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 8, 1999
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 16, 1999 Common Stock, $.01 Par Value 9,870,793
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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 8, 1999 and November 7, 1998 (audited) 3
Consolidated Statements of Operations
for the twenty-six weeks ended May 8,
1999 and May 2, 1998 4
Consolidated Statements of Operations
for the thirteen weeks ended May 8,
1999 and May 2, 1998 5
Consolidated Statements of Cash Flows
for the twenty-six weeks ended May 8,
1999 and May 2, 1998 6
Consolidated Statements of Stockholders'
Equity for the twenty-six weeks ended
May 8, 1999 and May 2 7
Notes to Consolidated Financial Statements 8-9
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
Part II. Other Information
Item 5: Special Note Regarding Forward-Looking Statements 15-17
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>
May 8, 1999 Nov. 7, 1998
(In thousands) (Unaudited) (Audited)
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<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 5,836 $ 3,623
Accounts receivable - net of reserve for possible losses 33,218 27,242
Inventories 70,855 74,167
Deferred income taxes 3,592 3,549
Prepaid expenses and other current assets 6,962 2,974
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Total Current Assets 120,463 111,555
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Property, Plant and Equipment, at cost less accumulated
depreciation and amortization 61,433 58,680
Deferred tax asset 4,557 4,557
Other Assets 2,361 2,283
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$188,814 $177,075
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Liabilities and Stockholders' Equity
Current:
Revolving bank loan $ 35,814 $ 21,381
Foreign bank debt 8,785 --
Current maturities of long-term debt 1,202 2,395
Obligations under capital leases 470 613
Accounts payable 11,521 12,466
Accrued liabilities:
Payroll, payroll taxes and commissions 6,936 5,759
Income taxes 1,355 1,874
Restructuring and special charges 1,191 2,383
Other 4,568 3,551
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Total current liabilities 71,842 50,422
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Non-current:
Long-term debt 44,285 44,850
Pension liability 11,982 11,982
Obligations under capital leases 963 1,186
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Total non-current liabilities 57,230 58,018
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Minority interest 7,013 9,164
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Stockholders' Equity
Preferred stock, $.01 par value -shares authorized 10,000,000; none
issued -- --
Common stock, $.01 par value - 25,000,000 shares authorized;
9,870,793 and 9,870,793 issued and outstanding 98 98
Paid-in capital 106,304 106,275
Retained earnings (deficit) (40,449) (34,249)
Foreign currency translation adjustment (1,242) (671)
Excess of additional pension liability over intangible pension asset (11,982) (11,982)
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity 52,729 59,471
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$ 188,814 $ 177,075
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</TABLE>
See notes to consolidated financial statements.
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Twenty-six weeks Twenty-six weeks
ended May 8, ended May 2,
(In Thousands, except share and per share amounts) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales 121,239 133,072
Cost of goods sold 92,267 101,729
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Gross profit 28,972 31,343
Licensing revenues 1,416 1,261
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30,388 32,604
Selling, general and administrative expenses 30,810 29,147
Restructuring and special charges -- 24,125
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Operating loss (422) (20,668)
Interest and finance costs (3,464) (1,987)
Other expense, net -- (1,104)
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Loss before provision for income taxes, minority
interest and extraordinary item (3,886) (23,759)
Benefit (provision) for income taxes (1,536) 3,270
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Loss before minority interest and extraordinary item (5,422) (20,489)
Minority interest (778) (1,198)
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Net loss (6,200) (21,687)
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Net loss per common share:
Basic ($ .63) ($ 2.18)
Diluted ($ .63) ($ 2.18)
Weighted average number of common shares and share equivalents
outstanding
Basic 9,870,793 9,928,393
Diluted 9,870,793 9,928,393
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</TABLE>
See notes to consolidated financial statements
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Thirteen weeks Thirteen weeks
ended May 8, ended May 2,
(In Thousands, except share and per share amounts) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales 70,011 68,828
Cost of goods sold 55,410 54,049
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Gross profit 14,601 14,779
Licensing revenues 779 664
- -------------------------------------------------------------------------------------------------------------------------
15,380 15,443
Selling, general and administrative expenses 17,269 17,240
Restructuring and special charges -- 24,125
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Operating loss (1,889) (25,922)
Interest and finance costs (1,947) (1,104)
Other expense, net -- (1,104)
- -------------------------------------------------------------------------------------------------------------------------
Loss before provision for income taxes, minority interest and
extraordinary item (3,836) (28,130)
Benefit (provision) for income taxes (336) 5,202
- -------------------------------------------------------------------------------------------------------------------------
Loss before minority interest and extraordinary item (4,172) (22,928)
Minority interest (141) (275)
Net loss (4,313) (23,203)
- -------------------------------------------------------------------------------------------------------------------------
Net loss per common share:
Basic ($ .44) ($ 2.34)
Diluted ($ .44) ($ 2.34)
Weighted average number of common shares and share equivalents
outstanding
Basic 9,870,793 9,928,393
Diluted 9,870,793 9,928,393
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</TABLE>
See notes to consolidated financial statements
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Twenty-six weeks ended
- -------------------------------------------------------------------------------------------------------------------------
May 8, 1999 May 2, 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,200) $ (21,687)
- -------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash used in operating activities:
Minority interest 778 1,198
Non-cash restructuring and special charges - 13,680
Gain on sale of property and equipment - (1,838)
Depreciation and amortization 2,069 2,448
Deferred income taxes (43) (5,548)
Decrease (increase) in:
Accounts receivable (5,976) (949)
Inventories 3,312 (825)
Prepaid expenses and other current assets (3,988) (2,626)
Other assets (78) (670)
Increase (decrease) in:
Accounts payable (945) 1,937
Accrued liabilities 483 3,604
- -------------------------------------------------------------------------------------------------------------------------
Total adjustments (4,388) 10,411
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Net cash used in operating activities (10,588) (11,276)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (4,460) (5,101)
Proceeds from the sale of fixed assets - 3,042
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,460) (2,059)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in loans under revolving line of credit 14,433 12,700
Increase in foreign bank debt 8,785 1,296
Repayment of long-term debt (1,585) (83)
Principal payments under capitalized lease obligations (367) (447)
Retirement of capitalized lease obligation - (175)
Proceeds from the issuance of common stock - 960
Proceeds from short swing profits 29 119
Dividend payment - shareholder rights redemption - (99)
Dividend payment - minority interest (1,955) (2,310)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 19,340 11,961
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,292 (1,374)
- -------------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (2,079) (807)
Cash and cash equivalents, beginning of period 3,623 7,395
Cash and cash equivalents, end of period $ 5,836 $ 5,214
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Excess of
additional
pension
liability
Foreign over
Retained currency intangible
Common Paid-in earnings translation pension
(In Thousands) Total stock capital (deficit) adjustment asset
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<S> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1997 $ 89,068 $ 99 $ 105,590 ($ 6,299) $ 332 ($ 10,654)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
Net loss (21,687) - - (21,687) - -
Foreign currency
translation adjustment (899) - - - (899) -
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Total comprehensive income (22,586) - - (21,687) (899) -
(loss)
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Stock options exercised 960 - 960 - - -
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Short-swing Section 16(b) 118 - 118 - - -
profits
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Dividends (99) - (99) - - -
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Balance, January 31, 1998 $ 67,461 $ 99 $ 106,569 ($ 27,986) ($ 567) ($ 10,654)
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Balance, November 7, 1998 $ 59,471 $ 98 $ 106,275 ($ 34,249) ($ 671) ($ 11,982)
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Comprehensive income (loss):
Net loss (6,200) - - (6,200) - -
Foreign currency
translation adjustment (571) - - - (571) -
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Total comprehensive income (6,771) - - (6,200) (571) -
(loss)
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Short-swing Section 16(b) 29 - 29 - - -
profits
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, February 6, 1999 $ 52,729 $ 98 $ 106,304 $ (40,449) $( 1,242) $ (11,982)
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</TABLE>
See notes to consolidated financial statements.
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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 8, 1999 November 7, 1998
Raw Materials $ 8,853 $ 9,159
Work-in-process 15,914 12,966
Finished Goods 46,088 52,042
$ 70,855 $ 74,167
3. Asset Purchase Agreement
In January 1999, the Company purchased certain assets, including inventory,
tradenames and sales orders, of Stuffed Shirt, Inc. for $4.3 million. The
purchase price was payable $1 million at closing, with the balance payable
within 90 days of the closing date.
4. Recent Accounting Standards
In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards, which are effective for fiscal periods beginning after December 15,
1997. Results of operations and financial position were unaffected by
implementation of these new standards.
Statement of Financial Accounting 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
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities. "SFAS No. 133
requires companies to recognize all derivative contracts at their fair values,
as either assets or liabilities on the balance sheet. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (1) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk, or (2) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard to affect its financial statements.
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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>
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Twenty-six Weeks Ended Thirteen Weeks Ended
- ------------------------------------------------------------------------------------------------------------------------------------
May 8, 1999 May 2, 1998 May 8, 1999 May 2, 1998
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales
United States 58.0% 61.5% 63.1% 59.4%
Europe 42.0 38.5 36.9 40.6
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Consolidated 100.0 100.0 100.0 100.0
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Gross margin
United States 10.8 11.9 9.9 8.1
Europe 42.1 42.1 39.5 41.1
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Consolidated 23.9 23.5 20.9 21.5
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Licensing revenues 1.2 1.0 1.1 1.0
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Selling, general and administrative expenses 25.4 21.9 24.7 25.1
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Restructuring and special charges - 18.1 - 35.1
- ------------------------------------------------------------------------------------------------------------------------------------
Operating loss (.3) (15.5) (2.7) (37.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest and finance costs (2.9) (1.5) (2.8) (1.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Other expense - (.8) - (1.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before provision for income taxes, minority interest and (3.2) (17.8) (5.5) (40.9)
extraordinary item
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit (provision) for income taxes (1.3) 2.4 (.5) 7.6
- ------------------------------------------------------------------------------------------------------------------------------------
Minority interest (.6) (.9) (.2) (.4)
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Net loss (5.1)% (16.3)% (6.2)% (33.7)%
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</TABLE>
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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 8,
1999 and May 2, 1998 and its liquidity and capital resources.
Twenty-six Weeks ended May 8, 1999 Compared to Twenty-six Weeks ended May 2,
1998
Net Sales. Net sales for the twenty-six weeks ended May 8, 1999
decreased $11.8 million, or 8.9%, from $133.1 million for the twenty-six weeks
ended May 2, 1998 to $121.2 million. United States sales decreased by
$11.5 million, or 14.1%, to $70.3 million primarily due to a decrease in unit
sales volume. As of May 8, 1999, the Company had a total backlog of confirmed
domestic purchase orders of $67.0 million, a decrease of 24.8% compared to $89.1
million as of May 2, 1998. In the twenty-six weeks ended May 8, 1999, European
sales decreased by 3.3 million deutsche marks, or 3.6%, to 88.8 million deutsche
marks. When converted into U.S. currency using the prevailing currency exchange
rate, the European sales translated into a decrease of $.3 million, or .6%, to
$50.9 million for the twenty-six weeks ended May 8, 1999. As of May 8, 1999, the
Company had a total backlog of confirmed European purchase orders of 68.7
million deutsche marks, a decrease of 16.7% compared to 82.5 million deutsche
marks as of May 2, 1998. The confirmed European backlog, when converted into
U.S. currency at the then prevailing currency exchange rate, was $37.8 million,
a decrease of 17.8% compared to $46.0 million on May 2, 1998.
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 8, 1999
decreased $2.4 million, or 7.6%, from $31.3 million in the twenty-six weeks
ended May 2, 1998 to $29.0 million, while gross margin increased from 23.5% to
23.9%. United States gross profit decreased $2.2 million from $9.8 million for
the twenty-six weeks ended May 2, 1998 to $7.6 million, while gross margin
decreased from 11.9% to 10.8%. The decrease in gross profit and as a percentage
of net sales in the United States was primarily due to the decrease in the
average unit selling price due to product mix and the increased use of outside
contractors. European gross profit decreased $.2 million from $21.6 million for
the twenty-six weeks ended May 2, 1998 to $21.4 million, while gross margin
remained relatively flat at 42.1% compared to the prior year period.
Licensing Revenues. Licensing revenues increased $.1 million for the
twenty-six weeks ended May 8, 1999 to $1.4 million primarily due to an increase
in European licensing revenues of $.3 million.
SG&A Expenses. Selling, general and administrative expenses increased
$1.7 million, or 5.7%, to $30.8 million for the twenty-six weeks ended May 8,
1999 primarily due to increased European selling and administrative expenses
related to the re-negotiation of certain regional salesmen's compensation
arrangements, the timing of advertising and trade shows and the accrual of an
estimated year-end bonus.
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 plant closings resulted in the termination
of approximately 1,300 employees. In addition, the downsizing associated with
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
such plant closings may affect the accounting, disclosure and funding of the
Company's pension benefit obligation.
Operating Loss. The operating loss for the twenty-six weeks ended
May 8, 1999 decreased $20.2 million from an operating loss of $20.7 million in
the twenty-six weeks ended May 2, 1998 to $.4 million, primarily due to the
restructuring and special charges recorded in the prior year period, which were
partially offset by the decrease in sales and gross profit and the increase in
operating expenses.
Interest and Finance Costs. Interest and finance costs increased
$1.5 million or 74.4%, from $2.0 million for the twenty-six weeks ended May 2,
1998 to $3.5 million for the twenty-six weeks ended May 8, 1999. The increase in
interest cost was due to higher outstanding borrowings at higher average
interest rates for the period.
Income Taxes. The provision for income taxes for the twenty-six weeks
ended May 8, 1999 was $1.5 million as compared to a recovery of $3.3 million for
the twenty-six weeks ended May 2, 1998. The increase in the provision is the
result of the increase in the valuation allowance against the domestic deferred
tax asset to the extent its future realization is uncertain. 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.
Thirteen Weeks ended May 8, 1999 (the "1999 Second Quarter") Compared to
Thirteen Weeks ended May 2, 1998 (the "1998 Second Quarter")
Net Sales. Net sales for the 1999 Second Quarter increased $1.2
million, or 1.7%, from $68.8 million for the 1998 Second Quarter to $70.0
million. In the 1999 Second Quarter, United States sales increased by $3.3
million, or 8.0%, to $44.2 million primarily due to an increase in unit sales
volume. In the 1999 Second Quarter, European sales decreased by 4.1 million
deutsche marks, or 8.1%, to 46.6 million deutsche marks. When converted into
U.S. currency using the prevailing currency exchange rate, the European sales
translated into a decrease of $2.1 million, or 7.5%, to $25.8 million for the
1999 Second Quarter.
Gross Profit. Gross profit for the 1999 Second Quarter decreased
$.2 million, or 1.2%, from $14.8 million in the 1998 Second Quarter to $14.6
million, while gross margin decreased from 21.5% to 20.9%. United States gross
profit increased $1.1 million from $3.3 million for the 1998 Second Quarter to
$4.4 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. European
gross profit decreased $1.3 million from $11.5 million for the 1998 Second
Quarter to $10.2 million, while gross margin decreased from 41.1% in the 1998
Second Quarter to 39.5% primarily due to product mix.
Licensing Revenues. Licensing revenues increased $.1 million for the
1999 Second Quarter to $.8 million primarily due to an increase in European
licensing revenues of $.3 million.
SG&A Expenses. Selling, general and administrative expenses remained
relatively flat for the 1999 Second Quarter compared to the prior year period.
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,
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
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 shutdown period and
the accrual of estimated costs of disposition. The plant closings resulted 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 Loss. The operating loss for the 1999 Second Quarter
decreased $24.0 million from $25.9 million in the 1998 Second Quarter to $1.9
million, primarily due to the restructuring and special charges recorded in the
prior year period.
Interest and Finance Costs. Interest and finance costs increased $.8
million or 76.3%, from $1.1 million for the 1998 Second Quarter to $1.9 for the
1999 Second Quarter. The increase in interest cost was due to higher outstanding
borrowings for the period at higher average interest rates for the period.
Income Taxes. The provision for income taxes for the 1999 Second
Quarter was $.3 million as compared to a recovery of $5.2 million for the 1998
Second Quarter. The increase in the provision is the result of the increase in
the valuation allowance against the domestic deferred tax asset to the extent
its future realization is uncertain. 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.
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 8, 1999, net cash of $10.6 million
was used in operations, as compared to $11.3 million in the twenty-six weeks
ended May 2, 1998. The net cash used in operations was primarily attributable to
the net loss for the period, the increase accounts receivables and other current
assets, which was partially offset by the decrease in inventory. The changes in
accounts receivable and inventories are primarily attributable to the increase
and timing of sales in the period, as well as inventory purchasing controls. The
latter was offset by the increase in inventory levels attributable to the
purchase of inventory from Stuffed Shirt, Inc.
Net cash of $4.5 million was used in investing activities in the
twenty-six weeks ended May 8, 1999, as compared to $2.0 million in the
twenty-six weeks ended May 2, 1998. Cash used in investing activities was
primarily attributable to the construction of manufacturing facilities and the
acquisition of equipment. The Company is continuing to develop its manufacturing
facilities in Mexico and has a laundry facility under construction. The
construction of the laundry is expected to require an investment of
approximately $8 million in fiscal 1999, to be financed primarily through bank
borrowing.
As of May 8, 1999, the Company had a $60 million domestic credit
agreement providing a $40 million revolving line of credit and $20 million term
loan, with seasonal increases in the revolving line of credit to $43,000,000
from February through June and to $48,000,000 from July through September of
each year. As of May 8, 1999, $55.8 million was outstanding against the domestic
credit agreement. In addition, the Company had $24.3 million of IRBs outstanding
at May 8, 1999. The Company also has foreign financing agreements with two banks
providing term loans aggregating 2.2 million deutsche marks
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
(approximately $1.2 million, based on the May 8, 1999 foreign currency exchange
rate) and lines of credit aggregating 58 million deutsche marks (approximately
$31.9 million, based on the May 8, 1999 foreign currency exchange rate).
Approximately $8.8 million was outstanding against the foreign lines of credit
as of May 8, 1999.
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. During fiscal 1998 and 1997, sales to one
major customer (with sales in excess of 10% of total sales), Kmart Corporation
("K-Mart"), accounted for approximately 23.5% and 23.4% of the Company's
consolidated net sales, respectively. For the year ended November 2, 1996, sales
to two major customers (with sales in excess of 10% of total sales) approximated
25.5% and 12.2% of consolidated net sales on an individual basis. The loss of
such a major 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 retailer. 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.
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
-15-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
changing rapidly, and commenced manufacturing operations in Mexico in 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 contain certain limitations on the Company's ability to pay
dividends.
Leverage and Financial Covenants. Although debt and equity transactions
have 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 8, 1999, the
Company had an aggregate of approximately $91.5 million of indebtedness
(including capital leases) outstanding and the Company's stockholders' equity
was approximately $52.7 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 8, 1999, the Company was not in compliance with certain covenants of
its domestsic credit agreement for which waivers have been obtained.
The Year 2000
The Company continues to assess the potential impact of the Year 2000
("Y2K") computer processing issue on its management and information systems. The
Company believes that it has a prudent approach in place to address these issues
and monitor remedial action. The approach includes: an assessment of internal
programs and equipment; communication with major customers and vendors with
respect to the state of readiness of their systems; an evaluation of facility
related issues and the development of a contingency plan. This approach is
designed to maintain an uninterrupted supply of goods and services to/from the
Company.
The Company is incorporating the Y2K programming modifications with an
overall upgrade in its computer programming language. While this project
involves a significant effort from its programming staff, the Company believes
that it is on schedule for a timely completion. All programs are expected to be
reviewed, remediated and converted by mid-1999. The Company is also in the
process of assessing all hardware components and is not aware of any material
investment required for its mainframe and critical hardware equipment to be Y2K
compliant.
The Company is in a continuous process of communicating with its major
customers and suppliers. This contact is designed to determine systems
compatibility and compliance. The Company has been assured by its major
suppliers that there will be no disruption in the delivery of goods and
services. The Company believes that adequate resources are available for the
supply of its raw materials and facility related equipment will be operational.
-16-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
The Company has relied entirely on internal programming and operational
resources for review and remediation of Y2K issues. Accordingly, no incremental
costs have been expended for such activities.
At this time, the Company is not aware of any internal or external systems
related to the Y2K programming issues which would prevent or significantly
impair the Company from continuing operations after the turn of the century. The
Company continues to assess the risks associated with program failures and will
develop a formal contingency plan with its business partners to address specific
risks. At this point, no serious risks of failure have been identified.
The failure to correct a material Y2K problem could result in an
interruption in normal business activity. The Company's plan is expected to
significantly reduce the risk associated with the Y2K issue. However, due to the
inherent uncertainty of the Y2K issue and dependence on third-party compliance,
no assurance can be given that potential Y2K failures will not adversely effect
the Company's operations, liquidity and financial position.
-17-
<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
-18-
<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 16, 1999 By: /s/ Daniel Rubin
------------------------------
Daniel Rubin
Chief Executive Officer
Dated: June 16, 1999 By: /s/ Christine A. Hadjigeorge
-----------------------------
Christine A. Hadjigeorge
Chief Financial Officer
-19-
<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> 6-MOS
<FISCAL-YEAR-END> NOV-7-1998
<PERIOD-END> MAY-8-1999
<CASH> 5,836
<SECURITIES> 0
<RECEIVABLES> 33,440
<ALLOWANCES> 222
<INVENTORY> 70,855
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<PP&E> 90,076
<DEPRECIATION> 28,643
<TOTAL-ASSETS> 188,814
<CURRENT-LIABILITIES> 71,842
<BONDS> 45,248
0
0
<COMMON> 98
<OTHER-SE> 52,631
<TOTAL-LIABILITY-AND-EQUITY> 188,814
<SALES> 121,239
<TOTAL-REVENUES> 122,655
<CGS> 92,267
<TOTAL-COSTS> 3,373
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<INTEREST-EXPENSE> 3,464
<INCOME-PRETAX> (3,886)
<INCOME-TAX> 1,536
<INCOME-CONTINUING> (6,200)
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<NET-INCOME> (6,200)
<EPS-BASIC> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
