Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 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 Identification No.)
incorporation or organization)
530 Seventh Avenue, New York, New York 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(212) 354-1280
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.01 par value None; securities quoted on the Over the Counter
Bulletin Board
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) Yes No X
The aggregate market value of the voting stock held by non-affiliates
of the registrant on August 26, 2003 was $10,168,000
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Date Class Shares Outstanding
---- ----- ------------------
August 26, 2003 Common Stock, $0.01 par value 27,322,007
LOCATION IN FORM 10-K IN
DOCUMENTS INCORPORATED BY REFERENCE WHICH INCORPORATED
----------------------------------- ------------------
Portions of registrant's Proxy Statement for the Annual Part III
Meeting of Stockholders to be held November 12, 2003.
PART I
ITEM 1. BUSINESS.
GENERAL
Bernard Chaus, Inc. (the "Company" or "Chaus") designs, arranges for
the manufacture of and markets an extensive range of women's career and casual
sportswear principally under the JOSEPHINE CHAUS(R) COLLECTION, and JOSEPHINE
CHAUS(R) SPORT trademarks and under private label brands names. The Company's
products are sold nationwide through department store chains, specialty
retailers and other retail outlets. The Company has positioned its JOSEPHINE
CHAUS product line into the opening price points of the "better" category. In
December 2002, the Company acquired certain assets of S.L. Danielle, Inc. ("SL
Danielle"). SL Danielle designs, arranges for the manufacture of and markets
women's moderately priced private label clothing. As used herein, fiscal 2003
refers to the fiscal year ended June 30, 2003, fiscal 2002 refers to the fiscal
year ended June 30, 2002 and fiscal 2001 refers to the fiscal year ended June
30, 2001.
PRODUCTS
The Company markets its products as coordinated groups of jackets,
skirts, pants, blouses, sweaters and related accessories principally under the
following brand names that also include products for women and petites:
JOSEPHINE CHAUS COLLECTION - a collection of better tailored career clothing
that includes tailored suits, dresses, jackets, skirts and pants.
JOSEPHINE CHAUS SPORT - designed for more relaxed dressing. This line includes
casual tops, sweaters, pants, skirts, shorts and other items for "true weekend"
wear.
JOSEPHINE CHAUS WOMAN AND PETITE COLLECTIONS - collections of the items from the
clothing lines set forth above specializing in large and petite sizes.
PRIVATE LABEL - the Company also sells private label apparel manufactured
according to customers' specifications.
The above products, while sold as separates, are coordinated by styles,
color schemes and fabrics and are designed to be merchandised and worn together.
The Company believes that the target consumers for its products are women aged
25 to 65.
During fiscal 2003, the suggested retail prices of the Company's Chaus
products ranged between $24.00 and $180.00. The Company's jackets ranged in
price between $98.00 and $180.00, its blouses and sweaters ranged in price
between $30.00 and $120.00, its skirts and pants ranged in price between $38.00
and $110.00, and its knit tops and bottoms ranged in price between $18.00 and
$68.00.
The following table sets forth a breakdown by percentage of the
Company's net sales by brand for fiscal 2001 through fiscal 2003:
Fiscal Year Ended June 30,
2003 2002 2001
---- ---- ----
Josephine Chaus Collection 42% 44% 38%
Josephine Chaus Sport 22 24 25
Josephine Chaus Woman Collection 9 9 10
Josephine Chaus Petite Collection 9 7 8
Chaus & Co. 1 7 0
Josephine Chaus Studio 0 6 8
Josephine Chaus Essentials 0 0 10
Private Label and Other 17 3 1
--- --- ---
Total 100% 100% 100%
1
BUSINESS SEGMENTS
The Company operates in one segment, women's career and casual
sportswear. In addition, less than 1% of total revenue is derived from customers
outside the United States. The majority of the Company's long-lived assets are
located in the United States.
CUSTOMERS
The Company's products are sold nationwide in an estimated 3,500 stores
operated by approximately 111 department store chains, specialty retailers and
other retail outlets. The Company does not have any long-term commitments or
contracts with any of its customers.
The Company extends credit to the majority of its customers through a
factoring agreement with CIT. Under the factoring arrangement, the Company
receives payment from CIT only after CIT has been paid by the Company's
customers. CIT assumes only the risk of our customers' financial inability to
pay. All other receivable risks are retained by the Company, including, but not
limited to allowable customer markdowns, operational chargebacks, disputes,
discounts, and returns. The Company expects the factoring agreement to terminate
in March 2004 assuming certain conditions contained in its credit facility are
satisfied. At such time the Company will continue to extend credit to its
customers based upon an evaluation of the customers' financial condition and
credit history. At June 30, 2003, approximately 98% of the Company's accounts
receivable was due from CIT. At June 30, 2003 and 2002, approximately 72 % and
71 %, respectively of the Company's accounts receivable were due from customers
owned by three single corporate entities. During fiscal 2003, approximately 73%
of the Company's net sales were made to customers owned by three single
corporate entities, as compared to 70% in fiscal 2002 and 77% in fiscal 2001.
Sales to Dillard's Department Stores accounted for 40% of net sales in fiscal
2003, 34% in fiscal 2002 and 39% in fiscal 2001. Sales to TJX Companies, Inc.
accounted for approximately 23% of the Company's net sales in fiscal 2003, 18%
of net sales in fiscal 2002 and 13% in fiscal years 2001. Sales to the May
Department Stores Company accounted for approximately 10% of the Company's net
sales in fiscal 2003, 18% in fiscal 2002 and 25% in fiscal 2001. As a result of
the Company's dependence on its major customers, such customers may have the
ability to influence the Company's business decisions. The loss of or
significant decrease in business from any of its major customers would have a
material adverse effect on the Company's financial position and results of
operations. In addition, the Company's ability to achieve growth in revenues is
dependent, in part, on its ability to identify new distribution channels.
SALES AND MARKETING
The Company's selling operation is highly centralized. Sales to the
Company's department and specialty store customers are made primarily through
the Company's New York City showrooms. As of June 30, 2003, the Company had an
in-house sales force of 12, all of whom are located in the New York City
showrooms. The Company does not employ independent sales representatives or
operate regional sales offices, but it does participate in various regional
merchandise marts. This sales structure enables management to control the
Company's selling operation more effectively, to limit travel expenses, as well
as to deal directly with, and be readily accessible to, major customers.
Products are marketed to department and specialty store customers
during "market weeks," generally four to five months in advance of each of the
Company's selling seasons. The Company assists its customers in allocating their
purchasing budgets among the items in the various product lines to enable
consumers to view the full range of the Company's offerings in each collection.
During the course of the retail selling seasons, the Company monitors its
product sell-through at retail in order to directly assess consumer response to
its products.
The Company emphasizes the development of long-term customer
relationships by consulting with its customers concerning the style and
coordination of clothing purchased by the store, optimal delivery schedules,
floor presentation, pricing and other merchandising considerations. Frequent
communications between the Company's senior management and other sales personnel
and their counterparts at various levels in the buying organizations of the
Company's customers is an essential element of the Company's marketing and sales
efforts. These contacts allow the Company to closely monitor retail sales volume
to
2
maximize sales at acceptable profit margins for both the Company and its
customers. The Company's marketing efforts attempt to build upon the success of
prior selling seasons to encourage existing customers to devote greater selling
space to the Company's product lines and to penetrate additional individual
stores within the Company's existing customers. The Company's largest customers
discuss with the Company retail trends and their plans regarding their
anticipated levels of total purchases of Company products for future seasons.
These discussions are intended to assist the Company in planning the production
and timely delivery of its products.
DESIGN
The Company's products and certain of the fabrics from which they are
made are designed by an in-house staff of fashion designers. The 19 person
design staff, headed by Judith Leech, monitors current fashion trends and
changes in consumer preferences. The Company believes that its design staff is
well regarded for its distinctive styling and its ability to contemporize
fashion classics. Emphasis is placed on the coordination of outfits and quality
of fabrics to encourage the purchase of more than one garment.
MANUFACTURING AND DISTRIBUTION
The Company does not own any manufacturing facilities; all of its
products are manufactured in accordance with its design specifications and
production schedules through arrangements with independent manufacturers. The
Company believes that outsourcing its manufacturing maximizes its flexibility
while avoiding significant capital expenditures, work-in-process buildup and the
costs of a large workforce. Approximately 95% of its product is manufactured by
independent suppliers located primarily in South Korea, Hong Kong, Taiwan,
China, Indonesia and elsewhere in the Far East. Less than 5% of the Company's
products are manufactured in the United States. No contractual obligations exist
between the Company and its manufacturers except on an order-by-order basis.
During fiscal 2003, the Company purchased approximately 62% of its finished
goods from its ten largest manufacturers, including approximately 13% of its
purchases from its largest manufacturer. Contracting with foreign manufacturers
enables the Company to take advantage of prevailing lower labor rates and to use
a skilled labor force to produce high quality products.
Generally, each manufacturer agrees to produce finished garments on the
basis of purchase orders from the Company, specifying the price and quantity of
items to be produced and supported by a letter of credit naming the manufacturer
as beneficiary to secure payment for the finished garments.
The Company's technical production support staff, located in New York
City, coordinates the production of patterns and the production of samples from
the patterns by its production staff and by overseas manufacturers. The
production staff also coordinates the marking and the grading of the patterns in
anticipation of production by overseas manufacturers. The overseas manufacturers
produce finished garments in accordance with the production samples and obtain
necessary quota allocations and other requisite customs clearances. Branch
offices of the Company's subsidiaries in Korea, Taiwan and Hong Kong monitor
production at each manufacturing facility to control quality, compliance with
the Company's specifications and timely delivery of finished garments, and
arrange for the shipment of finished products to the Company's New Jersey
distribution center. Approximately 93% of the Company's finished goods are
shipped to the Company's New Jersey distribution center for final inspection,
assembly into collections, allocation and shipment to customers. A third party
distributor ships the remaining finished goods.
The Company believes that the number and geographical diversity of its
manufacturing sources minimize the risk of adverse consequences that would
result from termination of its relationship with any of its larger
manufacturers. The Company also believes that it would have the ability to
develop, over a reasonable period of time, adequate alternate manufacturing
sources should any of its existing arrangements terminate. However, should any
substantial number of such manufacturers become unable or unwilling to continue
to produce apparel for the Company or to meet their delivery schedules, or if
the Company's present relationships with such manufacturers were otherwise
materially adversely affected, there can be no assurance that the Company would
find alternate manufacturers of finished goods on satisfactory terms to permit
the Company to meet its commitments to its customers on a timely basis. In such
event, the Company's operations could be materially disrupted, especially over
the short-term. The Company believes that relationships with its major
manufacturers are satisfactory.
3
The Company uses a broad range of fabrics in the production of its
clothing, consisting of synthetic fibers (including polyester and acrylic),
natural fibers (including cotton and wool), and blends of natural and synthetic
fibers. The Company does not have any formal, long-term arrangements with any
fabric or other raw material supplier. During fiscal 2003, virtually all of the
fabrics used in the Company's products manufactured in the Far East were ordered
from the Company's five largest suppliers in the Far East, which are located in
Japan, Taiwan, Hong Kong and Korea. The Company selects the fabrics to be
purchased for production in accordance with the Company's specifications. To
date, the Company has not experienced any significant difficulty in obtaining
fabrics or other raw materials and considers its sources of supply to be
adequate.
The Company operates under substantial time constraints in producing
each of its collections. Orders from the Company's customers generally precede
the related shipping period by up to four months. In order to make timely
delivery of merchandise which reflects current style trends and tastes, the
Company attempts to schedule a substantial portion of its fabric and
manufacturing commitments relatively late in a production cycle. However, in
order to secure adequate amounts of quality raw materials, especially greige
(i.e., "undyed") goods, the Company must make some advance commitments to
suppliers of such goods. Many of these early commitments are made subject to
changes in colors, assortments and/or delivery dates.
IMPORTS AND IMPORT RESTRICTIONS
The Company's arrangements with its manufacturers and suppliers are
subject to the risks attendant to doing business abroad, including the
availability of quota and other requisite customs clearances, the imposition of
export duties, political and social instability, currency revaluations, and
restrictions on the transfer of funds. Bilateral agreements between exporting
countries, including those from which the Company imports substantially all of
its products, and the United States' imposition of quotas, limits the amount of
certain categories of merchandise, including substantially all categories of
merchandise manufactured for the Company, that may be imported into the United
States. Furthermore, the majority of such agreements contain "consultation
clauses" which allow the United States to impose at any time restraints on the
importation of categories of merchandise which, under the terms of the
agreements, are not subject to specified limits. The bilateral agreements
through which quotas are imposed have been negotiated under the framework
established by the Arrangement Regarding International Trade in Textiles, known
as the Multifiber Arrangement ("MFA") which has been in effect since 1974. The
United States has concluded international negotiations known as the "Uruguay
Round" in which a variety of trade matters were reviewed and modified. Quotas
established under the MFA will be phased out as of December 2004, after which
the textile and clothing trade will be fully integrated into the General
Agreement on Trade and Tariffs ("GATT") and will be subject to the same
disciplines as other sections. The GATT agreement provides for expanded trade,
improved market access, lower tariffs and improved safeguard mechanisms.
The United States and the countries in which the Company's products are
manufactured may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adversely adjust presently prevailing quotas, duty or tariff
levels, with the result that the Company's operations and its ability to
continue to import products at current or increased levels could be adversely
affected. The Company cannot predict the likelihood or frequency of any such
events occurring. The Company monitors duty, tariff and quota-related
developments, and seeks continually to minimize its potential exposure to
quota-related risks through, among other measures, geographical diversification
of its manufacturing sources, allocation of production of merchandise categories
where more quota is available and shifts of production among countries and
manufacturers. The expansion in the past few years of the Company's varied
manufacturing sources and the variety of countries in which it has potential
manufacturing arrangements, although not the result of specific import
restrictions, have had the result of reducing the potential adverse effect of
any increase in such restrictions. In addition, substantially all of the
Company's products are subject to United States customs duties. Due to the large
portion of the Company's products, which are produced abroad, any substantial
disruption of its foreign suppliers could have a material adverse effect on the
Company's operations and financial condition. In September 2001, the Company
completed a United States Customs Duty Audit covering a prior five year period
and recorded a $0.4 million charge in the fiscal year ended June 30, 2001 for
costs associated with the audit.
4
BACKLOG
As of August 27, 2003 and 2002, the Company's order book reflected
unfilled customer orders for approximately $59.2 million and $56.5 million of
merchandise, respectively. Order book data at any date are materially affected
by the timing of the initial showing of collections to the trade, as well as by
the timing of recording of orders and of shipments. The order book represents
customer orders prior to discounts. Accordingly, a comparison of unfilled orders
from period to period is not necessarily meaningful and may not be indicative of
eventual actual shipments.
TRADEMARKS
CHAUS, CHAUS & CO., CHAUS SPORT, CHAUS WOMAN, MS. CHAUS, JOSEPHINE, and
JOSEPHINE CHAUS, are registered trademarks of the Company for use on ladies'
garments. The Company considers its trademarks to be strong and highly
recognized, and to have significant value in the marketing of its products.
The Company has also registered its CHAUS, CHAUS SPORT, CHAUS WOMAN,
JOSEPHINE CHAUS and JOSEPHINE trademarks for women's apparel in certain foreign
countries. JOSEPHINE CHAUS for clothing, accessories and cosmetics is a
registered trademark in the European Economic Community.
COMPETITION
The women's apparel industry is highly competitive, both within the
United States and abroad. The Company competes with many apparel companies, some
of which are larger, and have better established brand names and greater
resources than the Company. In some cases the Company also competes with
private-label brands of its department store customers.
The Company believes that an ability to effectively anticipate, gauge
and respond to changing consumer demand and taste relatively far in advance, as
well as an ability to operate within substantial production and delivery
constraints (including obtaining necessary quota allocations), is necessary to
compete successfully in the women's apparel industry. Consumer and customer
acceptance and support, which depend primarily upon styling, pricing, quality
(both in material and production), and product identity, are also important
aspects of competition in this industry. The Company believes that its success
will depend upon its ability to remain competitive in these areas.
Furthermore, the Company's traditional department store customers,
which account for a substantial portion of the Company's business, encounter
intense competition from off-price and discount retailers, mass merchandisers
and specialty stores. The Company believes that its ability to increase its
present levels of sales will depend on such customers' ability to maintain their
competitive position and the Company's ability to increase its market share of
sales to department stores.
EMPLOYEES
At June 30, 2003, the Company employed 260 employees as compared with
242 employees at June 30, 2002. This total includes 60 in managerial and
administrative positions, approximately 57 in design, production and production
administration, 16 in marketing, merchandising and sales and 70 in distribution.
Of the Company's total employees, 57 were located in the Far East. The Company
is a party to a collective bargaining agreement with the Amalgamated Workers
Union, Local 88, covering 73 full-time employees. This agreement expired August
31, 2003 and the Company is negotiating a new collective bargaining agreement
with its union. Although the Company can give no assurance, it expects to be
able to negotiate a favorable collective bargaining agreement with its union.
The Company considers its relations with its employees to be
satisfactory and has not experienced any business interruptions as a result of
labor disagreements with its employees.
5
EXECUTIVE OFFICERS
The executive officers of the Company are:
NAME AGE POSITION
- ---- --- --------
Josephine Chaus 52 Chairwoman of the Board and Chief Executive Officer
Nicholas DiPaolo 62 Vice Chairman of the Board and Chief Operating Officer
Greg Mongno 41 President of the Company
Barton Heminover 49 Chief Financial Officer
Executive officers serve at the discretion of the Board of Directors.
Josephine Chaus has been an employee of the Company in various
capacities since its inception. She has been a director of the Company since
1977, President from 1980 through February 1993, Chief Executive Officer from
July 1991 through September 1994 and again since December 1998, Chairwoman of
the Board since 1991 and member of the Office of the Chairman since September
1994.
Nicholas DiPaolo was appointed Vice Chairman of the Board and Chief
Operating Officer in November 2000 and has been a director of the Company since
February 1999. Prior to joining the Company, Mr. DiPaolo served as a consultant
to the apparel industry and as a private investor. From 1991 through May 1997,
Mr. DiPaolo served as Chairman, President and Chief Executive Officer of Salant
Corporation, a diversified apparel company which he joined in 1988 as President
and Chief Operating Officer. Prior to 1988, he held executive positions with a
number of apparel and related companies, including Manhattan Industries, a
menswear company, and The Villager, a women's sportswear company. Mr. DiPaolo
currently serves as a director of JPS Industries Inc., a publicly traded
manufacturer of specialty extruded and woven materials, and Foot Locker, Inc., a
publicly traded athletic footwear and apparel retailer.
Greg Mongno was appointed President of the Company in August 2001 and
served as Senior Vice President of Sales and Marketing from January 2000 through
August of 2001. He was Vice President/General Manager of Liz Casual at Liz
Claiborne, Inc. from 1996 to January 2000.
Barton Heminover was appointed Chief Financial Officer in August 2002
and served as Vice President of Finance from January 2000 through August 2002
and as Vice President - Corporate Controller from July 1996 to January 2000.
From January 1983 to July 1996 he was employed by Petrie Retail, Inc. (formerly
Petrie Stores Corporation), a woman's retail apparel chain, serving as Vice
President/Treasurer from 1986 to 1994 and as Vice President/Financial Controller
from 1994 to 1996.
FORWARD LOOKING STATEMENTS
Certain statements contained herein are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 that have been made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
statements are indicated by words or phrases such as "anticipate," "estimate,"
"project," "expect," "believe" and similar words or phrases. Such statements are
based on current expectations and are subject to certain risks, uncertainties
and assumptions, including, but not limited to, the overall level of consumer
spending on apparel; the financial strength of the retail industry, generally
and the Company's customers in particular; changes in trends in the market
segments in which the Company competes and the Company's ability to gauge and
respond to changing consumer demands and fashion trends; the level of demand for
the Company's products; the Company's dependence on its major department store
customers; the highly competitive nature of the fashion industry; the Company's
ability to satisfy its cash flow needs by meeting its business plan and
satisfying the financial covenants in its credit facility; and changes in
economic or political conditions in the markets where the Company sells or
sources its products, as well as other risks and uncertainties set forth in the
Company's publicly-filed documents, including this Annual Report on Form 10-K.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. The Company disclaims any intention
or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
6
ITEM 2. PROPERTIES.
The Company's principal executive office is located at 530 Seventh
Avenue in New York City where the Company leases approximately 28,000 square
feet. This lease expires in May 2009. This facility also houses the Company's
showrooms and its sales, design, production and merchandising staffs. Net base
rental expense for the executive offices aggregated approximately $0.9 million
in each of fiscal 2003, fiscal 2002 and fiscal 2001.
The Company's technical production support facility (including its
sample and patternmakers) is located at 519 Eighth Avenue in New York City where
the Company leases approximately 15,000 square feet. This lease expires in
August 2009. Net base rental expense for the technical production support
facilities aggregated approximately $0.3 million in each of fiscal 2003, fiscal
2002, and fiscal 2001.
The Company's distribution center is located in Secaucus, New Jersey
where the Company leases approximately 276,000 square feet. This facility also
houses the Company's administrative and finance personnel, its computer
operations, and its one retail outlet store. This space is occupied under a
lease expiring June 30, 2004. Base rental expense for the Secaucus facility
aggregated approximately $1.2 million in each of fiscal 2003, fiscal 2002, and
fiscal 2001.
Office locations are also leased in Hong Kong, Korea and Taiwan, with
annual aggregate rental expense of approximately $0.1 million for each of fiscal
2003, fiscal 2002, and fiscal 2001.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in legal proceedings from time to time arising
out of the ordinary conduct of its business. The Company believes that the
outcome of these proceedings will not have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, par value $0.01 per share (the "Common
Stock"), is currently traded in the over the counter market and quotations are
available on the Over the Counter Bulletin Board (OTC BB: CHBD).
The following table sets forth for each of the Company's fiscal periods
indicated the high and low bid prices for the Common Stock as reported on the
OTC BB. These prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
HIGH LOW
---- ---
FISCAL 2002
First Quarter.....................................$0.50 $0.26
Second Quarter.....................................0.50 0.31
Third Quarter......................................0.47 0.35
Fourth Quarter.....................................0.55 0.35
FISCAL 2003
First Quarter.....................................$0.77 $0.45
Second Quarter.....................................0.85 0.52
7
Third Quarter......................................0.92 0.55
Fourth Quarter.....................................0.93 0.77
FISCAL 2004
July 01-August 29, 2003...........................$1.65 $0.92
As of August 26, 2003, the Company had approximately 444 stockholders of record.
The Company has not declared or paid cash dividends or made other
distributions on the Common Stock since prior to its 1986 initial public
offering. The payment of dividends, if any, in the future is within the
discretion of the Board of Directors and will depend on the Company's earnings,
capital requirements and financial condition. It is the present intention of the
Board of Directors to retain all earnings, if any, for use in the Company's
business operations and, accordingly, the Board of Directors does not expect to
declare or pay any dividends in the foreseeable future. In addition, the
Company's Financing Agreement prohibits the Company from declaring dividends or
making other distributions on its capital stock, without the consent of the
lender. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition, Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA.
The following financial information is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements of the
Company and the notes thereto, as well as Management's Discussion and Analysis
of Financial Condition and Results of Operations contained elsewhere herein.
STATEMENT OF OPERATIONS DATA:
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $ 140,225 $ 145,769 $ 149,499 $ 181,538 $ 187,875
Cost of goods sold 104,398 116,951 122,324 142,909 137,958
--------- --------- --------- --------- ---------
Gross profit 35,827 28,818 27,175 38,629 49,917
Selling, general and administrative expenses 29,634 30,130 32,666 36,075 36,512
Other income -- (193) -- -- --
Interest expense, net 1,091 2,049 2,121 2,358 2,360
--------- --------- --------- --------- ---------
Income (loss) before income tax provision
(benefit) 5,102 (3,168) (7,612) 196 11,045
Income tax provision (benefit) 425 (944) 11 4 200
--------- --------- --------- --------- ---------
Net income (loss) $ 4,677 $ (2,224) $ (7,623) $ 192 $ 10,845
========= ========= ========= ========= =========
Basic earnings (loss) per share (1) $ 0.17 $ (0.08) $ (0.28) $ 0.01 $ 0.40
========= ========= ========= ========= =========
Diluted earnings (loss) per share (2) $ 0.16 $ (0.08) $ (0.28) $ 0.01 $ 0.40
========= ========= ========= ========= =========
Weighted average number of common
shares outstanding - basic 27,384 27,216 27,216 27,174 27,116
========= ========= ========= ========= =========
Weighted average number of common and common
equivalent shares outstanding - diluted 29,912 27,216 27,216 27,183 27,191
========= ========= ========= ========= =========
BALANCE SHEET DATA
AS OF JUNE 30,
-----------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Working capital $15,653 $12,404 $15,185 $23,891 $29,330
Total assets 39,847 35,691 44,795 49,045 53,484
Short-term debt, including current portion of
long-term debt 1,500 4,716 6,024 1,000 1,000
Long-term debt 7,875 9,375 10,500 11,500 12,500
Stockholders' equity 13,109 8,213 10,679 18,302 17,860
(1) Computed by dividing the applicable net income by the weighted average
number of shares of Common Stock outstanding during the year.
(2) Computed by dividing the applicable net income by the weighted average
number of common shares outstanding and common stock equivalents
outstanding during the year.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items expressed
as a percentage of net sales.
Fiscal Year Ended June 30,
---------------------------
2003 2002 2001
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Gross profit 25.5 19.8 18.2
Selling, general and administrative expenses 21.1 20.7 21.9
Interest expense 0.8 1.4 1.4
Net income (loss) 3.3 (1.5) (5.1)
Fiscal 2003 Compared to Fiscal 2002
Net sales for fiscal 2003 decreased 3.8% or $5.6 million to $140.2
million as compared to $145.8 million for fiscal 2002. The decrease in net sales
was primarily due to lower net sales for the Chaus product lines partially
offset by private label merchandise sales resulting from S.L. Danielle product
lines acquired in December 2002.
Gross profit for fiscal 2003 increased $7.0 million to $35.8 million as
compared to $28.8 million for fiscal 2002. As a percentage of sales, gross
profit increased to 25.5% for fiscal 2003 from 19.8% for fiscal 2002. The
increase in gross profit dollars and gross profit percentage was primarily due
to an increase in the overall markup, lower sales discounts and better inventory
management for the Chaus product lines. S.L. Danielle sales also contributed to
the increase in gross profit dollars.
Selling, general and administrative ("SG&A") expenses decreased by $0.5
million for fiscal 2003 as compared to fiscal 2002. As a percentage of net
sales, SG&A expenses increased to 21.1% in fiscal 2003 as compared to 20.7% in
fiscal 2002. The decrease in SG&A expenses was primarily due to decreases in
payroll and payroll related expenses ($1.0 million), marketing and advertising
expenses ($0.4 million), provision for bad debts ($0.3 million) and professional
fees ($0.2 million) associated with the Company's Chaus product lines. These
decreases were partially offset by increases in overhead of approximately$1.5
million related to the Company's addition of the S.L. Danielle product lines in
December of 2002. The increase in SG&A expense as a percentage of net sales was
due to a decrease in sales volume, which reduced the Company's leverage on SG&A
expenses.
Interest expense decreased by $1.0 million for fiscal 2003 as compared
to fiscal 2002. The decrease was due to lower revolving credit borrowings and
interest rates.
The provision for income taxes for fiscal 2003 reflects a provision for
certain federal, state and local taxes. For fiscal 2003, the Company's income
tax provision includes federal alternative minimum taxes (AMT) that are not
offset by the Company's net operating loss (NOL) carryforward from prior years.
New Jersey enacted new tax legislation temporarily suspending the use of net
operating loss (NOL) carryforwards against income. Accordingly, for fiscal 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.
Fiscal 2002 Compared to Fiscal 2001
Net sales for fiscal 2002 decreased 2.5% or $3.7 million to $145.8
million as compared to $149.5 million for fiscal 2001. The decrease in net sales
was primarily due to the decrease in sales of merchandise under the Josephine
Chaus label partially offset by the sales to JC Penney under the Chaus & Co
label introduced in June 2001 and the private label merchandise
9
introduced in January 2002. Net sales and gross margins were particularly
impacted by the adverse retail conditions existing following the events of
September 11th.
Gross profit for fiscal 2002 increased $1.6 million to $28.8 million as
compared to $27.2 million for fiscal 2001. As a percentage of sales, gross
profit increased to 19.8% for fiscal 2002 from 18.2% for fiscal 2001. The
increase in gross profit dollars and gross profit percentage was primarily the
result of an increase in the initial markup.
Selling, general and administrative ("SG&A") expenses decreased by $2.5
million for fiscal 2002 as compared to fiscal 2001. As a percentage of net
sales, SG&A expenses were approximately 20.7% in fiscal 2002 as compared to
21.9% in fiscal 2001. The reduction in SG&A expenses resulted from cost savings
initiatives commenced during the second quarter of fiscal 2002. The decrease was
primarily attributable to a reduction in payroll and payroll related costs ($1.2
million), marketing and advertising expenses ($.7 million) and sample expenses
($.5 million).
Other income of $0.2 million in fiscal 2002 is comprised of a gain on
the sale of equity securities.
Interest expense decreased by $0.1 million for fiscal 2002 as compared
to fiscal 2001. The decrease was due to lower interest rates partially offset by
higher bank borrowings.
Income tax benefit of $0.9 million in fiscal 2002 includes a benefit of
$0.2 million for refund claims due to tax law changes and a benefit of $0.7
million related to the elimination of tax liabilities that are no longer
required, offset by a provision for state and local taxes of $30,000. The income
tax provision in fiscal 2001 of $11,000 relates to state and local taxes.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
Net cash provided by operating activities was $12.2 million for fiscal
2003 as compared to net cash provided by operating activities of $3.2 million
for fiscal 2002, and net cash used in operating activities of $6.6 million for
fiscal 2001. Net cash provided by operating activities for fiscal 2003 resulted
primarily from net income ($4.7 million), an increase in accounts payable ($3.0
million), a decrease in accounts receivable ($1.8 million).
Net cash provided by operating activities for fiscal 2002 resulted
primarily from a decrease in inventory ($5.5 million), and accounts receivable
($3.0 million), partially offset by a decrease in accounts payable ($3.8
million) and the net loss of $2.2 million in fiscal 2002.
Cash used in investing activities was $5.0 million in fiscal 2003
compared to $0.8 million in fiscal 2002. The investing activities in fiscal 2003
consisted of $4.7 million for the acquisition of the S.L. Danielle product lines
and $0.3 million for the purchase of fixed assets. In fiscal 2002 and fiscal
2001 purchases of fixed assets were $0.4 million and $0.9 million, respectively
and consisted primarily of purchases of computer hardware and software systems.
The Company also incurred capital expenditures for in-store shops of $0.4
million and $0.8 million in fiscal 2002 and fiscal 2001, respectively. In fiscal
2004, the Company anticipates capital expenditures of approximately $0.5 million
consisting primarily of Management Information System upgrades.
Cash used in financing activities for fiscal 2003 resulted from net
repayments of $3.6 million for short-term bank borrowings and principal payments
of $1.1 million on the term loan. Cash used in financing activities for fiscal
2002 resulted from net repayments of $1.4 million for short-term bank borrowings
and principal payments of $1.0 million on the term loan. Cash provided by
financing activities for fiscal 2001 resulted from net proceeds from short-term
bank borrowings of $5.0 million offset by principal payments on the term loan of
$1.0 million. In addition, the Company borrowed approximately $4.6 million to
acquire SL Danielle in November 2002. As of June 30, 2003, the Company has
repaid these borrowings.
10
Contractual Obligations and Commercial Commitments
The following table summarizes as of June 30, 2003, the Company's contractual
obligations and commercial commitments by future period:
Payments due by
(in thousands)
Less than After
Contractual obligations (in thousands) 1 year 2-3 years 4-5 years 5 years
Operational leases $ 2,609 $ 2,499 $ 2,264 $ 1,101
Inventory Purchase commitments Letters of Credits 11,600 - - -
Inventory Purchase commitments 11,649 - - -
Short-term borrowings 1,500 - - -
Long-term borrowings - 7,875 - -
------- ------- ------- -------
Total contractual obligations and commercial
commitments $27,358 $10,374 $ 2,264 $ 1,101
======= ======= ======= =======
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 consolidated financial statements for
fiscal 2003 (the "2003 financials") to the Lender (the "Adjustment Date") and
thereafter at a rate ranging from the Prime Rate to 3/4 of 1% above the Prime
Rate and (ii) on the Term Loan accrues at a rate of 1% above the Prime Rate for
fiscal 2003 and until the Adjustment Date and thereafter at a rate ranging from
1/2 of 1% above the Prime Rate to 1 1/4 % above the Prime Rate. If the Company
chooses LIBOR, the interest (i) on the Revolving Facility accrues at a rate of 3
1/4% above LIBOR for fiscal 2003 and until the Adjustment Date and thereafter at
a rate ranging from 2 3/4% above LIBOR to 3 1/2% above LIBOR and (ii) on the
Term Loan accrues at a rate of 3 3/4% above LIBOR for fiscal 2003 and until the
Adjustment Date and thereafter at a rate ranging from 3 1/4% above LIBOR to 4%
above LIBOR. All adjustments to interest rates will be determined upon delivery
of the Company's 2003 financials to the Lender, based upon the availability
under the Revolving Facility and certain fixed charge coverage ratios and
leverage ratios. The interest rate as of June 30, 2003 on the Revolving Facility
was 4.5% and on the Term Loan was 5.0%.
On September 27, 2002, the Company borrowed $18.3 million under the
Revolving Facility and $10.5 million under the Term Loan. These borrowings were
used to pay off the balances under the Former Financing Agreement of $18.3
million and the Former Term Loan of $10.5 million and for working capital
purposes. Commencing October 1, 2002, amortization payments in the amount of
$375,000 are payable quarterly in arrears in connection with the Term Loan. A
balloon payment of $6.0 million is due on September 27, 2005 under the Term
Loan. The Company's obligations under the Financing Agreement are secured by a
first priority lien on substantially all of the Company's assets, including the
Company's accounts receivable, inventory, intangibles, equipment, and trademarks
and a pledge of the Company's stock in its subsidiaries.
11
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. At June 30,
2003, the Company was in compliance with all of its covenants. In the event of
the early termination by the Company of the Financing Agreement, the Company
will be liable for termination fees of (i) (a) $500,000 plus (b) any unpaid
portion of the $500,000 in minimum factoring commission fees otherwise due in
the first year of the term, if termination occurs within twelve months of the
closing date; or (ii) (a) $350,000 if termination occurs between the thirteenth
and the twenty-fourth month from the closing date plus, (b) any unpaid portion
of the $250,000 minimum factoring commission fees otherwise due for the first
half of the second year of the term , if termination occurs between the
thirteenth and eighteenth month from the closing date; or (iii) $150,000 if
termination occurs after the twenty-fourth month from the closing date. The
Company may prepay at any time, in whole or in part, the Term Loan without
penalty. The Financing Agreement expires on September 27, 2005. A fee of
$125,000 was paid in connection with the new Financing Agreement.
On September 27, 2002 the Company also entered into a factoring
agreement with CIT. The factoring agreement provides for a factoring commission
equal to 4/10 of 1% of the gross face amount of all accounts factored by CIT,
plus certain customary charges. The minimum factoring commission fee per year is
$500,000. The Factoring Agreement will be terminated after eighteen months
provided that there is no event of default under the factoring agreement at such
time. In such event, the Company shall pay to CIT a collateral management fee
equal to $5,000 a month. Under the agreement, CIT may also require the Company
to utilize CIT to continue to perform certain bookkeeping, collection and
management services and the Company shall pay CIT an additional fee equal to 1/4
of 1% of the gross face amount of all accounts, with a minimum aggregate
commission of $300,000 per annum and a minimum of $1.50 per invoice.
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, and trademarks and a
pledge of the Company's stock and membership interest in the Company's
subsidiaries, including the Additional Borrower.
On June 30, 2003, the Company had $11.6 million of outstanding letters
of credit under the Revolving Facility, total availability of approximately
$10.7 million under the new Financing Agreement and no revolving credit
borrowings. At June 30, 2002, the Company had $9.8 million of outstanding
letters of credit, total availability of approximately $3.8 million and
borrowings of $3.6 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 (6.0% at June 30, 2002) and was
payable on a monthly basis, in arrears. Interest on the Former Term Loan accrued
at an interest rate equal to the greater of (i) 6.0% or (ii) a rate ranging from
1/2 of 1% above the Prime Rate to 1 1/2% above the Prime Rate, which interest
rate was determined, from time to time, based upon the Company's availability
under the Revolving Facility. The interest rate on the Former Term Loan was 6.0%
at June 30, 2002.
12
Future Financing Requirements
At June 30, 2003, the Company had working capital of $15.7 million as
compared with working capital of $12.4 million at June 30, 2002. The Company's
business plan requires the availability of sufficient cash flow and borrowing
capacity to finance its product lines. The Company expects to satisfy such
requirements through cash flow from operations and borrowings under its
financing agreements. The Company believes that it has adequate resources to
meet its needs for the foreseeable future assuming that it meets its business
plan and satisfies the covenants set forth in the new Financing Agreement.
The foregoing discussion contains forward-looking statements which are
based upon current expectations and involve a number of uncertainties, including
the Company's ability to maintain its borrowing capabilities under the Financing
Agreement, retail market conditions, and consumer acceptance of the Company's
products.
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 valued at $84,000 and stock
options to purchase 500,000 shares of Common Stock 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 was determined based on the average market price of the
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 of 1986, 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
of Common Stock. 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 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 installments upon each of the first two anniversaries of the Agreement's
effective date and on November 1, 2003, respectively. In the event that the
Company achieved a cumulative EBITDA target determined by the Company's Board of
Directors for the three year period ended June 30, 2003, Mr. DiPaolo would have
been 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.
The Company did not meet the cumulative EBITDA target, therefore the Company is
not required to purchase 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.
13
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements except for
letters of credit under the Financing Agreement. See "-Financing Agreement".
INFLATION
The Company does not believe that the relatively moderate rates of
inflation which recently have been experienced in the United States, where it
competes, have had a significant effect on its net sales or profitability.
SEASONALITY OF BUSINESS AND FASHION RISK
The Company's principal products are organized into seasonal lines for
resale at the retail level during the Spring, Summer, Fall and Holiday Seasons.
Typically, the Company's products are designed as much as one year in advance
and manufactured approximately one season in advance of the related retail
selling season. Accordingly, the success of the Company's products is often
dependent on the ability to successfully anticipate the needs of retail
customers and the tastes of the ultimate consumer up to a year prior to the
relevant selling season.
Historically, the Company's sales and operating results fluctuate by
quarter, with the greatest sales occurring in the Company's first and third
fiscal quarters. It is in these quarters that the Company's Fall and Spring
product lines, which traditionally have had the highest volume of net sales, are
shipped to customers, with revenues recognized at the time of shipment. As a
result, the Company experiences significant variability in its quarterly results
and working capital requirements. Moreover, delays in shipping can cause
revenues to be recognized in a later quarter, resulting in further variability
in such quarterly results.
FOREIGN OPERATIONS
The Company's foreign sourcing operations are subject to various risks
of doing business abroad and any substantial disruption of its relationships
with its foreign suppliers could adversely affect the Company's operations. Any
material increase in duty levels, material decrease in quota levels or material
decrease in available quota allocation could adversely affect the Company's
operations. Approximately 95% of the products sold by the Company in fiscal 2003
were manufactured in Asia.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are more fully
described in Note 2 to the consolidated financial statements. Certain of the
Company's accounting policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an inherent degree of
uncertainty. These judgments are based on historical experience, observation of
trends in the industry, information provided by customers and information
available from other outside sources, as appropriate. Significant accounting
policies include:
Revenue Recognition - The Company recognizes sales upon shipment of
products to customers since title 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 - Accounts Receivable is net of allowances and
anticipated discounts. An allowance for doubtful accounts is determined through
analysis of the aging of accounts receivable at the date of the financial
statements, assessments of collectibility based on historic trends and an
evaluation of the impact of economic conditions. This amount is not significant
primarily due to the Company's factoring agreement. An allowance for discounts
is based on those discounts relating to open invoices where trade discounts have
been extended to customers. Costs associated with potential returns of products
as well as allowable customer markdowns and operational charge backs, net of
expected recoveries, are included as a reduction to net sales
14
and are part of the provision for allowances included in Accounts Receivable.
These provisions result form seasonal negotiations as well as historic deduction
trends, net expected recoveries and the evaluation of current market conditions.
Account Receivable reserves were $1.9 million and $1.4 million at June 30, 2003
and 2002, respectively.
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 $0.7 million and $0.6 million at
June 30, 2003 and 2002, respectively. The increase 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 and Goodwill - 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. The Company evaluates goodwill whenever events
and changes in circumstances suggest that the carrying amount may not be
recoverable from its estimated future cash flows. To the extent these future
projections or the Company's strategies change, the conclusion regarding
impairment may differ from the current estimates.
Income Taxes- The Company's results of operations have generated a
federal tax net operating loss ("NOL") carryforward of approximately $100
million as of June 30, 2003. Generally accepted accounting principles require
that the Company record a valuation allowance against the deferred tax asset
associated with this NOL if it is "more likely than not" that the Company will
not be able to utilize it to offset future taxes. Due to the size of the NOL
carryforward in relation to the Company's history of unprofitable operations,
the Company has not recognized any of this net deferred tax asset. The provision
for income taxes primarily relates to state and local taxes. It is possible,
however, that the Company could be profitable in the future at levels which
cause management to conclude that it is more likely than not that the Company
will realize all or a portion of the NOL carryforward. Upon reaching such a
conclusion, the Company would record the estimated net realizable value of the
deferred tax asset at that time and would then provide for income taxes at a
rate equal to its 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 its cash tax payments would remain unaffected until the benefit of the
NOL is utilized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and other
Intangible Assets. SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB No. 17,
"Intangible Assets". It changes the accounting for goodwill from an amortization
method to an impairment only approach. SFAS 142 is effective for the fiscal year
beginning July 1, 2002 to all goodwill and other intangible assets recognized in
an entity's statement of financial position at that date, regardless of when
those assets were initially recognized. The adoption of this Statement on July
1, 2002 did not have an impact on the Company's 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 Company's 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"
15
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 Company's
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 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
Company's 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 Company's 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 Company's consolidated financial statements as the
Company does not have interests in variable interest entities.
In April 30, 2003, the Financial Accounting Standards Board issued SFAS
No. 149, "Amendment of Statement No. 133 on Derivatives Instruments and Hedging
Activities". The Statement amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. This Statement is
effective for contracts entered into or modified after June 30, 2003, except as
stated below, and for hedging relationships designated after June 30, 2003. The
guidance should be applied prospectively. The provisions of this Statement
16
that relate to "Statement No. 133 Implementation Issues" that have been
effective for fiscal quarters beginning prior to June 15, 2003, should continue
to be applied in accordance with the respective effective dates. In addition,
certain provisions relating to forward purchases or sales of when-issued
securities that do not yet exist, should be applied to existing contracts as
well as new contracts entered into after June 30, 2003. The adoption of this
standard did not have an impact on the consolidated financial statements.
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equities", which establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equities. SFAS No. 150 applies specifically to a number of
financial instruments that issuers have historically presented in their
financial statements as equity, or between the liabilities and equity sections
of the balance sheet, rather than as liabilities. Generally, SFAS No. 150 is
effective for financial instruments issued or modified after May 31, 2003 and is
otherwise effective for interim periods beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have an impact on the Company's consolidated
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk- The Company is subject to market risk from exposure
to changes in interest rates based primarily on its financing activities. The
market risk inherent in the financial instruments represents the potential loss
in earnings or cash flows arising from adverse changes in interest rates. These
debt obligations with interest rates tied to the prime rate are described in
"Liquidity and Capital Resources", as well as Note 6 of the Notes to the
Consolidated Financial Statements. The Company manages these exposures through
regular operating and financing activities. The Company has not entered into any
derivative financial instruments for hedging or other purposes. The following
quantitative disclosures are based on the prevailing prime rate. These
quantitative disclosures do not represent the maximum possible loss or any
expected loss that may occur, since actual results may differ from these
estimates.
At June 30, 2003 and 2002, the carrying amounts of the Company's
revolving credit borrowings and term loan approximated fair value. As of June
30, 2003, the Company's revolving credit borrowings bore interest at 4.5% and
the term loan bore interest at 5.0%. As of June 30, 2003, a hypothetical
immediate 10% adverse change in prime interest rates relating to the Company's
revolving credit borrowings and term loan would have a $0.1 million unfavorable
impact on its earnings and cash flows over a one-year period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements are included herein
commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed by the Company in
the reports filed or submitted by it under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, and include controls and procedures designed to ensure that
information required to be disclosed by the Company in such reports is
accumulated and communicated to the Company's management, including the
Company's Chairwoman and Chief Executive Officer and the Company's Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Each fiscal quarter the Company carries out an evaluation, under the
supervision and with the participation of the Company's management, including
Company's Chairwoman 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
17
to Exchange Act Rule 13a-15. Based upon the foregoing, the Company's Chairwoman
and Chief Executive Officer along with the Company's Chief Financial Officer,
concluded that, as of June 30, 2003, 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 Exchange Act reports.
During the fiscal quarter ended June 30, 2003, there has been no change
in the Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the executive officers of the Company is
set forth in Part I of this Annual Report on Form 10-K.
Information with respect to the directors of the Company is
incorporated by reference to the information to be set forth under the heading
"Election of Directors" in the Company's definitive proxy statement relating to
its 2003 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A
(the "2003 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
Information called for by Item 11 is incorporated by reference to the
information to be set forth under the heading "Executive Compensation" in the
Company's 2003 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information called for by Item 12 is incorporated by reference to the
information to be set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's 2003 Proxy Statement.
Information with respect to securities authorized for issuance under
equity compensation plans is incorporated by reference to the information to be
set forth under the heading "Compensation Program Components" in the Company's
2003 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by Item 13 is incorporated by reference to the
information to be set forth under the headings "Executive Compensation" and
"Certain Transactions" in the Company's 2003 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Information called for by Item 14 is incorporated by reference to the
information to be set forth under the headings "Report of the Audit Committee"
and "Fees Paid to Independent Auditors" in the Company's 2003 Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Financial Statement Schedule: See List of
Financial Statements and Financial Statement Schedule on page F-1.
(b) The Company did not file any Forms 8-K during the last quarter of
its fiscal year ended June 30, 2003.
18
(c) Exhibits
3.1 Restated Certificate of Incorporation (the "Restated Certificate")
of the Company (incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1, Registration No.
33-5954 (the "1986 Registration Statement")).
3.2 Amendment dated November 18, 1987 to the Restated Certificate
(incorporated by reference to Exhibit 3.11 of the Company's
Registration Statement on Form S-2, Registration No. 33-63317 (the
"1995 Registration Statement")).
3.3 Amendment dated November 15, 1995 to the Restated Certificate
(incorporated by reference to Exhibit 3.12 of Amendment No. 1 to
the 1995 Registration Statement).
3.4 Amendment dated December 9, 1998 to the Restated Certificate
(incorporated by reference to Exhibit 3.13 of the Company's Form
10-K for the year ended June 30, 1998 (the "1998 Form 10-K")).
3.5 By-Laws of the Company, as amended (incorporated by reference to
exhibit 3.1 of the Company's Form 10-Q for the quarter ended
December 31, 1987).
3.6 Amendment dated September 13, 1994 to the By-Laws (incorporated by
reference to Exhibit 10.105 of the Company's Form 10-Q for the
quarter ended September 30, 1994).
10.68 Second Restated and Amended Financing Agreement dated as of October
10, 1997, between the Company and BNY Financial Corp. (incorporated
by reference to Exhibit 10.79 of the Company's Form 10-K for the
year ended June 30, 1997).
10.69 Agreement dated October 10, 1997, between the Company and BNY
Financial Corp. issuing 125,000 warrants to purchase Common Stock
of the Company (incorporated by reference to Exhibit 10.80 of the
Company's Form 10-Q for the quarter ended September 30, 1997).
10.70 Agreement dated October 10, 1997, between the Company and BNY
Financial Corp. issuing 375,000 warrants to purchase Common Stock
of the Company (incorporated by reference to Exhibit 10.81 of the
Company's Form 10-Q for the quarter ended September 30, 1997).
+10.77 1998 Stock Option Plan, as amended by Amendment No.1 thereto
including form of related stock option agreement (incorporated by
reference to Exhibit A and Exhibit B of the Company's Proxy
Statement filed with the Commission on October 17, 2000).
10.78 Amendment No. 1 dated June 3, 1998 to the Second Restated and
Amended Financing Agreement (incorporated by reference to Exhibit
10.78 of the 1998 Form 10-K).
+10.80 Letter Agreement between the Company and Stuart S. Levy dated
February 23, 1999 (incorporated by reference to Exhibit 10.80 of
the Company's Form 10-K for the year ended June 30, 1999 (the "1999
Form 10-K")).
10.81 Collective Bargaining Agreement between the Company and Amalgamated
Workers Union, Local 8 effective as of September 24, 1999
(incorporated by reference to Exhibit 10.81 of the 1999 Form 10-K).
10.82 Lease between the Company and Adler Realty Company, dated June 1,
1999 with respect to the Company's executive offices and showroom
at 530 Seventh Avenue, New York City (incorporated by reference to
Exhibit 10.82 of the 1999 Form 10-K).
19
10.83 Employment Agreement dated November 5, 1999 between the Company and
Ivy Karkut (incorporated by reference to Exhibit 10.82 of the
Company's Form 10-Q for the quarter ended December 31, 1999).
10.84 Lease between the Company and Kaufman Eighth Avenue Associates,
dated September 11, 1999 with respect to the Company's technical
support facilities at 519 Eighth Avenue, New York City
(incorporated by reference to Exhibit 10.84 of the Company's Form
10-K for the year ended June 30, 2000 (the "2000 Form 10-K")).
10.85 Amendment dated September 22, 2000 to the Second Restated and
Amended Financing Agreement (incorporated by reference to Exhibit
10.85 of the 2000 Form 10-K).
10.86 Resignation and Non-Competition Agreement dated January 4, 2001
between the Company and Ivy Karkut (incorporated by reference to
Exhibit 10.86 of the Company's Form 10-Q for the quarter ended
December 31, 2000).
10.87 Employment Agreement dated January 10, 2001 between the Company and
Nicholas DiPaolo (incorporated by reference to Exhibit 10.87 of the
Company's Form 10-Q for the quarter ended December 31, 2000).
10.88 Amendment dated January 19, 2001 to the Second Restated and Amended
Financing Agreement (incorporated by reference to Exhibit 10.88 of
the Company's Form 10-Q for the quarter ended December 31, 2000).
10.89 Amendment dated April 26, 2001 to the Second Restated and Amended
Financing Agreement (incorporated by reference to Exhibit 10.89 of
the Company's Form 10-Q for the quarter ended March 31, 2001).
10.90 Lease modification agreement between the Company and Hartz Mountain
Industries, Inc., dated August 30, 1999 with respect to the
Company's distribution and office facilities in Secaucus, NJ.
(incorporated by reference to Exhibit 10.90 of the Company's Form
10-K for the year ended June 30, 2001 (the "2001 Form 10-K")).
10.91 Employment Agreement dated June 1, 2001 between the Company and
Gregory Mongno. (incorporated by reference to Exhibit 10.91 of the
2001 Form 10-K).
10.92 Amendment dated June 1, 2001 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.92 of
the 2001 Form 10-K).
10.93 Amendment dated August 23, 2001 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.93 of
the 2001 Form 10-K).
10.94 Amendment dated August 28, 2001 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.94 of
the 2001 Form 10-K).
10.95 Amendment dated December 31, 2001 to the Second Restated and
Amended Financing Agreement. (incorporated by reference to Exhibit
10.95 of the Company's Form 10-Q for the quarter ended December 31,
2001).
10.96 Amendment dated January 29, 2002 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.96 of
the Company's Form 10-Q for the quarter ended December 31, 2001).
10.97 Amendment dated April 30, 2002 to the Second Restated and Amended
Financing Agreement. (incorporated by reference to Exhibit 10.97 of
the Company's Form 10-Q for the quarter ended March 31, 2002).
10.98 Amendment dated July 10, 2002 to the Second Restated and Amended
Financing Agreement (incorporated by reference to Exhibit 10.98 of
the 2002 Form 10-K).
20
10.99 Amendment dated September 10, 2002 to the Second Restated and
Amended Financing Agreement. (incorporated by reference to Exhibit
10.99 of the 2002 Form 10-K).
10.100 Financing Agreement between the Company and CIT/Commercial
Services, Inc., as Agent, dated September 27, 2002. (incorporated
by reference to Exhibit 10.100 of the 2002 Form 10-K).
10.101 Factoring Agreement between the Company and CIT/Commercial
Services, Inc., dated September 27, 2002. (incorporated by
reference to Exhibit 10.101 of the 2002 Form 10-K).
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. (incorporated by reference to
Exhibit 10.102 of the Company's Form 10-Q for the quarter ended
December 31, 2002).
10.103 Amendment No. 1 to Factoring Agreement between the Company and The
CIT Group/Commercial Services, Inc., dated November 27, 2002.
(incorporated by reference to Exhibit 10.103 of the Company's Form
10-Q for the quarter ended December 31, 2002).
10.104 Factoring Agreement between S.L. Danielle and The CIT
Group/Commercial Services, Inc., dated November 27, 2002.
(incorporated by reference to Exhibit 10.104 of the Company's Form
10-Q for the quarter ended December 31, 2002).
10.105 Asset Purchase Agreement between S.L. Danielle and S.L. Danielle,
Inc., dated November 27, 2002. (incorporated by reference to
Exhibit 10.105 of the Company's Form 10-Q for the quarter ended
December 31, 2002).
*21 List of Subsidiaries of the Company.
*23 Consent of Deloitte & Touche LLP.
*31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for Josephine Chaus.
*31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for Barton Heminover.
*32.1 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.
*32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
Barton Heminover.
+ Management agreement or compensatory plan or arrangement required to be filed
as an exhibit.
* Filed herewith.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Josephine Chaus
-----------------------
Josephine Chaus
Chairwoman of the Board and
Chief Executive Officer
Date: September 8, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Josephine Chaus Chairwoman of the Board and September 8, 2003
- ------------------------- Chief Executive Officer
Josephine Chaus
/s/ Nicholas DiPaolo Vice Chairman of the Board and September 8, 2003
- ------------------------- Chief Operating Officer
Nicholas DiPaolo
/s/ Barton Heminover Chief Financial Officer September 8, 2003
- -------------------------
Barton Heminover
/s/ Philip G. Barach Director September 8, 2003
- -------------------------
Philip G. Barach
/s/ S. Lee Kling Director September 8, 2003
- -------------------------
S. Lee Kling
/s/ Harvey M. Krueger Director September 8, 2003
- -------------------------
Harvey M. Krueger
22
BERNARD CHAUS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Bernard Chaus, Inc. and
subsidiaries are included in Item 8:
Report of Independent Auditors..............................................F-2
Consolidated Balance Sheets-- June 30, 2003 and 2002 .......................F-3
Consolidated Statements of Operations-- Years Ended June 30, 2003, 2002
and 2001..................................................................F-4
Consolidated Statements of Stockholders' Equity -- Years Ended June 30,
2003, 2002 and 2001.......................................................F-5
Consolidated Statements of Cash Flows-- Years Ended June 30, 2003, 2002
and 2001..................................................................F-6
Notes to Consolidated Financial Statements..................................F-7
The following consolidated financial statement schedule of Bernard Chaus, Inc.
and subsidiaries is included in Item 15:
Schedule II-- Valuation and Qualifying Accounts...........................S-1
The other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Bernard Chaus, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Bernard Chaus,
Inc. and subsidiaries as of June 30, 2003 and June 30, 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 2003. Our audits also
included the financial statement schedule listed in the Index at item 15. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Bernard Chaus, Inc. and
subsidiaries at June 30, 2003 and June 30, 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2003 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/S/ Deloitte & Touche LLP
Parsippany, New Jersey
August 26, 2003
F-2
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and per share amounts)
June 30, June 30,
ASSETS 2003 2002
--------- ---------
Current Assets
Cash and cash equivalents $ 2,650 $ 150
Accounts receivable - net 19,996 20,586
Inventories - net 10,696 8,050
Prepaid expenses and other current assets 719 1,331
--------- ---------
Total current assets 34,061 30,117
Fixed assets - net 3,792 4,465
Other assets - net 599 1,109
Goodwill 1,395 --
--------- ---------
Total assets $ 39,847 $ 35,691
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving credit borrowings $ -- $ 3,591
Accounts payable 12,747 9,749
Accrued expenses 4,161 3,248
Term loan - current 1,500 1,125
--------- ---------
Total current liabilities 18,408 17,713
Deferred rent 455 390
Term loan 7,875 9,375
--------- ---------
Total liabilities 26,738 27,478
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized shares - 1,000,000; -- --
outstanding shares - none
Common stock, $.01 par value, authorized shares - 50,000,000; 274 273
issued shares - 27,384,277 at June 30, 2003 and 27,278,177 at
June 30,2002
Additional paid-in capital 125,943 125,473
Deficit (111,134) (115,811)
Accumulated other comprehensive loss (494) (242)
Less: Treasury stock at cost - 62,270 shares at June 30, 2003 and 2002 (1,480) (1,480)
--------- ---------
Total stockholders' equity 13,109 8,213
--------- ---------
Total liabilities and stockholders' equity $ 39,847 $ 35,691
========= =========
See accompanying notes to consolidated financial statements.
F-3
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share amounts)
Fiscal Year Ended June 30,
-------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net sales $ 140,225 $ 145,769 $ 149,499
Cost of goods sold 104,398 116,951 122,324
------------ ------------ ------------
Gross profit 35,827 28,818 27,175
Selling, general and administrative expenses 29,634 30,130 32,666
------------ ------------ ------------
Income (loss) from operations 6,193 (1,312) (5,491)
Other income -- (193) --
Interest expense, net 1,091 2,049 2,121
------------ ------------ ------------
Income (loss) before income tax provision (benefit) 5,102 (3,168) (7,612)
Income tax provision (benefit) 425 (944) 11
------------ ------------ ------------
Net income (loss) $ 4,677 $ (2,224) $ (7,623)
============ ============ ============
Basic earnings (loss) per share - basic $ 0.17 $ (0.08) $ (0.28)
============ ============ ============
Basic earnings (loss) per share - diluted $ 0.16 $ (0.08) $ (0.28)
============ ============ ============
Weighted average number of common shares
outstanding - basic 27,384,000 27,216,000 27,216,000
============ ============ ============
Weighted average number of common and common
equivalent shares outstanding - diluted 29,912,000 27,216,000 27,216,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except number of shares)
Common Stock Treasury Stock
--------------------- ---------------------
Accumulated
Additional Other
Number Paid-in Number Comprehensive
of Shares Amount Capital (Deficit) of Shares Amount Loss Total
---------- ------ -------- --------- --------- -------- ------ -------
Balance at July 01, 2000 27,278,177 $ 273 $125,473 $(105,964) 62,270 $ (1,480) $ - $18,302
Net loss - - - (7,623) - - - (7,623)
---------- ----- -------- --------- ------ -------- ------ -------
Balance at June 30, 2001 27,278,177 273 125,473 (113,587) 62,270 (1,480) - 10,679
-------
Minimum pension liability
adjustment - - - - - - (242) (242)
-
Net loss - - - (2,224) - - (2,224)
-------
Comprehensive loss (2,466)
---------- ----- -------- --------- ------ -------- ------ -------
Balance at June 30, 2002 27,278,177 273 125,473 (115,811) 62,270 (1,480) (242) 8,213
Issuance of common stock
upon exercise of stock
options 6,100 - 3 - - - - 3
Common stock and stock
options issued for
acquisition 100,000 1 467 - - - - 468
Minimum pension liability
adjustment - - - - - - (252) (252)
Net income - - - 4,677 - - - 4,677
-------
Comprehensive income 4,425
---------- ----- -------- --------- ------ -------- ------ -------
Balance at June 30, 2003 27,384,277 $ 274 $125,943 $(111,134) 62,270 $ (1,480) $ (494) $13,109
========== ===== ======== ========= ====== ======== ====== =======
See accompanying notes to consolidated financial statements
F-5
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended June 30,
--------------------------------
2003 2002 2001
-------- -------- --------
OPERATING ACTIVITIES
Net income (loss) $ 4,677 $ (2,224) $ (7,623)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,580 1,608 1,324
Loss on disposal of other assets 244 -- --
Provision for losses on accounts receivable 260 75 75
Changes in operating assets and liabilities:
Accounts receivable 1,748 3,027 (201)
Inventories (455) 5,532 1,139
Prepaid expenses and other current assets 405 (360) (671)
Accounts payable 2,998 (3,767) 1,022
Accrued expenses and deferred rent 726 (680) (1,673)
-------- -------- --------
Net Cash Provided By (Used In) Operating Activities 12,183 3,211 (6,608)
-------- -------- --------
INVESTING ACTIVITIES
Acquisition of business (4,662) -- --
Purchases of fixed assets (308) (392) (889)
Purchases of other assets -- (419) (790)
-------- -------- --------
Net Cash Used In Investing Activities (4,970) (811) (1,679)
-------- -------- --------
FINANCING ACTIVITIES
Net repayments of short-term bank borrowings (3,591) (1,433) --
Net proceeds from short-term bank borrowings -- -- 5,024
Principal payments on term loan (1,125) (1,000) (1,000)
Net proceeds from issuance of stock 3 -- --
-------- -------- --------
Net Cash (Used In) Provided By Financing Activities (4,713) (2,433) 4,024
-------- -------- --------
Increase (decrease) in Cash and Cash Equivalents 2,500 (33) (4,263)
Cash, Beginning of Year 150 183 4,446
-------- -------- --------
Cash, End of Year $ 2,650 $ 150 $ 183
======== ======== ========
Cash paid for:
Taxes $ 313 $ 23 $ 18
======== ======== ========
Interest $ 964 $ 1,767 $ 1,989
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
1. BUSINESS
Bernard Chaus, Inc. (the "Company" or "Chaus") designs, arranges for
the manufacture of and markets an extensive range of women's career and casual
sportswear principally under the JOSEPHINE CHAUS(R) COLLECTION, and JOSEPHINE
CHAUS(R) SPORT trademarks and under private label brand names. The Company's
products are sold nationwide through department store chains, specialty
retailers and other retail outlets. The Company has positioned its JOSEPHINE
CHAUS product line into the opening price points of the "better" category . In
December 2002, the Company acquired certain assets of S.L. Danielle Inc. ("SL
Danielle"). SL Danielle designs, arranges for the manufacture of and markets
women's moderately priced private label clothing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany accounts and transactions have been
eliminated.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
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.
Credit Terms:
The Company extends credit to the majority of its customers through a
factoring agreement with CIT. Under the factoring arrangement, the Company
receives payment from CIT only after CIT has been paid by the Company's
customers. CIT assumes only the risk of our customers' financial inability to
pay. All other receivable risks are retained by the Company, including, but not
limited to allowable customer markdowns, operational chargebacks, disputes,
discounts, and returns. The Company expects the factoring agreement to terminate
in March 2004 assuming certain conditions contained in its credit facility are
satisfied. At such time the Company will continue to extend credit to its
customers based upon an evaluation of the customers' financial condition and
credit history. At June 30, 2003, approximately 98% of the Company's accounts
receivable was due from CIT. At June 30, 2003 and 2002, approximately 72 % and
71 %, respectively of the Company's accounts receivable were due from customers
owned by three single corporate entities. During fiscal 2003, approximately 73%
of the Company's net sales were made to customers owned by three single
corporate entities, as compared to 70% in fiscal 2002 and 77% in fiscal 2001.
Sales to Dillard's Department Stores accounted for 40% of net sales in fiscal
2003, 34% in fiscal 2002 and 39% in fiscal 2001. Sales to TJX Companies, Inc.
accounted for approximately 23% of the Company's net sales in fiscal 2003, 18%
of net sales in fiscal 2002 and 13% in fiscal years 2001. Sales to the May
Department Stores Company accounted for approximately 10% of the Company's net
sales in fiscal 2003, 18% in fiscal 2002 and 25% in fiscal 2001. As a result of
the Company's dependence on its major customers, such customers may have the
ability to influence the Company's business decisions. The loss of or
significant decrease in business from any of its major customers would have a
material adverse effect on the Company's financial position
F-7
and results of operations. In addition, the Company's ability to achieve growth
in revenues is dependent, in part, on its ability to identify new distribution
channels.
Accounts Receivable:
Accounts Receivable as shown on the Consolidated Balance Sheets, is
net of allowances and anticipated discounts. An allowance for doubtful accounts
is determined through analysis of the aging of accounts receivable at the date
of the financial statements, assessments of collectibility based on historic
trends and an evaluation of the impact of economic conditions. This amount is
not significant primarily due to the Company's factoring agreement. An allowance
for discounts is based on those discounts relating to open invoices where trade
discounts have been extended to customers. Costs associated with potential
returns of products as well as allowable customer markdowns and operational
charge backs, net of expected recoveries, are included as a reduction to net
sales and are part of the provision for allowances included in Accounts
Receivable. As of June 30, 2003 and June 30, 2002, Accounts Receivable was net
of allowances of $1.9 million and $1.4 million, respectively.
Inventories:
Inventories - Inventory is stated at the lower of cost or market, cost
being determined on the first-in, first-out method. Reserves for slow moving and
aged merchandise are provided based on historical experience and current product
demand. The Company evaluates the adequacy of the reserves quarterly.
Valuation of Long-Lived Assets and Goodwill:
The Company periodically reviews the carrying value of its long-lived
assets for continued appropriateness. This review is based upon projections of
anticipated future undiscounted cash flows. As of June 30, 2003, no impairments
of long-lived assets have been recognized. Goodwill represents the cost in
excess of the fair value of net assets acquired. In July 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which
was effective July 1, 2002. SFAS 142 requires, among other things, that goodwill
not be amortized. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. The result of the Company's impairment test as of June
30, 2003 indicated that there were no impairments of goodwill or intangible
assets to be recorded. The Company will continue to conduct impairment tests
annually in the fourth quarter of each fiscal year or sooner if circumstances
require. No amortization expense has been recorded for the fiscal years ended
June 30, 2003, 2002 and 2001.
Income Taxes:
The Company accounts for income taxes under the asset and liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes. Deferred income taxes reflect the future
tax consequences of differences between the tax bases of assets and liabilities
and their financial reporting amounts at year-end. As of June 30, 2003 and 2002,
the Company recorded a full valuation allowance on its Deferred tax assets. See
Note 5. The Company will recognize a tax benefit as the Company's net operating
loss carryforwards are utilized.
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 Stock
Issued to Employees", and related interpretations. Under this method,
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date or other measurement date over the amount an employee must pay
to acquire the stock. 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. Had
compensation costs for the Company's stock option grants been determined based
on the fair
F-8
value at the grant dates for awards under these plans in accordance
with SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts as follows (Dollars in thousands, except
share data):
For the Year Ended
June 30, June 30, June 30,
2003 2002 2001
------------------------------------------
Net income (loss), as reported $4,677 $(2,224) $(7,623)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method,
net of tax effects (549) (900) (385)
------------------------------------------
Proforma net income (loss) $4,128 $(3,124) $(8,008)
==========================================
Earnings (loss) per share:
Basic-as reported $0.17 $(0.08) $(0.28)
==========================================
Basic-proforma $0.15 $(0.12) $(0.29)
==========================================
Diluted-as reported $0.16 $(0.08) $(0.28)
==========================================
Diluted-proforma $0.14 $(0.12) $(0.29)
==========================================
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 Year Ended For the Year Ended For the Year Ended
June 30, 2003 June 30, 2002 June 30, 2001
------------- ------------- -------------
Weighted average fair value of stock options granted $ 0.74 $ 0.42 $ 0.30
Risk-free Interest rate 3.92% 3.36% 4.38%
Expected dividend yield 0% 0% 0%
Expected life of option 5.5 years 2.5 years 2.5 years
Expected volatility 188% 181% 159%
Earnings Per Share:
Basic earnings (loss) per share has been computed by dividing the
applicable net income (loss) by the weighted average number of common shares
outstanding. Diluted earnings per share has been computed for the year end June
30, 2003 by dividing the applicable net income by the weighted average number of
common shares outstanding and common share equivalents. Potentially dilutive
shares of 651,357 and 367,518 were not included in the calculation of diluted
loss per share for the years ended June 30, 2002 and 2001, as their inclusion
would have been antidilutive.
F-9
For the Year Ended
June 30, June 30, June 30,
Denominator for Earnings per share (in millions) 2003 2002 2001
--------------------------------
Denominator for basic earnings per share 27.4 27.2 27.2
weighted-average shares outstanding
Assumed exercise of potential common shares 2.5 - -
--------------------------------
Denominator for diluted earnings per share 29.9 27.2 27.2
================================
Advertising Expense:
Advertising costs are expensed when incurred. Advertising expenses of
$0.3 million, $0.7 million, and $1.4 million were included in selling, general
and administrative expenses for the years ended June 30, 2003, 2002, and 2001,
respectively.
Shipping and handling costs:
Shipping and handling costs are included as a component of Selling,
General, & Administrative Expenses in the Consolidated Statements of Operations.
In fiscal years 2003, 2002, and 2001 shipping and handling costs approximated
$0.4 million, $0.5 million, and $0.5 million, respectively.
Fixed Assets:
Furniture and equipment are depreciated principally using the
straight-line method over eight years. Leasehold improvements are amortized
using the straight-line method over either the term of the lease or the
estimated useful life of the improvement, whichever period is shorter. Computer
hardware and software is depreciated using the straight-line method over three
to five years.
Other Assets:
Other assets primarily consist of in-store shop fixtures which are
being depreciated using the straight-line method over three years.
Foreign Currency Transactions:
The Company negotiates substantially all of its purchase orders with
foreign manufacturers in United States dollars. The Company considers the United
States dollar to be the functional currency of its overseas subsidiaries. All
foreign currency gains and losses are recorded in the Consolidated Statement of
Operations.
Fair Value of Financial Instruments:
For financial instruments, including accounts receivable, accounts
payable, revolving credit borrowings and term loans, the carrying amounts
approximated fair value due to their short-term maturity or variable interest
rate.
Deferred Rent Obligations:
The Company accounts for rent expense under noncancelable operating
leases with scheduled rent increases on a straight-line basis over the lease
term. The excess of straight-line rent expense over scheduled payment amounts is
recorded as a deferred liability. Deferred rent obligations amounted to $0.5
million and $0.4 million at June 30, 2003 and 2002.
F-10
Other Comprehensive Loss:
Other comprehensive loss is reflected in the consolidated statements of
stockholders' equity. Other comprehensive loss reflects adjustments for minimum
pension liability.
Segment Reporting:
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information requires enterprises to report certain information about products
and services, activities in different geographic areas and reliance on major
customers and to disclose certain segment information in their financial
statements. The basis for determining an enterprise's operating segments is the
manner in which financial information is used internally by the enterprise's
chief operating decision maker. The Company has determined that it operates in
one segment, women's career and casual sportswear. In addition, less than 1% of
total revenue is derived from customers outside the United States. The majority
of the Company's long-lived assets are located in the United States.
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 on July
1, 2002 did not have an impact on the Company's 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 Company's 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 Company's 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 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
Company's 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
F-11
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 Company's 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
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 Company's consolidated financial statements as the
Company does not have interests in variable interest entities.
In April 30, 2003, the FASB issued SFAS No. 149, "Amendment of
Statement No. 133 on Derivatives Instruments and Hedging Activities". The
Statement amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. This Statement is effective for contracts entered
into or modified after June 30, 2003, except as stated below, and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to "Statement No.
133 Implementation Issues" that have been effective for fiscal quarters
beginning prior to June 15, 2003, should continue to be applied in accordance
with the respective effective dates. In addition, certain provisions relating to
forward purchases or sales of when-issued securities that do not yet exist,
should be applied to existing contracts as well as new contracts entered into
after June 30, 2003. The adoption of this standard did not have an impact on the
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equities,
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equities.
SFAS No. 150 applies specifically to a number of financial instruments that
issuers have historically presented in their financial statements as equity, or
between the liabilities and equity sections of the balance sheet, rather than as
liabilities. Generally, SFAS No. 150 is effective for financial instruments
issued or modified after May 31, 2003 and is otherwise effective for interim
periods beginning after June 15, 2003. The adoption of SFAS No. 150 did not have
an impact on the consolidated financial statements.
F-12
3. INVENTORIES - NET
June 30, June 30,
2003 2002
-------- --------
(In thousands)
Raw materials $ 698 $ 65
Work-in-process 140 -
Finished goods 10,597 8,576
Inventory reserves (739) (591)
-------- --------
Total $ 10,696 $ 8,050
======== ========
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 $8.9 million at June 30, 2003, $6.7 million at June 30, 2002.
4. FIXED ASSETS
June 30, June 30,
2003 2002
-------- --------
(In thousands)
Furniture, equipment, computer hardware and software $ 13,388 $ 13,056
Leasehold improvements 10,025 10,013
-------- --------
23,413 23,069
Less: accumulated depreciation and amortization 19,621 18,604
-------- --------
$ 3,792 $ 4,465
========= =========
5. INCOME TAXES
The following are the major components of the provision (benefit) for income
taxes:
Fiscal Year Ended June 30,
2003 2002 2001
-------------------------------
Current:
Federal $ 88 $ (974) $ -
State 337 30 11
-------------------------------
$ 425 $ (944) $ 11
Deferred:
Federal $ - $ - $ -
State - - -
-------------------------------
$ 425 $ (944) $ 11
===============================
F-13
Significant components of the Company's net deferred tax assets are as follows:
June 30, June 30,
2003 2002
-------- --------
(In thousands)
Deferred tax assets:
Net federal, state and local operating loss carryforwards $ 40,700 $ 43,300
Costs capitalized to inventory for tax purposes 600 400
Inventory valuation 200 200
Excess of book over tax depreciation 2,300 2,400
Sales allowances not currently deductible 650 1,000
Reserves and other items not currently deductible 850 400
-------- --------
45,300 47,700
Less: valuation allowance for deferred tax assets (45,300) (47,700)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
Fiscal Year Ended June 30,
2003 2002 2001
------- ------- -------
(In thousands)
Expense (benefit) for federal income taxes at the statutory
rate of 35.0% $ 1,786 $(1,109) $(2,664)
Other 40 472 326
State and local taxes net of federal benefit 219 -- --
Effects of elimination of tax liabilities no longer required -- (747) --
Effects of unrecognized federal tax loss carryforwards -- 667 2,349
Effects of tax loss carrybacks/(carryforwards) (1,620) (227) --
------- ------- -------
Provision (benefit) for income taxes $ 425 $ (944) $ 11
------- ------- -------
At June 30, 2003, the Company has a federal net operating loss carryforward for
income tax purposes of approximately $100 million, which will expire between
fiscal 2010 and 2023.
The income tax benefit in the fiscal year ended June 30, 2002 includes a benefit
$0.2 million for refund claims due to tax law changes and a benefit of $0.7
million related to the elimination of tax liabilities that are no longer
required.
6. FINANCING AGREEMENTS
On September 27, 2002, the Company and certain of its subsidiaries
entered into a new three-year financing agreement (the "Financing Agreement")
with The CIT Group/Commercial Services, Inc. ("CIT"), to replace the former
Financing Agreement discussed below. The Financing Agreement provides the
Company with a $50.5 million facility comprised of (i) a $40 million revolving
line of credit (the "Revolving Facility") with a $25 million sublimit for
letters of credit, a $3 million seasonal overadvance and certain other
overadvances at the discretion of CIT, and (ii) a $10.5 million term loan (the
"Term Loan").
At the option of the Company, the Revolving Facility and the Term Loan
each may bear interest either at the JPMorgan Chase Bank Rate ("Prime Rate") or
the London Interbank Offered Rate ("LIBOR"). If the Company chooses the JPMorgan
Chase Bank Rate, the interest (i) on the Revolving Facility accrues at a rate of
1/2 of 1% above the Prime Rate for fiscal 2003 and until the first day of the
month following delivery of the Company's consolidated financial statements for
fiscal 2003 (the "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
F-14
accrues at a rate of 3 3/4% above LIBOR for fiscal 2003 and until the Adjustment
Date and thereafter at a rate ranging from 3 1/4% above LIBOR to 4% above LIBOR.
All adjustments to interest rates will be determined upon delivery of the
Company's 2003 financials to the Lender, based upon the availability under the
Revolving Facility and certain fixed charge coverage ratios and leverage ratios.
The interest rate as of June 30, 2003 on the Revolving Facility was 4.5% and on
the Term Loan was 5.0%.
On September 27, 2002, the Company borrowed $18.3 million under the
Revolving Facility and $10.5 million under the Term Loan. These borrowings were
used to pay off the balances under the Former Financing Agreement of $18.3
million and the Former Term Loan of $10.5 million and for working capital
purposes. Commencing October 1, 2002, amortization payments in the amount of
$375,000 are payable quarterly in arrears in connection with the Term Loan. A
balloon payment of $6.0 million is due on September 27, 2005 under the Term
Loan. The Company's obligations under the Financing Agreement are secured by a
first priority lien on substantially all of the Company's assets, including the
Company's accounts receivable, inventory, intangibles, equipment, and trademarks
and a pledge of the Company's stock 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. At June 30, 2003
the Company was in compliance with all of its covenants. In the event of the
early termination by the Company of the Financing Agreement, the Company will be
liable for termination fees of (i) (a) $500,000 plus (b) any unpaid portion of
the $500,000 minimum factoring commission fees otherwise due in the first year
of the term, if termination occurs within twelve months of the closing date; or
(ii) (a) $350,000 if termination occurs between the thirteenth and the
twenty-fourth month from the closing date plus, (b) any unpaid portion of the
$250,000 minimum factoring commission fees otherwise due for the first half of
the second year of the term, if termination occurs between the thirteenth and
eighteenth month from the closing date; or (iii) $150,000 if termination occurs
after the twenty-fourth month from the closing date. The Company may prepay at
any time, in whole or in part, the Term Loan without penalty. The Financing
Agreement expires on September 27, 2005.A fee of $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 such event, the Company shall pay to CIT a collateral management fee
equal to $5,000 a month. Under the agreement, CIT may also require the Company
to utilize CIT to continue to perform certain bookkeeping, collection and
management services and the Company shall pay CIT an additional fee equal to 1/4
of 1% of the gross face amount of all accounts, with a minimum aggregate
commission of $300,000 per annum and a minimum of $1.50 per invoice.
Until September 27, 2002, the Company had a financing agreement with
BNY Financial Corporation, a wholly owned subsidiary of General Motors
Acceptance Corp. ("GMAC") (the "Former Financing Agreement"). The Former
Financing Agreement consisted of two facilities: (i) the Former Revolving
Facility which was a $45.5 million five-year revolving credit line (subject to
an asset based borrowing formula) with a $34.0 million sublimit for letters of
credit, and (ii) the Former Term Loan which was a $14.5 million term loan
facility. Each facility had been amended to extend the maturity date until April
1, 2003. At June 30, 2002 and June 30, 2001, the Company had borrowings of $3.6
million and $5.0 million under the Revolving Facility and total availability of
approximately $6.9 million and $2.5 million (inclusive of over advance
availability) under the Former Financing Agreement.
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
F-15
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,
and trademarks and a pledge of the Company's stock and membership interest in
the Company's subsidiaries, including the Additional Borrower.
On June 30, 2003, the Company had $11.6 million of outstanding letters
of credit under the Revolving Facility, total availability of approximately
$10.7 million under the new Financing Agreement and no revolving credit
borrowings. At June 30, 2002, the Company had $9.8 million of outstanding
letters of credit, total availability of approximately $3.8 million and
borrowings of $3.6 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 (6.0% at June 30, 2002) and was
payable on a monthly basis, in arrears. Interest on the Former Term Loan accrued
at an interest rate equal to the greater of (i) 6.0% or (ii) a rate ranging from
1/2 of 1% above the Prime Rate to 1 1/2% above the Prime Rate, which interest
rate was determined, from time to time, based upon the Company's availability
under the Revolving Facility. The interest rate on the Former Term Loan was 6.0%
at June 30, 2002.
7. 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 valued at $84,000 and stock
options to purchase 500,000 shares of Common Stock 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 was determined based on the average market price of the
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 $3,609
Property, plant, and equipment 36
Intangible assets 90
Goodwill 1,395
------
Total assets acquired $5,130
======
F-16
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 Year Ended
June 30, June 30,
2003 2002
---------------------------------------
(Unaudited)
(In thousands except per share amounts)
Net sales $ 147,129 $ 166,356
Net income (loss) 5,087 (574)
Basic income (loss) per share $ 0.19 $ (0.02)
Diluted income (loss) per share $ 0.17 $ (0.02)
8. EMPLOYEE BENEFIT PLANS
Pension Plan:
Pursuant to a collective bargaining agreement, all of the Company's
union employees are covered by a defined benefit pension plan. Pension expense
amounted to approximately $81,000, $50,000, and $1,000 in fiscal 2003, 2002, and
2001, respectively.
The reconciliation of the funded status of the pension plan as of June 30, 2003,
2002 and 2001 is as follows:
2003 2002 2001
------- ------- -------
(in thousands)
Components of Net Periodic Benefit Costs:
Service Cost $ 58 $ 59 $ 50
Interest Cost 72 67 60
Expected Return on Plan Assets (64) (76) (89)
Recognized Net Actuarial Loss/ (Gain) 15 -- (20)
------- ------- -------
Net Periodic Benefit Cost $ 81 $ 50 $ 1
------- ------- -------
Change in Benefit Obligation:
Benefit Obligation at Beginning of Year $ 1,049 $ 905 $ 797
Service Cost 58 59 50
Interest Cost 72 67 60
Actuarial Loss/(Gain) 5 (23) (33)
Change in Assumption (Discount Rate) 220 69 59
Benefits Paid (29) (28) (28)
------- ------- -------
Benefit Obligation at End of Year $ 1,375 $ 1,049 $ 905
------- ------- -------
Reconciliation of Plan Assets:
Fair Value of Plan Assets at Beginning of Year $ 779 $ 910 $ 971
Actual Return/(Loss) on Plan Assets 27 (100) (137)
F-17
Employer Contribution -- -- 108
Benefits Paid (29) (28) (28)
Expenses Paid (3) (3) (4)
------- ------- -------
Fair Value of Plan Assets at End of Year $ 774 $ 779 $ 910
------- ------- -------
Reconciliation of Funded Status at End of Year
Prepaid Benefit Cost $ -- $ -- $ 5
Accrued Benefit Liability (601) (270) 16
Accumulated Other Comprehensive Loss 494 242 --
------- ------- -------
Net Amount Recognized $ (107) $ (28) $ 21
------- ------- -------
Assumptions as of June 30 2003 2002 2001
------- ------- -------
Discount Rate 5.75% 7.00% 7.50%
Long Term Rate of Return 8.50% 8.50% 8.50%
SAVINGS PLAN:
The Company has a savings plan (the "Savings Plan") under which
eligible employees may contribute a percentage of their compensation and the
Company (subject to certain limitations) as of January 2003 contributes 10% of
the employee's contribution. From February 2002 to January 2003 there was no
employer matching contribution. Prior to February 2002 the Company matched 50%
of the employee's contribution. The Company contributions are invested in
investment funds selected by the participants and are subject to vesting
provisions of the Savings Plan. Expense under the Savings Plan was approximately
$15,000 in fiscal 2003, $200,000 in fiscal 2002 and $300,000 in fiscal 2001.
9. 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 of 1986, 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
of Common Stock. 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 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 each of the first two anniversaries of the
Agreement's effective date and November 1, 2003, respectively. In the event that
the Company achieved a cumulative earnings before income taxes, depreciation and
amortization ("EBITDA") target determined by the Company's Board of Directors
for the three year period ended June 30, 2003, Mr. DiPaolo would have been
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). The Company did not meet the cumulative EBITDA target therefore the
company is not required to purchases 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.
F-18
During February 2001, employee and director options for an aggregate of
1,400,401 shares of the Company's common stock were surrendered under a stock
option replacement program offered by the Company. Under the program, employees
had the right to surrender their outstanding, out-of-the- money options in
exchange for a commitment by the Company to grant new options to them for the
same number of shares on a date, which is in excess of six months (183 days)
after the surrender date. To be eligible to receive the new options, which have
an exercise price equal to the fair market value on the future grant date
(August 8, 2001), employees (or directors as the case may be) must have been
employed by the Company (or to serve as directors) on such grant date. On August
8, 2001, 1,400,401 options were granted to employees and directors under this
program. The new options vest in increments of 50% on August 8, 2002 and 50% on
August 8, 2003.
Information regarding the Company's stock options is summarized below:
Stock Options
--------------------------------------------------------------------
Number Exercise Weighted Average
of Shares Price Range Exercise Price
----------------- -------------------------- -----------------
Outstanding at June 30, 2000 2,181,310 $ 1.25 - $ 3.50 $ 2.63
Options granted 3,325,000 $ .38 - $ .69 $ .39
Options canceled (2,166,310) $ .69 - $ 3.50 $ 2.61
-----------------
Outstanding at June 30, 2001 3,340,000 $ .38 - $ 3.50 $ .41
Options granted 1,920,401 $ .50 - $ .50 $ .50
Options canceled (29,417) $ .50 - $ 3.11 $ .94
-----------------
Outstanding at June 30, 2002 5,230,984 $ .38 - $ 3.50 $ .44
Options granted 910,000 $ .75 - $ .84 $ .80
Options exercised (6,100) $ .50 - $ .50 $ .50
Options canceled (15,290) $ .50 - $ .75 $ .75
-----------------
Outstanding at June 30, 2003 6,119,594 $ .38 - $ 3.50 $ .49
================= ========================== =================
The following table summarizes information about the Company's outstanding and
exercisable stock options at June 30, 2003:
Outstanding Exercisable
---------------------------------------------- --------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Price Shares Life (Yrs.) Price Shares Price
- -------------------------------------------------------------------------------- --------------------------------
$0.38 3,000,000 2.34 $0.38 2,000,000 $.38
$0.50 2,189,594 7.32 $0.50 1,153,416 $.50
$0.69 10,000 7.00 $0.69 5,000 $.69
$0.75 345,000 9.16 $0.75 0 $0.00
$0.84 550,000 4.87 $0.84 0 $0.00
$3.00 10,000 6.00 $3.00 7,500 $3.00
$3.11 10,000 4.65 $3.11 10,000 $3.11
$3.50 5,000 5.00 $3.50 5,000 $3.50
- -------------------------------------------------------------------------------- --------------------------------
6,119,594 4.75 $.49 3,180,916 $0.44
- -------------------------------------------------------------------------------- --------------------------------
F-19
All stock options are granted at fair market value of the Common Stock
at grant date. The outstanding stock options have a weighted average contractual
life of 4.75 years, 5.45 years, and 4.37 years in 2003, 2002, and 2001,
respectively. The number of stock options exercisable at June 30, 2003, 2002,
and 2001 were 3,180,916, 1,321,250, and 317,500, respectively.
10. ACCUMULATED OTHER COMPREHENSIVE LOSS
For the Year Ended
June 30, 2003 June 30, 2002
------------- -------------
Minimum Pension Liability $ (494) $ (242)
------ ------
Accumulated Other Comprehensive Loss $ (494) $ (242)
====== ======
11. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Lease Obligations:
The Company leases showroom, distribution and office facilities, and
equipment under various noncancellable operating lease agreements which expire
through 2009. Rental expense for the years ended June 30, 2003, 2002 and 2001
was approximately $2.6 million, $2.6 million and $2.5 million, respectively.
The minimum aggregate rental commitments at June 30, 2003 are as
follows (in thousands):
Fiscal year ending:
2004................................ $ 2,609
2005................................ 1,277
2006................................ 1,222
2007................................ 1,132
2008................................ 1,132
Subsequent to 2009................... 1,101
---------
$ 8,473
=========
Letters of Credit:
The Company was contingently liable under letters of credit issued by
banks to cover primarily contractual commitments for merchandise purchases of
approximately $11.6 million and $9.8 million at June 30, 2003 and June 30, 2002,
respectively.
Inventory purchase commitments:
The Company was contingently liable for contractual commitments for
merchandise purchases of approximately $11.6 million and $11.9 million at June
30, 2003 and June 30, 2002, respectively.
Non-Competition Agreement:
In connection with a non-competition agreement with a former executive,
Ivy Karkut, who resigned in January 2001, the Company paid $900,000 in equal
monthly installments over the 12-month period from January 2001 to January 2002.
F-20
Litigation:
The Company is involved in legal proceedings from time to time arising
out of the ordinary conduct of its business. The Company believes that the
outcome of these proceedings will not have a material adverse effect on the
Company's financial condition or results of operations.
12. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly financial information for fiscal 2003 and fiscal 2002 is set
forth in the table below:
(In thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
FISCAL 2003
Net sales $ 34,791 $ 30,879 $ 40,983 $ 33,572
Gross profit 9,457 8,202 10,359 7,809
Net income 1,563 580 2,094 440
Basic earnings per share 0.06 0.02 0.08 0.02
Diluted earnings per share 0.05 0.02 0.07 0.01
FISCAL 2002
Net sales $ 39,458 $ 29,964 $ 43,617 $ 32,730
Gross profit 8,227 3,003 9,305 8,283
Net income (582) (5,338) 1,754 1,942
Basic and diluted earnings (loss) per share (0.02) (0.20) 0.06 0.07
The sum of the quarterly net earnings per share amounts may not equal the
full-year amount since the computations of the weighted average number of
common-equivalent shares outstanding for each quarter and the full year are made
independently.
During the fourth quarter for fiscal year 2002, the Company recorded an income
tax benefit which represents refund claims of $0.2 million and the elimination
of income tax liabilities of $0.7 million that are no longer required.
During the fourth quarter of fiscal 2002 the Company recorded other income of
$0.2 million comprised of a gain on the sale of equity securities.
F-21
SCHEDULE II
BERNARD CHAUS, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at Charged to
Beginning of Costs and Balance at End
Description Year Expenses Deductions of Year
Year ended June 30, 2003
Allowance for doubtful accounts $ 340 $ (260) $ 0 (1) $ 80
Reserve for customer allowances and deductions $1,093 $ 9,352 $ 9,610 (2) $ 835
------ ------- ------------ ------
Year ended June 30, 2002
Allowance for doubtful accounts $ 273 $ 75 $ 8 (1) $ 340
Reserve for customer allowances and deductions $1,074 $11,248 $ 11,229 (2) $1,093
------ ------- ------------ ------
Year ended June 30, 2001
Allowance for doubtful accounts $ 407 $ 75 $ 209 (1) $ 273
------ ------- ------------ ------
Reserve for customer allowances and deductions $2,365 $13,292 $ 14,583 (2) $1,074
------ ------- ------------ ------
- -------------
(1) Uncollectible accounts written off
(2) Allowances charged to reserve and granted to customers
S-1