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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 5(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended December 31, 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
incorporation or organization) number)
530 Seventh Avenue, New York, New York 10018
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 354-1280
--------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes [X] No [ ] .
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Date Class Shares Outstanding
- ----------------- ------------------------ ---------------------
February 12, 2004 Common Stock, $0.01 par value 27,407,007
- ----------------- ------------------------ ---------------------
INDEX
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited) PAGE
Condensed Consolidated Balance Sheets as of
December 31, 2003, June 30, 2003 and
December 31, 2002 3
Condensed Consolidated Statements of Operations for the
Quarters and Six Months ended December 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the
Six Months ended December 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
INDEX TO EXHIBITS 25
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and per share amounts)
December 31, June 30, December 31,
2003 2003 2002
------------ --------- ------------
(Unaudited) ( * ) (Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 162 $ 2,650 $ 836
Accounts receivable - net 23,623 19,996 18,134
Inventories - net 10,225 10,696 10,049
Prepaid expenses and other current assets 774 719 932
--------- --------- ---------
Total current assets 34,784 34,061 29,951
Fixed assets - net 3,554 3,792 4,103
Other assets - net 432 599 633
Goodwill 1,437 1,395 1,270
--------- --------- ---------
Total assets $ 40,207 $ 39,847 $ 35,957
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving credit borrowings $ 4,037 $ -- $ --
Accounts payable 9,882 12,747 9,878
Accrued expenses 3,224 4,161 4,706
Term loan - current 1,500 1,500 1,500
--------- --------- ---------
Total current liabilities 18,643 18,408 16,084
Deferred rent 468 455 421
Term loan 7,125 7,875 8,625
--------- --------- ---------
Total liabilities 26,236 26,738 25,130
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
authorized shares - 1,000,000; -- -- --
outstanding shares - none
Common stock, $.01 par value,
authorized shares - 50,000,000; issued shares - 275 274 274
27,469,277 at December 31, 2003, 27,384,277
at June 30, 2003 and at December 31, 2002
Additional paid-in capital 125,985 125,943 125,943
Deficit (110,315) (111,134) (113,668)
Accumulated other comprehensive loss (494) (494) (242)
Less: Treasury stock at cost -
62,270 shares at December 31, 2003, June
30, 2003 and December 31, 2002 (1,480) (1,480) (1,480)
--------- --------- ---------
Total stockholders' equity 13,971 13,109 10,827
--------- --------- ---------
Total liabilities and stockholders' equity $ 40,207 $ 39,847 $ 35,957
========= ========= =========
*Derived from audited financial statements at June 30, 2003. See accompanying
notes to condensed consolidated financial statements.
3
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share amounts)
For the Quarter Ended For the Six Months Ended
December 31, December 31, December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Net sales $ 34,566 $ 30,879 $ 73,371 $ 65,670
Cost of goods sold 26,549 22,677 56,144 48,011
------------ ------------ ------------ ------------
Gross profit 8,017 8,202 17,227 17,659
Selling, general and administrative expenses 7,877 7,154 15,713 14,702
------------ ------------ ------------ ------------
Income from operations 140 1,048 1,514 2,957
Interest expense, net 338 304 610 640
------------ ------------ ------------ ------------
Income (loss) before for income tax provision (benefit) (198) 744 904 2,317
Income tax provision (benefit) (7) 164 85 174
------------ ------------ ------------ ------------
Net income (loss) $ (191) $ 580 $ 819 $ 2,143
============ ============ ============ ============
Basic earnings (loss) per share $ (0.01) $ 0.02 $ 0.03 $ 0.08
============ ============ ============ ============
Diluted earnings (loss) per share $ (0.01) $ 0.02 $ 0.03 $ 0.07
============ ============ ============ ============
Weighted average number of
common shares outstanding- basic 27,378,000 27,256,000 27,351,000 27,237,000
============ ============ ============ ============
Weighted average number of common
shares outstanding - diluted 27,378,000 29,793,000 30,889,000 29,646,000
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
4
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Six Months Ended
----------------------------
December 31, December 31,
2003 2002
------------ ------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 819 $ 2,143
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 671 774
Loss on disposal of other assets -- 243
Provision for losses on accounts receivable (20) --
Changes in operating assets and liabilities:
Accounts receivable (3,607) 3,930
Inventories 471 192
Prepaid expenses and other current assets (55) 475
Accounts payable (2,865) 129
Accrued expenses and deferred rent (924) 1,489
------- -------
Net Cash (Used In) Provided by Operating Activities (5,510) 9,375
------- -------
INVESTING ACTIVITIES
Acquisition of business (42) (4,577)
Purchases of fixed assets (266) (149)
------- -------
Net Cash Used In Investing Activities (308) (4,726)
------- -------
FINANCING ACTIVITIES
Net proceeds (payments) from short-term bank borrowings 4,037 (3,591)
Principal payments on term loan (750) (375)
Net proceeds from exercise of stock options 43 3
------- -------
Net Cash Provided by (Used In) Financing Activities 3,330 (3,963)
------- -------
(Decrease) increase in cash and cash equivalents (2,488) 686
Cash and cash equivalents, beginning of period 2,650 150
------- -------
Cash and cash equivalents, end of period $ 162 $ 836
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Taxes $ 226 $ 86
======= =======
Interest $ 469 $ 540
======= =======
Non cash investing activities:
Common stock issued for acquisition of business $ -- $ 84
======= =======
Stock options issued for acquisition of business $ -- $ 384
======= =======
See accompanying notes to condensed consolidated financial statements
5
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six Months Ended December 31, 2003 and December 31, 2002
1. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("generally accepted accounting principles") for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. All
significant intercompany balances and transactions were eliminated. Operating
results for the quarter and six months ended December 31, 2003 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 2004 ("fiscal 2004") or any other period. The balance sheet at June 30,
2003 has been derived from the audited financial statements at that date. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended June 30,
2003.
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 The CIT Group/Commercial Services, Inc. ("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 the
Company's customers' insolvency. 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 expects
to continue to extend credit to its customers based upon an evaluation
6
BERNARD CHAUS, INC. AND SUBSIDIARIES
of the customers' financial condition and credit history. At December 31, 2003,
approximately 98% of the Company's accounts receivable are being serviced by CIT
under the factoring arrangement. As a result of the Company's dependence on its
major customers, particularly three single corporate entities (Dillard's
Department Stores, TJX Companies, Inc., and Sam's Club), 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.
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 bad debt history and the
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 December 31, 2003, June 30,
2003 and December 31, 2002, Accounts Receivable was net of allowances of $0.4
million, $1.9 million and $1.5 million, 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. 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 December 31,
2003, no impairments of long-lived assets have been recognized. Goodwill
represents the cost in excess of the fair value of net assets acquired. 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 six months ended December 31, 2003 and 2002.
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 December 31, 2003 and
2002 and June 30, 2003, the Company recorded a full valuation allowance on its
deferred tax assets. The Company will recognize a tax benefit as the Company's
net operating loss carryforwards are utilized.
7
BERNARD CHAUS, INC. AND SUBSIDIARIES
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
because 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
value at the grant dates for awards under these plans in accordance with SFAS
No. 123, the Company's net income (loss) and earnings per share would have been
adjusted to the pro forma amounts as follows (Dollars in thousands, except share
data):
For the Three Months Ended For the Six Months Ended
December 31, December 31, December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited)
(In thousands except per share amounts)
Net income (loss), as reported $ (191) $ 580 $ 819 $ 2,143
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of tax effects (43) (135) (118) (310)
------ ------- ------- ---------
Proforma net income (loss) $ (234) $ 445 $ 701 $ 1,833
====== ======= ======= =========
Earnings per share:
------ ------- ------- ---------
Basic-as reported $(0.01) $ 0.02 $ 0.03 $ 0.08
====== ======= ======= =========
Basic-proforma $(0.01) $ 0.02 $ 0.03 $ 0.07
====== ======= ======= =========
------ ------- ------- ---------
Diluted-as reported $(0.01) $ 0.02 $ 0.03 $ 0.07
====== ======= ======= =========
Diluted-proforma $(0.01) $ 0.01 $ 0.02 $ 0.06
====== ======= ======= =========
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 For the
Three Months Ended Three Months Ended
December 31, 2003 December 31, 2002
------------------ ------------------
Weighted average fair value of stock options $0.88 $0.82
granted
Risk-free Interest rate 4.18% 3.92%
Expected dividend yield $0.00 $0.00
Expected life of option 10.0 years 5.5 years
Expected volatility 103% 188%
Earnings Per Share: Basic earnings 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
three months ended December 31, 2002 and for the six months ended December 31,
2003 and December 31, 2002 by dividing the applicable net income by the weighted
average number of common shares outstanding and common equivalents. Potentially
dilutive shares were not included in the calculation of diluted loss per share
for the three months ended December 31, 2003, as their inclusion would have been
antidilutive.
8
BERNARD CHAUS, INC. AND SUBSIDIARIES
For the Three Months Ended For the Six Months Ended
December 31, December 31, December 31, December 31,
Denominator for Earnings per share (in millions) 2003 2002 2003 2002
------------ ------------ ------------ ------------
Denominator for basic earnings per share
weighted-average shares outstanding 27.4 27.3 27.4 27.2
Assumed exercise of potential common shares -- 2.5 3.5 2.4
---- ---- ---- ----
Denominator for diluted earnings per share 27.4 29.8 30.9 29.6
==== ==== ==== ====
Shipping and handling costs:
Shipping and handling costs are included as a component of Selling,
General, & Administrative Expenses in the Consolidated Statements of Operations.
For the three months ended December 31, 2003 and 2002, shipping and handling
costs approximated $0.1 million and $0.1 million, respectively. For the six
months ended December 31, 2003 and 2002, shipping and handling costs
approximated $0.3 million and $0.2 million, respectively.
2. Inventories - net
December 31, June 30, December 31,
2003 2003 2002
------------ -------- ------------
(in thousands)
(unaudited) (unaudited)
Raw materials $ 1,540 $ 698 $ 445
Work-in-process 6 140 330
Finished goods 9,373 10,597 9,873
Inventory reserves (694) (739) (599)
-------- -------- --------
Total $ 10,225 $ 10,696 $ 10,049
======== ======== ========
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 $7.6 million at December 31, 2003, $8.9 million at June
30, 2003 and $6.5 million at December 31, 2002.
3. Financing Agreement
On September 27, 2002, the Company and certain of its subsidiaries
entered into a new three-year financing agreement (the "Financing Agreement")
with 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 JP Morgan Chase Bank Rate ("Prime Rate") or
the London Interbank Offered Rate ("LIBOR"). If the Company chooses the Prime
Rate, the interest (i) on the Revolving Facility accrues at a rate of 1/2 of 1%
above the Prime Rate
9
BERNARD CHAUS, INC. AND SUBSIDIARIES
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," i.e., October 1, 2003 ) 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 of October 1, 2003 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 of October 1, 2003 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 of October 1, 2003 and
thereafter at a rate ranging from 3 1/4% above LIBOR to 4% above LIBOR. All
adjustments to interest rates are based upon the availability under the
Revolving Facility and certain fixed charge coverage ratios and leverage ratios.
The Company and CIT have agreed that there will be no change in the interest
rates charged under the Revolving Facility or the Term Loan at this time. The
interest rate as of December 31, 2003 on the Revolving Facility was 4.50% and on
the Term Loan was 5.00%.
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 (increased to $425,000 by the Second Amended Financing Agreement
described in note 6) are payable quarterly in arrears in connection with the
Term Loan. A balloon payment of $6.6 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 equity interest in its
subsidiaries.
The Financing Agreement contains numerous financial and operational
covenants, including limitations on additional indebtedness, liens, dividends,
stock repurchases and capital expenditures. In addition, the Company is required
to maintain (i) specified levels of tangible net worth, (ii) certain fixed
charge coverage ratios, (iii) certain leverage ratios, and (iv) specified levels
of minimum borrowing availability under the Revolving Facility. At December 31,
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 Financing
Agreement provides that the Company will be liable for termination fees of (i)
if the termination occurs within twelve months of the closing date, (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; or (ii) (a) if termination occurs
between the thirteenth and the twenty-fourth month from the closing date,
$350,000 plus (b) if termination occurs between the thirteenth and eighteenth
month from the closing date, any unpaid portion of the $250,000 minimum
factoring commission fees otherwise due for the first half of the second year of
the term or (iii) if termination occurs after the twenty-fourth month from the
closing date, $150,000. 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"). 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. Once terminated, the Company shall pay to CIT
a collateral management fee equal to $5,000 a month. Under the Factoring
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. [The Company and CIT are in
10
BERNARD CHAUS, INC. AND SUBSIDIARIES
discussions regarding the transition of the factoring agreement to a collateral
management arrangement . The costs and timing of a substitute arrangement, if
any, have not yet been agreed upon.]
On November 27, 2002, the Company and CIT agreed to an amendment to the
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 interest and membership interest in the Company's
subsidiaries, including the Additional Borrower.
See Note 6 regarding the Cynthia Steffe acquisition and the related
amendment to the Financing Agreement and Term Loan.
On December 31, 2003, the Company had $11.7 million of outstanding
letters of credit under the Revolving Facility, total availability of
approximately $6.7 million under the Amended Financing Agreement, $4.0 in
revolving credit borrowings and a balance of $8.6 million on the Term Loan. At
December 31, 2002, the Company had $9.3 million of outstanding letters of
credit, total availability of approximately $8.8 million, a balance of $10.1
million on the Term Loan and no revolving credit borrowings under the Revolving
Facility. At 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 Financing Agreement, a balance of $9.4 million on the
Term Loan and no revolving credit borrowings.
Prior Financing Agreement
Until September 27, 2002, the Company had a financing agreement with
BNY Financial Corporation, a wholly owned subsidiary of General Motors
Acceptance Corp. ("GMAC") (the "Former Financing Agreement"). The Former
Financing Agreement consisted of two facilities: (i) the Former Revolving
Facility which was a $45.5 million five-year revolving credit line (subject to
an asset based borrowing formula) with a $34.0 million sublimit for letters of
credit, and (ii) the Former Term Loan which was a $14.5 million term loan
facility. Each facility had been amended to extend the maturity date until April
1, 2003.
Interest on the Former Revolving Facility accrued at the greater of (i)
6% or (ii) 1/2 of 1% above the lender's prime rate and was payable on a monthly
basis, in arrears. Interest on the Former Term Loan accrued at an interest rate
equal to the greater of (i) 6.0% or (ii) a rate ranging from 1/2 of 1% above the
lender's prime rate to 1 1/2% above the lender's 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%.
11
BERNARD CHAUS, INC. AND SUBSIDIARIES
4. S.L. Danielle Acquisition
On November 27, 2002, S.L. Danielle Acquisition, LLC ("S.L.
Danielle"), a newly formed subsidiary of the Company acquired certain assets of
S.L. Danielle Inc. The results of S.L. Danielle's operations have been included
in the consolidated financial statements since that date. S.L. Danielle designs,
arranges for the manufacture of, markets and sells a women's apparel line,
principally under private labels.
The aggregate purchase price was approximately $5.1
million, including cash of $4.4 million, 100,000 shares of
common stock of the Company ("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 pricing model. The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition.
At November 27, 2002
(in thousands)
Current assets $3,567
Property, plant, and equipment 36
Intangible assets 90
Goodwill 1,437
------
Total assets acquired $5,130
======
The following unaudited pro forma information presents financial
information of the Company as though the acquisition had been completed as of
the beginning of the period set forth below.
For the Three Months Ended For the Six Months Ended
December 31, December 31,
2002 2002
---------------------------------------
(Unaudited)
(In thousands except per share amounts)
Net sales $33,074 $72,211
Net income 666 2,553
Basic income per share $ 0.02 $ 0.09
Diluted income per share $ 0.02 $ 0.09
5. Stock Based Compensation
The Company has a Stock Option Plan (the "Option Plan"). Pursuant to
the Option Plan, the Company may grant to eligible individuals incentive stock
options, as defined in the Internal Revenue Code 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
12
BERNARD CHAUS, INC. AND SUBSIDIARIES
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.
Information regarding the Company's stock options is summarized below:
Stock Options
------------------------------------------
Weighted
Average
Number Exercise Exercise
of Shares Price Range Price
------------- ---------------- ---------
Outstanding at December 31, 2002 6,134,884 $ .38 - $3.50 $ .50
Options canceled (15,290) $ .50 - $ .75 $ .75
-------------
Outstanding at June 30, 2003 6,119,594 $ .38 - $3.50 $ .49
Options granted 130,000 $ .98 - $1.12 $1.09
Options exercised (85,000) $ .50 - $ .50 $ .50
Options canceled (50,000) $ .84 - $ .84 $ .84
-------------
Outstanding at December 31, 2003 6,114,594 $ .38 - $3.50 $ .50
============= ================ =========
The following table summarizes information about the Company's outstanding and
exercisable stock options at December 31, 2003:
Outstanding Exercisable
------------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Shares Life (Yrs.) Price Shares Price
- ------------------------------------------------ ----------------------
$0.38 3,000,000 1.84 $0.38 3,000,000 $0.38
$0.50 2,104,594 6.78 $0.50 1,927,928 $0.50
$0.69 10,000 6.50 $0.69 7,500 $0.69
$0.75 345,000 8.66 $0.75 86,250 $0.75
$0.84 500,000 3.91 $0.84 250,000 $0.84
$0.98 30,000 9.50 $0.98 -- $ --
$1.12 100,000 9.89 $1.12 -- $ --
$3.00 10,000 5.50 $3.00 10,000 $3.00
$3.11 10,000 4.15 $3.11 10,000 $3.11
$3.50 5,000 4.50 $3.50 5,000 $3.50
- ---------------------------------------------- --------------------
6,114,594 4.28 $ .50 5,296,678 $0.46
- ---------------------------------------------- --------------------
13
BERNARD CHAUS, INC. AND SUBSIDIARIES
The outstanding stock options have a weighted average contractual life
of 4.3 years and 5.3 years as of December 31, 2003 and 2002, respectively. The
number of stock options exercisable at December 31, 2003, June 30, 2003 and
December 31, 2002 were 5,296,678, 3,180,916, and 3,181,061, respectively.
6. Subsequent Event - Cynthia Steffe Acquisition
On January 2, 2004, Cynthia Steffe Acquisition, LLC ("CS Acquisition"),
a newly formed subsidiary of the Company acquired certain assets of the Cynthia
Steffe division of LF Brands Marketing, Inc., including inventory and showroom
fixtures. The Company also acquired the Cynthia Steffe trademarks from Cynthia
Steffe. The Cynthia Steffe business designs, arranges for the manufacture of,
markets and sells a women's apparel line, under the Cynthia Steffe trademarks.
As a result of the acquisition, the Company expects to increase its sales volume
through the sale of Cynthia Steffe product lines. The results of Cynthia
Steffe's operations will be included in the consolidated financial statements
commencing January 2, 2004. The aggregate purchase price was approximately $2.4
million, including cash of $2.1 million and a note payable to CIT of $0.3
million, subject to adjustment based upon a post closing evaluation of the
inventory acquired. The acquisition was funded by CIT through revolving credit
borrowings of $2.1 million.
On January 30, 2004, the Company and CIT agreed to an amendment to the
Financing Agreement in order to facilitate the Cynthia Steffe acquisition. The
Company and CIT agreed to add CS Acquisition 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. 2 to the Financing Agreement (the "Second
Amended Financing Agreement") and (ii) entered into a new factoring agreement
with CS Acquisition, to add CS Acquisition as a co-borrower. The obligations of
the Company, SL Danielle and CS Acquisition under the Second Amended Financing
Agreement are secured by a first priority lien on substantially all of the
assets of the Company, SL Danielle and CS Acquisition, including their
respective accounts receivables, inventory, intangibles, equipment, and
trademarks and a pledge of the Company's stock interest and membership interest
in the Company's subsidiaries. The Second Amended Financing Agreement also
provided, among other things for, (i) an increase in the amount of the Term Loan
by $1.2 million to cover a portion of the purchase price of the Cynthia Steffe
assets which had initially been paid for through revolving credit borrowings
under the Revolving Facility; (ii) an increase in the quarterly amortization
payments on the Term Loan from $375,000 to $425,000; and (iii) the amendment of
certain financial covenants for fiscal 2004 (including the fixed charge coverage
ratio and the minimum borrowing availability covenants) to provide for the
Cynthia Steffe operations and to be consistent with the Company's latest
business plan for fiscal 2004.
14
BERNARD CHAUS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net sales for the quarter ended December 31, 2003 increased by 11.9 %
or $3.7 million to $34.6 million from $30.9 million for the quarter ended
December 31, 2002. Net sales for the six months ended December 31, 2003
increased by 11.7% or $7.7 million to $73.4 million from $65.7 million for the
six months ended December 31, 2002. The increase in net sales for the quarter
and six months ended December 31, 2003 was primarily due to the sales of the
Company's S.L. Danielle product lines acquired in November 2002, partially
offset by the decrease in sales of the Company's Chaus product lines for
department stores. The ongoing difficult women's retail environment,
particularly in the department store channel, continues to adversely impact the
Company's net sales and overall operating performance. The Company did not
receive orders for spring or summer 2004 merchandise from May Department Stores
which had accounted for approximately $7.0 million or 9% of the Company's
revenues for the second half of fiscal 2003. The Company is currently in
discussions with this retailer regarding possible orders of Fall merchandise.
Gross profit for the quarter ended December 31, 2003 decreased $0.2
million to $8.0 million as compared to $8.2 million for the quarter ended
December 31, 2002. As a percentage of net sales, gross profit decreased to 23.
2% for the quarter ended December 31, 2003 from 26.6% for the quarter ended
December 31, 2002. Gross profit for the six months ended December 31, 2003
decreased $0.5 million to $17.2 million as compared to $17.7 million for the six
months ended December 31, 2002. As a percentage of net sales, gross profit
decreased to 23.5% for the six months ended December 31, 2003 from 26.9% for the
six months ended December 31, 2002. The decrease in gross profit dollars and
gross profit percentage was primarily due to the lower sales volume and lower
initial mark up related to the Company's Chaus product lines sold in department
stores. The decrease in gross profit dollars of the Chaus product lines sold in
department stores was partially offset by the gross profit from the Company's
S.L. Danielle product lines, acquired in November 2002.
Selling, general and administrative ("SG&A") expenses increased by $0.7
million to $7.9 million for the quarter ended December 31, 2003 from $7.2
million for the quarter ended December 31, 2002. SG&A expenses as a percentage
of net sales decreased to 22.8% for the quarter ended December 31, 2003 compared
to 23.2% for the quarter ended December 31, 2002. SG&A for the six months ended
December 31, 2003 increased by $1.0 million to $15.7 million from $14.7 million
for the six months ended December 31, 2002. SG&A expenses as a percentage of net
sales decreased to 21.4% for the six months ended December 31, 2003 compared to
22.4% for the six months ended December 31, 2002. The increase in SG&A expenses
for the quarter and six months ended December 31, 2003 was primarily due to SG&A
expenses related to the Company's S.L. Danielle product lines acquired in
November 2002. The decrease in SG&A expense as a percentage of net sales for the
quarter and six months ended December 31, 2003 compared to the prior year
periods was due to the Company's ability to leverage its SG&A expenses on its
increased sales volume. During the quarter the Company began a targeted branding
effort designed to enhance the visibility of the Josephine Chaus line in
department stores and has engaged a marketing/branding firm to assist in this
project.
Interest expense is greater for the quarter ended December 31, 2003 as
compared to the quarter ended December 31, 2002 primarily due to higher bank
borrowings offset by lower interest rates. Interest expense is lower for the six
months ended December 31, 2003 as compared to the six months ended December 31,
2002 due lower interest rates partially offset by higher bank borrowings.
15
BERNARD CHAUS, INC. AND SUBSIDIARIES
The provision for income taxes for the six months ended December 31,
2003 and 2002 reflects a provision for certain federal, state and local taxes.
For the six months ended December 31, 2003 and 2002, 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 tax legislation temporarily suspending the use of net operating
loss (NOL) carryforwards against income. Accordingly, for the six months ended
December 31, 2003 and 2002, the Company has made provisions for additional state
income taxes. See discussion below under Critical Accounting Policies and
Estimates regarding income taxes and the Company's federal net operating loss
carryforward.
Financial Position, Liquidity and Capital Resources
General
Net cash used in operating activities was $5.5 million for the six
months ended December 31, 2003 as compared to cash provided by operating
activities of $9.4 million for the six months ended December 31, 2002. Cash used
in operating activities for such six month period of fiscal 2004 was primarily
the result of an increase in accounts receivable ($3.6 million), a decrease in
accounts payable ($2.9 million), a decrease in accrued expenses ($0.9 million),
partially offset by net income ($0.8 million) and depreciation and amortization
($0.7 million). Cash provided by operating activities for the six month period
of fiscal 2003 was primarily the result of net income ($2.1 million), a decrease
in accounts receivable ($3.9 million) and an increase in accrued expenses and
deferred rent ($1.5 million).
Cash used in investing activities in the six months ended December 31,
2003 was $0.3 million compared to $4.7 million in the previous year. The capital
expenditures for the six months ended December 31, 2003 consisted primarily of
management information systems upgrades. The Company anticipates additional
capital expenditures of approximately $0.5 million for the remainder of fiscal
year 2004. The investing activities for the six months ended December 31, 2002
consisted of $4.6 million for the acquisition of S.L. Danielle (discussed below)
and $0.1 million for capital expenditures of fixed assets.
Net cash provided by financing activities was $3.3 million for the six
months ended December 31, 2003 primarily as the result of net proceeds from
short-term borrowings of $4.0 million partially offset by principal payments on
the Term Loan (as defined below) of $750,000. Net cash used in financing
activities was $4.0 million for the six months ended December 31, 2002 primarily
as the result of repayment of short-term borrowings of $3.6 million and
principal payments on the Term Loan of $375,000.
Financing Agreement
On September 27, 2002, the Company and certain of its subsidiaries
entered into a new three-year financing agreement (the "Financing Agreement")
with The CIT Group/Commercial Services, Inc. ("CIT"), to replace the former
Financing Agreement discussed below. The Financing Agreement provides the
Company with a $50.5 million facility comprised of (i) a $40 million revolving
line of credit (the "Revolving Facility") with a $25 million sublimit for
letters of credit, a $3 million seasonal overadvance and certain other
overadvances at the discretion of CIT, and (ii) a $10.5 million term loan (the
"Term Loan").
At the option of the Company, the Revolving Facility and the Term Loan
each may bear interest either at the JPMorgan Chase Bank Rate ("Prime Rate") or
the London Interbank Offered Rate ("LIBOR"). If the Company chooses the Prime
Rate, the interest (i) on the Revolving Facility accrues at a rate of 1/2 of 1%
above the Prime Rate
16
BERNARD CHAUS, INC. AND SUBSIDIARIES
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," i.e., October 1, 2003) 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 of October 1, 2003 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 of October 1, 2003 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 of October 1, 2003 and
thereafter at a rate ranging from 3 1/4% above LIBOR to 4% above LIBOR. All
adjustments to interest rates are based upon the availability under the
Revolving Facility and certain fixed charge coverage ratios and leverage ratios.
The Company and CIT have agreed that there will be no change in the interest
rates charged under the Revolving Facility or the Term Loan at this time. The
interest rate as of December 31, 2003 on the Revolving Facility was 4.50% and on
the Term Loan was 5.00%.
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 (increased to $425,000 by the Second Amended Financing Agreement
described below) are payable quarterly in arrears in connection with the Term
Loan. A balloon payment of $6.6 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 equity interest in its subsidiaries.
The Financing Agreement contains numerous financial and operational
covenants, including limitations on additional indebtedness, liens, dividends,
stock repurchases and capital expenditures. In addition, the Company is required
to maintain (i) specified levels of tangible net worth, (ii) certain fixed
charge coverage ratios, (iii) certain leverage ratios, and (iv) specified levels
of minimum borrowing availability under the Revolving Facility. At December 31,
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 Financing
Agreement provides that the Company will be liable for termination fees of (i)
if termination occurs within twelve months of the closing date, (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; or (ii) (a) if termination occurs
between the thirteenth and the twenty-fourth month from the closing date,
$350,000 plus (b) if termination occurs between the thirteenth and eighteenth
month from the closing date, any unpaid portion of the $250,000 minimum
factoring commission fees otherwise due for the first half of the second year of
the term or (iii) if termination occurs after the twenty-fourth month from the
closing date, $150,000. 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"). 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. Once terminated, the Company shall pay to CIT
a collateral management fee equal to $5,000 a month. Under the Factoring
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
17
BERNARD CHAUS, INC. AND SUBSIDIARIES
aggregate commission of $300,000 per annum and a minimum of $1.50 per invoice.
The Company and CIT are in discussions regarding the transition of the factoring
agreement to a collateral management arrangement. The costs and timing of a
substitute arrangement, if any, have not yet been agreed upon.
On November 27, 2002, the Company and CIT agreed to an amendment to the
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 interest and membership interest in the Company's
subsidiaries, including the Additional Borrower.
On December 31, 2003, the Company had $11.7 million of outstanding
letters of credit under the Revolving Facility, total availability of
approximately $6.7 million under the Financing Agreement and $4.0 in revolving
credit borrowings. At December 31, 2002, the Company had $9.3 million of
outstanding letters of credit, total availability of approximately $8.8 million
and no credit borrowing, under the Revolving Facility. At 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 Financing
Agreement and no revolving credit borrowings.
On January 30, 2004, the Company and CIT agreed to an amendment to the
Financing Agreement in order to facilitate the Cynthia Steffe acquisition
discussed below. The Company and CIT agreed to add CS Acquisition 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. 2 to the Financing
Agreement (the "Second Amended Financing Agreement") and (ii) entered into a new
factoring agreement with CS Acquisition, to add CS Acquisition as a co-borrower.
The obligations of the Company, SL Danielle and CS Acquisition under the Second
Amended Financing Agreement are secured by a first priority lien on
substantially all of the assets of the Company, SL Danielle and CS Acquisition,
including their respective accounts receivables, inventory, intangibles,
equipment, and trademarks and a pledge of the Company's stock interest and
membership interest in the Company's subsidiaries. The Second Amended Financing
Agreement also provided, among other things for, (i) an increase in the amount
of the Term Loan by $1.2 million to cover a portion of the purchase price of the
Cynthia Steffe assets which had initially been paid for through revolving credit
borrowings under the Revolving Facility; (ii) an increase in the quarterly
amortization payments on the Term Loan from $375,000 to $425,000; and (iii) the
amendment of certain financial covenants for fiscal 2004 (including the fixed
charge coverage ratio and the minimum borrowing availability covenants) to
provide for the Cynthia Steffe operations and to be consistent with the
Company's latest business plan for fiscal 2004.
Prior Financing Agreement
Until September 27, 2002, the Company had a financing agreement with
BNY Financial Corporation, a wholly owned subsidiary of General Motors
Acceptance Corp. ("GMAC") (the "Former Financing Agreement"). The Former
Financing Agreement consisted of two facilities: (i) the Former Revolving
Facility which was a $45.5 million five-year revolving credit line (subject to
an asset based borrowing formula) with a $34.0 million sublimit for letters of
credit, and (ii) the Former Term Loan which was a $14.5 million term loan
facility. Each facility had been amended to extend the maturity date until April
1, 2003.
18
BERNARD CHAUS, INC. AND SUBSIDIARIES
Interest on the Former Revolving Facility accrued at the greater of (i)
6% or (ii) 1/2 of 1% above the lender's prime rate and was payable on a monthly
basis, in arrears. Interest on the Former Term Loan accrued at an interest rate
equal to the greater of (i) 6.0% or (ii) a rate ranging from 1/2 of 1% above the
lender's prime rate to 1 1/2% above the lender's 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%.
Future Financing Requirements
At December 31, 2003, the Company had working capital of $16.1 million
as compared with working capital of $13.9 million at December 31, 2002 and $15.7
million at June 30 2003 was. 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 agreement. The Company
believes that it has adequate resources to meet its needs for the foreseeable
future assuming that it meets its business plan and satisfies the covenants set
forth in the 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.
The aggregate purchase price was approximately $5.1 million, including
cash of $4.4 million, 100,000 shares of common stock of the Company ("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 pricing model.
Cynthia Steffe Acquisition
On January 2, 2004, Cynthia Steffe Acquisition, LLC ("CS Acquisition"),
a newly formed subsidiary of the Company acquired certain assets of the Cynthia
Steffe division of LF Brands Marketing, Inc., including inventory and showroom
fixtures. The Company also acquired the Cynthia Steffe trademarks from Cynthia
Steffe. The Cynthia Steffe business designs, arranges for the manufacture of,
markets and sells a women's apparel line, under the Cynthia Steffe trademarks.
As a result of the acquisition, the Company expects to increase its sales volume
through the sale of Cynthia Steffe product lines. The results of Cynthia
Steffe's operations will be included in the consolidated financial statements
commencing January 2, 2004. The aggregate purchase price was approximately $2.4
million, including cash of $2.1 million and a note payable to CIT of $0.3
million, subject to adjustment based upon a post closing evaluation of the
inventory acquired. The acquisition was funded by CIT through revolving credit
borrowings of $2.1 million.
19
BERNARD CHAUS, INC. AND SUBSIDIARIES
Critical Accounting Policies and Estimates
The Company's significant accounting policies are more fully described
in Note 2 to the consolidated financial statements included in the Company's
annual report on Form 10-K for the year ended June 30, 2003. 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 are 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 bad debt history and the 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. These provisions result from seasonal negotiations as well
as historic deduction trends, net expected recoveries and the evaluation of
current market conditions. As of December 31, 2003, June 30, 2003 and December
31, 2002, Accounts Receivable was net of allowances of $0.4 million, $1.9
million, and $1.5 million, respectively. The decrease in accounts receivable
allowances at December 31, 2003 was primarily due to the timing of markdown and
other allowances and the change in the sales mix.
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 at December 31, 2003, $0.6 million
at December 31, 2002, and $0.7 million at June 30, 2003. Inventory reserves are
based upon the level of excess and aged inventory and the Company's estimated
recoveries on the sale of the inventory. 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.
20
BERNARD CHAUS, INC. AND SUBSIDIARIES
Income Taxes - The Company's results of operations have generated a
federal tax net operating loss ("NOL") carryforward of approximately $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 does not recognize federal tax benefits of its losses and has
established a valuation allowance for all deferred tax assets. As a result, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk- The Company is subject to market risk from exposure
to changes in interest rates based primarily on its financing activities. The
market risk inherent in the financial instruments represents the potential loss
in earnings or cash flows arising from adverse changes in interest rates. These
debt obligations with interest rates tied to the prime rate are described in
"Liquidity and Capital Resources", as well as Note 3 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 December 31, 2003 and 2002, the carrying amounts of the Company's
revolving credit borrowings and term loan approximated fair value. As of
December 31, 2003, the Company's revolving credit borrowings bore interest at
4.5% and the term loan bore interest at 5.0%. As of December 31, 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 4. 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
the 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 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
21
BERNARD CHAUS, INC. AND SUBSIDIARIES
December 31, 2003, the Company's disclosure controls and procedures were
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 December 31, 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.
22
BERNARD CHAUS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
Exhibits.
*10.106 Joinder and Amendment No. 2 to Cynthia Financing Agreement by and
among the Company, S.L. Danielle, Cynthia Steffe Acquisition, LLC and
The CIT Group/Commercial Services, Inc., as agent, dated January 30,
2004.
*10.107 Amendment No. 2 to Factoring Agreement between the Company and The CIT
Group/Commercial Services, Inc., dated January 30, 2004.
*10.108 Amendment No. 1 to Factoring Agreement between S.L. Danielle and The
CIT Group/Commercial Services, Inc., dated January 30, 2004.
*10.109 Factoring Agreement between Cynthia Steffe Acquisition, LLC and The
CIT Group/Commercial Services, Inc., dated January 15, 2004.
*10.110 Amendment to Employment Agreement between the Company and Gregory
Mongo, dated October 15, 2003.
*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.
* Filed herewith
(b) The Company filed no reports on Form 8-K, for the quarter ended
December 31, 2003.
23
BERNARD CHAUS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERNARD CHAUS, INC.
(Registrant)
Date: February 12, 2004 By: /s/ Josephine Chaus
-------------------
JOSEPHINE CHAUS
Chairwoman of the Board, and
Chief Executive Officer
Date: February 12, 2004 By: /s/ Nicholas DiPaolo
--------------------
NICHOLAS DIPAOLO
Vice Chairman of the Board, and
Chief Operating Officer
Date: February 12, 2004 By: /s/ Barton Heminover
--------------------
BARTON HEMINOVER
Chief Financial Officer
24
BERNARD CHAUS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit Number Exhibit Title
10.106 Joinder and Amendment No. 2 to Financing Agreement by and among the
Company, S.L. Danielle, Cynthia Steffe Acquisition, LLC and The CIT
Group/Commercial Services, Inc., as agent, dated January 30, 2004.
10.107 Amendment No. 2 to Factoring Agreement between the Company and The CIT
Group/Commercial Services, Inc., dated January 30, 2004.
10.108 Amendment No. 1 to Factoring Agreement between S.L. Danielle and The
CIT Group/Commercial Services, Inc., dated January 30, 2004.
10.109 Factoring Agreement between Cynthia Steffe Acquisition, LLC and The
CIT Group/Commercial Services, Inc., dated January 15, 2004.
10.110 Amendment to Employment Agreement between the Company and Gregory
Mongo, dated October 15, 2003.
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.
25