SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended May 3, 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
------------- ---------------------------- -----------
June 12, 1997 Common Stock, $.01 Par Value 9,753,868
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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
May 3, 1997 and November 2, 1996 (audited) 3
Consolidated Statements of Operations
for the twenty-six weeks ended May 3,
1997 and May 4, 1996 4
Consolidated Statements of Operations
for the thirteen weeks ended May 4,
1997 and May 4, 1996 5
Consolidated Statements of Cash Flows
for the twenty-six weeks ended
May 3, 1997 and May 4, 1996 6
Consolidated Statements of Stockholders'
Equity for the twenty-six weeks ended
May 3, 1997 and May 4, 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>
May 3,1997 November 2, 1996
(Unaudited) (Audited)
-------- --------
ASSETS
------
CURRENT:
<S> <C> <C>
Cash and cash equivalents $ 49,632 $ 27,178
Accounts receivable (net of reserve for possible losses) 29,220 33,309
Inventories 80,077 58,360
Deferred income taxes 837 5,010
Prepaid expenses and other
current assets 4,392 1,465
-------- --------
TOTAL CURRENT ASSETS 164,158 125,322
PROPERTY, PLANT AND EQUIPMENT, at
cost, less accumulated depreciation and amortization 69,211 66,830
INTANGIBLE ASSET RELATING TO PENSION 396 396
OTHER ASSETS 2,104 1,112
-------- --------
TOTAL ASSETS $235,869 $193,660
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT:
<S> <C> <C>
Revolver debt $ 27,300 $ --
Foreign revolver debt 9,821 --
Bank Loan - term current 20,000 --
Current maturities of long-term debt 750 750
Obligations under capital leases 806 864
Accounts payable 21,839 11,625
Accrued liabilities
Payroll, payroll taxes and commissions 5,532 4,639
Income taxes 3,095 2,009
Restructuring charge 5,014 5,400
Other 6,715 4,666
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TOTAL CURRENT LIABILITIES 100,872 29,953
-------- --------
NONCURRENT:
Long-term debt 27,977 71,444
Pension liability 10,023 10,023
Obligation under capital leases 973 1,362
-------- --------
TOTAL NONCURRENT LIABILITIES 38,973 82,829
-------- --------
MINORITY INTEREST 7,940 --
STOCKHOLDERS' EQUITY 88,084 80,878
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $235,869 $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>
Twenty-six weeks Twenty-six weeks
ended ended
May 3, May 4,
1997 1996
--------- ---------
<S> <C> <C>
NET SALES $122,473 $155,173
COST OF GOODS SOLD 99,965 120,470
--------- ---------
Gross profit 22,508 34,703
LICENSING REVENUES 1,302 2,898
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23,810 37,601
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 38,870 29,794
RESTRUCTURING AND SPECIAL CHARGES -- 15,000
--------- ---------
OPERATING LOSS (15,060) (7,193)
GAIN ON SALE OF SUBSIDIARY STOCK 34,079 --
INTEREST AND FINANCE COST (2,689) (3,481)
--------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEMS 16,330 (10,674)
PROVISION FOR INCOME TAXES 7,654 2,423
--------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $8,676 ($13,097)
EXTRAORDINARY LOSS
FROM EXTINGUISHMENT OF DEBT (330) --
--------- ---------
NET INCOME (LOSS) $8,346 ($13,097)
========= =========
PER SHARE DATA:
Income (loss) before extraordinary items $.89 ( $1.34)
========= =========
Net income (loss) $.86 ( $1.34)
========= =========
AVERAGE OUTSTANDING COMMON SHARES 9,753,868 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
May 3, May 4,
1997 1996
--------- ---------
<S> <C> <C>
NET SALES $66,442 $84,344
COST OF GOODS SOLD 58,745 65,814
--------- ---------
Gross profit 7,697 18,530
LICENSING REVENUES 764 1,279
--------- ---------
8,461 19,809
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 24,531 16,379
--------- ---------
OPERATING INCOME (LOSS) (16,070) 3,430
GAIN ON SALE OF SUBSIDIARY STOCK 34,079 --
INTEREST AND FINANCE COST (1,502) (1,618)
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 16,507 1,812
PROVISION FOR INCOME TAXES 7,437 1,137
--------- ---------
NET INCOME $9,070 $675
========= =========
PER SHARE DATA:
Net income $.93 $.07
========= =========
AVERAGE OUTSTANDING COMMON SHARES 9,796,427 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>
Twenty-six weeks Twenty-six weeks
ended ended
May 3, May 4,
1997 1996
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $8,346 ($13,097)
------- -------
Adjustments to reconcile net loss to
net cash used in operating
activities:
Gain on sale of subsidiary stock (34,079) --
Non-cash restructuring and special charges -- 9,937
Depreciation and amortization 2,215 1,327
Deferred interest -- 1,531
Decrease (increase) in:
Accounts receivable 4,089 (1,892)
Inventories (21,717) 13,291
Deferred income taxes 4,173 --
Prepaid expenses and other (2,927) (1,825)
Other assets (992) (492)
Increase (decrease) in:
Accounts payable 10,215 4,482
Accrued liabilities 3,642 (3,379)
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Total adjustments (35,381) 26,764
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Net cash provided by (used in)
operating activities (27,035) 13,667
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,764) (3,297)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of subsidiary stock 43,054 --
Repayment of senior notes payable (43,000) --
Repayment of foreign term loan (92) --
Increase (decrease) in loans under revolver 27,300 (6,500)
Increase (decrease) in foreign revolver debt 9,821 (98)
Increase in term loan 20,000 --
Principal payments under capitalized leases (447) (469)
Increase in deferred financing costs -- (58)
Due from trustee -- 409
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Net cash provided by (used in)
financing activities 56,636 (6,716)
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INCREASE IN CASH 24,837 3,654
EFFECT OF EXCHANGE RATES ON CASH (2,383) (2,188)
CASH AND CASH EQUIVALENTS, beginning of period 27,178 15,197
------- -------
CASH AND CASH EQUIVALENTS, end of period $49,632 $16,663
======= =======
</TABLE>
See notes to consolidated financial statements.
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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 (13,097) -- -- (13,097) -- --
Foreign currency
translation adjustment (1,680) -- -- -- (1,680) --
-----------------------------------------------------------------------------
Balance, May 4, 1996 $98,650 $98 $105,526 ($4,297) $1,388 ($4,065)
=============================================================================
Balance, November 5, 1996 $80,878 $98 $105,526 $(16,764) $1,645 ($9,627)
Net income 8,346 -- -- 8,346 -- --
Foreign currency
translation adjustment (1,140) -- -- -- (1,140) --
-----------------------------------------------------------------------------
Balance, May 3, 1997 $88,084 $98 $105,526 ($8,418) $505 ($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) May 3, 1997 November 2, 1996
- --------------------------------------------------------------------------------
Raw Materials $9,393 $9,169
Work-in-process 20,342 12,629
Finished Goods 50,342 36,569
- --------------------------------------------------------------------------------
$80,077 $58,360
================================================================================
3. Recent Accounting Standards
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 AAccounting 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.
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 twenty-six and thirteen weeks ended May 3,
1997 and May 4, 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>
Twenty-six weeks ended Thirteen weeks ended
---------------------- -----------------------
May 3, May 4, May 3, May 4,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Net sales:
<S> <C> <C> <C> <C>
United States 52.8% 65.7% 51.7% 65.1%
Europe 47.2 34.3 48.3 34.9
---- ---- ---- ----
Consolidated 100.0 100.0 100.0 100.0
Gross margin:
United States (4.4) 12.9 (20.4) 12.7
Europe 43.8 40.6 45.9 39.2
Consolidated 18.4 22.4 11.6 22.0
Licensing revenues 1.1 1.9 1.2 1.5
Selling, general and administrative
expenses 31.7 19.2 16.9 19.4
Restructuring and special charges -- 9.7 -- --
Operating income (loss) (12.3) (4.6) (24.2) 4.1
Gain on sale of subsidiary stock 27.8 -- 51.3 --
Interest and finance costs (2.2) (2.2) (2.3) (1.9)
Income (loss) before provision for
income taxes and extraordinary item 13.3 (6.8) 24.8 2.2
Provision for income taxes 6.2 1.6 11.2 1.3
Income (loss) before extraordinary item 7.1 (8.4) 13.7 .9
Extraordinary item (.3) -- -- --
Net income (loss) 6.8% (8.4)% 13.7 .9%
</TABLE>
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
TWENTY-SIX WEEKS ENDED MAY 3, 1997 COMPARED TO TWENTY-SIX WEEKS ENDED MAY 4,
1996
NET SALES. Net sales for the twenty-six weeks ended May 3,1997
decreased $32.7 million, or 21.1%, from $155.2 million for the twenty-six weeks
ended May 4, 1996 to $122.5 million. United States sales decreased by $37.3
million, or 36.6%, to $64.6 million primarily due to a decline in unit sales
volume . As of May 3, 1997, the Company had a total backlog of confirmed
domestic purchase orders of $98.8 million, a decrease of 23.8% compared to
$129.6 million on May 4, 1996. In the twenty-six weeks ended May 3,1997,
European sales increased by $4.6 million, or 8.6%, to $57.8 million primarily
due to the expansion of sales in Poland and the Czech Republic. As of May 3,
1997, the Company had a backlog of confirmed European purchase orders of 90.3
million deutsche marks, an increase of 48.3 % compared to 60.9 million deutsche
marks on May 4, 1996. The confirmed European backlog, when converted into U.S.
currency at the then prevailing rate, was $52.2 million, an increase of 30.8%
compared to $39.9 million on May 4, 1996.
GROSS PROFIT. Gross profit for the twenty-six weeks ended May
3, 1997 decreased $12.2 million, or 34.7%, from $34.7 million in the twenty-six
weeks ended May 4, 1996 to $22.5 million, and gross margin decreased to 18.4%
from 22.4%. United States gross profit decreased $15.9 million from $13.1
million for the twenty-six weeks ended May 4, 1996 to a loss of $2.8 million.
The reduction of the gross profit amount and as a percentage of net sales in the
United States was primarily due to 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 40.6% in the twenty-six weeks ended May 4, 1996 to 43.8%
primarily due to product mix, as well as the Company's ability to capitalize on
improved purchasing power.
LICENSING REVENUES. Licensing revenues for the twenty-six
weeks ended May 4,1996 decreased $1.6 million, or 55.2%, from $2.9 million for
the twenty-six weeks ended May 4, 1996 to $1.3 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 $9.1 million, or 30.5%, to $38.9 million for the twenty-six weeks
ended May 3, 1997 primarily due to increased advertising charges associated with
special cooperative advertising programs designed to stimulate over-the-counter
sales. Such costs are not reflective of anticipated advertising costs for the
remainder of the year.
RESTRUCTURING AND SPECIAL CHARGES. In the twenty-six weeks
ended May 4, 1996, the Company decided to restructure 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 a restructuring charge against earnings in the amount of $15
million in the twenty-six weeks ended May 4, 1996.
OPERATING INCOME. Operating income for the twenty-six weeks
ended May 3,1997 decreased $7.9 million from an operating loss of $7.2 million
in the twenty-six weeks ended May 4, 1996 to an operating loss of $15.1 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 charge recorded in the prior year
period.
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
GAIN ON SALE OF SUBSIDIARY STOCK. In the twenty-six weeks
ended May 3, 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 $.8 million or 22.8%, from $3.5 million for the twenty-six weeks ended
May 4,1996 to $2.7 million in the twenty-six weeks ended May 3,1997. The
decrease in interest cost was primarily due to lower average levels of
borrowings.
INCOME TAXES. The provisions for income taxes for the
twenty-six weeks ended May 3, 1997 was $7.7 million as compared to $2.4 million
for the twenty-six weeks ended May 4,1996, 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 twenty-six weeks ended May 3, 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 MAY 3, 1997 (THE "1997 SECOND QUARTER") COMPARED TO
THIRTEEN WEEKS ENDED MAY 4, 1996 (THE "1996 SECOND QUARTER")
NET SALES. Net sales for the 1997 Second Quarter decreased
$17.9 million, or 21.2%, from $84.3 million for the 1996 Second Quarter to $66.4
million. United States sales decreased by $20.5 million, or 37.4%, to $34.4
million primarily due to a decline in unit sales volume. In the 1997 Second
Quarter, European sales increased by $2.6 million, or 8.8%, to $32.1 million due
to expansion of sales in Poland and the Czech Republic.
GROSS PROFIT. Gross profit for the 1997 Second Quarter
decreased $10.8 million, or 58.5%, from $18.5 million in the 1996 Second Quarter
to $7.7 million, and gross margin decreased to 11.6% from 22.0%. United States
gross profit decreased $14.0 million from $7.0 million for the 1996 Second
Quarter to a loss of $7.0 million. The reduction of the gross profit amount and
as a percentage of net sales in the United States was primarily due to inventory
valuation adjustments to reflect the cost structure of the Company's Mexican
production facility. European gross margin increased from 39.2% in the 1996
Second Quarter to 45.9% primarily due to product mix and improved purchasing
power.
LICENSING REVENUES. Licensing revenues for the 1997 Second
Quarter decreased $.5 million, or 40.3%, from $1.3 million for the 1996 Second
Quarter to $.8 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 $8.2 million, or 49.8 %, to $24.5 million for the 1997 Second Quarter
primarily due to increased advertising costs related to special cooperative
advertising programs designed to stimulate over-the-counter sales.
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
OPERATING INCOME. Operating income for the 1997 Second Quarter
decreased $19.5 million from $3.4 million in the 1996 Second Quarter to a loss
of $16.1 million, primarily due to the decrease in sales and gross profit and
the increase in selling, general and administrative expenses.
GAIN ON SALE OF SUBSIDIARY STOCK. In the 1997Second Quarter,
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 million or 7.2%, from $1.6 million for the 1996 Second Quarter to
$1.5 for the 1997 Second Quarter. The decrease in interest cost was primarily
due to lower average borrowings.
INCOME TAXES. The provisions for income taxes for the 1997
Second Quarter was $7.4 million as compared to $1.1 million for the 1996 Second
Quarter as a result of an increase in foreign income taxes and the utilization
of the Company's 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 twenty-six weeks ended May 3, 1997, net cash of $27.0
million was used in operations, as compared to $13.7 million provided by
operations in the twenty-six weeks ended May 4, 1996. The net cash used in
operations was primarily attributable to the net loss from operations of $15.1
million and the increases in inventories and prepaid and other assets of $21.7
million and $2.9 million, respectively, which were partially offset by the
decrease in accounts receivable of $4.1 million and the increase in accounts
payable and accrued expenses of $13.8 million. The changes in accounts
receivable, inventories and accounts payable are primarily attributable to the
decrease in net sales for the period and the build up of inventory for the
back-to-school season.
Net cash used in investing activities increased by $1.5
million in the twenty-six weeks ended May 3, 1997 to $4.8 million as compared to
$3.3 million in the twenty-six weeks ended May 4, 1996. Cash used in investing
activities was primarily attributable to the acquisition and renovation of
manufacturing facilities and equipment. Subsequent to May 3, 1997, the Company
also acquired additional property in Mexico to develop a larger manufacturing
complex that it expects to place into operations during the first quarter of
fiscal 1998.
Net cash provided by financing activities was $56.6 million in
the twenty-six weeks ended May 3, 1997, as compared to $6.7 million used in
financing activities in the twenty-six weeks ended May 4, 1996. The cash
provided by financing activities in the twenty-six weeks ended May 3, 1997 was
primarily attributable to the proceeds from the sale of the Company's subsidiary
stock and borrowings against the Company's credit facilities. The proceeds from
the sale of the subsidiary stock were used to repay the bank borrowings in the
subsequent period.
As of May 3, 1997, the Company had domestic credit agreements
providing a $30 million
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
revolving line of credit and a $20 million term loan, of which $47.3 million was
outstanding. In addition, the Company had $26.2 million of IRBs outstanding at
May 3, 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 4,600,000 deutsche marks (approximately $2.7 million,
based on the May 3, 1997 foreign currency exchange rate) and lines of credit
aggregating 18 million deutsche marks (approximately $10.4 million, based on the
May 3, 1997 foreign currency exchange rate). Approximately $9.8 million was
outstanding against the foreign lines of credit as of May 3, 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.
In January 1997, the Company announced that it had retained a
managing underwriter for a proposed initial public offering of a significant
minority interest in the Company=s wholly-owned German subsidiary. The
transaction was consummated in April 1997 resulting in the sale of approximately
47.5% of the stock of the Company's European subsidiary. The net proceeds of the
offering of $43.1 million were used in May 1997 to repay bank borrowings.
-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
(ATarget@), 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.
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
-15-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
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 the second quarter of 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. In addition, an agreement between the
Company's wholly owned German subsidiary ("Sportswear"), and one of its lenders
would prohibit Sportswear from paying dividends to the Company under certain
circumstances.
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 May 3, 1997, the Company had an aggregate of approximately $87.6
million of indebtedness (including capital leases) outstanding and the Company's
stockholders' equity was approximately $88.1 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, make capital expenditures and pay dividends. In addition, the
Company's credit agreement provides for the use of proceeds from the sale of the
Company's subsidiary stock to repay the debt, which was done subsequent to May
3, 1997.
-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
<TABLE>
<CAPTION>
Financial
Statements
Date Items Reported Filed
---- -------------- -----
<S> <C> <C> <C>
February 28, 1997 Declaration of a dividend distribution of one None
Preferred Share Purchase Right on each
outstanding share of Common Stock payable on
or about March 24, 1997 to shareholders of
record on March 17, 1997.
April 28, 1997 Filing of press release announcing execution None
of underwriting agreement in connection with
an initial public offering of the common
stock of the Company's wholly-owned German
subsidiary.
</TABLE>
-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: June 12, 1997 By: /s/ Burton M. Rosenberg
-------------------------------
Burton M. Rosenberg
Chief Executive Officer
Dated: June 12, 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-2-1996
<PERIOD-END> MAY-3-1997
<CASH> 49,632
<SECURITIES> 0
<RECEIVABLES> 29,411
<ALLOWANCES> 191
<INVENTORY> 80,077
<CURRENT-ASSETS> 164,158
<PP&E> 97,409
<DEPRECIATION> 28,198
<TOTAL-ASSETS> 235,869
<CURRENT-LIABILITIES> 100,872
<BONDS> 28,950
0
0
<COMMON> 98
<OTHER-SE> 87,986
<TOTAL-LIABILITY-AND-EQUITY> 235,869
<SALES> 122,473
<TOTAL-REVENUES> 157,854
<CGS> 99,965
<TOTAL-COSTS> 38,779
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 91
<INTEREST-EXPENSE> 2,689
<INCOME-PRETAX> 16,330
<INCOME-TAX> 7,654
<INCOME-CONTINUING> 8,676
<DISCONTINUED> 0
<EXTRAORDINARY> (330)
<CHANGES> 0
<NET-INCOME> 8,346
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.86
</TABLE>
