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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 5(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2004.
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
- -------------- ----------------------------- ------------------
May 14, 2004 Common Stock, $0.01 par value 27,652,007
- -------------- ----------------------------- ------------------
INDEX
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited) PAGE
Condensed Consolidated Balance Sheets as of
March 31, 2004, June 30, 2003 and
March 31, 2003 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended March 31, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
INDEX TO EXHIBITS 26
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and per share amounts)
March 31, June 30, March 31,
2004 2003 2003
--------- --------- ---------
(Unaudited) ( * ) (Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 108 $ 2,650 $ 166
Accounts receivable - net 37,239 19,996 32,933
Inventories - net 13,913 10,696 11,717
Prepaid expenses and other current assets 757 719 722
--------- --------- ---------
Total current assets 52,017 34,061 45,538
Fixed assets - net 4,008 3,792 3,943
Other assets - net 389 599 723
Trademarks 1,000 -- --
Goodwill 1,995 1,395 1,421
--------- --------- ---------
Total assets $ 59,409 $ 39,847 $ 51,625
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving credit borrowings $ 16,184 $ -- $ 11,234
Accounts payable 14,244 12,747 13,340
Accrued expenses 3,160 4,161 3,943
Term loan - current 1,700 1,500 1,500
--------- --------- ---------
Total current liabilities 35,288 18,408 30,017
Deferred rent 475 455 437
Term loan 7,750 7,875 8,250
--------- --------- ---------
Total liabilities 43,513 26,738 38,704
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 - 277 274 274
27,714,277 at March 31, 2004, 27,384,277
at June 30, 2003 and at March 31, 2003
Additional paid-in capital 126,104 125,943 125,943
Deficit (108,511) (111,134) (111,574)
Accumulated other comprehensive loss (494) (494) (242)
Less: Treasury stock at cost -
62,270 shares at March 31, 2004, June
30, 2003 and March 31, 2003 (1,480) (1,480) (1,480)
--------- --------- ---------
Total stockholders' equity 15,896 13,109 12,921
--------- --------- ---------
Total liabilities and stockholders' equity $ 59,409 $ 39,847 $ 51,625
========= ========= =========
*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 Nine Months Ended
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Net sales $ 43,713 $ 40,983 $ 117,084 $ 106,653
Cost of goods sold 32,022 30,624 88,166 78,635
----------- ----------- ----------- -----------
Gross profit 11,691 10,359 28,918 28,018
Selling, general and administrative expenses 9,517 7.795 25,230 22,497
----------- ----------- ----------- -----------
Income from operations 2,174 2,564 3,688 5,521
Interest expense, net 321 297 931 937
----------- ----------- ----------- -----------
Income before for income tax provision 1,853 2,267 2,757 4,584
Income tax provision 49 173 134 347
----------- ----------- ----------- -----------
Net income $ 1,804 $ 2,094 $ 2,623 $ 4,237
=========== =========== =========== ===========
Basic earnings per share $ 0.07 $ 0.08 $ 0.10 $ 0.16
=========== =========== =========== ===========
Diluted earnings per share $ 0.06 $ 0.07 $ 0.09 $ 0.14
=========== =========== =========== ===========
Weighted average number of
common shares
outstanding- basic 27,532,000 27,322,000 27,410,000 27,265,000
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - diluted 30,656,000 30,145,000 30,731,000 29,804,000
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Nine Months Ended
-------------------------
March 31, March 31,
2004 2003
-------- --------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 2,623 $ 4,237
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 983 1,158
Loss on disposal of other assets -- 243
Changes in operating assets and liabilities:
Accounts receivable (17,440) (10,948)
Inventories (2,391) (1,476)
Prepaid expenses and other current assets 17 453
Accounts payable 1,497 3,591
Accrued expenses and deferred rent (981) 742
-------- --------
Net Cash Used In Operating Activities (15,692) (2,000)
-------- --------
INVESTING ACTIVITIES
Acquisition of business (2,749) (4,669)
Purchases of fixed assets (524) (211)
-------- --------
Net Cash Used In Investing Activities (3,273) (4,880)
-------- --------
FINANCING ACTIVITIES
Net proceeds from short-term bank borrowings 16,184 7,643
Net proceeds (payments) from term loan 75 (750)
Net proceeds from exercise of stock options 164 3
-------- --------
Net Cash Provided by Financing Activities 16,423 6,896
-------- --------
(Decrease) increase in cash and cash equivalents (2,542) 16
Cash and cash equivalents, beginning of period 2,650 150
-------- --------
Cash and cash equivalents, end of period $ 108 $ 166
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Taxes $ 231 $ 136
======== ========
Interest $ 837 $ 752
======== ========
Non cash investing activities:
Common stock issued for acquisition of business $ -- $ 84
======== ========
Stock options issued for acquisition of business $ -- $ 384
======== ========
See accompanying notes to condensed consolidated financial statements.
5
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nine Months Ended March 31, 2004 and March 31, 2003
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 three and nine months ended March 31, 2004 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 revenue 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:
Until March 31, 2004, the Company extended 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. Effective
March 31, 2004, the Company, the Company's S.L. Danielle subsidiary and CIT
agreed to terminate the Factoring Agreements between them. In connection with
the termination of those Factoring Agreements, the Company's CS Acquisition
subsidiary and CIT entered into an amendment of their Factoring Agreement
revising only the factoring
6
BERNARD CHAUS, INC. AND SUBSIDIARIES
commission. At March 31, 2004, approximately 98% of the Company's accounts
receivable were being serviced by CIT under the factoring arrangement.
Effective as of April 1, 2004 the Company extends credit to its customers,
other than customers of the Company's CS Acquisition subsidiary, based upon an
evaluation of the customer's financial condition and credit history. The
non-factored customers are expected to represent approximately 90% of the
Company's Accounts Receivable. 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 history of minimal bad debts 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 March 31, 2004, June 30, 2003
and March 31, 2003, Accounts Receivable was net of allowances of $1.0 million,
$1.9 million and $1.4 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 March 31, 2004, 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 nine months ended March 31, 2004 and 2003.
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 March 31, 2004 and 2003 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 Nine Months Ended
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
------ --------- --------- ---------
(Unaudited)
(In thousands except per share amounts)
Net income, as reported $1,804 $ 2,094 $ 2,623 $ 4,237
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of tax effects (170) (118) (289) (428)
------ --------- --------- ---------
Proforma net income $1,634 $ 1,976 $ 2,334 $ 3,809
====== ========= ========= =========
Earnings per share:
Basic-as reported $ 0.07 $ 0.08 $ 0.10 $ 0.16
====== ========= ========= =========
Basic-proforma $ 0.06 $ 0.07 $ 0.09 $ 0.14
====== ========= ========= =========
Diluted-as reported $ 0.06 $ 0.07 $ 0.09 $ 0.14
====== ========= ========= =========
Diluted-proforma $ 0.05 $ 0.07 $ 0.08 $ 0.13
====== ========= ========= =========
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 For the For the
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
March 31, 2004 March 31, 2003 March 31, 2004 March 31, 2003
-------------- -------------- -------------- --------------
Weighted average fair value of stock $0.80 --- $0.84 $0.73
options granted
Risk-free Interest rate 4.30% --- 4.24% 3.92%
Expected dividend yield $0.00 --- $0.00 $0.00
Expected life of option 10.0 years --- 10.0 years 5.5 years
Expected volatility 83% --- 87% 188%
Earnings Per Share: Basic earnings per share has been computed by dividing
the applicable net income by the weighted average number of common shares
outstanding. Diluted earnings per share has been computed for the three months
ended and for the nine months ended March 31, 2004 and March 31, 2003 by
dividing the applicable net income by the weighted average number of common
shares outstanding and common equivalents.
8
BERNARD CHAUS, INC. AND SUBSIDIARIES
For the Three Months Ended For the Nine Months Ended
March 31, March 31, March 31, March 31,
Denominator for Earnings per share (in millions) 2004 2003 2004 2003
---- ---- ---- ----
Denominator for basic earnings per share 27.5 27.3 27.4 27.3
weighted-average shares outstanding
Assumed exercise of potential common shares 3.2 2.8 3.3 2.5
---- ---- ---- ----
Denominator for diluted earnings per share 30.7 30.1 30.7 29.8
==== ==== ==== ====
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 March 31, 2004 and 2003, shipping and handling costs
approximated $0.2 million and $0.1 million, respectively. For the nine months
ended March 31, 2004 and 2003, shipping and handling costs approximated $0.5
million and $0.3 million, respectively.
2. Inventories - net
March 31, June 30, March 31,
2004 2003 2003
--------- -------- ---------
(in thousands)
(unaudited) (unaudited)
Raw materials $ 1,057 $ 698 $ 306
Work-in-process 314 140 200
Finished goods 13,621 10,597 11,809
Inventory reserves (1,079) (739) (598)
------- ------- -------
Total $13,913 $10,696 $11,717
======= ======= =======
Inventories are stated at the lower of cost, using the first-in first-out
(FIFO) method, or market. Included in inventories is merchandise in transit of
approximately $6.7 million at March 31, 2004, $8.9 million at June 30, 2003 and
$6.6 million at March 31, 2003.
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 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
9
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 March 31, 2004 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 January 2004 amendment to the 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 March 31,
2004, 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)
$350,000 if termination occurs between the thirteenth and the twenty-fourth
month from the closing date, (ii) $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"). The Factoring Agreement provided 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 was $500,000. The Factoring Agreement provided that it
would be terminated after eighteen months if there were no event of default
under the Factoring Agreement at such time. Once terminated, the Company is
required to pay to CIT a collateral management fee equal to $5,000 a month.
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
10
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 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 the Company's wholly-owned
subsidiary, Cynthia Steffe Acquisition, LLC ("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, S.L. 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, S.L. 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.
Effective March 31, 2004, the Company, S.L. Danielle and CIT agreed to
terminate the Factoring Agreements between them. Pursuant to the terms of the
original agreement, the Company is now obligated to pay to CIT a collateral
management fee of $5,000 a month. In connection with the termination of those
Factoring Agreements, CS Acquisition and CIT entered into an amendment of their
Factoring Agreement which provides for a factoring commission equal to 6/10 of
1% of the gross face amount of all accounts factored by CIT up to $10 million
ratably declining to a commission between .55% and .45% of the gross amount of
the receivables in excess of $10 million. CS Acquisition is also obligated to
pay certain customary charges to CIT. The amended Factoring agreement between CS
Acquisition and CIT has a term of twelve months.
On March 31, 2004, the Company had $10.8 million of outstanding letters of
credit under the Revolving Facility, total availability of approximately $9.3
million under the Amended Financing Agreement, a balance of $9.5 million on the
Term Loan and $16.2 in revolving credit borrowings. At March 31, 2003, the
Company had $12.4 million of outstanding letters of credit, total availability
of approximately $9.5 million, a balance of $9.7 million on the Term Loan and
$11.2 million revolving credit borrowings. 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
11
BERNARD CHAUS, INC. AND SUBSIDIARIES
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%.
4. Acquisitions
A. 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
(Unaudited)
(In thousands)
Current assets $ 3,567
Property, plant, and equipment 36
Intangible assets 90
Goodwill 1,437
-------
Total assets acquired $ 5,130
=======
B. 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 have been included in the consolidated financial statements
commencing January 2, 2004. The aggregate purchase price was approximately $2.2
million plus transaction fees and related acquisition costs of $0.5 million. The
acquisition was initially funded out of borrowings under the Revolving Facility
of which $1.2 million was subsequently rolled into the Term Loan.
The following table summarizes the estimated fair values of the assets
acquired 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 values.
12
BERNARD CHAUS, INC. AND SUBSIDIARIES
At January 2, 2004
(Unaudited)
(in thousands)
Current assets $ 629
Property, plant, and equipment 458
Intangible assets 1,062
Goodwill 558
------
Total assets acquired $2,707
======
Intangible assets include i) $1,000 related to the Cynthia Steffe
trademark, which was determined to be an indefinite lived intangible asset and
thus not subject to amortization, and ii) $62 related to the sales order backlog
which is amortized over the sales period.
The following unaudited pro forma information presents financial
information of the Company as though the acquisitions had been completed as of
the beginning of the periods set forth below.
For the Three Months Ended For the Nine Months Ended
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
------- ------- -------- --------
(Unaudited) (Unaudited)
(In thousands except per share amounts)
Net sales $43,713 $44,207 $122,773 $122,470
Net income 1,804 2,130 2,751 4,397
Basic income per share $ 0.07 $ 0.08 $ 0.10 $ 0.16
Diluted income per share $ 0.06 $ 0.07 $ 0.09 $ 0.15
5. Pension Plan
Components of Net Periodic Benefit Cost
Pension Plan
For the Three Months Ended For the Nine Months Ended
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
---- ---- ----- -----
(Unaudited) (Unaudited)
(In Thousands) (In Thousands)
Service cost $ 18 $ 15 $ 53 $ 44
Interest cost 20 18 59 54
Expected return on plan assets (17) (16) (50) (48)
Amortization of net (gain) loss 10 3 30 11
---- ---- ----- -----
Net periodic benefit cost $ 31 $ 20 $ 92 $ 61
==== ==== ===== =====
13
BERNARD CHAUS, INC. AND SUBSIDIARIES
Employer Contributions
For the nine months ended March 31, 2004 the Company's contribution to the
pension plan was $36,000. The Company anticipates contributing an additional $
5,000 to fund its pension plan in 2004 for a total of $41,000.
6. 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.
Information regarding the Company's stock options is summarized below:
Stock Options
--------------------------------------------------------------------
Number Exercise Weighted Average
of Shares Price Range Exercise Price
----------------- -------------------------- -----------------
Outstanding at March 31, 2003 6,119,594 $ .38 - $ 3.50 $ .49
Outstanding at June 30, 2003 6,119,594 $ .38 - $ 3.50 $ .49
Options granted 690,000 $ .94 - $ 1.12 $ .97
Options exercised (330,000) $ .50 - $ .50 $ .50
Options canceled (56,100) $ .50 - $ .84 $ .80
-----------------
Outstanding at March 31, 2004 6,423,494 $ .38 - $ 3.50 $ .54
================= ========================== =================
The following table summarizes information about the Company's outstanding and
exercisable stock options at March 31, 2004:
Outstanding Exercisable
---------------------------------------------- ----------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Shares Life (Yrs.) Price Shares Price
- -------------------------------------------------------------------------------- ----------------------------------
$0.38 3,000,000 1.59 $0.38 3,000,000 $0.38
$0.50 1,853,494 6.42 $0.50 1,676,828 $0.50
$0.69 10,000 6.25 $0.69 7,500 $0.69
$0.75 345,000 8.41 $0.75 86,250 $0.75
$0.84 500,000 3.66 $0.84 250,000 $0.84
$0.94 560,000 9.76 $0.94 105,000 $0.94
$0.98 30,000 9.25 $0.98 -- $ --
$1.12 100,000 9.64 $1.12 -- $ --
$3.00 10,000 5.25 $3.00 10,000 $3.00
14
BERNARD CHAUS, INC. AND SUBSIDIARIES
$3.11-3.50 15,000 4.02 $3.24 15,000 $3.24
- -------------------------------------------------------------------------------- ----------------------------------
6,423,494 4.40 $.54 5,150,578 $0.47
- -------------------------------------------------------------------------------- ----------------------------------
The outstanding stock options have a weighted average contractual life of
4.4 years and 5.0 years as of March 31, 2004 and 2003, respectively. The number
of stock options exercisable at March 31, 2004, June 30, 2003 and March 31, 2003
were 5,150,578, 3,180,916, and 3,180,916, respectively.
15
BERNARD CHAUS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company purchased certain assets of the Cynthia Steffe division of LF
Brands Marketing, Inc., including inventory and intellectual property on January
2, 2004. 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 apparel line, under the Cynthia Steffe trademarks. The
results of Cynthia Steffe's operations are included in the consolidated
financial statements commencing January 2, 2004.
Results of Operations
Net sales for the quarter ended March 31, 2004 increased by 6.7% or $2.7
million to $43.7 million from $41.0 million for the quarter ended March 31,
2003. Net sales for the nine months ended March 31, 2004 increased by 9.8% or
$10.4 million to $117.1 million from $106.7 million for the nine months ended
March 31, 2003. The increase in net sales for the quarter and nine months ended
March 31, 2004 was driven primarily by the performance of our S.L. Danielle and
Cynthia Steffe divisions. This performance was primarily due to increases in
sales through non-department store channels and our private label business,
partially offset by a decrease in sales of the Company's Chaus product lines for
department stores.. The Company has not received orders from May Department
Stores since Fall 2003. May Department Stores accounted for approximately $4.3
million of net sales for the quarter ended March 31, 2003 and for approximately
10% of the Company's net sales in Fiscal 2003.
Gross profit for the quarter ended March 31, 2004 increased $1.3 million to
$11.7 million as compared to $10.4 million for the quarter ended March 31, 2003.
As a percentage of net sales, gross profit increased to 26.7% for the quarter
ended March 31, 2004 from 25.3% for the quarter ended March 31, 2003. The
increase in gross profit dollars was primarily due to an increase in gross
profit from sales to non-department store channels and the gross profit of the
Cynthia Steffe product lines acquired in January 2004, partially offset by a
decrease in gross profit on the Chaus product lines for department stores. The
increase in gross profit percentage was primarily due to the higher gross profit
percentage in our S.L. Danielle and Cynthia Steffe divisions.
Gross profit for the nine months ended March 31, 2004 increased $0.9
million to $28.9 million as compared to $28.0 million for the nine months ended
March 31, 2003. As a percentage of net sales, gross profit decreased to 24.7%
for the nine months ended March 31, 2004 from 26.3% for the nine months ended
March 31, 2003. The increase in gross profit dollars was due to an increase in
gross profit from sales to non-department store channels, our private label
business and the Cynthia Steffe product lines. This increase was partially
offset by a decrease in gross profit related to the Company's Chaus product
lines sold to department stores. The decrease in gross profit percentage was
primarily due to the decrease in gross profit percentage on Chaus product lines
sold to department stores.
Selling, general and administrative ("SG&A") expenses increased by $1.7
million to $9.5 million for the quarter ended March 31, 2004 from $7.8 million
for the quarter ended March 31, 2003. SG&A expenses as a percentage of net sales
increased to 21.8% for the quarter ended March 31, 2004 compared to 19.0% for
the quarter ended March 31, 2003. The increase in SG&A expenses for the quarter
ended March 31, 2004 measured in dollars and as a percentage of sales was
primarily due to the increase in expenses associated with the Cynthia Steffe
product lines ($1.5 million). During the quarter, the costs of the Company's
targeted branding effort ($0.2 million) designed to enhance the visibility of
the Josephine Chaus line in department stores also contributed to the increase
in SG&A expenses and increase in SG&A expenses as a percentage of sales.
SG&A expenses for the nine months ended March 31, 2004 increased by $2.7 million
to $25.2 million from $22.5
16
BERNARD CHAUS, INC. AND SUBSIDIARIES
million for the nine months ended March 31, 2003. SG&A expenses as a percentage
of net sales increased to 21.5% for the nine months ended March 31, 2004
compared to 21.1% for the nine months ended March 31, 2003. The increase in SG&A
expenses for the nine months ended March 31, 2004 was primarily due to SG&A
expenses related to the inclusion for a full nine months in the fiscal 2004
period of expenses of the Company's S.L. Danielle product lines acquired in
November 2002 and SG&A expenses related to Cynthia Steffe product lines acquired
in January 2004. The increase in SG&A expenses as a percentage of net sales for
the nine months ended March 31, 2004 compared to the prior year was primarily
due to the expenses associated with the Cynthia Steffe product lines..
Interest expense is greater for the quarter ended March 31, 2004 as
compared to the quarter ended March 31, 2003 primarily due to higher bank
borrowings offset by lower interest rates. Interest expense is approximately the
same for the nine months ended March 31, 2004 as compared to the nine months
ended March 31, 2003 as lower interest rates were offset by higher bank
borrowings.
The provision for income taxes for the nine months ended March 31, 2004 and
2003 reflects a provision for certain federal, state and local taxes. For the
nine months ended March 31, 2004 and 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 tax legislation temporarily suspending the use of net operating loss
(NOL) carryforwards against income. Accordingly, for the nine months ended March
31, 2004 and 2003, the Company has made provisions for 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 $15.7 million for the nine months
ended March 31, 2004 as compared to net cash used in operating activities of
$2.0 million for the nine months ended March 31, 2003. Cash used in operating
activities for such nine month period of fiscal 2004 was primarily the result of
an increase in accounts receivable ($17.4 million), an increase in inventory
($2.4 million), a decrease in accrued expenses ($1.0 million), partially offset
by net income ($2.6 million), an increase in accounts payable ($1.5 million) and
depreciation and amortization ($0.9 million).
Cash used in investing activities in the nine months ended March 31, 2004
was $3.3 million compared to $4.9 million in the previous year. The investing
activities for the nine months ended March 31, 2004 consisted primarily of $2.7
million for the acquisition of Cynthia Steffe (discussed below) and $.5 million
for capital expenditures of fixed assets. The Company anticipates additional
capital expenditures of approximately $0.4 million for the remainder of fiscal
year 2004. The investing activities for the nine months ended March 31, 2003
consisted of $4.7 million for the acquisition of S.L. Danielle (discussed below)
and $0.2 million for capital expenditures of fixed assets.
Net cash provided by financing activities was $16.4 million for the nine
months ended March 31, 2004 primarily as the result of net proceeds from
short-term borrowings of $16.2 million. Net cash provided by financing
activities was $6.9 million for the nine months ended March 31, 2003 as the
result of net proceeds from short-term bank borrowings of $7.6 million partially
offset by principal payments on the Term Loan of $0.8 million.
17
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 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 March 31, 2004 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 January 2004 amendment to the 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 March 31,
2004, 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)
$350,000, if termination occurs between the thirteenth and the twenty-fourth
month from the closing date, or (ii) $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"). The Factoring Agreement provided for a
factoring commission equal to 4/10 of 1% of the gross face
18
BERNARD CHAUS, INC. AND SUBSIDIARIES
amount of all accounts factored by CIT, plus certain customary charges. The
minimum factoring commission fee per year was $500,000. The Factoring Agreement
provided that it would be terminated after eighteen months if there were no
event of default under the Factoring Agreement at such time. Once terminated,
the Company is required to pay to CIT a collateral management fee equal to
$5,000 a month.
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 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, S.L. 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, S.L. 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.
Effective March 31, 2004, the Company, S.L. Danielle and CIT agreed to
terminate the Factoring Agreements between them. Pursuant to the terms of the
original agreement, the Company is now obligated to pay to CIT a collateral
management fee of $5,000 a month. In connection with the termination of those
Factoring Agreements, CS Acquisition and CIT entered into an amendment of their
Factoring Agreement which provides for a factoring commission equal to 6/10 of
1% of the gross face amount of all accounts factored by CIT up to $10 million
ratably declining to a commission between .55% and .45% of the gross amount of
the receivables in excess of $10 million. CS Acquisition is also obligated to
pay certain customary charges to CIT. The amended Factoring agreement between CS
Acquisition and CIT has a term of twelve months.
On March 31, 2004, the Company had $10.8 million of outstanding letters of
credit under the Revolving Facility, total availability of approximately $9.3
million under the Amended Financing Agreement, a balance of $9.5 million on the
Term Loan and $16.2 in revolving credit borrowings. At March 31, 2003, the
Company had $12.4 million of outstanding letters of credit, total availability
of approximately $9.5 million, a balance of $9.7 million on the Term Loan and
$11.2 million 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
19
BERNARD CHAUS, INC. AND SUBSIDIARIES
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%.
Future Financing Requirements
At March 31, 2004, the Company had working capital of $16.7 million as
compared with working capital of $15.5 million at March 31, 2003 and $15.7
million at June 30, 2003. 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, 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.
20
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 have been included in the consolidated financial statements
commencing January 2, 2004. The aggregate purchase price was approximately $2.2
million plus transaction fess and related acquisition costs of $0.5 million. The
acquisition was initially funded through borrowings under the Revolving Facility
of which $1.2 million was subsequently rolled into the Term Loan
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 revenue 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 history of minimal bad debts 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 March 31, 2004, June 30, 2003
and March 31, 2003, Accounts Receivable was net of allowances of $1.0 million,
$1.9 million, and $1.4 million, respectively. The decrease in accounts
receivable allowances at March 31, 2004 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 $1.1 million at March 31, 2004, $0.6 million at
March 31, 2003, 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.
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BERNARD CHAUS, INC. AND SUBSIDIARIES
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 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 March 31, 2004 and 2003, the carrying amounts of the Company's revolving
credit borrowings and term loan approximated fair value. As of March 31, 2004,
the Company's revolving credit borrowings bore interest at 4.5% and the term
loan bore interest at 5.0%. As of March 31, 2004, 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
22
BERNARD CHAUS, INC. AND SUBSIDIARIES
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
March 31, 2004, 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 March 31, 2004, 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.
23
BERNARD CHAUS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibits.
*10.111 Amendment to Employment Agreement between Nicholas DiPaolo and Bernard
Chaus, Inc., effective as of December 1, 2003.
*10.112 Notice of Defactoring between Bernard Chaus, Inc., S.L. Danielle
Acquisition, LLC and the CIT Group/Commercial Services, Inc., dated
March 31, 2004.
*10.113 Amendment No. 1 to Factoring Agreement between Cynthia Steffe
Acquisition LLC and the CIT Group/Commercial Services, Inc., dated
April1, 2004.
*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
March 31, 2004.
24
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: May 14, 2004 By: /s/ Josephine Chaus
-------------------------------------
JOSEPHINE CHAUS
Chairwoman of the Board, and
Chief Executive Officer
Date: May 14, 2004 By: /s/ Nicholas DiPaolo
-------------------------------------
NICHOLAS DIPAOLO
Vice Chairman of the Board, and
Chief Operating Officer
Date: May 14, 2004 By: /s/ Barton Heminover
-------------------------------------
BARTON HEMINOVER
Chief Financial Officer
25
BERNARD CHAUS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit Number Exhibit Title
10.111 Amendment to Employment Agreement between Nicholas DiPaolo and Bernard
Chaus, Inc., effective as of December 1, 2003.
10.112 Notice of Defactoring between Bernard Chaus, Inc., S.L. Danielle
acquisition, LLC and the CIT Group/Commercial Services, Inc., dated
March 31, 2004.
10.113 Amendment No. 1 to Factoring Agreement between Cynthia Steffe
Acquisition LLC and the CIT Group/Commercial Services, Inc., dated
April 1, 2004.
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.
26