SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 4, 1995
Commission file number 1-11722
CHIC BY H.I.S, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3494627
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1372 BROADWAY, NEW YORK, NEW YORK 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 302-6400
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock New York Stock Exchange, Inc.
$0.01 par value
Securities registered pursuant to Section 12(g) of the Act: NONE
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 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 [ ].
As of May 6, 1996, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $42,055,387 based
upon the closing market price of a share of Common Stock on the New York
Stock Exchange as reported by the Wall Street Journal.
As of May 6, 1996, the registrant had 9,753,868 shares of Common Stock
outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's Annual Report to Stockholders for the
fiscal year ended November 4, 1995 are incorporated by reference into Parts
I and II hereof.
(2) Portions of the registrant's Proxy Statement, which has been filed
with the Securities and Exchange Commission, for the Annual Meeting of
Stockholders to be held on March 15, 1996 are incorporated by reference
into Part III hereof.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Chic by H.I.S, Inc. (the "Company") was incorporated in Delaware in
December 1988 under the name Henry I. Siegel Holding Corp. and changed its name
to Chic by H.I.S, Inc. on December 15, 1992. All references herein to the
"Company" include Chic by H.I.S, Inc. and its domestic and foreign subsidiaries
unless otherwise indicated by the context.
The Company designs, manufactures and markets moderately priced, basic
style, cotton denim jeans, casual pants and shorts for women, girls, men and
boys, which are sold throughout the United States principally through mass
merchandisers. The Company also markets similar apparel in Europe, primarily
in Germany. In the United States, women's and girls' jeans and casual pants
are generally marketed under the CHIC<reg-trade-mark> brand name, and men's and
boys' jeans and casual pants are generally marketed under the
H.I.S <reg-trade-mark> brand name, while in Europe all of the Company's apparel
is sold under the H.I.S brand name.
The Company also licenses the use of its trademark, primarily the CHIC
brand name, to manufacturers of a variety of products that the Company does not
manufacture, including women's sportswear, intimate apparel, accessories,
hosiery and footwear. Many of these products are sold by the same retailers
that sell the Company's products and are generally promoted at the retail level
in a manner that complements the Company's products. In the United States, the
Company sells its apparel primarily to mass merchandisers. The Company's
marketing and advertising strategy emphasizes the quality, comfortable fit and
competitive pricing of its jeans and pants. The Company believes that its
ability to respond quickly to its domestic customers' needs, as a result of its
exclusively domestic sourcing and manufacturing operations and its state-of-
the-art ordering, inventory and management information systems, gives it an
advantage over many of its competitors, particularly those which import
finished goods. The Company's excellence in servicing mass merchandisers has
been recognized by industry-wide awards and, in the opinion of management, is
an important asset in maintaining and broadening its business.
Information with respect to sales, operating income and identifiable
assets attributable to each of the Company's geographic areas appears in Note
10 of Notes to Consolidated Financial Statements on page 31 of the Company's
Annual Report to Stockholders for the fiscal year ended November 4, 1995 (the
"Annual Report to Stockholders") and is incorporated herein by reference.
UNITED STATES OPERATIONS
The effects of the United States recession, which began in fiscal 1990,
were also apparent in fiscal 1991 as United States sales decreased. United
States sales increased during fiscal 1992 primarily as a result of greater
sales to major mass merchandiser customers, which generally gained market share
in the jeans market relative to other retailers, and an improving United States
economy. During fiscal 1993, United States sales remained relatively constant.
During fiscal 1994, United States sales increased primarily due to increased
advertising. During fiscal 1995, United States sales remained relatively
constant.
<PAGE>
APPAREL
WOMEN'S AND GIRLS' JEANS
The Company's principal product line is women's and girls' jeans marketed
under the CHIC and CHIC KIDS brand names, respectively, and other brand names
owned by the Company, including SUNSET BLUES<reg-trade-mark>. Based upon the
report, dated October 16, 1995, which was prepared by Leo J. Shapiro &
Associates for Discount Store News, the Company believes that its women's jeans
were the best selling women's jeans to mass merchandisers in the United States
in 1995. The Company's jeans are available in a variety of finishes, such as
prewashed and stone washed. By altering the laundry time and ingredients used
in the finishing process, the Company is able to produce various colors and
shades in denim products.
The Company was the originator of "proportioned to fit" jeans for women,
which it introduced in 1975. The Company's women's and girls' jeans are
designed to provide a more comfortable fit by tailoring their measurements to a
woman's or girl's height in addition to her waist size. Each size is offered
for sale in a variety of inseam lengths. Women's and girls' jeans are
available in a relaxed fit, slim fit and classic fit.
CHIC jeans are offered in four general size categories: CHIC misses is
offered in sizes 2 to 20 in petite, average and tall lengths; CHIC juniors is
offered in sizes 1 to 15 in petite, average and tall lengths; CHIC plus is
offered in sizes 18 to 26 in petite and average lengths; and CHIC KIDS is
offered in sizes 7 to 14 for young girls.
Currently, the Company's women's jeans are generally priced to sell at
retail for between $15.88 and $24.99, with most products priced to sell at
retail for $19.99. The Company's girls' jeans are generally priced to sell at
retail for between $15.99 and $17.99.
WOMEN'S AND GIRLS' CASUAL PANTS AND SHORTS
The Company markets women's casual pants and shorts under the CHIC brand
name and girls' casual pants and shorts under the CHIC KIDS brand name. The
Company's casual pants are available in the same "proportioned to fit" sizes as
CHIC jeans. The Company believes that CHIC pants have the same advantages as
CHIC jeans in terms of fit, quality and value. Casual pants are generally more
fashion-oriented and are more susceptible than basic jeans to changing consumer
preferences. The Company's two primary casual pant styles, the "CHIC
Spectator" which is made of 100% cotton wrinkle resistant, and the "CHIC
Schooners," which is all-cotton, are both basic design casual pants.
Currently, the Company's women's casual pants are generally priced to sell
at retail for between $17.99 and $22.99, with most products priced to sell at
retail for $19.99. The Company's women's casual shorts are generally priced to
sell at retail for between $12.99 and $15.99; girls' casual pants are generally
priced to sell at retail for between $13.99 and $17.99; and girls' casual
shorts are generally priced to sell at retail for between $9.99 and $12.99.
WOMEN'S AND GIRLS' JEAN SHORTS
The Company markets women's and girls' jean shorts under the CHIC and CHIC KIDS
brand names, respectively. Traditional five-pocket jean shorts constitute the
Company's core product in this line. The Company complements this basic
product with jean shorts that are slightly more fashion-oriented. Currently,
the Company's women's jean shorts are generally priced to sell at retail for
between $14.99 and $19.99. The Company's girls' jean shorts are generally
priced to sell at retail for between $14.99 and $18.99.
MEN'S AND BOYS' JEANS AND JEAN SHORTS AND MEN'S CASUAL PANTS AND SHORTS
The Company markets men's and boys' jeans and jean shorts and men's casual
pants and shorts under the H.I.S brand name. The Company offers its men's and
boys' apparel in a broad range of sizes, colors, fabrics and finishes. All of
the men's and boys' five-pocket jeans manufactured by the Company are available
in two styles: a relaxed fit and a classic fit. The Company offers men's jeans
in 38 different sizes by waist and inseam length. Boys' jeans are offered in
sizes 8 to 18 in regular fit and slim fit.
The Company's line of men's casual pants is marketed under the H.I.S label and
is available in casual, classic and basic styles that are generally more
fashion-oriented and are more susceptible than its men's or boys' jeans to
changing consumer preferences.
Currently, the Company's men's jeans are generally priced to sell at retail for
between $17.99 and $24.99, with most products priced to sell at retail for
$19.99; boys' jeans are generally priced to sell at retail for between $14.99
and $17.99; jean shorts are generally priced to sell at retail for between
$15.99 and $17.99; casual pants are generally priced to sell at retail for
between $19.99 and $21.99; and casual shorts are generally priced to sell at
retail for between $13.99 and $17.99.
SALES AND DISTRIBUTION
During fiscal 1995, the Company sold its products to more than 5,000 retailers,
which the Company believes operate over 16,000 stores in the United States.
Most of the Company's sales in fiscal 1995 were made to mass merchandisers and
the remainder were made primarily to department and specialty stores. Sales of
the CHIC and H.I.S product lines to the Company's two largest accounts, Kmart
Corporation and Target, accounted for approximately 50.3% of United States
sales.
Sales are made primarily through the Company's full-time sales force and also
through showrooms and trade shows, with an emphasis on selling to mass
merchandisers. The Company has a direct sales force, which includes
individuals located in the Company's New York City showroom as well as
showrooms in Los Angeles, Chicago, Dallas and other locations. The Company
pays only sales commissions to its salespeople. Although the Company pays a
base salary to its regional sales managers, a portion of the income of such
managers is in the form of incentive bonuses, traditionally based on increases
in the Company's sales. Each salesperson is equipped with a personal computer
that has a direct satellite linkup with the mainframe located in the Company's
executive offices, which allows each salesperson to access readily various
types of information such as product availability. The Company maintains its
principal showroom in New York and additional showrooms in Chicago, Dallas and
Los Angeles to service regional markets. Each showroom is staffed by local
sales representatives.
The Company currently operates eight retail stores in Tennessee and Kentucky
that sell seconds and closeouts of CHIC and H.I.S brand merchandise, including
licensed products which accounted for 7/10ths of 1% of the corporate
consolidated net sales in fiscal 1995. At the present time, the Company does
not intend to increase significantly the number of its retail stores.
The Company's warehouse and distribution center facility is located in
Bruceton, Tennessee. All sewn goods are shipped from the Company's fifteen
assembly plants to Bruceton by the Company's own fleet of tractors and trailers
and are then washed, either at the Company's facilities or an outside
launderer, pressed, warehoused and distributed to the Company's customers
throughout the United States.
Substantially all of the Company's sales in the United States and Europe are to
retailers. For the year ended November 4, 1995, sales to two major customers
(with sales in excess of 10% of total sales) approximated 23.2% and 14.0% of
consolidated net sales on an individual basis. For the year ended November 5,
1994, sales to two major customers approximated 22.3% and 12.8% on an
individual basis. For the year ended November 6, 1993, two major customers
accounted for approximately 15.1% and 11.6% of total sales on an individual
basis. The receivables from the two major customers at November 4, 1995
represent approximately 43.1% of the total accounts receivable balance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company reviews a customer's credit history before extending
credit. An allowance for possible losses is established based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
MARKETING, ADVERTISING AND PROMOTION
The Company advertises its products nationwide through television and print
media. The Company's advertising strategy emphasizes the quality, comfortable
fit and competitive pricing of its jeans and pants. At the national level, the
Company's advertising is image oriented. Television commercials promote the
CHIC name and are designed to create a personality for the brand. The Company
believes that such strategy has enabled CHIC to become a nationally recognized
brand name for women's apparel.
Consumer advertising for the Company's CHIC line of products is done primarily
through network and cable television and, to a lesser extent, magazines.
National television advertisements are generally run during the fall back-to-
school, spring and Christmas selling seasons. Print advertising of the CHIC
line consists primarily of spreads in magazines oriented toward women. The
Company's advertising of its H.I.S line has been accomplished primarily through
the use of print advertising. The Company has begun to place H.I.S
advertisements in major national magazines that generally appeal to male
readers. The Company targets women in the 18-49 age group for its CHIC brand
women's products, with and emphasis on the 18-34 age group, and targets men in
the 18-49 age group for its H.I.S brand men's products. The Company believes
that consumers of its products are generally in the moderate-income bracket.
The Company supplements its national advertising campaign through the use of
cooperative advertising in radio and newspaper media, in which the Company's
products are among those featured by various retailers in their advertisements.
Under the Company's cooperative advertising program, which is generally
standard in the industry, the Company will match up to two percent of the
store's total purchases from the Company during the preceding semi-annual
period. In addition, the Company advertises to retailers through print
advertisements in a variety of trade magazines and newspapers.
The Company is seeking a larger share of the domestic mass merchandise market
for its men's and boys' jeans under the H.I.S brand name. To attain such
increase, the Company has allocated a larger portion of its increased total
advertising budget to the H.I.S brand.
The Company believes that there are opportunities for increasing the Company's
share of the mass merchandise market for men's jeans in the United States,
which the Company believes is substantially larger than the market for women's
jeans. Based on its reputation as a reliable supplier of branded women's jeans
and its previous history as a manufacturer of men's jeans and other apparel
under the H.I.S brand name, the Company believes that opportunities exist to
penetrate further the mass merchandise and specialty store market for men's
jeans. The Company has begun to focus on selling men's jeans to the same mass
merchandisers and specialty stores that carry CHIC women's jeans. The Company
anticipates that there will be a positive correlation between an increase in
advertising and an increase in sales, but there can be no assurance that the
Company will realize its objective of increasing its share of the men's and
boys' jeans market, which is highly competitive and in which the Company
currently has only a limited presence.
The Company works with retailers to provide custom displays to stores. The
Company provides to its customers, free of charge, a variety of point of sale
display materials such as signs, size markers, graphics, in-store posters,
photographs and other visual supports.
PRODUCT DESIGN
The Company's two in-house merchandising groups develop jeans and casual pants
product lines, respectively, including the pricing and packaging for each line.
The merchandising groups interpret market trends by visiting retail stores
throughout the United States and Europe, attending trade shows, working with
textile mills and retailers and conducting market research. The Company also
researches and tests denim finishes in its Bruceton laundry facility in order
to develop new wash finishes to add to the Company's product mix.
After the merchandising groups have researched the retail market and domestic
fabric market, consulted with the various fashion and color forecasting
services to which the Company subscribes and decided on the details to be
incorporated into the new lines, prototype samples, fit, colors and packaging
are developed in the New York office. The prototypes are then sent to the
Company's main manufacturing facility in Bruceton, Tennessee, which produces a
manufactured sample.
In keeping with the Company's emphasis on a quality fit, the garment has
several fit evaluations using a professional fit model from prototype stage to
a finished manufactured garment. The samples produced in Tennessee are
evaluated for fit, color and finish and then sent to the sales force to display
to prospective customers. When the garment has been sold and the first
production run of garments is produced, a full size range is sent to New York
where the garment is fitted on models of various sizes to allow the
merchandisers to make any final adjustments that may be needed to improve the
fit and appearance of the new lines for different body types.
MANUFACTURING AND RAW MATERIALS
The Company performs all phases of the manufacturing process in converting raw
materials into finished goods. The Company believes that it is the only major
manufacturer of moderately priced jeans in the United States to purchase all of
its raw materials domestically and to manufacture all of its products
domestically. Consequently, the Company enjoys a shorter lead time in filling
orders than is usually associated with competitors that rely on imports of
finished goods or offshore manufacturing processes.
The Company currently buys finished fabric in bulk from domestic suppliers and
generally has no supply contracts with terms longer than three months. The
Company believes that through its domestic suppliers it is able to obtain good
quality materials in a timely manner at competitive prices. During fiscal 1995,
the Company purchased approximately 39.2% of its raw materials from two
suppliers, which were the only companies supplying more than 10% of the
Company's raw materials during fiscal 1995. The Company maintains a portion of
its inventories in commodity raw materials, which consist mainly of cotton
fabrics, including denim and twills. These raw materials, the Company
believes, are readily available from numerous domestic and foreign sources.
Although the Company relies heavily on certain suppliers for its raw material
needs, the Company believes that the loss of any one source of raw materials,
though no such loss is presently anticipated, would not have a material adverse
effect on its business since many other alternative, comparable sources are
readily available.
The Company operates manufacturing facilities in Tennessee, Alabama,
Kentucky and Mississippi. The Company believes that its current production
facilities are sufficient to permit it to respond to any increases in output in
the foreseeable future.
With its manufacturing systems, which the Company believes are state-of-
the-art, the Company is usually capable of converting raw material into a
finished garment and delivering such garment to the retailer within three weeks
from the date the Company receives the retailer's order as compared to
importers, which the Company believes generally take eight to ten weeks from
the date of order to delivery of a finished garment to the retailer. The
Company's facilities and systems, together with exclusively domestic sourcing
of fabric and other raw materials, enable it to adapt to changing consumer
preferences quickly and to respond swiftly to customer orders. In addition, by
reducing the time needed to manufacture a finished garment, the Company is able
to keep inventory at minimal levels. By limiting inventory and avoiding many
of the shipping and warehousing costs faced by importers, the Company believes
that it is currently able to offset any benefits it would derive from reduced
labor costs were it to manufacture in foreign countries for the United States
market. Although the Company currently has no plans to manufacture in foreign
countries for the domestic market, as new opportunities arise for manufacturing
in foreign countries for the domestic market (either through subcontractors or
owning facilities), the Company intends to evaluate the possible advantages and
disadvantages of manufacturing in foreign countries. The Company is currently
evaluating the feasibility of establishing manufacturing operations in Mexico
and/or the Dominican Republic in light of the passage of the North American
Free Trade Agreement in 1994.
The Company generally cuts fabric only after receiving confirmed purchase
contracts from customers. Each contract is for a specified amount of product
at a specified price and usually provides for several preliminary, staggered
delivery dates. Customers then place specific orders for delivery against such
contract. By manufacturing in response only to a confirmed purchase contract,
the Company is able to determine its finished inventory needs in advance of
such delivery dates so as to be able to respond quickly to a customer's order
and at the same time minimize its finished inventory risk. Occasionally, based
on agreements with customers, preliminary delivery dates are extended. The
postponement of a delivery date may cause the Company to lose sales it
otherwise might have made to the customer for the period during which delivery
is eventually made. Should a delivery date be postponed, the Company is often
able to arrange with its suppliers to delay delivery of raw materials the
Company has ordered. The Company has never lost a material sale due to its
inability to deliver goods on time.
The Company uses its own fleet of tractors and trailers to pick up raw
materials from its suppliers and transport such raw materials to the Company's
central manufacturing headquarters in Bruceton, Tennessee. In Bruceton, the
fabric is cut and trimmed and then shipped by the Company's fleet to one of the
Company's ten assembly plants where the garments are sewn. Assembled garments
are then returned to Bruceton by the Company's fleet for laundry processing,
final finishing and pressing.
EUROPEAN OPERATIONS
In Europe, where mass merchandisers have limited market share, the
Company's H.I.S brand jeans are sold primarily through department stores and
mail order catalogs. Most of the Company's sales in Europe are made in
Germany. In fiscal 1989, the Company focused on a more basic line of products
which were priced to afford the retailer a higher profit margin. European sales
in fiscal 1990 and fiscal 1991 continued to increase as a result of the new
pricing strategy and market opportunities created by German reunification. The
unusually high demand for H.I.S products created in fiscal 1991 by expansion of
the German market as a result of the reunification, however, was not duplicated
in fiscal 1992 and, aggravated by a weakening German economy, resulted in
decreased sales volume. Primarily as a result of increased advertising,
European sales increased in fiscal 1993, fiscal 1994, and fiscal 1995.
The Company markets women's and men's jeans and casual pants under the
H.I.S brand name primarily in Germany and, to a lesser extent, Austria and
Switzerland, as well as other European countries. As in the United States, the
Company's core business in Europe is basic, five-pocket denim jeans. The
Company believes that its jeans were the best selling women's jeans in Germany
during fiscal 1995.
In Eastern Europe, the Company has licensing agreements permitting third
parties to manufacture and market H.I.S brand jeans in the Czech Republic,
Slovakia and Hungary, where the Company currently does not market on a direct
basis. In the Czech Republic, the Company has a production manager on-site to
supervise the local manufacture of jeans by its licensee for export to the
Company for sale in Germany as well as for sale, pursuant to a licensing
agreement, under the H.I.S brand name in the Czech Republic. The Company
believes that H.I.S brand jeans were the best selling jeans in the Czech
Republic in fiscal 1994 and 1995.
The Company believes that in many European countries basic jeans, such as
those manufactured by the Company, are perceived to be a fashion item as well
as a basic, functional product and are therefore worn in a broader range of
settings than in the United States, which contributes to a high level of demand
for jeans in Europe. The Company believes that approximately 50 million pairs
of women's and men's jeans are sold in Germany alone each year, and that
approximately one-half of such jeans sold do not bear a recognized brand name.
Due to their fashion versatility and the absence of mass merchandisers and
discount retailers, jeans are priced much higher, in relative terms, at the
retail level in Europe than in the United States.
The Company's European headquarters are located in Garching, Germany
(outside of Munich), where the Company has its own staff of merchandising,
sales, production, management and finance personnel. The Company does not own
any manufacturing facilities in Europe, but currently has long-term agreements
with approximately ten manufacturers in the Czech Republic, Germany, Greece,
Italy, Malta, Portugal, Tunisia and Turkey, where the Company believes quality
products can be manufactured at competitive prices. Due to the large number of
manufacturers, the Company believes that the termination of any existing
contract would not have a material adverse effect on its operations. All of
the raw materials used to assemble the jeans and pants are purchased by the
Company in Europe and are readily available from numerous suppliers. Raw
materials are shipped to subcontractors in foreign countries for assembly.
Finished goods are shipped by the subcontractors to the Company's distribution
center in Garching, Germany for washing, finishing, warehousing and then
shipment to the Company's customers.
Most European customers are traditional department stores such as Kaufhof
AG, Mac Fash TextilHandels-GessellschaftmbH, Hertie Waren-und Kaufhaus GmbH,
Horten AG and specialty stores such as Leffers AG and Peek & Cloppenburg KG in
Germany. Other significant customers include German-based Otto Versand GmbH &
Co., the world's largest mail-order firm, and Quelle, Europe's largest mail-
order firm, as well as Spar Osterreichische Warenhandels-AG (Hervis
Modekaufhaus GmbH), one of the largest retail operations in Austria.
The Company employs a merchandising staff that creates styles and selects
fabrics designed to meet the demands of the European consumer. Twenty
commissioned salespersons service approximately 2,000 retail accounts and mail-
order houses. The Company's European advertising is aimed at men and women
between the ages of 16 and 39 through television and print media.
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It is not possible to predict accurately the effect that the continued
elimination of trade barriers among members of the European Union will have on
the Company's operations in Europe. The Company considers other Western
European countries, such as the United Kingdom, France and Italy, to be
extremely competitive markets and does not anticipate that it will seek to
expand sales significantly in such countries.
CENTRAL OFFICE AND COMPUTER SYSTEM
The Company maintains its principal executive offices in New York City
from which it provides its department managers with integrated information with
respect to inventory, production, manufacturing and distribution operations as
well as financial matters. The Company believes that it has a state-of-the-art
computer information system, substantially all of the software for which was
developed internally. This sophisticated system allows the Company's
salespeople to enter sales orders electronically. Many large customers submit
their orders directly to the Company over an electronic data interchange system
via satellite. Such linkups allow the Company to process customer orders
quickly, reducing the lead time between orders and deliveries.
Major customers customarily place confirmed purchase contracts for a total
unit quantity by price, style and delivery date. Through point of sale data
collection devices, many of these customers monitor their sales to consumers
and report directly to the Company their over-the-counter level of sales as
well as the desired inventory levels they wish to maintain at their individual
stores. On a weekly basis the Company receives information as well as detailed
shipment orders for each of the stores of such customers. These detailed store
orders are designed to replenish the inventory levels of the individual retail
stores, which the Company is generally able to do in five to eight business
days.
The Company also receives on a daily basis orders taken by its sales
force. These orders are electronically transmitted to the Company by members
of the sales force through their own computer terminals which are connected to
the Company's main computer system via satellite. Such orders are then
electronically reviewed for style, color, size, creditworthiness and requested
delivery dates. If the results of such reviews are satisfactory, the orders
are considered to be confirmed purchase contracts and are added to backlog.
The computer system allows the Company to monitor production in real time,
so that the location and status of every cut and production plan in every
factory is known at any moment in time. In the highly competitive apparel
industry, the Company believes that its "just-in-time" ability to respond
quickly to customer demand gives it a significant advantage over many of its
competitors, especially with respect to mass merchandisers.
LICENSING
Pursuant to approximately 30 license agreements between the Company and
various manufacturers, such manufacturers produce and market, mostly under the
CHIC name, a variety of products. These products include sportswear, such as
knit and woven tops and sweaters; fleece activewear; intimate apparel, such as
foundations, daywear, sleepwear and underwear; accessories, such as handbags,
small leather goods, totes, backpacks, costume jewelry and belts; hosiery, such
as socks, sheers and tights; and athletic and casual footwear. Most of these
products complement apparel products marketed by the Company.
The Company began licensing its trademarks in fiscal 1989. Licensing
revenues have increased from approximately $0.8 million in fiscal 1990, the
first full year of licensing operations, to approximately $5.8 million in
fiscal 1995.
The current license agreements expire on various dates through 1999. Many
of the agreements, however, permit the licensee to renew its agreement, subject
to certain conditions, prior to expiration, generally for an additional three-
year period. The majority of the agreements require that licensees pay a
specified guaranteed minimum royalty to the Company at the beginning of each
quarter during the term of the licensing agreement and then pay a certain
percentage (generally five percent) of the licensee's net sales of products
bearing a trademark licensed by the Company. Such payments are due within 30
days after the end of each quarter, against which amount the guaranteed royalty
is deducted. Generally, each licensee is required to spend specified amounts
for advertising and promotion of the licensed products and most licensees offer
a matching cooperative advertising plan to retailers for advertising in weekly
circulars that are used by some retailers to advertise sale items. The Company
has received no indication from its licensees that they intend to terminate
their licensing agreement with the Company prior to its expiration.
The Company's strategy is to identify market leaders in their respective
fields who will generate increased sales over an extended period of time and
entrench the brand names in key categories. The Company often consults with
its largest customers to identify and evaluate potentially suitable licensees.
In evaluating a potential licensee, the Company considers the experience,
financial stability, manufacturing performance and marketing ability of the
potential licensee. It also evaluates the marketability of the products
proposed to be licensed and the compatibility of such products with other
products manufactured or licensed by the Company. The Company believes that
strong consumer acceptance of the CHIC name and the care that the Company uses
in selecting suitable licensees have been major contributors to the success of
its licensing program.
Currently, the Company is exploring the possibility of licensing its brand
names in additional categories, including licensing CHIC for use on
childrenswear, bodywear, outerwear, cosmetics, luggage, swimwear and
sunglasses. The Company is continuing to explore the possibilities of
licensing H.I.S for use on various products such as knit and woven shirts,
dress shirts, socks, underwear, outwear, activewear, swimwear and career
apparel. By increasing consumer awareness of its brand names through expanded
advertising of its products, and continuing to use care in selecting suitable
licensees, the Company anticipates that it will be able to strengthen its
licensing business. As the demand for licensed products expands, competition
will increase among licensors and no assurance can be given that the Company
will be able to expand or maintain its market position with respect to various
licensed goods in the future. In addition, no assurance can be given that
demand will continue to expand.
The Company coordinates the efforts of its licensees in a number of ways.
The Company communicates its color schemes, styling and market trends to its
licensees prior to each season, presents a coordinated in-store presentation
of proprietary and licensed products, and coordinates the advertising of the
family of CHIC products through planned promotions.
As a general policy matter, in the United States the Company licenses its
brand names for use only on products it does not manufacture. The Company
licenses the H.I.S brand name for use on jeans sold in countries where it does
not market jeans itself, such as in Eastern Europe.
<PAGE>
COMPETITION
The apparel industry is highly competitive and characterized generally by
ease of entry. Although the Company's products have been historically less
sensitive to fashion trends than higher fashion lines, the apparel industry is
subject to rapidly changing consumer preferences, which may have an adverse
effect on the results of the Company's operations if the Company does not
accurately judge such preferences. Among the factors that shape the
competitive environment are quality of garment construction and design, price,
fit, brand name, style and color selection, advertising and the manufacturer's
ability to respond quickly to the retailer on a national basis. Customer and
consumer acceptance and support are also important aspects of competition in
this industry. The Company believes that its ability to market its products
though its broad distribution network, which consists primarily of mass
merchandisers, is important to its ability to compete. The Company also
believes that its continued success will depend upon its ability to remain
competitive in these areas.
The Company competes with numerous domestic and foreign manufacturers,
many of which are larger or are associated with companies with substantially
greater resources than the Company. The Company faces competition in sales on
both the retail and consumer level. In general, mass merchandisers limit their
product selection to moderately priced products. Accordingly, the Company
believes that the domestic jeans market with respect to sales to mass
merchandisers is stratified by a more narrow price range than sales to
consumers, who might be willing to buy products in a broader price range.
Since certain retailers generally carry only moderately priced products,
particularly mass merchandisers, the Company competes for sales to such
retailers only with companies that market similarly priced products.
The Company considers its significant competitive advantages to be the
high consumer recognition and acceptance of the CHIC brand name and its ability
to respond quickly to its customers' needs as a result of the Company's
domestic manufacturing facilities and advanced computer information system.
Although brand recognition is an important element of competition in the
apparel business, in the mass merchandising retail industry, brand recognition
is less significant in the marketing of casual pants than in the marketing of
jeans. Most mass merchandisers carry only casual pants bearing their own
private label and a limited number, if any, of other brands of casual pants.
Consequently, with respect to its mass merchandising customers, the Company's
casual pants compete with fewer brands than its jeans.
In Germany, Austria and Switzerland, the Company competes in a higher
priced market against various European and multinational companies, including
Mustang Bekleidungswerke, manufacturer of MUSTANG brand jeans, and Levi
Strauss, manufacturer of LEVI'S brand jeans. The Company believes that its
pricing strategy in Europe, which is to position its products in the price
range below the range for Levi Strauss, along with its reputation in Europe for
marketing jeans in a variety of sizes especially suited for women,
distinguishes it from its competitors in Europe. Certain jeans suppliers, such
as Levi Strauss, have traditionally spent more than the Company on advertising
in Europe. The Company believes that increased advertising in Europe has
increased the Company's market share by attracting consumers who traditionally
have bought unbranded products.
<PAGE>
BACKLOG
The Company's backlog consists of confirmed purchase contracts. At
November 4, 1995, the Company had unfilled customer orders of approximately
$166.4 million of merchandise, of which approximately $128.5 million were for
domestic orders and approximately $37.9 million (based on the exchange rate for
the deutsche mark on November 4, 1995) were for European orders, compared to
approximately $248.3 million at November 5, 1994, of which approximately $218.2
million were for domestic orders and approximately $30.1 million (based on the
exchange rate for the deutsche mark on November 5, 1994) were for European
orders. The Company believes that the change in backlog in the United States
and Europe is attributable largely to the performance of the Company's products
in over-the counter sales by its customers. Substantially all of the unfilled
orders at November 4, 1995 are expected to be shipped before the end of the
Company's fiscal year ending November 2, 1996. The Company believes that in
the past it has shipped at least 95% of its confirmed purchase contracts. The
Company has not generally experienced difficulty in filling orders on a timely
basis.
SEASONALITY
Demand for the Company's apparel products and its level of sales fluctuate
moderately during the course of the calendar year as a result of seasonal
buying trends. A moderate surge in sales of denim jeans and casual pants
generally occurs during the fall back-to-school and Christmas holiday selling
seasons (the Company's third and fourth quarter, respectively). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality of Business-Quarterly Results." To balance these
fluctuations in demand, the Company has developed competitively priced packages
of jean shorts and casual shorts, which are sold primarily during the Company's
first and second quarters. This enables the Company to market to the year-round
apparel needs of consumers, thereby stabilizing production levels at the
Company's manufacturing facilities during traditionally slower periods.
TRADEMARKS
Several of the Company's trademarks, including CHIC and H.I.S, are
registered in the United States Patent and Trademark Office. These
registrations expire on various dates through 2005, subject to renewal. From
time to time the Company adopts new trademarks in connection with the marketing
of its products. The Company considers its trademarks to be significant assets
of the Company and to have significant value in the marketing of its products.
The Company has registered and filed applications for various trademarks,
including H.I.S, which is the primary trademark used by the Company to market
its products in Europe, in approximately 20 countries throughout the world,
primarily Germany, Austria and Switzerland. The Company believes that these
foreign trademarks constitute significant assets and are material to its
European marketing operations.
EMPLOYEES
As of November 4, 1995, the Company employed approximately 5,000 full-time
people in the United States, most of whom work in Tennessee. The Company
believes that it is one of the largest private employers in the State of
Tennessee. As of November 4, 1995, the Company employed approximately 125
people in Germany.
None of the Company's employees are represented by a union, and the
Company has not experienced any labor disturbances during the last twelve
years. The Company believes that its relationship with its employees is good.
The Company believes that all of its manufacturing facilities are in
material compliance with applicable occupational health and safety laws.
<PAGE>
RECENT DEVELOPMENTS - SUBSEQUENT EVENTS
In view of the decline in sales that some of the Company's customers have
been experiencing, during the first quarter of fiscal 1996 the Company's
factories operated on average at approximately 40% of capacity. As a result,
the Company is in the process of closing its factory in Hohenwald, Tennessee
and will have reduced its workforce by 943 employees by May 1, 1996 of a total
of approximately 5,000 employees. In connection with the foregoing, the
Company has taken a non-cash restructuring charge against earnings in the
amount of $15,000,000 during the first quarter of fiscal 1996. The Company
believes that these actions will result in cost savings to the Company in
excess of $3,600,000 over the next 12 months. The Company will continue to
monitor closely market conditions and to asses from time to time the
desirability of further reductions in, or the expansion of, its production
capacity.
The Company previously announced that although it has been current with
respect to all principal and interest payments under all agreements with its
lenders, it breached a financial covenant set forth in paragraph 5.10
(Consolidated Fixed Charge Coverage) under its agreement with the holders of
its $25 million senior notes due 2003 and $18 million senior notes due 2005,
which required that the Company maintain the ratio of consolidated net earnings
available for fixed charges to consolidated fixed charges of not less than 2.0
to 1.0. This breach also triggered a default under the Company's agreement
with its bank lenders by virtue of a cross-default provision in that agreement.
The Company has obtained waivers of these breaches under the agreements with
its note holders and bank lenders and amendments to certain covenants in such
agreements.
<PAGE>
ITEM 2. PROPERTIES
The Company owns its principal manufacturing and distribution facilities
which are located in Tennessee. The Company leases additional facilities,
including its corporate headquarters and showrooms in New York City, and other
offices, factories, warehouses, showrooms and retail stores in the United
States, Germany, Austria and Switzerland from unrelated third parties. The
Company's principal leased properties are described in the chart below.
PRINCIPAL OWNED AND LEASED PROPERTIES
LOCATION SQUARE FOOTAGE OWNED/LEASED
United States
Manufacturing and Assembly Facilities
Belmont, MS 102,900 Leased
Bruceton, TN 200,094 Owned
Bruceton, TN 150,000 Owned
Camden, TN 41,022 Owned
Clinton, KY 15,600 Leased
Fulton, KY 17,000 Leased
Gleason,TN 53,103 Owned
Hickman, KY 280,000 Leased
Monticello, KY 58,000 Owned
Phil Campbell, AL 48,000 Leased
Saltillo, TN 48,028 Owned
South Fulton, TN 70,269 Owned
Tiptonville, TN 52,790 Owned
Trezevant, TN 42,008 Owned
Warehouse and Distribution Bruceton, TN 422,087 Owned
Showrooms Chicago, IL 1,242 Leased
Dallas, TX 1,325 Leased
Los Angeles, CA 1,350 Leased
New York, NY 8,721 Leased
Retail Stores Bowling Green, KY 7,200 Leased
Bruceton, TN 5,500 Leased
Clarksville, IN 6,420 Leased
Cookeville, KY 11,200 Leased
Goodlettsville, TN 5,310 Leased
Louisville, KY 7,100 Leased
Murfreesboro, TN 5,200 Leased
Paducah, KY 5,000 Leased
Machine Shop and Equipment Warehouse Bruceton, TN 41,000 Owned
Bruceton, TN 12,000 Owned
Corporate Offices New York, NY 34,034 Leased
Europe
Office and Warehouse Garching, Germany 90,000 Leased
Showrooms Bergheim, Austria 2,000 Leased
Berlin, Germany 600 Leased
Munich, Germany 1,500 Leased
Neuss, Germany 1,100 Leased
Zurich, Switzerland 700 Leased
The Company believes that its existing facilities are well maintained, in
good operating condition and are adequate for its present level of operations
and sufficient to accommodate any increased output for the foreseeable future.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation incidental to
the conduct of its business. The Company believes that no currently pending
litigation to which it is a party will have a material adverse effect on its
consolidated financial condition or results of operations.
ENVIRONMENTAL MATTERS
The Company believes it is in material compliance with all applicable
environmental laws to which it is subject, including, among others, the Federal
Water Pollution Control Act, and the Tennessee Solid Waste Disposal Act.
Although the Company is unable to predict what legislation or regulations may
be adopted in the future with respect to environmental protection and what
their impact on the Company may be, compliance with existing legislation and
regulations has not had a material adverse effect on its capital expenditures,
results of operations or competitive position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is included under the captions
"PRICE RANGE OF COMMON STOCK" and "DIVIDEND POLICY" on page 32 of the Annual
Report to Stockholders and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included under the caption
"SELECTED CONSOLIDATED FINANCIAL DATA" on page 15 of the Annual Report to
Stockholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. From 1984, when the Company incurred debt in connection with a
management buyout, until 1993, a significant portion of the Company's capital
structure consisted of debt. During the three fiscal years ended November 2,
1991, cash provided by income from operations was not sufficient to pay
interest requirements, necessitating further borrowings. During such period,
the Company's high leverage and debt service requirements constrained its
advertising and promotional budget and limited its capital expenditures.
However, as a result of the elimination of approximately $100 million principal
amount of debt and the accompanying reductions in interest expense during the
fiscal year ended November 6, 1993, the Company was able to expand its
advertising and promotional budget and believes that it now has the financial
resources to respond more effectively to market opportunities. The Company
believes that income generated from operations as well as funds available under
its domestic and European credit facilities will be sufficient to enable the
Company to continue such expanded advertising and promotional activities for at
least 12 months following the date of this report.
UNITED STATES. In fiscal 1989, the Company lowered its selling prices in the
United States as part of its strategy to reposition the Chic brand from the
department store to the mass merchandiser market. In fiscal 1989 and through
the third quarter of fiscal 1990, the Company's unit sales continued to
increase significantly as a result of its new United States pricing strategy
(which resulted in lower gross margins) and brand repositioning. During the
fourth quarter of fiscal 1990, United States sales declined as a result of the
United States recession impacted by Iraq's invasion of Kuwait, which the
Company believes negatively affected consumer confidence. The effects of the
United States recession which began in fiscal 1990, were also apparent in
fiscal 1991 as United States sales decreased. United States sales increased
during fiscal 1992 primarily as a result of greater sales to major mass
merchandiser customers, which generally gained market share in the jeans market
relative to other retailers, and an improving United States economy. During
fiscal 1993, United States sales remained relatively constant. During fiscal
1994, United States sales increased primarily due to increased advertising.
During fiscal 1995, United States sales remained relatively constant.
EUROPE. In Europe, where mass merchandisers have limited market share, the
Company's H.I.S brand jeans are sold primarily through department stores and
mail order catalogs. A substantial portion of the Company's sales in Europe
were made in Germany. The Company has focused on a more basic line of products
which, as in the United States, were priced to afford the retailer a higher
profit margin. The unusually high demand for H.I.S products created in fiscal
1991 by expansion of the German market as a result of the reunification was not
duplicated in fiscal 1992 and was aggravated by a weakening German economy,
resulting in decreased sales volume. Primarily as a result of increased
advertising, European sales increased in fiscal 1993 and fiscal 1994. In fiscal
1995, European sales increased by $21.0 million, attributed primarily to the
Company's continued penetration of the market.
The income statements of the Company's European subsidiary, which are
denominated in deutsche marks, are translated into United States dollars at the
average exchange rate for the period. The effect of exchange rate fluctuations
did not have a material effect on operating results expressed in United States
dollars.
RESULTS OF OPERATIONS. The following table sets forth selected operating data
as a percentage of net sales for the periods indicated.
FISCAL YEAR 1993 1994 1995
- ------------------------------------------------------------------------------
Net sales
United States 77.5% 78.2% 73.9%
Europe 22.5 21.8 26.1
- -------------------------------------------------------------------------------
Consolidated 100.0 100.0 100.0
Gross margin
United States 21.5 19.3 11.7
Europe 39.4 41.4 40.3
Consolidated 25.6 24.1 19.2
Licensing revenues 1.4 1.4 1.5
Selling, general and administrative expenses 21.1 20.9 18.5
Operating income 5.8 4.6 2.2
Interest and finance costs 2.7 1.0 1.6
Income before provision for income taxes
and extraordinary item 3.2 3.6 .6
Provision for income taxes 1.3 .8 .3
Extraordinary item (0.3) - -
Cumulative effect of change in accounting
principle - .1 -
Net income 1.6% 2.9% .3%
FISCAL YEAR ENDED NOVEMBER 4, 1995 ("FISCAL 1995") COMPARED TO FISCAL YEAR
ENDED NOVEMBER 5, 1994 ("FISCAL 1994")
NET SALES. Net sales for fiscal 1995 increased $21.9 million, or 6.2%, from
$354.2 million for fiscal 1994 to $376.1 million. Such a small increase is
directly attributable to the general decline in retail business. In fiscal
1995, United States sales increased $.9 million, or .3%, to $277.9 million. As
of November 4, 1995, the Company had a total backlog of confirmed domestic
purchase orders of $128.5 million, compared to $218.2 million on November 5,
1994. In fiscal 1995, European sales increased by $21.0 million, or 27.2%, to
$98.2 million attributable primarily to the Company's continued penetration of
the European market. As of November 4, 1995, the Company had a backlog of
confirmed European purchase orders of $37.9 million, an increase of 25.9%
compared to $30.1 million on November 5, 1994.
GROSS PROFIT. Gross profit for fiscal 1995 decreased $13.3 million. The
Company generated sales because of outside contracted production. However, the
Company was in a position where it generated sales but little gross profit.
That had a negative impact on the Company's gross margin. Gross margin
decreased to 19.2% from 24.1%. The decrease in the gross profit as a percentage
of net sales in the United States was due primarily to contractor costs
associated with increased production requirements to meet demand. European
gross margin decreased from 41.4% in fiscal 1994 to 40.3% as a result of
product mix.
LICENSING REVENUES. For the Company as a whole, licensing income increased $.9
million for fiscal 1995, or 18.4%, from $4.9 million for fiscal 1994 to $5.8
million for fiscal 1995. Licensing revenues generated in the United States
increased by approximately $.7 million, and licensing revenues generated in
Europe increased by $.2 million. The increase in licensing income was due
primarily to an increase in sales by existing licensees.
SG&A EXPENSES. Selling, general and administrative expenses ("SG&A" expenses)
decreased by 5.9% to $69.4 million in fiscal 1995. The decrease was primarily
due to the adoption of SOP 93-7 during fiscal 1994 (See Note 1 to the
consolidated financial statements).
OPERATING INCOME. Operating income decreased by 49.4% from $16.4 million for
fiscal 1994 to $8.5 million for fiscal 1995. In the United States, there was
substantially no operating income in fiscal 1995 as compared to $8.4 million in
the previous year. The decrease was primarily due to contractor costs
associated with increased production requirements to meet demand. In Europe,
operating income was $8.5 million as compared to $8.0 million for the
comparable period of the previous year. This increase was a result of continued
penetration of the market resulting in higher sales.
INTEREST AND FINANCE COSTS. Interest and finance costs increased $2.4 million,
or 64.9%, from $3.7 million for fiscal 1994 to $6.1 million for fiscal 1995 due
primarily to higher levels of borrowings. At November 4, 1995, the Company had
$93.5 million of outstanding debt. At November 5, 1994, outstanding debt
totaled $55.5 million.
INCOME TAXES. The provision for income taxes of $1.4 million for fiscal 1995,
as compared to $2.7 million for fiscal 1994, reflects the recognition of a
deferred tax asset of $2.4 million attributable to the Company's domestic net
operating loss carryforward (See Note 7 to the consolidated financial
statements).
NET INCOME. Net income decreased 90.5% to $1.0 million in fiscal 1995, a
decrease of $9.5 from net income of $10.5 million earned in fiscal 1994.
<PAGE>
FISCAL YEAR ENDED NOVEMBER 5, 1994 ("FISCAL 1994") COMPARED TO FISCAL YEAR
ENDED NOVEMBER 6, 1993 ("FISCAL 1993")
NET SALES. Net sales for fiscal 1994 increased $49.6 million, or 16.3%, from
$304.6 for fiscal 1993 to $354.2 million. In fiscal 1994 United States sales
increased $40.9 million, or 17.3%, from $236.0 million for fiscal 1993 to
$276.9 million. The Company believes that the increase in United States sales
was primarily attributable to increased advertising. The combined effects of
increased advertising of both Chic and H.I.S product lines, resulted in a total
backlog of confirmed domestic purchase orders at November 5, 1994 of $218.2
million, an increase of 73.9% compared to $125.4 million at November 6, 1993.
In fiscal 1994, European sales increased $8.7 million, or 12.7%, from $68.6
million for fiscal 1993 to $77.3 million. The Company believes that the
increase in European sales was primarily attributable to increased advertising.
The total backlog of confirmed European purchase orders at November 5, 1994 was
$30.1 million compared to $30.8 million at November 6, 1993.
GROSS PROFIT. Gross profit for fiscal 1994 increased $7.7 million, or 9.9%,
from $77.8 million to $85.5 million, and gross margin decreased from 25.6% to
24.1%. United States gross margin was 19.3% for fiscal 1994 as compared to
21.5% for the prior year. The decline in gross profit in the United States was
due primarily to a substantial increase in medical costs, severe weather
conditions which occasioned the temporary closing of plants and, a combination
of higher start-up and contractor costs associated with increased production
requirements to meet demand. European gross margin increased from 39.4% for
fiscal 1993 to 41.4% due primarily to a continuation of contract operations in
the Czech Republic together with the consistency of production with the
Company's contract manufacturing, which resulted in more efficient production
in a lower cost per unit.
LICENSING REVENUES. Licensing revenues increased $.5 million, or 11.4%, from
$4.4 million in fiscal 1993 to $4.9 million in fiscal 1994 primarily as a
result of increased sales by existing licensees as well as the addition of new
licensees.
SG&A EXPENSES. SG&A expenses increased by $9.6 million, or 14.9%, from $64.4
million in fiscal 1993 to $74.0 million in fiscal 1994. Of this increase, the
United States operations accounted for $6.7 million due primarily to the change
in accounting for advertising expense in accordance with the AICPA's statement
of position on reporting for advertising costs adopted during the fourth
quarter. Increases in both advertising and commissions as a result of increased
sales volume contributed to the increase of $2.9 million in European SG&A
expenses. SG&A expenses decreased as a percentage of net sales to 20.9% in
fiscal 1994 compared to 21.1% in fiscal 1993.
OPERATING INCOME. Operating income for fiscal 1994 decreased $1.4 million, or
7.9%, from $17.8 million, and operating margin decreased from 5.8% to 4.6%. The
decrease in operating income resulted from a decrease in United States
operating income of $3.5 million partially offset by a $2.1 million increase in
European operating income. The decrease in United States operating income was
due primarily to an increase in SG&A expenses resulting from the change in
accounting in accordance to the AICPA's statement of position on reporting for
advertising costs.
<PAGE>
INTEREST AND FINANCE COSTS. Interest and finance costs decreased $4.5 million
from $8.2 million in fiscal 1993 to $3.7 million. The reduction in interest
expense in fiscal 1994 was attributable primarily to debt repaid, converted to
equity and forgiven in connection with the consummation of the Company's
initial public offering and refinancing plan in February 1993. At November 5,
1994 the Company had $55.5 million of outstanding debt. At November 6, 1993 the
Company's outstanding debt totaled $54.0 million.
INCOME TAXES. The Company's provision for income taxes was $2.7 million for
fiscal 1994 as compared to $3.9 million for fiscal 1993.
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Income
before cumulative effect of change in accounting principle increased 75% to
$10.1 million in 1994, an increase of $4.3 million over the $5.7 million in
1993.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The Company adopted the
asset and liability approach of accounting for income taxes as required by
Statement of Financial Accounting Standards No. 109 in November 1993. The
effect of the adoption of SFAS No. 109 has been recorded as a $.4 million gain
due to a cumulative change in accounting principle.
NET INCOME. Net income increased 111% to $10.5 million in fiscal 1994, an
increase of $5.5 million over the net income of $5.0 million earned in fiscal
1993.
SEASONALITY OF BUSINESS--QUARTERLY RESULTS. Historically, the Company has
achieved its highest sales and profit levels in its third and fourth quarters,
followed in declining order by its second and first quarters. As a result, the
Company experiences seasonal increases and decreases in its working capital
requirements. This pattern results primarily from the demand for the Company's
apparel products and the level of sales, which fluctuate moderately during the
course of the calendar year as a result of seasonal buying trends. A moderate
surge in sales of denim jeans and casual pants generally occurs during the fall
back-to-school and Christmas holiday selling seasons. Back-to-school
merchandise is shipped primarily during the Company's third quarter, while
Christmas merchandise is shipped primarily during the Company's fourth quarter.
The following table summarizes the net sales, gross profit, gross margin and
operating income (loss) of the Company for each of the interim financial
reporting periods in the last two fiscal years.
<PAGE>
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
FISCAL YEAR ENDED NOVEMBER 4, 1995
Net sales $76,306 $107,405 $117,024 $75,333
Gross profit 16,883 21,107 20,587 13,575
Operating income (loss) 3,577 5,370 5,000 (5,437)
Net income (loss) 1,424 2,375 2,038 (4,825)
Per common share:
Net income (loss) $0.15 $0.24 $0.21 ($0.49)
FISCAL YEAR ENDED NOVEMBER 5, 1994
Net sales $76,601 $88,195 $97,816 $91,603
Gross profit 15,818 21,382 25,166 23,145
Operating income (loss) 2,479 4,635 9,749 (468)
Income before cumulative effect of
change in accounting method 696 2,213 5,357 1,792
Cumulative effect of change in
accounting method - - - 431
Net income 696 2,213 5,357 2,223
Per common share:
Income before cumulative effect of
change in accounting method $0.07 $0.23 $0.55 $0.18
Cumulative effect of change in
accounting method - - - $0.04
Net income $0.07 $0.23 $0.55 $0.22
LIQUIDITY AND CAPITAL RESOURCES. The Company's principal capital requirements
have been to fund working capital needs and capital expenditures. The Company
has historically relied primarily on internally generated funds, trade credit,
bank borrowings and other debt offerings to finance these needs.
In fiscal 1995, net cash of $15.8 million was used in operations, as
compared to $23.7 million and $.3 million provided by operations in fiscal 1994
and 1993, respectively. The increase from fiscal 1993 to 1994 was primarily
due to the increase in net income of $4.6 million, net of $.9 million non-cash
costs recognized in connection with the extraordinary loss on extinguishment of
debt, an increase in accounts payable and accrued expenses of $15.3 million,
and a decrease of $3.0 million in prepaid and other current assets. The
decrease from fiscal 1994 to 1995 was primarily due to the decrease in net
income of $9.5 million, the decrease in accounts payable and accrued
liabilities of $13.2 million and the increase in inventories of $13.9 million,
which was partially offset by the decrease in accounts receivable of $5.9
million. The decrease in accounts receivable is primarily due to the decrease
in fourth quarter net sales. The increase in inventories is primarily due to
soft retail sales in the United States during the fourth quarter, which
resulted in customers delaying delivery of goods, and the increase in European
backorders. The decrease in accounts payable is primarily due to the decrease
in fourth quarter inventory purchases. These changes are not believed to
represent a permanent trend in the Company's operations.
Net cash used in investing activities increased by $10.9 million in
fiscal 1995 to $27.0 million and $11.5 million in fiscal 1994 to $16.1 million.
Cash used in investing activities has been primarily attributable to the
acquisition and renovation of manufacturing, laundry and warehouse facilities.
These investments were primarily financed by the proceeds of industrial
development revenue bonds (IRBs). The Company has no material outstanding
capital expenditure commitments.
<PAGE>
Net cash provided by financing activities was $38.1 million, $6.9 million
and $6.2 million in fiscal 1995, 1994 and 1993, respectively. The increase in
fiscal 1995 was primarily due to the increase in the long-term debt
attributable to the replacement of the senior notes of $23 million, the
increase in the revolving line of credit of $6.5 million and the proceeds
attributable to the IRBs of $14.8 million.
As of November 4, 1995, the Company had credit agreements providing a
$37.5 revolving line of credit, a $10.0 million in senior term loan, and $43.0
million in senior notes payable. As of November 4, 1995, $6.5 million was
outstanding on the revolving line of credit. In addition, the Company had
$26.2 million of IRBs outstanding at November 4, 1995, the proceeds of which
have been used to finance the plant expansions noted above. The Company also
has foreign financing agreements with three banks providing term loans
aggregating 7,750,000 deutsche marks (approximately $5,500,000) and lines of
credit aggregating 18 million deutsche marks (approximately $12,774,000). The
were no outstanding borrowings against the foreign lines of credit as of
November 4, 1995 (See Note 4 to the Consolidated Financial Statements).
The Company is a holding company, and is dependent upon the receipt of
dividends or other payments from its subsidiaries. The Company expects that
cash generated from operations and the credit agreements will provide the
financial resources sufficient to meet its foreseeable working capital and
capital expenditure requirements. There can be no assurance, however, that the
Company will not need to borrow from other sources during such period.
In recent years, certain retail customers have experienced significant
financial difficulties. The Company attempts to minimize its credit risk
associated with these customers by closely monitoring its accounts receivable
balances and their ongoing financial performance and credit status.
Historically, the Company has not experienced material adverse effects from
transactions with these customers. However, considering the customer
concentration of the Company's net sales, any material financial difficulty
experienced by a significant customer could have an adverse effect on the
Company's financial position or results of operations.
INFLATION. The Company does not believe that the rates of inflation during the
past three years which have been experienced in the United States and Europe,
where it competes, have had a significant effect on its net sales or
profitability. In the past, the Company has generally been able to successfully
offset its cost increases by increasing prices.
EFFECTS OF NEW ACCOUNTING STANDARDS. In February 1992, the Financial
Accounting Standards Board issued SFAS No. 109, "Accounting for Income Taxes,"
which requires a change in the Company's method of accounting for income taxes
from the deferred method to the liability method. Effective November 7, 1993,
the Company adopted the provisions of SFAS No. 109. Prior years' financial
statements have not been restated. The cumulative effect of adopting the
statement was to increase net income by $.4 million, or $.05 per share, in
fiscal 1994.
In December 1990, the FASB issued SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions." SFAS No. 106 is effective for
fiscal years beginning after December 15, 1992. As the Company does not
currently provide, and has no present intention of providing, postretirement
benefits other than pensions, the impact of SFAS No. 106 is not expected to be
material to the financial statements of the Company.
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting
for Postemployment Benefits." SFAS No. 112 is effective for fiscal years
beginning after December 15, 1993. As the Company does not currently provide
and has no present intention of providing postemployment benefits, the impact
of SFAS No. 112 is not expected to be material to the financial statements of
the Company.
In December 1993, the American Institute. of Certified Public Accountants
issued Statement of Position (SOP) 93-7 "Reporting on Advertising Costs." The
SOP restricts the deferral of advertising costs, except direct-response
advertising which meets specified criteria, beyond the date incurred or the
date the advertising first takes place. The SOP is effective for fiscal years
beginning after June 15, 1994. The Company adopted the SOP during the fourth
quarter of fiscal 1994.
In October 1995, the FASB issued SFAS No.123, "Accounting for Stock-Based
Compensation," which establishes a fair value method of accounting for stock-
based compensation plans either through recognition or disclosure. The Company
expects to adopt the employees stock-based compensation provisions of SFAS No.
123 by disclosing the pro forma net income and pro forma net income per share
amounts assuming the fair value method was used. The adoption of this standard
will not impact the Company's consolidated results of operations, financial
position or cash flows. The standard is effective for fiscal years beginning
after December 15, 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are at end of the document.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under the captions
"ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS" on pages 4 - 7 of the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
March 15, 1996 (the "1996 Proxy Statement") and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"EXECUTIVE COMPENSATION" on pages 8 - 13 of the 1996 Proxy Statement and is
incorporated herein by reference, except that the subsections entitled "Report
of Compensation Committee on Executive Compensation" appearing on pages 11 - 13
and "Performance Graph" appearing on page 13 of the 1996 Proxy Statement shall
not be deemed to be so incorporated.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption
"PRINCIPAL STOCKHOLDERS OF THE COMPANY" on pages 2 - 4 of the 1996 Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" on page 14 of the Company's
1996 Proxy Statement and is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed or incorporated by reference as a
part of this report:
1. The financial statements which are incorporated by reference from
the Annual Reportto Stockholders pursuant to Item 8 as follows:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at November 5, 1994 and November 4, 1995
Consolidated Statements of Operations For the Years Ended November
6, 1993, November 5, 1994 and November 4, 1995
Consolidated Statement of Stockholders' Equity For the Years ended
November 6,1993, November 5, 1994 and November 4, 1995
Consolidated Statement of Cash Flows for the Years Ended November 6,
1993, November 5, 1994 and November 4, 1995
Notes to Consolidated Financial Statements
2. The schedules and report of independent certified public accountants
thereon, listed onthe Index to Financial Statement Schedules attached hereto.
(b) No reports on Form 8-K were filed by the registrant during the last
quarter of the periodcovered by this report.
<PAGE>
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, thereunto duly authorized, in the City of New
York, State of New York, on May 6, 1996.
CHIC BY H.I.S, INC.
By /s/ Burton M. Rosenberg
-----------------------------
(Burton M. Rosenberg)
Chairman of the Board and
Chief Executive Officer
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.
SIGNATURE CAPACITY DATE
/s/ Burton M. Rosenberg Chairman of the Board, May 6, 1996
- ------------------------ Chief Executive Officer and Director
(Burton M. Rosenberg) (Principal Executive Officer)
/s/John Chin Chief Financial Officer May 6, 1996
- ------------------------ and Treasurer
(John Chin) (Principal Financial Officer)
/s/ Stuart Jaeger Secretary and Controller May 6, 1996
- ------------------------ (Principal Accounting Officer)
(Stuart Jaeger)
/s/ Milan Danek Director May 6, 1996
- ------------------------
(Milan Danek)
/s/ Richard K. Howe Director May 6, 1996
- ------------------------
(Richard K. Howe)
/s/ Hirsch Jacobson Director May 6, 1996
- ------------------------
(Hirsh Jacobson)
/s/ Rica Spector Director May 6, 1996
- ------------------------
(Rica Spector)
<PAGE>
SIGNATURE CAPACITY DATE
/s/ Roland L. Kimberlin Director May 6, 1996
- ------------------------
(Roland L. Kimberlin)
/s/ Robert F. Luehrs Director May 6, 1996
- ------------------------
(Robert F. Luehrs)
/s/ Jesse S. Siegel Director May 6, 1996
- ------------------------
(Jesse S. Siegel)
/s/ Harvey Silverman Director May 6, 1996
- ------------------------
(Harvey Silverman)
/s/ Edward J. Walsh, Jr. Director May 6, 1996
- ------------------------
(Edward J. Walsh, Jr.)
<PAGE>
Report of Independent Certified Public Accountant F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets as of November 5, 1994
and November 4, 1995 F-2
Statements of Operations for the years ended
November 6, 1993, November 5, 1994 and
November 4, 1995 F-3
Statements of Stockholders' Equity for the
years ended November 6, 1993, November 5, 1994
and November 4, 1995 F-4
Statements of Cash Flows for the years
ended November 6, 1993, November 5, 1994
and November 4, 1995 F-5
Notes to Consolidated Financial Statements F-6 to F-16
<PAGE> Page F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Chic by H.I.S., Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Chic by
H.I.S., Inc. and subsidiaries as of November 5, 1994 and November 4, 1995,
and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
November 4, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
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 Chic by
H.I.S., Inc. and subsidiaries as of November 5, 1994 and November 4, 1995,
and the results of their operations and their cash flows for each of the
three years in the period ended November 4, 1995, in conformity with
generally accepted accounting principles.
As discussed in Notes 1 and 7 to the consolidated financial statements, the
Company changed its method of accounting for income taxes and advertising
costs, respectively in fiscal 1994.
BDO Seidman, LLP
New York, New York
December 15, 1995
(except for Note 14,
which is dated
January 31, 1996)
<PAGE> Page F-2
CONSOLIDATED BALANCE SHEETS
CHIC BY H.I.S, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA) NOV. 5, 1994 NOV. 4, 1995
- --------------------------------------------------------------------------------
ASSETS (Note 4)
CURRENT:
Cash $ 19,952 $ 15,197
Accounts receivable - net of allowance of
$269 and $371 for doubtful accounts (Note 10) 46,143 40,181
Inventories (Note 2) 81,701 95,623
Prepaid expenses and other current assets 4,019 7,638
- -------------------------------------------------------------------------------
Total Current Assets 151,815 158,639
PROPERTY, PLANT AND EQUIPMENT, at cost, less
accumulated depreciation and amortization of
$24,947 and $30,616 (Notes 3, 4 and 5) 54,980 76,017
INTANGIBLE ASSETS RELATING TO PENSION (Note 6) 659 528
DEFERRED FINANCING COSTS 1,296 3,225
RESTRICTED FUNDS HELD BY TRUSTEE (Note 4 (b)(ii)) 2,708 409
OTHER ASSETS 1,245 707
- -------------------------------------------------------------------------------
$212,703 $239,525
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Current maturities of long-term debt (Notes
4 and 12) $440 $0
Revolving bank loan (Note 4) 0 6,500
Obligations under capital leases (Note 5) 834 702
Accounts payable 25,633 13,515
Accrued liabilities:
Payroll, payroll taxes and commissions 8,952 4,191
Income taxes 1,368 1,997
Other 5,308 8,340
- -------------------------------------------------------------------------------
Total Current Liabilities 42,535 35,245
- -------------------------------------------------------------------------------
NONCURRENT:
Long-term debt (Note 4) 51,940 84,663
Obligations under capital leases (Note 5) 2,300 1,598
Pension liability (Note 6) 5,060 4,592
- -------------------------------------------------------------------------------
Total Noncurrent Liabilities 59,300 90,853
- -------------------------------------------------------------------------------
COMMITMENTS (Notes 4,5,6,8 and 11)
STOCKHOLDERS' EQUITY (Notes 4,6 and 9):
Preferred stock, $.01 par value - shares authorized
10,000,000; none issued 0 0
Common stock, $.01 par value - 25,000,000 shares
authorized, issued and outstanding, 9,753,868
in both years 98 98
Paid-in capital 105,526 105,526
Retained earnings 7,788 8,800
Foreign currency translation adjustment 1,857 3,068
Excess of additional pension liability over
intangible pension asset (4,401) (4,065)
- -------------------------------------------------------------------------------
110,868 113,427
- -------------------------------------------------------------------------------
$212,703 $239,525
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> Page F-3
CONSOLIDATED STATEMENT OF OPERATIONS
CHIC BY H.I.S, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED
- -------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) NOV. 6, 1993 NOV. 5, 1994 NOV. 4, 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES (Note 10) $304,623 $354,215 $376,068
Cost of goods sold 226,789 268,704 303,916
- -------------------------------------------------------------------------------------------
Gross Profit 77,834 85,511 72,152
LICENSING REVENUES (Note 11) 4,390 4,878 5,773
- -------------------------------------------------------------------------------------------
82,224 90,389 77,925
Selling, General and Administrative Expenses 64,407 68,066 69,415
Special Nonrecurring charge due to change in
accounting for advertising (Note 1) 0 5,928 0
- -------------------------------------------------------------------------------------------
Operating income before interest and finance
costs 17,817 16,395 8,510
Less: Interest and finance costs 8,186 3,677 6,129
- -------------------------------------------------------------------------------------------
Income before provision for income taxes,
extraordinary items and cumulative effect of
change in accounting method 9,631 12,718 2,381
Provision for Income Taxes (Note 7) 3,886 2,660 1,369
- -------------------------------------------------------------------------------------------
Income before extraordinary items and
cumulative effect of change in accounting
method 5,745 10,058 1,012
- -------------------------------------------------------------------------------------------
Extraordinary Items:
Utilization of net operating loss carry forward
(Note 7) 2,565 0 0
Loss on early extinguishment of debt (Note 12) (3,335) 0 0
- -------------------------------------------------------------------------------------------
(770) 0 0
- -------------------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting method 4,975 10,058 1,012
- -------------------------------------------------------------------------------------------
Cumulative effect of change in accounting method
(Note 7) 0 431 0
- -------------------------------------------------------------------------------------------
Net Income $4,975 $10,489 $1,012
- -------------------------------------------------------------------------------------------
Earnings Per Common Share:
Income before extraordinary item and cumulative
effect change in accounting method $0.80 $1.03 $0.10
- -------------------------------------------------------------------------------------------
Cumulative effect of change in accounting method $0.00 $0.05 $0.00
- -------------------------------------------------------------------------------------------
Net income $0.69 $1.08 $0.10
- -------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares
Outstanding 7,229,161 9,726,032 9,753,868
- -------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> Page F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 6,1993, NOVEMBER 5,1994, AND NOVEMBER 4, 1995
CHIC BY H.I.S, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
EXCESS OF
ADDITIONAL
PENSION
LIABILITY
FOREIGN OVER
RETAINED CURRENCY INTANGIBLE
COMMON PAID-IN EARNINGS TRANSLATION PENSION
(IN THOUSANDS) TOTAL STOCK CAPITAL (DEFICIT) ADJUSTMENT ASSET
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 7, 1992 $4,628 $8 $12,636 $(7,676) $786 $(1,126)
Net income 4,975 - - 4,975 - -
Shares issued through public offering 69,928 70 69,858 - - -
Shares issued for conversion of debt 22,000 19 21,981 - - -
Adjustment of excess of additional
pension liability over intangible
pension asset (Note 6) (1,522) - - - - (1,522)
Acquisition of minority interest 192 - 150 - 42 -
Foreign currency translation adjustment (345) - - - (345) -
- -----------------------------------------------------------------------------------------------------------------------------
Balance, November 6, 1993 99,856 97 104,625 (2,701) 483 (2,648)
Net income 10,489 - - 10,489 - -
Stock options exercised 39 - 39 - - -
Shares issued through public offering
over allotment 863 1 862 - - -
Adjustment of excess of additional
pension liability over intangible
pension asset (Note 6) (1,753) - - - - (1,753)
Foreign currency translation adjustment 1,374 - - - 1,374 -
- -----------------------------------------------------------------------------------------------------------------------------
Balance, November 5, 1994 110,868 98 105,526 7,788 1,857 (4,401)
Net income 1,012 - - 1,012 - -
Adjustment of excess of additional
pension liability over intangible
pension asset (Note 6) 336 - - - - 336
Foreign currency translation adjustment 1,211 - - - 1,211 -
- -----------------------------------------------------------------------------------------------------------------------------
Balance, November 4, 1995 $113,427 $98 $105,526 $8,800 $3,068 $(4,065)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> Page F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
CHIC BY H.I.S, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) NOV. 6, 1993 NOV. 5, 1994 NOV. 4, 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,975 $ 10,489 $ 1,012
- --------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 6,035 5,931 6,201
Allowance for doubtful accounts - - 102
Deferred income taxes - (1,824) (2,438)
Deferred interest 480 - -
Accretion of debt 333 - -
Forgiveness of junior subordinated debentures (4,427) - -
Elimination of deferred financing cost 2,945 - -
Amortization of original issue discount 2,417 - -
Decreased (increase) in:
Accounts receivable (2,527) (762) 5,860
Inventories (9,732) (9,918) (13,923)
Prepaid expenses and other current assets (835) 3,030 (1,181)
Other assets 1,153 123 538
Increase (decrease) in:
Accounts payable (5,461) 9,454 (12,118)
Accrued liabilities 5,334 5,835 (1,110)
- --------------------------------------------------------------------------------------------------------------
Total adjustments (4,285) 11,869 (18,069)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 690 22,358 (17,057)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (4,686) (16,083) (26,991)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of foreign bank debt (6,008) (358) -
Proceeds from issuance of new foreign bank debt 4,722 - -
Increase in loans under revolving line of credit 3,000 - 6,500
Repayment of long-term debt (93,486) (3,400) (23,578)
Increase in long-term debt 30,000 - 43,000
Proceeds from IPO 69,928 - -
Proceeds from issuance of common stock - 902 -
Proceeds from issuance of Industrial Development
Revenue Bonds 536 10,456 14,764
Increase in deferred financing costs (1,373) (79) (2,144)
Principal payments under capitalized lease obligations (1,107) (1,225) (834)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 6,212 6,296 37,708
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 2,216 12,571 (6,340)
Effect of exchange rates on cash (314) 1,878 1,585
CASH, beginning of year 3,601 5,503 19,952
- --------------------------------------------------------------------------------------------------------------
CASH, end of year $ 5,503 $ 19,952 $ 15,197
- --------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 7,563 $ 3,355 $ 7,018
Taxes 619 2,224 1,069
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital leases entered into during the year 3,426 949 87
Restricted funds held by trustee from issuance of
Industrial Development Revenue Bonds $ 8,164 $ 2,708 $ 409
Shares issued for conversion of debt 22,000 - -
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> Page F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHIC BY H.I.S, INC. AND SUBSIDIARIES
1. SUMMARY OF ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Chic by H.I.S, Inc. (the "Company") and its
wholly-owned domestic subsidiaries, Henry I. Siegel Company, Inc.
("Siegel") and Chic Holdings Corp., formed in 1991, and its wholly-owned
German subsidiary, h.i.s. sportswear GmbH ("Sportswear") and their
respective subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation. Prior to December 9, 1992, Sportswear was a
95%-owned subsidiary.
On December 9, 1992, the Company acquired the remaining interest in
Sportswear in exchange for 11 shares of the Company's common stock (before
giving effect to the stock split effected on February 16, 1993).
The equity accounts and earnings per common share information have been
retroactively adjusted to reflect the stock split effected on February 16,
1993 in which approximately 796 shares of $.01 par value common stock were
issued for each share of $1 par value Class A common stock.
(B) BUSINESS. The Company designs, manufactures and distributes moderately
priced jeans, casual pants and shorts. The Company is headquartered in New
York City, with manufacturing facilities located in Tennessee, Kentucky,
Mississippi and Alabama. Domestically, the Company markets its jeans and
casual pants primarily to mass merchandisers and to department stores and
specialty stores under the "Chic" and "H.I.S" brand names. Its foreign
operations are conducted by Sportswear, which markets the Company's branded
products in Europe. In addition, the Company derives licensing income from
the use primarily of its "Chic" trademark by manufacturers of various
products that the Company does not produce.
(C) REPORTING PERIODS. For financial reporting purposes, the Company
reports on a 52- to 53-week year ending on the first Saturday subsequent to
October 31. The fiscal years ended November 6, 1993, November 5, 1994 and
November 4, 1995 each contained 52 weeks.
(D) FOREIGN CURRENCY TRANSLATION. The financial statements of the foreign
subsidiary are translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, "Foreign Currency
Translation." Balance sheet accounts are translated at the current exchange
rate and income statement items are translated at the average exchange rate
for the period. Gains and losses resulting from the translation are
accumulated in a separate component of stockholders' equity.
(E) INVENTORIES. Inventories are valued at the lower of cost (first-in,
first-out) or market.
(F) DEPRECIATION. Depreciation of property, plant and equipment is
computed by the straight-line method.
(G) LEASED PROPERTY UNDER CAPITAL LEASES. Property under capital leases is
amortized over the lives of the respective leases or the useful lives of
the assets.
<PAGE> F-6
(H) DEFERRED FINANCING COSTS. Capitalized costs incurred by the Company in
connection with the financing transactions described in Note 4 are
amortized over the term of the debt.
(I) ADVERTISING COSTS. During the fourth quarter of fiscal 1994, the
Company adopted the AICPA Statement of Position (SOP) 93-7, "Reporting on
Advertising Costs." The SOP restricts the deferral of advertising costs,
except direct-response advertising which meets specified criteria, beyond
the date incurred or the date the advertising first takes place. Prior to
the adoption of SOP 93-7, these costs were generally expensed over their
useful life.
(J) INCOME TAXES. Effective November 7, 1993, the Company adopted the
liability method specified by SFAS No. 109 "Accounting for Income Taxes."
Prior year financial statements have not been restated.
(K) EARNINGS PER COMMON SHARE. Earnings per common share are computed
based upon the weighted average number of outstanding shares of common
stock during the respective years, as adjusted for the stock split
discussed in (a) above and common equivalent shares applicable to assumed
exercise of stock options and warrants.
(L) REVENUE RECOGNITION. Sales are recognized upon shipment of products
or, in the case of licensing revenues, when products using the Company's
brand name are sold by licensees or minimum guaranteed royalties are due.
(M) STATEMENTS OF CASH FLOWS. For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
2. INVENTORIES
Inventories consist of the following:
(IN THOUSANDS) NOV. 5, 1994 NOV. 4, 1995
- ------------------------------------------------------------------------
Raw materials $15,855 $11,852
Work-in-process 20,518 15,877
Finished goods 45,328 67,894
- ------------------------------------------------------------------------
$81,701 $95,623
- ------------------------------------------------------------------------
<PAGE> Page F-8
3. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
(IN THOUSANDS) NOV. 5, 1994 NOV. 4, 1995 USEFUL LIVES
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 532 $ 794
Building and improvements 38,800 54,018 30 years
Machinery and equipment (including data
processing and transportation equipment) 30,976 42,983 3-7 years
Construction in progress 1,646 778
- -------------------------------------------------------------------------------------
71,954 98,573
Less Accumulated depreciation 22,054 26,592
- -------------------------------------------------------------------------------------
49,900 71,981
- -------------------------------------------------------------------------------------
Equipment under capital leases 7,973 8,060 7 years
Less Accumulated depreciation 2,893 4,024
- -------------------------------------------------------------------------------------
5,080 4,036
- -------------------------------------------------------------------------------------
$54,980 $76,017
- -------------------------------------------------------------------------------------
</TABLE>
4. NOTES PAYABLE, LONG-TERM DEBT AND FOREIGN FINANCING AGREEMENTS
LONG-TERM DEBT
Long-term debt consists of the following:
(IN THOUSANDS) NOV. 5, 1994 NOV. 4, 1995
- -------------------------------------------------------------------------
Notes payable - revolving credit agreement (a) $ - $ 6,500
Senior term loan (a) 10,000 10,000
Senior notes payable (a) 20,000 43,000
Industrial Development Revenue Bonds (b)(i) 3,400 3,000
Industrial Development Revenue Bonds (b)(ii) 8,700 8,700
Industrial Development Revenue Bonds (b)(iii) 5,000 5,000
Industrial Development Revenue Bonds (b)(iv) 0 9,455
Foreign bank term loan (c) 5,280 5,508
- ----------------------------------------------------------------------
52,380 91,163
Less: Current portion 440 6,500
- ----------------------------------------------------------------------
$51,940 $84,663
- ----------------------------------------------------------------------
(A) Concurrent with the Company's initial public stock offering in February
1993 (see note 9), the Company consummated refinancing agreements with its
lenders. The agreements provided for the exchange of all outstanding warrants
and $22 million of debt into shares of common stock, the forgiveness of certain
accrued or paid-in-kind interest aggregating $4.4 million, the repayment of
approximately $71.0 million of indebtedness using the net proceeds of the
offering, and an increase in the amount available under its revolving line of
credit.
On June 30, 1993, the Company entered into two financing agreements in the
United States aggregating $40 million, which was used to pay off all
outstanding indebtedness under its former credit facility. The agreements
provided for a $10 million revolving credit line, a $10 million term loan and
$20 million of senior notes. In December 1994, the Company amended the terms of
its revolving credit line to increase the revolving credit facility from $10.0
million to $37.5 million. Borrowings under the revolving credit bear interest
at either the prime rate or the Eurorate plus 1.25% at the Company's option
(8.75% at November 4, 1995). The interest on the term loan of $10 million is
payable in quarterly installments at 5.869% commencing September 30, 1993. The
term loan is due on June 30, 1997. On June 30, 1995, the $20 million of 8.11%
senior notes were replaced by $43 million of new notes consisting of $25
million 7.5% senior notes due June 30, 2003 and $18 million 7.67% senior notes
due June 30, 2005. Principal payments commence June 30, 1998. The agreements
contain various covenants including, among others, requirements relating to the
maintenance of certain financial ratios and limitations on dividends and other
restricted payments. The Company has obtained waivers where required.
<PAGE> Page F-9
(B)(I) In May 1990, the Company borrowed $4.5 million in connection with the
issuance of Industrial Development Revenue Bonds by the County of Carroll,
Tennessee to construct a manufacturing facility. The bonds which were scheduled
to mature on May 1, 2000 were refinanced in April 1995 through the issuance of
new IRBs in an aggregate principal amount of $3 million. The new bonds mature
April 1, 2005, bear an average interest rate of 7.0% and are guaranteed by the
Company.
(II) In September 1993, the Company borrowed $8.7 million in connection
with the issuance of Industrial Development Revenue Bonds by the County of
Carroll, Tennessee to construct an addition to the distribution center. The
bonds mature on September 1, 2003, and bear interest at 8% per annum. Principal
payments commence on September 1, 1997. The bonds are collateralized by the
related real estate and are guaranteed by the Company.
(III) In September 1994, the Company borrowed $5.0 million in connection
with the issuance of Industrial Building Revenue Bonds by the City of Hickman,
Kentucky to (1) acquire land and building, (2) renovate and expand such
manufacturing facility, (3) purchase land and build a laundry facility. The
bonds are payable in annual installments commencing on August 1, 2000. The
bonds, which are not collateralized, mature as follows:
(IN THOUSANDS) INTEREST RATE
- ------------------------------------------------------------------------------
August 1, 2000 $ 375 6.10%
August 1, 2001 395 6.20%
August 1, 2002 420 6.30%
August 1, 2003 445 6.40%
August 1, 2004 475 6.50%
August 1, 2009 2,890 6.95%
The proceeds of the Industrial Revenue Bonds are held in trust on deposit
with First America Trust Company. These funds are restricted for the Hickman,
Kentucky Projects. These assets are invested in prime commercial paper, mature
within one year and bear interest at approximately 4.6% per annum.
(IV) On February 23, 1995, the Company borrowed approximately $9.45 million
in connection with the issuance of Industrial Development Revenue Bonds by
Fulton County, Kentucky. The proceeds will be used to (i) acquire and improve a
tract of land in Fulton County, (ii) construct and equip a laundry facility on
such land, (iii) finance capitalized interest on the bonds during the
construction period and (iv) cover a portion of the costs of the issuance of
the bonds. Principal payments on the bonds are to be made in annual
installments beginning on February 1, 2001 and ending on February 1, 2010. The
bonds on average bear interest at the rate of approximately 7.5% per annum and
mature as follows:
(IN THOUSANDS) INTEREST RATE
- ----------------------------------------------------------------------
February 1, 2001 $ 670 7.20%
February 1, 2002 720 7.20%
February 1, 2003 770 7.20%
February 1, 2004 830 7.60%
February 1, 2005 890 7.60%
February 1, 2006 960 7.60%
February 1, 2007 1,030 7.60%
February 1, 2008 1,110 7.50%
February 1, 2009 1,195 7.50%
February 1, 2010 1,280 7.50%
<PAGE> F-10
(C)FOREIGN FINANCING AGREEMENTS
(I) In fiscal 1995, Sportswear entered into financing agreements with three
banks to provide term loans aggregating 7,750,000 deutsche marks (approximately
$5,500,000). The term loans bear an average interest of 7.3% and mature through
fiscal 2000.
(II) Sportswear has lines of credit with three banks to provide up to 18
million deutsche marks (approximating $12.8 million) at prevailing interest
rates, which approximated 7.5% at November 4, 1995. The lines of credit
generally have no termination date but are reviewed periodically for renewal at
the option of the banks.
(D) Long-term debt maturities during the next five fiscal years are as
follows:
FISCAL YEAR ENDING (IN THOUSANDS)
- ---------------------------------------------------------------
1996 $ 6,500
1997 10,711
1998 6,850
1999 8,121
2000 11,371
Thereafter 47,610
- ---------------------------------------------------------------
$91,163
- ---------------------------------------------------------------
5. CAPITALIZED LEASE OBLIGATIONS
The Company has entered into lease/purchase agreements for certain machinery
and equipment. Future minimum lease payments under capital leases, and the
present value of the net minimum lease payments as of November 4, 1995 are as
follows:
FISCAL YEAR ENDING (IN THOUSANDS)
- --------------------------------------------------------------
1996 $ 868
1997 821
1998 590
1999 214
2000 29
Thereafter 120
- -------------------------------------------------------------
2,642
Less: Amount representing interest 342
- -------------------------------------------------------------
Present value of net minimum lease payments:Total 2,300
Due within one year 702
- -------------------------------------------------------------
Due after one year $1,598
- -------------------------------------------------------------
6. PENSION PLAN
The Company has a noncontributory defined benefit pension plan for the eligible
employees of Siegel who have met certain service requirements. The normal
retirement age is 65, with early retirement optional at age 62, provided the
length of service requirements, as defined in the plan, have been met.
Benefits are based upon length of service and a percentage of compensation
subject to limitation. The Company's funding policy is to contribute amounts
determined annually on an actuarial basis that provides for current and future
benefits in accordance with funding requirements of Federal law and
regulations.
The following table sets forth the plan's funded status and amounts
recognized in the Company's financial statements at November 5, 1994 and
November 4, 1995:
<PAGE> Page F-11
<TABLE>
<CAPTION>
(IN THOUSANDS) NOV. 5, 1994 NOV. 4, 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $14,300 and $15,400 $(15,600) $(16,600)
- ---------------------------------------------------------------------------------------------------------
Projected benefit obligation for services rendered to date (15,600) (16,600)
Plan assets at fair value, primarily bonds 9,707 11,424
- ---------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets (5,893) (5,176)
Unrecognized net loss from past experience different from that
assumed 4,401 4,065
Unrecognized prior service cost 139 112
Unrecognized net obligation at Nov. 1, 1987 being recognized
over 12 years 520 415
Adjustment required to recognize minimum liability (5,060) (4,592)
- ---------------------------------------------------------------------------------------------------------
Accrued pension liability (5,893) (5,176)
Less: Current portion (883) (584)
- ---------------------------------------------------------------------------------------------------------
$(5,060) $(4,592)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Net pension cost recognized in the consolidated statements of
operations consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
- --------------------------------------------------------------------------------------
(IN THOUSANDS) NOV. 6, 1993 NOV. 5, 1994 NOV. 4, 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 334 $ 335 $ 368
Interest cost 1,164 1,246 1,305
Actual return on plan assets (704) 932 (1,351)
Net amortization and deferral (50) (1,699) 670
- --------------------------------------------------------------------------------------
Net pension cost $744 $814 $992
- --------------------------------------------------------------------------------------
</TABLE>
Assumptions used in accounting for pension costs are as follows:
1993 1994 1995
- ------------------------------------------------------------------------------
Discount rate 8.5% 8.5% 8.5%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
7. INCOME TAXES
The components of earnings (loss) before income taxes and the related provision
(credit) for income taxes are presented below:
YEAR ENDED
- -------------------------------------------------------------------------------
(IN THOUSANDS) NOV. 6, 1993 NOV. 5, 1994 NOV. 4, 1995
- -------------------------------------------------------------------------------
Earnings (loss)before income taxes:
United States $4,492 $5,180 $(5,698)
Europe 5,139 7,538 8,079
- -------------------------------------------------------------------------------
9,631 12,718 2,381
- -------------------------------------------------------------------------------
Provision (credit) for income taxes
Current:
U.S. federal 600 1,393 0
State and local 341 300 392
Europe 380 2,360 3,415
- -----------------------------------------------------------------------------
1,321 4,053 3,807
- -----------------------------------------------------------------------------
Deferred:
U.S. federal 0 (1,393) (2,438)
- -----------------------------------------------------------------------------
Provision in lieu of income taxes 2,565 0 0
- -----------------------------------------------------------------------------
Total $3,886 $2,660 $1,369
- -----------------------------------------------------------------------------
<PAGE> Page F-12
A reconciliation of the provision (credit) for income taxes to the amounts
which would have been recorded using the statutory U.S. Federal income tax rate
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS) NOV. 6, 1993 NOV. 5, 1994 NOV. 4, 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes at the statutory rate $3,275 $4,324 $ 810
Increase (decrease) for the effect of:
State and local income taxes, net of Federal tax
benefit 224 198 259
Foreign income taxes 437 (204) 671
Utilization of net operating loss carryfoward 0 (2,138) 0
Deferred tax asset 0 0 (236)
Permanent depreciation differences (50) 382 (140)
Other (net) 0 98 5
- -------------------------------------------------------------------------------------------------
Provision for income taxes $3,886 $2,660 $1,369
- -------------------------------------------------------------------------------------------------
</TABLE>
In 1994 Siegel utilized approximately $6 million of domestic net
operating loss carryforwards. In 1993 Siegel utilized approximately
$1,898,000 of domestic net operating loss carryforwards for financial
reporting purposes and has reflected the related tax benefit of $759,000 as
an extraordinary credit in the accompanying statements of operations. As of
November 4, 1995 the Company has a deferred tax asset of $4.2 million
included with other current assets primarily attributable to tax credit
carryforwards of $1.8 million, which have no expiration date, and net
operating loss carryforwards of $2.4 million, which expire in 2010. As of
November 5, 1994, the Company had a deferred tax asset of $1.8 million
consisting primarily of tax credit carryforward. In fiscal 1994, the
valuation allowance was reduced by $2.1 million, when the realization of
the use of the net operating loss carryforwards was deemed to be more
likely than not. At November 5, 1994, and November 4, 1995, there was no
valuation allowance applied to the deferred tax assets. There were no
other significant temporary differences.
No provision has been made for U.S. Federal and foreign withholding
taxes on $8.7 million of the undistributed earnings of the foreign
subsidiary as of November 4, 1995, as the Company intends to indefinitely
reinvest such earnings.
Effective November 7, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The cumulative
effect of this adoption was an increase in net income of $431,000, or $.05
per share for fiscal 1994.
8. COMMITMENTS
(A) LEASES
The minimum annual rental commitments under noncancellable leases as of
November 4, 1995 are as follows (In Thousands):
REAL ESTATE MACHINERY,
AND AUTOMOTIVE
FISCAL YEAR ENDING TOTAL BUILDINGS EQUIPMENT, ETC.
1996 $2,351 $1,498 $853
1997 2,049 1,456 593
1998 1,728 1,380 348
1999 851 759 92
2000 709 638 71
Thereafter $3,625 $3,364 $261
Rent expense for the years ended November 6, 1993, November 5, 1994 and
November 4, 1995 totaled $4,345,000, $4,392,000 and $4,125,000, respectively.
<PAGE> F-13
(B) CONSULTING AND EMPLOYMENT AGREEMENTS
The Company has employment agreements with eight officers which have initial
terms that expire on various dates through 1998, and a consulting agreement
with the former owner of the business of Siegel, which has an initial term that
expires in 1998, which aggregate $2,375,000 in yearly compensation.
9. STOCKHOLDERS' EQUITY
On February 17, 1993, the Company completed an initial public stock offering of
6,900,000 shares of common stock (including 900,000 shares subject to an
over-allotment option) for a purchase price of $11.50 per share. Proceeds
totaled approximately $79,350,000. The net proceeds were used to pay a portion
of the outstanding debt at the date of the offering. Concurrent with the
offering, $22,000,000 of the debt was converted into 1,913,044 shares of common
stock.
On June 17, 1994, the underwriter of a secondary public offering of common
stock of the Company exercised an over-allotment option that the Company had
granted to the underwriter in connection with the public stock offering. The
Company issued approximately 97,000 shares of common stock pursuant to the
exercise of this over-allotment option.
In February 1993, the Company's stock option plan (the "Plan") was adopted.
Under the Plan, options to purchase an aggregate of not more than 600,000
shares of common stock may be granted from time to time to key employees,
officers, directors, and consultants of the Company or its affiliates. Stock
appreciation rights related to options ("related SARs") and stock appreciation
rights not related to options ("unrelated SARs") may also be granted to the
aforementioned groups.
The Plan is administered by the Stock Option Committee under the Plan. The
per share exercise price for stock options may not be less than 100% of the
fair market value of common stock on the date the option is granted (110% of
the fair market value on the date of grant for incentive stock options if the
optionee is more than a 10%-owner of the Company). The exercise price for
unrelated SARs cannot be less than 100% of the common stock price on the date
of grant. For related SARs, the exercise price cannot be less than 100% of the
fair market value of common stock on the date of grant of the options. Options
and SARs may be granted for a term to be determined by the committee of not
more than ten years from the date of grant.
During 1993 and 1994, stock options were granted to officers and employees
to purchase 477,159 shares of common stock at an exercise price of $11.50 per
share. These options were originally scheduled to vest equally over a period of
three years from date of grant and were exercisable for a term of five years
commencing on the date of grant.
In August 1994, the vesting schedule of all outstanding options was
accelerated and all of such options became immediately exercisable. A summary
of activity for the Company's stock option plan is presented below:
EXERCISE PRICE
OPTION SHARES RANGE PER SHARE
- ---------------------------------------------------------
Balance, November 5, 1994 477,159 $11.50
Granted 78,800 9.875-11.50
Exercised 0 11.50
Canceled 18,125 11.50
- --------------------------------------------------------
BALANCE, NOVEMBER 4, 1995 537,834 $11.50
- --------------------------------------------------------
NOV. 4, 1995
- ----------------------------------------------------
Exercisable 537,834
Available for future grants 62,166
<PAGE> Page F-14
On December 9, 1995, the Stock Option Committee approved the replacement of
outstanding options under the Stock Option Plan with new options. The new
options will have substantially the same terms as the replaced options except
for the following:
(a) The new options will have an exercise price of $5.875 per share,
reflecting the fair market value of a share of Chic common stock on December 9,
1995; and
(b) the new options will not be exercisable until after six months following
the replacement of the old options and will expire five years from the date of
grant, i.e., December 8, 2000.
In January 1995, the Board of Directors adopted the Chic by H.I.S, Inc. 1995
Stock Option Plan for Non-Employee Directors (the "Formula Plan"), which
permits the award of options to purchase an aggregate of up to 80,000 shares of
common stock of the Company to certain non-employee directors. Awards under the
Formula Plan are made pursuant to a formula that is set forth in the plan. The
Formula Plan was approved by the shareholders in February 1995 and options to
purchase 40,000 shares of common stock, at an exercise price of $9.875 per
share, have been awarded to certain non-employee directors. The outstanding
options became fully exercisable July 1995--six months after the date they were
granted, and expire five years from the date of grant, or earlier in the case
of death, disability or termination.
10. GEOGRAPHIC INFORMATION
The Company operates primarily in two reportable geographical areas. Geographic
information was:
YEAR ENDED
- ----------------------------------------------------------------------------
(IN THOUSANDS) NOV. 6, 1993 NOV. 5, 1994 NOV. 4, 1995
- ----------------------------------------------------------------------------
Net sales:
United States $236,025 $276,932 $277,896
Europe 68,598 77,283 98,172
- ----------------------------------------------------------------------------
$304,623 $354,215 $376,068
- ----------------------------------------------------------------------------
Income from operations:
United States $ 11,927 $ 8,424 $ (16)
Europe 5,890 7,971 8,526
- ----------------------------------------------------------------------------
$ 17,817 $ 16,395 $ 8,510
- ----------------------------------------------------------------------------
Identifiable assets:
United States $164,962 $186,138 $204,556
Europe 18,295 26,565 34,969
- ----------------------------------------------------------------------------
$183,257 $212,703 $239,525
- ----------------------------------------------------------------------------
Substantially all of the Company's sales are to retailers throughout the
United States and Europe. Sales to two major customers (with sales in excess of
10% of total sales) approximated, on an individual basis, 15.1%, and 11.6% for
the year ended November 6, 1993, 22.3% and 13.1% for the year ended November 5,
1994, and 23.2% and 14.0% for the year ended November 4, 1995, respectively.
The receivables from the two major customers at November 4, 1995 and November
5, 1994 represent approximately 43.1% and 43.9%, respectively, of the total
accounts receivable balance. The Company reviews a customer's credit history
before extending credit and obtains credit insurance on certain account
balances. An allowance for possible losses is established based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
<PAGE> Page F-15
11. LICENSING REVENUES
The Company has entered into licensing agreements providing for the use of its
trademark, "CHIC" for three- or four-year terms. The Company generally receives
royalty payments of 5% of net sales made by licensees, with guaranteed minimum
payments payable in quarterly installments. Remaining annual minimum amounts
are as follows:
(IN THOUSANDS)
- -----------------------------
1996 $3,525
1997 2,990
1998 1,844
1999 56
- -----------------------------
$8,415
- -----------------------------
12. LOSS ON EARLY EXTINGUISHMENT OF DEBT
On February 17, 1993, the Company effected the sale of its common stock to the
public and concurrently consummated agreements with its lenders to refinance
its debt. As a result of the refinancing, the Company realized an extraordinary
loss on early extinguishment of debt of $3,335,000 consisting of the following:
(IN THOUSANDS)
- -------------------------------------------------------------
Forgiveness of junior subordinated debentures
issued as interest $ 4,427
Amortization of original issue discount (2,417)
Elimination of deferred financing costs (2,945)
Refinancing financial advisory fees (2,400)
- -------------------------------------------------------------
$(3,335)
- -------------------------------------------------------------
13. UNAUDITED CONSOLIDATED FINANCIAL INFORMATION
(PRO FORMA)
The unaudited pro forma consolidated income statement following is presented to
illustrate the effects of the debt refinancing consummated concurrent with the
Company's public offering in February 1993 as if they occurred on November 8,
1992. Pro forma adjustments for the year ended November 6, 1993 include the
elimination of interest (including the amortization of original issue discount
and deferred financing costs) of approximately $4,668,000, relating to the debt
repaid, converted to equity or forgiven, and the related adjustments to the
provision for income taxes. The pro forma income statement does not include the
effect of the extraordinary loss of $3,335,000 incurred from the early
extinguishment of the restructured debt (see Note 12). The unaudited pro forma
statement is presented for illustrative purposes only and is not necessarily
indicative of the results that would have occurred or of future results.
<PAGE> Page F-16
YEAR ENDED
- ----------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOV. 6, 1993
- ----------------------------------------------------------------------------
Net sales $304,623
Cost of goods sold 226,789
- ----------------------------------------------------------------------------
Gross profit 77,834
Licensing revenues 4,390
- ----------------------------------------------------------------------------
82,224
Selling, general and administrative expenses 64,407
- ----------------------------------------------------------------------------
Operating income before interest and finance costs 17,817
Less: Interest and finance costs 3,518
Income before provision for income taxes and extraordinary item 14,299
Provision for income taxes 5,665
- ----------------------------------------------------------------------------
Income before extraordinary item 8,634
Extraordinary item (utilization of net operating loss
carryforward): 2,338
- ----------------------------------------------------------------------------
Net income 10,972
- ----------------------------------------------------------------------------
Earnings per common share:
Income before extraordinary item 0.90
- ----------------------------------------------------------------------------
Net income $1.14
- ----------------------------------------------------------------------------
Weighted average number of common shares outstanding 9,669,089
- ----------------------------------------------------------------------------
14. SUBSEQUENT EVENT
In January 1996, management decided to restructure certain manufacturing
operations due to the continuing downturn in the discount retail market.
Such restructuring is expected to include the closing of a manufacturing
facility, reducing its workforce, and disposing or abandoning certain
property and equipment. Management believes that these actions will result
in improved productivity and cost savings. In connection with this
strategy, the company intends to record a restructuring charge in the first
quarter of fiscal 1996, when the specific costs associated with the plan
have been identified. Management believes this charge may total
approximately $15 million.
DIVIDEND POLICY
The Company has not paid any cash or other dividends on its common stock in the
last two years. As a holding company, the ability of the Company to pay
dividends is dependent upon the receipt of dividends or other payments from its
subsidiaries. The payment of dividends (aggregated with certain other
restricted payments and restricted investments) by the Company, and by the
domestic subsidiaries to the Company, is generally limited to 50% of the
Company's consolidated net income computed on a cumulative basis from and after
(i) May 8, 1993 under the Company's domestic credit facilities and (ii) May 6,
1995 under the note agreement pursuant to which the Company's senior notes were
issued. Such restrictions limit the Company's ability to pay dividends to
approximately $1,020,000 as of November 4, 1995.
PRICE RANGE OF COMMON STOCK
1995 1994
- --------------------------------------------------------------------------
HIGH LOW HIGH LOW
- --------------------------------------------------------------------------
First Quarter $11 3/8 $ 9 1/8 $13 5/8 $ 9 7/8
Second Quarter $11 1/8 $ 9 1/2 $15 3/4 $14 1/4
Third Quarter $12 1/8 $10 1/2 $14 3/4 $12 1/4
Fourth Quarter $10 1/2 $ 5 1/4 $13 1/8 $10 1/4
The Company's Common Stock is traded on the New York Stock
Exchange under the symbol "JNS."
STOCKHOLDERS OF RECORD
As of December 29, 1995, there were 152 stockholders of record.
