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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the
fiscal year ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9169
BERNARD CHAUS, INC.
(Exact name of registrant as specified in its charter)
New York 13-2807386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
530 Seventh Avenue, New York, New York 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(212) 354-1280
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.01 par value None; securities quoted on the Over the
Counter Bulletin Board
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on September 16, 2002 was $6,276,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Date Class Shares Outstanding
---- ----- ------------------
September 27, 2002 Common Stock, $0.01 par value 27,215,907
LOCATION IN FORM 10-K IN
DOCUMENTS INCORPORATED BY REFERENCE WHICH INCORPORATED
----------------------------------- ------------------
Portions of registrant's Proxy Statement for the Part III
Annual Meeting of Stockholders to be held
November 13, 2002.
PART I
ITEM 1. BUSINESS.
GENERAL
Bernard Chaus, Inc. (the "Company" or "Chaus") designs, arranges for
the manufacture of and markets an extensive range of women's career and casual
sportswear principally under the JOSEPHINE CHAUS(R) COLLECTION, JOSEPHINE
CHAUS(R) STUDIO, JOSEPHINE CHAUS(R) SPORT and CHAUS & CO. trademarks. The
Company's products are sold nationwide through department store chains,
specialty retailers and other retail outlets. The Company has positioned its
JOSEPHINE CHAUS product line into the opening price points of the "better"
category and its CHAUS & CO. product line into the moderate category. As used
herein, fiscal 2002 refers to the fiscal year ended June 30, 2002, fiscal 2001
refers to the fiscal year ended June 30, 2001 and fiscal 2000 refers to the
fiscal year ended June 30, 2000.
PRODUCTS
The Company markets its products as coordinated groups of jackets,
skirts, pants, blouses, sweaters and related accessories principally under the
following brand names that also include products for women and petites:
JOSEPHINE CHAUS COLLECTION - a collection of better tailored career clothing
that includes tailored suits, dresses, jackets, skirts and pants.
JOSEPHINE CHAUS SPORT - designed for more relaxed dressing. This line includes
casual tops, sweaters, pants, skirts, shorts and other items for "true weekend"
wear
JOSEPHINE CHAUS STUDIO- a line of better sportswear featuring contemporary
styling and offering a more casual approach to traditional career dressing.
JOSEPHINE CHAUS WOMAN AND PETITE COLLECTIONS- collections of the items from the
clothing lines set forth above specializing in large and petite sizes.
CHAUS & CO. - an exclusive line of moderate tops and sweaters for JC Penney.
The Company also sells private label apparel manufactured according to
customers' specifications.
The above products, while sold as separates, are coordinated by styles,
color schemes and fabrics and are designed to be merchandised and worn together.
The Company believes that the target consumers for its products are women aged
25 to 65.
During fiscal 2002, the suggested retail prices of the Company's Chaus
products ranged between $24.00 and $180.00. The Company's jackets ranged in
price between $98.00 and $180.00, its blouses and sweaters ranged in price
between $30.00 and $120.00, its skirts and pants ranged in price between $48.00
and $110.00, and its knit tops and bottoms ranged in price between $24.00 and
$68.00.
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The following table sets forth a breakdown by percentage of the
Company's net sales by brand for fiscal 2000 through fiscal 2002:
Fiscal Year Ended June 30,
2002 2001 2000
------ ------ ------
Josephine Chaus Collection 44% 38% 30%
Josephine Chaus Sport 24 25 24
Josephine Chaus Woman Collection 9 10 11
Josephine Chaus Petite Collection 7 8 8
Chaus & Co. 7 0 0
Josephine Chaus Studio 6 8 20
Other (1) 3 1 0
Josephine Chaus Essentials 0 10 7
------ ------ ------
Total 100% 100% 100%
(1) Other brands and Outlet store offset by intercompany elimination.
CUSTOMERS
The Company's products are sold nationwide in an estimated 2,700 doors
operated by approximately 103 department store chains, specialty retailers and
other retail outlets. The Company does not have any long-term commitments or
contracts with any of its customers.
The Company extends credit to its customers based upon an evaluation of
the customer's financial condition and credit history and generally does not
require collateral. At June 30, 2002 and 2001, approximately 71% of the
Company's accounts receivable were due from department store customers owned by
three single corporate entities. During fiscal 2002, approximately 70% of the
Company's net sales were made to department store customers owned by three
single corporate entities, as compared to 77% in fiscal 2001 and 81% in fiscal
2000. Sales to Dillard's Department Stores accounted for 34% of net sales in
fiscal 2002, 39% in fiscal 2001 and 42% in fiscal 2000. Sales to the May
Department Stores Company accounted for approximately 18% of the Company's net
sales in fiscal 2002, 25% in fiscal 2001 and 26% in fiscal 2000. Sales to TJX
Companies, Inc. accounted for approximately 18% of net sales in fiscal 2002, 13%
in both fiscal years 2001 and 2000 respectively. As a result of the Company's
dependence on its major customers, such customers may have the ability to
influence the Company's business decisions. The loss of or significant decrease
in business from any of its major customers would have a material adverse effect
on the Company's financial position and results of operations. In addition, the
Company's ability to achieve growth in revenues is dependent, in part, on its
ability to identify new distribution channels.
SALES AND MARKETING
The Company's selling operation is highly centralized. Sales to the
Company's department and specialty store customers are made primarily through
the Company's New York City showrooms. As of June 30, 2002, the Company had an
in-house sales force of 10, all of whom are located in the New York City
showrooms. Senior management, principally Josephine Chaus, Chairwoman of the
Board, Chief Executive Officer and principal stockholder of the Company,
Nicholas DiPaolo, Vice Chairman and Chief Operating Officer of the Company, and
Gregory Mongno, President of the Company, actively participate in the planning
of the Company's marketing and selling efforts. The Company does not employ
independent sales representatives or operate regional sales offices, but it does
participate in various regional merchandise marts. This sales structure enables
management to control the Company's selling operation more effectively, to limit
travel expenses, as well as to deal directly with, and be readily accessible to,
major customers.
Products are marketed to department and specialty store customers
during "market weeks," generally four to five months in advance of each of the
Company's selling seasons. The Company assists its customers in allocating their
purchasing budgets among the items in the various product lines to enable
consumers to view the full range of the Company's offerings in each
3
collection. During the course of the retail selling seasons, the Company
monitors its product sell-through at retail in order to directly assess consumer
response to its products.
The Company emphasizes the development of long-term customer
relationships by consulting with its customers concerning the style and
coordination of clothing purchased by the store, optimal delivery schedules,
floor presentation, pricing and other merchandising considerations. Frequent
communications between the Company's senior management and other sales personnel
and their counterparts at various levels in the buying organizations of the
Company's customers is an essential element of the Company's marketing and sales
efforts. These contacts allow the Company to closely monitor retail sales volume
to maximize sales at acceptable profit margins for both the Company and its
customers. The Company's marketing efforts attempt to build upon the success of
prior selling seasons to encourage existing customers to devote greater selling
space to the Company's product lines and to penetrate additional individual
stores within the Company's existing customers. The Company's largest customers
discuss with the Company retail trends and their plans regarding their
anticipated levels of total purchases of Company products for future seasons.
These discussions are intended to assist the Company in planning the production
and timely delivery of its products.
DESIGN
The Company's products and certain of the fabrics from which they are
made are designed by an in-house staff of fashion designers. The 17 person
design staff, headed by Judith Leech, monitors current fashion trends and
changes in consumer preferences. Ms. Chaus, who is instrumental in the design
function, meets regularly with the design staff to create, develop and
coordinate the seasonal collections. The Company believes that its design staff
is well regarded for its distinctive styling and its ability to contemporize
fashion classics. Emphasis is placed on the coordination of outfits and quality
of fabrics to encourage the purchase of more than one garment.
MANUFACTURING AND DISTRIBUTION
The Company does not own any manufacturing facilities; all of its
products are manufactured in accordance with its design specifications and
production schedules through arrangements with independent manufacturers. The
Company believes that outsourcing its manufacturing maximizes its flexibility
while avoiding significant capital expenditures, work-in-process buildup and the
costs of a large workforce. Approximately 95% of its product is manufactured by
approximately 25 key independent suppliers located primarily in South Korea,
Hong Kong, Taiwan, China, Indonesia and elsewhere in the Far East. Less than 5%
of the Company's products are manufactured in the United States. No contractual
obligations exist between the Company and its manufacturers except on an
order-by-order basis. During fiscal 2002, the Company purchased approximately
74% of its finished goods from its ten largest manufacturers, including
approximately 15% of its purchases from its largest manufacturer. Contracting
with foreign manufacturers enables the Company to take advantage of prevailing
lower labor rates and to use a skilled labor force to produce high quality
products.
Generally, each manufacturer agrees to produce finished garments on the
basis of purchase orders from the Company, specifying the price and quantity of
items to be produced and supported by a letter of credit naming the manufacturer
as beneficiary to secure payment for the finished garments.
The Company's technical production support staff, located in New York
City, coordinates the production of patterns and the production of samples from
the patterns by our production staff and by overseas manufacturers. The
production staff also coordinates the marking and the grading of the patterns in
anticipation of production by overseas manufacturers. The overseas manufacturers
produce finished garments in accordance with the production samples and obtain
necessary quota allocations and other requisite customs clearances. Branch
offices of the Company's subsidiaries in Korea, Taiwan and Hong Kong monitor
production at each manufacturing facility to control quality, compliance with
the Company's specifications and timely delivery of finished garments, and
arrange for the shipment of finished products to the Company's New Jersey
distribution center. Almost all finished goods are shipped to the Company's New
Jersey distribution center for final inspection, assembly into collections,
allocation and shipment to customers.
4
The Company believes that the number and geographical diversity of its
manufacturing sources minimize the risk of adverse consequences that would
result from termination of its relationship with any of its larger
manufacturers. The Company also believes that it would have the ability to
develop, over a reasonable period of time, adequate alternate manufacturing
sources should any of its existing arrangements terminate. However, should any
substantial number of such manufacturers become unable or unwilling to continue
to produce apparel for the Company or to meet their delivery schedules, or if
the Company's present relationships with such manufacturers were otherwise
materially adversely affected, there can be no assurance that the Company would
find alternate manufacturers of finished goods on satisfactory terms to permit
the Company to meet its commitments to its customers on a timely basis. In such
event, the Company's operations could be materially disrupted, especially over
the short-term. The Company believes that relationships with its major
manufacturers are satisfactory.
The Company uses a broad range of fabrics in the production of its
clothing, consisting of synthetic fibers (including polyester and acrylic),
natural fibers (including cotton and wool), and blends of natural and synthetic
fibers. The Company does not have any formal, long-term arrangements with any
fabric or other raw material supplier. During fiscal 2002, virtually all of the
fabrics used in the Company's products manufactured in the Far East were ordered
from the Company's five largest suppliers in the Far East, which are located in
Japan, Taiwan, Hong Kong and Korea. The Company selects the fabrics to be
purchased for production in accordance with the Company's specifications. To
date, the Company has not experienced any significant difficulty in obtaining
fabrics or other raw materials and considers its sources of supply to be
adequate.
The Company operates under substantial time constraints in producing
each of its collections. Orders from the Company's customers generally precede
the related shipping period by up to four months. However, proposed production
budgets are prepared substantially in advance of the Company's initial
commitments for each collection. In order to make timely delivery of merchandise
which reflects current style trends and tastes, the Company attempts to schedule
a substantial portion of its fabric and manufacturing commitments relatively
late in a production cycle. However, in order to secure adequate amounts of
quality raw materials, especially greige (i.e., "undyed") goods, the Company
must make substantial advance commitments to suppliers of such goods, often as
much as seven months prior to the receipt of firm orders from customers for the
related merchandise. Many of these early commitments are made subject to changes
in colors, assortments and/or delivery dates.
IMPORTS AND IMPORT RESTRICTIONS
The Company's arrangements with its manufacturers and suppliers are
subject to the risks attendant to doing business abroad, including the
availability of quota and other requisite customs clearances, the imposition of
export duties, political and social instability, currency revaluations, and
restrictions on the transfer of funds. Bilateral agreements between exporting
countries, including those from which the Company imports substantially all of
its products, and the United States' imposition of quotas, limits the amount of
certain categories of merchandise, including substantially all categories of
merchandise manufactured for the Company, that may be imported into the United
States. Furthermore, the majority of such agreements contain "consultation
clauses" which allow the United States to impose at any time restraints on the
importation of categories of merchandise which, under the terms of the
agreements, are not subject to specified limits. The bilateral agreements
through which quotas are imposed have been negotiated under the framework
established by the Arrangement Regarding International Trade in Textiles, known
as the Multifiber Arrangement ("MFA") which has been in effect since 1974. The
United States has concluded international negotiations known as the "Uruguay
Round" in which a variety of trade matters were reviewed and modified. Quotas
established under the MFA will be phased out as of December 2004, after which
the textile and clothing trade will be fully integrated into the General
Agreement on Trade and Tariffs ("GATT") and will be subject to the same
disciplines as other sections. The GATT agreement provides for expanded trade,
improved market access, lower tariffs and improved safeguard mechanisms.
The United States and the countries in which the Company's products are
manufactured may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adversely adjust presently prevailing quotas, duty or tariff
levels, with the result that the Company's operations and its ability to
continue to import products at current or increased levels could be adversely
affected. The Company cannot predict the likelihood or frequency of any such
events occurring. The Company monitors duty, tariff and quota-related
developments, and seeks continually to minimize its potential exposure to
quota-related risks through, among other measures, geographical diversification
of its manufacturing sources, allocation of production of merchandise categories
where more quota is available and shifts of production among countries and
manufacturers. The
5
expansion in the past few years of the Company's varied manufacturing sources
and the variety of countries in which it has potential manufacturing
arrangements, although not the result of specific import restrictions, have had
the result of reducing the potential adverse effect of any increase in such
restrictions. In addition, substantially all of the Company's products are
subject to United States customs duties. In September 2001, the Company
completed a United States Customs Duty Audit covering a prior five year period
and recorded a $0.4 million charge in the fiscal year ended June 30, 2001 for
costs associated with the audit.
BACKLOG
As of September 6, 2002 and 2001, the Company's order book reflected
unfilled customer orders for approximately $46.8 million and $50.8 million of
merchandise, respectively. Order book data at any date are materially affected
by the timing of the initial showing of collections to the trade, as well as by
the timing of recording of orders and of shipments. The order book represents
customer orders prior to discounts. Accordingly a comparison of unfilled orders
from period to period is not necessarily meaningful and may not be indicative of
eventual actual shipments.
TRADEMARKS
CHAUS, CHAUS SPORT, CHAUS WOMAN, MS. CHAUS, JOSEPHINE, and JOSEPHINE
CHAUS, are registered trademarks of the Company for use on ladies' garments. The
Company has pending applications to register J. CHAUS and CHAUS & Co. for ladies
garments. The Company considers its trademarks to be strong and highly
recognized, and to have significant value in the marketing of its products.
The Company has also registered its CHAUS, CHAUS SPORT, CHAUS WOMAN,
JOSEPHINE CHAUS and JOSEPHINE trademarks for women's apparel in certain foreign
countries. JOSEPHINE CHAUS for clothing, accessories and cosmetics is a
registered trademark in the European Economic Community. An application to
register CHAUS is still pending.
COMPETITION
The women's apparel industry is highly competitive, both within the
United States and abroad. The Company competes with many apparel companies, some
of which are larger, and have better established brand names and greater
resources than the Company. In some cases the Company also competes with
private-label brands of its department store customers.
The Company believes that an ability to effectively anticipate, gauge
and respond to changing consumer demand and taste relatively far in advance, as
well as an ability to operate within substantial production and delivery
constraints (including obtaining necessary quota allocations), is necessary to
compete successfully in the women's apparel industry. Consumer and customer
acceptance and support, which depend primarily upon styling, pricing, quality
(both in material and production), and product identity, are also important
aspects of competition in this industry. The Company believes that its success
will depend upon its ability to remain competitive in these areas.
Furthermore, the Company's traditional department store customers,
which account for a substantial portion of the Company's business, encounter
intense competition from off-price and discount retailers, mass merchandisers
and specialty stores. The Company believes that its ability to increase its
present levels of sales will depend on such customers' ability to maintain their
competitive position and the Company's ability to increase its market share of
sales to department stores.
EMPLOYEES
At June 30, 2002, the Company employed 242 employees as compared with
298 employees at June 30, 2001. This total includes 49 in managerial and
administrative positions, approximately 38 in design, production and production
administration, 16 in marketing, merchandising and sales and 86 in distribution.
Of the Company's total employees, 53 were located in the Far East. The Company
is a party to a collective bargaining agreement with the Amalgamated Workers
Union, Local 88, covering 72 full-time employees. This agreement expires August
31, 2003.
6
The Company considers its relations with its employees to be
satisfactory and has not experienced any business interruptions as a result of
labor disagreements with its employees.
EXECUTIVE OFFICERS
The executive officers of the Company are:
NAME AGE POSITION
- ---- --- --------
Josephine Chaus 51 Chairwoman of the Board and Chief Executive
Officer
Nicholas DiPaolo 61 Vice Chairman of the Board and Chief
Operating Officer
Greg Mongno 40 President of the Company
Barton Heminover 48 Chief Financial Officer
Executive officers serve at the discretion of the Board of Directors.
Josephine Chaus has been an employee of the Company in various
capacities since its inception. She has been a director of the Company since
1977, President from 1980 through February 1993, Chief Executive Officer from
July 1991 through September 1994 and again since December 1998, Chairwoman of
the Board since 1991 and member of the Office of the Chairman since September
1994.
Nicholas DiPaolo was appointed Vice Chairman of the Board and Chief
Operating Officer in November 2000 and has been a director of the Company since
February 1999. Prior to joining the Company, Mr. DiPaolo served as a consultant
to the apparel industry and as a private investor. From 1991 through May 1997,
Mr. DiPaolo served as Chairman, President and Chief Executive Officer of Salant
Corporation, a diversified apparel company which he joined in 1988 as President
and Chief Operating Officer. Prior to 1988, he held executive positions with a
number of apparel and related companies, including Manhattan Industries, a
menswear company, and The Villager, a women's sportswear company. Mr. DiPaolo
currently serves as a director of JPS Industries Inc., a publicly traded
manufacturer of specialty extruded and woven materials, and Foot Locker, Inc., a
publicly traded athletic footwear and apparel retailer.
Greg Mongno was appointed President of the Company in August 2001 and
served as Senior Vice President of Sales and Marketing from January 2000 through
August of 2001. He was Vice President/General Manager of Liz Casual at Liz
Claiborne, Inc. from 1996 to January 2000.
Barton Heminover was appointed Chief Financial Officer in August 2002
and served as Vice President of Finance from January 2000 through August 2002
and as Vice President - Corporate Controller from July 1996 to January 2000.
From January 1983 to July 1996 he was employed by Petrie Retail, Inc. (formerly
Petrie Stores Corporation), a woman's retail apparel chain, serving as Vice
President/Treasurer from 1986 to 1994 and as Vice President/Financial Controller
from 1994 to 1996.
FORWARD LOOKING STATEMENTS
Certain statements contained herein are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that have been made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements are indicated by words or phrases such as "anticipate," "estimate,"
"project," "expect," "believe" and similar words or phrases. Such statements are
based on current expectations and are subject to certain risks, uncertainties
and assumptions, including, but not limited to, the overall level of consumer
spending on apparel; the financial strength of the retail industry, generally
and the Company's customers in particular; changes in trends in the market
segments in which the Company competes and the Company's ability to gauge and
respond to changing consumer demands and fashion trends; the level of demand for
the Company's products; the Company's dependence on its major department store
customers; the highly competitive nature of the fashion industry; the Company's
ability to satisfy its cash flow needs by meeting its business plan and
satisfying the financial covenants in its credit facility; and changes in
economic or political conditions in the markets where the Company sells or
sources its products, as well as other risks and uncertainties set
7
forth in the Company's publicly-filed documents, including this Annual Report on
Form 10-K. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. The Company disclaims
any intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
ITEM 2. PROPERTIES.
The Company's principal executive office is located at 530 Seventh
Avenue in New York City where the Company leases approximately 28,000 square
feet. This lease expires in May 2009. This facility also houses the Company's
showrooms and its sales, design, production and merchandising staffs. Net base
rental expense for the executive offices aggregated approximately $0.9 million
in fiscal 2002, fiscal 2001 and fiscal 2000.
The Company's technical production support facility (including its
sample and patternmakers) is located at 519 Eighth Avenue in New York City where
the Company leases approximately 15,000 square feet. This lease expires in
August 2009. Net base rental expense for the technical production support
facilities aggregated approximately $0.3 million in fiscal 2002, fiscal 2001,
and fiscal 2000.
The Company's distribution center is located in Secaucus, New Jersey
where the Company leases approximately 276,000 square feet. This facility also
houses the Company's administrative and finance personnel, its computer
operations, and its one retail outlet store. This space is occupied under a
lease expiring June 30, 2004. Base rental expense for the Secaucus facility
aggregated approximately $1.2 million in fiscal 2002, fiscal 2001, and fiscal
2000.
Office locations are also leased in Hong Kong, Korea and Taiwan, with
annual aggregate rental expense of approximately $0.1 million for fiscal 2002,
fiscal 2001, and fiscal 2000.
ITEM 3. LEGAL PROCEEDINGS.
The company is involved in legal proceedings from time to time arising
out of the ordinary conduct of its business. The Company believes that the
outcome of these proceedings will not have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is currently traded in the over the counter
market and quotations are available on the Over the Counter Bulletin Board (OTC
BB: CHBD). New York Stock Exchange trading of the Company's common stock was
discontinued effective prior to the opening of trading on October 6, 2000.
The following table sets forth for each of the Company's fiscal periods
indicated the high and low sales prices for the Common Stock as reported on the
OTC BB (October 6, 2000 to present) and the NYSE (July 1, 1999-October 5, 2000).
HIGH LOW
---- ---
FISCAL 2001
First Quarter..........................$ 0.813 $0.500
Second Quarter...........................0.750 0.266
Third Quarter............................0.516 0.344
Fourth Quarter...........................0.510 0.300
FISCAL 2002
First Quarter...........................$0.600 $0.320
Second Quarter...........................0.510 0.380
Third Quarter............................0.510 0.380
Fourth Quarter...........................0.600 0.350
As of September 16, 2002, the Company had approximately 435 stockholders of
record.
The Company has not declared or paid cash dividends or made other distributions
on its Common Stock since prior to its 1986 initial public offering. The payment
of dividends, if any, in the future is within the discretion of the Board of
Directors and will depend on the Company's earnings, its capital requirements
and financial condition. It is the present intention of the Board of Directors
to retain all earnings, if any, for use in the Company's business operations
and, accordingly, the Board of Directors does not expect to declare or pay any
dividends in the foreseeable future. In addition, the Company's Financing
Agreement prohibits the Company from declaring dividends or making other
distributions on its capital stock, without the consent of the lender. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition, Liquidity and Capital Resources."
Information with respect to securities authorized for issuance under
equity compensation plans is incorporated by reference to the information to be
set forth under the heading "Compensation Program Components" in the Company's
definitive proxy statement relating to its 2002 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A (the "Company's 2002 Proxy Statement").
9
ITEM 6. SELECTED FINANCIAL DATA.
The following financial information is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements of the
Company and the notes thereto, as well as Management's Discussion and Analysis
of Financial Condition and Results of Operations contained elsewhere herein.
STATEMENT OF OPERATIONS DATA:
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales .................................. $ 145,769 $ 149,499 $ 181,538 $ 187,875 $ 191,546
Cost of goods sold ......................... 116,951 122,324 142,909 137,958 142,175
--------- --------- --------- --------- ---------
Gross profit ............................... 28,818 27,175 38,629 49,917 49,371
Selling, general and administrative expenses 30,130 32,666 36,075 36,512 38,462
Other income ............................... (193) -- -- -- --
Interest expense, net ...................... 2,049 2,121 2,358 2,360 6,353
--------- --------- --------- --------- ---------
Income (loss) before income tax provision
(benefit) .................................. (3,168) (7,612) 196 11,045 4,556
Income tax provision (benefit) ............. (944) 11 4 200 245
--------- --------- --------- --------- ---------
Net income (loss) .......................... $ (2,224) $ (7,623) $ 192 $ 10,845 $ 4,311
========= ========= ========= ========= =========
Basic earnings (loss) per share (1) ........ $ (0.08) $ (0.28) $ 0.01 $ 0.40 $ 0.28
========= ========= ========= ========= =========
Diluted earnings (loss) per share (2) ...... $ (0.08) $ (0.28) $ 0.01 $ 0.40 $ 0.28
========= ========= ========= ========= =========
Weighted average number of common
shares outstanding - basic (3) ............. 27,216 27,216 27,174 27,116 15,296
========= ========= ========= ========= =========
Weighted average number of common and common
equivalent shares outstanding - diluted (3) 27,216 27,216 27,183 27,191 15,296
========= ========= ========= ========= =========
BALANCE SHEET DATA
AS OF JUNE 30,
-------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Working capital .................. $12,404 $15,185 $23,891 $29,330 $18,679
Total assets ..................... 35,691 44,795 49,045 53,484 39,012
Short-term debt, including current
portion of long-term debt ...... 4,716 6,024 1,000 1,000 1,000
Long-term debt ................... 9,375 10,500 11,500 12,500 13,500
Stockholders' equity ............. 8,213 10,679 18,302 17,860 7,015
(1) Computed by dividing the applicable net income by the weighted average
number of shares of common stock outstanding during the year.
(2) Computed by dividing the applicable net income by the weighted average
number of common shares outstanding and common stock equivalents
outstanding during the year.
(3) All share data reflects the 1 for 10 reverse stock split which was effected
December 9, 1997 and reflects the retroactive adjustment for the bonus
element of the Rights Offering, which was consummated on January 26, 1998.
10
ITEM 7. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain
items expressed as a percentage of net sales.
Fiscal Year Ended June 30,
--------------------------
2002 2001 2000
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Gross profit 19.8 18.2 21.3
Selling, general and administrative expenses 20.7 21.9 19.9
Interest expense 1.4 1.4 1.3
Net income (loss) (1.5) (5.1) 0.1
Fiscal 2002 Compared to Fiscal 2001
Net sales for fiscal 2002 decreased 2.5% or $3.7 million to $145.8
million as compared to $149.5 million for fiscal 2001. The decrease in net sales
was primarily due to the decrease in sales of merchandise under the Josephine
Chaus label partially offset by the sales to JC Penney under the Chaus & Co
label introduced in June 2001 and the private label merchandise introduced in
January 2002. Net sales and gross margins were particularly impacted by the
adverse retail conditions existing following the events of September 11th.
Gross profit for fiscal 2002 increased $1.6 million to $28.8 million as
compared to $27.2 million for fiscal 2001. As a percentage of sales, gross
profit increased to 19.8% for fiscal 2002 from 18.2% for fiscal 2001. The
increase in gross profit dollars and gross profit percentage was primarily the
result of an increase in the initial markup.
Selling, general and administrative ("SG&A") expenses decreased by $2.5
million for fiscal 2002 as compared to fiscal 2001. As a percentage of net
sales, SG&A expenses were approximately 20.7% in fiscal 2002 as compared to
21.9% in fiscal 2001. The reduction in SG&A expenses resulted from cost savings
initiatives commenced during the second quarter of fiscal 2002. The decrease was
primarily attributable to a reduction in payroll and payroll related costs ($1.2
million), marketing and advertising expenses ($.7 million) and sample expenses
($.5 million).
Other income of $0.2 million in fiscal 2002 is comprised of a gain on
the sale of equity securities.
Interest expense decreased by $0.1 million for fiscal 2002 as compared
to fiscal 2001. The decrease was due to lower interest rates partially offset by
higher bank borrowings.
Income tax benefit of $0.9 million in fiscal 2002 includes a benefit of
$0.2 million for refund claims due to tax law changes and a benefit of $0.7
million related to the elimination of tax liabilities that are no longer
required, offset by a provision for state and local taxes of $30,000. The income
tax provision in fiscal 2001 of $11,000 relates to state and local taxes.
Fiscal 2001 Compared to Fiscal 2000
Net sales for fiscal 2001 decreased 17.7% or $32.0 million to $149.5
million as compared to $181.5 million for fiscal 2000. The decrease in net sales
was primarily due to a 15.2% decrease in units shipped as a result of the
difficult retail environment for women's apparel.
Gross profit for fiscal 2001 decreased $11.4 million to $27.2 million
as compared to $38.6 million for fiscal 2000. As a percentage of sales, gross
profit decreased to 18.2% for fiscal 2001 from 21.3% for fiscal 2000. The
decrease in gross profit
11
dollars was primarily a result of decreased units shipped. The decrease in gross
profit percentage resulted primarily from a decrease in the initial markup.
Selling, general and administrative ("SG&A") expenses decreased by $3.4
million for fiscal 2001 as compared to fiscal 2000. The decrease was primarily
due to the Company's decision to reduce marketing and advertising expenses ($1.4
million) as well as a reduction in payroll and payroll related costs ($1.4
million) and professional fees ($.8 million). These reductions were partially
offset by a $0.4 million charge for costs associated with a United States
Customs audit covering a prior five-year period. As a percentage of net sales,
SG&A expenses were approximately 21.9% in fiscal 2001 as compared to 19.9% in
fiscal 2000. The increase in SG&A expenses as a percentage of net sales was due
to the decrease in sales volume, which reduced the Company's leverage on SG&A
expenses.
Interest expense decreased by $.2 million for fiscal 2001 as compared
to fiscal 2000. The decrease was due to lower interest rates partially offset by
higher bank borrowings.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
Net cash provided by operating activities was $3.2 million for fiscal
2002 as compared to net cash used in operating activities of $6.6 million for
fiscal 2001 and net cash provided by operating activities of $4.6 million for
fiscal 2000. Net cash provided by operating activities for fiscal 2002 resulted
primarily from a decrease in inventory ($5.5 million) and accounts receivable
($3.0 million), partially offset by a decrease in accounts payable ($3.8
million) and the net loss of $2.2 million in fiscal 2002.
Net cash used in operating activities for fiscal 2001 resulted
primarily from the net loss of $7.6 million in fiscal 2001, decreases in accrued
expenses ($1.7 million) offset by decreases in inventory ($1.1 million) and
increases in accounts payable ($1.0 million).
Cash used in investing activities was $0.8 million in fiscal 2002
compared to $1.7 million in fiscal 2001. In fiscal 2002 and fiscal 2001
purchases of fixed assets were $0.4 million and $0.9 million, respectively and
consisted primarily of purchases of computer hardware and software systems. The
Company also incurred capital expenditures for in-store shops of $0.4 million
and $0.8 million in fiscal 2002 and 2001, respectively. Cash used in investing
activities was $5.3 million in fiscal 2000 which consisted primarily of
leasehold improvements and furniture and fixtures for the new 530 Seventh Avenue
and 519 Eighth Avenue locations. Additional expenditures included upgrades to
the Company's distribution systems, telephone system and PC hardware and
software. The Company also incurred expenditures of $0.4 million for in-store
shops. In fiscal 2003, the Company anticipates capital expenditures of
approximately $0.7 million consisting primarily of Management Information System
upgrades.
Cash used in financing activities for fiscal 2002 resulted from net
repayments of $1.4 million for short-term bank borrowings and principal payments
of $1.0 million on the term loan. Cash provided by financing activities for
fiscal 2001 resulted from net proceeds from short-term bank borrowings of $5.0
million offset by principal payments on the term loan of $1.0 million. Cash used
in financing activities in fiscal 2000 consisted of $1.0 million in principal
payments on the term loan.
Financing Agreement
On September 27, 2002, the Company and certain of its subsidiaries
entered into a new three-year financing agreement (the "Financing Agreement")
with The CIT Group/Commercial Services, Inc. ("CIT"), to replace the former
Financing Agreement discussed below. The Financing Agreement provides the
Company with a $50.5 million facility comprised of (i) a $40 million revolving
line of credit (the "Revolving Facility") with a $25 million sublimit for
letters of credit, a $3 million
12
seasonal overadvance and certain other overadvances at the discretion of CIT,
and (ii) a $10.5 million term loan (the "Term Loan").
At the option of the Company, the Revolving Facility and the Term Loan
each may bear interest either at the JPMorgan Chase Bank Rate ("Prime Rate") or
the London Interbank Offered Rate ("LIBOR"). If the Company chooses the JPMorgan
Chase Bank Rate, the interest (i) on the Revolving Facility accrues at a rate of
1/2 of 1% above the Prime Rate for fiscal 2003 and until the first day of the
month following delivery of the Company's 2003 financials to the Lender (the
"Adjustment Date") and thereafter at a rate ranging from the Prime Rate to 3/4
of 1% above the Prime Rate and (ii) on the Term Loan accrues at a rate of 1%
above the Prime Rate for fiscal 2003 and until the Adjustment Date and
thereafter at a rate ranging from 1/2 of 1% above the Prime Rate to 1 1/4 %
above the Prime Rate. If the Company chooses LIBOR, the interest (i) on the
Revolving Facility accrues at a rate of 3 1/4% above LIBOR for fiscal 2003 and
until the Adjustment Date and thereafter at a rate ranging from 2 3/4% above
LIBOR to 3 1/2% above LIBOR and (ii) on the Term Loan accrues at a rate of 3
3/4% above LIBOR for fiscal 2003 and until the Adjustment Date and thereafter at
a rate ranging from 3 1/4% above LIBOR to 4% above LIBOR. All adjustments to
interest rates will be determined upon delivery of the Company's 2003 financials
to the Lender, based upon the Company's availability under the Revolving
Facility and certain fixed charge coverage ratios and leverage ratios.
On September 27, 2002, the Company borrowed $18.3 million under the
Revolving Facility and $10.5 million under the Term Loan. These borrowings were
used to pay off the balances under the Former Financing Agreement of $18.3
million and the Former Term Loan of $10.5 million and for working capital
purposes. Commencing October 1, 2002, amortization payments in the amount of
$375,000 are payable quarterly in arrears in connection with the Term Loan. A
balloon payment of $6.0 million is due on September 27, 2005 under the Term
Loan. The Company's obligations under the Financing Agreement are secured by a
first priority lien on substantially all of the Company's assets, including the
Company's accounts receivable, inventory, intangibles, equipment, trademarks and
a pledge of the Company's stock interest in its subsidiaries.
The Financing Agreement contains numerous financial and operational
covenants, including limitations on additional indebtedness, liens, dividends,
stock repurchases and capital expenditures. In addition, the Company is required
to maintain (i) specified levels of tangible net worth, (ii) certain fixed
charge coverage ratios, (iii) certain leverage ratios, and (iv) specified levels
of minimum borrowing availability under the Revolving Facility. In the event of
the early termination by the Company of the Financing Agreement, the Company
will be liable for termination fees of (i) (a) $500,000 plus (b) any unpaid
portion of the $500,000 in minimum factoring commission fees otherwise due in
the first year of the term,, if termination occurs within twelve months of the
closing date; or (ii) (a) $350,000 if termination occurs between the thirteenth
and the twenty-fourth month from the closing date plus, (b) any unpaid portion
of the $250,000 minimum factoring commission fees otherwise due for the first
half of the second year of the term , if termination occurs between the
thirteenth and eighteenth month from the closing date; or (iii) $150,000 if
termination occurs after the twenty-fourth month from the closing date. The
Company may prepay at any time, in whole or in part, the Term Loan without
penalty. The Financing Agreement expires on September 27, 2005. A fee of $75,000
is payable in September 2002 for the new Financing Agreement.
On September 27, 2002 the Company also entered into a factoring
agreement with CIT. The factoring agreement provides for a factoring commission
equal to 4/10 of 1% of the gross face amount of all accounts factored by CIT,
plus certain customary charges. The minimum factoring commission fee per year is
$500,000. The Factoring Agreement will be terminated after eighteen months
provided that there is no event of default under the factoring agreement at such
time. In such event, the Company shall pay to CIT a collateral management fee
equal to $5,000 a month. Under the agreement, CIT may also require the Company
to utilize CIT to continue to perform certain bookkeeping, collection and
management services and the Company shall pay CIT an additional fee equal to 1/4
of 1% of the gross face amount of all accounts, with a minimum aggregate
commission of $300,000 per annum and a minimum of $1.50 per invoice.
Until September 27, 2002, the Company had a financing agreement with
BNY Financial Corporation, a wholly owned subsidiary of General Motors
Acceptance Corp. ("GMAC") (the "Former Financing Agreement"). The Former
Financing Agreement consisted of two facilities: (i) the Former Revolving
Facility which was a $45.5 million five-year revolving credit line (subject to
an asset based borrowing formula) with a $34.0 million sublimit for letters of
credit, and (ii) the Former Term Loan which was a $14.5 million term loan
facility. Each facility had been amended to extend the maturity date until April
1, 2003. At June 30, 2002 and June 30, 2001, the Company had borrowings of $3.6
million and $5.0 million under the Revolving
13
Facility and total availability of approximately $6.9 million and $2.5 million
(inclusive of over advance availability) under the Former Financing Agreement.
Interest on the Former Revolving Facility accrued at the greater of (i)
6% or(ii) 1/2 of 1% above the Prime Rate (6.0% at June 30, 2002) and was payable
on a monthly basis, in arrears. Interest on the Former Term Loan accrued at an
interest rate equal to the greater of (i) 6.0% or (ii) a rate ranging from 1/2
of 1% above the Prime Rate to 1 1/2% above the Prime Rate, which interest rate
was determined, from time to time, based upon the Company's availability under
the Revolving Facility. The interest rate on the Former Term Loan was 6.0% at
June 30, 2002.
Amortization payments in the amount of $250,000 were payable quarterly
in arrears in connection with the Former Term Loan. Sixteen amortization
payments had been made resulting in a balance of $10.5 million at June 30, 2002.
A balloon payment in the amount of $9.8 million would have been due on April 1,
2003. The Company's obligations under the Former Financing Agreement were
secured by a first priority lien on substantially all of the Company's assets,
including the Company's accounts receivable, inventory and trademarks.
The Former Financing Agreement contained financial covenants requiring,
among other things, the maintenance of minimum levels of tangible net worth,
working capital and minimum permitted profit (maximum permitted loss). The
Former Financing Agreement also contained certain restrictive covenants which,
among other things, limited the Company's ability to incur additional
indebtedness or liens and to pay dividends. A number of amendments to the Former
Financing Agreement were entered into to establish covenants and fix the levels
of overadvance amounts. In July 2002, the Former Financing Agreement was amended
to provide agreed upon levels of overadvance amounts from July 10, 2002 through
September 29, 2002.
Future Financing Requirements
At June 30, 2002, the Company had working capital of $12.4 million as
compared with working capital of $15.2 million at June 30, 2001. The Company's
business plan requires the availability of sufficient cash flow and borrowing
capacity to finance its product lines. The Company expects to satisfy such
requirements through cash flow from operations and borrowings under its
financing agreements. The Company believes that it has adequate resources to
meet its needs for the foreseeable future assuming that it meets its business
plan and satisfies the covenants set forth in the new Financing Agreement.
The foregoing discussion contains forward-looking statements which are
based upon current expectations and involve a number of uncertainties, including
the Company's ability to maintain its borrowing capabilities under the Financing
Agreement, retail market conditions, and consumer acceptance of the Company's
products.
Employment and Non-Competition Agreements
On January 10, 2001, the Company entered into an employment agreement
(the "Agreement") with Nicholas DiPaolo. Mr. DiPaolo has been serving as the
Company's Vice Chairman and Chief Operating Officer since November 1, 2000, the
effective date of the Agreement. The Agreement has a term of approximately three
years from the effective date. The compensation package is weighted towards
equity, with what the Company believes is a below market salary of $300,000 per
year and options entitling Mr. DiPaolo to acquire (x)300,000 shares (the
"Sign-On Options") of the Company's common stock which were fully vested upon
issuance and (y)3,000,000 shares (the "Put Options") of the Company's common
stock, which vest in three equal annual installments upon the anniversaries of
the Agreement's effective date. The per share exercise price of the Sign-On
Options, which were issued in November 2000 in connection with the commencement
of his employment, is $0.50. The per share exercise price of the Put Options,
which were issued in January 2001, is $0.375. Each such exercise price was at or
above the fair market value of the Company's common stock on the date of
issuance. In the event that the Company achieves a cumulative EBITDA target
determined by the Company's Board of Directors for the three year period ended
June 30, 2003, Mr. DiPaolo shall be entitled to require the Company to purchase
his Put Options, for a purchase price equal to $1,125,000, (i.e., the aggregate
exercise price of the Put Options). Mr. DiPaolo shall also have such right to
require the Company to purchase his then vested Put Options, at a purchase price
equal to the aggregate exercise price of such then vested Put Options,
14
in the event there is a "Change In Control" of the Company or his employment is
terminated without "Cause" (as such terms are defined in the Agreement).
In connection with a non-competition agreement with a former executive,
Ivy Karkut, who resigned in January 2001, the Company paid $900,000 in equal
monthly installments over the 12-month period from January 2001 to January 2002.
INFLATION
The Company does not believe that the relatively moderate rates of
inflation which recently have been experienced in the United States, where it
competes, have had a significant effect on its net sales or profitability.
SEASONALITY OF BUSINESS AND FASHION RISK
The Company's principal products are organized into seasonal lines for
resale at the retail level during the Spring, Summer, Fall and Holiday Seasons.
Typically, the Company's products are designed as much as one year in advance
and manufactured approximately one season in advance of the related retail
selling season. Accordingly, the success of the Company's products is often
dependent on the ability to successfully anticipate the needs of retail
customers and the tastes of the ultimate consumer up to a year prior to the
relevant selling season.
Historically, the Company's sales and operating results fluctuate by
quarter, with the greatest sales occurring in the Company's first and third
fiscal quarters. It is in these quarters that the Company's Fall and Spring
product lines, which traditionally have had the highest volume of net sales, are
shipped to customers, with revenues recognized at the time of shipment. As a
result, the Company experiences significant variability in its quarterly results
and working capital requirements. Moreover, delays in shipping can cause
revenues to be recognized in a later quarter, resulting in further variability
in such quarterly results.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are more fully described
in Note 2 to the consolidated financial statements. Certain of the Company's
accounting policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an inherent degree of
uncertainty. These judgments are based on historical experience, observation of
trends in the industry, information provided by customers and information
available from other outside sources, as appropriate. Significant accounting
policies include:
Revenue Recognition - The Company recognizes sales upon shipment of
products to customers since title passes upon shipment. Provisions for estimated
uncollectible accounts, discounts and returns and allowances are provided when
sales are recorded based upon historical experience and current trends. While
such amounts have been within expectations and the provisions established, the
Company cannot guarantee that it will continue to experience the same rates as
in the past.
Inventories - Inventory is stated at the lower of cost or market, cost
being determined on the first-in, first-out method. Reserves for slow moving and
aged merchandise are provided based on historical experience and current product
demand. The Company evaluates the adequacy of the reserves quarterly. While
markdowns have been within expectations and the provisions established, the
Company cannot guarantee that it will continue to experience the same level of
markdowns as in the past.
Valuation of Long-Lived Assets - The Company periodically reviews the
carrying value of its long-lived assets for continued appropriateness. This
review is based upon projections of anticipated future undiscounted cash flows.
While the Company believes that its estimates of future cash flows are
reasonable, different assumptions regarding such cash flows could materially
affect evaluations.
15
Income Taxes- The Company's results of operations have generated a
federal tax net operating loss (NOL) carryforward of approximately $105.1
million as of June 30, 2002. Generally accepted accounting principles require
that the Company record a valuation allowance against the deferred tax asset
associated with this NOL if it is "more likely than not" that the Company will
not be able to utilize it to offset future taxes. Due to the size of the NOL
carryforward in relation to the Company's history of unprofitable operations,
the Company has not recognized any of this net deferred tax asset. The provision
for income taxes primarily relates to state and local taxes. It is possible,
however, that the Company could be profitable in the future at levels which
cause management to conclude that it is more likely than not that the Company
will realize all or a portion of the NOL carryforward. Upon reaching such a
conclusion, the Company would record the estimated net realizable value of the
deferred tax asset at that time and would then provide for income taxes at a
rate equal to our combined federal and state effective rates. Subsequent
revisions to the estimated net realizable value of the deferred tax asset could
cause the Company's provision for income taxes to vary from period to period,
although our cash tax payments would remain unaffected until the benefit of the
NOL is utilized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and other
Intangible Assets. SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB No. 17,
"Intangible Assets". It changes the accounting for goodwill from an amortization
method to an impairment only approach. SFAS 142 is effective for the fiscal year
beginning July 1, 2002 to all goodwill and other intangible assets recognized in
an entity's statement of financial position at that date, regardless of when
those assets were initially recognized. The Company has determined that the
adoption of this Statement will not have an impact on its consolidated financial
statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This Statement is effective for
financial statements issued for the fiscal year beginning July 1, 2002. The
Company has determined that the adoption of SFAS No. 143 will not have an impact
on its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and provides updated
guidance concerning the recognition and measurement of an impairment loss for
certain types of long-lived assets. This Statement is effective for financial
statements issued for the fiscal year beginning July 1, 2002. The Company has
determined that the adoption of SFAS No. 144 will not have an impact on its
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS No. 145"). SFAS No. 145 rescinds the provisions of SFAS No. 4
that requires companies to classify certain gains and losses from debt
extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44
regarding the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13
to require that certain lease modifications be treated as sale leaseback
transactions. The provisions of SFAS No.145 related to classification of debt
extinguishments are effective for fiscal years beginning after May 15, 2002. The
provisions of SFAS 145 related to lease modifications are effective for
transactions occurring after May 15, 2002. The Company does not expect that the
adoption of SFAS No. 145 will have a material impact on its consolidated
financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This Statement also
established
16
that fair value is the objective for initial measurement of the liability. The
provisions of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not expect that the
adoption of SFAS No. 146 will have a material impact on its consolidated
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk- The Company is subject to market risk from exposure
to changes in interest rates based primarily on its financing activities. The
market risk inherent in the financial instruments represents the potential loss
in earnings or cash flows arising from adverse changes in interest rates. These
debt obligations with interest rates tied to the prime rate are described in
"Liquidity and Capital Resources", as well as Note 6 of the Notes to the
Consolidated Financial Statements. The Company manages these exposures through
regular operating and financing activities. The Company has not entered into any
derivative financial instruments for hedging or other purposes. The following
quantitative disclosures are based on the prevailing prime rate. These
quantitative disclosures do not represent the maximum possible loss or any
expected loss that may occur, since actual results may differ from these
estimates.
At June 30, 2002 and 2001, the carrying amounts of the Company's
revolving credit borrowings and term loan approximated fair value. As of June
30, 2002, the Company's revolving credit borrowings under its Former Financing
Agreement bore interest at 6.0 percent. As of June 30, 2002, the Company's
Former Term Loan bore interest at 6.0 percent. On September 27, 2002, the
Company entered into the new Financing Agreement. Interest rates under the new
Financing Agreement are discussed above. Under the new Financing Agreement, as
of June 30, 2002, a hypothetical immediate 10% adverse change in prime interest
rates relating to our revolving credit borrowings and term loan would have a
$0.2 million unfavorable impact on our earnings and cash flows over a one-year
period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are included herein commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the executive officers of the Company is
set forth in Part I of this Annual Report on Form 10-K.
Information with respect to the directors of the Company is
incorporated by reference to the information to be set forth under the heading
"Election of Directors" in the Company's 2002 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
Information called for by Item 11 is incorporated by reference to the
information to be set forth under the heading "Executive Compensation" in the
Company's 2002 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information called for by Item 12 is incorporated by reference to the
information to be set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's 2002 Proxy Statement.
17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by Item 13 is incorporated by reference to the
information to be set forth under the headings "Executive Compensation" and
"Certain Transactions" in the Company's 2002 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Financial Statement Schedule: See List of
Financial Statements and Financial Statement Schedule on page F-1.
(b) The Company did not file a Form 8-K during the last quarter of its
fiscal year ended June 30, 2002.
3.1 Restated Certificate of Incorporation (the "Restated Certificate") of
the Company incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1, Registration No. 33-5954 (the "1986
Registration Statement").
3.2 Amendment dated November 18, 1987 to the Restated Certificate
incorporated by reference to Exhibit 3.11 of the Company's Registration
Statement on Form S-2, Registration No. 33-63317 (the "1995
Registration Statement").
3.3 Amendment dated November 15, 1995 to the Restated Certificate
(incorporated by reference to Exhibit 3.12 of Amendment No. 1 to the
1995 Registration Statement).
3.4 Amendment dated December 9, 1998 to the Restated Certificate
(incorporated by reference to Exhibit 3.13 of the Company's Form 10-K
for the year ended June 30, 1998 (the "1998 Form 10-K").
3.5 By-Laws of the Company, as amended (incorporated by reference to
exhibit 3.1 of the Company's Form 10-Q for the quarter ended December
31, 1987).
3.6 Amendment dated September 13, 1994 to the By-Laws (incorporated by
reference to Exhibit 10.105 of the Company's Form 10-Q for the quarter
ended September 30, 1994).
10.68 Second Restated and Amended Financing Agreement dated as of October 10,
1997, between the Company and BNY Financial Corp. (incorporated by
reference to Exhibit 10.79 of the Company's Form 10-K for the year
ended June 30, 1997).
10.69 Agreement dated October 10, 1997, between the Company and BNY Financial
Corp. issuing 125,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.80 of the Company's Form 10-Q
for the quarter ended September 30, 1997).
10.70 Agreement dated October 10, 1997, between the Company and BNY Financial
Corp. issuing 375,000 warrants to purchase Common Stock of the Company
(incorporated by reference to Exhibit 10.81 of the Company's Form 10-Q
for the quarter ended September 30, 1997).
+10.77 1998 Stock Option Plan, as amended by Amendment No.1 thereto including
form of related stock option agreement (incorporated by reference to
Exhibit A and Exhibit B of the Company's Proxy Statement filed with the
Commission on October 17, 2000).
10.78 Amendment No. 1 dated June 3, 1998 to the Second Restated and Amended
Financing Agreement (incorporated by reference to Exhibit 10.78 of the
Company's 1998 Form 10-K).
18
+10.80 Letter Agreement between the Company and Stuart S. Levy dated February
23, 1999 (incorporated by reference to Exhibit 10.80 of the Company's
1999 Form 10-K).
10.81 Collective Bargaining Agreement between the Company and Amalgamated
Workers Union, Local 8 effective as of September 24, 1999 (incorporated
by reference to Exhibit 10.81 of the Company's 1999 Form 10-K).
10.82 Lease between the Company and Adler Realty Company, dated June 1, 1999
with respect to the Company's executive offices and showroom at 530
Seventh Avenue, New York City (incorporated by reference to Exhibit
10.82 of the Company's 1999 Form 10-K).
10.83 Employment Agreement dated November 5, 1999 between the Company and Ivy
Karkut (incorporated by reference to Exhibit 10.82 of the Company's
Form 10-Q for the quarter ended December 31, 1999).
10.84 Lease between the Company and Kaufman Eighth Avenue Associates, dated
September 11, 1999 with respect to the Company's technical support
facilities at 519 Eighth Avenue, New York City (incorporated by
reference to Exhibit 10.84 of the Company's 2000 Form 10-K).
10.85 Amendment dated September 22, 2000 to the Second Restated and Amended
Financing Agreement (incorporated by reference to Exhibit 10.85 of the
Company's 2000 Form 10-K).
10.86 Resignation and Non-Competition Agreement dated January 4, 2001 between
the Company and Ivy Karkut (incorporated by reference to Exhibit 10.86
of the Company's Form 10-Q for the quarter ended December 31, 2000).
10.87 Employment Agreement dated January 10, 2001 between the Company and
Nicholas DiPaolo (incorporated by reference to Exhibit 10.87 of the
Company's Form 10-Q for the quarter ended December 31, 2000).
10.88 Amendment dated January 19, 2001 to the Second Restated and Amended
Financing Agreement (incorporated by reference to Exhibit 10.88 of the
Company's Form 10-Q for the quarter ended December 31, 2000).
10.89 Amendment dated April 26, 2001 to the Second Restated and Amended
Financing Agreement (incorporated by reference to Exhibit 10.89 of the
Company's Form 10-Q for the quarter ended March 31, 2001).
10.90 Lease modification agreement between the Company and Hartz Mountain
Industries, Inc., dated August 30, 1999 with respect to the Company's
distribution and office facilities in Secaucus, NJ. (incorporated by
reference to Exhibit 10.90 of the Company's 2001 Form 10-K).
10.91 Employment Agreement dated June 1, 2001 between the Company and Gregory
Mongno. (incorporated by reference to Exhibit 10.91 of the Company's
2001 Form 10-K).
10.92 Amendment dated June 1, 2001 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.92 of the
Company's 2001 Form 10-K).
10.93 Amendment dated August 23, 2001 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.93 of the
Company's 2001 Form 10-K).
10.94 Amendment dated August 28, 2001 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.94 of the
Company's 2001 Form 10-K).
10:95 Amendment dated December 31, 2001 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.95 of the
Company's Form 10-Q for the quarter ended December 31, 2001).
19
10:96 Amendment dated January 29, 2002 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.96 of the
Company's Form 10-Q for the quarter ended December 31, 2001).
10:97 Amendment dated April 30, 2002 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.97 of the
Company's Form 10-Q for the quarter ended March 31, 2002).
*10:98 Amendment dated July 10, 2002 to the Second Restated and Amended
Financing Agreement
*10:99 Amendment dated September 10, 2002 to the Second Restated and Amended
Financing Agreement.
*10:100 Financing Agreement between the Company and CIT/Commercial Services,
Inc., as Agent, dated September 27, 2002.
*10:101 Factoring Agreement between the Company and CIT/Commercial Services,
Inc., dated September 27, 2002.
*21 List of Subsidiaries of the Company (incorporated by reference to
Exhibit 21 of the Company's 1998 Form 10-K).
*23 Consent of Deloitte & Touche LLP.
*99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 for Josephine Chaus.
*99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 for Barton Heminover.
+ Management agreement or compensatory plan or arrangement required to be filed
as an exhibit. * Filed herewith.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, on
September 27, 2002.
BERNARD CHAUS, INC.
By: /s/ Josephine Chaus
----------------------------
Josephine Chaus
Chairwoman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of
the registrant and in the capacities indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Josephine Chaus Chairwoman of the Board and September 27, 2002
- ------------------------ Chief Executive Officer
Josephine Chaus
/s/ Nicholas DiPaolo Vice Chairman of the Board and September 27, 2002
- ------------------------ Chief Operating Officer
Nicholas DiPaolo
/s/ Barton Heminover Chief Financial Officer September 27, 2002
- ------------------------
Barton Heminover
/s/ Philip G. Barach Director September 27, 2002
- ------------------------
Philip G. Barach
/s/ S. Lee Kling Director September 27, 2002
- ------------------------
S. Lee Kling
/s/ Harvey M. Krueger Director September 27, 2002
- ------------------------
Harvey M. Krueger
21
BERNARD CHAUS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Bernard Chaus, Inc. and
subsidiaries are included in Item 8:
Report of Independent Auditors...............................................F-2
Consolidated Balance Sheets-- June 30, 2002 and 2001 ........................F-3
Consolidated Statements of Operations-- Years Ended June 30, 2002, 2001
and 2000...................................................................F-4
Consolidated Statements of Stockholders' Equity --
Years Ended June 30, 2002, 2001 and 2000...................................F-5
Consolidated Statements of Cash Flows-- Years Ended June 30, 2002, 2001
and 2000...................................................................F-6
Notes to Consolidated Financial Statements...................................F-7
The following consolidated financial statement schedule of Bernard Chaus, Inc.
and subsidiaries is included in Item 14(a):
Schedule II-- Valuation and Qualifying Accounts..............................S-1
The other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Bernard Chaus, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Bernard Chaus,
Inc. and subsidiaries as of June 30, 2002 and June 30, 2001 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 2002. Our audits also
included the financial statement schedule listed in the Index at item 14(a).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Bernard Chaus, Inc. and
subsidiaries at June 30, 2002 and June 30, 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2002 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/S/ Deloitte & Touche LLP
Parsippany, New Jersey
August 28, 2002
(September 27, 2002 as to Note 6)
F-2
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and per share amounts)
June 30, June 30,
2002 2001
--------- ---------
ASSETS
Current Assets
Cash ................................................................ $ 150 $ 183
Accounts receivable - net ........................................... 20,586 23,688
Inventories ......................................................... 8,050 13,582
Prepaid expenses and other current assets ........................... 1,331 1,051
--------- ---------
Total current assets ............................................. 30,117 38,504
Fixed assets - net .................................................... 4,465 5,079
Other assets - net .................................................... 1,109 1,212
--------- ---------
Total assets ..................................................... $ 35,691 $ 44,795
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving credit borrowings ......................................... $ 3,591 $ 5,024
Accounts payable .................................................... 9,749 13,516
Accrued expenses .................................................... 3,248 3,779
Term loan - current ................................................. 1,125 1,000
--------- ---------
Total current liabilities ........................................ 17,713 23,319
Deferred rent ......................................................... 390 297
Term loan ............................................................. 9,375 10,500
--------- ---------
Total liabilities ................................................ 27,478 34,116
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized shares - 1,000,000; ....... -- --
outstanding shares - none
Common stock, $.01 par value, authorized shares - 50,000,000;
issued shares - 27,278,177 at June 30, 2002 and 2001 ............. 273 273
Additional paid-in capital ............................................ 125,473 125,473
Deficit ............................................................... (115,811) (113,587)
Accumulated other comprehensive loss .................................. (242) --
Less: Treasury stock at cost - 62,270 shares at June 30, 2002 and 2001 (1,480) (1,480)
--------- ---------
Total stockholders' equity ....................................... 8,213 10,679
--------- ---------
Total liabilities and stockholders' equity .................. $ 35,691 $ 44,795
========= =========
See accompanying notes to consolidated financial statements.
F-3
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share amounts)
Fiscal Year Ended June 30,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net sales ......................................... $ 145,769 $ 149,499 $ 181,538
Cost of goods sold ................................ 116,951 122,324 142,909
------------ ------------ ------------
Gross profit ...................................... 28,818 27,175 38,629
Selling, general and administrative expenses ...... 30,130 32,666 36,075
------------ ------------ ------------
Income (loss) from operations ..................... (1,312) (5,491) 2,554
Other income ...................................... (193) -- --
Interest expense, net ............................. 2,049 2,121 2,358
------------ ------------ ------------
Income (loss) before income tax provision (benefit) (3,168) (7,612) 196
Income tax provision (benefit) .................... (944) 11 4
------------ ------------ ------------
Net income (loss) ................................. $ (2,224) $ (7,623) $ 192
============ ============ ============
Basic and diluted earnings (loss) per share ....... $ (0.08) $ (0.28) $ 0.01
============ ============ ============
Weighted average number of common shares
outstanding - basic ........................... 27,216,000 27,216,000 27,174,000
============ ============ ============
Weighted average number of common and common
equivalent shares outstanding - diluted ....... 27,216,000 27,216,000 27,183,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except number of shares)
Common Stock Treasury Stock
------------------------- -----------------------
Accumulated
Additional Other
Number Paid-in Number Comprehensive
of Shares Amount Capital (Deficit) of Shares Amount Loss Total
----------------------------------------------------------------------------------------------------
Balance at July 1,1999 27,178,177 $272 $125,224 $(106,156) 62,270 $(1,480) $ - $17,860
Net income - - - 192 - - - 192
Issuance of restricted stock 100,000 1 249 - - - - 250
----------------------------------------------------------------------------------------------------
Balance at June 30, 2000 27,278,177 273 125,473 (105,964) 62,270 (1,480) - 18,302
Net loss - - - (7,623) - - - (7,623)
----------------------------------------------------------------------------------------------------
Balance at June 30, 2001 27,278,177 273 125,473 (113,587) 62,270 (1,480) - 10,679
----------
Minimum pension
liability adjustment - - - - - - (242) (242)
Net loss - - - (2,224) - - - (2,224)
----------
Comprehensive loss (2,466)
----------------------------------------------------------------------------------------------------
Balance at June 30, 2002 27,278,177 $273 $125,473 $(115,811) 62,270 $(1,480) $(242) $8,213
====================================================================================================
See accompanying notes to consolidated financial statements.
F-5
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended June 30,
-----------------------------------
2002 2001 2000
------- ------- -------
OPERATING ACTIVITIES
Net income (loss) .................................... $(2,224) $(7,623) $ 192
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .................. 1,608 1,324 533
Provision for losses on accounts receivable .... 75 75 138
Stock compensation expense ..................... -- -- 250
Changes in operating assets and liabilities:
Accounts receivable ............................ 3,027 (201) 3,056
Inventories .................................... 5,532 1,139 4,085
Prepaid expenses and other current assets ...... (360) (671) 185
Accounts payable ............................... (3,767) 1,022 (5,006)
Accrued expenses and deferred rent ............. (680) (1,673) 1,125
------- ------- -------
Net Cash Provided By (Used In) Operating Activities .. 3,211 (6,608) 4,558
------- ------- -------
INVESTING ACTIVITIES
Purchases of fixed assets ...................... (392) (889) (4,902)
Purchases of other assets ...................... (419) (790) (418)
------- ------- -------
Net Cash Used In Investing Activities ................ (811) (1,679) (5,320)
------- ------- -------
FINANCING ACTIVITIES
Net repayments of short-term bank borrowings ... (1,433) -- --
Net proceeds from short-term bank borrowings ... -- 5,024 --
Principal payments on term loan ................ (1,000) (1,000) (1,000)
------- ------- -------
Net Cash (Used In) Provided By Financing Activities .. (2,433) 4,024 (1,000)
------- ------- -------
Decrease in Cash and Cash Equivalents ................ (33) (4,263) (1,762)
Cash, Beginning of Year .............................. 183 4,446 6,208
------- ------- -------
Cash, End of Year .................................... $ 150 $ 183 $ 4,446
======= ======= =======
Cash paid for:
Taxes .......................................... $ 23 $ 18 $ 168
Interest ....................................... $ 1,767 $ 1,989 $ 2,149
See accompanying notes to consolidated financial statements.
F-6
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
1. BUSINESS
Bernard Chaus, Inc. (the "Company" or "Chaus") designs, arranges for
the manufacture of and markets an extensive range of women's career and casual
sportswear principally under the JOSEPHINE CHAUS(R) COLLECTION, JOSEPHINE
CHAUS(R) STUDIO, JOSEPHINE CHAUS(R) SPORT and CHAUS & CO.(R) trademarks. The
Company's products are sold nationwide through department store chains,
specialty retailers and other retail outlets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany accounts and transactions have been
eliminated.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Earnings Per Share:
Basic earnings (loss) per share has been computed by dividing the
applicable net income (loss) by the weighted average number of common shares
outstanding. Diluted earnings per share has been computed by dividing the
applicable net income by the weighted average number of common shares
outstanding and common share equivalents. Potentially dilutive shares were not
included in the calculation of diluted loss per share, as their inclusion would
have been antidilutive.
Revenue Recognition:
The Company recognizes sales upon shipment of products to customers
since title passes upon shipment. Provisions for estimated uncollectible
accounts, discounts and returns and allowances are provided when sales are
recorded based upon historical experience and current trends.
Credit Terms:
The Company extends credit to its customers based upon an evaluation
of the customer's financial condition and credit history and generally does not
require collateral. At June 30, 2002 and 2001, approximately 71% of the
Company's accounts receivable were due from department store customers owned by
three single corporate entities. During the year ended June 30, 2002 ("fiscal
2002"), approximately 70% of the Company's net sales were made to department
store customers owned by three single corporate entities, as compared to 77% in
fiscal 2001 and 81% in fiscal 2000. Sales to Dillard's Department Stores
accounted for 34% of net sales in fiscal 2002, 39% in fiscal 2001 and 42% in
fiscal 2000. Sales to the May Department Stores Company accounted for
approximately 18% of the Company's net sales in fiscal 2002, 25% in fiscal 2001
and 26% in fiscal 2000. Sales to TJX Companies, Inc. accounted for approximately
18% of net sales in fiscal 2002, 13% in both fiscal years 2001 and 2000
respectively. As a result of the Company's dependence on its major customers,
such customers may have the ability to influence the Company's business
decisions. The loss of or significant decrease in business from any of its major
customers would have a material adverse effect on the Company's financial
position and results of operations. In addition, the Company's ability to
achieve
F-7
growth in revenues is dependent, in part, on its ability to identify new
distribution channels. As of June 30, 2002 and June 30, 2001, Accounts
Receivable was net of allowances of $1.4 million and $1.3 million, respectively.
Advertising Expense:
Advertising costs are expensed when incurred. Advertising expenses of
$.7 million, $1.4 million, and $2.7 million were included in selling, general
and administrative expenses for the years ended June 30, 2002, 2001, and 2000,
respectively.
Inventories:
Inventories - Inventory is stated at the lower of cost or market, cost
being determined on the first-in, first-out method. Reserves for slow moving and
aged merchandise are provided based on historical experience and current product
demand. The Company evaluates the adequacy of the reserves quarterly.
Fixed Assets:
Furniture and equipment are depreciated principally using the
straight-line method over eight years. Leasehold improvements are amortized
using the straight-line method over either the term of the lease or the
estimated useful life of the improvement, whichever period is shorter. Computer
hardware and software is depreciated using the straight-line method over three
to five years.
Other Assets:
Other assets primarily consist of in-store shop fixtures which are
being depreciated using the straight-line method over three years.
Valuation of Long-Lived Assets:
The Company periodically reviews the carrying value of its
long-lived assets for continued appropriateness. This review is based upon
projections of anticipated future undiscounted cash flows. As of June 30, 2002,
no impairments of long-lived assets have been recognized.
Foreign Currency Transactions:
The Company negotiates substantially all of its purchase orders with
foreign manufacturers in United States dollars. The Company considers the United
States dollar to be the functional currency of its overseas subsidiaries. All
foreign currency gains and losses are recorded in the Consolidated Statement of
Operations.
Fair Value of Financial Instruments:
For financial instruments, including accounts receivable, accounts
payable, revolving credit borrowings and term loans, the carrying amounts
approximated fair value due to their short-term maturity or variable interest
rate.
Deferred Rent Obligations:
The Company accounts for rent expense under noncancelable operating leases
with scheduled rent increases on a straight-line basis over the lease term. The
excess of straight-line rent expense over scheduled payment amounts is recorded
as a deferred liability. Deferred rent obligations amounted to $0.4 million and
$0.3 million at June 30, 2002 and 2001.
F-8
Income Taxes:
The Company accounts for income taxes under the asset and liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes. Deferred income taxes reflect the future
tax consequences of differences between the tax bases of assets and liabilities
and their financial reporting amounts at year-end.
New Accounting Pronouncements:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
other Intangible Assets". SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
No. 17, "Intangible Assets". It changes the accounting for goodwill from an
amortization method to an impairment only approach. SFAS 142 is effective for
the fiscal year beginning July 1, 2002 to all goodwill and other intangible
assets recognized in an entity's statement of financial position at that date,
regardless of when those assets were initially recognized. The Company has
determined that the adoption of this Statement will not have an impact on its
consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This Statement is effective for
financial statements issued for the fiscal year beginning July 1, 2002. The
Company has determined that the adoption of SFAS No. 143 will not have an impact
on its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and provides updated
guidance concerning the recognition and measurement of an impairment loss for
certain types of long-lived assets. This Statement is effective for financial
statements issued for the fiscal year beginning July 1, 2002. The Company has
determined that the adoption of SFAS No. 144 will not have an impact on its
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS No. 145"). SFAS No. 145 rescinds the provisions of SFAS No. 4
that requires companies to classify certain gains and losses from debt
extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44
regarding the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13
to require that certain lease modifications be treated as sale leaseback
transactions. The provisions of SFAS No.145 related to classification of debt
extinguishments are effective for fiscal years beginning after May 15, 2002. The
provisions of SFAS 145 related to lease modifications are effective for
transactions occurring after May 15, 2002. The Company does not expect that the
adoption of SFAS No. 145 will have a material impact on its consolidated
financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This Statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
expect that the adoption of SFAS No. 146 will have a material impact on its
consolidated financial statements.
F-9
3. INVENTORIES
June 30, June 30,
2002 2001
----------- ------------
(In thousands)
Finished goods $8,030 $13,316
Raw materials 20 266
----------- ------------
$8,050 $13,582
=========== ============
Inventories include merchandise in transit (principally finished goods) of
approximately $6.7 million at June 30, 2002 and $9.0 million at June 30, 2001.
4. FIXED ASSETS
June 30, June 30,
2002 2001
----------- -----------
(In thousands)
Furniture, equipment, computer hardware
and software $ 13,056 $ 12,709
Leasehold improvements 10,013 9,968
----------- -----------
23,069 22,677
Less: accumulated depreciation
and amortization 18,604 17,598
----------- -----------
$ 4,465 $ 5,079
=========== ===========
5. INCOME TAXES
The following are the major components of the provision (benefit) for income
taxes:
Fiscal Year Ended June 30,
2002 2001 2000
------- ------- -------
Current:
Federal .... $ (974) $ - $ -
State ...... 30 11 4
------- ------- -------
$ (944) $ 11 $ 4
======= ======= =======
Deferred:
Federal .... $ - $ - $ -
State ...... - - -
------- ------- -------
$ (944) $ 11 $ 4
======= ======= =======
F-10
Significant components of the Company's net deferred tax assets are as follows:
June 30, June 30,
2002 2001
----------- -----------
(In thousands)
Deferred tax assets:
Net federal, state and local operating loss carryforwards $ 43,300 $ 40,900
Costs capitalized to inventory for tax purposes 400 700
Inventory valuation 200 400
Excess of book over tax depreciation 2,400 2,500
Sales allowances not currently deductible 1,000 1,300
Reserves and other items not currently deductible 400 800
----------- -----------
47,700 46,600
Less: valuation allowance for deferred tax assets (47,700) (46,600)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
Fiscal Year Ended June 30,
2002 2001 2000
-------- -------- --------
(In thousands)
Expense (benefit) for federal income taxes at the statutory
rate of 35.0% $ (1,109) $ (2,664) $ 68
Other 472 326 47
Effects of elimination of tax liabilities no longer required (747) - -
Effects of unrecognized federal tax loss carryforwards 667 2,349 (111)
Effects of tax loss carrybacks (227) - -
-------- -------- --------
Provision (benefit) for income taxes $ (944) $ 11 $ 4
======== ======== ========
At June 30, 2002, the Company has a federal net operating loss carryforward for
income tax purposes of approximately $105.1 million, which will expire between
fiscal 2009 and 2023.
The income tax benefit in the fiscal year ended June 30, 2002 includes a benefit
$0.2 million for refund claims due to tax law changes and a benefit of $0.7
million related to the elimination of tax liabilities that are no longer
required.
6. FINANCING AGREEMENTS
On September 27, 2002, the Company and certain of its subsidiaries
entered into a new three-year financing agreement (the "Financing Agreement")
with The CIT Group/Commercial Services, Inc. ("CIT"), to replace the former
Financing Agreement discussed below. The Financing Agreement provides the
Company with a $50.5 million facility comprised of (i) a $40 million revolving
line of credit (the "Revolving Facility") with a $25 million sublimit for
letters of credit, a $3 million seasonal overadvance and certain other
overadvances at the discretion of CIT, and (ii) a $10.5 million term loan (the
"Term Loan").
At the option of the Company, the Revolving Facility and the Term Loan
each may bear interest either at the JPMorgan Chase Bank Rate ("Prime Rate") or
the London Interbank Offered Rate ("LIBOR"). If the Company chooses the JPMorgan
Chase Bank Rate, the interest (i) on the Revolving Facility accrues at a rate of
1/2 of 1% above the Prime Rate for fiscal 2003 and until the first day of the
month following delivery of the Company's 2003 financials to the Lender (the
"Adjustment Date") and thereafter at a rate ranging from the Prime Rate to 3/4
of 1% above the Prime Rate and (ii) on the Term Loan accrues at a rate of 1%
above the Prime Rate for fiscal 2003 and until the Adjustment Date and
thereafter at a rate ranging from 1/2 of 1% above the Prime Rate to 1 1/4 %
above the Prime Rate. If the Company chooses LIBOR, the interest (i) on the
Revolving Facility accrues at a rate of 3 1/4% above LIBOR for fiscal 2003 and
until the Adjustment Date and thereafter at a rate ranging from 2 3/4% above
F-11
LIBOR to 3 1/2% above LIBOR and (ii) on the Term Loan accrues at a rate of 3
3/4% above LIBOR for fiscal 2003 and until the Adjustment Date and thereafter at
a rate ranging from 3 1/4% above LIBOR to 4% above LIBOR. All adjustments to
interest rates will be determined upon delivery of the Company's 2003 financials
to the Lender, based upon the Company's availability under the Revolving
Facility and certain fixed charge coverage ratios and leverage ratios.
On September 27, 2002, the Company borrowed $18.3 million under the
Revolving Facility and $10.5 million under the Term Loan. These borrowings were
used to pay off the balances under the Former Financing Agreement of $18.3
million and the Former Term Loan of $10.5 million and for working capital
purposes. Commencing October 1, 2002, amortization payments in the amount of
$375,000 are payable quarterly in arrears in connection with the Term Loan. A
balloon payment of $6.0 million is due on September 27, 2005 under the Term
Loan. The Company's obligations under the Financing Agreement are secured by a
first priority lien on substantially all of the Company's assets, including the
Company's accounts receivable, inventory, intangibles, equipment, trademarks and
a pledge of the Company's stock interest in its subsidiaries.
The Financing Agreement contains numerous financial and operational
covenants, including limitations on additional indebtedness, liens, dividends,
stock repurchases and capital expenditures. In addition, the Company is required
to maintain (i) specified levels of tangible net worth, (ii) certain fixed
charge coverage ratios, (iii) certain leverage ratios, and (iv) specified levels
of minimum borrowing availability under the Revolving Facility. In the event of
the early termination by the Company of the Financing Agreement, the Company
will be liable for termination fees of (i) (a) $500,000 plus (b) any unpaid
portion of the $500,000 minimum factoring commission fees otherwise due in the
first year of the term,, if termination occurs within twelve months of the
closing date; or (ii) (a) $350,000 if termination occurs between the thirteenth
and the twenty-fourth month from the closing date plus, (b) any unpaid portion
of the $250,000 minimum factoring commission fees otherwise due for the first
half of the second year of the term, if termination occurs between the
thirteenth and eighteenth month from the closing date; or (iii) $150,000 if
termination occurs after the twenty-fourth month from the closing date. The
Company may prepay at any time, in whole or in part, the Term Loan without
penalty. The Financing Agreement expires on September 27, 2005.A fee of $75,000
is payable in September 2002 for the new Financing Agreement.
On September 27, 2002, the Company also entered into a factoring
agreement with CIT. The factoring agreement provides for a factoring commission
equal to 4/10 of 1% of the gross face amount of all accounts factored by CIT,
plus certain customary charges. The minimum factoring commission fee per year is
$500,000. The Factoring Agreement will be terminated after eighteen months
provided that there is no event of default under the factoring agreement
at such time. In such event, the Company shall pay to CIT a collateral
management fee equal to $5,000 a month. Under the agreement, CIT may also
require the Company to utilize CIT to continue to perform certain bookkeeping,
collection and management services and the Company shall pay CIT an additional
fee equal to 1/4 of 1% of the gross face amount of all accounts, with a minimum
aggregate commission of $300,000 per annum and a minimum of $1.50 per invoice.
Until September 27, 2002, the Company had a financing agreement with
BNY Financial Corporation, a wholly owned subsidiary of General Motors
Acceptance Corp. ("GMAC") (the "Former Financing Agreement"). The Former
Financing Agreement consisted of two facilities: (i) the Former Revolving
Facility which was a $45.5 million five-year revolving credit line (subject to
an asset based borrowing formula) with a $34.0 million sublimit for letters of
credit, and (ii) the Former Term Loan which was a $14.5 million term loan
facility. Each facility had been amended to extend the maturity date until April
1, 2003. At June 30, 2002 and June 30, 2001, the Company had borrowings of $3.6
million and $5.0 million under the Revolving Facility and total availability of
approximately $6.9 million and $2.5 million (inclusive of over advance
availability) under the Former Financing Agreement.
Interest on the Former Revolving Facility accrued at the greater of (i)
6% or (ii) 1/2 of 1% above the Prime Rate (6.0% at June 30, 2002) and was
payable on a monthly basis, in arrears. Interest on the Former Term Loan accrued
at an interest rate equal to the greater of (i) 6.0% or (ii) a rate ranging from
1/2 of 1% above the Prime Rate to 1 1/2% above the Prime Rate, which interest
rate was determined, from time to time, based upon the Company's availability
under the Revolving Facility. The interest rate on the Former Term Loan was 6.0%
at June 30, 2002.
F-12
Amortization payments in the amount of $250,000 were payable quarterly
in arrears in connection with the Former Term Loan. Sixteen amortization
payments had been made resulting in a balance of $10.5 million at June 30, 2002.
A balloon payment in the amount of $9.8 million would have been due on April 1,
2003. The Company's obligations under the Former Financing Agreement were
secured by a first priority lien on substantially all of the Company's assets,
including the Company's accounts receivable, inventory and trademarks.
The Former Financing Agreement contained financial covenants requiring,
among other things, the maintenance of minimum levels of tangible net worth,
working capital and minimum permitted profit (maximum permitted loss). The
Former Financing Agreement also contained certain restrictive covenants which,
among other things, limited the Company's ability to incur additional
indebtedness or liens and to pay dividends. A number of amendments to the Former
Financing Agreement were entered into to establish covenants and fix the levels
of overadvance amounts. In July 2002, the Former Financing Agreement was amended
to provide agreed upon levels of overadvance amounts from July 10, 2002 through
September 29, 2002.
7. EMPLOYEE BENEFIT PLANS
Pension Plan:
Pursuant to a collective bargaining agreement, all of the Company's
union employees are covered by a defined benefit pension plan. Pension expense
amounted to approximately $50,000, $1,000, and $61,000 in fiscal 2002, 2001, and
2000, respectively.
The reconciliation of the funded status of the pension plan as of June 30, 2002
and 2001 is as follows:
2002 2001
------- -------
(in thousands)
Components of Net Periodic Benefit Costs:
Service Cost $ 59 $ 50
Interest Cost 67 60
Expected Return on Plan Assets (76) (89)
Recognized Net Actuarial Gain -- (20)
------- -------
Net Periodic Benefit Cost $ 50 $ 1
------- -------
Change in Benefit Obligation:
Benefit Obligation at Beginning of Year $ 905 $ 797
Service Cost 59 50
Interest Cost 67 60
Actuarial Gain (23) (33)
Change in Assumption (Discount Rate) 69 59
Benefits Paid (28) (28)
------- -------
Benefit Obligation at End of Year $ 1,049 $ 905
------- -------
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Year $ 910 $ 971
Actual Loss on Plan Assets (100) (137)
Employer Contribution -- 108
Benefits Paid (28) (28)
Expenses Paid (3) (4)
------- -------
Fair Value of Plan Assets at End of Year $ 779 $ 910
------- -------
Reconciliation of Funded Status at End of Year
Funded Status $ -- $ 5
Unrecognized Net Actuarial Loss/(Gain) (270) 16
F-13
Accumulated Other Comprehensive Loss 242 0
------- -------
Prepaid (Accrued) Benefit Cost $ (28) $ 21
------- -------
Assumptions as of June 30 2002 2001
------- -------
Discount Rate 7.00% 7.50%
Long Term Rate of Return 8.50% 8.50%
As of June 30, 2000 the benefit obligation was approximately $0.8
million and the fair value of plan assets was approximately $1.0 million. The
components of net periodic benefit cost was not available for the fiscal year
ended June 30, 2000.
SAVINGS PLAN:
The Company has a savings plan (the "Savings Plan") under which
eligible employees may contribute a percentage of their compensation and the
Company (subject to certain limitations), until February 2002, matched 50% of
the employee's contribution. As of February 2002 the Company discontinued its
Company match. The Company contributions are invested in investment funds
selected by the participants and are subject to vesting provisions of the
Savings Plan. Expense under the Savings Plan was approximately $0.2 million in
fiscal 2002, $0.3 million in fiscal 2001 and $0.3 million in fiscal 2000.
8. STOCK BASED COMPENSATION:
The Company has a Stock Option Plan (the "Option Plan"). Pursuant to
the Option Plan, the Company may grant to eligible individuals incentive stock
options, as defined in the Internal Revenue Code, and non-incentive stock
options. Under the Option Plan, 6,750,000 shares of Common Stock are reserved
for issuance. The maximum number of shares that any one Eligible Individual may
be granted in respect of options may not exceed 4,000,000 Shares. No stock
options may be granted subsequent to October 29, 2007. The exercise price may
not be less than 100% of the fair market value on the date of grant for
incentive stock options.
On January 10, 2001, the Company entered into an employment agreement
(the "Agreement") with Nicholas DiPaolo. Who has been serving as the Company's
Vice Chairman and Chief Operating Officer since November 1, 2000, the effective
date of the Agreement. The Agreement has a term of 37 months from the effective
date. Under the Agreement on November 1, 2000, Mr. DiPaolo was granted 300,000
fully vested options to purchase common stock of the Company at the fair market
value on the date of grant (the "Sign-On Options"). Under the Agreement on
January 10, 2001, Mr. DiPaolo was granted 3,000,000 options to purchase common
stock of the Company at the fair market value on the date of the grant (the "Put
Options"). The exercise price of the Put Options is $0.375. The Put Options vest
in three equal annual installments upon the anniversaries of the Agreement's
effective date. In the event that the Company achieves a cumulative earnings
before income taxes, depreciation and amortization ("EBITDA") target determined
by the Company's Board of Directors for the three year period ending June 30,
2003, Mr. DiPaolo shall be entitled to require the Company to purchase his Put
Options, for a purchase price equal to $1,125,000, (i.e., the aggregate exercise
price of the Put Options). In the event there is a "Change of Control" of the
Company or his employment is terminated without "Cause" (as such terms are
defined in the Agreement), Mr. DiPaolo shall also have the right to require the
Company to purchase his vested Put Options at a purchase price equal to the
aggregate exercise price of the vested Put Options.
During February 2001, employee and director options for an aggregate of
1,400,401 shares of the Company's common stock were surrendered under a stock
option replacement program offered by the Company. Under the program, employees
had the right to surrender their outstanding, out-of-the- money options in
exchange for a commitment by the Company to grant new options to them for the
same number of shares on a date, which is in excess of six months (183 days)
after the surrender date. To be eligible to receive the new options, which have
an exercise price equal to the fair market value on the future grant date
(August 8, 2001), employees (or directors as the case may be) must have been
employed by the Company (or to serve as directors) on such grant date. On August
8, 2001, 1,400,401 options were granted to employees and directors under this
program. The new options vest in increments of 50% on August 8, 2002 and 50% on
August 8, 2003.
F-14
In August 2002 the Company issued 360,000 options to purchase common
stock which have an exercise price equal to the fair market value on the date of
the grant.
Information regarding the Company's stock options is summarized below:
Stock Options
--------------------------------------------------------------------
Number Exercise Weighted Average
of Shares Price Range Exercise Price
----------------- -------------------------- -----------------
Outstanding at June 30, 1999 1,834,338 $ 2.13 - $ 3.50 $ 2.73
Options granted 893,167 $ 1.25 - $ 3.00 $ 2.38
Options canceled (546,195) $ 2.13 - $ 3.11 $ 2.55
-----------------
Outstanding at June 30, 2000 2,181,310 $ 1.25 - $ 3.50 $ 2.63
Options granted 3,325,000 $ .38 - $ .69 $ .39
Options canceled (2,166,310) $ .69 - $ 3.50 $ 2.61
-----------------
Outstanding at June 30, 2001 3,340,000 $ .38 - $ 3.50 $ .41
Options granted 1,920,401 $ .50 - $ .50 $ .50
Options canceled (29,417) $ .50 - $ 3.11 $ .94
-----------------
Oustanding at June 30, 2002 5,230,984 $ .38 - $ 3.50 $ .44
================= ========================== =================
The following table summarizes information about the Company's outstanding and
exercisable stock options at June 30, 2002:
Outstanding Exercisable
---------------------------------------------- ----------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Price Shares Life (Yrs.) Price Shares Price
- -------------------------------------------------------------------------------- ----------------------------------
$0.38 3,000,000 3.34 $0.38 1,000,000 $.38
$0.50 2,195,984 8.32 $0.50 300,000 $.50
$0.69 10,000 8.00 $0.69 2,500 $.69
$3.00 10,000 7.00 $3.00 5,000 $3.00
$3.11 10,000 5.65 $3.11 10,000 $3.11
$3.50 5,000 6.00 $3.50 3,750 $3.50
- -------------------------------------------------------------------------------- ----------------------------------
5,230,984 5.45 $.44 1,321,250 $0.45
- -------------------------------------------------------------------------------- ----------------------------------
All stock options are granted at fair market value of the Common Stock
at grant date. The weighted average fair value of stock options granted during
2002, 2001 and 2000 was $0.42, $0.30 and $1.75 respectively. The fair value of
each option is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for the
grants: risk-free interest rate of 3.36%, 4.38%, and 6.25% in 2002, 2001 and
2000, respectively; expected dividend yield of 0% in 2002, 2001, and 2000;
expected life of 2.48, 2.49, and 3.34 years in 2002, 2001 and 2000,
respectively; and expected volatility of 180.90%, 159.29%, and 120.55% in 2002,
2001, and 2000, respectively. The outstanding stock options
F-15
have a weighted average contractual life of 5.45 years, 4.37 years, and 8.53
years in 2002, 2001, and 2000, respectively. The number of stock options
exercisable at June 30, 2002, 2001, and 2000 were 1,321,250, 317,500, and
849,000, respectively.
The Company accounts for the stock option plans in accordance with the
Accounting Principles Board Opinion No. 25, under which no compensation cost is
recognized for stock option awards. Had compensation cost been determined
consistent with Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), the Company's pro forma net
(loss)/income for 2002, 2001 and 2000 would have been ($3,124), ($8,008), and
($1,011) respectively. The Company's pro forma net (loss)/income per share for
2002, 2001 and 2000 would have been ($0.12), ($0.29), and ($0.04), respectively.
9. WARRANTS
In October 1997 as part of the Company's Financing Agreement, discussed
in Note 6, GMAC was issued 162,500 warrants. As of June 30, 2002 there were
125,000 warrants exercisable at a weighted average exercise price of $3.12 and
37,500 warrants at a weighted average exercise price of $10.63. The warrants
expire December 31, 2002.
10. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Lease Obligations:
The Company leases showroom, distribution and office facilities, and
equipment under various noncancellable operating lease agreements which expire
through 2009. Rental expense for the years ended June 30, 2002, 2001 and 2000
was approximately $2.6 million, $2.5 million and $2.7 million, respectively.
The minimum aggregate rental commitments at June 30, 2002 are as
follows (in thousands):
Fiscal year ending:
2003................................ $ 2,488
2004................................ 2,340
2005................................ 1,132
2006................................ 1,132
2007................................ 1,132
Subsequent to 2007............ 2,233
----------
$ 10,457
==========
Letters of Credit:
The Company was contingently liable under letters of credit issued by
banks to cover contractual commitments for merchandise purchases of
approximately $9.8 million and $13.1 million at June 30, 2002 and June 30, 2001,
respectively.
Non-Competition Agreement:
In connection with a non-competition agreement with a former executive,
Ivy Karkut, who resigned in January 2001, the Company paid $900,000 in equal
monthly installments over the 12-month period from January 2001 to January 2002.
Litigation:
The Company is involved in legal proceedings from time to time arising
out of the ordinary conduct of its business. The Company believes that the
outcome of these proceedings will not have a material adverse effect on the
Company's financial condition or results of operations.
F-16
11. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly financial information for fiscal 2002 and fiscal 2001 is set
forth in the table below:
(In thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
FISCAL 2002
Net sales $39,458 $29,964 $43,617 $32,730
Gross profit 8,227 3,003 9,305 8,283
Net income (582) (5,338) 1,754 1,942
Basic and diluted earnings (loss) per share (0.02) (0.20) 0.06 0.07
FISCAL 2001
Net sales $40,677 $30,213 $44,079 $34,530
Gross profit 7,931 5,022 7,699 6,523
Net income (936) (3,686) (952) (2,049)
Basic and diluted earnings (loss) per share (0.03) (0.14) (0.03) (0.08)
The sum of the quarterly net earnings per share amounts may not equal the
full-year amount since the computations of the weighted average number of
common-equivalent shares outstanding for each quarter and the full year are made
independently.
During the fourth quarter for fiscal year 2002, the Company recorded an income
tax benefit which represents refund claims of $0.2 million and the elimination
of income tax liabilities of $0.7 million that are no longer required.
During the fourth quarter of fiscal 2002 the Company recorded other income of
$0.2 million comprised of a gain on the sale of equity securities.
During the fourth quarter for fiscal year 2001, the Company recorded a $0.4
million charge for cost associated with a United States Customs Duty Audit
covering a prior five-year period.
F-17
SCHEDULE II
BERNARD CHAUS, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at Charged to
Beginning of Costs and Balance at End
Description Year Expenses Deductions of Year
Year ended June 30, 2002
Allowance for doubtful accounts $ 273 $ 75 $ 8(1) $ 340
Reserve for customer allowances and deductions $ 1,074 $11,248 $11,229(2) $ 1,093
------- ------- ------- -------
Year ended June 30, 2001
Allowance for doubtful accounts $ 407 $ 75 $ 209(1) $ 273
------- ------- ------- -------
Reserve for customer allowances and deductions $ 2,365 $13,292 $14,583(2) $ 1,074
------- ------- ------- -------
Year ended June 30, 2000
Allowance for doubtful accounts $ 366 $ 138 $ 97(1) $ 407
------- ------- ------- -------
Reserve for customer allowances and deductions $ 1,245 $17,618 $16,498(2) $ 2,365
------- ------- ------- -------
- ---------
(1) Uncollectible accounts written off
(2) Allowances charged to reserve and granted to customers
S-1