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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 5(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended SEPTEMBER 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 number)
530 Seventh Avenue, New York, New York 10018
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 354-1280
--------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Date Class Shares Outstanding
- ----------- -------------------------------- ---------------------
10/30/02 Common Stock, $0.01 par value 27,222,007
- ----------- -------------------------------- ---------------------
INDEX
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited) PAGE
Condensed Consolidated Balance Sheets as of September 30, 2002,
June 30, 2002 and September 30, 2001 3
Condensed Consolidated Statements of Operations for the Three
Months ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the Three
Months ended September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
CERTIFICATIONS 17
INDEX TO EXHIBITS 19
2
PART I -- FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
- -----------------------------
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and per share amounts)
September 30, June 30, September 30,
2002 2002 2001
----------------- --------------- -----------------
(Unaudited) ( * ) (Unaudited)
ASSETS
Current Assets
Cash $ 123 $ 150 $ 107
Accounts receivable - net 25,880 20,586 35,925
Inventories 11,002 8,050 18,259
Prepaid expenses and other current assets 788 1,331 637
----------------- --------------- -----------------
Total current assets 37,793 30,117 54,928
Fixed assets - net 4,273 4,465 4,936
Other assets - net 731 1,109 1,259
----------------- --------------- -----------------
Total assets $ 42,797 $ 35,691 $ 61,123
================= =============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving credit borrowings $ 7,619 $ 3,591 $ 21,307
Accounts payable 11,024 9,749 14,358
Accrued expenses 3,470 3,248 3,795
Term loan - current 1,500 1,125 1,000
----------------- --------------- -----------------
Total current liabilities 23,613 17,713 40,460
Deferred rent 405 390 316
Term loan 9,000 9,375 10,250
----------------- --------------- -----------------
Total liabilities 33,018 27,478 51,026
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, -- -- --
authorized shares - 1,000,000;
outstanding shares - none
Common stock, $.01 par value, 273 273 273
authorized shares - 50,000,000; issued shares -
27,284,277 at September 30, 2002 and 27,278,177
at June 30, 2002 and September 30, 2001
Additional paid-in capital 125,476 125,473 125,473
Deficit (114,248) (115,811) (114,169)
Accumulated other comprehensive loss (242) (242) --
Less: Treasury stock at cost -
62,270 shares at September 30, 2002,
June 30, 2002 and September 30, 2001 (1,480) (1,480) (1,480)
----------------- --------------- -----------------
Total stockholders' equity 9,779 8,213 10,097
----------------- --------------- -----------------
Total liabilities and stockholders' equity $ 42,797 $ 35,691 $ 61,123
================= =============== =================
*Derived from audited financial statements at June 30, 2002.
See accompanying notes to condensed consolidated financial statements.
3
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share amounts)
For the Three Months Ended
---------------------------------------
September 30, September 30,
2002 2001
----------------- -----------------
(Unaudited)
Net sales $ 34,791 $ 39,458
Cost of goods sold 25,334 31,231
----------------- -----------------
Gross profit 9,457 8,227
Selling, general and administrative expenses 7,548 8,245
----------------- -----------------
Income (loss) from operations 1,909 (18)
Interest expense, net 336 561
----------------- -----------------
Income (loss) before income tax provision 1,573 (579)
Income tax provision 10 3
----------------- -----------------
Net income (loss) $ 1,563 $ (582)
================= =================
Basic earnings (loss) per share $ 0.06 $ (0.02)
================= =================
Diluted earnings (loss) per share $ 0.05 $ (0.02)
================= =================
Weighted average number of common shares
outstanding-basic 27,222,000 27,216,000
================= =================
Weighted average number of common shares
outstanding-diluted 29,502,000 27,216,000
================= =================
See accompanying notes to condensed consolidated financial statements
4
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Three Months Ended
-----------------------------------
September 30, September 30,
2002 2001
------------- -------------
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ 1,563 $ (582)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 393 362
Loss on disposal of other assets 243 -
Provision for losses on accounts receivable - 19
Changes in operating assets and liabilities:
Accounts receivable (5,294) (12,256)
Inventories (2,952) (4,677)
Prepaid expenses and other assets 546 396
Accounts payable 1,275 842
Accrued expenses and deferred rent 237 35
--------- ----------
Net Cash Used In Operating Activities (3,989) (15,861)
--------- ----------
INVESTING ACTIVITIES
Purchases of fixed assets (69) (101)
Purchases of other assets - (147)
--------- ----------
Net Cash Used In Investing Activities (69) (248)
--------- ----------
FINANCING ACTIVITIES
Net proceeds from short-term bank borrowings 4,028 16,283
Principal payments on term loan - (250)
Net proceeds from exercise of options 3 -
--------- ----------
Net Cash Provided By Financing Activities 4,031 16,033
--------- ----------
Decrease in cash (27) (76)
Cash, Beginning of Year 150 183
--------- ----------
Cash, End of Year $ 123 $ 107
========= ==========
Cash Paid for:
Taxes $ 1 $ 7
========= ==========
Interest $ 287 $ 522
========= ==========
See accompanying notes to condensed consolidated financial statements.
5
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended September 30, 2002 and September 30, 2001
1. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("generally accepted accounting principles") for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. All
significant intercompany balances and transactions were eliminated. Operating
results for the quarter ended September 30, 2002 are not necessarily indicative
of the results that may be expected for the year ending June 30, 2003 or any
other period. The balance sheet at June 30, 2002 has been derived from the
audited financial statements at that date. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 2002.
Earnings (loss) Per Share: Basic earnings (loss) per share have 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 for the three months ended September 30, 2002 by dividing the
applicable net income by the weighted average number of common shares
outstanding and common equivalents. Potentially dilutive shares were not
included in the calculation of diluted loss per share for the three months ended
September 30, 2001, as their inclusion would have been antidilutive.
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 adoption of this Statement did not have an impact on the
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
adoption of SFAS No. 143 did not have an impact on the 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
6
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 adoption of SFAS No. 144 did not
have an impact on the 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 adoption of SFAS No. 145 did not
have an impact on the 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.
2. Inventories
Inventories (principally finished goods) are stated at the lower of
cost, using the first-in first-out (FIFO) method, or market. Included in
inventories is merchandise in transit of approximately $5.4 million at September
30, 2002, $6.7 million at June 30, 2002 and $8.3 million at September 30, 2001.
3. 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 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
7
BERNARD CHAUS, INC. AND SUBSIDIARIES
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. The interest rate as of September 30, 2002 on the
Revolving Facility was 5.25% and on the Term Loan was 5.75%.
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. 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
$125,000 was paid in connection with 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 the event the Factoring Agreement is terminated, the Company shall pay
to CIT a collateral management fee equal to $5,000 a month through September 27,
2005. 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 receivable, with a minimum aggregate commission of
$300,000 per annum and a minimum of $1.50 per invoice.
On September 30, 2002, the Company had revolving credit borrowings of
$7.6 million and $11.0 million of outstanding letters of credit under the
Revolving Facility and total availability of approximately $9.0 million under
the new Financing Agreement.
8
BERNARD CHAUS, INC. AND SUBSIDIARIES
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.
Interest on the Former Revolving Facility accrued at the greater of (i)
6% or (ii) 1/2 of 1% above the Prime Rate 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.
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.
9
BERNARD CHAUS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Results of Operations
- ---------------------
Net sales for the quarter ended September 30, 2002 decreased by 11.8 %
or $4.7 million to $34.8 million from $39.5 million for the quarter ended
September 30, 2001. The decrease in net sales for the quarter was primarily due
to the decrease in the average selling price of 15.4% as a result of the product
mix and lower standard selling prices. The Company's ability to lower its
standard selling price was due to reduced costs. The ongoing difficult women's
retail environment continues to adversely impact the Company's net sales.
Gross profit for the quarter ended September 30, 2002 increased $1.2
million to $9.4 million as compared to $8.2 million for the quarter ended
September 30, 2001. As a percentage of net sales, gross profit increased to
27.2% for the quarter ended September 30, 2002 from 20.9% for the quarter ended
September 30, 2001. The increase in gross profit and gross profit percentage for
the quarter was primarily a result of an increase in the initial markup and the
reduction of excess inventory.
Selling, general and administrative ("SG&A") expenses decreased by $.7
million to $7.5 million for the quarter ended September 30, 2002 from $8.2
million for the quarter ended September 30, 2001. The decrease was primarily due
to a decrease in payroll and payroll related expenses ($0.8 million) partially
offset by a write-off of store fixtures ($0.2 million). SG&A expenses as a
percentage of net sales increased to 21.7% for the quarter ended September 30,
2002 compared to 20.9% for the quarter ended September 30, 2001. 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 was lower for fiscal 2003 as compared to fiscal 2002
due to decreased revolving credit borrowings and lower interest rates.
The provision for income taxes for the three months ended September 30,
2002 and 2001 reflects a provision for state and local taxes. See discussion
below under Critical Accounting Policies and Estimates regarding income taxes
and the Company's federal net operating loss carryforwards.
Financial Position, Liquidity and Capital Resources
- ---------------------------------------------------
General
Net cash used in operating activities was $4.0 million for the quarter
ended September 30, 2002 as compared to cash used in operating activities of
$15.9 million for the quarter ended September 30, 2001. Cash used in operating
activities for fiscal 2003 resulted primarily from an increase in accounts
receivable ($5.3 million), an increase in inventory ($3.0 million) partially
offset by an increase in accounts payable ($1.3 million) and net income for the
quarter of $1.6 million.
Cash used in investing activities in the quarter ended September 30,
2002 was for capital expenditures of $0.1 million compared to $0.2 million in
the previous year. The capital expenditures for the quarter ended September 30,
2002 consisted of $0.1 million primarily for management information system
upgrades. The Company anticipates additional capital expenditures of
approximately $0.6 million for the remainder of fiscal year 2003.
10
BERNARD CHAUS, INC. AND SUBSIDIARIES
Net cash provided by financing activities was $4.0 million in fiscal
2003 as the result of net proceeds from short-term borrowings. Net cash provided
by financing activities for fiscal 2002 was $16.0 million as the result of net
proceeds from short-term borrowings of $16.3 million partially offset by a
principle payment on the Term Loan of $250,000.
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 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. The
interest rate as of September 30, 2002 on the Revolving Facility was 5.25% and
on the Term Loan was 5.75%.
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. 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
11
BERNARD CHAUS, INC. AND SUBSIDIARIES
(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 $125,000 was paid in
connection with 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 the event the Factoring Agreement is terminated, the Company shall pay
to CIT a collateral management fee equal to $5,000 a month through September 27,
2005. 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 receivable, with a minimum aggregate commission of
$300,000 per annum and a minimum of $1.50 per invoice.
On September 30, 2002, the Company had revolving credit borrowings of
$7.6 million and $11.0 million of outstanding letters of credit under the
Revolving Facility and total availability of approximately $9.0 million under
the new Financing Agreement.
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.
Interest on the Former Revolving Facility accrued at the greater of (i)
6% or (ii) 1/2 of 1% above the Prime Rate 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.
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.
Future Financing Requirements
At September 30, 2002, the Company had working capital of $14.2 million
as compared with working capital of $14.5 million at September 30, 2001. The
Company had revolving credit borrowings of $7.6 million and outstanding letters
of credit of $11.0 million at September 30, 2002 as compared with revolving
credit borrowings
12
BERNARD CHAUS, INC. AND SUBSIDIARIES
of $21.3 million and outstanding letters of credit of $15.8 million at September
30, 2001. The decrease in revolving credit borrowings was primarily a result of
the Company's decrease in accounts receivable of $10.0 million, and the decrease
in inventory of $7.3 million partially offset by a decrease in accounts payable
of $3.3 million. 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 the Financing Agreement. 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, but not limited to, the Company's ability to comply with the
financial covenants and adequacy of borrowing base in accordance with the
Financing Agreement, the Company's ability to maintain its borrowing
capabilities under the Financing Agreement, and retail market conditions and
consumer acceptance of the Company's products.
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 adoption of this
Statement did not have an impact on the 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
adoption of SFAS No. 143 did not have an impact on the 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 adoption of
SFAS No. 144 did not have an impact on the 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
13
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 adoption of SFAS No. 145 did not
have an impact on the 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.
Critical Accounting Policies and Estimates
The Company's significant accounting policies are more fully described
in Note 1 to the consolidated financial statements, included in the Company's
annual report on form 10k for the year ended June 30, 2002. 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.
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 we record a valuation allowance against the deferred tax asset associated
with this NOL if it is "more likely than not" that we 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, we have not
recognized any of this
14
BERNARD CHAUS, INC. AND SUBSIDIARIES
net deferred tax asset. We currently provide for income taxes only to the extent
that we expect to pay cash taxes (primarily state and local taxes) for current
income. 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 we 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.
Item 3. 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 and/or
LIBOR described in "Liquidity and Capital Resources", as well as Note 3 of the
Notes to the Condensed 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 September 30, 2002 and 2001, the carrying amounts of the Company's
revolving credit borrowings and term loan approximated fair value. As of
September 30, 2002, the Company's revolving credit borrowings under the
Financing Agreement bore interest at 5.25%. As of September 30, 2002, the
Company's Term Loan bore interest at 5.75%. Under the Financing Agreement, as of
September 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 4. Controls and Procedures.
- -------------------------------
Within the 90 days prior to the date of this Form 10-Q, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's President and Chief Executive
Officer along with the Company's Chief Financial Officer, of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's
President and Chief Executive Officer along with the Company's Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings. There have been no significant changes in the
Company's internal controls or in other factors which could significantly affect
internal controls subsequent to the date the Company carried out its evaluation.
15
BERNARD CHAUS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(a) Exhibits.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) The Company filed no reports on Form 8-K during the quarter ended
September 30, 2002.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERNARD CHAUS, INC.
(Registrant)
Date: November 5, 2002 By: /s/ Josephine Chaus
-------------------
JOSEPHINE CHAUS
Chairwoman of the Board, and
Chief Executive Officer
Date: November 5, 2002 By: /s/ Nicholas DiPaolo
--------------------
NICHOLAS DIPAOLO
Vice Chairman of the Board, and
Chief Operating Officer
Date: November 5, 2002 By: /s/ Barton Heminover
--------------------
BARTON HEMINOVER
Chief Financial Officer
16
BERNARD CHAUS, INC. AND SUBSIDIARIES
CERTIFICATIONS
I, Josephine Chaus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bernard Chaus,
Inc. (the "Company") for the fiscal quarter ended September 30, 2002
(this "Report");
2. Based on my knowledge, this Report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material
respects the financial condition and results of operations and cash
flows of the Company as of, and for, the periods presented in this
Report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this Report (the "Evaluation Date"); and
(c) presented in this Report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing
the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize, and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's other certifying officers and I have indicated in this
Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 5, 2002
/s/ Josephine Chaus
-------------------------------------
Josephine Chaus
Chairwoman of the Board and Chief Executive Officer
17
BERNARD CHAUS, INC. AND SUBSIDIARIES
I, Barton Heminover, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bernard Chaus,
Inc. (the "Company") for the fiscal quarter ended September 30, 2002
(this "Report");
2. Based on my knowledge, this Report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material
respects the financial condition and results of operations and cash
flows of the Company as of, and for, the periods presented in this
Report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this Report (the "Evaluation Date"); and
(c) presented in this Report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing
the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize, and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's other certifying officers and I have indicated in this
Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 5, 2002
/s/ Barton Heminover
--------------------------------
Barton Heminover
Chief Financial Officer
18
BERNARD CHAUS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT TITLE
- -------------- ------------------------------------------------------------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
19