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 May 2, 1998
Commission File No. 1-11722
CHIC BY H.I.S, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3494627
(State of Incorporation) (I.R.S. Employer
Identification No.)
1372 Broadway, New York, New York 10018
(Address of principal executive offices) (Zip Code)
(212) 302-6400
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 10, 1998 Common Stock, $.01 Par Value 10,020,093
CHIC BY H.I.S, INC.
INDEX
Page
Part I. Financial Information
Item 1: Financial Statements (unaudited, except
as noted):
Consolidated Balance Sheets at
May 2, 1998 and November 1, 1997 (audited) 3
Consolidated Statements of Operations
for the twenty-six weeks ended May 2,
1998 and May 3, 1997 4
Consolidated Statements of Operations
for the thirteen weeks ended May 2,
1998 and May 3, 1997 5
Consolidated Statements of Cash Flows
for the twenty-six weeks ended May 2,
1998 and May 3, 1997 6
Consolidated Statements of Stockholders'
Equity for the twenty-six weeks ended
May 2, 1998 and May 3, 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
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 2, 1998 Nov. 1, 1997
(In thousands) (Unaudited) (Audited)
- -------------- ----------- -------------
Assets
Current:
Cash and cash equivalents $ 5,214 $ 7,395
Accounts receivable - net of
reserve for possible losses 33,875 32,926
Inventories 72,193 71,368
Deferred income taxes 4,068 3,020
Prepaid expenses and other
current assets 6,186 3,560
--------- -------
Total Current Assets 121,536 118,269
--------- -------
Property, Plant and Equipment,
at cost less accumulated
depreciation and amortization 56,707 67,998
Deferred income taxes 4,500 -
Other Assets 3,106 2,436
--------- ---------
$ 185,849 $ 188,703
========= =========
Liabilities and Stockholders' Equity
Current:
Revolving bank loan $ 27,700 $ 15,000
Foreign bank debt 1,296 -
Current maturities of
long-term debt 2,215 1,997
Obligations under capital leases 789 701
Accounts payable 18,970 17,032
Accrued liabilities:
Payroll, payroll taxes and
commissions 6,755 5,492
Accrued restructuring and
special charges 3,575 -
Income taxes 2,063 4,802
Other 7,235 5,731
--------- --------
Total current
liabilities 70,598 50,755
--------- --------
Non-current:
Long-term debt 25,587 25,989
Pension liability 10,654 10,654
Deferred income taxes 2,713 2,713
Obligations under capital leases 1,433 660
Total non-current ------ ------
liabilities 40,387 40,016
------ ------
Minority interest 7,403 8,864
------ ------
Stockholders' Equity
Preferred stock, $.01 par value -
shares authorized 10,000,000; none
issued - -
Common stock, $.01 par value -
25,000,000 shares authorized;
9,928,393 and 9,764,968 issued
and outstanding 99 99
Paid-in capital 106,569 105,590
Retained earnings (deficit) (27,986) (6,299)
Foreign currency translation
adjustment (567) 332
Excess of additional pension
liability over intangible
pension asset (10,654) (10,654)
---------- ----------
Stockholders' Equity 67,461 89,068
---------- ----------
$ 185,849 $ 188,703
========== ==========
See notes to consolidate financial statements
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Twenty-six weeks Twenty-six weeks
(In Thousands, except ended May 2, ended May 3,
share and per share amounts) 1998 1997
- ---------------------------- ------------ ---------------
Net sales $ 133,072 $ 122,473
Cost of goods sold 101,729 99,965
--------- ---------
Gross profit 31,343 22,508
Licensing revenues 1,261 1,302
--------- ---------
32,604 23,810
Selling, general and
administrative expenses 29,147 38,870
Restructuring and special
charges 24,125 -
---------- ----------
Operating loss (20,668) (15,060)
---------- ----------
Gain on sale of subsidiary
stock - 34,079
Interest and finance cost (1,987) (2,689)
Other expense, net (1,104) -
---------- ----------
Income (loss) before
provision for income
taxes, minority
interest and
extraordinary item (23,759) 16,330
Provision (recovery) for
income taxes (3,270) 7,654
---------- ----------
Income (loss) before
minority interest
and extraordinary item (20,489) 8,676
Minority interest (1,198) -
---------- ----------
Income (loss) before
extraordinary item (21,687) 8,676
Extraordinary loss from
extinguishment of debt - (330)
---------- ----------
Net income (loss) $ (21,687) $ 8,346
---------- ----------
Earnings (loss) per common
share:
Basic:
Income (loss) before
extraordinary item ($ 2.18) $ .89
Net income (loss) ($ 2.18) $ .86
---------- ----------
Diluted:
Income (loss) before
extraordinary item ($ 2.18) $ .89
Net income (loss) ($ 2.18) $ .86
Weighted average number of
common shares and share
equivalents outstanding:
Basic 9,928,393 9,753,868
---------- -----------
Diluted 9,928,393 9,753,868
========== ===========
See notes to consolidated financial statements
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen weeks Thirteen weeks
(In Thousands, except ended May 2, ended May 3,
share and per share amounts) 1998 1997
- --------------------------- ---------------- ----------------
Net sales 68,828 66,442
Cost of goods sold 54,049 58,745
--------- --------
Gross profit 14,779 7,697
Licensing revenues 664 764
--------- --------
15,443 8,461
Selling, general and
administrative expenses 17,240 24,531
Restructuring and special
charges 24,125 -
---------- --------
Operating loss (25,922) (16,070)
---------- --------
Gain on sale of subsidiary
stock - 34,079
Interest and finance cost (1,104) (1,502)
Other expense, net (1,104) -
---------- --------
Income (loss) before
provision for income
taxes, minority interest (28,130) 16,507
Provision (recovery) for
income taxes (5,202) 7,437
---------- --------
Income (loss) before
minority interest (22,928) 9,070
Minority interest (275) -
---------- --------
Net income (loss) $ (23,203) $ 9,070
========== ========
Earnings (loss) per common
share:
Basic:
Net income (loss) ($ 2.34) $ .93
Diluted:
Net income (loss) ($ 2.34) $ .93
========== ========
Weighted average number of
common shares and share
equivalents outstanding:
Basic 9,928,393 9,753,868
Diluted 9,928,393 9,796,427
========= =========
See notes to consolidated financial statements
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six weeks ended
(In Thousands) May 2, 1998 May 3, 1997
- -------------- ----------- -----------
Cash flows from operating
activities:
Net income (loss) $ (21,687) $ 8,346
---------- ---------
Adjustments to reconcile net
income (loss) to net cash
used in operating activities:
Minority interest 1,198 -
Non-cash restructuring and
special charges 13,680 -
Gain on sale of subsidiary
stock - (34,079)
Gain on sale of property
and equipment (1,838) -
Depreciation and amortization 2,448 2,215
Deferred income taxes (5,548) 4,173
Decrease (increase) in:
Accounts receivable (949) 4,089
Inventories (825) (21,717)
Prepaid expenses and other
current assets (2,626) (2,927)
Other assets (670) (992)
Increase (decrease) in:
Accounts payable 1,937 10,215
Accrued liabilities 3,604 3,642
---------- --------
Total adjustments 10,411 (35,381)
---------- --------
Net cash used in
operating activities (11,276) (27,035)
---------- --------
Cash flows from investing
activities:
Purchase of property, plant
and equipment (5,101) (4,764)
Proceeds from the sale of fixed
assets 3,042 -
---------- --------
Net cash used in investing
activities (2,059) (4,764)
---------- --------
Cash flows from financing
activities:
Proceeds from the sale of
subsidiary stock - 43,054
Increase in loans under
revolving line of credit 12,700 27,300
Increase in term loan - 20,000
Increase in foreign bank debt 1,296 9,821
Repayment of long-term debt (83) (43,092)
Principal payments under
capitalized lease obligations (447) (447)
Retirement of capitalized lease
obligation (175) -
Proceeds from the issuance of
common stock 960 -
Proceeds from short swing profits 119 -
Dividend payment - shareholder
rights redemption (99) -
Dividend payment - minority interest (2,310) -
---------- --------
Net cash provided by
financing activities 11,961 56,636
---------- --------
Increase (decrease) in cash
and cash equivalents (1,374) 24,837
---------- --------
Effect of exchange rates on cash (807) (2,383)
Cash and cash equivalents,
beginning of period 7,395 27,178
Cash and cash equivalents,
end of period $ 5,214 $49,632
========== ========
See notes to consolidated financial statement
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Excess
of
additional
pension
liability
Foreign over
(In Retained currency intangible
Thou- Common Paid-in earnings translation pension
sands) Total stock capital (deficit) adjustment asset
- ------ ------ ------- ------- -------- ----------- ---------
Balance,
November
2, 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)
======== ==== ========= ========= ======= ==========
Balance,
November
1,1997 $ 89,068 $ 99 $ 105,590 ($ 6,299) $ 332 ($ 10,654)
Net loss (21,687) - - (21,687) - -
Foreign
currency
translation
adjustment (899) - - - (899) -
Stock
options
exercised 960 - 960 - - -
Short-swing
Section 16(b)
profits 118 - 118 - - -
Dividends
paid (99) - (99) - - -
Balance,
May 2, -------- ---- --------- --------- -------- ---------
1998 $ 67,461 $ 99 $ 106,569 $ (27,986) $ ( 567) $(10,654)
======== ==== ========= ========= ======== =========
See notes to consolidated financial statements
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 2, 1998 November 1, 1997
- ----------------------------------------------------------------
Raw Materials $ 9,728 $ 8,138
Work-in-process 17,880 16,461
Finished Goods 44,585 46,769
- ----------------------------------------------------------------
$ 72,193 $ 71,368
3. Restructuring and Special Charges
In the twenty-six weeks ended May 2, 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
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.
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.
Twenty-six Thirteen
Weeks Ended Weeks Ended
May 2, May 3, May 2, May 3
1998 1997 1998 1997
----- ----- ------ -----
Net sales
United States 61.5% 52.8% 59.4% 51.7%
Europe 38.5 47.2 40.6 48.3
----- ----- ----- -----
Consolidated 100.0 100.0 100.0 100.0
----- ----- ----- -----
Gross margin
United States 11.9 (4.4) 8.1 (20.4)
Europe 42.1 43.8 41.1 45.9
----- ----- ----- -----
Consolidated 23.5 18.4 21.5 11.6
----- ----- ----- -----
Licensing revenues 1.0 1.1 1.0 1.2
Selling, general and
administrative expenses 21.9 31.7 25.1 36.9
Restructuring and special
charges 18.1 - 35.1 -
Operating loss (15.5) (12.3) (37.7) (24.2)
Gain on sale of subsidiary
stock - 27.8 - 51.3
Interest and finance costs (1.5) (2.2) (1.6) (2.3)
Other income (expense) (.8) - (1.6) -
Income (loss) before
provision for income taxes,
minority interest and
extraordinary item (17.8) 13.3 (40.9) 24.8
Provision (recovery) for
income taxes (2.4) 6.2 (7.6) 11.2
Minority interest .9 - .4 -
Extraordinary item - (.3) - -
Net income (loss) (16.3)% 6.8% (33.7)% 13.7%
CHIC BY H.I.S., INC. AND SUBSIDIARIES
The following discussion provides information and analysis of the
results of operations of the Company for the twenty-six and
thirteen weeks ended May 2, 1998 and May 3, 1997 and its
liquidity and capital resources.
Twenty-six Weeks ended May 2, 1998 Compared to Twenty-six Weeks
ended May 3, 1997
Net Sales. Net sales for the twenty-six weeks ended
May 2, 1998 increased $10.6 million, or 8.7%, from $122.5
million for the twenty-six weeks ended May 3, 1997 to $133.1
million. United States sales increased by $17.2 million, or
26.6%, to $81.8 million primarily due to an increase in unit
sales volume. As of May 2, 1998, the Company had a total backlog
of confirmed domestic purchase orders of $89.1 million, a
decrease of 9.8% compared to $98.8 million as of May 3, 1997. In
the twenty-six weeks ended May 2, 1998, European sales decreased
by 2.5 million deutsche marks, or 2.6%, to 92.1 million deutsche
marks. When converted into U.S. currency using the prevailing
currency exchange rate, the European sales translated into a
decrease of $6.6 million, or 11.4%, to $51.3 million for the
twenty-six weeks ended May 2, 1998. As of May 2, 1998, the
Company had a total backlog of confirmed European purchase orders
of 82.5 million deutsche marks, a decrease of 9.4% compared to
90.3 million deutsche marks as of May 3, 1997. The confirmed
European backlog, when converted into U.S. currency at the then
prevailing currency exchange rate, was $46.4 million, a decrease
of 11.0% compared to $52.2 million on May 3, 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 twenty-six weeks
ended May 2, 1998 increased $8.8 million, or 39.3%, from $22.5
million in the twenty-six weeks ended May 3, 1997 to $31.3
million, while gross margin increased from 18.4% to 23.5%.
United States gross profit increased $12.6 million from a loss of
$2.8 million for the twenty-six weeks ended May 3, 1997 to $9.8
million. The increase in gross profit and as a percentage of net
sales in the United States was primarily due to the increase in
sales volume, as well as the increase in production at the
Company's Mexican production facility. European gross profit
decreased $3.7 million from $25.3 million for the twenty-six
weeks ended May 3, 1997 to $21.6 million, while gross margin
decreased from 43.8% in the twenty-six weeks ended May 3,
1997 to 42.1% primarily due to product mix.
Licensing Revenues. Licensing revenues remained
relatively flat for the twenty-six weeks ended May 2, 1998 at
$1.3 million, as compared to the prior year period.
SG&A Expenses. Selling, general and administrative
expenses decreased $9.7 million, or 25.0%, to $29.1 million for
the twenty-six weeks ended May 2, 1998 primarily due to a
decrease in domestic advertising expense. An overall increase in
European operating expenses was more than offset by the decrease
in the foreign currency exchange rate.
Restructuring and Special Charges. In the twenty-six
weeks ended May 2, 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
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
twenty-six weeks ended May 2, 1998 increased $5.6 million from an
operating loss of $15.1 million in the twenty-six weeks ended May
3, 1997 to $20.7 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 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 sale were used in
May 1997 to repay domestic borrowings.
Interest and Finance Costs. Interest and finance costs
decreased $.7 million or 26.1%, from $2.7 million for the
twenty-six weeks ended May 3, 1997 to $2.0 for the twenty-six
weeks ended May 2, 1998. The decrease in interest cost was due
to lower outstanding borrowings for the period.
Other Expenses, Net. In the twenty-six weeks ended May
2, 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
twenty-six weeks ended May 2, 1998 was $3.3 million as compared
to a provision of $7.7 million for the twenty-six weeks ended May
3, 1997. The deferred tax benefit attributable to the
restructuring charge recorded in the twenty-six weeks ended May
2, 1998 was reduced by approximately $4.5 million to the extent
its future realization is uncertain.
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 2, 1998 (the "1998 Second Quarter")
Compared to Thirteen Weeks ended May 3, 1997 (the "1997 Second
Quarter").
Net Sales. Net sales for the 1998 Second Quarter
increased $2.4 million, or 3.6%, from $66.4 million for the 1997
Second Quarter to $68.8 million. United States sales increased
by $6.5 million, or 18.9%, to $40.9 million primarily due to an
increase in unit sales volume. In the 1998 Second Quarter,
European sales decreased by 3.5 million deutsche marks, or 6.4%,
to 50.7 million deutsche marks. When converted into U.S.
currency using the prevailing currency exchange rate, the
European sales translated into a decrease of $4.1 million, or
12.8%, to $27.9 million for the 1998 Second Quarter.
Gross Profit. Gross profit for the 1998 Second Quarter
increased $7.1 million, or 92.0%, from $7.7 million in the 1997
Second Quarter to $14.8 million, while gross margin increased
from 11.6% to 21.5%. United States gross profit increased $10.3
million from a loss of $7.0 million for the 1997 Second Quarter
to $3.3 million. The increase in gross profit and as a
percentage of net sales in the United States was primarily due to
the increase in sales volume, as well as the increase in
production at
CHIC BY H.I.S., INC. AND SUBSIDIARIES
the Company's Mexican production facility. European gross profit
decreased $3.2 million from $14.7 million for the 1997 Second
Quarter to $11.5 million, while gross margin decreased from 45.9%
in the 1997 Second Quarter to 41.1% primarily due to product mix.
Licensing Revenues. Licensing revenues remained
relatively flat for the 1998 Second Quarter at $.7 million, as
compared to $.8 million for the 1997 Second Quarter.
SG&A Expenses. Selling, general and administrative
expenses decreased $7.3 million, or 29.7%, to $17.2 million for
the 1998 Second Quarter primarily due to the decrease in domestic
advertising. The Company recorded a special cooperative
advertising charge in the 1997 Second Quarter designed to
stimulate over-the-counter sales.
Restructuring and Special Charges. In the 1998 Second
Quarter, 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 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
1998 Second Quarter increased $9.8 million from $16.1 million in
the 1997 Second Quarter to $25.9 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 1997 Second
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 sale were used in May 1997 to
repay domestic borrowings.
Interest and Finance Costs. Interest and finance costs
decreased $.4 million or 26.5%, from $1.5 million for the 1997
Second Quarter to $1.1 for the 1998 Second Quarter. The decrease
in interest cost was due to lower outstanding borrowings for the
period.
Other expenses, Net. In the 1998 Second Quarter, 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
1998 Second Quarter was $5.2 million as compared to a provision
of $7.4 million for the 1997 Second Quarter as a result of the
decrease in income. The deferred tax benefit attributable to the
restructuring charge recorded in the 1998 Second Quarter was
reduced by approximately $4.5 million to the extent its future
realization is uncertain.
CHIC BY H.I.S., INC. AND SUBSIDIARIES
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 2, 1998, net cash of
$11.3 million was used in operations, as compared to $27.0
million in the twenty-six weeks ended May 3, 1997. The net cash
used in operations was primarily attributable to the net loss for
the period, as well as increases in accounts receivables,
inventories, and prepaid and other assets, which were partially
offset by the increases in accounts payable and accrued expenses.
Net cash of $2.0 million was used in investing
activities in the twenty-six weeks ended May 2, 1998, as compared
to $4.8 million in the twenty-six weeks ended May 3, 1997. Cash
used in investing activities was primarily attributable to the
acquisition of manufacturing facilities and equipment. The
Company has acquired property in Mexico that is being developed
into a manufacturing complex that was placed in service early in
the second quarter of fiscal 1998, with continued expansion in
progress. 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 twenty-six
weeks ended May 2, 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 $12.0
million in the twenty-six weeks ended May 2, 1998, as compared to
$56.6 million in the twenty-six weeks ended May 3, 1997. The
cash provided by financing activities in the twenty-six weeks
ended May 2, 1998 was primarily attributable to the increase in
borrowings against the Company's credit facilities. 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.
As of May 2, 1998, the Company had domestic credit
agreements providing a $50 million revolving line of credit, of
which $27.7 million was outstanding. In addition, the Company
had $25.5 million of IRBs outstanding at May 2, 1998. The
Company also has foreign financing agreements with three banks
providing term loans aggregating 4,300,000 deutsche marks
(approximately $2.4 million, based on the May 2, 1998 foreign
currency exchange rate) and lines of credit aggregating 38
million deutsche marks (approximately $21.2 million, based on the
May 2, 1998 foreign currency exchange rate). Approximately $1.3
million was outstanding against the foreign lines of credit as of
May 2, 1998. As of May 2, 1998, the Company was in violation of
certain financial covenants of its domestic credit agreement for
which waivers have been obtained through July 31, 1998. The
Company is currently negotiating to amend the terms of the credit
agreement prospectively.
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.
CHIC BY H.I.S., INC. AND SUBSIDIARIES
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.
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.
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.
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 May 2, 1998, the Company had an aggregate of
approximately $59.0 million of indebtedness (including capital
leases) outstanding and the Company's stockholders' equity was
approximately $67.5 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 May 2, 1998, the Company was in violation of certain
financial covenants of its domestic credit agreement for which
waivers have been obtained through July 31, 1998. The Company is
currently negotiating to amend the terms of the credit agreement
prospectively.
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.
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
---- -------------- ----------
February 20, Agreement for a reconstituted None
1998 Board of Directors
February 20, Registration statement filed None
1998 on Form S-3 for 1,150,043
shares of Common Stock at the
request of Jesse Siegel.
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 15, 1998 By: /s/ Daniel Rubin
Daniel Rubin
Chief Executive Officer
Dated: June 15, 1998 By: /s/ Christine A. Hadjigeorge
Christine A. Hadjigeorge
Chief Financial Officer
EXHIBIT 27
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
<MULTIPLIER > 1,000
<PERIOD-TYPE > 6-MOS
<FISCAL-YEAR-END > NOV-1-1997
<PERIOD-END > MAY 2-1998
<CASH > 5,214
<SECURITIES > 0
<RECEIVABLES > 35,075
<ALLOWANCES > 174
<INVENTORY > 72,193
<CURRENT-ASSETS > 121,536
<PP&E > 105,909
<DEPRECIATION > 34,055
<TOTAL-ASSETS > 185,849
<CURRENT-LIABILITIES > 70,598
<BONDS > 27,020
<COMMON > 99
0
0
<OTHER-SE > 67,362
<TOTAL-LIABILITY
- -AND-EQUITY > 185,849
<SALES > 133,072
<TOTAL-REVENUES > 134,333
<CGS > 101,729
<TOTAL-COSTS > 29,060
[OTHER-EXPENSES] 24,125
[LOSS-PROVISION] 87
<INTEREST-EXPENSES> 1,987
<INCOME-PRETAX > (23,759)
<INCOME-TAX > (3,270)
<INCOME-CONTINUING > (21,687)
<DISCONTINUED > 0
<EXTRAORDINARY > 0
<CHANGES > 0
<NET-INCOME > (21,687)
<EPS-BASIC > (2.18)
<EPS-DILUTED > (2.18)
