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 1, 1998
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
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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
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September 14, 1998 Common Stock, $.01 Par Value 9,870,543
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CHIC BY H.I.S, INC.
INDEX
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PAGE
Part I. Financial Information
Item 1: Financial Statements (unaudited, except as noted):
Consolidated Balance Sheets at
August 1, 1998 and November 1, 1997 (audited) 3
Consolidated Statements of Operations
for the thirty-nine weeks ended August 1,
1998 and August 2, 1997 4
Consolidated Statements of Operations
for the thirteen weeks ended August 1,
1998 and August 2, 1997 5
Consolidated Statements of Cash Flows for the
thirty-nine weeks ended August 1,
1998 and August 2, 1997
Consolidated Statements of Stockholders'
Equity for the thirty-nine weeks ended
August 1, 1998 and August 2, 1997 7
Notes to Consolidated Financial Statements 8-9
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
Part II. Other Information
Item 5: Special Note Regarding Forward-Looking Statements 16-17
Item 6: Exhibits and Reports on Form 8-K 18
Signature Page 19
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
August 1, 1998 Nov. 1, 1997
(IN THOUSANDS) (Unaudited) (Audited)
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Assets
Current:
Cash and cash equivalents $ 4,596 $ 7,395
Accounts receivable - net of reserve for possible losses 33,331 32,926
Inventories 79,166 71,368
Deferred income taxes 5,008 3,020
Prepaid expenses and other current assets 6,565 3,560
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Total Current Assets 128,666 118,269
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Property, Plant and Equipment, at cost less accumulated
depreciation and amortization 57,469 67,998
Deferred income taxes 4,500 -
Other Assets 2,357 2,436
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$ 192,992 $ 188,703
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Liabilities and Stockholders' Equity
Current:
Revolving bank loan $ 38,200 $ 15,000
Foreign bank debt 6,926 -
Current maturities of long-term debt 2,213 1,997
Obligations under capital leases 688 701
Accounts payable 13,100 17,032
Accrued liabilities:
Payroll, payroll taxes and commissions 5,637 5,492
Income taxes 2,773 4,802
Other 8,862 5,731
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Total current liabilities 78,399 50,755
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Non-current:
Long-term debt 25,585 25,989
Pension liability 10,654 10,654
Deferred income taxes 2,713 2,713
Obligations under capital leases 1,298 660
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Total non-current liabilities 40,250 40,016
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Minority interest 7,919 8,864
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Stockholders' Equity
Preferred stock, $.01 par value -shares authorized 10,000,000; none
issued - -
Common stock, $.01 par value - 25,000,000 shares authorized;
10,030,543 and 9,764,968 issued and outstanding 100 99
Paid-in capital 107,161 105,590
Retained earnings (deficit) (29,357) (6,299)
Foreign currency translation adjustment (826) 332
Excess of additional pension liability over intangible pension asset (10,654) (10,654)
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Stockholders' Equity 66,424 89,068
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$ 192,992 $ 188,703
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</TABLE>
See notes to consolidated financial statements. -3-
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Thirty-nine weeks Thirty-nine weeks
ended August 1, ended August 2,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1998 1997
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Net sales 192,968 204,379
Cost of goods sold 147,484 163,015
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Gross profit 45,484 41,364
Licensing revenues 2,327 2,023
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47,811 43,387
Selling, general and administrative expenses 44,206 54,202
Restructuring and special charges 24,125 -
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Operating loss (20,520) (10,815)
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Gain on sale of subsidiary stock - 34,079
Interest and finance cost (3,232) (3,628)
Other expense, net (1,104) -
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Income (loss) before provision for income taxes, minority
interest and extraordinary item (24,856) 19,636
Provision (recovery) for income taxes (3,409) 9,224
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Income (loss) before minority interest and extraordinary item (21,447) 10,412
Minority interest 1,611 726
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Income (loss) before extraordinary item (23,058) 9,686
Extraordinary loss from extinguishment of debt - (330)
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Net income (loss) $ (23,058) $ 9,356
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Earnings (loss) per common share:
Basic:
Income (loss) before extraordinary item $ (2.30) $ .99
Net income (loss) $ (2.30) $ .96
Diluted:
Income (loss) before extraordinary item $ (2.30) $ .99
Net income (loss) $ (2.30) $ .96
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Weighted average number of common shares and share equivalents
outstanding:
Basic 10,030,543 9,753,868
Diluted 10,030,543 9,763,829
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</TABLE>
See notes to consolidated financial statements. -4-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Thirteen weeks Thirteen weeks
ended August 1, ended August 2,
1998 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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Net sales 59,896 81,906
Cost of goods sold 45,755 63,050
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Gross profit 14,141 18,856
Licensing revenues 1,066 721
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15,207 19,577
Selling, general and administrative expenses 15,059 15,332
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Operating income 148 4,245
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Interest and finance cost (1,245) (939)
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Income (loss) before provision for income taxes, minority interest (1,097) 3,306
Provision (recovery) for income taxes (139) 1,570
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Income (loss) before minority interest (958) 1,736
Minority interest 413 726
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Net income (loss) ($ 1,371) $ 1,010
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Earnings (loss) per common share:
Basic:
Net income (loss) ($ .14) $ .10
Diluted:
Net income (loss) ($ .14) $ .10
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Weighted average number of common shares and share equivalents outstanding:
Basic 10,030,543 9,753,868
Diluted 10,030,543 9,806,784
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</TABLE>
See notes to consolidated financial statements. -5-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Thirty-nine weeks ended
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August 1, August 2,
(In Thousands) 1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (23,058) $9,356
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Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Minority interest 1,611 725
Non-cash restructuring and special charges 13,680 -
Gain on sale of subsidiary stock - (34,079)
Gain on sale of property and equipment (1,912) -
Depreciation and amortization 3,436 3,377
Deferred income taxes (6,488) 4,403
Decrease (increase) in:
Accounts receivable (405) (4,006)
Inventories (7,798) (13,605)
Prepaid expenses and other current assets (3,005) (3,850)
Other assets 79 (803)
Increase (decrease) in:
Accounts payable (3,932) 5,355
Accrued liabilities 1,248 1,673
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Total adjustments (3,486) (40,810)
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Net cash used in operating activities (26,544) (31,454)
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Cash flows from investing activities:
Purchase of property, plant and equipment (7,060) (6,627)
Proceeds from the sale of fixed assets 3,187 -
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Net cash used in investing activities (3,873) (6,627)
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Cash flows from financing activities:
Proceeds from the sale of subsidiary stock - 43,054
Increase in loans under revolving line of credit 23,200 6,800
Increase in foreign revolver debt 6,926 12,955
Repayment of senior notes payable - (43,000)
Repayment of foreign term loan (83) (89)
Principal payments under capitalized lease obligations (683) (677)
Retirement of capitalized lease obligation (175) -
Proceeds from the issuance of common stock 1,553 -
Proceeds from short swing profits 118 -
Dividend payment - shareholder rights redemption (99) -
Dividend payment - minority interest (2,310) -
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Net cash provided by financing activities 28,447 19,043
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Decrease in cash and cash equivalents (1,970) (19,038)
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Effect of exchange rates on cash (829) (3,739)
Cash and cash equivalents, beginning of period 7,395 27,178
Cash and cash equivalents, end of period $ 4,596 $ 4,401
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</TABLE>
See notes to consolidated financial statements. -6-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Excess of
Foreign additional
Retained currency pension
Common Paid-in earnings translation liability over
(IN THOUSANDS) Total stock capital (deficit) adjustment pension asset
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Balance, November 2, 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) -
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Balance, August 2, 1997 $ 88,432 $ 98 $ 105,526 ($ 7,408) ($157) ($ 9,627)
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Balance, November 1, 1997 $ 89,068 $ 99 $ 105,590 ($ 6,299) $ 332 ($ 10,654)
Net loss (23,058) - - (23,058) - -
Foreign currency translation
adjustment (1,158) - - - (1,158) -
Stock options exercised 1,553 1 1,552 - - -
Short-swing Section 16(b)
profits 118 - 118 - - -
Dividends paid (99) - (99) - - -
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Balance, August 1, 1998 $ 66,424 $ 100 $ 107,161 ($ 29,357) ($ 826) ($ 10,654)
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</TABLE>
See notes to consolidated financial statements. -7-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 1, 1998 November 1, 1997
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Raw Materials $ 8,975 $ 8,138
Work-in-process 17,293 16,461
Finished Goods 52,898 46,769
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$ 79,166 $ 71,368
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3. Restructuring and Special Charges
In the thirty-nine weeks ended August 1, 1998, the Company recorded
restructuring and special charges of $24.1 million related to the Company's
continued closing of domestic manufacturing facilities and relocation to Mexico.
Such costs consist of a write-down in the value of property and equipment, the
write-off of operating inefficiencies incurred during the shut-down period and
the accrual of estimated costs of disposition. The plant closings are expected
to result in the termination of approximately 1,300 employees. In addition, the
downsizing associated with such plant closings may affect the accounting,
disclosure and funding of the Company's pension benefit obligation.
4. Recent Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") 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
periods ending after December 15, 1997. The
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adoption of this standard did not have a significant effect on the Company's
earnings per share calculation.
In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards. Results of operations and financial position will be unaffected by
implementation of these new standards.
SFAS No. 130, "Reporting Comprehensive Income," established standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of and enterprises about which separate financial information is
available that is evaluated regularly by management in deciding how to allocate
resources and in assessing performance.
Both SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated.
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
Item 2: Management's discussion and
analysis of financial condition
and results of operations
General
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 table sets forth selected operating data as a percentage of
net sales for the periods indicated.
<TABLE>
<CAPTION>
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<S> <C> <C> <C> <C>
THIRTY-NINE WEEKS ENDED THIRTEEN WEEKS ENDED
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August 1, August 2, August 1, August 2,
1998 1997 1998 1997
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Net sales
United States 61.9% 58.6% 62.8% 67.4%
Europe 38.1 41.4 37.2 32.6
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Consolidated 100.0 100.0 100.0 100.0
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Gross margin
United States 12.2 4.5 12.8 15.0
Europe 42.0 42.5 41.8 39.7
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Consolidated 23.6 20.2 23.6 23.0
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Licensing revenues 1.2 1.0 1.8 .1
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Selling, general and administrative expenses 22.9 26.5 25.1 18.7
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Restructuring and special charges 12.5 - - -
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Operating income (loss) (10.6) (5.3) .3 5.2
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Gain on sale of subsidiary stock - 16.7 - -
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Interest and finance costs (1.7) (1.8) (2.1) (1.2)
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Other income (expense) (.6) - - -
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Income (loss) before provision for income taxes, minority interest and extraordinary item (12.9) 9.6 (1.8) 4.0
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Provision (recovery) for income taxes (1.8) 4.5 ( .2) 1.9
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Minority interest .8 .4 .7 .9
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Extraordinary item - .2 - -
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Net income (loss) (11.9%) 4.6% (2.3%) 1.2%
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</TABLE>
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIAIRIES
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,
1998 and August 1, 1997 and its liquidity and capital resources.
Thirty-nine Weeks ended August 1, 1998 Compared to Thirty-nine Weeks ended
August 2, 1997
Net Sales. Net sales for the thirty-nine weeks ended August 1, 1998
decreased by $11.4 million, or 5.6%, from $204.4 million for the thirty-nine
weeks ended August 2, 1997 to $193.0 million. United States sales decreased by
$.4 million, or .3 %, to $119.4 million primarily due to an decrease in unit
sales volume and a decrease in average selling price. As of August 1, 1998, the
Company had a total backlog of confirmed domestic purchase orders of $61.5
million, a decrease of 8.8% compared to $67.5 million as of August 2, 1997. In
the thirty-nine weeks ended August 1, 1998, European sales decreased by 9.6
million deutsche marks, or 6.8%, to 132.0 million deutsche marks. When converted
into U.S. currency using the prevailing currency exchange rate, the European
sales translated into a decrease of $11.0 million, or 13.0%, to $73.5 million
for the thirty-nine weeks ended August 1, 1998. As of August 1, 1998, the
Company had a total backlog of confirmed European purchase orders of 63.0
million deutsche marks, an increase of 4.2% compared to 60.4 million deutsche
marks as of August 2, 1997. The confirmed European backlog, when converted into
U.S. currency at the then prevailing currency exchange rate, was $35.1 million,
an increase of 8.4% compared to $32.4 million on August 2, 1997.
The Company's backlog consists of confirmed purchase contracts.
Substantially all of the unfilled orders are expected to be shipped within 12
months. 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.
Gross Profit. Gross profit for the thirty-nine weeks ended August 1,
1998 increased $4.1 million, or 10.0%, from $41.4 million in the thirty-nine
weeks ended August 2, 1997 to $45.5 million, while gross margin increased from
20.2% to 23.6%. United States gross profit increased $9.2 million from $5.4
million for the thirty-nine weeks ended August 2, 1997 to $14.6 million. The
increase in gross profit and as a percentage of net sales in the United States
was primarily due to the increase in production at the Company's Mexican
production facility. European gross profit decreased $5.0 million from $35.9
million for the thirty-nine weeks ended August 2, 1997 to $30.9 million, while
gross margin decreased from 42.5% in the thirty-nine weeks ended August 2, 1997
to 42.0% primarily due to product mix.
Licensing Revenues. Licensing revenues increased 15.1% for the
thirty-nine weeks ended August 1, 1998 from $2.0 million in the thirty-nine
weeks ended August 2, 1997 to $2.3 million. The increase is partially due to the
negotiated settlement of a licensing agreement.
SG&A EXPENSES. Selling, general and administrative expenses decreased
$10.0 million, or 18.4%, to $44.2 million for the thirty-nine weeks ended August
2, 1998 primarily due to the special advertising charge recorded in the prior
year period.
Restructuring and Special Charges. In the thirty-nine weeks ended
August 1, 1998, the Company announced its intention to continue to close
additional manufacturing facilities in the United States. In connection
therewith, the Company recorded restructuring and special charges of $24.1
million consisting of a write-down in the value of related property and
equipment, the write-off of operating inefficiencies incurred during the
shut-down period and the accrual of estimated costs of disposition. The
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
plant closings are expected to result in the termination of approximately 1,300
employees. In addition, the downsizing associated with such plant closings may
affect the accounting, disclosure and funding of the Company's pension benefit
obligation.
Operating Income (Loss). The operating loss for the thirty-nine weeks
ended August 1, 1998 increased $9.7 million from an operating loss of $10.8
million in the thirty-nine weeks ended August 2, 1997 to $20.5 million,
primarily due to the restructuring and special charges, which were partially
offset by the increase in gross profit and the decrease in operating expenses.
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 sale were used in May 1997 to repay domestic borrowings.
Interest and Finance Costs. Interest and finance costs decreased $.4
million or 10.9%, from $3.6 million for the thirty-nine weeks ended August 2,
1997 to $3.2 million for the thirty-nine weeks ended August 1, 1998. The
decrease in interest cost was due to lower outstanding borrowings for the
period.
Other Expenses, Net. In the thirty-nine weeks ended August 1, 1998,
the Company incurred non-operating expenses of approximately $2.6 million, which
were partially offset by the gain on the sale of fixed assets of $1.5 million.
The non-operating expenses include costs incurred in connection with the
reconstitution of the Company's Board of Directors, the termination of a
consulting agreement with a former director, and severance agreements with
certain former employees.
Income Taxes. The recovery for income taxes for the thirty-nine weeks
ended August 1, 1998 was $3.4 million as compared to a provision of $9.2 million
for the thirty-nine weeks ended August 2, 1997. The deferred tax benefit
attributable to the restructuring charge recorded in the thirty-nine weeks ended
August 1, 1998 was reduced by approximately $4.5 million to the extent its
future realization is uncertain.
Extraordinary Item. In the thirty-nine weeks ended August 1, 1997, the
Company recorded an extraordinary charge of $.3 million attributable to the
early extinguishment of $43 million of senior notes payable.
Thirteen Weeks ended August 1, 1998 (the "1998 third Quarter") Compared to
Thirteen Weeks ended August 2, 1997 (the "1997 Third Quarter")
Net Sales. Net sales for the 1998 Third Quarter decreased $22.0
million, or 26.9%, from $81.9 million for the 1997 Third Quarter to $59.9
million. United States sales decreased by $17.6 million, or 31.9%, to $37.6
million. In the 1998 Third Quarter, European sales decreased by 7.1 million
deutsche marks, or 15.1%, to 40.0 million deutsche marks. When converted into
U.S. currency using the prevailing currency exchange rate, the European sales
translated into a decrease of $4.4 million, or 16.6%, to $22.3 million for the
1998 Third Quarter. The decline in sales is primarily attributable to the weak
retail environment for basic denim jeans.
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<PAGE>
CHIC BY H.I.S, AND SUBSIDIARIES
Gross Profit. Gross profit for the 1998 Third Quarter decreased $4.7
million, or 25.0%, from $18.9 million in the 1997 Third Quarter to $14.1
million, while gross margin increased from 23.0% to 23.6%. United States gross
profit decreased $3.4 million from $8.3 million for the 1997 Third Quarter to
$4.8 million. The decrease in gross profit and as a percentage of net sales in
the United States was primarily due to the decrease in sales volume. European
gross profit decreased $1.3 million from $10.6 million for the 1997 Third
Quarter to $9.3 million, while gross margin increased from 39.7% in the 1997
Third Quarter to 41.8% primarily due to product mix.
Licensing Revenues. Licensing revenues increased $.3 million, or
48.0%, for the 1998 Third Quarter from $.7 million for the 1997 Third Quarter to
$1.1 million. The increase is primarily due to the negotiated settlement of a
licensing agreement.
SG&A Expenses. Selling, general and administrative expenses decreased
$.3 million, or 1.8%, to $15.1 million for the 1998 Third Quarter primarily due
to the reduction in various administrative expenses which was partially offset
by the provision for certain European employee incentive expenses and domestic
promotional programs.
Operating Income. The operating income for the 1998 Third Quarter
decreased $4.1 million from $4.2 million in the 1997 Third Quarter to $.1
million, primarily due to the decrease in sales, which was partially offset by
the decrease in operating expenses.
Interest and Finance Costs. Interest and finance costs increased $.3
million or 32.7%, from $.9 million for the 1997 Third Quarter to $1.2 million
for the 1998 Third Quarter. The increase in interest expense was due to the
increase in average outstanding borrowings for the period.
Income Taxes. The recovery for income taxes for the 1998 Third Quarter
was $.1 million as compared to a provision of $1.6 million for the 1997 Third
Quarter as a result of the decrease in income.
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 1, 1998, net cash of $26.5
million was used in operations, as compared to $31.4 million in the thirty-nine
weeks ended August 2, 1997. The net cash used in operations was primarily
attributable to the net loss for the period, as well as the increase in accounts
receivables, inventories, and prepaid and other assets, and the decrease in
accounts payable, which were partially offset by the increase in accrued
expenses.
Net cash of $3.9 million was used in investing activities in the
thirty-nine weeks ended August 1, 1998, as compared to $6.6 million in the
thirty-nine weeks ended August 2, 1997. Cash used in investing activities was
primarily attributable to the acquisition of manufacturing facilities and
equipment. The Company is continuing to expand its manufacturing facilities in
Mexico and intends to
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
develop a laundry operation in the foreseeable future. The Company's investment
in such manufacturing operations was offset by the proceeds from the disposition
of the corporate aircraft and certain idle property and equipment. In the second
quarter of fiscal 1998, the Company announced its intention to close additional
domestic manufacturing facilities. In connection therewith, the Company recorded
restructuring and special charges in the thirty-nine weeks ended August 1, 1998
which include a valuation adjustment of the related property and equipment, the
write-off of manufacturing inefficiencies and accrued estimated costs of
disposition. In addition, the downsizing associated with such plant closings may
affect the accounting, disclosure and funding of the Company's pension benefit
obligation.
Net cash provided by financing activities was $28.4 million in the
thirty-nine weeks ended August 1, 1998, as compared to $19.0 million in the
thirty-nine weeks ended August 2, 1997. The cash provided by financing
activities in the thirty-nine weeks ended August 1, 1998 was primarily
attributable to the increase in borrowings against the Company's credit
facilities and proceeds from the sale of common stock issued pursuant to the
exercise of outstanding stock options. In August 1998, the Company used
approximately $1.0 million to repurchase 160,000 shares of its common stock on
the open market. This repurchase partially offsets the potentially dilutive
effect of the stock options exercised. 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 the Company's subsidiary stock and borrowings against
the Company's credit facilities.
As of August 1, 1998, the Company had domestic credit agreements
providing a $50 million revolving line of credit, of which $38.2 million was
outstanding. In addition, the Company had $25.5 million of IRBs outstanding at
August 1, 1998. The Company also has foreign financing agreements with three
banks providing term loans aggregating 4.3 million deutsche marks (approximately
$2.4 million, based on the August 1, 1998 foreign currency exchange rate) and
lines of credit aggregating 38 million deutsche marks (approximately $21.1
million, based on the August 1, 1998 foreign currency exchange rate).
Approximately $6.9 million was outstanding against the foreign lines of credit
as of August 1, 1998. As of August 1, 1998, the Company was in violation of
certain financial covenants of its domestic credit agreement for which waivers
have been obtained through September 30, 1998. The Company is currently
negotiating to cure an existing event of default and amend the terms of the
credit agreement.
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 future periods.
-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.
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 38% and 30% of the Company's
consolidated net sales during fiscal 1996 and fiscal 1997, respectively. Each of
these customers accounted for more than ten percent of the Company's
consolidated net sales in fiscal 1996, while only K-Mart represented more than
ten percent of the Company's consolidated net sales in fiscal 1997. The loss of
either K-Mart or Target as a customer 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 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.
-15-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
Risks of Doing Business Overseas. 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 commenced
manufacturing operations in Mexico during fiscal 1997. In general, there can be
no assurance that the results of the Company's European operations or the
operations in Mexico 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 1,
1998, the Company had an aggregate of approximately $74.9 million of
indebtedness (including capital leases) outstanding and the Company's
stockholders' equity was approximately $66.4 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. As of August 1, 1998, the Company was in
violation of certain financial covenants of its domestic credit agreement for
which waivers have been obtained through September 30, 1998. The Company is
currently negotiating to cure an existing event of default and amend the terms
of the credit agreement.
The Year 2000
The Company is currently evaluating the impact of the year 2000 on its
management and information systems. At this time, management does not believe
the impact of the year 2000 will have a material effect on its operations or
financial results.
-16-
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
-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 14, 1998 By: /s/ Daniel Rubin
-----------------
Daniel Rubin
Chief Executive Officer
Dated: September 14, 1998 By: /s/ Christine A. Hadjigeorge
-----------------------------
Christine A. Hadjigeorge
Chief Financial Officer
-18-
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-1-1997
<PERIOD-END> AUG-1-1998
<CASH> 4,596
<SECURITIES> 0
<RECEIVABLES> 33,484
<ALLOWANCES> 153
<INVENTORY> 79,166
<CURRENT-ASSETS> 128,666
<PP&E> 107,662
<DEPRECIATION> 50,193
<TOTAL-ASSETS> 192,992
<CURRENT-LIABILITIES> 78,399
<BONDS> 26,883
0
0
<COMMON> 100
<OTHER-SE> 66,324
<TOTAL-LIABILITY-AND-EQUITY> 192,992
<SALES> 192,968
<TOTAL-REVENUES> 195,295
<CGS> 147,484
<TOTAL-COSTS> 44,129
<OTHER-EXPENSES> 24,125
<LOSS-PROVISION> 77
<INTEREST-EXPENSE> 3,232
<INCOME-PRETAX> (24,856)
<INCOME-TAX> (3,409)
<INCOME-CONTINUING> (21,447)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,058)
<EPS-BASIC> (2.30)
<EPS-DILUTED> (2.30)
</TABLE>
