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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 DECEMBER 31, 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
------------------------------------------------------------------------
(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
--------- ----------------------------- ------------------
2/13/03 Common Stock, $0.01 par value 27,322,007
--------- ----------------------------- ----------------
INDEX
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited) PAGE
Condensed Consolidated Balance Sheets as of
December 31, 2002, June 30, 2002 and
December 31, 2001 3
Condensed Consolidated Statements of Operations for the
Quarters and Six Months ended December 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the
Six Months ended December 31, 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 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 21
CERTIFICATIONS 22
INDEX TO EXHIBITS 24
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)
December 31, June 30, December 31,
2002 2002 2001
------------ --------- ----------
(Unaudited) ( * ) (Unaudited)
ASSETS
Current Assets
Cash $ 836 $ 150 $ 159
Accounts receivable - net 18,134 20,586 19,601
Inventories 10,049 8,050 12,928
Prepaid expenses and other current assets 932 1,331 799
--------- --------- ---------
Total current assets 29,951 30,117 33,487
Fixed assets - net 4,103 4,465 4,773
Other assets - net 633 1,109 1,276
Goodwill 1,270 -- --
--------- --------- ---------
Total assets $ 35,957 $ 35,691 $ 39,536
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving credit borrowings $ -- $ 3,591 $ 6,660
Accounts payable 9,878 9,749 13,412
Accrued expenses 4,706 3,248 3,355
Term loan - current 1,500 1,125 1,000
--------- --------- ---------
Total current liabilities 16,084 17,713 24,427
Deferred rent 421 390 350
Term loan 8,625 9,375 10,000
--------- --------- ---------
Total liabilities 25,130 27,478 34,777
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, -- -- --
authorized shares - 1,000,000;
outstanding shares - none
Common stock, $.01 par value, 274 273 273
authorized shares - 50,000,000; issued shares -
27,384,277 at December 31, 2002 and
27,278,177 at June 30, 2002 and December 31, 2001
Additional paid-in capital 125,943 125,473 125,473
Deficit (113,668) (115,811) (119,507)
Accumulated other comprehensive loss (242) (242) --
Less: Treasury stock at cost -
62,270 shares at December 31, 2002, June
30, 2002 and December 31, 2001 (1,480) (1,480) (1,480)
--------- --------- ---------
Total stockholders' equity 10,827 8,213 4,759
--------- --------- ---------
Total liabilities and stockholders' equity $ 35,957 $ 35,691 $ 39,536
========= ========= =========
*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 Quarter Ended For the Six Months Ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Net sales $ 30,879 $ 29,964 $ 65,670 $ 69,422
Cost of goods sold 22,677 26,961 48,011 58,192
------------ ------------ ------------ ------------
Gross profit 8,202 3,003 17,659 11,230
Selling, general and administrative expenses 7,154 7,787 14,702 16,032
------------ ------------ ------------ ------------
Income (loss) from operations 1,048 (4,784) 2,957 (4,802)
Interest expense, net 304 551 640 1,112
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes 744 (5,335) 2,317 (5,914)
Provision for income taxes 164 3 174 6
------------ ------------ ------------ ------------
Net income (loss) $ 580 $ (5,338) $ 2,143 $ (5,920)
============ ============ ============ ============
Basic earnings (loss) per share $ 0.02 $ (0.20) $ 0.08 $ (0.22)
============ ============ ============ ============
Diluted earnings (loss) per share $ 0.02 $ (0.20) $ 0.07 $ (0.22)
============ ============ ============ ============
Weighted average number of
common shares outstanding - basic 27,256,000 27,216,000 27,237,000 27,216,000
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding - diluted 29,793,000 27,216,000 29,646,000 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 Six Months Ended
-------------------------
December 31, December 31,
2002 2001
------------ ------------
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ 2,143 $(5,920)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 774 740
Loss on asset disposal 243 --
Provision for losses on accounts receivable -- 38
Changes in operating assets and liabilities:
Accounts receivable 3,930 4,049
Inventories 192 654
Prepaid expenses and other assets 475 228
Accounts payable 129 (104)
Accrued expenses and deferred rent 1,489 (371)
------- -------
Net Cash Provided by (Used In) Operating Activities 9,375 (686)
------- -------
INVESTING ACTIVITIES
Acquisition of business (4,577) --
Purchases of fixed assets (149) (184)
Purchases of other assets -- (290)
------- -------
Net Cash Used In Investing Activities (4,726) (474)
------- -------
FINANCING ACTIVITIES
Net proceeds (payments) on short-term bank borrowings (3,591) 1,636
Principal payments on term loan (375) (500)
Net proceeds from issuance of stock 3 --
------- -------
Net (Used In) Cash Provided By Financing Activities (3,963) 1,136
------- -------
Increase (decrease) in cash and cash equivalents 686 (24)
Cash and cash equivalents, beginning of period 150 183
------- -------
Cash and cash equivalents, end of period $ 836 $ 159
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Taxes $ 86 $ 11
======= =======
Interest $ 540 $ 1,001
======= =======
Non cash investing activities:
Common stock issued for acquisition of business $ 84 $ -
======= =======
Stock options issued for acquisition of business $ 384 $ -
======= =======
See accompanying notes to condensed consolidated financial statements.
5
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six Months Ended December 31, 2002 and December 31, 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 and six months ended December 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending June 30, 2003
("fiscal 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 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 for the quarter and six months ended December 31, 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 quarter and the
six months ended December 31, 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
currently expect that the adoption of SFAS No. 146 will have a material impact
on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
amendments to Statement 123 contained in SFAS No. 148 are effective for
financial statements for fiscal years ending after December 15, 2002. The
amendment to Statement 123 and the amendment to Opinion 28 contained in SFAS No.
148 are effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. The Company
will include the required disclosures in its interim financial statements for
the quarter ending March 31, 2003.
7
BERNARD CHAUS, INC. AND SUBSIDIARIES
2. Inventories
Inventories consisted of the following: (in thousands)
Dec. 31, June 30, Dec. 31,
2002 2002 2001
----------- ----------- -----------
(unaudited) (unaudited)
Raw materials $ 445 $ 20 $ --
Work-in-process 330 -- --
Finished goods 9,274 8,030 12,928
------- ------ -------
Total $10,049 $8,050 $12,928
======= ====== =======
Inventories 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 $6.5 million at December 31, 2002, $6.7 million at June 30, 2002
and $9.3 million at December 31, 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 fiscal 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 fiscal 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 December 31, 2002 on the Revolving Facility was 4.75%
and on the Term Loan was 5.25%.
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
8
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 (described below), 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 though 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 November 27, 2002, the Company and CIT agreed to an amendment to the
original Financing Agreement in order to facilitate the S.L. Danielle
acquisition discussed below. The Company and CIT agreed to add the Company's
newly formed wholly-owned subsidiary, S.L. Danielle Acquisition, LLC (the
"Additional Borrower"), as a co-borrower under the Financing Agreement and
related factoring agreement. Accordingly, the Company and CIT (i) amended the
Financing Agreement pursuant to a joinder agreement, which also constitutes
Amendment No. 1 to the Financing Agreement (the "Amended Financing Agreement")
and (ii) entered into a new factoring agreement with the Additional Borrower, to
add the Additional Borrower as a co-borrower. The Company's and the Additional
Borrower's obligations under the Amended Financing Agreement are secured by a
first priority lien on substantially all of the Company's and the Additional
Borrower's assets, including the Company's and the Additional Borrower's
accounts receivable, inventory, intangibles, equipment, trademarks and a pledge
of the Company's stock interest and membership interest in the Company's
subsidiaries, including the Additional Borrower.
On December 31, 2002, the Company had $9.3 million of outstanding letters
of credit under the Revolving Facility, total availability of approximately $8.8
million under the new Financing Agreement and no revolving credit borrowings. At
December 31, 2001, the Company had $14.2 million of outstanding letters of
credit, total availability of approximately $0.6 million and borrowings of $6.7
million, in each case, under the Former Revolving Facility.
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
9
BERNARD CHAUS, INC. AND SUBSIDIARIES
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.
4. S.L. Danielle Acquisition
On November 27, 2002, S.L. Danielle Acquisition, LLC ("S.L. Danielle"), a
newly formed subsidiary of the Company acquired certain assets of S.L. Danielle
Inc. The results of S.L. Danielle's operations have been included in the
consolidated financial statements since that date. S.L. Danielle designs,
arranges for the manufacture of, markets and sells a women's apparel line,
principally under private labels. As a result of the acquisition, the Company
expects to increase its sales volume through the sale of S.L. Danielle products
assuming it can maintain existing customers for such lines and/or obtain new
customer relationships for such products.
The aggregate purchase price was approximately $5.1 million, including cash
of $4.3 million, 100,000 shares of common stock of the Company valued at $84,000
and stock options to purchase 500,000 shares of common stock of the Company
valued at $384,000 and transaction costs of approximately $250,000. The
acquisition was funded by CIT through revolving credit borrowings of $4.6
million. The value of the 100,000 shares of common stock of the Company was
determined based on the average market price of the Company's common stock over
the 3-day period before and after the date of the acquisition. The 500,000 stock
options were granted at the fair market value on the date of the acquisition and
were valued using the Black-Scholes option price model.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. The Company is in
the process of finalizing the purchase price allocation including the fair value
of assets acquired.
At November 27, 2002
(in thousands)
-------------
Current assets $3,669
Property, plant, and equipment 16
Intangible assets 90
Goodwill 1,270
------
Total Assets acquired $5,045
======
10
BERNARD CHAUS, INC. AND SUBSIDIARIES
The following unaudited pro forma information presents financial
information of the Company as though the acquisition had been completed as of
the beginning of each of the periods set forth below.
For the Quarter Ended For the Six Months Ended
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
(In thousands except per share amounts)
Net sales $33,074 $33,199 $72,211 $76,643
Net income (loss) 666 (5,195) 2,553 (5,639)
Basic income (loss) per share $ 0.02 $ (0.19) $ 0.09 $ (0.21)
Diluted income (loss) per share $ 0.02 $ (0.19) $ 0.09 $ (0.21)
5. 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 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.
11
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 December 31, 2002 increased by 3 % or $.9
million to $30.9 million from $30.0 million for the quarter ended December 31,
2001. Net sales for the six months ended December 31, 2002 decreased by 5.3% or
$3.7 million to $65.7 million from $69.4 million for the six months ended
December 31, 2001. The increase in net sales for the quarter was due to the
one-month contribution from the Company's recent acquisition of certain assets
of S.L. Danielle. The decrease in net sales for the six months ended December
31, 2002 was primarily due to a decrease in the average selling price of 7.5% as
a result of the product mix and lower standard selling prices, partially offset
by an increase of 2.2% in number of units shipped. The Company was able to lower
its standard selling price 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 December 31, 2002 increased $5.2 million
to $8.2 million as compared to $3.0 million for the quarter ended December 31,
2001. As a percentage of net sales, gross profit increased to 26.6% for the
quarter ended December 31, 2002 from 10.0% for the quarter ended December 31,
2001. Gross profit for the six months ended December 31, 2002 increased $6.5
million to $17.7 million as compared to $11.2 million for the six months ended
December 31, 2001. As a percentage of net sales, gross profit increased to 26.9%
for the six months ended December 31, 2002 from 16.2% for the six months ended
December 31, 2001. The increase in gross profit and gross profit percentage for
the quarter and the six months was primarily a result of lower sales discounts
which was made possible by tighter inventory management. The increase in gross
profit was also due to an increase in the initial markup.
Selling, general and administrative ("SG&A") expenses decreased by $.6
million to $7.2 million for the quarter ended December 31, 2002 from $7.8
million for the quarter ended December 31, 2001. The decrease was primarily due
to a decrease in payroll and payroll related expenses ($0.6 million). SG&A
expenses as a percentage of net sales decreased to 23.2% for the quarter ended
December 31, 2002 compared to 26.0% for the quarter ended December 31, 2001. The
decrease in SG&A expense as a percentage of net sales was due primarily to the
Company's cost savings initiatives commenced during the second quarter of fiscal
2002.
SG&A for the six months ended December 31, 2002 decreased by $1.3 million
to $14.7 million from $16.0 million for the six months ended December 31, 2001.
The decrease was primarily due to a decrease in payroll and payroll related
expenses ($1.5 million) partially offset by a write-off of store fixtures ($0.2
million). SG&A expenses as a percentage of net sales decreased to 22.4% for the
six months ended December 31, 2002 compared to 23.1% for the six months ended
December 31, 2001. The decrease in SG&A expense as a percentage of net sales was
primarily due to the Company's cost savings initiatives commenced during the
second quarter of fiscal 2002.
Interest expense was lower for fiscal 2003 as compared to fiscal 2002 due
to decreased revolving credit borrowings and lower interest rates.
The provisions for income taxes for the quarters and six months ended
December 31, 2002 and 2001 reflect a provision for state and local taxes. New
Jersey and California enacted new tax legislation temporarily suspending the use
of net operating loss (NOL) carryforwards against income. Accordingly, for
fiscal year 2003, the Company has provided additional state income taxes. See
discussion below under Critical Accounting Policies and Estimates regarding
income taxes and the Company's federal net operating loss carryforward.
12
BERNARD CHAUS, INC. AND SUBSIDIARIES
Financial Position, Liquidity and Capital Resources
- ---------------------------------------------------
General
Net cash provided by operating activities was $9.4 million for the six
months ended December 31, 2002 as compared to cash used in operating activities
of $.7 million for the six months ended December 31, 2001. Cash provided by
operating activities for such six month period of fiscal 2003 was primarily the
result of the net income ($2.1 million), decrease in accounts receivable ($3.9
million), increase in accrued expenses and deferred rent ($1.5 million).
Cash used in investing activities in the six months ended December 31, 2002
was $4.7 million compared to $0.5 million in the previous year. The investing
activities for the six months ended December 31, 2002 consisted of $4.6 million
for the acquisition of S.L. Danielle (discussed below) and $.1 million for
capital expenditures of fixed assets. The Company anticipates additional capital
expenditures of approximately $0.5 million for the remainder of fiscal year
2003. Investing activities for the six months ended December 31, 2001 consisted
of $0.3 million for in-store shops and $0.2 for leasehold improvements and
management information system upgrades.
Net cash used in financing activities was $4.0 million for the six months
ended December 31, 2002 as the result of repayment of short-term borrowings of
$3.6 million and principal payments on the Term Loan (as defined below) of
$375,000. Net cash provided by financing activities for the six months ended
December 31, 2001 was $1.1 million primarily as the result of net proceeds from
short-term borrowing of $1.6 million partially offset by principal payments on
the Term Loan of $500,000.
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 fiscal 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 fiscal 2003
financials to the Lender, based upon the Company's availability under the
Revolving Facility and certain fixed
13
BERNARD CHAUS, INC. AND SUBSIDIARIES
charge coverage ratios and leverage ratios. The interest rate as of December 31,
2002 on the Revolving Facility was 4.75% and on the Term Loan was 5.25%.
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 as described below, 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 though 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 November 27, 2002, the Company and CIT agreed to an amendment to the
original Financing Agreement in order to facilitate the S.L. Danielle
acquisition discussed below. The Company and CIT agreed to add the Company's
newly formed wholly-owned subsidiary, S.L. Danielle Acquisition, LLC (the
"Additional Borrower"), as a co-borrower under the Financing Agreement and
related factoring agreement. Accordingly, the Company and CIT (i) amended the
Financing Agreement pursuant to a joinder agreement, which also constitutes
Amendment No. 1 to the Financing Agreement (the "Amended Financing Agreement")
and (ii) entered into a new factoring agreement with the Additional Borrower, to
add the Additional Borrower as a co-borrower. The
14
BERNARD CHAUS, INC. AND SUBSIDIARIES
Company's and the Additional Borrower's obligations under the Amended Financing
Agreement are secured by a first priority lien on substantially all of the
Company's and the Additional Borrower's assets, including the Company's and the
Additional Borrower's accounts receivable, inventory, intangibles, equipment,
trademarks and a pledge of the Company's stock interest and membership interest
in the Company's subsidiaries, including the Additional Borrower.
On December 31, 2002, the Company had $9.3 million of outstanding letters
of credit under the Revolving Facility, total availability of approximately $8.8
million under the new Financing Agreement and no revolving credit borrowings. At
December 31, 2001, the Company had $14.2 million of outstanding letters of
credit, total availability of approximately $0.6 million and borrowings of $6.7
million, in each case, under the Former Revolving Facility.
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 December 31, 2002, the Company had working capital of $13.9 million as
compared with working capital of $9.0 million at December 31, 2001. The Company
had net cash of $0.8 million and outstanding letters of credit of $9.3 million
at December 31, 2002 as compared with revolving credit borrowings of $6.7
million and outstanding letter of credit of $ 14.2 million at December 31, 2001.
The decrease in revolving credit borrowings was primarily a result of the
Company's net income of $5.8 million during the past twelve months and reduced
accounts receivable position. 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.
15
BERNARD CHAUS, INC. AND SUBSIDIARIES
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.
S.L. Danielle Acquisition
On November 27, 2002, S.L. Danielle Acquisition, LLC ("S.L. Danielle"), a
newly formed subsidiary of the Company acquired certain assets of S.L. Danielle
Inc. The results of S.L. Danielle's operations have been included in the
consolidated financial statements since that date. S.L. Danielle designs,
arranges for the manufacture of, markets and sells a women's apparel line,
principally under private labels. As a result of the acquisition, the Company
expects to increase its sales volume through the sale of S.L. Danielle products
assuming it can maintain existing customers for such lines and/or obtain new
customer relationships for such products.
The aggregate purchase price was approximately $5.1 million, including cash
of $4.3 million, 100,000 shares of common stock of the Company valued at $84,000
and stock options to purchase 500,000 shares of common stock of the Company
valued at $384,000 and transaction costs of approximately $250,000. The
acquisition was funded by CIT through revolving credit borrowings of $4.6
million. The value of the 100,000 shares of common stock of the Company was
determined based on the average market price of the Company's common stock over
the 3-day period before and after the date of the acquisition. The 500,000 stock
options were granted at the fair market value on the date of the acquisition and
were valued using the Black-Scholes option price model.
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 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
16
BERNARD CHAUS, INC. AND SUBSIDIARIES
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.
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
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
17
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 currently expect that the adoption of SFAS No. 146 will have a
material impact on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
amendments to Statement 123 contained in SFAS No. 148 are effective for
financial statements for fiscal years ending after December 15, 2002. The
amendment to Statement 123 and the amendment to Opinion 28 contained in SFAS No.
148 are effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. The Company
will include the required disclosures in its interim financial statements for
the quarter ending March 31, 2003.
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 and risk of loss 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. Accounts receivable reserves were $1.5
million and $1.1 million at December 31, 2002 and 2001, respectively. The
increase in accounts receivable reserves was due to an increase in accrued
markdown allowances and the reserve associated with S.L. Danielle's accounts
receivable.
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. Inventory reserves were $0.5 million and $0.9 million at December 31,
2002 and 2001, respectively. The decrease in inventory reserves was due to a
reduction in current season inventory and in slow moving and aged merchandise as
compared to last year. 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.
18
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 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, we have not recognized any of this
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 are
described in "Liquidity and Capital Resources", and in 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 December 31, 2002 and 2001, the carrying amounts of the Company's
revolving credit borrowings and term loan approximated fair value. As of
December 31, 2002, the Company's revolving credit borrowings under the Financing
Agreement bore interest at 4.75%. As of December 31, 2002, the Company's Term
Loan bore interest at 5.25%. Under the Financing Agreement, as of December 31,
2002, a hypothetical immediate 10% adverse change in prime interest rates
relating to our revolving credit borrowings and term loan would have a $0.1
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.
19
BERNARD CHAUS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of Stockholders of the Company was held on
November 13, 2002 at 9:00 a.m.
(c) At such meeting, the Stockholders voted on three matters:
Matter: The election of five directors of the Company to serve until the
next Annual Meeting of Stockholders and until their respective
successors have been elected and qualified.
Number of Shares
For Abstain
Philip G. Barach 26,501,196 247,339
Josephine Chaus 26,506,949 241,586
Nicholas DiPaolo 26,504,920 243,615
S. Lee Kling 26,506,632 241,903
Harvey M. Krueger 26,500,025 248,510
Matter: The approval of the amendment to the Company's Stock Option Plan
to provide for an automatic annual grant of 10,000 option shares
to each of the non-employee directors of the Company.
Number of Shares
For Against Abstain Broker Non-Votes
26,232,540 436,101 79,893 473,473
Matter: The ratification of the appointment of Deloitte & Touche LLP
as auditors of the Company to serve for the fiscal year ending
June 30, 2003.
Number of Shares
For Against Abstain Broker Non-Votes
26,689,576 54,393 4,565 473,473
20
BERNARD CHAUS, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
Exhibits.
*10.102 Joinder and Amendment No. 1 to Financing Agreement by and
among the Company, S.L. Danielle and The CIT
Group/Commercial Services, Inc., as agent, dated November
27, 2002.
*10.103 Amendment No. 1 to Factoring Agreement between the Company
and The CIT Group/Commercial Services, Inc. dated November
27, 2002.*
*10.104 Factoring Agreement between S.L. Danielle and The CIT
Group/Commercial Services, Inc., dated November 27, 2002.
*10.105 Asset Purchase Agreement between S.L. Danielle and S.L.
Danielle, Inc., dated November 27, 2002.
*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.
* Filed herewith
(b) The Company filed no reports on Form 8-K during the quarter
ended December 31, 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: February 13, 2003 By: /s/ Josephine Chaus
------------------------------------
JOSEPHINE CHAUS
Chairwoman of the Board, and
Chief Executive Officer
Date: February 13, 2003 By: /s/ Nicholas DiPaolo
------------------------------------
NICHOLAS DIPAOLO
Vice Chairman of the Board, and
Chief Operating Officer
Date: February 13, 2003 By: /s/ Barton Heminover
------------------------------------
BARTON HEMINOVER
Chief Financial Officer
21
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 December 31, 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.
February 13, 2003
/s/ Josephine Chaus
--------------------------------
Josephine Chaus
Chairwoman of the Board and
Chief Executive Officer
22
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 December 31, 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.
February 13, 2003
/s/ Barton Heminover
------------------------------
Barton Heminover
Chief Financial Officer
23
BERNARD CHAUS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT TITLE
-------------- -------------
10.102 Joinder and Amendment No. 1 to Financing Agreement by and
among the Company, S.L. Danielle and The CIT
Group/Commercial Services, Inc., as agent, dated November
27, 2002.
10.103 Amendment No. 1 to Factoring Agreement between the Company
and The CIT Group/Commercial Services, Inc. dated November
27, 2002.*
10.104 Factoring Agreement between S.L. Danielle and The CIT
Group/Commercial Services, Inc., dated November 27, 2002.
10.105 Asset Purchase Agreement between S.L. Danielle and S.L.
Danielle, Inc., dated November 27, 2002.
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
24