<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 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. 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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ITEM 2 - PROPERTIES
The Company leases two showrooms in New York and one in Los Angeles with an
aggregate monthly gross rental of approximately $34,000, excluding monthly
sublease income of approximately $20,000. The Los Angeles showroom lease expires
in July 2000 and the New York leases expire in September 2000 and February 2000.
The Company has subleased approximately 80% of the larger New York showroom on
substantially the same terms and at the same lease rate as that paid by the
Company to the landlord. 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, 1999.
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 1999.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock trades on The NASDAQ SmallCap Market under the
symbol NICH. The number of record holders of the Common Stock was 132 on
November 5, 1999. The Company believes that there are a significant number of
beneficial owners of its Common Stock whose shares are held in "street name".
The closing sales price of the Common Stock on November 5, 1999 was $3.75 per
share.
The high and low stock closing sale prices, adjusted for a 2-for-1 stock
split effective on May 4, 1998, for each fiscal quarter of the last two years
were as follows:
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
November 30, 1997 3 7/16 2 9/16
February 28, 1998 3 13/32 2 1/2
May 31, 1998 3 5/16 2 9/16
August 31, 1998 3 9/16 2 1/8
November 30, 1998 3 3/8 2 5/8
February 28, 1999 3 3/4 2 5/8
May 31, 1999 3 23/32 2 3/16
August 31, 1999 4 3 1/4
</TABLE>
On October 29, 1999, the Company announced a special dividend of $.25 per
share to be paid on December 1, 1999 to the holders of record as of November 17,
1999. However, the Company has not resumed a quarterly dividend policy.
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ITEM 6 - SELECTED FINANCIAL DATA (In thousands, except per share amounts)
<TABLE>
<CAPTION>
OPERATING RESULTS: 1999 1998 1997 1996 1995
------------------ ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales (1) $ 31,473 $ 31,041 $ 48,414 $ 54,381 $ 83,846
Cost of goods sold 23,275 23,776 36,190 40,396 63,274
----------------------------------------------------------------
8,198 7,265 12,224 13,985 20,572
Selling, general and
administrative expenses 7,267 8,437 11,888 12,547 19,795
Restructuring charge 1,803
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Income (loss) from operations 931 (1,172) 336 1,438 (1,026)
Gain on sale of product lines 563
Other income 164 178 151 319 355
Interest income (expense), net (44) 190 (167) (52) (2)
----------------------------------------------------------------
Income (loss) before income
taxes 1,051 (804) 320 1,705 (110)
Provision (benefit) for
income taxes
410 (807) 125 279 (269)
----------------------------------------------------------------
Income before minority
interest 641 3 195 1,426 159
Minority interest (55)
----------------------------------------------------------------
Net income $ 641 $ 3 $ 195 $ 1,426 $ 214
================================================================
Earnings per share:
Basic $ .52 $ .00 $ .08 $ .57 $ .04
================================================================
Diluted $ .52 $ .00 $ .08 $ .55 $ .04
================================================================
Cash dividends per common
share $ .00 $ .00 $ .00 $ .50 $ .00
================================================================
</TABLE>
(1) See Management's Discussion and Analysis on page 10.
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<TABLE>
<CAPTION>
FINANCIAL POSITION: 1999 1998 1997 1996 1995
------------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 201 $ 1,338 $ 955 $ 2,197 $ 10,485
Receivables 3,302 5,435 7,029 6,484 10,719
Income taxes receivable -- 5 41 261 459
Inventories 4,553 5,340 4,272 7,044 6,680
Total current assets 8,993 12,595 13,886 17,568 29,971
Total assets 9,786 13,782 15,079 18,179 30,966
Accounts payable and
accrued expenses 2,954 3,211 2,377 5,359 8,433
Total current liabilities 2,954 3,211 2,377 5,359 8,433
Shareholders' equity 6,832 10,571 11,681 11,724 21,437
Other Financial Information:
----------------------------
Profitability:
Gross margin 26.0% 23.4% 25.2% 25.7% 24.5%
Operating margin (deficit) 3.0% (3.8%) .7% 2.6% (1.2%)
Net income as percent
of net sales 2.0% -- .4% 2.6% .3%
Liquidity:
Current ratio 3.04 3.92 5.84 3.28 3.55
Working capital $ 6,039 $ 9,384 $ 11,509 $ 12,209 $ 21,538
Share data:
Weighted average number of
common shares (000's):
Basic 1,226 2,218 2,420 2,421 4,954
Diluted 1,226 2,203 2,536 2,491 4,954
Number of common shares
outstanding at year end 1,065 2,012 2,344 2,420 4,796
</TABLE>
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
YEARS ENDED AUGUST 31, 1998 AND 1997
Net sales for the fiscal year ended August 31, 1998 decreased approximately
$17.0 million (35.9%) compared to the fiscal year ended August 31, 1997. The
decrease was due primarily to the sale of the dress product line which took
place effective September 1, 1997 and the discontinuance of the activewear
product line January 1998. These product lines contributed approximately $14.0
million to net sales in the fiscal year ended August 31,1997.
Gross margins decreased from 25.2% for the fiscal year ended August 31,
1997 to 23.4% for the fiscal year ended August 31, 1998. The sale of the dress
product line, the discontinuance of the activewear product line, and the reduced
profit margins in the sleepwear product line contributed to the decrease in
gross margins by .3%, .7%, and .8% respectively.
Selling, general and administrative expenses decreased in dollar amount
from $11.9 million in fiscal 1997 to $8.4 million in fiscal 1998, but increased
as a percent of net sales (24.5% in fiscal 1997 and 27.2% in fiscal 1998). The
decrease in dollar amount was due to the Company's reduction in certain
expenses, such as salaries and commissions, associated with restructuring. The
increase as a percentage of sales is due to the loss in sales volume.
Interest expense increased in fiscal 1998 due to a nonrecurring assessment
imposed in fiscal 1997 by the Internal Revenue Service in connection with the
audit of the Company's federal tax returns for fiscal years 1992 through 1994.
The audit has been completed and the Company has paid all taxes, penalties, and
interest owing as of October 31, 1997. Interest income decreased in fiscal 1998
due to payments received on the purchase agreement for the dress product line
effective September 1, 1998.
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The Company's benefit for income taxes of $807,000 is primarily a result of
the merger of Body Drama, Inc. into Nitches, Inc. as of August 31, 1998. A
deferred tax liability relating to the gain recognized in connection with a sale
of stock in an initial offering of Body Drama in 1991 was eliminated and a
deferred tax benefit was recorded.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital of $6.0 million at August 31, 1999 decreased
from the August 31, 1998 level of $9.4 million, while the Company's current
ratio decreased from 3.92:1 at August 31, 1998 to 3.04:1 at August 31, 1999. The
principal reason for the decrease in working capital and in current ratio was
the Company's stock repurchases aggregating to $4.5 million during the fiscal
year.
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, 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 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, 1999 was approximately $313,000 of which approximately
$256,000 has been collected through November 5, 1999.
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 8.25%) 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, 1999, the Company had outstanding letters
of credit of approximately $5.9 million for the purchase of finished goods,
which had been opened, through CIT. Under the Discount Factoring Agreement, the
Company is required to maintain $5 million of net worth and $5 million of
working capital. The Discount Factoring Agreement can be terminated by CIT on
60-days 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. has resulted in the
elimination of the potential liability and a resulting increase in the book
value of the Company.
11
<PAGE> 12
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, 1999. The amount of such sales depends on several factors, including
general economic conditions, market conditions within the apparel industry, the
desirability of the styles held in inventory and competitive pressures from
other garment suppliers.
The Company's inventory decreased from $5.3 million at August 31, 1998 to
$5.0 million at August 31, 1999. The Company has established an inventory
markdown reserve as of August 31, 1999, 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, 1999 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 1999, 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.
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.
YEAR 2000 ISSUE
The worldwide issue which has arisen regarding the arrival of the
year 2000 is the result of computer programs being written using two digits
rather than four digits to define the applicable year. Many computer programs
that have time sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. Furthermore, they may not recognize the year
2000 as a leap year. If the Company did not ensure that these were corrected in
its systems, this could result in a system failure or miscalculations causing
disruptions of operations including a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company also faces risk from the Year 2000 issues affecting its
suppliers, customers and service providers. This risk can stem from the general
issue of those entities' ability to conduct their business, as well as the
specific issue of communication and integration issued between the Company's
computer systems and those entities' systems. Manufacturers of clothing may be
experiencing power interruptions or the failure of computerized machinery or
machinery with embedded logic as a result of the Year 2000 issue. Management
believes that the risk associated with such problems can be remediated by moving
production to alternate suppliers who are not adversely affected, but there can
be no assurance of their availability or that the change will not result in an
interruption in service or an increase in cost resulting in reduced
profitability. The Company receives electronic purchase orders from certain
large customers. In the event that the system for delivering electronic purchase
orders were to fail, the customers would have to return to paper purchase orders
and the Company may experience some interruption in the placement of orders for
merchandise.
12
<PAGE> 13
The Company has completed the remediation of its year 2000 exposure
as it pertains to internal systems, and continues to assess key customer and
supplier compliance. The internal systems include all traditional data
processing computer systems and all control, communication, and reporting
equipment such as security, telephones, and timeclocks. Because the Company has
purchased all of its critical systems (hardware and software) from third
parties, it did not incur any material costs as the updates were provided under
maintenance contracts.
The Company has initiated communications with all of its key
customers and suppliers to determine the extent to which the Company is
vulnerable based upon those third parties' failure to remediate their own year
2000 issues. The Company has completed testing with those third parties
(exchanges of critical information such as orders, purchases, invoices, fund
transfers, et al.). Part of the process is to provide mutual contingency plans.
Formal contingency plans covering approximately 90% of the Company's backlog
will be in place as of December 31, 1999; however, at this time, there can be no
assurance that the systems of other companies on which the Company relies will
be converted on a timely basis and would not have material adverse effect on the
Company.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in the annual report on Form 10K under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations", as
well as oral statements that may be made by the Company or by officers,
directors or employees of the Company acting on the Company's behalf, that are
not historical fact constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements involve
known and unknown risks and uncertainties which may cause the Company's actual
results in future periods to differ materially from forecasted results. Those
risks include a softening of retailer or consumer acceptance of the Company's
products, pricing pressures and other competitive forces, or unanticipated loss
of a major customer. In addition, the Company's business, operations and
financial condition are subject to reports and statements filed from time to
time with the Securities and Exchange Commission.
13
<PAGE> 14
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NITCHES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FILED WITH
THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditor's Report 15
Consolidated Balance Sheets at August 31, 1999 and 1998 16
Consolidated Statements of Income for the years ended August 31, 1999, 1998 and 1997 17
Consolidated Statements of Shareholders' Equity for the years ended August 31, 1999, 1998 and 1997 18
Consolidated Statements of Cash Flows for the years ended August 31, 1999, 1998 and 1997 19
Notes to consolidated financial statements 20
</TABLE>
14
<PAGE> 15
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, 1999 and 1998 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, 1999. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended August 31, 1999 in conformity with generally accepted accounting
principles.
Moss Adams LLP
Los Angeles, California
October 15, 1999
15
<PAGE> 16
NITCHES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
August 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 201,000 $ 1,338,000
Receivables:
Trade accounts, less allowances ($374,000 in 1999
and $275,000 in 1998) 3,267,000 5,306,000
Income taxes receivable -- 5,000
Due from affiliates and employees 35,000 124,000
----------- -----------
3,302,000 5,435,000
Inventories, net 4,553,000 5,340,000
Deferred income taxes 347,000 323,000
Other current assets 590,000 159,000
----------- -----------
Total current assets 8,993,000 12,595,000
Furniture, fixtures and equipment, net 83,000 137,000
Deferred income taxes 647,000 987,000
Other assets 63,000 63,000
----------- -----------
$ 9,786,000 $13,782,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,610,000 $ 2,283,000
Accrued expenses 344,000 928,000
----------- -----------
Total current liabilities 2,954,000 3,211,000
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 1999 and 2,012,030 shares in 1998
issued and outstanding 805,000 1,308,000
Retained earnings 6,027,000 9,263,000
----------- -----------
Total shareholders' equity 6,832,000 10,571,000
----------- -----------
$ 9,786,000 $13,782,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
16
<PAGE> 17
NITCHES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
YEAR ENDED AUGUST 31,
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 31,473,000 $ 31,041,000 $ 48,414,000
Cost of goods sold 23,275,000 23,776,000 36,190,000
------------ ------------ ------------
Gross profit 8,198,000 7,265,000 12,224,000
Selling, general
and administrative expenses 7,267,000 8,437,000 11,888,000
------------ ------------ ------------
Income (loss) from operations 931,000 (1,172,000) 336,000
Other income 164,000 178,000 151,000
Interest income (expense), net (44,000) 190,000 (167,000)
------------ ------------ ------------
Income (loss) before income taxes 1,051,000 (804,000) 320,000
Provision (benefit) for income taxes 410,000 (807,000) 125,000
------------ ------------ ------------
Net income $ 641,000 $ 3,000 $ 195,000
============ ============ ============
Earnings per share:
Basic and diluted $ .52 $ .00 $ .08
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
17
<PAGE> 18
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, 1996 1,210,296 $ 2,659,000 $ 9,065,000 $ 11,724,000
Net income 195,000 195,000
Purchases and retirement
of subsidiary shares (1,000) (1,000)
Purchases and retirement (37,700) (237,000) (237,000)
of common stock
------------ ------------ ------------ ------------
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
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
18
<PAGE> 19
NITCHES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 641,000 $ 3,000 $ 195,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 91,000 200,000 288,000
Loss on disposal of fixed assets -- 16,000 --
(Increase) decrease in trade receivables 2,039,000 1,600,000 (824,000)
Decrease in income taxes receivable 5,000 36,000 220,000
(Increase) decrease in inventories 787,000 (1,068,000) 2,773,000
(Increase) decrease in deferred income taxes 480,000 (863,000) (43,000)
(Increase) decrease in other current assets (342,000) 659,000 (460,000)
(Increase) decrease in other assets -- 162,000 (96,000)
Increase (decrease) in accounts payable
and accrued expenses (257,000) 833,000 (1,772,000)
----------- ----------- -----------
Net cash provided by operating activities 3,444,000 1,578,000 281,000
----------- ----------- -----------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (37,000) (82,000) (75,000)
----------- ----------- -----------
Net cash used by investing activities (37,000) (82,000) (75,000)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid -- -- (1,210,000)
Purchases and retirement of common stock (4,544,000) (1,113,000) (237,000)
Purchases and retirement of subsidiary shares -- -- (1,000)
----------- ----------- -----------
Net cash used by financing activities (4,544,000) (1,113,000) (1,448,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (1,137,000) 383,000 (1,242,000)
Cash and cash equivalents at beginning of year 1,338,000 955,000 2,197,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 201,000 $ 1,338,000 $ 955,000
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest $ 263,000 $ 94,000 $ 97,000
=========== =========== ===========
Income taxes $ 23,000 $ 57,000 $ 96,000
=========== =========== ===========
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.
19
<PAGE> 20
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 intercompany transactions and balances
are eliminated in consolidation.
Financial Instruments:
Financial instruments consist of cash and cash equivalents, accounts
receivable, and accounts payable. The carrying amount approximates fair value
because of their short maturity.
Concentration of Credit Risk:
The Company sells a majority of its accounts receivable to a financial
institution. Under the agreement, the financial institution purchases trade
accounts receivable and assumes substantially all credit risks. The Company is
responsible for following up on adjustments claimed by customers. Accounts which
are not sold remain the credit risk of the Company. Such accounts are diverse
and are subject to credit approval and ongoing evaluation by the Company.
Management considers the credit risk with respect to all receivables to be low.
Historically, the Company has not experienced significant loss due to
uncollectible accounts receivable.
Cash balances are periodically maintained in amounts in excess of FDIC
insured limits in high quality financial institutions. Management considers the
risk of loss to be low.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Furniture, Fixtures and Equipment:
Furniture, fixtures and equipment are stated at cost. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the related assets, which range from three to ten years. Leasehold improvements
are amortized using the straight-line method over the shorter of the estimated
useful lives of the assets or the remaining term of the related lease.
Maintenance and repair costs are charged to expense as incurred. When assets are
retired or sold, the assets and accumulated depreciation are removed from the
respective accounts and any profit or loss on the disposition is credited or
charged to income.
20
<PAGE> 21
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share:
The computation of net income per common share is based on the weighted
average number of common shares outstanding plus common share equivalents
arising from dilutive stock options.
The weighted average number of common shares and common share equivalents
outstanding for basic and diluted earnings per share was 1,225,914 for fiscal
1999; 2,218,479 and 2,202,837 respectively, for fiscal 1998; 2,419,559 and
2,535,972 respectively, for fiscal 1997.
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:
In February 1998, the Financial Accounting Standards Board (FASB) also
issued statement No. 132 (SFAS 132), "Employers Disclosures about Pension and
Other Post Retirement Benefits." This pronouncement revises the requirements for
disclosure made by employers pertaining to pension plans and other post
retirement benefits. SFAS 132 will be effective for the Company in fiscal 2000.
Management believes this pronouncement will not have a material effect on the
Company's financial statements.
In June 1998, the FASB also issued SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 will be effective for the Company
in fiscal 2000. Management believes this pronouncement will not have a material
effect on the Company's financial statements.
21
<PAGE> 22
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Fabric and trim $ 76,000 $ 417,000
Finished goods 4,477,000 4,923,000
---------- ----------
$4,553,000 $5,340,000
========== ==========
</TABLE>
4. FURNITURE, FIXTURES AND EQUIPMENT
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Leasehold improvements $ 259,000 $ 259,000
Computer equipment 282,000 258,000
Vehicles 46,000 46,000
Furniture, fixtures and other equipment 48,000 39,000
---------- ----------
635,000 602,000
Less accumulated depreciation and amortization 552,000 465,000
---------- ----------
$ 83,000 $ 137,000
========== ==========
</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, August 31,
1999 1998
----------- -----------
<S> <C> <C>
Receivables assigned to factor:
Non-recourse $ 4,487,000 $ 4,814,000
Recourse 36,000 707,000
Advances from factor (1,166,000) (276,000)
----------- -----------
Due from factor 3,357,000 5,245,000
Nonfactored accounts receivable 284,000 336,000
Allowance for customer credits and doubtful accounts (374,000) (275,000)
----------- -----------
$ 3,267,000 $ 5,306,000
=========== ===========
Contingent liabilities for irrevocable letters of credit $ 5,885,000 $ 6,313,000
=========== ===========
</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.
22
<PAGE> 23
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 $ 393,000 -- $(162,000)
State 100,000 $ (1,000) (29,000)
--------- --------- ---------
493,000 (1,000) (191,000)
--------- --------- ---------
Deferred:
Federal 348,000 (685,000) 268,000
State 62,000 (121,000) 48,000
--------- --------- ---------
410,000 (806,000) 316,000
NOL utilized (493,000) -- --
--------- --------- ---------
(83,000) (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>
23
<PAGE> 24
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Non-current assets:
Tax loss carryforward $ 954,000 $ 1,283,000
Other 6,000 17,000
Less valuation allowance (313,000) (313,000)
----------- -----------
$ 647,000 $ 987,000
=========== ===========
</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.
The Company has a federal consolidated net operating loss carryforward of
approximately $2.4 million which expires between 2014 and 2017. This federal tax
loss may be utilized by Nitches, Inc. but not its foreign subsidiaries. The
Company also has a consolidated state net operating loss carryforward of
approximately $1.7 million which expires between 2000 and 2004.
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,
---------------------------------
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% (34.0)% 34.0%
State income taxes, net of 6.1% (2.9)% 6.1%
Federal benefit
Merger of subsidiary, net -- (75.7)% --
Change in valuation
allowance -- 6.3% --
Foreign subsidiaries tax effect -- .8% (.9)%
Nondeductible entertainment
expenses (.4)% 1.4% --
Other items (.7)% 3.7% (.2)%
---------------------------------
Effective rate 39.0% (100.4)% 39.0%
=================================
</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 1999, 1998 or 1997.
24
<PAGE> 25
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS
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 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, 1999.
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 1998 and 1997 consistent with the provisions of SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Net earnings - as reported $ 641,000 $ 3,000 $ 195,000
Net earnings (loss) - pro forma $ 641,000 ($ 53,000) $ 139,000
Earnings per basic share - as reported $ .52 $ .00 $ .08
Earnings (loss) per basic share - pro forma $ .52 ($ .02) $ .06
Earnings per diluted share - as reported $ .52 $ .00 $ .08
Earnings (loss) per diluted share - pro forma $ .52 ($ .02) $ .05
</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,
1999, no options are outstanding.
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>
2000 $462,000
2001 261,000
2002 17,000
--------
$740,000
========
</TABLE>
In connection with the sale of certain product lines in August 1995 (see
Note 13), the Company subleased a portion of one of its New York showroom
facilities. The above schedule of lease commitments excludes sublease income of
approximately $20,000 per month.
The Company's leases for real property are generally subject to rent
escalation based on increases in the consumer price or other indices with
certain minimum and maximum increases. Rent expense, net of sublease income, was
approximately $512,000, $407,000, and $582,000, during fiscal 1999, 1998 and
1997, respectively.
25
<PAGE> 26
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 28.5% and 13.0%, respectively, of the Company's net sales in the
fiscal year ended August 31, 1999. These same two customers accounted for 27.6%
and 26.7%, respectively, of the Company's trade receivable balance at August 31,
1999.
Sales to two customers accounted for 17.9% and 13.8%, respectively, of the
Company's net sales in fiscal 1998. One customer accounted for 10.8% of the
Company's net sales in fiscal 1997. Three customers accounted for 14.7%, 13.0%,
and 11.5%, respectively, of the Company's trade receivable balance at August 31,
1998.
13. SALE OF PRODUCT LINES
The Company holds a $600,000 note receivable relating to the sale of
product lines in 1995. The Company fully reserved the note and is accounting for
it on a cost recovery basis, recording income when the buyer makes payments on
the note. Interest payments of 4% per year are payable until March 15, 2001, at
which time the principal and any unpaid interest are due and payable. Interest
income of $24,000 was received during the year ended August 31, 1999.
14. TENDER OFFERS AND RELATED PARTY TRANSACTIONS
On October 21, 1998, the Company purchased and retired approximately
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 $4,500,000. 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.
During fiscal year 1999 the Company rented a 30,000 square foot warehouse
and office building from Kuma Sport, Inc., which is 40% owned by a director of
Nitches. The Company paid rent of $15,000, on a month-to-month basis, which
management believes is consistent with the fair market value of the facility.
Nitches also purchased labor and administrative services from Kuma Sport on a
monthly basis, as needed, at fair market rates. The Company purchased labor and
administrative services from Kuma Sport, Inc. for approximately $674,000 and
$1.6 million in the fiscal years ending August 31, 1999 and 1998, 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.
26
<PAGE> 27
NITCHES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONTINGENCY
Management has initiated a program to prepare the Company's computer
systems and applications for the year 2000. The Company has incurred internal
staff costs and other expenses related to infrastructure and facilities
enhancements necessary to prepare the systems for the year 2000. Certain
internal applications have already been modified and testing and conversion of
system applications has been sufficiently completed. The Company is also
continuing to assess its vendors, customers and other third parties as to their
year 2000 compliance.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended August 31, 1999 and 1998:
<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 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
Fiscal 1998:
Net sales $ 9,298 $ 5,959 $ 8,483 $ 7,301
Gross profit 2,465 1,250 2,016 1,534
Net income (loss) 50 (434) 79 308
Net income (loss) per weighted
average common share .02 (.19) .02 .15
</TABLE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE> 28
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 ("1999 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 in November 1999.
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 1999 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 1999
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 1999 Proxy Statement.
28
<PAGE> 29
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, 1999 and 1998;
Consolidated Statements of Operations for the years ended August 31, 1999,
1998 and 1997;
Consolidated Statements of Shareholders' Equity for the years ended August
31, 1999, 1998 and 1997;
Consolidated Statements of Cash Flows for the years ended August 31, 1999,
1998 and 1997;
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:
Reports of independent auditors on financial statement schedules
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not required, are
inapplicable or the information is otherwise shown in the financial
statements or notes thereto.
3 The following exhibits are filed herewith or incorporated by
reference as indicated. Exhibit numbers refer to Item 601 of
Regulation S-K:
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)
29
<PAGE> 30
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
See Note 2 of Notes to Consolidated Financial Statements
21 Subsidiaries of the Registrant(4)
23 Consent of Independent Certified Public Accountants (Moss
Adams LLP)
24 Power of Attorney regarding authority to documents to be filed
with the Commission(4)
27 Financial Data Schedule
(b) Exhibits and Reports on Form 8-K. None
- --------------------------------------------------------------------------------
FOOTNOTES
(1) Incorporated by reference from Registrant's Form 10-K filed on November
23, 1988 for the fiscal year ended August 31, 1988.
(2) Incorporated by reference from Registrant's Form 10-K filed on November
21, 1989 for the fiscal year ended August 31, 1989.
(3) Incorporated by reference from 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.
30
<PAGE> 31
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 12, 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 12, 1999
- ------------------------------- (Principal Executive Officer), Chief
Steven P. Wyandt Financial Officer (Principal Financial Officer)
and Director
/s/ Arjun C. Waney Director November 12, 1999
- -------------------------------
Arjun C. Waney
/s/ Eugene B. Price II Director November 12, 1999
- -------------------------------
Eugene B. Price II
/s/ Luther A. Henderson Director November 12, 1999
- -------------------------------
Luther A. Henderson
/s/ William L. Hoese Director November 12, 1999
- -------------------------------
William L. Hoese
</TABLE>
31
<PAGE> 32
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 15, 1999 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 15, 1999
- -------------------------------------------------------------------------------
32
<PAGE> 33
SCHEDULE II
NITCHES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at End
of Year Expenses Accounts Deductions of Year
---------- ---------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Year ended August 31, 1997
Allowance for doubtful accounts $ 425,000 $ 882,000 $ 955,000 $ 352,000
Inventory markdown allowance $ 333,000 $ 566,000 $ 695,000 $ 204,000
Note receivable reserve $ 950,000 -- $ 350,000 $ 600,000
Year ended August 31, 1998
Allowance for doubtful accounts $ 352,000 $1,292,000 $1,369,000 $ 275,000
Inventory markdown allowance $ 204,000 $ 360,000 $ 434,000 $ 130,000
Note receivable reserve $ 600,000 -- -- $ 600,000
Year ended August 31, 1999
Allowance for doubtful accounts $ 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
</TABLE>
33
<PAGE> 34
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
23 Consent of Independent Certified Public Accountants (Moss Adams
LLP)
*24 Power of Attorney regarding authority to sign documents to be
filed with the Commission
27 Financial Data Schedule
</TABLE>
* Incorporated by reference; see page 29.
34
<PAGE> 1
EXHIBIT 10.36
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and effective as of September 1, 1998 by and between
NITCHES, INC., a California corporation ("Company"), and Steven P. Wyandt
("Executive"), an individual residing in the State of Texas, with reference to
the following:
WHEREAS, Executive is currently employed by the Company in the capacity
as its President, CEO, and CFO, and Executive's background, expertise, and
efforts have contributed to the success and financial strength of the Company;
and
WHEREAS, the relative rights and obligations of employers and employees
in Texas may be, in the absence of agreement or policy, subject to the
uncertainties of future changes in Texas law and judicial decisions; and
WHEREAS, the Company and Executive desire to define their respective
rights and obligations as provided herein; and
WHEREAS, the Company wishes to assure itself of the continued
opportunity to benefit from Executive's services for the period provided in this
Agreement, and Executive is willing to serve in the employ of the Company on a
full-time basis solely in accordance with the terms hereof for said period; and
WHEREAS, the Board has determined that the best interests of the Company
would be served by Executive's continued employment under the terms of this
Agreement by the Company and its Affiliates in Executive's current capacity or
such capacities as the Board may delegate to him from time to time during the
term of this Agreement.
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereby agree as follows:
1. Definitions.
(a)"Affiliate" shall mean any Person that controls or is
controlled by or under common control with the Company, whether now or hereafter
formed, including but not limited to Body Drama, Inc., a California corporation.
(b) "Agreement" means this Employment Agreement and any
amendments hereto complying with section 15(f) hereof.
(c) "Base Amount" shall have the meaning set forth in Section
280G of the Code.
(d) "Board" means the Board of Directors of the Company unless
the context otherwise requires.
(e) "Cause" means (1) Executive's personal dishonesty, gross
incompetence (which is intended to be far beyond failure to meet performance
goals), willful misconduct, conflict of interest or breach of fiduciary duty
involving intent for or obtainment of personal or family profit, willful
violation of any law, rule, or regulation to the extent detrimental to the
Company's business or reputation or the Executive's ability to perform this
Agreement, causing the issuance of a final cease-and-desist order, or a material
breach of any provision of this Agreement; or (2) the willful and continued
failure by Executive to substantially
<PAGE> 3
perform Executive's duties with the Company or its Affiliates (other than any
failure resulting from Disability) after a written demand for substantial
performance is given to Executive by the Board which demand specifically
identifies the manner in which the Board believes that Executive has not
substantially performed his duties.
(f) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(g) compensation Committee" is the committee of the Board
appointed as such under Corporations Code Section 311 to act on behalf of the
full Board in matters of executive compensation and benefits.
(h) "Disability" means physical or mental illness resulting in
Executive's absence on a full-time basis from Executive's duties with the
Company or its Affiliates for one hundred eighty (180) consecutive calendar
days, subject to the procedure referenced in Section 9(a).
(i) "Expiration" means the termination of this Agreement
(including Executive's employment hereunder) and of any further obligations of
the parties (except as specified in the Agreement) upon completion of the Term.
(j) "Fiscal Year" means the year ending August 31.
(k) (Definition not used.)
(l) "Parachute Payment" shall have the meaning set forth in
Section 280G of the Code and the regulations promulgated thereunder.
(m) "Person" means an individual, a group acting in
<PAGE> 4
concert, a corporation, a partnership, an association, a joint stock company, a
trust, any unincorporated organization or a government or political subdivision
thereof.
(n) "Retirement" or "Retire" means the Termination by Executive
of his employment with the Company and its Affiliates based upon retirement in
accordance with the Retirement Plan.
(o) "Retirement Plan" means any retirement plans of Company
applicable to Executive in effect on the date of Executive's Termination or
resignation.
(p) "Term" means the initial term of this Agreement and any
extensions hereof, as provided in Section 4.
(q) "Termination" and "Terminate(d)" means the termination of
Executive's employment hereunder for any of the following reasons unless the
context indicates otherwise: (i) Retirement, (ii) Death of Executive, (iii)
Disability, (iv) Expiration, (v) resignation by Executive, (vi) liquidation of
the Company, (vii) Termination Without Cause, and (viii) Termination for Cause.
(r) "Termination Without Cause" and "Terminate(d) Without Cause"
means the cessation of Executive's employment hereunder for any reason except
(i) a voluntary resignation by Executive, (ii) Termination for Cause, (iii)
Retirement, (iv) Disability, (v) liquidation of the Company, (vi) Death, or
(vii) Expiration.
(s) "Unexpired Term" has the meaning specified in Section
10(e)(1).
2. Employment.
The Company agrees to continue Executive in its employ,
<PAGE> 5
and Executive agrees to remain in the employ of the Company, for the period
stated in Section 4 hereof and upon the terms and conditions herein provided.
3. Position and Responsibilities.
The Company shall employ Executive in his current capacity with
the Company, and Executive shall serve the Company as such for the Term and on
the conditions hereinafter set forth. Executive agrees to perform such services
not materially inconsistent with Executive's position as shall from time to time
be assigned to Executive by the Board or its designee.
4. Term of Employment.
Subject to the provisions and conditions of this Agreement, the
period of Executive's employment under this Agreement shall be deemed to have
commenced as of Sept 1, 1998 and shall continue for a term ending on August 31,
2002. In the event the Company retains Executive as an employee following the
expiration of the Term, such employment, absent a written agreement to the
contrary, will be on an at-will basis with such compensation to which the
parties may then agree, subject to termination at any time with or without
cause, and without liability. If the Company does not retain Executive as an
employee after Expiration of the Term, Executive's employment shall cease
without further liability to Executive unless otherwise provided in this
Agreement. Executive's employment shall also terminate, and the Term of this
Agreement will expire, upon Executive's resignation, Retirement, Death or
Disability as described in Section 9(a), or upon Executive's Termination for
Cause as described in Section 9(b).
5. Duties.
<PAGE> 6
(a) The Company and Executive hereby agree that, subject to the
provisions of this Agreement, the Company shall employ Executive, and Executive
shall serve the Company as an executive for the Term of this Agreement. The
specific executive position(s) in which Executive will serve will be designated
from time to time by the Board or its Compensation Committee, with his initial
positions to be as set forth in this Agreement.
(b) In the event that Executive is assigned to a position
involving different responsibilities and duties of office than those he is
currently exercising or is provided with a different title than that stipulated
in this Agreement, then such changed position and title shall at a minimum be
equivalent to Executive's then current position and title including but not
limited to his reporting relationship within the Company.
(c) During the Term hereof, Executive shall devote substantially
all of his business time, attention, skill and efforts to the faithful
performance of the business of the Company to the fullest extent necessary to
properly discharge his duties and responsibilities hereunder, whether such
business is operated directly by the Company or through one or more of its
Affiliates. Executive's position and duties with Affiliates, if any, shall be as
identified from time to time by the Board of Directors of such Affiliate(s).
Further, with the approval of the Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or charitable, political or civic organizations,
which, in the Board's judgment, will not present any material conflict of
interest with the Company or its
<PAGE> 7
Affiliates, and will not unfavorably affect the performance of Executive's
duties pursuant to this Agreement.
6. Working Facilities.
Executive shall be furnished with a private office, secretarial
or other necessary clerical assistance, and such other facilities, amenities and
services as are presently or may hereafter be furnished to similarly situated
executives of the Company, and as are appropriate for Executive's position and
adequate for the performance of his duties hereunder.
7. Place of Performance.
The Company shall provide and the Executive shall maintain an
office located within 30 miles of the Executive's residence or such other
location as the Company and the Executive shall mutually agree upon.
8. Salary, Bonus, Expenses and Benefits.
(a) Salary. The Company shall pay Executive a base annual salary
of $250,000 or such higher amount as the Board may set in its sole discretion,
payable in at least monthly installments. Any increase in annual salary shall
not serve to limit or reduce any other obligations to Executive under this
Agreement.
(b) Bonus. In addition to said salary, Executive may receive an
annual bonus ("Bonus") for each fiscal year in an amount that is recommended by
the Compensation Committee and approved by the Board of Directors.
Executive must be employed for the entire fiscal year in order to
receive such bonus except that a pro rata portion of the Bonus shall be paid to
Executive based on the period Executive
<PAGE> 8
worked during the fiscal year in the event Executive is Terminated Without
Cause. the Board may elect in its sole discretion to pay an additional Bonus for
any year. The Bonus shall be paid within 30 days of the Company's independent
accountants' audit opinion date on the Company's annual fiscal year-end
financial statement. Executive shall also receive such additional compensation
and rights as the Board may, from time to time, expressly grant to him in its
sole discretion.
(c) Reimbursement of Expenses. The Company shall pay or
reimburse Executive, on a monthly basis, for reasonable travel, entertainment,
promotional and other expenses incurred by Executive in the performance of his
obligations under this Agreement, pursuant to Company expense reimbursement
policies in effect for all executive employees from time to time. The Company
also will reimburse Executive for initiation fees and dues associated with
membership in such professional, social, civic and service clubs of which
Executive is now a member, and which have been or are hereafter approved for
reimbursement on a case by case basis by the Board of Directors.
(d) vacation Leave. Executive shall be entitled to vacation time
each year during the Term hereof in accordance with normal Company policy for
executives of comparable tenure and position.
(e) Holidays, Leave Days, Etc.. Executive shall be entitled to
such holidays, sick leave, leaves of absence and other absences in accordance
with normal Company policy for executives of comparable tenure and position.
(f) Participation in welfare and Benefit Plans.
<PAGE> 9
During the Term hereof, in addition to the foregoing, Executive shall be
entitled to participate in (personally and/or for the benefit of his family or
other beneficiaries) any Company welfare, insurance and benefit plans that are
available to other executives of the Company of comparable tenure and position,
in accordance with the terms of such plans.
(g) Pension and Profit-Sharing Plans. In accordance with the
general terms and provisions of such plans, Executive shall be entitled to all
benefits payable under the Company's qualified profit-sharing plan, or other
present or future retirement plans or programs, which are available to other
executives of the Company of comparable tenure and position.
9. Termination.
Executive's employment during the Term may be ended by the Board
or its designee, or by Executive, as herein provided, without further obligation
or liability except as expressly provided herein:
(a) Resignation, Retirement, Death or Disability. Executive's
employment hereunder shall cease at any time by Executive's voluntary
resignation or by Executive's Retirement, Death or Disability. Disability shall
be deemed to have occurred only after the following procedure has been
satisfied: If within thirty (30) days after written notice of proposed
Termination for Disability is given to Executive by the Company, Executive has
not returned to the full-time performance of his duties, the Company may end
Executive's employment by giving written notice of Termination for Disability.
Such notice may be given by the Company following Executive's absence from
Executive's duties by reason of physical or mental disability for one hundred
fifty
<PAGE> 10
(150) consecutive calendar days.
(b) Termination for Cause. Executive's employment hereunder
shall cease upon a good faith finding of Cause by the President; provided,
however, that Executive shall be given written notice of the President's finding
of conduct by Executive amounting to Cause for such Termination, specifying the
particulars thereof.
(c) Termination Without Cause. Executive's employment may be
Terminated Without Cause upon five (5) days' notice for any reason, subject to
the payment of all amounts required by Section 10(e) hereof.
(d) Expiration. Executive's employment shall cease, or shall
continue on an at-will basis as provided in Section 4, upon the expiration of
the Term of this Agreement as provided in Section 4.
10. Payments to Executive Upon Termination.
(a) Disability or Retirement. In the event of Termination of
this Agreement due to Executive's Retirement, Death or Disability, Executive or
Executive's spouse and/or estate shall be entitled to all benefits generally
available to Company employees, or their spouses and/or estates, as of the date
of such, Disability or Retirement, without reduction, including but not limited
to payments under the plans identified in Sections 8(f) and (g).
(b) Death. In the event of Termination of this Agreement due to
Executive's death, Executive or Executive's spouse and/or estate shall be
entitled to all benefits generally available to Company executives, or their
spouses and/or estates,
<PAGE> 11
as of the date of such Death without reduction, including but not limited to
payments under the plans identified in Sections 8(f) and (g).
(c) Resignation or Expiration. In the event of Executive's
voluntary resignation, or upon Expiration, neither the Company nor any Affiliate
shall have any further obligation to Executive under this Agreement or
otherwise, except as may be expressly required by law.
(d) Termination for Cause. In the event Executive is Terminated
by the Company for Cause, neither the Company nor any Affiliate shall have any
further obligation to Executive under this Agreement or otherwise, except as may
be expressly required by law.
(e) Termination Without Cause. Upon the occurrence of a
Termination Without Cause the Company shall, as damages for breach of contract:
(1) Pay to Executive within 15 days of said termination,
a lump sum payment equal to the amount that the Executive would have received
(without reduction for the time value of money) if this Agreement would have
remained in effect, without renewal, but for such Termination Without Cause
("Unexpired Term"); and
(2) Pay to Executive a pro rata portion of the Bonus
under the terms set forth under Section 8(b).
(3) Continue to provide to Executive during the
Unexpired Term hereof, at the Company's expense, those benefits afforded to
Executive under Section 8(f) as if Executive continued to remain in the employ
of the Company or, if that is infeasible, shall compensate Executive for the
value thereof.
<PAGE> 12
(4) within ninety (90) days of the end of each plan year
during the Unexpired Term hereof, pay to Executive sums equivalent to those
which Executive would have received under Section 8(g) but for such Termination
Without Cause. The objective of this provision is to place Executive, so far as
is financially reasonable, in the same position as if he had been employed
throughout the Unexpired Term of this Agreement and any such retirement plans
continued to provide the same benefits after the Executive's Termination Without
Cause as before such Termination without Cause.
(5) The receipt of the amounts and benefits provided by
this Section 10(e) shall constitute the sole remedy of Executive as against the
Company, its Affiliates and their respective past, present and future officers,
directors, shareholders, employees and agents, in the event of a Termination
Without Cause, or other material breach by the Company of the terms of this
Agreement unless specified to the contrary herein.
(f) Liquidation of Company. In the event the Company plans to
liquidate, prior to the liquidation of the Company the Company shall pay to
Executive a lump sum payment equal to the remaining amount that would have been
due Executive pursuant to Section 8(a) for the remainder of the Term of this
Agreement; provided, however, that if the liquidation occurs after August 31,
1999, Executive shall also receive an additional one year's salary set forth in
Section 8(a). In the event of a liquidation of the Company, this Agreement shall
terminate and the Company shall have no further obligation to Executive except
as set forth herein.
<PAGE> 13
(g) Payment Limitation. Notwithstanding anything to the contrary
in this Agreement which is treated as a Parachute Payment, the total
compensation paid to Executive pursuant to this Agreement, together with any
other payment or the value of any benefit received or to be received by the
Executive which is treated as a Parachute Payment shall not exceed 2.99 times
the Executive's Base Amount. In the event a reduction of the payments set forth
in this Agreement is required pursuant to this Section, the Executive may select
the compensation which will be reduced in order to fall within the 2.99 times
Base Amount limitation.
(h) Source of Payments. All payments provided in Section 10
shall be paid in cash from the general funds of the Company, and no special or
separate fund need be established and no other segregation of assets need be
made to assure payment. Executive shall have no right, title, or interest
whatever in or to any investments which the Company may make to aid the Company
in meeting its obligations hereunder.
(i) Sole Remedy. The receipt of the amounts described in this
Section 10 shall constitute the Executive's sole remedy for breach of this
Agreement against the Company, its Affiliates, and their respective officers,
directors, shareholders, employees and agents.
11. Confidential Information.
During the Term of this Agreement and thereafter, Executive
shall not, to the detriment of the Company or its Affiliates, disclose or reveal
to any unauthorized person any confidential information relating to the Company
or its Affiliates, or to any of the businesses operated by them, and
<PAGE> 14
Executive confirms that such information constitutes the exclusive property of
the Company and its Affiliates.
12. Federal Income Tax Withholding.
The Company may withhold from any compensation or benefits
payable under this Agreement, including amounts payable under Section 10, all
federal, state, city or other taxes or deductions as shall be required pursuant
to any law, governmental regulation or ruling.
13. Effect of Prior Agreements.
This Agreement contains the entire understanding between the
parties hereto with respect to the subject matter hereof and supersedes any
prior or contemporaneous agreements, representations or understandings, whether
oral or written, express or implied, between the Company, its Affiliates, and
Executive with respect to Executive's employment by the Company. The parties do
not intend for this Agreement to supersede or invalidate the terms of any
written employee benefit or welfare plans with the Company covering Executive,
unless necessary to carry out the purposes of this Agreement.
14. Arbitration.
Any controversy between the parties hereto, including the
construction, application or breach of any of the terms, covenants or conditions
of this Agreement, and all claims relating to or arising from Executive's
employment or termination, including all statutory claims (including but not
limited to all statutes dealing with employment discrimination), shall on timely
written request of one party served upon the other, be submitted to confidential
arbitration and be governed
<PAGE> 15
by the California Arbitration Act as set forth in the California Code of Civil
Procedure (presently Sections 1280 et seq.). The parties agree that any written
request for arbitration must be made within twelve months after the initiating
party first learned or should have learned in the exercise of reasonable
diligence of the essential facts upon which the claim is based, or first
suffered any harm, or first learned or should have learned in the exercise of
reasonable diligence of the breach of this Agreement, whichever is earlier. Any
claim not raised within such time limitation shall be waived and forever barred.
The arbitration shall take place in the City of San Diego, California. The
parties may agree upon one arbitrator, but in the event they cannot agree the
arbitrator shall be a retired judge designated by the then Presiding Judge of
the San Diego Superior Court. Arbitration shall be the exclusive remedy of
Executive and the Company and the award of the arbitrator shall be final and
binding upon the parties.
15. General Provisions.
(a) Nonassignability. Neither this Agreement nor any right or
interest hereunder shall be assignable by Executive or Executive's beneficiaries
or legal representatives without the Company's prior written consent, provided,
however, that nothing in this Section 15(a) shall preclude (i) Executive from
designating a beneficiary to receive any benefits payable hereunder upon his
death, or (ii) the executors, administrators, or other legal representatives of
Executive or his estate from assigning any rights hereunder to the person or
persons entitled thereto.
(b) Assumption. The Company shall require any
<PAGE> 16
successor in interest (whether direct or indirect or as a result of purchase,
merger, consolidation, Change in Control or otherwise) to all or substantially
all of the business and/or assets of the Company to expressly assume and agree
to perform the obligation under this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
(c) No Attachment. Except as required by law, no right to
receive payments under this Agreement shall be subject to anticipation,
commutation, alienation, sale, assignment, encumbrance, charge, pledge, or
hypothecation or to execution, attachment, levy, or similar process of
assignment by operation of law, and any attempt, voluntary or involuntary, to
effect any such action shall be null, void and of no effect.
(d) Effect of Termination of Agreement. Notwithstanding any
Termination of this Agreement and Executive's employment in accordance with the
provisions hereof, such Termination shall not be construed to relieve any party
of the obligation to pay any sums which are accrued and owing under this
Agreement unpaid as of the date of such Termination, or to affect benefits which
have become vested either pursuant to the terms hereof or to the plan under
which such benefits have been granted.
(e) Binding Agreement. This Agreement shall be binding upon, and
inure to the benefit of, Executive, the Company and its Affiliates, and their
respective heirs, successors and assigns. Each party acknowledges that no
representations, inducements, promises, or agreements have been made by any
party,
<PAGE> 17
or anyone acting on behalf of any party, which are not embodied herein and that
no other agreement, statement, or promise not contained in this Agreement shall
be valid or binding on either party except as provided herein.
(f) Amendment or Augmentation of Agreement. This Agreement may
not be modified or amended except by an instrument in writing signed by the
parties hereto. unless expressly agreed to in writing by the parties hereto, no
additional rights or compensation, even if given or accepted, shall be deemed to
modify or otherwise affect the express terms and conditions of this Agreement.
(g) Waiver. No term or condition of this Agreement shall be
deemed to have been waived, nor shall there be any estoppel against the
enforcement of any provision of this Agreement except by written instrument of
the party charged with such waiver or estoppel. No such waiver shall be deemed a
continuing waiver unless specifically stated therein, and each waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
(h) Severability. If, for any reason, any provision of this
Agreement is held invalid, such invalidity shall not affect any other provision
of this Agreement not held so invalid, and each such other provision shall to
the full extent consistent with law continue in full force and effect. If any
provision of this Agreement shall be held invalid in part, such invalidity shall
in no way affect the rest of such provision not held so invalid, and the rest of
such provision together with all other
<PAGE> 18
provision of this Agreement shall, to the full extent consistent with law,
continue in full force and effect.
(i) Notices. All notices, requests, demands and other
communications hereunder shall he in writing and shall be deemed to have been
duly given if personally delivered or if mailed by United States certified or
registered mail, prepaid, to the parties or their permitted assignees at the
following addresses (or at such other address as shall be given in writing by
either party to the other):
To: Nitches, Inc.
10280 Camino Santa Fe
San Diego, CA 92121
Attention: Assistant Secretary
To: Executive at the last known address contained
in the Personnel Records of the Company
(j) Headings. The headings of paragraphs herein are included
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provision of this Agreement.
(k) Governing Law. This Agreement has been executed and
delivered in the State of California, and its validity, interpretation,
performance, and enforcement shall be governed by the laws of said State.
(1) Advice of Counsel. Executive has been encouraged to consult
with legal counsel of his choosing concerning the terms of this Agreement prior
to executing this Agreement. Any failure by Executive to consult with competent
counsel prior to executing this Agreement shall not be a basis for rescinding or
<PAGE> 19
otherwise avoiding the binding effect of this Agreement. The parties acknowledge
that they are entering into this Agreement freely and voluntarily, with full
understanding of the terms of the Agreement. Interpretation of the terms of this
Agreement shall not be construed for or against either party on the basis of the
identity of the party who drafted the provision in question.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by a duly authorized representative, and Executive has signed this Agreement,
all as of the day and month first above written.
NITCHES, INC. EXECUTIVE
By: /s/ WILLIAM L. HOESE /s/ STEVEN P. WYANDT
---------------------------- ----------------------------
Director, Compensation Committee Steven P. Wyandt
<PAGE> 1
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 33-11005, 33-33293, 33-38663, 33-44398 and
333-43909) of Nitches, Inc. and Subsidiaries, of our report dated October 15,
1999, appearing in item 8 in this Annual Report on Form 10-K.
MOSS ADAMS LLP
Los Angeles, California
November 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 201,000
<SECURITIES> 0
<RECEIVABLES> 3,302,000
<ALLOWANCES> 0
<INVENTORY> 4,553,000
<CURRENT-ASSETS> 8,993,000
<PP&E> 635,000
<DEPRECIATION> 552,000
<TOTAL-ASSETS> 9,786,000
<CURRENT-LIABILITIES> 2,954,000
<BONDS> 0
0
0
<COMMON> 805,000
<OTHER-SE> 6,027,000
<TOTAL-LIABILITY-AND-EQUITY> 9,786,000
<SALES> 31,473,000
<TOTAL-REVENUES> 31,473,000
<CGS> 23,275,000
<TOTAL-COSTS> 25,214,000
<OTHER-EXPENSES> 5,328,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,000
<INCOME-PRETAX> 1,051,000
<INCOME-TAX> 410,000
<INCOME-CONTINUING> 641,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 641,000
<EPS-BASIC> .52
<EPS-DILUTED> .52
</TABLE>
