SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended August 7, 1999
Commission File No. 1-11722
CHIC BY H.I.S, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3494627
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(State of Incorporation) (I.R.S. Employer
Identification No.)
1372 Broadway, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
(212) 302-6400
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Registrant's telephone number,
including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares
Date Class Outstanding
- ------------------ ---------------------------- -----------
September 10, 1999 Common Stock, $.01 Par Value 9,870,793
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<PAGE>
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
August 7, 1999 and November 7, 1998 (audited) 3
Consolidated Statements of Operations
for the thirty-nine weeks ended August 7,
1999 and August 1, 1998 4
Consolidated Statements of Operations
for the thirteen weeks ended August 7,
1999 and August 1, 1998 5
Consolidated Statements of Cash Flows
for the thirty-nine weeks ended August 7,
1999 and August 1, 1998 6
Consolidated Statements of Stockholders'
Equity for the thirty-nine weeks ended
August 7, 1999 and August 1, 1998 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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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 7, 1999 Nov. 7, 1998
(In thousands) (Unaudited) (Audited)
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<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 2,421 $ 3,623
Accounts receivable - net of reserve for possible losses 32,324 27,242
Inventories 72,153 74,167
Deferred income taxes 3,592 3,549
Prepaid expenses and other current assets 9,202 2,974
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Total Current Assets 119,692 111,555
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Property, Plant and Equipment, at cost less accumulated
depreciation and amortization 60,644 58,680
Deferred income taxes 4,557 4,557
Other Assets 2,596 2,283
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$ 187,489 $ 177,075
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Liabilities and Stockholders' Equity
Current:
Revolving bank loan $ 30,506 $ 21,381
Foreign bank debt 9,384 -
Current maturities of long-term debt 1,211 2,395
Obligations under capital leases 428 613
Accounts payable 20,250 12,466
Accrued liabilities:
Payroll, payroll taxes and commissions 5,866 5,759
Income taxes 1,950 1,874
Restructuring and special charges 592 2,383
Other 2,590 3,551
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Total current liabilities 72,777 50,422
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Non-current:
Long-term debt 43,385 44,850
Pension liability 11,982 11,982
Obligations under capital leases 870 1,186
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Total non-current liabilities 56,237 58,018
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Minority interest 7,430 9,164
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Stockholders' Equity
Preferred stock, $.01 par value -shares authorized 10,000,000; none issued - -
Common stock, $.01 par value - 25,000,000 shares authorized; 9,870,793 and
9,870,793 issued and outstanding 98 98
Paid-in capital 106,304 106,275
Retained earnings (deficit) (42,317) (34,249)
Foreign currency translation adjustment (1,058) (671)
Excess of additional pension liability over intangible pension asset (11,982) (11,982)
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Stockholders' Equity 51,045 59,471
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$ 187,489 $ 177,075
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</TABLE>
See notes to consolidated financial statements. -3-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine weeks Thirty-nine weeks
ended August 7, ended August 1,
(In Thousands, except share and per share amounts) 1999 1998
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<S> <C> <C>
Net sales 173,537 192,968
Cost of goods sold 132,950 147,484
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Gross profit 40,587 45,484
Licensing revenues 1,822 2,327
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42,409 47,811
Selling, general and administrative expenses 41,838 44,206
Restructuring and special charges - 24,125
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Operating income (loss) 571 (20,520)
Interest and finance costs (5,298) (3,232)
Other expense, net - (1,104)
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Loss before benefit (provision) for income taxes and
minority interest (4,727) (24,856)
Benefit (provision) for income taxes (2,220) 3,409
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Loss before minority interest (6,947) (21,447)
Minority interest (1,121) (1,611)
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Net loss (8,068) (23,058)
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Net loss per common share:
Basic ($ .82) ($ 2.30)
Diluted ($ .82) ($ 2.30)
Weighted average number of common shares and share equivalents outstanding
Basic 9,870,793 10,030,543
Diluted 9,870,793 10,030,543
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</TABLE>
See notes to consolidated financial statements. -4-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen weeks Thirteen weeks
ended August 7, ended August 1,
(In Thousands, except share and per share amounts) 1999 1998
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<S> <C> <C>
Net sales 52,298 59,896
Cost of goods sold 40,683 45,755
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Gross profit 11,615 14,141
Licensing revenues 406 1,066
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12,021 15,207
Selling, general and administrative expenses 11,028 15,059
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Operating income 993 148
Interest and finance costs (1,834) (1,245)
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Loss before benefit (provision) for income taxes and
minority interest (841) (1,097)
Benefit (provision) for income taxes (684) 139
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Loss before minority interest (1,525) (958)
Minority interest 342 413
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Net loss ($1,867) ($1,371)
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Net loss per common share:
Basic ($ .19) ($ .14)
Diluted ($ .19) ($ .14)
Weighted average number of common shares and share equivalents outstanding
Basic 9,870,793 10,030,543
Diluted 9,870,793 10,030,543
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</TABLE>
See notes to consolidated financial statements. -5-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine weeks ended
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(In Thousands) August 7, 1999 August 1, 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,068) $ (23,058)
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Adjustments to reconcile net loss to net cash used in operating activities:
Minority interest 1,121 1,611
Non-cash restructuring and special charges - 13,680
Gain on sale of property and equipment - (1,912)
Depreciation and amortization 2,978 3,436
Deferred income taxes (43) (6,488)
Decrease (increase) in:
Accounts receivable (5,082) (405)
Inventories 2,014 (7,798)
Prepaid expenses and other current assets (6,228) (3,005)
Other assets (313) 79
Increase (decrease) in:
Accounts payable 7,784 (3,932)
Accrued liabilities (2,569) 1,248
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Total adjustments (338) (3,486)
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Net cash used in operating activities (8,406) (26,544)
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Cash flows from investing activities:
Purchase of property, plant and equipment (4,397) (7,060)
Proceeds from the sale of fixed assets - 3,187
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Net cash used in investing activities (4,397) (3,873)
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Cash flows from financing activities:
Increase in loans under revolving line of credit 9,125 23,200
Increase in foreign bank debt 9,384 6,926
Repayment of long-term debt (2,360) (83)
Principal payments under capitalized lease obligations (502) (683)
Retirement of capitalized lease obligation - (175)
Proceeds from the issuance of common stock - 1,553
Proceeds from short swing profits 29 118
Dividend payment - shareholder rights redemption - (99)
Dividend payment - minority interest (1,955) (2,310)
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Net cash provided by financing activities 13,721 28,447
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Increase (decrease) in cash and cash equivalents 918 (1,970)
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Effect of exchange rates on cash (2,120) (829)
Cash and cash equivalents, beginning of period 3,623 7,395
Cash and cash equivalents, end of period $2,421 $4,596
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</TABLE>
See notes to consolidated financial statements. -6-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Excess of
Foreign additional
Retained currency pension liability
Common Paid-in earnings translation over intangible
(In Thousands) Total stock capital (deficit) adjustment pension asset
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<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1997 $ 89,068 $ 99 $ 105,590 ($ 6,299) $ 332 ($ 10,654)
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Comprehensive income (loss):
Net loss (23,058) - - (23,058) - -
Foreign currency translation
adjustment (1,158) - - - (1,158) -
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Total comprehensive income (24,216) - - (23,058) (1,158) -
(loss)
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Stock options exercised 1,553 1 1,552 - - -
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Short-swing Section 16(b) profits 118 - 118 - - -
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Dividends (99) - (99) - - -
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Balance, August 1, 1998 $ 66,424 $ 100 $ 107,161 ($ 29,357) ($ 826) ($ 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 (8,068) - - (8,068) - -
Foreign currency translation
adjustment (387) - - - (387) -
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Total comprehensive income (8,455) - - (8,068) (387) -
(loss)
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Short-swing Section 16(b) profits 29 - 29 - - -
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Balance, August 7, 1999 $ 51,045 $ 98 $ 106,304 $ (42,317) $ (1,058) $ (11,982)
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</TABLE>
See notes to consolidated financial statements. -7-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
2. Inventories
Inventories consist of the following:
(In Thousands) August 7, 1999 November 7, 1998
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Raw Materials $ 9,487 $ 9,159
Work-in-process 17,576 12,966
Finished Goods 45,090 52,042
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$ 72,153 $ 74,167
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3. Asset Purchase Agreements
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.
In August 1999, the Company purchased certain assets, including inventory,
tradenames, sales orders and equipment, of Sierra Pacific Apparel Company, Inc.,
for $5.1 million. The purchase price of the inventory of approximately $4.1
million is payable out of the proceeds of the sale of the merchandise.
Approximately $.5 million was payable at closing, with the balance payable
through capitalized lease financing.
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.
-8-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
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.
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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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
Item 2: Management's discussion and
analysis of financial condition
and results of operations
General
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As a designer, manufacturer and marketer of moderately priced, basic style male
and female denim jeans, casual pants and shorts, Chic by H.I.S, Inc. (the
"Company") believes that its products constitute basic apparel and, as such,
generally do not depend upon impulse buying or high fashion trends. The Company
distributes its products primarily through mass merchandisers which constitute
the Company's traditional channel of distribution.
The following table sets forth selected operating data as a percentage
of net sales for the periods indicated.
<TABLE>
<S> <C> <C> <C> <C>
Thirty-nine Weeks Ended Thirteen Weeks Ended
August 7, August 1, August 7, August 1,
1999 1998 1999 1998
Net sales
United States 59.1% 61.9% 61.7% 62.8%
Europe 40.9 38.1 38.3 37.2
Consolidated 100.0 100.0 100.0 100.0
Gross margin
United States 10.5 12.2 10.0 12.8
Europe 42.0 42.0 41.9 41.8
Consolidated 23.4 23.6 21.5 21.5
Licensing revenues 1.0 1.2 .8 1.8
Selling, general and administrative expenses 24.1 22.9 21.1 25.1
Restructuring and special charges - 12.5 - -
Operating income (loss) .3 (10.6) 1.9 .3
Interest and finance costs (3.0) (1.7) (3.5) (2.1)
Other expense - (.6) - -
Loss before benefit (provision) for income taxes and (2.7) (12.9) (1.6) (1.8)
minority interest
Benefit (provision) for income taxes (1.3) 1.8 (1.3) .2
Minority interest (.6) (.6) (.7) (.7)
Net loss (4.6)% (11.9)% (3.6)% (2.3)%
</TABLE>
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<PAGE>
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 thirty-nine and thirteen weeks ended August 7,
1999 and August 1, 1998 and its liquidity and capital resources.
Thirty-nine Weeks ended August 7, 1999 Compared to Thirty-nine Weeks ended
August 1, 1998
Net Sales. Net sales for the thirty-nine weeks ended August 7, 1999
decreased $19.4 million, or 10.1%, from $193.0 million for the thirty-nine weeks
ended August 1, 1998 to $173.5 million. United States sales decreased by $16.9
million, or 14.1%, to $102.6 million primarily due to a decrease in unit sales
volume resulting from the weakness in the retail denim market. As of August 7,
1999, the Company had a total backlog of confirmed domestic purchase orders of
$55.5 million, a decrease of 9.7% compared to $61.5 million as of August 1,
1998. In the thirty-nine weeks ended August 7, 1999, European sales decreased by
5.4 million deutsche marks, or 4.1%, to 126.6 million deutsche marks. When
converted into U.S. currency using the prevailing currency exchange rate, the
European sales translated into a decrease of $2.6 million, or 3.5%, to $71.0
million for the thirty-nine weeks ended August 7, 1999. As of August 7, 1999,
the Company had a total backlog of confirmed European purchase orders of 48.1
million deutsche marks, a decrease of 23.7% compared to 63.0 million deutsche
marks as of August 1, 1998. The confirmed European backlog, when converted into
U.S. currency at the then prevailing currency exchange rate, was $26.5 million,
a decrease of 24.6% compared to $35.1 million on August 1, 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 thirty-nine weeks ended August 7,
1999 decreased $4.9 million, or 10.8%, from $45.5 million in the thirty-nine
weeks ended August 1, 1998 to $40.6 million, while gross margin decreased from
23.6% to 23.4%. United States gross profit decreased $3.8 million from $14.6
million for the thirty-nine weeks ended August 1, 1998 to $10.8 million, while
gross margin decreased from 12.2% to 10.5%. The decrease in gross profit and as
a percentage of net sales in the United States was primarily due to the decrease
in sales and in the average unit selling price due to product mix and the
increased use of outside contractors. European gross profit decreased $1.1
million from $30.9 million for the thirty-nine weeks ended August 1, 1998 to
$29.8 million, while gross margin remained relatively flat at 42.0% compared to
the prior year period.
Licensing Revenues. Licensing revenues decreased $.5 million for the
thirty-nine weeks ended August 7, 1999 to $1.8 million primarily due to a
decrease in domestic licensing revenue of $.9 million, which was partially
offset by an increase in European licensing revenues of $.4 million. The
decrease in domestic licensing revenue is attributable to renegotiated minimum
royalty payments, the expiration of certain licensing agreements and the receipt
of a royalty termination settlement in the prior year.
SG&A Expenses. Selling, general and administrative expenses decreased
$2.4 million, or 2.4%, to $41.8 million for the thirty-nine weeks ended August
7, 1999 primarily due to a decrease in domestic operating expenses of $3.3
million, which was partially offset by an increase in European selling and
administrative expenses of $.9 million. The decrease in domestic operating
expenses is primarily related to a decrease in payroll and payroll fringe costs
of approximately $2.3 million, a decrease in aviation expenses of $.4 million,
and the receipt of a workers' compensation refund of approximately $1.1
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
million, which was partially offset by an increase in domestic advertising
expenses of $.6 million. The increase in European selling and administrative
expenses is primarily 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 thirty-nine weeks ended
August 1, 1998, the Company announced its intention to continue to close
additional manufacturing facilities in the United States. In connection
therewith, the Company recorded restructuring and special charges of $24.1
million consisting of a write-down in the value of related property and
equipment, the write-off of operating inefficiencies incurred during the
shut-down period and the accrual of estimated costs of disposition. The 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 Income (Loss). Operating income for the thirty-nine weeks
ended August 7, 1999 increased $21.1 million from an operating loss of $20.5
million in the thirty-nine weeks ended August 1, 1998 to an operating profit of
$.6 million, primarily due to the decrease in the restructuring and special
charges recorded in the prior year period, and the selling, general and
administrative expenses in the current year, which were partially offset by the
decrease in sales and gross profit.
Interest and Finance Costs. Interest and finance costs increased $2.1
million or 63.9%, from $3.2 million for the thirty-nine weeks ended August 1,
1998 to $5.3 million for the thirty-nine weeks ended August 7, 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 thirty-nine weeks
ended August 7, 1999 was $2.2 million as compared to a recovery of $3.4 million
for the thirty-nine weeks ended August 1, 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
thirty-nine weeks ended August 1, 1998 was reduced by approximately $4.5 million
to the extent its future realization is uncertain.
Thirteen Weeks ended August 7, 1999 (the "1999 Third Quarter")
Compared to Thirteen Weeks ended August 1, 1998 (the "1998 Third Quarter")
Net Sales. Net sales for the 1999 Third Quarter decreased $7.6
million, or 12.7%, from $59.9 million for the 1998 Third Quarter to $52.3
million. In the 1999 Third Quarter, United States sales decreased by $5.4
million, or 14.3%, to $32.3 million primarily due to a decrease in unit sales
volume. In the 1999 Third Quarter, European sales decreased by 2.2 million
deutsche marks, or 5.5%, to 37.8 million deutsche marks. When converted into
U.S. currency using the prevailing currency exchange rate, the European sales
translated into a decrease of $2.2 million, or 10.1%, to $20.0 million for the
1999 Third Quarter.
Gross Profit. Gross profit for the 1999 Third Quarter decreased $2.5
million, or 17.9%, from $14.1 million in the 1998 Third Quarter to $11.6
million, while gross margin decreased from 23.6% to 22.2%. United States gross
profit decreased $1.6 million from $4.8 million for the 1998 Third Quarter to
$3.2 million. The decrease in gross profit and as a percentage of net sales in
the United States was primarily due to the increased use of outside contractors.
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<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
European gross profit decreased $.9 million from $9.3 million for the 1998 Third
Quarter to $8.4 million, while gross margin remained relatively flat at 41.9%
compared to the prior year period.
Licensing Revenues. Licensing revenues decreased $.7 million for the
1999 Third Quarter to $.4 million primarily due to a decrease in domestic
licensing revenues that was partially offset by an increase in European
licensing revenues.
SG&A Expenses. Selling, general and administrative expenses decreased
$4.0 million, or 26.7%, to $11.0 million for the 1999 Third Quarter primarily
due to a decrease in domestic operating expenses of $3.3 million and a decrease
in European selling and administrative expenses of $.7 million. The decrease in
domestic operation expenses is primarily related to a decrease in payroll and
payroll fringe costs, a decrease in aviation expenses, and the receipt of a
workers' compensation refund, which was partially offset by an increase in
domestic advertising expenses. The decrease in European selling and
administrative expenses is primarily attributable to the decrease in regional
advertising expenses.
Operating Income. Operating income for the 1999 Third Quarter
increased $.9 million from $.1 million in the 1998 Third Quarter to $1.0
million, primarily due to decrease in operating expenses which was partially
offset by the decrease in gross profit and licensing income.
Interest and Finance Costs. Interest and finance costs increased $.6
million or 47.2%, from $1.2 million for the 1998 Third Quarter to $1.8 million
for the 1999 Third 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 Third
Quarter was $.7 million as compared to a recovery of $.1 million for the 1998
Third 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.
Liquidity and Capital Resources
The Company's principal capital requirements have been to fund working
capital needs and capital expenditures. The Company has historically relied
primarily on internally generated funds, trade credit, bank borrowings and other
debt offerings to finance these needs.
In the thirty-nine weeks ended August 7, 1999, net cash of $8.4
million was used in operations, as compared to $26.5 million in the thirty-nine
weeks ended August 1, 1998. The net cash used in operations was primarily
attributable to the net loss for the period, the increase in 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 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 $4.4 million was used in investing activities in the
thirty-nine weeks ended August 7, 1999, as compared to $3.9 million in the
thirty-nine weeks ended August 1, 1998. Cash used in investing activities was
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CHIC BY H.I.S, INC. AND SUBSIDIARIES
primarily attributable to the construction of manufacturing facilities and the
acquisition of equipment. The Company is continuing to develop its manufacturing
and laundry operations in Mexico.
As of August 7, 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 August 7, 1999, $49.6 million was outstanding against the
domestic credit agreement. In addition, the Company had $24.3 million of IRBs
outstanding at August 7, 1999. The Company also has foreign financing agreements
with two banks providing term loans aggregating 2.2 million deutsche marks
(approximately $1.2 million, based on the August 7, 1999 foreign currency
exchange rate) and lines of credit aggregating 58 million deutsche marks
(approximately $31.9 million, based on the August 7, 1999 foreign currency
exchange rate). Approximately $9.4 million was outstanding against the foreign
lines of credit as of August 7, 1999. As of August 7, 1999, the Company was not
in compliance with certain covenants of its domestic credit agreement for which
waivers have been obtained.
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.
-15-
<PAGE>
CHIC BY H.I.S, INC. AND SUBSIDIARIES
Risks of Doing Business Overseas. In general, the Company believes
that the demand for jeans in foreign markets is more susceptible to changes in
fashion preferences than in the domestic market. In addition, it is not possible
to predict accurately the effect that the continued elimination of trade
barriers among members of the European Union will have on the Company's
operations in Europe. The Company is also expanding its activities in Eastern
Europe, where economic, political and financial conditions are changing rapidly,
and commenced manufacturing operations in Mexico 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 August 7,
1999, the Company had an aggregate of approximately $85.8 million of
indebtedness (including capital leases) outstanding and the Company's
stockholders' equity was approximately $51.0 million. The Company's credit
agreements contain covenants that impose certain operating and financial
restrictions on the Company. Such restrictions affect, and in many respects
limit or prohibit, among other things, the ability of the Company to incur
additional indebtedness, create liens, sell assets, engage in mergers or
acquisitions and pay dividends. As of August 7, 1999, the Company was not in
compliance with certain covenants of its domestic 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 were reviewed,
remediated and converted by the end of the third quarter. The Company has
expanded its program testing to include an integrated systems test to provide an
additional level of assurance on the system. 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.
-16-
<PAGE>
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.
-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
None
-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: September 17, 1999 By: /s/ Daniel Rubin
--------------------------
Daniel Rubin
Chief Executive Officer
Dated: September 17, 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> 9-MOS
<FISCAL-YEAR-END> NOV-7-1998
<PERIOD-END> AUG-7-1999
<CASH> 2,421
<SECURITIES> 0
<RECEIVABLES> 32,636
<ALLOWANCES> 312
<INVENTORY> 72,153
<CURRENT-ASSETS> 119,692
<PP&E> 90,287
<DEPRECIATION> 29,643
<TOTAL-ASSETS> 187,489
<CURRENT-LIABILITIES> 72,777
<BONDS> 44,255
0
0
<COMMON> 98
<OTHER-SE> 50,947
<TOTAL-LIABILITY-AND-EQUITY> 187,489
<SALES> 173,537
<TOTAL-REVENUES> 175,359
<CGS> 132,950
<TOTAL-COSTS> 41,723
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 115
<INTEREST-EXPENSE> 5,298
<INCOME-PRETAX> (4,727)
<INCOME-TAX> 2,220
<INCOME-CONTINUING> (8,068)
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<NET-INCOME> (8,068)
<EPS-BASIC> (.82)
<EPS-DILUTED> (.82)
</TABLE>
