity for the years ended
August 31, 2000, 1999 and 1998 17
Consolidated Statements of Cash Flows for the years ended August
31, 2000, 1999 and 1998 18
Notes to consolidated financial statements 19
</TABLE>
13
<PAGE> 14
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Nitches, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheets of Nitches, Inc.
and subsidiaries as of August 31, 2000 and 1999 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended August 31, 2000. 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, 2000 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended August 31, 2000 in conformity with generally accepted accounting
principles.
Moss Adams LLP
Los Angeles, California
October 13, 2000
14
<PAGE> 15
NITCHES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 314,000 $ 201,000
Receivables:
Trade accounts, less allowances ($225,000 in 2000
and $374,000 in 1999) 4,224,000 3,267,000
Due from affiliates and employees 38,000 35,000
----------- -----------
4,262,000 3,302,000
Inventories, net 5,055,000 4,553,000
Deferred income taxes 150,000 347,000
Other current assets 76,000 590,000
----------- -----------
Total current assets 9,857,000 8,993,000
Furniture, fixtures and equipment, net 109,000 83,000
Deferred income taxes 28,000 647,000
Other assets 17,000 63,000
----------- -----------
$10,011,000 $ 9,786,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,534,000 $ 2,610,000
Accrued expenses 417,000 344,000
Income taxes payable 98,000 --
----------- -----------
Total current liabilities 3,049,000 2,954,000
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;
1,064,680 shares in 2000 and 1999 issued and outstanding 805,000 805,000
Retained earnings 6,157,000 6,027,000
----------- -----------
Total shareholders' equity 6,962,000 6,832,000
----------- -----------
$10,011,000 $ 9,786,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
15
<PAGE> 16
NITCHES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 39,471,000 $ 31,473,000 $ 31,041,000
Cost of goods sold 29,156,000 23,275,000 23,776,000
------------ ------------ ------------
Gross profit 10,315,000 8,198,000 7,265,000
Selling, general and administrative expenses 7,403,000 7,267,000 8,437,000
------------ ------------ ------------
Income (loss) from operations 2,912,000 931,000 (1,172,000)
Other income 20,000 164,000 178,000
Interest income (expense), net (100,000) (44,000) 190,000
------------ ------------ ------------
Income (loss) before income taxes 2,832,000 1,051,000 (804,000)
Provision (benefit) for income taxes 946,000 410,000 (807,000)
------------ ------------ ------------
Net income $ 1,886,000 $ 641,000 $ 3,000
============ ============ ============
Earnings per share:
Basic and diluted $ 1.77 $ .52 $ .00
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
16
<PAGE> 17
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, 1997 1,172,596 $ 2,421,000 $ 9,260,000 $ 11,681,000
Net income 3,000 3,000
Purchases and retirement of
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
Net income 641,000 641,000
Options exercised, including
income tax benefit 162,500 164,000 164,000
Purchases and retirement of
common stock (1,109,850) (667,000) (3,877,000) (4,544,000)
------------ ------------ ------------ ------------
Balance, August 31, 1999 1,064,680 $ 805,000 $ 6,027,000 $ 6,832,000
Net income 1,886,000 1,886,000
Dividends (1,756,000) (1,756,000)
------------ ------------ ------------ ------------
Balance, August 31, 2000 1,064,680 $ 805,000 $ 6,157,000 $ 6,962,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
17
<PAGE> 18
NITCHES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,886,000 $ 641,000 $ 3,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 43,000 91,000 200,000
Loss on disposal of fixed assets 26,000 -- 16,000
(Increase) decrease in trade receivables (957,000) 2,039,000 1,600,000
Decrease in income taxes receivable -- 5,000 36,000
(Increase) decrease in inventories (502,000) 787,000 (1,068,000)
(Increase) decrease in deferred income taxes 816,000 480,000 (863,000)
(Increase) decrease in other current assets 511,000 (342,000) 659,000
(Increase) decrease in other assets 46,000 -- 162,000
Increase (decrease) in accounts payable
and accrued expenses (2,000) (257,000) 833,000
Increase (decrease) in income taxes payable 98,000 -- --
----------- ----------- -----------
Net cash provided by operating activities 1,965,000 3,444,000 1,578,000
----------- ----------- -----------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (96,000) (37,000) (82,000)
----------- ----------- -----------
Net cash used by investing activities (96,000) (37,000) (82,000)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid (1,756,000) -- --
Purchases and retirement of common stock -- (4,544,000) (1,113,000)
----------- ----------- -----------
Net cash used by financing activities (1,756,000) (4,544,000) (1,113,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 113,000 (1,137,000) 383,000
Cash and cash equivalents at beginning of year 201,000 1,338,000 955,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 314,000 $ 201,000 $ 1,338,000
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest $ 100,000 $ 263,000 $ 94,000
=========== =========== ===========
Income taxes $ 32,000 $ 23,000 $ 57,000
=========== =========== ===========
Non-cash activities:
Deferred tax benefit for exercise of stock options $ -- $ 164,000 $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
18
<PAGE> 19
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. Prior to August 31, 1998, Body
Drama, Inc. was a wholly owned subsidiary of Nitches, Inc. consolidated in the
financial statements of Nitches, Inc. Effective August 31, 1998, Body Drama,
Inc. was merged into Nitches, Inc. and Body Drama, Inc. ceased to exist as a
separate legal entity. All significant inter-company 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 that
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.
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 was 1,064,680 for fiscal
2000, 1,225,914 for fiscal 1999; and 2,218,479 for fiscal 1998.
19
<PAGE> 20
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 tax 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:
During 1999, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standard No. 135 ("Rescission of FASB
Statement No. 75 and Technical Corrections"), No. 136 ("Transfers of Assets to a
Not-for-Profit Organization or Charitable Trust that Raises or Holds
Contributions for Others") and No. 137 ("Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of Financial Accounting
Standard Statement No. 133--an amendment of Financial Accounting Standard
Statement No. 133") which are effective for years after 1999. Management
believes these pronouncements will not have a material effect on the Company's
financial statements or disclosures.
3. INVENTORIES
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Fabric and trim $ 126,000 $ 76,000
Finished goods 4,929,000 4,477,000
---------- ----------
$5,055,000 $4,553,000
========== ==========
</TABLE>
20
<PAGE> 21
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FURNITURE, FIXTURES AND EQUIPMENT
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Leasehold improvements $ 15,000 $259,000
Computer equipment 256,000 282,000
Vehicles 115,000 46,000
Furniture, fixtures and other equipment 44,000 48,000
-------- --------
430,000 635,000
Less accumulated depreciation and amortization 321,000 552,000
-------- --------
$109,000 $ 83,000
======== ========
</TABLE>
5. TRADE ACCOUNTS
Pursuant to the terms of an agreement between Nitches and a factor, Nitches
sells a majority of its trade accounts receivable to a factor on a pre-approved,
non-recourse basis. The Company may request advances in anticipation of customer
collections and open letters of credit through the factor, all of which are
collateralized by all of the Company's assets. Outstanding advances are charged
interest at the factor's prime rate less one half percent. Advances and
contingent liabilities for irrevocable letters of credit outstanding are as
follows:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Receivables assigned to factor:
Non-recourse $ 4,986,000 $ 4,487,000
Recourse 239,000 36,000
Advances from factor (996,000) (1,166,000)
----------- -----------
Due from factor 4,229,000 3,357,000
Non-factored accounts receivable 220,000 284,000
Allowance for customer credits and doubtful accounts (225,000) (374,000)
----------- -----------
$ 4,224,000 $ 3,267,000
=========== ===========
Contingent liabilities for irrevocable letters of credit $ 4,510,000 $ 5,885,000
=========== ===========
</TABLE>
The factoring agreement allows the Company to borrow up to $15,000,000,
limited by certain percentages of outstanding accounts receivable and finished
goods inventory owned by the Company. Outstanding borrowings are collateralized
by accounts receivable and inventories. The President has provided a $1,000,000
personal guarantee in connection with the factoring arrangement.
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,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Accrued bonuses, commissions and other
payroll related expenses $417,000 $344,000
-------- --------
$417,000 $344,000
======== ========
</TABLE>
21
<PAGE> 22
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 833,000 $ 333,000 --
State 200,000 90,000 $ (1,000)
----------- ----------- -----------
1,033,000 423,000 (1,000)
----------- ----------- -----------
Deferred:
Federal 694,000 408,000 (685,000)
State 122,000 72,000 (121,000)
----------- ----------- -----------
816,000 480,000 (806,000)
NOL utilized (903,000) (493,000) --
----------- ----------- -----------
(87,000) (13,000) (806,000)
----------- ----------- -----------
Provision (benefit) $ 946,000 $ 410,000 $ (807,000)
=========== =========== ===========
</TABLE>
Net deferred income tax assets at August 31, 2000 and 1999 consist of the
tax effects of temporary differences related to the following:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Current deferred assets:
Inventories $ 172,000 $ 139,000
Sales returns and doubtful
account reserves 90,000 149,000
Accrued vacation and bonuses 32,000 59,000
Other items (144,000) --
--------- ---------
$ 150,000 $ 347,000
========= =========
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Non-current assets:
Tax loss carryforward $ 0 $ 954,000
Other 28,000 6,000
Less valuation allowance 0 (313,000)
--------- ---------
$ 28,000 $ 647,000
========= =========
</TABLE>
A long term deferred income tax liability at August 31, 1997 related 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.
22
<PAGE> 23
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 as a percentage of pre-tax income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% (34.0)%
State income taxes, net of
Federal benefit 6.1% 6.1% (2.9)%
Merger of subsidiary, net -- -- (75.7)%
Change in valuation
allowance (4.5)% -- 6.3%
Foreign subsidiaries tax effect -- -- .8%
Nondeductible entertainment
expenses -- (.4)% (.4)%
Other items (.3)% (.7)% 3.7%
------ ------ ------
Effective rate 35.3% 39.0% (100.4)%
====== ====== ======
</TABLE>
In 1999, the Company settled an examination by the California Franchise Tax
Board 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 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 or profit sharing
contributions to this Plan in fiscal 2000, 1999, or 1998.
10. STOCK OPTIONS AND DIVIDENDS
Executive Stock Options
During fiscal 1999, certain directors and officers exercised 346,670
options and received 162,500 shares of common stock. These options were
exercised without cash consideration to the Company for a reduced number of
shares. The $164,000 charge to common stock in fiscal 1999 in the accompanying
financial statements represents the income tax benefit to the Company as a
result of these transactions. No stock options are outstanding as of August 31,
2000.
Accounting for Stock Options
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 was 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 1999 and 1998 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 in the following table.
23
<PAGE> 24
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS AND DIVIDENDS (CONTINUED)
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net earnings - as reported $ 1,886,000 $ 641,000 $ 3,000
Net earnings (loss) - pro forma $ 1,886,000 $ 641,000 ($53,000)
Earnings per basic share - as reported $ 1.77 $ .52 $ .00
Earnings (loss) per basic share - pro forma $ 1.77 $ .52 ($.02)
Earnings per diluted share - as reported $ 1.77 $ .52 $ .00
Earnings (loss) per diluted share - pro forma $ 1.77 $ .52 ($.02)
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used: dividend yield of 0%; expected volatility of 57.4%; risk-free
interest rate of 6.36%; and expected lives of three years. As of August 31,
2000, no options are outstanding.
DIVIDENDS
During fiscal 2000, the company declared and paid dividends of $1.65 per
share.
11. LEASES
The Company has lease commitments expiring at various dates through October
2002, principally for real property and equipment. The aggregate minimum rental
commitments for future years ending August 31 for all non-cancelable leases
having initial or remaining terms of one or more years are as follows:
<TABLE>
<S> <C>
2001 $360,000
2002 293,000
2003 7,000
--------
$660,000
========
</TABLE>
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 $403,000, $512,000, and $407,000, during fiscal 2000, 1999 and
1998, respectively.
12. OPERATING SEGMENTS
The Company's products comprise a single operating segment. No significant
assets are maintained outside the United States. Sales are made at a variety of
customers throughout the United States. Sales to two separate customers
accounted for 33.4% and 15.7%, respectively, of the Company's net sales in the
fiscal year ended August 31, 2000. Three customers accounted for 26.5%, 25.7%,
and 10.3%, respectively, of the Company's trade receivable balance at August 31,
2000.
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 $32,000 was received during the year ended August 31, 2000.
24
<PAGE> 25
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. TENDER OFFERS AND RELATED PARTY TRANSACTIONS
On October 21, 1998, the Company purchased and retired 1,049,500 shares of
its outstanding common stock for $4 per share in connection with a self-tender
offer. The total cost of the transaction to the Company was approximately
$4,300,000. Cash and cash equivalents, together with proceeds from borrowings
under the new factoring agreement were used to purchase the tendered shares. The
Company's president subsequently purchased approximately 330,000 shares from its
chairman and a director at the $4 per share tender price. Additionally, the
Company purchased, as part of its ongoing stock repurchase program, 60,350
shares at an average price of $3.22 per share. 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.
Nitches purchased labor and administrative services from Kuma Sport, Inc.,
which is 40% owned by a director of Nitches, on a monthly basis, at fair market
rates. The Company purchased labor and administrative services from Kuma Sport,
Inc. for approximately $774,000 and $674,000 in the fiscal years ending August
31, 2000 and 1999, respectively.
15. EMPLOYMENT AGREEMENTS
The Company has an Employment Agreement expiring August 31, 2001 with its
President. The annual base salary through January 1, 2001, excluding bonuses and
employee benefits, is $250,000. 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 and a continuation of certain employee benefits.
16. CONTINGENCY
Management initiated a program to prepare the Company's computer systems
and applications for the year 2000. The Company 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 were modified and testing and conversion of system applications
were completed. The Company continues to assess its vendors, customers and other
third parties as to their year 2000 compliance.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended August 31, 2000 and 1999:
<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 2000:
Net sales $ 11,527 $ 9,664 $ 10,601 $ 7,679
Gross profit 2,870 2,299 3,087 2,058
Net income 558 348 646 334
Net income per weighted average
Common share .52 .33 .61 .31
Fiscal 1999:
Net sales $ 10,318 $ 5,431 $ 9,059 $ 6,665
Gross profit 2,511 1,462 2,415 1,810
Net income 370 38 107 126
Net income per weighted
Average common share .23 .03 .10 .16
</TABLE>
25
<PAGE> 26
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 "Information Concerning Nominees,
Directors and Executive Officers" in the Proxy Statement ("2000 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 November
2000, to be filed with the Commission in October 2000.
ITEM 11 - EXECUTIVE COMPENSATION
The information required as to this Item is incorporated herein by
reference from the data under the captions "Executive Officer Compensation",
"Board Compensation Committee Report on Executive Compensation" and "Employment
Agreements" in the 2000 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 2000
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 Relationships and Related
Transactions" in the 2000 Proxy Statement.
26
<PAGE> 27
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, 2000 and 1999;
Consolidated Statements of Operations for the years ended August 31, 2000,
1999 and 1998;
Consolidated Statements of Shareholders' Equity for the years ended August
31, 2000, 1999 and 1998;
Consolidated Statements of Cash Flows for the years ended August 31, 2000,
1999 and 1998;
Notes to Consolidated Financial Statements; and Independent Auditor Report
2. The following financial statement schedules of the Registrant are
included as part of this report:
Report of independent auditors on schedule
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:
<TABLE>
<S> <C>
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:
10.3.3 Executive Option Plan adopted October 3, 1989, as amended (7)
10.5.12 Lease Agreement between the Company and Broadway and 41st
Associates Limited Partnership dated August 17, 1989 (2)
10.6 Form of Indemnification Agreement for Officers and Directors (5)
10.12 Employee Stock Purchase Plan (4)
10.28 Management Services Agreement between Company and Body Drama,
Inc. dated October 9, 1991 (3)
10.30 Asset Purchase Agreement and related agreements between the
Company and Design and Source Holding Company, Ltd. effective
July 1, 1995 (8)
10.31 Employment Agreement dated May 9, 1995 between the Company and
Arjun C. Waney (8)
10.32 Employment Agreement dated May 9, 1995 between the Company and
Steven P. Wyandt (8)
10.33 Employment Agreement dated January 1, 1998 between the Company
and Arjun Waney (9)
10.34 Employment Agreement dated January 1, 1998 between the Company
and Steven P. Wyandt (9)
10.35 Documents concerning offer to purchase shares pursuant to a
tender offer dated August 18, 1998 (9)
10.36 Employment agreement dated September 1, 1998 between the Company
and Steven P. Wyandt
11 Computation of earnings per share
</TABLE>
27
<PAGE> 28
<TABLE>
<S> <C>
See Note 2 of Notes to Consolidated Financial Statements
21 Subsidiaries of the Registrant (4)
24 Power of Attorney regarding authority to documents to be filed
with the Commission (4)
27 Financial Data Schedule
</TABLE>
(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 Form S-1 filed on August 26, 1991 by Body
Drama, Inc., Commission file number 33-42417, Exhibit 10.2.
(4) Incorporated by reference from Registrant's Form 10-K filed on November
21, 1991 for the fiscal year ended August 31, 1991.
(5) Incorporated by reference from Registrant's Form 10-K filed on November
23, 1992 for the fiscal year ended August 31, 1992.
(6) Incorporated by reference from Schedule 13E-4 filed on July 20, 1995.
(7) Incorporated by reference from Registrant's Definitive Proxy Statement
filed November 13, 1995.
(8) Incorporated by reference from Registrant's Form 10-K filed on November 3,
1995 for the fiscal year ended August 31, 1995.
(9) Incorporated by reference in Schedule 13E-4 filed with the SEC on August
18, 1998 and amendments related thereto.
28
<PAGE> 29
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: October 31, 2000
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>
President, Chief Executive Officer
(Principal Executive Officer), Chief
Financial Officer (Principal
/s/ Steven P. Wyandt Financial Officer) and Director October 31, 2000
----------------------------------
Steven P. Wyandt
/s/ Arjun C. Waney Director October 31, 2000
----------------------------------
Arjun C. Waney
/s/ Eugene B. Price II Director October 31, 2000
----------------------------------
Eugene B. Price II
/s/ Luther A. Henderson Director October 31, 2000
----------------------------------
Luther A. Henderson
/s/ William L. Hoese Director October 31, 2000
----------------------------------
William L. Hoese
</TABLE>
29
<PAGE> 30
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 13, 2000 appearing in item
8 in this Annual Report of Form 10-K also included an audit of the information
included in the financial statement schedule listed in item 14(a) of this Form
10-K. In our opinion, the information 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 13, 2000
--------------------------------------------------------------------------------
30
<PAGE> 31
SCHEDULE II
NITCHES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Additions
--------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
of Year Expenses Accounts Deductions of Year
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended August 31, 1998
Allowance for doubtful accounts &
sales returns $ 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
Year ended August 31, 1999
Allowance for doubtful accounts &
sales returns $ 275,000 $ 554,000 $ 455,000 $ 374,000
Inventory markdown allowance $ 130,000 $ 229,000 $ 160,000 $ 199,000
Note receivable reserve $ 600,000 -- -- $ 600,000
Year ended August 31, 2000
Allowance for doubtful accounts &
sales returns $ 374,000 $ 300,000 $ 449,000 $ 225,000
Inventory markdown allowance $ 199,000 $ 199,000 $ 265,000 $ 133,000
Note receivable reserve $ 600,000 -- -- $ 600,000
</TABLE>
31
<PAGE> 32
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
*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
*10.3.3 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
*10.30 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
*10.36 Employment Agreement dated September 1, 1998 between the Company
and Steven P. Wyandt
11 Computation of earnings per share. See Note 2 of Notes to
Consolidated Financial Statements
*21 Subsidiaries of the Registrant
*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 27.
32
