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 February 6, 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
----------- --------------------- -----------
March 16, 1999 Common Stock, $.01 Par Value 9,870,793
1
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CHIC BY H.I.S, INC.
INDEX
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Page
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Part I. Financial Information
Item 1: Financial Statements (unaudited, except as noted):
Consolidated Balance Sheets at
February 6, 1999 and November 7, 1998 (audited) 3
Consolidated Statements of Operations
for the thirteen weeks ended February 6,
1999 and January 31, 1998 4
Consolidated Statements of Cash Flows
for the thirteen weeks ended February 6,
1999 and January 31, 1998 5
Consolidated Statements of Stockholders'
Equity for the thirteen weeks ended
February 6, 1999 and January 31, 1998 6
Notes to Consolidated Financial Statements 7-8
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
Part II. Other Information
Item 5: Special Note Regarding Forward-Looking Statements 13-15
Item 6: Exhibits and Reports on Form 8-K 16
Signature Page 17
2
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Feb. 6, 1999 Nov. 7, 1998
(In thousands) (Unaudited) (Audited)
============================================================================================================================
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 7,895 $ 3,623
Accounts receivable - net of reserve for possible losses 29,012 27,242
Inventories 85,829 74,167
Deferred income taxes 4,507 3,549
Prepaid expenses and other current assets 5,070 2,974
- ----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 132,313 111,555
- ----------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at cost less accumulated
depreciation and amortization 58,992 58,680
Deferred tax asset 4,557 4,557
Other Assets 1,914 2,283
- ----------------------------------------------------------------------------------------------------------------------------
$ 197,776 $ 177,075
============================================================================================================================
Liabilities and Stockholders' Equity
Current:
Revolving bank loan $ 31,657 $ 21,381
Foreign bank debt 7,133 -
Current maturities of long-term debt 4,523 2,395
Obligations under capital leases 544 613
Accounts payable 15,547 12,466
Accrued liabilities:
Payroll, payroll taxes and commissions 7,337 5,759
Income taxes 1,109 1,874
Restructuring and special charges 1,798 2,383
Other 4,043 3,551
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 73,691 50,422
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Non-current:
Long-term debt 44,800 44,850
Pension liability 11,982 11,982
Obligations under capital leases 1,072 1,186
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Total non-current liabilities 57,854 58,018
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Minority interest 9,413 9,164
- ----------------------------------------------------------------------------------------------------------------------------
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) (36,136) (34,249)
Foreign currency translation adjustment (1,466) (671)
Excess of additional pension liability over intangible pension asset (11,982) (11,982)
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity 56,818 59,471
- ----------------------------------------------------------------------------------------------------------------------------
$ 197,776 $ 177,075
============================================================================================================================
</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>
Thirteen weeks Thirteen weeks
ended February 6, ended January 31,
(In Thousands, except share and per share amounts) 1999 1998
===========================================================================================================================
<S> <C> <C>
Net sales 51,228 64,245
Cost of goods sold 36,857 47,680
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 14,371 16,565
Licensing revenues 637 597
- ---------------------------------------------------------------------------------------------------------------------------
15,008 17,162
Selling, general and administrative expenses 13,541 11,907
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 1,467 5,255
Interest and finance costs (1,517) (883)
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes, minority
interest and extraordinary item (50) 4,372
Provision for income taxes 1,200 1,932
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest and extraordinary item (1,250) 2,440
Minority interest 637 924
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) (1,887) 1,516
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share:
Basic ($ .19) $ .15
Diluted ($ .19) $ .15
Weighted average number of common shares and share equivalents
outstanding
Basic 9,870,793 9,787,868
Diluted 9,870,793 9,895,017
==========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
4
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
- ------------------------------------------------------------------------------------------------------------------
February 6, January 31,
(In Thousands) 1999 1998
==================================================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 1,887) $ 1,516
- ------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Minority interest 637 924
Depreciation and amortization 1,036 1,266
Deferred income taxes (958) 253
Decrease (increase) in:
Accounts receivable (1,770) (2,635)
Inventories (11,662) (385)
Prepaid expenses and other current assets (2,096) (1,028)
Other assets 369 (670)
Increase (decrease) in:
Accounts payable 3,081 (3,196)
Accrued liabilities 718 (680)
- ------------------------------------------------------------------------------------------------------------------
Total adjustments (10,645) (6,151)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (12,532) (4,635)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,550) (3,259)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in loans under revolving line of credit 10,276 8,500
Increase in foreign bank debt 7,133 888
Increase in short-term notes payable 3,336 -
Repayment of long-term debt (1,190) -
Proceeds from the issuance of common stock - 134
Short-swing profits 29 -
Principal payments under capitalized lease obligations (184) (202)
Retirement of capitalized lease obligation - (175)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 19,400 9,145
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 5,318 1,251
- ------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (1,046) (1,166)
Cash and cash equivalents, beginning of period 3,623 7,395
Cash and cash equivalents, end of period $ 7,895 $ 7,480
==================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Excess of
additional
pension
liability
Foreign over
Retained currency intangible
Common Paid-in earnings translation pension
(In Thousands) Total stock capital (deficit) adjustment asset
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1997 $ 89,068 $ 99 $ 105,590 ($ 6,299) $ 332 ($ 10,654)
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 1,516 - - 1,516 - -
Foreign currency translation
adjustment (578) - - - (578) -
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 938 - - 1,516 (578) -
- --------------------------------------------------------------------------------------------------------------------------------
Stock options exercised 134 - 134 - - -
- --------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1998 $ 90,140 $ 99 $ 105,724 ($ 4,783) ($ 246) ($ 10,654)
================================================================================================================================
Balance, November 7, 1998 $ 59,471 $ 98 $ 106,275 ($34,249) ($ 671) ($ 11,982)
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net loss (1,887) - - (1,887) - -
Foreign currency translation
adjustment (795) - - - (795) -
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (2,682) - - (1,887) (795) -
- --------------------------------------------------------------------------------------------------------------------------------
Short-swing Section 16(b) profits 29 - 29 - - -
- --------------------------------------------------------------------------------------------------------------------------------
Balance, February 6, 1999 $ 56,818 $ 98 $ 106,304 $ (36,136) $(1,466) $ (11,982)
================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
=========================================================
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
2. Inventories.
Inventories consist of the following:
(In Thousands) February 6, 1999 November 7, 1998
- --------------------------------------------------------------------------------
Raw Materials $ 11,891 $ 9,159
Work-in-process 19,192 12,966
Finished Goods 54,745 52,042
- --------------------------------------------------------------------------------
$ 85,829 $ 74,167
================================================================================
3. Asset Purchase Agreement
In January 1999, the Company purchased certain assets, including inventory,
tradenames and sales orders, of Stuffed Shirt, Inc. ("Stuffed Shirt") 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 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.
7
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
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.
8
<PAGE>
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>
Thirteen Weeks Ended
February 6, January 31,
1999 1998
<S> <C> <C>
Net Sale
United States 51.1 63.7
Europe 48.9 36.3
- ------------------------------------------------------------------------------------------------------------------------
Consolidated 100.0 100.0
- ------------------------------------------------------------------------------------------------------------------------
Gross margin
United States 12.1 15.8
Europe 44.7 43.3
- ------------------------------------------------------------------------------------------------------------------------
Consolidated 28.5 25.8
- ------------------------------------------------------------------------------------------------------------------------
Licensing revenues 1.2 .9
- ------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 26.4 18.5
- ------------------------------------------------------------------------------------------------------------------------
Operating income 2.9 8.2
- ------------------------------------------------------------------------------------------------------------------------
Interest and finance costs (3.0) (1.4)
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes and minority interest (.1) 6.8
- ------------------------------------------------------------------------------------------------------------------------
Provision for income taxes (2.3) (3.0)
- ------------------------------------------------------------------------------------------------------------------------
Minority interest (1.2) (1.4)
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) (3.6) 2.4
========================================================================================================================
</TABLE>
9
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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 thirteen weeks ended February 6, 1999 and
January 31, 1998 and its liquidity and capital resources.
Thirteen Weeks ended February 6, 1999 (the "1999 First Quarter") Compared
to Thirteen Weeks ended January 31, 1998 (the "1998 First Quarter")
Net Sales. Net sales for the 1999 First Quarter decreased $13.0 million, or
20.3%, from $64.2 million for the 1998 First Quarter to $51.2 million. United
States sales decreased by $14.8 million, or 36.1%, to $26.2 million primarily
due to a decrease in unit sales volume. As of February 6, 1999, The Company had
a total backlog of confirmed domestic purchase orders of $72.5 million, a
decrease of 5.1% compared to $76.4 million as of January 31, 1998. In the 1999
First Quarter, European sales increased by .7 million deutsche marks, or 1.7%,
to 42.1 million deutsche marks. When converted using the prevailing currency
exchange rate, the European sales translated into an increase of $1.8 million,
or 7.5%, to $25.1 million for the 1999 First Quarter. As of February 6, 1999,
the Company had a total backlog of confirmed European purchase orders of 53.8
million deutsche marks, a decrease of 14.5% compared to 62.9 million deutsche
marks as of January 31, 1998. The confirmed European backlog, when converted
into U.S. currency at the then prevailing rate, was $31.1 million, a decrease of
10.0% compared to $34.6 million on January 31, 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 1999 First Quarter decreased $2.2
million, or 13.2%, from $16.6 million in the 1998 First Quarter to $14.4
million, although gross margin increased from 25.8% to 28.0% due to the higher
proportionate contribution of European sales. United States gross profit
decreased $3.3 million from $6.5 million for the 1998 First Quarter to $3.2
million, while the gross margin decreased from 15.8% to 12.1%. The decrease in
gross profit in the United States was primarily due to the decrease in sales
volume, while the decrease in gross margin is primarily due to the decrease in
the average unit selling price and product mix. European gross margin increased
from 43.3% in the 1998 First Quarter to 44.7% primarily due to product mix.
Licensing Revenues. Licensing revenues remained relatively flat for the
1999 First Quarter at $.6 million, as compared to the 1998 First Quarter.
SG&A Expenses. Selling, general and administrative expenses increased $1.6
million, or 13.7%, to $13.5 million for the 1999 First Quarter primarily due to
increased European selling and administrative expenses of $2.1 million which
were partially offset by a decrease in domestic operating expenses of $.5
million. The increase in European operating expenses is primarily due 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. The decrease in domestic operating expenses reflects the Company's cost
reduction efforts.
Operating Income. Operating income for the 1999 First Quarter decreased
$3.8 million from $5.3 million in the 1998 First Quarter to $1.5 million,
primarily due to the decrease in sales and the increase in selling, general and
administrative expenses.
10
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
Interest and Finance Costs. Interest and finance costs increased $.6
million or 71.2%, from $.9 million for the 1998 First Quarter to $1.5 million
for the 1999 First Quarter. 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 1999 First Quarter was
$1.2 million as compared to $1.9 million for the 1998 First Quarter as a result
of the decrease in income and the increase in the valuation allowance against
the domestic deferred tax asset to the extent its 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 1999 First Quarter, net cash of $12.5 million was used
in operations, as compared to $4.6 million in the 1998 First Quarter. The net
cash used in operations was primarily attributable to the net loss for the
period, the increase in accounts receivables and inventories, which was
partially offset by the increase in accounts payable and accrued expenses. The
changes in accounts receivable, inventories and accounts payable are
primarily attributable to the decrease and timing of sales in the period, as
well as the purchase of approximately $4.5 million of inventory from
Stuffed Shirt, Inc. ("Stuffed Shirt"). The increase in accounts payable is
primarily due to the timing of inventory purchases.
Net cash of $1.5 million was used in investing activities in the 1999 First
Quarter, as compared to $3.3 million in the 1998 First Quarter. Cash used in
investing activities was primarily attributable to the construction of
manufacturing facilities and 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.
Net cash provided by financing activities was $19.4 million in the
1999 First Quarter, as compared to $9.1 million in the 1998 First Quarter. The
cash provided by financing activities in the 1999 First Quarter was
primarily attributable to a $10.3 million increase in the Company's borrowings
against its domestic credit facilities, $7.1 million increase in foreign bank
debt and $3.3 million increase in short-term notes payable to the principal
stockholders of Stuffed Shirt for the purchase of certain assets of the
company, which was partially offset by the repayment of current maturities
of foreign long-term debt of $1.1 million.
As of February 6, 1999, the Company had a $60 million domestic credit
agreement providing a $40 million revolving line of credit and $20 million term
loan, of which $51.7 million was outstanding. In addition, the Company had $24.7
million of IRBs outstanding at February 6, 1999. The Company also has foreign
financing agreements with two banks providing term loans aggregating 2.3 million
deutsche marks (approximately $1.3 million, based on the February 6, 1999
foreign currency exchange rate) and lines of credit aggregating 58 million
deutsche marks (approximately $33.6 million, based on the February 6, 1999
foreign currency exchange rate). Approximately $7.1 million was outstanding
against the foreign lines of credit as of February 6, 1999.
11
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
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.
12
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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.
13
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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 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 (the "Loan 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 February 6, 1999, the Company had an aggregate of
approximately $89.7 million of indebtedness (including capital leases)
outstanding and the Company's stockholders' equity was approximately $56.8
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.
The Company has amended the terms of its domestic credit agreement to
provide seasonal increases in its revolving credit facility and amend
certain covenants with which the Company was not in compliance as of
February 6, 1999.
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 incorporated 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.
14
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
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.
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.
15
<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
None
16
<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 hereunto duly authorized.
CHIC BY H.I.S, INC.
Dated: March 16, 1999 By: /s/ Daniel Rubin
--------------------------
Daniel Rubin
Chief Executive Officer
Dated: March 16, 1999 By: /s/ Christine A. Hadjigeorge
------------------------------
Christine A. Hadjigeorge
Chief Financial Officer
17
<PAGE>
<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> 3-MOS
<FISCAL-YEAR-END> NOV-7-1998
<PERIOD-END> FEB-6-1999
<CASH> 7,895
<SECURITIES> 0
<RECEIVABLES> 29,234
<ALLOWANCES> 222
<INVENTORY> 85,829
<CURRENT-ASSETS> 9,577
<PP&E> 86,602
<DEPRECIATION> 27,610
<TOTAL-ASSETS> 197,776
<CURRENT-LIABILITIES> 73,691
<BONDS> 45,872
0
0
<COMMON> 98
<OTHER-SE> 56,720
<TOTAL-LIABILITY-AND-EQUITY> 197,776
<SALES> 51,228
<TOTAL-REVENUES> 51,865
<CGS> 36,857
<TOTAL-COSTS> 13,511
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 1,517
<INCOME-PRETAX> (50)
<INCOME-TAX> 1,200
<INCOME-CONTINUING> (1,887)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,887)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (.019)
</TABLE>
