SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended August 2, 1997
Commission File No. 1-11722
CHIC BY H.I.S, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3494627
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(State of Incorporation) (I.R.S. Employer
Identification No.)
1372 Broadway, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
(212) 302-6400
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Registrant's telephone number,
including area code
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares
Date Class Outstanding
- ------------------ ---------------------------- -----------
September 11, 1997 Common Stock, $.01 Par Value 9,759,718
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<PAGE>
CHIC BY H.I.S, INC.
INDEX
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<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1: Financial Statements (unaudited, except as noted):
Consolidated Balance Sheets at
August 2, 1997 and November 2, 1996 (audited) 3
Consolidated Statements of Operations
for the thirty-nine weeks ended August 2,
1997 and August 3, 1996 4
Consolidated Statements of Operations
for the thirteen weeks ended August 2,
1997 and August 3, 1996 5
Consolidated Statements of Cash Flows
for the thirty-nine weeks ended
August 2, 1997 and August 3, 1996 6
Consolidated Statements of Stockholders'
Equity for the thirty-nine weeks ended
August 2, 1997 and August 3, 1996 7
Notes to Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Part II. Other Information
Item 5: Special Note Regarding Forward-Looking Statements 15-16
Item 6: Exhibits and Reports on Form 8-K 17
Signature Page 18
</TABLE>
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
------------------------------------
<TABLE>
<CAPTION>
August 2,1997 November 2,1996
(Unaudited) (Audited)
----------- -----------
ASSETS
------
<S> <C> <C>
CURRENT:
Cash and cash equivalents $ 4,401 $ 27,178
Accounts receivable (net of reserve for possible losses) 37,315 33,309
Inventories 71,965 58,360
Deferred income taxes 607 5,010
Prepaid expenses and other
current assets 5,315 1,465
-------- --------
TOTAL CURRENT ASSETS 119,603 125,322
PROPERTY, PLANT AND EQUIPMENT, at
cost, less accumulated depreciation and amortization 69,822 66,830
INTANGIBLE ASSET RELATING TO PENSION 396 396
OTHER ASSETS 1,915 1,112
-------- --------
TOTAL ASSETS $191,736 $193,660
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT:
Revolver $ 6,800 $ --
Foreign revolver debt 12,955
Current maturities of long-term debt 750 750
Obligations under capital leases 757 864
Accounts payable 16,980 11,625
Accrued liabilities
Payroll, payroll taxes and commissions 5,058 4,639
Income taxes 4,064 2,009
Restructuring charge 3,000 5,400
Other 6,265 4,666
-------- --------
TOTAL CURRENT LIABILITIES 56,629 29,953
-------- --------
NONCURRENT:
Long-term debt 27,792 71,444
Pension liability 10,023 10,023
Obligation under capital leases 792 1,362
-------- --------
TOTAL NONCURRENT LIABILITIES 38,607 82,829
-------- --------
MINORITY INTEREST 8,068 --
-------- --------
STOCKHOLDERS' EQUITY 88,432 80,878
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $191,736 $193,660
======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except share and per share data)
----------------------------------------------
<TABLE>
<CAPTION>
Thirty-nine weeks Thirty-nine weeks
ended ended
August 2, August 3,
1997 1996
----------- -----------
<S> <C> <C>
NET SALES $ 204,379 $ 245,358
COST OF GOODS SOLD 163,015 193,111
----------- -----------
GROSS PROFIT 41,364 52,247
LICENSING REVENUES 2,023 4,393
----------- -----------
43,387 56,640
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 54,202 43,564
RESTRUCTURING AND SPECIAL CHARGES -- 15,000
----------- -----------
OPERATING LOSS (10,815) (1,924)
GAIN ON SALE OF SUBSIDIARY STOCK 34,079 --
INTEREST AND FINANCE COST (3,628) (5,173)
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES, MINORITY INTEREST AND
EXTRAORDINARY ITEM 19,636 (7,097)
PROVISION FOR INCOME TAXES 9,224 3,719
----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND EXTRAORDINARY ITEM $ 10,412 ($ 10,816)
MINORITY INTEREST 726 --
----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 9,686 (10,816)
EXTRAORDINARY LOSS
FROM EXTINGUISHMENT OF DEBT (330) --
----------- -----------
NET INCOME (LOSS) $ 9,356 ($ 10,816)
=========== ===========
PER SHARE DATA:
Income (loss) before extraordinary item $ .99 ($ 1.11)
=========== ===========
Net income (loss) $ .96 ($ 1.11)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES AND
SHARE EQUIVALENTS OUTSTANDING 9,763,829 9,753,868
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except share and per share data)
----------------------------------------------
<TABLE>
<CAPTION>
Thirteen weeks Thirteen weeks
ended ended
August 2, August 3,
1997 1996
----------- -----------
<S> <C> <C>
NET SALES $ 81,906 $ 90,185
COST OF GOODS SOLD 63,050 72,641
----------- -----------
GROSS PROFIT 18,856 17,544
LICENSING REVENUES 721 1,495
----------- -----------
19,577 19,039
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 15,332 13,770
----------- -----------
OPERATING INCOME 4,245 5,269
INTEREST AND FINANCE COST (939) (1,692)
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST 3,306 3,577
PROVISION FOR INCOME TAXES 1,570 1,296
----------- -----------
INCOME BEFORE MINORITY INTEREST 1,736 2,281
MINORITY INTEREST 726 --
----------- -----------
NET INCOME $ 1,010 $ 2,281
=========== ===========
PER SHARE DATA:
Net income $ .10 $ .23
=========== ===========
WEIGHTED AVERAGE COMMON SHARES AND
SHARE EQUIVALENTS OUTSTANDING 9,806,784 9,753,868
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
-------------------------------------
<TABLE>
<CAPTION>
Thirty-nine weeks Thirty-nine weeks
ended ended
August 2, August 3,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 9,356 ($10,816)
-------- --------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Gain on sale of subsidiary stock (34,079) --
Minority interest 725 --
Non-cash restructuring and special charges -- 9,545
Depreciation and amortization 3,377 2,520
Decrease (increase) in:
Accounts receivable (4,006) (10,627)
Inventories (13,605) 24,659
Deferred income taxes 4,403 --
Prepaid expenses and other (3,850) (2,154)
Other assets (803) (342)
Increase (decrease) in:
Accounts payable 5,355 1,029
Accrued liabilities 1,673 115
-------- --------
Total adjustments (40,810) 24,745
-------- --------
Net cash provided by (used in)
operating activities (31,454) 13,929
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (6,627) (5,010)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of subsidiary stock 43,054 --
Repayment of senior notes payable (43,000) (10,000)
Repayment of foreign term loan (89) --
Increase (decrease) in loans under revolver 6,800 (1,500)
Increase in foreign revolver debt 12,955 --
Increase in term loan -- (102)
Principal payments under capitalized leases (677) (608)
Increase in deferred financing costs -- (58)
Due from trustee -- 409
-------- --------
Net cash provided by (used in)
financing activities 19,043 (11,931)
-------- --------
DECREASE IN CASH (19,038) (3,012)
EFFECT OF EXCHANGE RATES ON CASH (3,739) (1,141)
CASH AND CASH EQUIVALENTS, beginning of period 27,178 15,197
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 4,401 $ 11,044
======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
-----------------------------------------------
<TABLE>
<CAPTION>
Excess
of addi-
tional
pension
liability
Foreign over
Retained currency intangible
Common Paid-in earnings translation pension
Total stock capital (deficit) adjustment asset
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, NOVEMBER 4, 1995 $ 113,427 $ 98 $ 105,526 $ 8,800 $ 3,068 ($ 4,065)
Net loss (10,816) -- -- (10,816) -- --
Foreign currency
translation adjustment (938) -- -- -- (938) --
--------- --------- --------- --------- --------- ---------
BALANCE, AUGUST 3, 1996 $ 101,673 $ 98 $ 105,526 ($ 2,016) $ 2,130 ($ 4,065)
========= ========= ========= ========= ========= =========
BALANCE, NOVEMBER 5, 1996 $ 80,878 $ 98 $ 105,526 ($ 16,764) $ 1,645 ($ 9,627)
Net income 9,356 -- -- 9,356 -- --
Foreign currency
translation adjustment (1,802) -- -- -- (1,802) --
--------- --------- --------- --------- --------- ---------
BALANCE, AUGUST 2, 1997 $ 88,432 $ 98 $ 105,526 ($ 7,408) ($ 157) ($ 9,627)
========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
2. Inventories
Inventories consist of the following:
(In Thousands) August 2, 1997 November 2, 1996
------- -------
Raw Materials $10,491 $ 9,169
Work-in-process 16,004 12,629
Finished Goods 45,470 36,569
------- -------
$71,965 $58,360
======= =======
3. Recent Accounting Standards
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," which allows a choice of either the intrinsic value method or the
fair value method of accounting for employee stock options effective for fiscal
years beginning after December 15, 1995. The Company has selected the option to
continue the use of the current intrinsic value method.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which provides for
the calculation of "basic" and "diluted" earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution from
the assumed exercise of stock options in a manner similar to fully diluted
earnings per share, except that the use of the market price at the end of the
period, when that price is higher than the average market price for the period,
has been eliminated. This standard is effective for period ending after December
15, 1997. The adoption of this standard is not expected to have a significant
effect on the Company's earnings per share calculation.
4. Presentation of Prior Year Data
Certain reclassifications have been made to conform prior year data with the
current presentation.
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
Item 2: Management's discussion and
analysis of financial condition
and results of operations
General
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As a designer, manufacturer and marketer of moderately priced, basic style male
and female denim jeans, casual pants and shorts, Chic by H.I.S, Inc. (the
"Company") believes that its products constitute basic apparel and, as such,
generally do not depend upon impulse buying or high fashion trends. The Company
distributes its products primarily through mass merchandisers which constitute
the Company's traditional channel of distribution.
The following discussion provides information and analysis of the results of
operations of the Company for the thirty-nine and thirteen weeks ended August 2,
1997 and August 3, 1996 and its liquidity and capital resources.
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
The following table sets forth selected operating data as a percentage
of net sales for the periods indicated.
<TABLE>
<CAPTION>
Thirty-nine weeks ended Thirteen weeks ended
-------------------------------- ------------------------------
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales:
United States 58.6% 68.0% 67.4% 72.0%
Europe 41.4 32.0 32.6 28.0
------ ------ ------ ------
Consolidated 100.0 100.0 100.0 100.0
Gross margin:
United States 4.5 12.2 15.0 11.3
Europe 42.5 40.5 39.7 40.4
Consolidated 20.2 21.3 23.0 19.5
Licensing revenues 1.0 1.8 .1 1.7
Selling, general and administrative
expenses 26.5 17.8 18.7 15.3
Restructuring and special charges - 6.1 - -
Operating income (loss) (5.3) (.8) 5.2 5.9
Gain on sale of subsidiary stock 16.7 - - -
Interest and finance costs 1.8 2.1 1.2 1.9
Income (loss) before provision for
income taxes, minority interest
and extraordinary item 9.6 (2.9) 4.0 4.0
Provision for income taxes 4.5 1.5 1.9 1.4
Income (loss) before minority interest and
extraordinary item 5.1 (4.4) 2.1 2.6
Minority interest .4 - .9 -
Extraordinary item .2 - - -
Net income (loss) 4.6% (4.4)% 1.2% 2.6%
</TABLE>
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
THIRTY-NINE WEEKS ENDED AUGUST 2, 1997 COMPARED TO THIRTY-NINE WEEKS ENDED
AUGUST 3, 1996
NET SALES. Net sales for the thirty-nine weeks ended August
2,1997 decreased $41.0 million, or 16.7%, from $245.4 million for the
thirty-nine weeks ended August 3, 1996 to $204.4 million. United States sales
decreased by $47.0 million, or 28.2%, to $119.8 million primarily due to a
decline in unit sales volume. As of August 2, 1997, the Company had a total
backlog of confirmed domestic purchase orders of $67.5 million, a decrease of
9.4% compared to $74.5 million on August 3, 1996. In the thirty-nine weeks ended
August 2, 1997, European sales increased by 25.7 million deutsche marks, or
22.1%, to 141.7 million deutsche marks primarily due to the increased market
penetration in Germany and Switzerland and the expansion of sales in Poland and
the Czech Republic. When converted using the prevailing currency exchange rate,
the European sales translated into an increase of $6.0 million, or 7.6%, to
$84.5 million for the thirty-nine weeks ended August 2, 1997. As of August 2,
1997, the Company had a backlog of confirmed European purchase orders of 60.4
million deutsche marks, an increase of 47.6% compared to 40.9 million deutsche
marks on August 3, 1996. The confirmed European backlog, when converted into
U.S. currency at the then prevailing rate, was $32.4 million, an increase of
16.7% compared to $27.7 million on August 3, 1996.
GROSS PROFIT. Gross profit for the thirty-nine weeks ended
August 2, 1997 decreased $10.8 million, or 20.8%, from $52.2 million in the
thirty-nine weeks ended August 3, 1996 to $41.4 million, and gross margin
decreased to 20.2% from 21.3%. United States gross profit decreased $15.0
million from $20.4 million for the thirty-nine weeks ended August 3, 1996 to
$5.4 million. The reduction of the gross profit amount and as a percentage of
net sales in the United States was primarily due to previously reported
inventory valuation adjustments. The Company has reduced the carrying cost of
the inventory to reflect the integration of the cost structure of its production
facility in Mexico, which it expects to reach full capacity in the first quarter
of fiscal 1998. European gross margin increased from 40.5% in the thirty-nine
weeks ended August 3, 1996 to 42.5% primarily due to product mix, as well as the
Company's ability to capitalize on improved purchasing power.
LICENSING REVENUES. Licensing revenues for the thirty-nine
weeks ended August 2,1997 decreased $2.4 million, or 54.0%, from $4.4 million
for the thirty-nine weeks ended August 3, 1996 to $2.0 million primarily due to
the poor retail business in the United States and the discontinuation of a
licensing agreement in the Czech Republic. The licensing agreement in the Czech
Republic was discontinued to allow the Company to pursue full sales and
marketing efforts in this region.
SG&A EXPENSES. Selling, general and administrative expenses
increased $10.6 million, or 24.4%, to $54.2 million for the thirty-nine weeks
ended August 2, 1997 primarily due to increased advertising charges associated
with special cooperative advertising programs designed to stimulate
over-the-counter sales.
RESTRUCTURING AND SPECIAL CHARGES. In the thirty-nine weeks
ended August 3, 1996, the Company restructured certain manufacturing operations
due to the continuing downturn in the retail market. Such restructuring included
the closing of certain manufacturing facilities and an accompanying reduction in
the workforce. In connection with the foregoing, the Company recorded
restructuring and special charges against earnings in the amount of $15 million
in the thirty-nine weeks ended August 3, 1996.
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
OPERATING INCOME. Operating income for the thirty-nine weeks
ended August 2,1997 decreased $8.9 million from an operating loss of $1.9
million in the thirty-nine weeks ended August 3, 1996 to an operating loss of
$10.8 million, primarily due to the decrease in sales and gross profit and the
increase in selling, general and administrative expenses in the current year
period, which was partially offset by the restructuring and special charges
recorded in the prior year period.
GAIN ON SALE OF SUBSIDIARY STOCK. In the thirty-nine weeks
ended August 2, 1997, the Company recorded a gain on the sale of approximately
47.5% of its wholly owned European subsidiary of approximately $34.1 million.
Proceeds of the offering were used in May 1997 to repay domestic borrowings.
INTEREST AND FINANCE COSTS. Interest and finance costs
decreased $1.6 million or 29.9%, from $5.2 million for the thirty-nine weeks
ended August 3,1996 to $3.6 million in the thirty-nine weeks ended August
2,1997. The decrease in interest cost was primarily due to lower average levels
of borrowings.
INCOME TAXES. The provision for income taxes for the
thirty-nine weeks ended August 2, 1997 was $9.2 million as compared to $3.7
million for the thirty-nine weeks ended August 3,1996, as a result of an
increase in foreign income taxes and the utilization of the Company's domestic
deferred tax asset.
EXTRAORDINARY ITEM. In the thirty-nine weeks ended August 2,
1997, the Company recorded an extraordinary charge of $330,000 attributable to
the early extinguishment of $43 million of senior notes payable.
THIRTEEN WEEKS ENDED AUGUST 2, 1997 (THE "1997 THIRD QUARTER") COMPARED TO
THIRTEEN WEEKS ENDED AUGUST 3, 1996 (THE "1996 THIRD QUARTER")
NET SALES. Net sales for the 1997 Third Quarter decreased $8.3
million, or 9.2%, from $90.2 million for the 1996 Third Quarter to $81.9
million. United States sales decreased by $9.7 million, or 15.0%, to $55.2
million primarily due to a decline in unit sales volume, as well as a decrease
in the average unit selling price. In the 1997 Third Quarter, European sales
increased by 9.1 million deutsche marks, or 23.8%, to 47.1 million deutsche
marks due to increased market penetration in Germany and expansion of sales in
Poland and the Czech Republic. When converted using the prevailing currency
exchange rate, the European sales translated into an increase of $1.4 million,
or 5.7% to $26.7 million for the 1997 Third Quarter.
GROSS PROFIT. Gross profit for the 1997 Third Quarter
increased $1.3 million, or 7.5%, from $17.5 million in the 1996 Third Quarter to
$18.8 million, and gross margin increased to 23.0% from 19.5%. United States
gross profit increased $1.0 million from $7.3 million for the 1996 Third Quarter
to $8.3 million. The increase in gross profit amount and as a percentage of net
sales in the United States was primarily due to an increase in production at the
Company's Mexican production facility. European gross margin decreased from
40.4% in the 1996 Third Quarter to 39.7% primarily due to product mix.
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
LICENSING REVENUES. Licensing revenues for the 1997 Third
Quarter decreased $.8 million, or 51.8%, from $1.5 million for the 1996 Third
Quarter to $.7 million primarily due to the poor retail business in the United
States and the discontinuation of a licensing agreement in the Czech Republic.
SG&A EXPENSES. Selling, general and administrative expenses
increased $1.6 million, or 11.3%, to $15.3 million for the 1997 Third Quarter
primarily due to increased merchandising and advertising costs, as well as an
increase of approximately $.3 million in bad debt expense.
OPERATING INCOME. Operating income for the 1997 Third Quarter
decreased $1.1 million from $5.3 million in the 1996 Third Quarter to $4.2
million, primarily due to the increase in selling, general and administrative
expenses, which were partially offset by the increase in gross profit.
INTEREST AND FINANCE COSTS. Interest and finance costs
decreased $.8 million or 44.5%, from $1.7 million for the 1996 Third Quarter to
$.9 for the 1997 Third Quarter. The decrease in interest cost was primarily due
to lower average borrowings.
INCOME TAXES. The provision for income taxes for the 1997
Third Quarter was $1.6million as compared to $1.3 million for the 1996 Third
Quarter as a result of an increase in the proportion of foreign income subject
to higher tax rates and the utilization of the domestic deferred tax asset.
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 the thirty-nine weeks ended August 2, 1997, net cash of
$31.4 million was used in operations, as compared to $13.9 million provided by
operations in the thirty-nine weeks ended August 3, 1996. The net cash used in
operations was primarily attributable to the net loss from operations of $10.8
million and the increases in accounts receivables, inventories, and prepaid and
other assets of $4.0 million, $13.6 million and $4.7 million, respectively,
which were partially offset by the increase in accounts payable and accrued
expenses of $7.0 million. The changes in accounts receivable, inventories and
accounts payable are primarily attributable to the expansion of European
operations.
Net cash of $6.6 million was used in investing activities in
the thirty-nine weeks ended August 2, 1997 as compared to $5.0 million in the
thirty-nine weeks ended August 3, 1996. Cash used in investing activities was
primarily attributable to the acquisition and renovation of manufacturing
facilities and equipment. The Company has acquired additional property in Mexico
that is being developed into a manufacturing complex that is expected to be
placed in service during the second quarter of fiscal 1998.
-13-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
Net cash provided by financing activities was $19.0 million in
the thirty-nine weeks ended August 2, 1997, as compared to $11.9 million used in
financing activities in the thirty-nine weeks ended August 3, 1996. The cash
provided by financing activities in the thirty-nine weeks ended August 2, 1997
was primarily attributable to the proceeds from the sale of approximately 47.5%
of the stock of the Company's European subsidiary in April 1997 and borrowings
against the Company's credit facilities. The net proceeds of the offering of
$43.1 million were used in May 1997 to repay bank borrowings.
As of August 2, 1997, the Company had domestic credit
agreements providing a $30 million revolving line of credit, of which $6.8
million was outstanding. In addition, the Company had $26.2 million of IRBs
outstanding at August 2, 1997, the proceeds of which have been used to finance
plant expansions. The Company also has foreign financing agreements with three
banks providing term loans aggregating 4,450,000 deutsche marks (approximately
$2.4 million, based on the August 2, 1997 foreign currency exchange rate) and
lines of credit aggregating 28 million deutsche marks (approximately $15.0
million, based on the August 2, 1997 foreign currency exchange rate).
Approximately $13.0 million was outstanding against the foreign lines of credit
as of August 2, 1997.
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.
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.
-14-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
Part II OTHER INFORMATION
Item 5: SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Except for the historical information
contained or incorporated by reference in this filing, the matters discussed or
incorporated by reference herein are forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance, or achievements of
the Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those set forth
below under the heading "Additional Cautionary Statements" as well as the
following: general economic and business conditions; industry capacity; fashion,
apparel and other industry trends; competition; overseas expansion; the loss of
major customers; changes in demand for the Company's products; cost and
availability of raw materials; changes in business strategy or development
plans; quality of management; and availability, terms and deployment of capital.
Special attention should be paid to the forward-looking statements contained
herein including, but not limited to, statements relating to the Company's
ability to obtain sufficient financial resources to meet its capital expenditure
and working capital needs, financial risks associated with customers
experiencing financial difficulties, the benefits expected to be derived from
the Company's recent restructuring and Mexican plant opening, international
expansion and competition.
ADDITIONAL CAUTIONARY STATEMENTS
DEPENDENCE ON MAJOR CUSTOMERS. The Company's two largest customers,
Kmart Corporation ("K-Mart") and Target, a division of Dayton Hudson Corporation
("Target"), together accounted for approximately 37% and 38% of the Company's
consolidated net sales during fiscal 1995 and fiscal 1996, respectively. Each of
these customers accounted for more than ten percent of the Company's
consolidated net sales in such periods. The loss of either K-Mart or Target
could have an adverse effect on the results of the Company's operations. In
addition, several of the Company's licensees sell products bearing the Company's
trademarks to the same retailers, including K-Mart. The Company has no long-term
commitments or long-term contracts with any of its customers.
RECENT APPAREL INDUSTRY TRENDS. Competition in the apparel industry has
been exacerbated by the recent consolidations and closings of major stores. Like
many of its competitors, the Company sells to certain retailers who have
recently experienced financial difficulties and some of whom are currently
operating under the protection of the federal bankruptcy laws. Although the
Company monitors the financial condition of its customers, the Company cannot
predict what effect, if any, the financial condition of such customers will have
on the Company. The Company believes that developments to date within these
companies have not had a material adverse effect on the Company's financial
position or results of operations.
-15-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
NATURE OF INDUSTRY; DEPENDENCE ON JEANS. The apparel industry is highly
competitive and characterized generally by ease of entry. Many of the Company's
competitors are substantially larger and have greater financial, marketing and
other resources than the Company. The Company's revenues are derived principally
from sales of jeans products. Although the Company's products for the domestic
market have historically been 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 materially misjudges such preferences.
DEPENDENCE ON KEY PERSONNEL. The Company depends on the services of
certain key personnel, including Mr. Burton M. Rosenberg, the Chairman of the
Board and Chief Executive Officer of the Company. The Company believes that the
loss of the services of any of these key personnel could have an adverse effect
on the results of the Company's operations.
RISKS OF DOING BUSINESS OVERSEAS. The Company's sales and earnings
attributable to its European operations have generally been increasing in recent
years. In general, the Company believes that the demand for jeans in foreign
markets is more susceptible to changes in fashion preferences than in the
domestic market. In addition, 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 is
also expanding its activities in Eastern Europe, where economic, political and
financial conditions are changing rapidly, and manufacturing operations in
Mexico during fiscal 1997. In general, there can be no assurance that the
results of the Company's European operations or any operations in Mexico that
the Company may establish will not be adversely affected by factors such as
restrictions on transfer of funds, political instability, competition, the
relative strength of the U.S. dollar, changes in fashion preferences and general
economic conditions.
ABSENCE OF DIVIDENDS. The Company has not, in recent years, paid any
cash or other dividends on its Common Stock, and there can be no assurance that
the Company will pay cash dividends in the foreseeable future. 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 Company's
domestic credit agreements (the "Loan Agreements") contain certain limitations
on the Company's ability to pay dividends.
LEVERAGE AND FINANCIAL COVENANTS. Although the Company's initial public
offering in February 1993 and the other components of its refinancing plan (the
"Refinancing Plan") improved the Company's operating and financial flexibility,
the Company continues to have indebtedness that could adversely affect its
ability to respond to changing business and economic conditions. At August 2,
1997, the Company had an aggregate of approximately $49.8 million of
indebtedness (including capital leases) outstanding and the Company's
stockholders' equity was approximately $88.4 million. The Company's credit
agreements contain covenants that impose certain operating and financial
restrictions on the Company. Such restrictions affect, and in many respects
limit or prohibit, among other things, the ability of the Company to incur
additional indebtedness, create liens, sell assets, engage in mergers or
acquisitions and pay dividends.
-16-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Financial
Statements
Date Items Reported Filed
---- -------------- -----
May 13, 1997 Filing of press release announcing exercise None
of underwriters' over allotment option to
purchase additional shares of common stock of
the Company's wholly-owned German subsidiary.
-17-
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
CHIC BY H.I.S, INC.
Dated: September 11, 1997 By: /s/ Burton M. Rosenberg
------------------------
Burton M. Rosenberg
Chief Executive Officer
Dated: September 11, 1997 By: /s/ Christine A. Hadjigeorge
-----------------------------
Christine A. Hadjigeorge
Chief Financial Officer
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS AS
FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000895519
<NAME> CHIC BY H I S INC
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<PERIOD-TYPE> 9-MOS
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<PERIOD-END> AUG-2-1997
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