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BERNARD CHAUS, INC. AND SUBSIDIARIES
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 September 30, 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
---- ----- ------------------
November 12, 2004 Common Stock, $0.01 par value 27,967,089
BERNARD CHAUS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited) PAGE
Condensed Consolidated Balance Sheets as of
September 30, 2004, June 30, 2004 and
September 30, 2003 3
Condensed Consolidated Statements of Operations for the
Three Months ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the
Three Months ended September 30, 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 18
PART II OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
INDEX TO EXHIBITS 20
2
BERNARD CHAUS, INC. AND SUBSIDIARIES
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)
September 30, June 30, September 30,
2004 2004 2003
--------- --------- -----------
(Unaudited) ( * ) (Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 90 $ 137 $ 102
Accounts receivable - net 27,123 28,803 33,697
Inventories - net 10,318 8,673 14,376
Prepaid expenses and other current assets 1,022 952 937
--------- --------- ---------
Total current assets 38,553 38,565 49,112
Fixed assets - net 3,987 4,212 3,723
Other assets - net 298 342 496
Trademarks 1,000 1,000 --
Goodwill 2,257 2,257 1,437
--------- --------- ---------
Total assets $ 46,095 $ 46,376 $ 54,768
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving credit borrowings $ 8,727 $ 8,563 $ 11,604
Accounts payable 7,659 7,913 16,234
Accrued expenses 2,667 3,198 2,773
Term loan - current 1,700 1,700 1,500
--------- --------- ---------
Total current liabilities 20,753 21,374 32,111
Term loan 6,900 7,325 7,500
Long term liabilities 894 897 1,033
Deferred income taxes 103 81 --
--------- --------- ---------
Total liabilities 28,650 29,677 40,644
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 - 280 280 274
28,029,359 at September 30, 2004, 27,979,359
at June 30, 2004 and 27,394,277 at September 30, 2003
Additional paid-in capital 126,259 126,234 125,948
Deficit (107,309) (108,030) (110,124)
Accumulated other comprehensive loss (305) (305) (494)
Less: Treasury stock at cost -
62,270 shares at September 30, 2004, June 30,
2003 and September 30, 2003 (1,480) (1,480) (1,480)
--------- --------- ---------
Total stockholders' equity 17,445 16,699 14,124
--------- --------- ---------
Total liabilities and stockholders' equity $ 46,095 $ 46,376 $ 54,768
========= ========= =========
*Derived from audited financial statements at June 30, 2004.
See accompanying notes to condensed consolidated financial statements.
3
BERNARD CHAUS, INC. AND SUBSIDIARIES
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share amounts)
For the Three Months Ended
--------------------------------------------
September 30, September 30,
2004 2003
-------------------- --------------------
(Unaudited) (Unaudited)
Net revenue $ 34,434 $ 38,805
Cost of goods sold 24,239 29,595
-------------------- --------------------
Gross profit 10,195 9,210
Selling, general and administrative expenses 9,097 7,836
-------------------- --------------------
Income from operations 1,098 1,374
Interest expense, net 305 272
-------------------- --------------------
Income before income tax provision 793 1,102
Income tax provision 72 92
-------------------- --------------------
Net income $ 721 $ 1,010
==================== ====================
Basic earnings per share $ 0.03 $ 0.04
==================== ====================
Diluted earnings per share $ 0.02 $ 0.03
==================== ====================
Weighted average number of common
shares outstanding- basic 27,932,000 27,325,000
==================== ====================
Weighted average number of common and common
equivalent shares outstanding- diluted 30,743,000 30,986,000
==================== ====================
See accompanying notes to condensed consolidated financial statements.
4
BERNARD CHAUS, INC. AND SUBSIDIARIES
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Three Months Ended
------------------------------
September 30, September 30,
2004 2003
------------- -------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 721 $ 1,010
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 338 356
Provision for losses on accounts receivable -- (20)
Changes in operating assets and liabilities:
Accounts receivable 1,680 (13,681)
Inventories (1,645) (3,680)
Prepaid expenses and other current assets (70) (224)
Accounts payable (254) 3,487
Accrued expenses and long term liabilities (512) (810)
-------- --------
Net Cash Provided by (Used In) Operating Activities 258 (13,562)
-------- --------
INVESTING ACTIVITIES
Acquisition of business -- (42)
Purchases of fixed assets (69) (178)
-------- --------
Net Cash Used In Investing Activities (69) (220)
-------- --------
FINANCING ACTIVITIES
Net proceeds from short-term bank borrowings 164 11,604
Principal payments on term loans (425) (375)
Net proceeds from exercise of stock options 25 5
-------- --------
Net Cash (Used In) Provided By Financing Activities (236) 11,234
-------- --------
Decrease in cash and cash equivalents (47) (2,548)
Cash and cash equivalents, beginning of period 137 2,650
-------- --------
Cash and cash equivalents, end of period $ 90 $ 102
======== ========
Cash paid for:
Taxes $ 18 $ 1
======== ========
Interest $ 266 $ 202
======== ========
See accompanying notes to condensed consolidated financial statements.
5
BERNARD CHAUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended September 30, 2004 and September 30, 2003
1. Business and Summary of Significant Accounting Policies
Business:
Bernard Chaus, Inc. (the "Company" or "Chaus") designs, arranges for
the manufacture of and markets an extensive range of women's career and casual
sportswear principally under the JOSEPHINE CHAUS(R) COLLECTION, JOSEPHINE
CHAUS(R) SPORT, CHAUS(R), CYNTHIA STEFFE(R), CYNTHIA CYNTHIA STEFFE(R) , and
FRANCES & RITA(R) trademarks and under private label brand names. The Company's
products are sold nationwide through department store chains, specialty
retailers and other retail outlets. The Company has positioned its JOSEPHINE
CHAUS product line into the opening price points of the "better" category. In
November 2002, the Company acquired certain assets of S.L. Danielle, Inc. ("SL
Danielle"). SL Danielle designs, arranges for the manufacture of and markets
women's moderately priced clothing under private and other labels. In January
2004, the Company acquired certain assets of the Cynthia Steffe division of LF
Brands Marketing, Inc., ("CS Acquisition") including inventory and showroom
fixtures. In connection with such acquisition, the Company also acquired the
Cynthia Steffe trademarks from Cynthia Steffe. The Cynthia Steffe business
designs, arranges for the manufacture of, markets and sells an upscale modern
women's apparel line, under the Cynthia Steffe trademarks. As used herein,
fiscal 2005 refers to the fiscal year ended June 30, 2005, fiscal 2004 refers to
the fiscal year ended June 30, 2004 and fiscal 2003 refers to the fiscal year
ended June 30, 2003.
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 months ended September 30, 2004 are
not necessarily indicative of the results that may be expected for the year
ending June 30, 2005 ("fiscal 2005") or any other period. The balance sheet at
June 30, 2004 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, 2004.
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. While such amounts have been within expectations and the
6
BERNARD CHAUS, INC. AND SUBSIDIARIES
provisions established, the Company cannot guarantee that it will continue to
experience the same rates as in the past. Design revenue is recognized when
designs are manufactured and shipped.
Credit Terms:
Through 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 SL Danielle
subsidiary and CIT agreed to terminate the Factoring Agreements between them. In
connection with the termination of those Factoring Agreements, the Company's
Cynthia Steffe Acquisition subsidiary and CIT entered into an amendment of their
Factoring Agreement revising only the factoring commission. Receivables related
to sales of Cynthia Steffe product lines continue to be factored. Effective
April 1, 2004 the Company extends credit to its customers, other than customers
of CS Acquisition based upon an evaluation of the customer's financial condition
and credit history. As of September 30, 2004 approximately 90% of the Company's
accounts receivable was non-factored.
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
revenue 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 September 30, 2004, June 30, 2004 and September 30,
2003, Accounts Receivable was net of allowances of $1.4 million, $1.2 million
and $1.1 million, respectively.
Inventories:
Inventories are 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 $0.9 million at September 30, 2004, $0.8 million
at June 30, 2004, and $0.9 million at September 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.
Cash and Cash Equivalents:
All highly liquid investments with an original maturity of three months
or less at the date of purchase are classified as cash equivalents.
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. The Company periodically
reviews its historical and projected taxable income and considers available
information and evidence to determine if it is more likely than not that a
portion of the deferred tax assets will be realized. A valuation allowance is
established to reduce the deferred tax assets to the amount that is more likely
than not to be realized. As of September 30, 2004, June 30, 2004 and September
30, 2003, based upon its evaluation, the Company recorded a full valuation
allowance on its deferred tax assets. If the Company determines that a portion
of the deferred tax assets will be realized in the future, a portion of
7
BERNARD CHAUS, INC. AND SUBSIDIARIES
the valuation allowance will be reduced and the Company will provide for income
tax expense (benefit) in its Statement of Operations at its estimated effective
tax rate.
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 and earnings per share would have been reduced
to the pro forma amounts as follows (Dollars in thousands, except share data):
For the Three Months Ended
September 30, September 30,
2004 2003
------------- -------------
(Unaudited)
(In thousands except per share amounts)
Net income, as reported $ 721 $ 1,010
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of tax effects (76) (75)
------- ---------
Proforma net income $ 645 $ 935
======= =========
Earnings per share:
Basic-as reported $ 0.03 $ 0.04
======= =========
Basic-proforma $ 0.02 $ 0.03
======= =========
Diluted-as reported 0.02 $ 0.03
======= =========
Diluted-proforma $ 0.02 $ 0.03
======= =========
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 Three For the Three
Months Ended Months Ended
September 30,2004 September 30, 2003
----------------- ------------------
Weighted average fair value of stock options $0.81 $0.91
granted
Risk-free interest rate 4.69% 3.42%
Expected dividend yield $0.00 $0.00
Expected life of option 10.0 years 10.0 years
Expected volatility 84% 110%
Earnings Per Share: Basic earnings per share have 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
8
BERNARD CHAUS, INC. AND SUBSIDIARIES
September 30, 2004 and September 30, 2003 by dividing the applicable net
income by the weighted average number of common shares outstanding and common
equivalents.
For the Three Months Ended
September 30, September 30,
Denominator for earnings per share (in millions): 2004 2003
--------------------------------------
Denominator for basic earnings per share
weighted-average shares outstanding 27.9 27.3
Assumed exercise of potential common shares 2.8 3.7
--------------------------------------
Denominator for diluted earnings per share 30.7 31.0
======================================
Reclassifications: Certain reclassifications have been made to conform to the
current period presentation.
2. Inventories - net
September 30, June 30, September 30,
2004 2004 2003
-----------------------------------------------------
(in thousands)
(unaudited) (unaudited)
Raw materials $ 1,288 $ 1,275 $ 385
Work-in-process 201 283 -
Finished goods 9,724 7,885 14,938
Inventory reserves (895) (770) (947)
-----------------------------------------------------
Total $ 10,318 $ 8,673 $ 14,376
=====================================================
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 $3.5 million at September 30, 2004, $5.2 million at
June 30, 2004 and $7.1 million at September 30, 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 The CIT Group/Commercial Services, Inc. ("CIT"), to replace the former
financing agreement. 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 (ii) on the Term Loan accrues at a rate of 1% 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 (2.75% above LIBOR from and
after November 2004) (ii) on the Term Loan accrues at a rate of 3 3/4% above
LIBOR. From the inception of the financing agreement through September 30, 2004,
the Company has elected the Prime Rate option. Pursuant to the November 2004
amendment to the Financing Agreement described below, each of the foregoing
interest rates is subject to an annual upward or downward adjustment by 1/4 of
1%, commencing with the month following delivery of the Company's consolidated
financial statements to CIT for fiscal 2005, fiscal 2006 and fiscal 2007 based
upon the Company's borrowing availability, fixed charge coverage ratio and
leverage ratio as in effect at each such adjustment period. The interest rate as
of September 30, 2004 on the Revolving Facility was 5.25% and on the Term Loan
was 5.75%.
9
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 $1.8 million is due on October 1, 2008 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 September 30,
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 Company
will be liable for termination fees of $150,000 if termination occurs prior to
November 11, 2007. The Company may prepay at any time, in whole or in part, the
Term Loan without penalty. A fee of $125,000 was paid in connection with the
original Financing Agreement. The expiration of the Financing Agreement was
initially set for September 27, 2005 and was extended to October 1, 2008 by an
amendment dated November 11, 2004.
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. 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 in Note 4. 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.
On September 15, 2004 the Company and CIT agreed to further amend the
Financing Agreement to modify the financial covenants to be consistent with the
Company's latest business plan for fiscal 2005.
On November 11, 2004 the Company and CIT agreed to further amend the
Financing Agreement to extend the term of the agreement to October 1, 2008. In
conjunction with this amendment, the Company and CIT 1) revised interest rates
as described above; 2) revised the borrowing availability calculation under the
agreement; and 3) revised certain financial covenants for fiscal 2005 and
established financial covenants for fiscal 2006. A facility fee of $100,000 is
payable in connection with the amendment.
10
BERNARD CHAUS, INC. AND SUBSIDIARIES
On September 30, 2004, the Company had $9.4 million of outstanding
letters of credit under the Revolving Facility, total availability of
approximately $8.9 million under the Amended Financing Agreement, a balance of
$8.6 million on the Term Loan and $8.7 million in revolving credit borrowings.
On September 30, 2003, the Company had $18.2 million of outstanding letters of
credit under the Revolving Facility, total availability of approximately $6.1
million under the Amended Financing Agreement, a balance of $9.0 million on the
Term Loan and $11.6 million in revolving credit borrowings. At June 30, 2004,
the Company had $8.0 million of outstanding letters of credit, total
availability of approximately $11.6 million, a balance of $9.0 million on the
Term Loan and $8.6 million in revolving credit borrowings.
Factoring 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.
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. Receivables related to sales of Cynthia Steffe
product lines continue to be factored. 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. The Factoring Agreement
between CS Acquisition and CIT, as most recently amended in November 2004, has a
term ending on March 31, 2006.
4. 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 for consideration equal to $1.0 million under a separate
agreement. 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 the payment of $0.5 million in satisfaction of certain
liabilities, plus transaction fees and related acquisition costs of $0.2
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 unaudited pro forma information presents financial
information of the Company as though the acquisition had been completed as of
the beginning of the periods set forth below.
For the Quarter Ended
September 30, 2003
-----------------------------------------------
(Unaudited)
(In thousands except per share amounts)
Net revenue $42,005
Net income 877
Basic income per share $0.03
Diluted income per share $0.03
11
BERNARD CHAUS, INC. AND SUBSIDIARIES
5. Pension Plan
Components of Net Periodic Benefit Cost
Pension Plan
For the Three Months Ended
September 30, September 30,
2004 2003
---------------------- -----------------
(Unaudited)
(In Thousands)
Service cost $18 $18
Interest cost 22 20
Expected return on plan assets (19) (17)
Amortization of net loss 5 10
---------------------- -----------------
Net periodic benefit cost $26 $31
====================== =================
Employer Contributions
For the three months ended September 30, 2004 the Company's contribution to
the pension plan was $14,000. The Company anticipates contributing an additional
$74,000 to fund its pension plan in 2005 for a total of $88,000.
12
BERNARD CHAUS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Bernard Chaus, Inc. (the "Company" or "Chaus") designs, arranges for
the manufacture of and markets an extensive range of women's career and casual
sportswear principally under the JOSEPHINE CHAUS(R) COLLECTION, JOSEPHINE
CHAUS(R) SPORT, CHAUS(R), CYNTHIA STEFFE(R), CYNTHIA CYNTHIA STEFFE(R), and
FRANCES & RITA(R) trademarks and under private label brand names. The Company's
products are sold nationwide through department store chains, specialty
retailers and other retail outlets. The Company has positioned its JOSEPHINE
CHAUS product line into the opening price points of the "better" category. In
November 2002, the Company acquired certain assets of S.L. Danielle, Inc. ("SL
Danielle"). SL Danielle designs, arranges for the manufacture of and markets
women's moderately priced clothing under private and other labels. In January
2004, the Company acquired certain assets of the Cynthia Steffe division of LF
Brands Marketing, Inc., ("CS Acquisition") including inventory and showroom
fixtures. In connection with such acquisition, the Company also acquired the
Cynthia Steffe trademarks from Cynthia Steffe. The Cynthia Steffe business
designs, arranges for the manufacture of, markets and sells an upscale modern
women's apparel line, under the Cynthia Steffe trademarks. As used herein,
fiscal 2005 refers to the fiscal year ended June 30, 2005, fiscal 2004 refers to
the fiscal year ended June 30, 2004 and fiscal 2003 refers to the fiscal year
ended June 30, 2003.
Overview
The Company has moved forward in implementing a series of actions to
better position itself for long-term profitable growth. Chief among these has
been the diversification of the Company's business base through the S.L.
Danielle acquisition in December 2002 and the Cynthia Steffe acquisition in
January 2004. Each of these acquisitions has given the Company entree into new
markets and distribution channels and provided new platforms for the future. At
the same time, the Company has introduced significant new design, merchandising
and branding initiatives to revitalize the performance of the Josephine Chaus
line. Many of these changes were shared with department store customers during
the September 2004 Fashion Week, and the Company is encouraged that these
changes will provide the necessary catalyst to increase revenue growth and
improve the performance in the Josephine Chaus line.
Results of Operations
Net revenue for the quarter ended September 30, 2004 decreased by 11.3
%, or $4.4 million, to $34.4 million from $38.8 million for the quarter ended
September 30, 2003. Units sold decreased by approximately 19 % and the overall
price per unit increased by 9%. The Cynthia Steffe product lines acquired in
January 2004 and SL Danielle contributed $7.6 million to revenues for the
quarter ended September 30, 2004. This increase was offset by a decrease of
approximately $12.0 million in sales of Chaus and other product lines sold to
department stores and discount stores due to a decrease in the volume of
products sold.
Gross profit for the quarter ended September 30, 2004 increased $1.0
million to $10.2 million as compared to $9.2 million for the quarter ended
September 30, 2003. As a percentage of net revenue, gross profit increased to
29.6% for the quarter ended September 30, 2004 from 23.7% for the quarter ended
September 30, 2003. The increase in gross profit dollars and gross profit
percentage was primarily due to the contribution of the Cynthia Steffe product
lines acquired in January 2004, which have a higher overall gross profit
percentage which is more typical of the higher price upscale market. This
increase in gross profit dollars more than offset a decrease in gross profit
dollars associated with Chaus and other product lines sold to department stores
and discount stores due to the decrease in volume of product sold.
Selling, general and administrative ("SG&A") expenses increased by $1.3
million to $9.1 million (26.4% of net revenue) for the quarter ended September
30, 2004 from $7.8 million (20.2% of net revenue) for the quarter ended
September 30, 2003. The increase was primarily due to SG&A expenses related to
the Cynthia Steffe product lines acquired in January 2004. The increase in SG&A
expenses was primarily due to SG&A expenses related to payroll and payroll
related costs ($0.9 million), design related costs ($0.2 million) and marketing
and advertising costs ($0.2 million). The increase in SG&A expenses as a
percentage of net revenue was due to the lower sales volume, which reduced the
Company's leverage on SG&A expenses.
13
BERNARD CHAUS, INC. AND SUBSIDIARIES
Interest expense was higher for the quarter ended September 2004 as
compared to the quarter ended September 2003 due to increased average bank
borrowings and higher interest rates.
The provision for income taxes for the quarters ended September 30,
2004 and 2003 reflects a provision for certain federal, state and local taxes.
For the quarters ended September 30, 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 quarters ended
September 30, 2004 and 2003, the Company has made provisions for state income
taxes.
The Company periodically reviews its historical and projected taxable
income and considers available information and evidence to determine if it is
more likely than not that a portion of the deferred tax assets will be realized.
A valuation allowance is established to reduce the deferred tax assets to the
amount that is more likely than not to be realized. As of September 30, 2004 and
June 30, 2004 based upon its evaluation of taxable income and the current
business environment, the Company recorded a full valuation allowance on its
deferred tax assets including NOL's. If the Company determines that a portion of
the deferred tax assets will be realized in the future, a portion of the
valuation allowance will be reduced and the Company will provide for income tax
expense (benefit) in its Statement of Operations at its estimated effective tax
rate. 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 provided by operating activities was $0.3 million for the
three months ended September 30, 2004 as compared to cash used in operating
activities of $13.6 million for the three months ended September 30, 2003. Cash
provided by operating activities for such three-month period of fiscal 2005 was
primarily the result of a decrease in accounts receivable ($1.7 million)
partially offset by an increase in inventories ($1.6 million) and a decrease in
accounts payable, accrued expenses and long-term liabilities ($0.8 million). Net
cash used in operating activities was $13.6 million for the three months ended
September 30, 2003 and was primarily the result of an increase in accounts
receivable ($13.7 million) and an increase in inventories ($3.7 million)
partially offset by an increase in accounts payable ($3.5 million).
Cash used in investing activities in the three months ended September
30, 2004 was $0.1 million compared to $0.2 million in the previous year. The
capital expenditures for the three months ended September 30, 2004 and 2003
consisted primarily of management information system upgrades. The Company
anticipates additional capital expenditures of approximately $0.7 million for
the remainder of fiscal 2005.
Net cash used in financing activities was $0.2 million for the three
months ended September 30, 2004 as the result of principal payments on term loan
of $0.4 million offset by net proceeds from short-term bank borrowings of $0.2
million. Net cash provided by financing activities was $11.2 million for the
three months ended September 30, 2003 as the result of net proceeds from
short-term bank borrowings of $11.6 million offset by principal payments on the
term loan of $0.4 million.
Financing Agreement
On September 27, 2002, the Company and certain of its subsidiaries
entered into a new three-year financing agreement (the "Financing Agreement")
with The CIT Group/Commercial Services, Inc. ("CIT"), to replace the former
financing agreement. 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 (ii) on the Term Loan accrues at a rate of 1% 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 (2.75% above LIBOR from and
after November 2004) (ii) on the Term Loan accrues at a rate of
14
BERNARD CHAUS, INC. AND SUBSIDIARIES
3 3/4% above LIBOR. From the inception of the financing agreement through
September 30, 2004, the Company has elected the Prime Rate option. . Pursuant to
the November 2004 amendment to the Financing Agreement described below, each of
the foregoing interest rates is subject to an annual upward or downward
adjustment by 1/4 of 1%, commencing with the month following delivery of the
Company's consolidated financial statements to CIT for fiscal 2005, fiscal 2006
and fiscal 2007 based upon the Company's borrowing availability, fixed charge
coverage ratio and leverage ratio as in effect at each such adjustment period.
The interest rate as of September 30, 2004 on the Revolving Facility was 5.25%
and on the Term Loan was 5.75%.
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 $1.8 million is due on October 1, 2008 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 September 30,
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 Company
will be liable for termination fees of $150,000 if termination occurs prior to
November 11, 2007. The Company may prepay at any time, in whole or in part, the
Term Loan without penalty. A fee of $125,000 was paid in connection with the
original Financing Agreement. The expiration of the Financing Agreement was
initially set for September 27, 2005 and was extended to October 1, 2008 by an
amendment dated November 11, 2004.
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. 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 in Note 4. 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.
15
BERNARD CHAUS, INC. AND SUBSIDIARIES
On September 15, 2004 the Company and CIT agreed to further amend the
Financing Agreement to modify the financial covenants to be consistent with the
Company's latest business plan for fiscal 2005.
On November 11, 2004 the Company and CIT agreed to further amend the
Financing Agreement to extend the term of the agreement to October 1, 2008. In
conjunction with this amendment, the Company and CIT 1) revised interest rates
as described above; 2) revised the borrowing availability calculation under the
agreement; and 3) revised certain financial covenants for fiscal 2005 and
established financial covenants for fiscal 2006. A facility fee of $100,000 is
payable in connection with the amendment.
On September 30, 2004, the Company had $9.4 million of outstanding
letters of credit under the Revolving Facility, total availability of
approximately $8.9 million under the Amended Financing Agreement, a balance of
$8.6 million on the Term Loan and $8.7 million in revolving credit borrowings.
On September 30, 2003, the Company had $18.2 million of outstanding letters of
credit under the Revolving Facility, total availability of approximately $6.1
million under the Amended Financing Agreement, a balance of $9.0 million on the
Term Loan and $11.6 million in revolving credit borrowings. At June 30, 2004,
the Company had $8.0 million of outstanding letters of credit, total
availability of approximately $11.6 million, a balance of $9.0 million on the
Term Loan and $8.6 million in revolving credit borrowings.
Factoring 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.
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. Receivables related to sales of Cynthia Steffe
product lines continue to be factored. 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. The amended Factoring
Agreement between CS Acquisition and CIT has a term ending on March 31, 2006
(which reflects an extension effected in connection with the November 2004
amendment to the Financing Agreement).
Future Financing Requirements
At September 30, 2004, the Company had working capital of $17.8 million
as compared with working capital of $17.0 million at September 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, the success of the Company's design,
merchandising and branding initiatives, and consumer acceptance of the Company's
products.
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, 2004. 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:
16
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 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 revenue 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. Account Receivable reserves were
$1.4 million, $1.2 million and $1.1 million at September 30, 2004, June 30,
2004, and September 30, 2003, respectively.
Inventories - Inventory is stated at the lower of cost or market,
cost being determined on the first-in, first-out method. Reserves for slow
moving and aged merchandise are provided based on historical experience and
current product demand. Inventory reserves were $0.9 million at September 30,
2004, $0.8 million at June 30, 2004 and $0.9 million at September 30, 2003,
respectively. 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.
Income Taxes- The Company's results of operations have generated a
federal tax net operating loss ("NOL") carryforward of approximately $93.0
million as of June 30, 2004. 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. As of September 30, 2004 and
June 30, 2004, based upon its evaluation of the Company's historical and
projected results of operations, the current business environment and the
magnitude of the NOL, the Company recorded a full valuation allowance on its
deferred tax assets including NOL's. The provision for income taxes primarily
relates to federal alternative minimum taxes (AMT) and 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
Condensed Consolidated Financial Statements. The Company manages these exposures
through regular operating and financing activities. The Company has not entered
into any derivative financial instruments for hedging or other purposes. The
following quantitative disclosures are based on the prevailing prime rate. These
quantitative disclosures do not represent the maximum possible loss or any
expected loss that may occur, since actual results may differ from these
estimates.
17
BERNARD CHAUS, INC. AND SUBSIDIARIES
At September 30, 2004 and 2003, the carrying amounts of the Company's
revolving credit borrowings and term loan approximated fair value. As of
September 30, 2004, the Company's revolving credit borrowings bore interest at
4.5% and the term loan bore interest at 5.0%. As of September 30, 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 communicated to the Company's management, including the
Company's Chairwoman and Chief Executive Officer and the Company's Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Each fiscal quarter the Company carries out an evaluation, under the
supervision and with the participation of the Company's management, including
Company's Chairwoman and Chief Executive Officer along with the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant 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
September 30, 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 September 30, 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.
18
BERNARD CHAUS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibits.
*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
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: November 12, 2004 By: /s/ Josephine Chaus
--------------------------------------
JOSEPHINE CHAUS
Chairwoman of the Board, and
Chief Executive Officer
Date: November 12, 2004 By: /s/ Nicholas DiPaolo
-----------------------------------------
NICHOLAS DIPAOLO
Vice Chairman of the Board, and
Chief Operating Officer
Date: November 12, 2004 By: /s/ Barton Heminover
-----------------------------------------
BARTON HEMINOVER
Chief Financial Officer
19
BERNARD CHAUS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT TITLE
- -------------- -------------
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.
20