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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 March 31, 2003.
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
---- ----- ------------------
May 9, 2003 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
March 31, 2003, June 30, 2002 and
March 31, 2002 3
Condensed Consolidated Statements of Operations for the
Quarters and Nine Months ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended March 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 24
CERTIFICATIONS 25
INDEX TO EXHIBITS 27
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)
March 31, June 30, March 31,
2003 2002 2002
-------------- -------------- --------------
(Unaudited) ( * ) (Unaudited)
ASSETS
Current Assets
Cash $ 166 $ 150 $ 163
Accounts receivable - net 32,933 20,586 36,611
Inventories - net 11,717 8,050 11,499
Prepaid expenses and other current assets 722 1,331 994
-------------- -------------- --------------
Total current assets 45,538 30,117 49,267
Fixed assets - net 3,943 4,465 4,657
Other assets - net 723 1,109 1,274
Goodwill 1,421 -- --
-------------- -------------- --------------
Total assets $ 51,625 $ 35,691 $ 55,198
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving credit borrowings $ 11,234 $ 3,591 $ 18,567
Accounts payable 13,340 9,749 15,694
Accrued expenses 3,943 3,248 3,111
Term loan - current 1,500 1,125 1,000
-------------- -------------- --------------
Total current liabilities 30,017 17,713 38,372
Deferred rent 437 390 374
Term loan 8,250 9,375 9,750
-------------- -------------- --------------
Total liabilities 38,704 27,478 48,496
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 March 31, 2003 and 27,278,177
at June 30, 2002 and March 31, 2002
Additional paid-in capital 125,943 125,473 125,473
Deficit (111,574) (115,811) (117,753)
Accumulated other comprehensive loss (242) (242) 189
Less: Treasury stock at cost -
62,270 shares at March 31, 2003, June
30, 2002 and March 31, 2002 (1,480) (1,480) (1,480)
-------------- -------------- --------------
Total stockholders' equity 12,921 8,213 6,702
-------------- -------------- --------------
Total liabilities and stockholders' equity $ 51,625 $ 35,691 $ 55,198
============== ============== ==============
*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 Nine Months Ended
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Net sales $ 40,983 $ 43,617 $ 106,653 $ 113,039
Cost of goods sold 30,624 34,312 78,635 92,504
------------ ------------ ------------ ------------
Gross profit 10,359 9,305 28,018 20,535
Selling, general and administrative expenses 7,795 7,107 22,497 23,139
------------ ------------ ------------ ------------
Income (loss) from operations 2,564 2,198 5,521 (2,604)
Interest expense, net 297 441 937 1,553
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes 2,267 1,757 4,584 (4,157)
Provision for income taxes 173 3 347 9
------------ ------------ ------------ ------------
Net income (loss) $ 2,094 $ 1,754 $ 4,237 $ (4,166)
============ ============ ============ ============
Basic earnings (loss) per share $ 0.08 $ 0.06 $ 0.16 $ (0.15)
============ ============ ============ ============
Diluted earnings (loss) per share $ 0.07 $ 0.06 $ 0.14 $ (0.15)
============ ============ ============ ============
Weighted average number of common
shares outstanding - basic 27,322,000 27,216,000 27,265,000 27,216,000
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding - diluted 30,145,000 27,896,000 29,804,000 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 Nine Months Ended
--------------------------------
March 31, March 31,
2003 2002
-------------- --------------
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ 4,237 $ (4,166)
Adjustments to reconcile net income (loss) to net cash (used in)
operating activities:
Depreciation and amortization 1,158 1,139
Loss on asset disposal 243 --
Provision for losses on accounts receivable -- 56
Changes in operating assets and liabilities:
Accounts receivable (10,948) (12,979)
Inventories (1,476) 2,083
Prepaid expenses and other assets 453 225
Accounts payable 3,591 2,178
Accrued expenses and deferred rent 742 (591)
-------------- --------------
Net Cash Used In Operating Activities (2,000) (12,055)
-------------- --------------
INVESTING ACTIVITIES
Acquisition of business (4,669) --
Purchases of fixed assets (211) (320)
Purchases of other assets -- (438)
-------------- --------------
Net Cash Used In Investing Activities (4,880) (758)
-------------- --------------
FINANCING ACTIVITIES
Net proceeds on short-term bank borrowings 7,643 13,543
Principal payments on term loan (750) (750)
Net proceeds from issuance of stock 3 --
-------------- --------------
Net Cash Provided By Financing Activities 6,896 12,793
-------------- --------------
Increase (decrease) in cash and cash equivalents 16 (20)
Cash and cash equivalents, beginning of period 150 183
-------------- --------------
Cash and cash equivalents, end of period $ 166 $ 163
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Taxes $ 136 $ 16
============== ==============
Interest $ 752 $ 1,363
============== ==============
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)
Nine Months Ended March 31, 2003 and March 31, 2002
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 nine months ended March 31, 2003 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.
Stock-based Compensation: The Company has a Stock Option Plan and accounts
for the plan under the recognition and measurement principles of APB 25,
"Accounting for Sock Issued to Employees", and related interpretations. No
stock-based employee compensation cost is reflected in net income, as options
granted under the plan had an exercise price equal to the market value of the
underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation:
For the Quarter Ended For the Nine Months Ended
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
(In thousands except per share amounts)
Net income (loss), as reported $ 2,094 $ 1,754 $ 4,237 $ (4,166)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method,
net of tax effects (118) (211) (428) (693)
------------ ------------ ------------ ------------
Proforma net income (loss) $ 1,976 $ 1,543 $ 3,809 $ (4,859)
============ ============ ============ ============
6
BERNARD CHAUS, INC. AND SUBSIDIARIES
Earnings (loss) per share:
Basic-as reported $ 0.08 $ 0.06 $ 0.16 $ (0.15)
============ ============ ============ ============
Basic-proforma $ 0.07 $ 0.06 $ 0.14 $ (0.18)
============ ============ ============ ============
Diluted-as reported $ 0.07 $ 0.06 $ 0.14 $ (0.15)
============ ============ ============ ============
Diluted-proforma $ 0.07 $ 0.06 $ 0.13 $ (0.18)
============ ============ ============ ============
The following assumptions were used in the Black Scholes option pricing model
that was utilized to determine stock-based employee compensation expense under
the fair value based method:
For the Quarter For the Quarter For the Nine For the Nine
Ended Ended Months Ended Months Ended
March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002
-------------- -------------- -------------- --------------
Weighted average fair value of
stock options granted * * $0.73 $0.42
Risk-free Interest rate * * 3.92% 3.36%
Expected dividend yield * * $0.00 $0.00
Expected life of option * * 5.5 years 2.5 years
Expected volatility * * 188% 181%
*No option activity occurred for the quarter ended March 31, 2003 and March 31,
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 the nine months ended March 31, 2003 and for the
quarter ended March 31, 2002 by dividing the applicable net income by the
weighted average number of common shares outstanding and common equivalents.
Potentially dilutive shares of 631,579 were not included in the calculation of
diluted loss per share for the nine months ended March 31, 2002, as their
inclusion would have been antidilutive.
For the Quarter Ended For the Nine Months Ended
March 31, March 31, March 31, March 31,
Denominator for Earnings per share (in millions) 2003 2002 2003 2002
------------ ------------ ------------ ------------
Denominator for basic earnings per share 27.3 27.2 27.3 27.2
daily weighted-average shares outstanding)
Assumed exercise of potential common shares 2.8 .7 2.5 --
------------ ------------ ------------ ------------
Denominator for diluted earnings per share 30.1 27.9 29.8 27.2
============ ============ ============ ============
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
7
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 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 adoption of SFAS No.
146 did not have an impact on the 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
8
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 adopted the disclosure requirements of SFAS
No. 148.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the
recognition of liabilities for guarantees that are issued or modified subsequent
to December 31, 2002. The liabilities should reflect the fair value, at
inception, of the guarantors' obligations. The adoption of FIN 45 did not have
an impact on the consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse the risks and rewards of ownership among
their owners and other parties involved. The provisions of FIN 46 are applicable
immediately to all variable interest entities created after January 31, 2003 and
variable interest entities in which an enterprise obtains an interest in after
that date, and for variable interest entities created before this date, the
provisions are effective July 1, 2003. The adoption of FIN 46 did not have an
impact on the consolidated financial statements as the Company does not have
interests in variable interest entities.
2. Inventories - net
Inventories consisted of the following: (in thousands)
March 31, June 30, March 31,
2003 2002 2002
-------- -------- --------
(unaudited) (unaudited)
Raw materials $ 306 $ 65 $ 125
Work-in-process 200 -- --
Finished goods 11,809 8,533 12,369
Inventory reserves (598) (548) (995)
-------- -------- --------
Total $ 11,717 $ 8,050 $ 11,499
======== ======== ========
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 $6.6 million at March 31, 2003, $6.7 million at June 30, 2002 and
$7.7 million at March 31, 2002.
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").
9
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 March 31, 2003 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. The Company is
in compliance with all covenants at March 31, 2003. 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
10
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 March 31, 2003, the Company had $12.4 million of outstanding letters of
credit under the Revolving Facility, total availability of approximately $9.5
million under the new Financing Agreement and $11.2 in revolving credit
borrowings. At March 31, 2002, the Company had $15.0 million of outstanding
letters of credit, total availability of approximately $1.0 million and
borrowings of $18.6 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.
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,
11
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 $4.4 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. The final allocation could differ from the estimated fair
value.
At November 27, 2002
(in thousands)
Current assets $ 3,590
Property, plant, and equipment 36
Intangible assets 90
Goodwill 1,421
-----------------
Total Assets acquired $ 5,137
=================
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 Nine Months Ended
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
----------------------------------- ------------------------------------
(Unaudited) (Unaudited)
(In thousands except per share amounts)
Net sales $ 40,983 $ 48,395 $ 113,557 $ 125,038
Net income (loss) 2,094 2,052 4,647 (3,587)
Basic income (loss) per share 0.08 0.08 0.17 (0.13)
Diluted income (loss) per share 0.07 0.07 0.16 (0.13)
12
BERNARD CHAUS, INC. AND SUBSIDIARIES
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.
Information regarding the Company's stock options is summarized below:
Stock Options
--------------------------------------------------------------------
Weighted Average
Number Exercise Exercise Price
of Shares Price Range
----------------- -------------------------- -----------------
Outstanding at March 31, 2002 5,254,901 $ .38 - $ 3.50 $ .44
Options granted - $ - $ -
Options canceled (23,917) $ .50 - $ 0.50 $ .50
-----------------
Outstanding at June 30, 2002 5,230,984 $ .38 - $ 3.50 $ .44
Options granted 910,000 $ .75 - $ .84 $ .81
Options canceled (15,290) $ .50 - $ .75 $ .75
Options exercised (6,100) $ .50 - $ .50 $ .50
-----------------
Oustanding at March 31, 2003 6,119,594 $ .38 - $ 3.50 $ .49
================= ========================== =================
13
BERNARD CHAUS, INC. AND SUBSIDIARIES
The following table summarizes information about the Company's outstanding and
exercisable stock options at March 31, 2003:
Outstanding Exercisable
---------------------------------------------- ----------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Shares Life (Yrs.) Price Shares Price
- -------------------------------------------------------------------------------- ----------------------------------
$0.38 3,000,000 2.59 $0.38 2,000,000 $0.38
$0.50 2,189,594 7.57 $0.50 1,153,416 $0.50
$0.69 10,000 7.25 $0.69 5,000 $0.69
$0.75 345,000 9.41 $0.75 - $ -
$0.84 550,000 5.11 $0.84 - $ -
$3.00 10,000 6.25 $3.00 7,500 $3.00
$3.11 10,000 4.90 $3.11 10,000 $3.11
$3.50 5,000 5.25 $3.50 5,000 $3.50
- -------------------------------------------------------------------------------- ----------------------------------
6,119,594 5.00 $.49 3,180,916 $0.44
- -------------------------------------------------------------------------------- ----------------------------------
The outstanding stock options have a weighted average contractual life of
5.0 years and 5.7 years as of March 31, 2003 and 2002, respectively. The number
of stock options exercisable at March 31, 2003, June 30, 2002 and March 31, 2002
were 3,180,916, 1,321,250, and 1,321,250, respectively.
14
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 March 31, 2003 decreased by 6.0 % or $2.6
million to $41.0 million from $43.6 million for the quarter ended March 31,
2002. The decrease in net sales for the quarter was primarily due to a decrease
in sales for the Chaus product lines partially offset by sales from the
Company's recently acquired S.L. Danielle product lines. The decrease in net
sales for the Chaus product lines was primarily due to a decrease in number of
units shipped.
Net sales for the nine months ended March 31, 2003 decreased by 6.0% or
$6.3 million to $106.7 million from $113.0 million for the nine months ended
March 31, 2002. The decrease in net sales for the nine months ended March 31,
2003 was due to the decrease in sales for the Chaus product lines partially
offset by sales from the Company's recently acquired S.L. Danielle product
lines. The decrease in net sales for the Chaus product lines was due to a 6.9%
decrease in number of units shipped and a 3.2% decrease in the average selling
price as a result of the product mix and lower standard selling prices. 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 March 31, 2003 increased $1.1million to
$10.4 million as compared to $9.3 million for the quarter ended March 31, 2002.
As a percentage of net sales, gross profit increased to 25.3% for the quarter
ended March 31, 2003 from 21.3% for the quarter ended March 31, 2002. The
increase in gross profit dollars was primarily due to the gross profit from the
Company's recently acquired S.L. Danielle product lines and lower sales
discounts and higher initial markup in the Chaus product lines. The increase in
gross profit as a percentage of sales was primarily due to lower sales discounts
for the Chaus product lines, which was made possible by tighter inventory
management and in addition to an increase in the initial markup.
Gross profit for the nine months ended March 31, 2003 increased $7.5
million to $28.0 million as compared to $20.5 million for the nine months ended
March 31, 2002. As a percentage of net sales, gross profit increased to 26.3%
for the nine months ended March 31, 2003 from 18.2% for the nine months ended
March 31, 2002. The increase in gross profit dollars and gross profit percentage
for the nine months was primarily a result of lower sales discounts for the
Chaus product lines, which was made possible by tighter inventory management and
in addition to an increase in the initial markup.
Selling, general and administrative ("SG&A") expenses increased by $.7
million to $7.8 million for the quarter ended March 31, 2003 from $7.1 million
for the quarter ended March 31, 2002. The increase was primarily due to SG&A
expenses related to the Company's recently acquired S.L. Danielle product lines.
SG&A expenses as a percentage of net sales increased to 19.0% for the quarter
ended March 31, 2003 compared to 16.3% for the quarter ended March 31, 2002. The
increase in SG&A expense as a percentage of net sales was due to the decrease in
sales volume, which reduced the Company's leverage on SG&A expenses.
SG&A for the nine months ended March 31, 2003 decreased by $.6 million to
$22.5 million from $23.1 million for the nine months ended March 31, 2002. The
decrease was primarily due to a decrease in payroll and payroll related expenses
associated with the Company's Chaus product lines ($1.3 million) partially
offset by SG&A expenses related to the Company's recently acquired S.L. Danielle
product lines. SG&A expenses as a percentage of net sales increased to 21.1% for
the nine months ended March 31, 2003 compared to 20.5% for the nine months ended
March 31, 2002. The increase in SG&A expense as a percentage of net sales was
due to the
15
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 provisions for income taxes for the quarters and nine months ended
March 31, 2003 and 2002 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 made provisions for 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.
Financial Position, Liquidity and Capital Resources
- ---------------------------------------------------
General
Net cash used in operating activities was $2.0 million for the nine months
ended March 31, 2003 as compared to cash used in operating activities of $12.1
million for the nine months ended March 31, 2002. Cash used in operating
activities for such nine month period of fiscal 2003 was primarily the result of
an increase in accounts receivable ($10.9 million), increase in inventories
($1.5 million) partially offset by net income ($4.2 million), and an increase in
accounts payable ($3.5 million).
Cash used in investing activities in the nine months ended March 31, 2003
was $4.9 million compared to $0.8 million in the previous year. The investing
activities for the nine months ended March 31, 2003 consisted of $4.7 million
for the acquisition of S.L. Danielle (discussed below) and $.2 million for
capital expenditures of fixed assets. The Company anticipates additional capital
expenditures of approximately $0.2 million for the remainder of fiscal year
2003. Investing activities for the nine months ended March 31, 2002 consisted of
$0.4 million for in-store shops and $0.3 million for leasehold improvements and
management information system upgrades.
Net cash provided by financing activities was $6.9 million for the nine
months ended March 31, 2003 as the result of net proceeds from short-term
borrowing of $7.6 million partially offset by principal payments on the Term
Loan (as defined below) of $0.8 million. Net cash provided by financing
activities was $12.8 million for the nine months ended March 31, 2002 as the
result of net proceeds from short-term borrowing of $13.5 million partially
offset by principal payments on the Former Term Loan of $0.8 million.
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
16
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 March 31, 2003 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. The Company is
in compliance with all covenants at March 31, 2003. 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.
17
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 March 31, 2003, the Company had $12.4 million of outstanding letters of
credit under the Revolving Facility, total availability of approximately $9.5
million under the new Financing Agreement and $11.2 in revolving credit
borrowings. At March 31, 2002, the Company had $15.0 million of outstanding
letters of credit, total availability of approximately $1.0 million and
borrowings of $18.6 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 March 31, 2003, the Company had working capital of $15.5 million as
compared with working capital of $10.9 million at March 31, 2002. The Company
had borrowings of $11.2 million and outstanding letters of credit of $12.4
million at March 31, 2003 as compared with revolving credit borrowings of $18.6
million and outstanding letter of credit of $ 15.0 million at March 31, 2002.
The decrease in revolving credit borrowings was primarily a result of the
Company's net income of $6.2 million during the past twelve months. 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
18
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 including the products of S.L.
Danielle.
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 $4.4 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
19
BERNARD CHAUS, INC. AND SUBSIDIARIES
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.
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
20
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 adoption of SFAS No. 146 did not have an impact on
the 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
adopted the disclosure requirements of SFAS No. 148.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the
recognition of liabilities for guarantees that are issued or modified subsequent
to December 31, 2002. The liabilities should reflect the fair value, at
inception, of the guarantors' obligations. The adoption of FIN 45 did not have
an impact on the consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse the risks and rewards of ownership among
their owners and other parties involved. The provisions of FIN 46 are applicable
immediately to all variable interest entities created after January 31, 2003 and
variable interest entities in which an enterprise obtains an interest in after
that date, and for variable interest entities created before this date, the
provisions are effective July 1, 2003. The adoption of FIN 46 did not have an
impact on the consolidated financial statements as the Company does not have
interests in variable interest entities.
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
21
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 $1.4 million and $0.9 million at
March 31, 2003 and 2002, 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 $0.6 million and $1.0 million at March 31, 2003
and 2002, respectively. The decrease in inventory reserves was due to a
reduction 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.
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 March 31, 2003 and 2002, the carrying amounts of the Company's revolving
credit borrowings and term loan approximated fair value. As of March 31, 2003,
the Company's revolving credit borrowings under the Financing Agreement bore
interest at 4.75%. As of March 31, 2003, the Company's Term Loan bore interest
at 5.25%. Under the Financing Agreement, as of March 31, 2003, a hypothetical
immediate 10% adverse change in
22
BERNARD CHAUS, INC. AND SUBSIDIARIES
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.
23
BERNARD CHAUS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
Exhibits.
*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
March 31, 2003.
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: May 9, 2003 By: /s/ Josephine Chaus
--------------------
JOSEPHINE CHAUS
Chairwoman of the Board,and
Chief Executive Officer
Date: May 9, 2003 By: /s/ Nicholas DiPaolo
---------------------
NICHOLAS DIPAOLO
Vice Chairman of the Board, and
Chief Operating Officer
Date: May 9, 2003 By: /s/ Barton Heminover
---------------------
BARTON HEMINOVER
Chief Financial Officer
24
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 March 31, 2003 (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.
May 9, 2003
/s/ Josephine Chaus
-----------------------------------
Josephine Chaus
Chairwoman of the Board and Chief Executive Officer
25
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 March 31, 2003 (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.
May 9, 2003
/s/ Barton Heminover
------------------------------------
Barton Heminover
Chief Financial Officer
26
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
27