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 5, 2000
Commission File No. 1-11722
DURANGO APPAREL 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
Chic By H.I.S, Inc.
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
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
------------- ---------------------------- -----------
May 26, 2000 Common Stock, $.01 Par Value 9,870,793
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DURANGO APPAREL INC.
INDEX
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Page
Part I. Financial Information
Item 1: Financial Statements (unaudited, except as noted):
Consolidated Balance Sheets at
February 5, 2000 and November 6, 1999 (audited) 3
Consolidated Statements of Operations
for the thirteen weeks ended February 5,
2000 and February 6, 1999 4
Consolidated Statements of Cash Flows
for the thirteen weeks ended February 5,
2000 and February 6, 1999 5
Consolidated Statements of Stockholders'
Equity for the thirteen weeks ended
February 5, 2000 and February 6, 1999 6
Notes to Consolidated Financial Statements 7-8
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 13
Part II. Other Information
Item 5: Special Note Regarding Forward-Looking Statements 14-15
Item 6: Exhibits and Reports on Form 8-K 16
Signature Page 17
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DURANGO APPAREL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
Feb. 5, 2000 Nov. 6, 1999
(In Thousands)) (Unaudited) (Audited)
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Assets
Current:
Cash and cash equivalents $ 1,177 $ 2,079
Accounts receivable - net of reserve for possible losses 26,619 35,115
Inventories 43,181 58,488
Deferred income taxes 3,665 3,592
Prepaid expenses and other current assets 6,905 3,199
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Total Current Assets 81,547 102,473
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Property, Plant and Equipment, at cost less accumulated
depreciation and amortization 61,584 62,694
Deferred income taxes 4,557 4,557
Other Assets 2,160 2,543
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$149,848 $172,267
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Liabilities and Stockholders' Equity
Current:
Revolving bank loan $ 21,853 $ 31,982
Foreign bank debt 9,600 5,337
Current maturities of long-term debt 22,015 22,488
Obligations under capital leases 647 664
Accounts payable 15,328 18,066
Accrued liabilities:
Payroll, payroll taxes and commissions 5,497 4,418
Income taxes 847 668
Other 3,600 2,947
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Total current liabilities 79,387 86,570
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Non-current:
Long-term debt 20,640 21,310
Pension liability 13,298 13,298
Obligations under capital leases 948 1,046
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Total non-current liabilities 34,886 35,654
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Minority interest 6,378 6,536
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Stockholders' Equity
Preferred stock, $.01 par value - shares authorized 10,000,000; none
issued - -
Common stock, $.01 value - 25,000,000 shares authorized;
9,870,793 and 9,870,793 issued and outstanding 98 98
Paid-in capital 106,304 106,304
Accumulated deficit (60,568) (47,292)
Cumulative foreign currency translation adjustment (3,339) (2,305)
Excess of additional pension liability over intangible pension asset (13,298) (13,298)
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Stockholders' Equity 29,197 43,507
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$149,848 $172,267
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See notes to consolidated financial statements.
3
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DURANGO APPAREL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C>
Thirteen Weeks Thirteen Weeks
Ended February 5, Ended February 6,
(In Thousands, Except Share and Per Share Amounts) 2000 1999
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Net sales $ 44,983 $ 51,228
Cost of goods sold 42,717 36,857
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Gross profit 2,266 14,371
Licensing revenues 185 637
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2,451 15,008
Selling, general and administrative expenses 12,478 13,541
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Operating income (loss) (10,027) 1,467
Interest and finance costs (1,860) (1,517)
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Loss before provision for income taxes and minority interest (11,887) (50)
Provision for income taxes 937 1,200
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Loss before minority interest (12,824) (1,250)
Minority interest 452 637
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Net loss $(13,276) $ (1,887)
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Net loss per common share:
Basic ($1.34) ($ .19)
Diluted ($1.34) ($ .19)
Weighted average number of common shares and share equivalents
outstanding
Basic 9,870,793 9,870,793
Diluted 9,870,793 9,870,793
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See notes to consolidated financial statements.
4
</TABLE>
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<TABLE>
DURANGO APPAREL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<S> <C> <C>
Thirteen Weeks Emded
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February 5, February 6,
(In Thousands) 2000 1999
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Cash Flows from operating activities:
Net loss ($13,276) ($ 1,887)
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Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Minority interest 452 637
Gain on sale of fixed assets 22 -
Depreciation and amortization 1,148 1,036
Deferred income taxes (73) (958)
Decrease (increase) in:
Accounts receivable 8,496 (1,770)
Inventories 15,307 (11,662)
Prepaid expenses and other current assets (3,706) (2,096)
Other assets 383 369
Increase (decrease) in:
Accounts payable (2,738) 3,081
Accrued liabilities 1,911 718
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Total adjustments 21,202 (10,645)
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Net cash provided by (used in) operating activities 7,926 (12,532)
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Cash Flows from investing activities:
Purchase of property, plant and equipment (242) (1,550)
Proceeds from sale of fixed assets 25 -
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Net cash used in investing activities (217) (1,550)
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Cash flows from financing activities:
Net increase (decrease) in loans under revolving line of credit (10,129) 10,276
Net increase in foreign bank debt 4,263 7,133
Increase in short-term notes payable - 3,336
Repayment of long-term debt (1,080) (1,190)
Dividend payment - minority interest (172) -
Short-swing profits - 29
Principal payments under capitalized lease obligations (115) (184)
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Net cash provided by (used in) financing activities (7,233) 19,400
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Increase in cash and cash equivalents 476 5,318
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Effect of exchange rates on cash (1,378) (1,046)
Cash and Cash Equivalents, beginning of period 2,079 3,623
Cash and Cash Equivalents, end of period $1,177 $7,895
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</TABLE>
See notes to consolidated financial statements.
5
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<TABLE>
DURANGO APPAREL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Excess of
Additional
Pension
Liability
Foreign over
Currency Intangible
Common Paid-In Accumulated Translation Pension
(In Thousands) Total Stock Capital Deficit Adjustment Asset
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Balance, November 7, 1998 $59,471 $98 $106,275 ($34,249) ($ 671) ($11,982)
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Comprehensive loss:
Net loss (1,887) - - (1,887) - -
Foreign currency translation
adjustment (795) - - - (795) -
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Total comprehensive loss (2,682) - - (1,887) (795) -
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Short-swing Section 16(b) profits 29 - 29 - - -
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Balance, February 6, 1999 $56,818 $98 $106,304 ($36,136) ($1,466) ($11,982)
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Balance, November 6, 1999 $43,507 $98 $106,304 ($47,292) ($2,305) ($13,298)
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Comprehensive loss:
Net loss (13,276) - - (13,276) - -
Foreign currency translation
adjustment (1,034) - - (1,034) -
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Total comprehensive loss (14,310) - - (13,276) (1,034) -
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Balance February 5, 2000 $29,197 $98 $106,304 ($60,568) ($3,339) ($13,298)
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</TABLE>
See notes to consolidated financial statements.
6
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DURANGO APPAREL 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.
The consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. As discussed in the independent
certified public accountants report on the November 6, 1999 consolidated
financial statements, recurring losses from operations and operating cash
constraints raise doubt about the Company's ability to continue as a going
concern. The Company also continues to be in default of the domestic credit
agreement for which waivers have not been obtained.
The consolidated financial statements do not include adjustments relating
to the recoverability and classification of recorded asset amounts, or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's ability to
continue as a going concern is dependent upon its ability to generate sufficient
cash flow to meet its obligations on a timely basis and ultimately to attain
profitable operations. As discussed in Note 4, the Company entered into an
agreement with VF Corporation, the final phases of which should be completed by
the end of July 2000. The proceeds, use of proceeds and the Company's ongoing
operations are also discussed in Note 4. The Company continues to negotiate with
its creditors to restructure its existing debt. There can be no assurances that
the Company will be successful in these efforts.
2. Inventories
Inventories consist of the following:
(In Thousands) February 5, 2000 November 6, 1999
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Raw Materials $ 5,939 $ 6,535
Work-in-process 9,668 17,922
Finished Goods 27,574 34,031
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$43,181 $ 58,488
3. Recent Accounting Standards
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
7
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DURANGO APPAREL INC. AND SUBSIDIARIES
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, 2000.
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.
4. Subsequent Events
On April 4, 2000 the Company sold the global trademark rights of the
Company's CHIC brand name and the rights of the H.I.S brand name outside of
Europe to VF Corporation ("VF") and in connection therewith, the Company changed
its name from Chic By H.I.S, Inc. to Durango Apparel Inc. The net proceeds of
approximately $9.8 million were used to reduce both the term and revolving bank
loans. Concurrently, VF executed an Interim Licensing Agreement granting the
Company the right to produce and sell certain branded "CORE" products, as
defined through April 30, 2000 and certain branded "NON-CORE" products, as
defined through June 30, 2000.
In addition, the Company signed a letter of intent with VF to sell its
majority share in H.I.S Sportswear AG. The sale is subject to satisfactory
completion of due diligence by VF, regulatory approvals and the successful
completion of a proposed tender offer that would result in VF owning more than
75% of the shares of H.I.S Sportswear AG.
The Company also entered into a contract with VF providing for the
Company to manufacture one million units of product by December 31, 2000 and an
additional two million units of product upon the successful completion of the
sale of the Company's majority share in H.I.S Sportswear AG.
In May 2000, VF agreed to purchase approximately three hundred thousand
units of branded "CORE" products valued at $2.4 million.
The Company expects to continue as a contractor, manufacturing out of
Mexico for VF, Levis, J.C. Penney's and others.
8
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DURANGO APPAREL 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, 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.
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Thirteen Weeks Ended
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February 5, February 6,
2000 1999
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Net sales
United States 56.9 51.1
Europe 43.1 48.9
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Consolidated 100.0 100.0
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Gross margin
United States (25.2) 12.1
Europe 44.9 44.7
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Consolidated 5.0 28.5
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Licensing revenues .4 1.2
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Selling, general and administrative expenses 27.7 26.4
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Operating income (loss) (22.3) 2.9
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Interest and finance costs (4.1) (3.0)
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Loss before provision for income taxes and
minority interest (26.4) (0.1)
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Provision for income taxes (2.1) (2.3)
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Minority interest (1.0) (1.2)
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Net loss (29.5) (3.6)
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9
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DURANGO APPAREL INC. AND SUBSIDIARIES
The following discussion provides information and analysis of the results of
operations of the Company for the thirteen weeks ended February 5, 2000 and
February 6, 1999 and its liquidity and capital resources.
Thirteen Weeks ended February 5, 2000 (the "2000 First Quarter") compared to
Thirteen Weeks ended February 6, 1999 (the "1999 First Quarter")
Net Sales. Net sales for the 2000 First Quarter decreased $6.3
million, or 12.2%, from $51.2 million for the 1999 First Quarter to $45.0
million. United States sales decreased $.6 million from $26.2 million for the
1999 First quarter to $25.6 million. As of February 5, 2000, the Company had a
total backlog of confirmed domestic purchase orders of $43.1 million, a decrease
of 40.6% compared to $72.5 million as of February 6, 1999. In the 2000 First
Quarter, European sales decreased by 4.7 million deutsche marks, or 11.2%, to
37.4 million deutsche marks. When converted using the prevailing currency
exchange rate, the European sales translated into a decrease of $5.7 million, or
22.6%, to $19.4 million for the 2000 First Quarter due to weak German consumer
demand. As of February 5, 2000, the Company had a total backlog of confirmed
European purchase orders of 52.2 million deutsche marks, a decrease of 3.0%
compared to 53.8 million deutsche marks as of February 6, 1999. The confirmed
European backlog, when converted into U.S. currency at the then prevailing rate,
was $26.2 million, a decrease of 15.8% compared to $31.1 million on February 6,
1999.
Gross Profit. Gross profit for the 2000 First Quarter decreased
$12.1 million, or 84.2%, from $14.4 million in the 1999 First Quarter to $2.3
million. United States 2000 First Quarter gross profit decreased $9.6 million to
a gross loss of $6.5 million compared to 1999 First Quarter gross profit of $3.1
million. The decrease in gross profit in the United States resulted from
decreased sales, production at less than full capacity and sales of inventory at
selling prices below cost. In addition, the Company provided for future losses
on inventory sales. European gross profit decreased $2.5 million due to lower
sales volume, but the gross margin percentage increased to 44.9% compared to
1999 First Quarter gross margin of 44.7% due to a change in product mix.
Licensing Revenues. Licensing revenues for 2000 First Quarter of
$.2 million decreased $.4 million from $.6 million for the 1999 First Quarter
due to the termination or elimination of licensing contracts.
SG&A Expenses. Selling, general and administrative expenses
decreased $1.1 million, or 7.8%, to $12.5 million for the 2000 First Quarter.
The decrease was primarily due to Company's decreased sales and cost reduction
efforts.
Operating Income. Operating income for the 2000 First Quarter
decreased $11.5 million from $1.5 million in the 1999 First Quarter to a
operating loss of $10.0 million, primarily due to the decrease in sales and
gross profit, offset by a reduction in selling, general and administrative
expenses.
Interest and Finance Costs. Interest and finance costs increased
$.3 million or 22.6%, from $1.5 million for the 1999 First Quarter to $1.8
million for the 2000 First Quarter. The increase in interest cost was due to
higher average interest rates for the period.
Income Taxes. The provision for income taxes for the 2000 First
Quarter was $.9 million as compared to $1.2 million for the 1999 First Quarter
primarily as a result of the decrease in income.
10
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DURANGE APPAREL INC. AND SUBSIDIARIES
Liquidity and Capital Resources
The Company's principal capital requirements have been to fund
working capital needs and capital expenditures. The Company has historically
relied primarily on internally generated funds, trade credit, bank borrowings
and other debt offerings to finance these needs.
The consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As discussed in
the independent certified public accountants report on the November 6, 1999
consolidated financial statements, recurring losses from operations and
operating cash constraints raise doubt about the Company's ability to continue
as a going concern.
The consolidated financial statements do not include adjustments
relating to the recoverability and classification of recorded asset amounts, or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's ability to
continue as a going concern is dependent upon its ability to generate sufficient
cash flow to meet its obligations on a timely basis and ultimately to attain
profitable operations.
In the 2000 First Quarter, net cash of $7.9 million was provided
by operations, as compared to $12.5 million used in operations in the 1999 First
Quarter. The net cash provided by operations was primarily attributable the
decrease in accounts receivables and inventories, which was offset by the net
loss for the period. The decrease in accounts receivable resulted from
collections and overall lower sales. The decrease in inventories resulted from
the company's cash flow problems hindering adequate new purchases.
Net cash used in investing activities was $.2 million in the 2000
First Quarter, as compared to $1.6 million used in investing activities in the
1999 First Quarter. Cash used in investing activities was primarily attributable
to the purchase of equipment for the Mexico manufacturing Plants.
Net cash used in financing activities was $7.2 million in the
2000 First Quarter, as compared to $19.4 million provided by financing
activities in the 1999 First Quarter. The cash used in financing activities in
the 2000 First Quarter was primarily attributable to a decrease in the Company's
borrowings against its domestic credit facilities, offset by an increase in
foreign bank debt.
As of February 5, 2000, the Company had a $60 million domestic
credit agreement providing a $40 million revolving line of credit and $20
million term loan, of which $41.0 million was outstanding. The Company was not
in compliance with certain covenants of its domestic credit agreement for which
waivers have not been obtained. Accordingly, the Company has classified the
outstanding balance under the domestic credit agreement as current liabilities.
The Company is pursuing negotiations to amend the existing credit facility or
obtain alternative financing. There can be no assurance that the Company will be
successful in its efforts to modify or replace its domestic credit facility. In
addition, the Company had $23.6 million of IRBs outstanding at February 5, 2000.
The Company also has foreign financing agreements with two banks
providing term loans aggregating 2.3 million deutsche marks (approximately $1.2
million, based on the February 5, 2000
11
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DURANGO APPAREL INC. AND SUBSIDIARIES
foreign currency exchange rate) and lines of credit aggregating 58 million
deutsche marks (approximately $29.1 million, based on the February 5, 2000
foreign currency exchange rate). Approximately $8.5 million was outstanding
against the foreign lines of credit as of February 5, 2000.
On April 4, 2000 the Company sold the global trademark rights of
the Company's CHIC brand name and the rights of the H.I.S brand name outside of
Europe to VF Corporation ("VF") and in connection therewith the Company changed
its name from Chic By H.I.S, Inc. to Durango Apparel Inc. The net proceeds of
approximately $9.8 million were used to reduce both the term and revolving bank
loans. Concurrently, VF executed an Interim Licensing Agreement granting the
Company the right to produce and sell certain branded "CORE" products, as
defined through April 30, 2000 and certain branded "NON-CORE" products, as
defined through June 30, 2000.
In addition, the Company signed a letter of intent with VF to
sell its majority share in H.I.S Sportswear AG. The sale is subject to
satisfactory completion of due diligence by VF, regulatory approvals and the
successful completion of a proposed tender offer that would result in VF owning
more than 75% of the shares of H.I.S Sportswear AG.
The Company also entered into a contract with VF providing for
the Company to manufacture one million units of product by December 31, 2000 and
an additional two million units of product upon the successful completion of the
sale of the Company's majority share in H.I.S Sportswear AG.
In May 2000, VF agreed to purchase approximately three hundred
thousand units of branded "CORE" products valued at $2.4 million.
The Company expects to continue as a contractor, manufacturing
out of Mexico for VF, Levis, J.C. Penney's and others.
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.
12
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DURANGO APPAREL INC. AND SUBSIDIARIES
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risks include fluctuations in
interest rates, and exchange rate variability. A significant portion of the
Company's debt relates to a revolver and term loan. As of February 5, 2000 the
outstanding balance of the revolver was $22 million. Interest on the outstanding
balance is charged at either the prime rate, plus .75% or the Eurodollar rate,
plus 3.25% at the Company's option. As of February 5, 2000 the outstanding
balance of the term loan was $19 million. Interest on the outstanding balance is
charged the Eurodollar rate, plus 3.5%. Thus, the Company is subject to market
risk in the form of fluctuations in interest rates. The Company does not trade
in derivative financial instruments.
The Company also conducts operations in various foreign
countries, including Mexico, Canada, Germany, Austria, Switzerland, Czech
Republic, Poland, and Slovakia. For the quarter ended February 5, 2000,
approximately 43% of the Company's revenues were earned outside of the U.S. and
collected in local currency. In addition, operating expenses are paid in the
corresponding local currency and is subject to increased risk for exchange rate
fluctuations between such local currencies and the dollar. The Company does not
conduct any hedging activities.
13
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DURANGO APPAREL 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
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 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.
14
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DURANGO APPAREL INC. AND SUBSIDIARIES
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 5, 2000, the
Company had an aggregate of approximately $75.7 million of indebtedness
(including capital leases) outstanding and the Company's stockholders' equity
was approximately $29.2 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 5, 2000.
Subsequent Events
On April 4, 2000 the Company sold the global trademark rights of the
Company's CHIC brand name and the rights of the H.I.S brand name outside of
Europe to VF Corporation ("VF") and in connection therewith, the Company changed
its name from Chic By H.I.S., Inc. to Durango Apparel, Inc. The net proceeds of
approximately $9.8 million were used to reduce both the term and revolving bank
loans. Concurrently, VF executed an Interim Licensing Agreement granting the
Company the right to produce and sell certain branded "CORE" products, as
defined through April 30, 2000 and certain branded "NON-CORE" products, as
defined through June 30, 2000.
In addition, the Company signed a letter of intent with VF to sell its
majority share in H.I.S Sportswear AG. The sale is subject to satisfactory
completion of due diligence by VF, regulatory approvals and the successful
completion of a proposed tender offer that would result in VF owning more than
75% of the shares of H.I.S Sportswear AG.
The Company also entered into a contract with VF providing for the
Company to manufacture one million units of product by December 31, 2000 and an
additional two million units of product upon the successful completion of the
sale of the Company's majority share in H.I.S Sportswear AG.
In May 2000, VF agreed to purchase approximately three hundred thousand
units of branded "CORE" products valued at $2.4 million.
15
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DURANGO APPAREL INC. AND SUBSIDIARIES
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Asset Purchase Agreement dated as of April 4, 2000
Among Chic By H.I.S, Inc., Chic By H.I.S Licensing
Corporation, Henry I. Siegel Company, Inc.
and VF Corporation
10.2 Contract for outside Purchase of Garment or C.M.T.
Services dated April 4, 2000 between Chic By H.I.S,
Inc. and VF Jeanswear, Inc.
(b) Reports on Form 8-K
None
16
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DURANGO APPAREL INC. AND SUBSIDIARIES
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.
DURANGO APPAREL INC.
Dated: May 26, 2000 By: /s/ Daniel Rubin
-----------------
Daniel Rubin
Chief Executive Officer
Dated: May 26, 2000 By: /s/ Joe Ciccarone
------------------
Joe Ciccarone
Secretary
17
