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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, 2005.
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 16, 2005 Common Stock, $0.01 par value 28,097,089
INDEX
PART I FINANCIAL INFORMATION
- ----------------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited) PAGE
Condensed Consolidated Balance Sheets as of
March 31, 2005, June 30, 2004 and
March 31, 2004 3
Condensed Consolidated Statements of Income for the
Quarters and Nine Months ended March 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended March 31, 2005 and 2004 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits 21
SIGNATURES 21
CERTIFICATIONS 23
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,
2005 2004 2004
-------------- ------------- -------------
(Unaudited) ( * ) (Unaudited)
ASSETS
Current Assets
Cash $ 123 $ 137 $ 108
Accounts receivable - net 28,669 28,108 432
Accounts receivable - due from factor 3,522 695 36,807
Inventories - net 9,524 8,673 13,913
Prepaid expenses and other current assets 1,433 952 757
--------- --------- ---------
Total current assets 43,271 38,565 52,017
Fixed assets - net 3,461 4,212 4,008
Other assets - net 384 342 389
Trademarks 1,000 1,000 1,000
Goodwill 2,257 2,257 1,995
--------- --------- ---------
Total assets $ 50,373 $ 46,376 $ 59,409
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving credit borrowings $ 11,785 $ 8,563 $ 16,184
Accounts payable 7,167 7,913 14,244
Accrued expenses 3,989 3,198 2,548
Term loan - current 1,700 1,700 1,700
--------- --------- ---------
Total current liabilities 24,641 21,374 34,676
Term loan 6,050 7,325 7,750
Long term liabilities 641 897 1,087
Deferred income taxes 147 81 --
--------- --------- ---------
Total liabilities 31,479 29,677 43,513
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized shares - -- -- --
1,000,000; outstanding shares- none
Common stock, $.01 par value, 282 280 277
authorized shares - 50,000,000; issued shares -
28,159,359 at March 31, 2005, 27,979,359
at June 30, 2004 and 27,714,277 at March 31, 2004
Additional paid-in capital 126,310 126,234 126,104
Deficit (105,913) (108,030) (108,511)
Accumulated other comprehensive loss (305) (305) (494)
Less: Treasury stock at cost -
62,270 shares at March 31, 2005, June
30, 2004 and March 31, 2004 (1,480) (1,480) (1,480)
--------- --------- ---------
Total stockholders' equity 18,894 16,699 15,896
--------- --------- ---------
Total liabilities and stockholders' equity $ 50,373 $ 46,376 $ 59,409
========= ========= =========
*Derived from audited financial statements at June 30, 2004.
See accompanying notes to condensed consolidated financial statements.
3
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(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,
2005 2004 2005 2004
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Net revenue $ 41,553 $ 43,713 $ 114,556 $ 117,084
Cost of goods sold 29,314 32,022 81,484 88,166
----------- ----------- ----------- -----------
Gross profit 12,239 11,691 33,072 28,918
Selling, general and administrative expenses 10,730 9,517 29,716 25,230
----------- ----------- ----------- -----------
Income from operations 1,509 2,174 3,356 3,688
Interest expense 384 321 1,030 931
----------- ----------- ----------- -----------
Income before income tax provision 1,125 1,853 2,326 2,757
Income tax provision 101 49 209 134
----------- ----------- ----------- -----------
Net income $ 1,024 $ 1,804 $ 2,117 $ 2,623
=========== =========== =========== ===========
Basic earnings per share $ 0.04 $ 0.07 $ 0.08 $ 0.10
=========== =========== =========== ===========
Diluted earnings per share $ 0.03 $ 0.06 $ 0.07 $ 0.09
=========== =========== =========== ===========
Weighted average number of common
shares outstanding- basic 28,083,000 27,532,000 28,026,000 27,410,000
=========== =========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding- diluted 30,439,000 30,656,000 30,529,000 30,731,000
=========== =========== =========== ===========
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,
2005 2004
----------- -----------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 2,117 $ 2,623
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 953 983
Deferred income taxes 66 --
Changes in operating assets and liabilities:
Accounts receivable (561) (613)
Accounts receivable- due from factor (2,827) (16,827)
Inventories (851) (2,391)
Prepaid expenses and other assets (593) 17
Accounts payable (746) 1,497
Accrued expenses and long term liabilities 535 (981)
-------- --------
Net Cash Used In Operating Activities (1,907) (15,692)
-------- --------
INVESTING ACTIVITIES
Acquisition of business -- (2,749)
Purchases of fixed assets (132) (524)
-------- --------
Net Cash Used In Investing Activities (132) (3,273)
-------- --------
FINANCING ACTIVITIES
Net proceeds from short-term bank borrowings 3,222 16,184
Principal payments on term loans (1,275) (1,125)
Borrowings on term loans -- 1,200
Proceeds from exercise of stock options 78 164
-------- --------
Net Cash Provided By Financing Activities 2,025 16,423
-------- --------
Decrease in cash and cash equivalents (14) (2,542)
Cash and cash equivalents, beginning of period 137 2,650
-------- --------
Cash, end of period $ 123 $ 108
======== ========
Cash paid for:
Taxes $ 84 $ 231
======== ========
Interest $ 935 $ 837
======== ========
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, 2005 and March 31, 2004
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., 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 ending 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. Operating results for the Quarter and nine months ended March 31,
2005 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.
New Accounting Pronouncements:
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4". SFAS No. 151 retains the general principle
of ARB 43, Chapter 4, "Inventory Pricing (AC Section I78)", that inventories are
presumed to be stated at cost; however, it amends ARB 43 to clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and require
the allocation of fixed production overheads to inventories based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The Company does not anticipate that SFAS No.
151 will have a significant impact on the Company's overall results of
operations or financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Non
monetary Transactions". The amendments made by SFAS 153 are based on the
principle
6
BERNARD CHAUS, INC. AND SUBSIDIARIES
that exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the narrow exception
for nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This statement shall be applied prospectively and is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. Earlier application is permitted for nonmonetary asset exchanges
occurring in fiscal periods beginning after the date of issuance. The Company
does not anticipate that the adoption of SFAS 153 will have a significant impact
on the Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment". SFAS 123(R) requires that the compensation cost relating
to share-based payment transactions be recognized in financial statements. The
amount of compensation cost will be measured based on the grant-date fair value
of the equity or liability instruments issued. SFAS 123(R) covers a wide range
of share-based compensation arrangements including share options, restricted
share plans, performance-based awards, share appreciation rights, and employee
share purchase plans. SFAS 123(R) replaces SFAS No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees". This statement is effective as of the beginning of
the Company's next fiscal year. The Company is required to implement this new
standard in the quarter ending September 30, 2005. The impact of this new
standard, if it had been in effect, on the net earnings and related per share
amounts of our fiscal years ended in June 2004, 2003 and 2002 was disclosed in
Note 2, Summary of Significant Accounting Policies, Stock-Based Compensation of
our Financial Statements included in our Form 10-k for the fiscal year ended
June 30, 2004. The impact of this new standard, if it had been in effect, on the
net earnings and related per share amounts of our fiscal quarter ended March 31,
2005 is disclosed in Note 1 below. The impact of this new standard on the
Company's net earnings for fiscal 2006 is estimated to be approximately $0.2
million before the grant of any new options.
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 provisions
established, the Company cannot guarantee that it will continue to experience
the same rates as in the past. Design revenue, which is less than 1% of total
revenue, is recognized when designs are manufactured and shipped.
Shipping and Handling:
Shipping and handling costs charged to customers is recorded as a
component of net revenue. For all periods presented shipping and handling costs
charged to customers was less than $0.1 million.
Cooperative Advertising:
Cooperative advertising allowances are recorded in selling, general
and administrative expenses in the period in which the costs are incurred. For
the three months ended March 31, 2005 and 2004, cooperative advertising expenses
were approximately $0.2 million and $0.1 million, respectively. For the nine
months ended March 31, 2005 and 2004, cooperative advertising expenses were
approximately $0.4 million and $0.2 million, respectively.
7
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 as of the earlier of: a) the date that CIT has been paid by the
Company's customers; b) the date of the customer's longest maturity if the
customer is in a bankruptcy or insolvency proceeding; or c) the last day of the
third month following the customer's longest maturity date if the receivable
remains unpaid. CIT assumes only the risk of the Company's customers' insolvency
or non-payment. All other receivable risks for customer deductions that reduce
the customer receivable balances 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 wholly owned subsidiary, Cynthia Steffe Acquisition, LLC ("CS
Acquisition") 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 March 31, 2005 approximately 89% 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 historical 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. 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 March
31, 2005, June 30, 2004 and March 31, 2004, Accounts Receivable was net of
allowances of $2.2 million, $1.2 million and $1.0 million, respectively.
Inventories:
Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out method. The majority of the Company's
inventory purchases are shipped FOB shipping point from the Company's suppliers.
The Company takes title and assumes the risk of loss when the merchandise is
received at the boat or airplane overseas. The Company records inventory at the
point of such receipt at the boat or airplane overseas. Reserves for slow moving
and aged merchandise are provided to adjust inventory costs based on historical
experience and current product demand. Inventory reserves were $1.5 million at
March 31, 2005, $0.8 million at June 30, 2004, and $1.1 million at March 31,
2004. 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
8
BERNARD CHAUS, INC. AND SUBSIDIARIES
established to reduce the deferred tax assets to the amount that is more likely
than not to be realized. As of March 31, 2005, June 30, 2004 and March 31, 2004,
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 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 For the Nine Months Ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------ ------------ ----------- -----------
(Unaudited)
(in thousands except per share amounts)
Net income, as reported $ 1,024 $ 1,804 $ 2,117 $ 2,623
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of tax effects (67) (170) (232) (289)
----------- ---------- ----------- ---------
Proforma net income $ 957 $ 1,634 $ 1,885 $ 2,334
=========== ========== =========== =========
Earnings per share:
----------- ---------- ----------- ---------
Basic-as reported $ 0.04 $ 0.07 $ 0.08 $ 0.10
=========== ========== =========== =========
Basic-proforma $ 0.04 $ 0.06 $ 0.07 $ 0.09
=========== ========== =========== =========
----------- ---------- ----------- ---------
Diluted-as reported $ 0.03 $ 0.06 $ 0.07 $ 0.09
=========== ========== =========== =========
Diluted-proforma $ 0.03 $ 0.05 $ 0.06 $ 0.08
=========== ========== =========== =========
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
Months Ended
March 31, 2004
--------------
Weighted average fair value of stock options
granted $0.80
Risk-free Interest rate 4.30%
Expected dividend yield $0.00
Expected life of option 10.0 years
Expected volatility 83%
There were no stock options granted during the three months ended March 31,
2005.
9
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 Quarter and nine months ended March
31, 2005 and March 31, 2004 by dividing the applicable net income by the
weighted average number of common shares outstanding and common equivalents.
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) 2005 2004 2005 2004
------------- ---------------- ------------------ -------------
Denominator for basic earnings per share
weighted-average shares outstanding 28.1 27.5 28.0 27.4
Assumed exercise of potential common shares 2.3 3.2 2.5 3.3
------------- ---------------- ------------------ -------------
Denominator for diluted earnings per share 30.4 30.7 30.5 30.7
============= ================ ================== =============
Reclassifications:
Certain reclassifications have been made to conform to the current
period presentation.
2. Inventories - net
March 31, June 30, March 31,
2005 2004 2004
--------------- -------------- ---------------
(in thousands)
(unaudited) (unaudited)
Raw materials $ 789 $ 1,105 $ 984
Work-in-process 186 283 314
Finished goods 8,549 7,285 12,615
--------------- ------------- --------------
Total $ 9,524 $ 8,673 $ 13,913
=============== ============= ==============
Inventories are stated at the lower of cost, using the first in
first-out (FIFO) method, or market. Included in finished goods inventories is
merchandise in transit of approximately $2.7 million at March 31, 2005, $5.2
million at June 30, 2004 and $6.7 million at March 31, 2004.
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
10
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 March 31, 2005, 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 March 31, 2005 on the
Revolving Facility was 6.25% and on the Term Loan was 6.75%.
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 March 31,
2005, 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, 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 then latest
business plan for fiscal 2004.
11
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 then 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 was
paid in connection with the amendment.
On May 12, 2005, the Company and CIT agreed to further amend the
Financing Agreement to reset certain financial covenants regarding tangible net
worth, fixed charge coverage ratio and minimum borrowing availability for the
fourth quarter of fiscal 2005.
On March 31, 2005, the Company had $6.1 million of outstanding letters
of credit under the Revolving Facility, total availability of approximately
$15.0 million under the Amended Financing Agreement, a balance of $7.8 million
on the Term Loan and $11.8 million in revolving credit borrowings. 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 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, 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. 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.
12
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 Three Months Ended For the Nine Months Ended
March 31, March 31,
2004 2004
----------------------------------------------------------
(Unaudited)
(in thousands except per share amounts)
Net sales $ 43,713 $ 122,773
Net income 1,804 2,751
Basic income per share $ 0.07 $ 0.10
Diluted income per share $ 0.06 $ 0.09
5. Pension Plan
Components of Net Periodic Benefit Cost
Pension Plan Pension Plan
For the Three Months Ended For the Nine Months Ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
--------------- ----------------- --------------- ----------------
(Unaudited) (Unaudited)
(in thousands) (in thousands)
Service cost $18 $18 $54 $53
Interest cost 22 20 66 59
Expected return on plan assets (19) (17) (57) (50)
Amortization of net loss 5 10 15 30
--------------- -------------- --------------- ----------------
Net periodic benefit cost $26 $31 $78 $92
=============== ============== =============== ================
Employer Contributions
For the nine months ended March 31, 2005 the Company's contribution to
the pension plan was $42,000. The Company anticipates contributing an additional
$101,000 to fund its pension plan in fiscal 2005 for a total of $143,000.
13
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., 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.
Results of Operations
Net revenue for the quarter ended March 31, 2005 decreased by 4.9%, or
$2.1 million, to $41.6 million from $43.7 million for the quarter ended March
31, 2004. Units sold decreased by approximately 10% and the overall price per
unit increased by approximately 5%. Exclusive of the Company's Cynthia Steffe
product lines acquired in January 2004, the Company's revenue decreased by $7.2
million primarily due to a decrease in Chaus products sold to department stores.
This decrease was partially offset by an increase of $5.0 million in the
Company's Cynthia Steffe product lines acquired in January 2004.
Net revenue for the nine months ended March 31, 2005 decreased by 2.2
%, or $2.5 million, to $114.6 million from $117.1 million for the nine months
ended March 31, 2004. Units sold decreased by approximately 6 % and the overall
price per unit increased by 4%. Exclusive of the Company's Cynthia Steffe
product lines acquired in January 2004, the Company's revenue decreased by $21.1
million primarily due to a decrease in Chaus products sold to department stores
and discounters. This decrease was partially offset by an increase of $18.6
million in the Company's Cynthia Steffe product lines acquired in January 2004.
Gross profit for the quarter ended March 31, 2005 increased $0.5
million to $12.2 million as compared to $11.7 million for the quarter ended
March 31, 2004. As a percentage of net revenue, gross profit increased to 29.5%
for the quarter ended March 31, 2005 from 26.7% for the quarter ended March 31,
2004. The increase in gross profit dollars was primarily due to the gross profit
of the Company's Cynthia Steffe product lines acquired in January 2004
accounting for $2.2 million of the increase in gross profit, partially offset by
a $1.7 million decrease in gross profit excluding Cynthia Steffe product lines.
The $1.7 million decrease in gross profit relates primarily to the decrease in
Chaus products sold to department stores and discount stores. The Cynthia Steffe
product, which is an upscale modern women's line, carries a higher gross
percentage than the Company's other product lines.
Gross profit for the nine months ended March 31, 2005 increased $4.2
million to $33.1 million as compared to $28.9 million for the nine months ended
March 31, 2004. As a percentage of net revenue, gross profit increased to 28.9%
for the nine months ended March 31, 2005 from 24.7% for the nine months ended
March 31, 2004. The increase in gross profit dollars was primarily due to the
inclusion of a full nine months of gross profit of the Company's Cynthia Steffe
product lines acquired in January 2004, accounting for $8.7 million of the
increase in gross profit. This increase was partially offset by a $4.5 million
decrease in gross profit excluding Cynthia Steffe product lines. The $4.5
million decrease in gross profit relates primarily to the decrease in Chaus
products sold to department stores and discount stores. The Cynthia Steffe
product, which is an upscale modern women's line, carries a higher gross
percentage than the Company's other product lines.
Selling, general and administrative ("SG&A") expenses increased by $1.2
million to $10.7 million (25.8% of net revenue) for the quarter ended March 31,
2005 from $9.5 million (21.8% of net revenue) for the quarter ended March 31,
2004.
14
BERNARD CHAUS, INC. AND SUBSIDIARIES
The main components of the increase in SG&A expenses for the quarter ended March
31, 2005 were design related costs ($0.4 million), payroll and payroll related
costs ($0.4 million), professional fees ($0.1 million) and other SG&A expenses
($0.3 million). The increase in SG&A expenses as a percentage of net revenue was
due to the increase in SG&A expenses and the lower sales volume, which reduced
the Company's leverage on SG&A expenses.
Selling, general and administrative expenses increased by $4.5 million
to $29.7 million (25.9% of net revenue) for the nine months ended March 31, 2005
from $25.2 million (21.4% of net revenue) for the nine months ended March 31,
2004. The increase was primarily due to SG&A expenses related to the Cynthia
Steffe product lines acquired in January 2004. The main components of the
increase in SG&A expenses for the nine months ended March 31, 2005 were payroll
and payroll related costs ($2.8 million), design related costs ($0.9 million)
and marketing and advertising costs ($0.4 million) and other SG&A expenses of
($0.4 million). The increase in SG&A expenses as a percentage of net revenue was
due to the increase in SG&A expenses and the lower sales volume, which reduced
the Company's leverage on SG&A expenses.
Interest expense increased approximately ($0.1 million) for the
quarter and nine months ended March 31, 2005 as compared to the quarter and nine
months ended March 31, 2004 primarily due to higher interest rates.
The Company's income tax provision for the quarters and the nine
months ended March 31, 2005 and 2004, includes federal alternative minimum taxes
(AMT) resulting from the use of the Company's net operating loss (NOL)
carryforward from prior years and provisions for state and local taxes. New
Jersey enacted tax legislation temporarily suspending the use of net operating
loss (NOL) carryforwards against income for fiscal 2004 and allowing 50% use of
net operating loss (NOL) carryforwards against income for fiscal 2005.
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 March 31, 2005, June
30, 2004 and March 31, 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 Income 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 used in operating activities was $1.9 million for the nine
months ended March 31, 2005 as compared to cash used in operating activities of
$15.7 million for the nine months ended March 31, 2004. Cash used in operating
activities for the nine-month period of fiscal 2005 resulted primarily from an
increase in accounts receivable and due from factor ($3.4 million), an increase
in inventory ($0.9 million) a decrease in accounts payable ($0.7 million)
partially offset by net income ($2.1million) and depreciation and amortization
($0.9 million). Cash used in operating activities for the 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). The timing of sales and the improvement in the aging of accounts
receivable for the nine months ended March 31, 2005 resulted in a smaller change
in accounts receivable for the nine month period this year as compared to the
nine month period last year. The decrease in accounts payable for the nine month
period this year is predominately due to the change in the mix of suppliers,
with the Company purchasing higher levels of raw materials than in prior
periods, which require earlier payment.
Cash used in investing activities in the nine months ended March 31,
2005 was $0.1 million compared to $3.3 million in the previous year. The capital
expenditures for the nine months ended March 31, 2005 consisted primarily of
management information system upgrades. The investing activities for the nine
months ended March 31, 2004 consisted primarily of $2.7 million for the
acquisition of Cynthia Steffe and $.5 million for capital expenditures of fixed
assets. The Company anticipates additional capital expenditures of approximately
$0.2 million for the remainder of fiscal year 2005.
15
BERNARD CHAUS, INC. AND SUBSIDIARIES
Net cash provided by financing activities of $2.0 million for the nine
months ended March 31, 2005 was primarily the result of principal payments on
the term loan of $1.3 million and proceeds on short-term bank borrowings of $3.2
million. 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.
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 March 31, 2005, 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 March 31, 2005 on the Revolving Facility was 6.25% and on the Term Loan was
6.75%.
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 March 31,
2005, 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.
16
BERNARD CHAUS, INC. AND SUBSIDIARIES
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 then 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 then 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 was
paid in connection with the amendment.
On May 12, 2005, the Company and CIT agreed to further amend the
Financing Agreement to reset certain financial covenants regarding tangible net
worth, fixed charge coverage ratio and minimum borrowing availability for the
fourth quarter of fiscal 2005.
On March 31, 2005, the Company had $6.1 million of outstanding letters
of credit under the Revolving Facility, total availability of approximately
$15.0 million under the Amended Financing Agreement, a balance of $7.8 million
on the Term Loan and $11.8 million in revolving credit borrowings. 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 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).
17
BERNARD CHAUS, INC. AND SUBSIDIARIES
Outlook
The Company expects that a decline in its business, exclusive of the
Company's Cynthia Steffe product lines, will result in the Company incurring a
loss for the fourth quarter and for the current fiscal year, as a whole.
Future Financing Requirements
At March 31, 2005, the Company had working capital of $18.6 million as
compared with working capital of $16.7 million at March 31, 2004. Based on
preliminary discussions with its lender , the Company and CIT have agreed to
review the business plan for fiscal 2006 at the end of fiscal 2005 and to set
the financial covenants for fiscal 2006 at that time . The Company 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. Subject to
reaching an agreement with CIT on the business plan for 2006 and the execution
of a definitive agreement regarding the resetting of the covenants for 2006, the
Company believes it will have adequate resources to meet its needs for the
foreseeable future as it meets its revised business plan and satisfies the
anticipated new covenants to be 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:
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. Design revenue, which is less than 1%
of total revenue, is recognized when designs are manufactured and shipped.
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 historical 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. 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 March 31, 2005, June 30, 2004 and March 31, 2004,
Account Receivable was net of allowances of $2.2 million, $1.2 million and $1.0
million, respectively.
Inventories - Inventories are stated at the lower of cost or market,
cost being determined on the first-in, first-out method. The majority of the
Company's inventory purchases are shipped FOB shipping point from the Company's
suppliers. The Company takes title and assumes the risk of loss when the
merchandise is received at the boat or airplane overseas. The Company records
inventory at the point of such receipt at the boat or airplane overseas.
Reserves for slow moving and aged
18
BERNARD CHAUS, INC. AND SUBSIDIARIES
merchandise are provided to adjust inventory costs based on historical
experience and current product demand. Inventory reserves were $1.5 million at
March 31, 2005, $0.8 million at June 30, 2004, and $1.1 million at March 31,
2004. 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, Trademarks and Goodwill - The
Company periodically reviews the carrying value of its long-lived assets and
Trademarks 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 at least annually or 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 taxable income. As of March 31, 2005
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.
At March 31, 2005 and 2004, the carrying amounts of the Company's
revolving credit borrowings and term loan approximated fair value. As of March
31, 2005, the Company's revolving credit borrowings bore interest at 6.25% and
the term loan bore interest at 6.75%. As of March 31, 2005, 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.
19
BERNARD CHAUS, INC. AND SUBSIDIARIES
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, 2005, 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, 2005, 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.
20
BERNARD CHAUS, INC. AND SUBSIDIARIES
Item 6. 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: May 16, 2005 By: /s/ Josephine Chaus
------------------------------------
JOSEPHINE CHAUS
Chairwoman of the Board, and
Chief Executive Officer
Date: May 16, 2005 By: /s/ Nicholas DiPaolo
-------------------------------------
NICHOLAS DIPAOLO
Vice Chairman of the Board
Date: May 16, 2005 By: /s/ David Panitz
-------------------------------------
DAVID PANITZ
Chief Operating Officer
Date: May 16, 2005 By: /s/ Barton Heminover
-------------------------------------
BARTON HEMINOVER
Chief Financial Officer
21
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.
22