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EX-32.2 - EX-32.2 - CHAUS BERNARD INC | y03021exv32w2.htm |
EX-31.2 - EX-31.2 - CHAUS BERNARD INC | y03021exv31w2.htm |
EX-32.1 - EX-32.1 - CHAUS BERNARD INC | y03021exv32w1.htm |
EX-31.1 - EX-31.1 - CHAUS BERNARD INC | y03021exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended December 31, 2009.
OR
o | 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 incorporation or organization) | (I.R.S. employer identification number) | |
530 Seventh Avenue, New York, New York | 10018 | |
(Address of Principal Executive Offices) | (Zip Code) |
(212) 354-1280
(Registrants telephone number, including area code)
(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 þ No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any , every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for shorter period that the registrant was required to submit and post such files). Yes o
No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (check one):
o Large accelerated filer | o Accelerated filer | o Non-accelerated filer | þ Smaller reporting company | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
Date | Class | Shares Outstanding | ||||
February 16, 2010
|
Common Stock, $0.01 par value | 37,481,373 |
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and per share amounts)
December 31, | June 30, | December 31, | ||||||||||
2009 | 2009 | 2008 | ||||||||||
(Unaudited) | ( * ) | (Unaudited) | ||||||||||
Assets |
||||||||||||
Current Assets |
||||||||||||
Cash |
$ | 149 | $ | 126 | $ | 82 | ||||||
Accounts receivable factored |
13,443 | 10,589 | 16,478 | |||||||||
Accounts receivable net |
907 | 207 | 144 | |||||||||
Inventories net |
4,187 | 3,839 | 11,249 | |||||||||
Prepaid expenses and other current assets |
532 | 275 | 733 | |||||||||
Total current assets |
19,218 | 15,036 | 28,686 | |||||||||
Fixed assets net |
746 | 857 | 1,650 | |||||||||
Other assets |
91 | 158 | 190 | |||||||||
Trademarks |
1,000 | 1,000 | 1,000 | |||||||||
Goodwill |
| | 2,257 | |||||||||
Total assets |
$ | 21,055 | $ | 17,051 | $ | 33,783 | ||||||
Liabilities and Stockholders Equity (Deficiency) |
||||||||||||
Current Liabilities |
||||||||||||
Revolving credit borrowings |
$ | 7,762 | $ | 6,606 | $ | 14,984 | ||||||
Accounts payable |
8,559 | 6,251 | 8,016 | |||||||||
Accrued expenses |
2,392 | 2,164 | 2,658 | |||||||||
Total current liabilities |
18,713 | 15,021 | 25,658 | |||||||||
Deferred income |
3,433 | | | |||||||||
Long term liabilities |
1,556 | 1,295 | 602 | |||||||||
Deferred income taxes |
161 | 147 | 506 | |||||||||
Total liabilities |
23,863 | 16,463 | 26,766 | |||||||||
Stockholders Equity (Deficiency) |
||||||||||||
Preferred stock, $.01 par value, authorized
shares 1,000,000; issued
and outstanding shares none |
| | | |||||||||
Common stock, $.01 par value,
authorized shares 50,000,000; issued
shares 37,543,643 at
December 31, 2009, June 30, 2009
and December 31, 2008 |
375 | 375 | 375 | |||||||||
Additional paid-in capital |
133,434 | 133,416 | 133,395 | |||||||||
Deficit |
(134,208 | ) | (130,794 | ) | (124,672 | ) | ||||||
Accumulated other comprehensive loss |
(929 | ) | (929 | ) | (601 | ) | ||||||
Less: Treasury stock at cost
62,270 shares at December 31 2009, June
30, 2009 and December 31, 2008 |
(1,480 | ) | (1,480 | ) | (1,480 | ) | ||||||
Total stockholders equity (deficiency) |
(2,808 | ) | 588 | 7,017 | ||||||||
Total liabilities and stockholders
equity (deficiency) |
$ | 21,055 | $ | 17,051 | $ | 33,783 | ||||||
* | Derived from audited financial statements at June 30, 2009. |
See accompanying notes to consolidated financial statements.
3
Table of Contents
BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share amounts)
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Net revenue |
$ | 21,097 | $ | 26,049 | $ | 44,807 | $ | 59,947 | ||||||||
Cost of goods sold |
16,396 | 20,426 | 33,635 | 44,356 | ||||||||||||
Gross profit |
4,701 | 5,623 | 11,172 | 15,591 | ||||||||||||
Selling, general and administrative expenses |
6,955 | 8,882 | 14,206 | 18,461 | ||||||||||||
Loss from operations |
(2,254 | ) | (3,259 | ) | (3,034 | ) | (2,870 | ) | ||||||||
Interest expense, net |
207 | 289 | 360 | 522 | ||||||||||||
Loss before income tax provision |
(2,461 | ) | (3,548 | ) | (3,394 | ) | (3,392 | ) | ||||||||
Income tax provision |
10 | 33 | 20 | 63 | ||||||||||||
Net loss |
$ | (2,471 | ) | $ | (3,581 | ) | $ | (3,414 | ) | $ | (3,455 | ) | ||||
Basic loss per share |
$ | (0.07 | ) | $ | (0.10 | ) | $ | (0.09 | ) | $ | (0.09 | ) | ||||
Diluted loss per share |
$ | (0.07 | ) | $ | (0.10 | ) | $ | (0.09 | ) | $ | (0.09 | ) | ||||
Weighted average number of shares
outstanding- basic |
37,481,000 | 37,481,000 | 37,481,000 | 37,481,000 | ||||||||||||
Weighted average number of common and
common equivalent shares outstanding-
diluted |
37,481,000 | 37,481,000 | 37,481,000 | 37,481,000 | ||||||||||||
See accompanying notes to consolidated financial statements.
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BERNARD CHAUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Six Months Ended | ||||||||
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
Operating Activities |
||||||||
Net loss |
$ | (3,414 | ) | $ | (3,455 | ) | ||
Adjustments to reconcile net loss to net cash
used in operating activities: |
||||||||
Depreciation and amortization |
413 | 614 | ||||||
Amortization of deferred income |
(167 | ) | | |||||
Gain from insurance recovery |
| (384 | ) | |||||
Proceeds from insurance recovery |
| 92 | ||||||
Stock compensation expense |
18 | 22 | ||||||
Deferred income taxes |
14 | 44 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable factored |
(2,854 | ) | (15,639 | ) | ||||
Accounts receivable |
(700 | ) | 13,206 | |||||
Inventories |
(348 | ) | (3,767 | ) | ||||
Prepaid expenses and other current assets |
(226 | ) | (132 | ) | ||||
Accounts payable |
2,308 | 1,172 | ||||||
Accrued expenses and long term liabilities |
89 | 289 | ||||||
Net cash used in operating activities |
(4,867 | ) | (7,938 | ) | ||||
Investing Activities |
||||||||
Purchases of fixed assets |
(266 | ) | (194 | ) | ||||
Proceeds from insurance recovery |
| 192 | ||||||
Net cash used in investing activities |
(266 | ) | (2 | ) | ||||
Financing Activities |
||||||||
Net proceeds from revolving credit borrowings |
1,156 | 8,386 | ||||||
Proceeds from supply premium |
4,000 | | ||||||
Principal payments on term loan |
| (425 | ) | |||||
Net cash provided by financing activities |
5,156 | 7,961 | ||||||
Increase in cash |
23 | 21 | ||||||
Cash beginning of period |
126 | 61 | ||||||
Cash end of period |
$ | 149 | $ | 82 | ||||
Supplemental Disclosure of Cash Flow Information: |
||||||||
Cash paid for: |
||||||||
Taxes |
$ | 13 | $ | 21 | ||||
Interest |
$ | 329 | $ | 456 | ||||
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
On September 18, 2008, in connection with the amended financing agreement, $1,800,000 of the term loan was
assumed through the utilization of the Companys revolving credit borrowings.
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six Months Ended December 31, 2009 and December 31, 2008
(UNAUDITED)
Six Months Ended December 31, 2009 and December 31, 2008
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 womens career and casual sportswear principally under the JOSEPHINE
CHAUS®, JOSEPHINE®, JOSEPHINE STUDIO®, CHAUS®, CYNTHIA STEFFE®, and CYNTHIA CYNTHIA STEFFE®
trademarks and under private label brand names. The Companys products are sold nationwide through
department store chains, specialty retailers, discount stores, wholesale clubs and other retail
outlets. The Companys CHAUS product lines sold through the department store channels are in the
opening price points of the better category. The Companys CYNTHIA STEFFE product lines are an
upscale contemporary womens apparel line sold through department stores and specialty stores. The
Companys private label product lines are designed and sold to various customers. The Company also
has a license agreement with Kenneth Cole Productions (LIC), Inc. to manufacture and sell womens
sportswear under various labels. The Company began initial shipments of these licensed products in
December 2005 primarily to department stores. These products offer high-quality fabrications and
styling at better price points. As used herein, fiscal 2010 refers to the fiscal year ended June
30, 2010 and fiscal 2009 refers to the fiscal year ended June 30, 2009.
The Companys business plan requires the availability of sufficient cash flow and borrowing
capacity to finance its product lines and to meet its cash needs. The Company expects to satisfy
such requirements through cash on hand, cash flow from operations and borrowings from its lender.
The Companys fiscal 2010 business plan anticipates improvement from fiscal 2009, by achieving
improved gross margin percentages and additional cost reduction initiatives primarily in the last
six months of fiscal 2010.
There can be no assurance that the Company will be successful in its
efforts. The Company relies on The CIT Group/Commercial Services, Inc. (CIT), which is the sole
source of the Companys financing to borrow money in order to fund its operations. On November 1,
2009, CIT Group, Inc. and CIT Group Funding Company of Delaware LLC filed voluntary petitions for
reorganization seeking relief under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy
Court in the Southern District of New York. The CIT Group/Commercial Services, Inc. is an
operating subsidiary of CIT Group Inc. CIT Group Inc. indicated that no operating subsidiaries were
included in the filings and that all of its operating entities would continue normal operations
while it is reorganizing. On December 10, 2009, The CIT Group, Inc. emerged from bankruptcy court.
Since the time of the filing, The CIT Group/Commercial Services, Inc. has continued to perform its
obligations under the agreements with the Company. Should there be a disruption to the normal
operations of The CIT Group/Commercial Services, Inc., the Company believes it could obtain
alternative financing, however such a disruption could cause the Company to not have sufficient
cash flow from operations to meet its liquidity needs, and therefore this could result in a
material adverse affect on its business, liquidity and financial condition.
At December 31, 2009,
the Company was not in compliance with its financial covenants under its financing
agreement with CIT. The Company has been advised by CIT that although the Company
is not in compliance with its financial covenants under the financing agreement
and is therefore in default, CIT is not terminating the financing agreement,
and, without waiving those defaults, will continue to operate under, and provide
funding at its discretion. The Company has not reached an agreement with CIT regarding
an amendment to the financing agreement. If the Company cannot achieve an acceptable amendment,
it believes it will be unable to meet the future financial covenants, resulting in
additional defaults under the agreement. As a result, CIT may, in its sole discretion
halt any and all obligations to make loans, advances and extensions of credit.
Upon the continuance of such non-compliance, CIT may in its sole discretion (i)
declare that all financial obligations are due and immediately payable; (ii) terminate
the financing agreement; and (iii) require that all outstanding and future financial
obligations incur a higher default interest rate. To the extent the Company cannot
reach an agreement with CIT or find alternative financing, it will not have sufficient
cash flow from operations to meet its liquidity needs, and therefore, this will have
a material adverse affect on its business, results of operations, liquidity and financial
condition, and its ability to operate as a going concern. For additional information
about the Companys financing agreement with CIT, see Note 3.
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Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America (GAAP) 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 GAAP 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 three and six months ended December 31, 2009 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2010 or any other period. The balance
sheet at June 30, 2009 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
Companys Annual Report on Form 10-K for the year ended June 30, 2009.
Subsequent Events:
The Company has evaluated subsequent events through February 16, 2010, which is the date the
financial statements were issued, and has concluded that no such events or transactions took place
which would require a disclosure herein, except relating to the
Companys financing agreement with CIT as described above and in Note 3.
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 generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition:
The Company recognizes sales upon shipment of products to customers since title and risk of
loss pass 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.
Factoring Agreement and Accounts Receivable:
On September 10, 2009 the Company entered into an Amended and Restated Factoring and Financing
Agreement (the September 2009 Agreement) with CIT whereby substantially all of its receivables
are factored. The agreement is a non-recourse factoring agreement whereby CIT, based on credit
approved orders, assumes the accounts receivable risk of the Companys customers in the event of
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. These deductions
totaling $2.6 million as of December 31, 2009, $3.4 million as of June 30, 2009 and $3.3 million as
of December 31, 2008 have been recorded as a reduction of amounts in accounts receivable
factored. The Company receives payment on non-recourse factored receivables from CIT as of the
earlier of: a) the date that CIT has been paid by the Companys customers; b) the date of the
customers longest maturity if the customer is in bankruptcy or insolvency proceedings; or c) the
last day of the third month following the customers longest maturity date if the receivable
remains unpaid. The Company assumes the accounts receivable risk on sales factored to CIT but not
approved by CIT as non-recourse factored receivables, which approximated
$0.6 million at December 31, 2009, $0.4 million at June 30, 2009, and $0.6 million at December
31, 2008.
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The Company also assumes the risk on accounts receivable not factored to CIT, which at
December 31, 2009, June 30, 2009 and December 31, 2008 was approximately $0.9 million, $0.2
million, and $0.1 million, respectively. Prior to October 2008 the Company extended credit to its
customers based on an evaluation of the customers financial condition and credit history, except
for customers of the Companys wholly owned subsidiary, Cynthia Steffe Acquisition, LLC.
For additional information about the Companys financing,
see Note 3.
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 Companys inventory purchases are shipped FOB shipping point
from the Companys 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 approximately $0.4 million at December 31, 2009, $0.8
million at June 30, 2009 and $1.2 million
at December 31, 2008. Inventory reserves are based upon the level of excess and aged inventory and
the Companys 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.
Long-Lived Assets, Goodwill and Trademarks:
Goodwill represented the excess of purchase price over the fair value of net assets acquired
in business combinations accounted for under the purchase method of accounting. The Company
recorded goodwill related to the acquisition of S.L. Danielle, Inc. (SL Danielle) and certain
assets of the Cynthia Steffe division of LF Brands Marketing, Inc. (Cynthia Steffe). Trademarks
relate to the Cynthia Steffe trademarks and were determined to have an indefinite life. The Company
does not amortize assets with indefinite lives and conducts impairment testing annually in the
fourth quarter of each fiscal year, or sooner if events and changes in circumstances suggest that
the carrying amount may not be recoverable from estimated future cash flows including market
participant assumptions, when available. During the fourth quarter of fiscal 2009, the Company
performed impairment testing by determining the fair value of the entire Company based on the
market capitalization at June 30, 2009. The Company then allocated the fair value among the
various reporting units and determined that the goodwill balances for SL Danielle and Cynthia
Steffe were impaired because the carrying value exceeded the allocated fair value. Accordingly, the
Company recorded a goodwill impairment of $2.3 million for fiscal year end 2009. As of June 30,
2009 the Company no longer maintains any goodwill. The review of trademarks and long lived assets
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. To the extent these future projections or the Companys
strategies change, the conclusion regarding impairment may differ from the current estimates. For
the three and six months ending December 31, 2009 and 2008 no impairment of trademarks or long
lived assets was recognized.
Income Taxes:
The Company accounts for income taxes under the asset and liability method in accordance with
the Financial Accounting Standards Boards (FASB) Accounting Codification Standards 740 (formerly
Statement of Financial Accounting Standards (SFAS) 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
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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 December 31, 2009,
June 30, 2009 and December 31, 2008, based upon its evaluation of the Companys historical and
projected results of operations, the current business environment and the magnitude of the net
operating loss, the Company recorded a full valuation allowance on its deferred tax assets. If
the Company determines that it is more likely than not that a portion of the deferred tax assets
will be realized in the future, that portion of the valuation allowance will be reduced and the
Company will provide for an income tax benefit in its Statement of Operations at its estimated
effective tax rate.
The Companys deferred tax liability decreased due to the reversal of the deferred tax
liabilities previously recorded for temporary differences relating to the Companys goodwill, which
was deemed impaired during the fourth quarter of fiscal 2009. The Companys trademarks are not
amortized for book purposes, however, they continue to be amortized for tax purposes and therefore
the Company records a deferred tax liability on the temporary difference. The temporary difference
will not reverse until such time as the assets are impaired or sold, therefore the likelihood of
being offset by the Companys net operating loss carryforward is uncertain.
Earnings (Loss) Per Share:
Basic earnings (loss) per share has been calculated by dividing the applicable net income
(loss) by the weighted average number of common shares outstanding. Diluted earnings per share has
been calculated by dividing the applicable net income by the weighted average number of common
shares outstanding and common share equivalents.
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Denominator for loss per share (in millions):
|
||||||||||||||||
Denominator for basic loss per share
weighted-average shares outstanding |
37.5 | 37.5 | 37.5 | 37.5 | ||||||||||||
Assumed exercise of potential common shares |
| | | | ||||||||||||
Denominator for diluted loss per share |
37.5 | 37.5 | 37.5 | 37.5 | ||||||||||||
Options to purchase approximately 895,000 and 1,057,000 shares of common stock were excluded
from the computation of diluted earnings per share for the three months and six months ended
December 31, 2009 and December 31, 2008, respectively, because their exercise price was greater
than the average market price.
Fair Value of Financial Instruments:
The carrying amounts of financial instruments, including accounts receivable, accounts payable
and revolving credit borrowings approximated fair value due to their short-term maturity or
variable interest rates.
New Accounting Pronouncements:
In June 2009, the FASB issued The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 (ASC) which
became the official source of authoritative GAAP, other than guidance issued by the SEC, and
eliminated the historical GAAP hierarchy. ASC is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The Company adopted the ASC effective
for its September 30, 2009 financial statements.
In September 2006, the FASB issued a new requirement which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value measurements, which
are included in ASC 820 (formerly SFAS 157). The Company adopted these provisions for non-financial
assets and liabilities, effective July 1, 2009 which did not have a material impact on its
financial statements.
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In December 2007, the FASB issued new requirements which established accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary, which are included in ASC 810 (formerly SFAS 160) and are effective for fiscal years
beginning on or after December 15, 2008, and for interim periods within such fiscal years. The
Company adopted these provisions effective July 1, 2009, which did not have a material impact on
its financial statements.
In March 2008, the FASB issued new requirements which required enhanced disclosures about how
and why an entity uses derivative instruments, how derivative instruments and related hedged items
are accounted for, and how they affect an entitys financial position, financial performance, and
cash flows, which are included in ASC 815 (formerly SFAS 161) and are effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008. The
Company adopted these provisions effective July 1, 2009, which did not have a material impact on
its financial statements.
In December 2008, the FASB issued new requirements which expanded the disclosure requirements
about plan assets for pension plans, postretirement medical plans, and other funded postretirement
plans, which are included in ASC 715 (These requirements were formerly discussed in the FASBs
Financial Staff Position FSP 132(R) 1). Specifically, the rules require disclosure of: i) how
investment allocation decisions are made by management; ii) major categories of plan assets; iii)
significant concentrations of credit risk within plan assets; iv) the level of the fair value
hierarchy in which the fair value measurements of plan assets fall (i.e. level 1, level 2 or level
3); v) information about the inputs and valuation techniques used to measure the fair value of plan
assets; and vi) a reconciliation of the beginning and ending balances of plan assets valued with
significant unobservable inputs (i.e. level 3 assets). These new requirements are required to be
adopted by the Company effective for its annual financial statements for fiscal 2010. The Company
expects the adoption of these requirements will not have a material impact on its financial
statements.
2. Inventories net
December 31, | June 30, | December 31, | ||||||||||
2009 | 2009 | 2008 | ||||||||||
(in thousands) | ||||||||||||
(unaudited) | (*) | (unaudited) | ||||||||||
Raw materials |
$ | 416 | $ | 306 | $ | 339 | ||||||
Work-in-process |
115 | 71 | 75 | |||||||||
Finished goods |
3,656 | 3,462 | 10,835 | |||||||||
Total |
$ | 4,187 | $ | 3,839 | $ | 11,249 | ||||||
* | Derived from the audited financial statements at June 30, 2009. |
Inventories are stated at the lower of cost, using the first-in, first-out method, or market.
Included in finished goods inventories is merchandise in transit of approximately $1.1 million at
December 31, 2009, $1.5 million at June 30, 2009 and $4.8 million at December 31, 2008.
3. Financing Agreements
On September 10, 2009 the Company entered into an Amended and Restated Factoring
and Financing Agreement (the September 2009 Agreement) with CIT that expires on September 18,
2011. This agreement consolidated our financing and factoring arrangements into one agreement and
replaced all prior financing and factoring agreements with CIT. The September 2009 Agreement
provides the Company with a $30.0 million revolving line of credit including a sub-limit in the
amount of $12.0 million for issuance of letters of credit. The September 2009 Agreement was
amended on November 5, 2009 to clarify the treatment of cash as well as the unamortized portion of
the exclusive supply premium received from China Ting Group Holdings Limited (CTG) described
below in Note 4.
The borrowings under the September 2009 Agreement accrue interest at a rate of 2% above prime.
The interest rate as of December 31, 2009 was 5.25%.
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The Companys obligations under the September 2009 Agreement are secured by a first priority
lien on substantially all of the Companys assets, including accounts receivable, inventory,
intangibles, equipment, and trademarks, and a pledge of the Companys interest in its
subsidiaries.
The September
2009 Agreement contains various financial and operational covenants, including limitations
on additional indebtedness, liens, dividends, stock repurchases and capital expenditures.
More specifically, the Company is required to maintain minimum levels of defined tangible
net worth, minimum EBITDA, and minimum leverage ratios. At December 31, 2009, the Company
was not in compliance with its financial covenants under the September 2009 Agreement with CIT.
The Company has been advised by CIT that although the Company is not in compliance with its
financial covenants under the September 2009 agreement and is therefore in default, CIT is
not terminating the September 2009 agreement, and, without waiving those defaults, will continue
to provide funding at its discretion. The Company has not reached an agreement with CIT regarding
an amendment to the September 2009 agreement. If the Company cannot achieve an acceptable
amendment, it believes it will be unable to meet the future financial covenants, resulting
in additional defaults under the September 2009 agreement. As a result, CIT may, in its sole
discretion halt any and all obligations to make loans, advances and extensions of credit.
Upon the continuance of such non-compliance, CIT may in its sole discretion (i) declare that
all financial obligations are due and immediately payable; (ii) terminate the September
2009 agreement; and (iii) require that all outstanding and future financial obligations
incur a higher default interest rate. To the extent the Company cannot reach an agreement
with CIT or find alternative financing, it will not have sufficient cash flow from operations
to meet its liquidity needs, and therefore, this will have a material adverse affect
on its business, results of operations, liquidity and financial condition, and its ability
to operate as a going concern.
The Company has the option to terminate the agreement with CIT. If the Company terminates the
agreement with CIT due to non-performance by CIT of certain of its obligations for a specified
period of time, the Company will not be liable for any termination fees. Otherwise in the event of
an early termination by the Company it will be liable for minimum factoring fees and early
termination fees of (a) 1.0% of the revolving credit limit if the Company terminates on or before
September 18, 2010 (b) 0.50% of the revolving credit limit if the Company terminates after
September 18, 2010. However, the early termination fee will be waived if terminated 120 days from
September 18, 2011.
Under the Companys financing agreements with CIT prior to the September 2009 Agreement (the
Prior Agreements) the Company operated under various interest rates which were increased due to
covenant defaults. The Companys obligations under the Prior Agreements were secured by the same
assets as the September 2009 Agreement.
On December 31, 2009, the Company had $1.5 million of outstanding letters of credit, total
availability of approximately $4.0 million, and $7.8 million of revolving credit borrowings under
the September 2009 Agreement. On December 31, 2008, the Company had $2.5 million of outstanding
letters of credit and total availability of approximately $1.0 million, and $15.0 million revolving
credit borrowings under the Prior Agreements.
On November 1, 2009, CIT Group, Inc. and CIT Group Funding Company of Delaware LLC filed
voluntary petitions for reorganization seeking relief under Chapter 11 of the U.S. Bankruptcy Code
with the U.S. Bankruptcy Court in the Southern District of New York. On December 10, 2009, The CIT
Group, Inc. emerged from bankruptcy court. See Note 1.
Factoring Agreement:
As discussed above, the September 2009 Agreement replaced the Companys previous factoring
agreements with CIT. The September 2009 Agreement is a non-recourse agreement which provides
notification factoring on substantially all of the Companys sales. The proceeds of this agreement
are assigned to CIT as collateral for all indebtedness, liabilities and obligations due to CIT. A
factoring commission based on various rates is charged on the gross face amount of all accounts
with minimum fees as defined in the agreement. The previous factoring agreements operated under
similar conditions.
Prior to September 18, 2008, one of the Companys subsidiaries, CS Acquisition, had a
factoring agreement with CIT which provided for a factoring commission based on various sales
levels.
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4. Deferred Income
In July 2009, the Company entered into an exclusive supply agreement with CTG. Under this
agreement, CTG will act as the exclusive supplier of substantially all merchandise purchased by the
Company in addition to providing sample making and production supervision services. In
consideration for the Company appointing CTG as the sole supplier of its merchandise in Asia/China
for a term of 10 years, CTG paid the Company an exclusive supply premium of $4.0 million. The
Company recorded this premium as deferred income and as of December 31, 2009, $0.4 million of the
premium is included in accrued expenses and approximately $3.4 million is considered long term. The
Company will recognize the premium as income on a straight line basis over the 10 year term of the
agreement. For the three and six months ended December 31, 2009, the Company recognized
approximately $.1 million and $0.2 million, respectively, which was recorded as a reduction to cost
of goods sold. For the six months ended December 31, 2009 the company recorded a charge of $0.2
million reflecting net severance costs related to the closure of the Companys Hong Kong office and
the transfer of the majority of the staff to CTG.
5. Pension Plan
Components of Net Periodic Benefit Cost
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||
Service cost |
$ | 2 | $ | 4 | $ | 4 | $ | 8 | ||||||||
Interest cost |
28 | 28 | 56 | 56 | ||||||||||||
Expected return on plan assets |
(26 | ) | (32 | ) | (52 | ) | (64 | ) | ||||||||
Amortization of net loss |
20 | 11 | 40 | 22 | ||||||||||||
Net periodic benefit cost |
$ | 24 | $ | 11 | $ | 48 | $ | 22 | ||||||||
Employer Contributions
The Company does not anticipate a requirement to make contributions to fund its pension plan
in fiscal 2010.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Forward-looking Statements
Certain statements contained herein are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
that have been made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are indicated by words or phrases such as anticipate,
estimate, project, expect, believe, may, could, would, plan, intend and similar
words or phrases. Such statements are based on current expectations and are subject to certain
risks, uncertainties and assumptions, including, but not limited to, the overall level of consumer
spending on apparel; the financial strength of the retail industry, generally and our customers in
particular; changes in trends in the market segments in which we compete and our ability to gauge
and respond to changing consumer demands and fashion trends; the level of demand for our products;
our dependence on our major department store customers; the success of the Kenneth Cole license
agreement; the highly competitive nature of the fashion industry; our ability to satisfy our cash
flow needs, including the cash requirements under the Kenneth Cole license agreement, by meeting
our business plan and satisfying the financial covenants in our credit facility; our ability to
operate within production and delivery constraints, including the risk of failure of manufacturers
and our exclusive supplier to deliver products in a timely manner or to quality standards; our
ability to meet the requirements of the Kenneth Cole license agreement; our ability to operate
effectively in the new quota environment, including changes in sourcing patterns resulting from the
elimination of quota on apparel products; our ability to attract and retain qualified personnel;
and changes in economic or political conditions in the markets where we sell or source our
products, including war and terrorist activities and their effects on shopping patterns, as well as
other risks and uncertainties set forth in the Companys publicly-filed documents, including this
Quarterly Report on Form 10-Q. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected.
There are important factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements, including those addressed below in Part
II, Item 1A. under Risk Factors. For a more detailed discussion of some of the foregoing risks
and uncertainties, see Item 1A. Risk Factors in Part I of our Annual Report on Form 10-K for the
year ended June 30, 2009, as well as the other reports filed by us with the Securities and Exchange
Commission.
We undertake no obligation (and expressly disclaim any such obligation) to publicly update any
forward-looking statements, whether as a result of new information, future events or otherwise,
except as required by law. You are advised, however, to consult any further disclosures we make on
related subjects in our filings with the United States Securities and Exchange Commission (SEC),
all of which are available in the SEC EDGAR database at www.sec.gov and from us.
Unless the context otherwise requires, the terms Company, we, us, and our refer to
Bernard Chaus, Inc.
Overview
The Company designs, arranges for the manufacture of and markets an extensive range of
womens career and casual sportswear principally under the JOSEPHINE CHAUS® JOSEPHINE®, JOSEPHINE
STUDIO®, CHAUS®, CYNTHIA STEFFE®, and CYNTHIA CYNTHIA STEFFE® trademarks and under private label
brand names. Our products are sold nationwide through department store chains, specialty
retailers, off price retailers, wholesale clubs and other retail outlets. On June 13, 2005, we
entered into a license agreement with Kenneth Cole Productions (LIC), Inc. (KCP) (the License
Agreement) which was subsequently amended in September and December 2007. The License Agreement
as amended grants us an exclusive license to design, manufacture, sell and distribute womens
sportswear under KCPs trademark KENNETH COLE REACTION and the KENNETH COLE NEW YORK (cream label)
in the United States in the womens better sportswear and better petite sportswear departments of
approved department stores and approved specialty retailers, UNLISTED and UNLISTED, A KENNETH COLE
PRODUCTION brands (the Unlisted Brands). We began initial shipments of the KENNETH COLE REACTION
line in December 2005 and transitioned from the KENNETH COLE REACTION label to the KENNETH COLE NEW
YORK (cream label) for department stores and specialty stores in the first quarter of fiscal 2009.
The License Agreement includes an option for the Company to extend the term for an additional three
years provided the Company meets certain specified sales targets
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BERNARD CHAUS, INC. AND SUBSIDIARIES
and is in compliance with the License Agreement. The License Agreement also requires us to achieve certain minimum sales levels,
to pay specified
royalties and advertising on net sales, to pay certain minimum royalties and advertising and to
maintain a minimum net worth. The initial term of the License Agreement will expire on June 30,
2012, except for the Unlisted Brands which expired at the end of calendar 2008, with an extension
beyond 2008 subject to the approval of KCP. KCP has continued to provide approval for specific
Unlisted Brands products. Pursuant to the amendment, KCP has agreed not to sell womens
sportswear, or license any other party to sell womens sportswear, in the United States in the
womens better sportswear and better petite sportswear departments of approved department stores
and approved specialty retailers bearing the mark KENNETH COLE NEW YORK under its cream label.
While KCP retains the ability to sell products bearing the mark KENNETH COLE NEW YORK (black label)
in the same channels, it is expected that products bearing the cream label and products bearing the
black label will not typically be sold in the same stores. It is also the expectation of the
parties that in the stores where the cream label and black label lines overlap, the black label
products will be sold in different and more exclusive departments and will have a distinctly higher
price point than the cream label products. The License Agreement permits early termination by us or
KCP under certain circumstances. We have the option to renew the License Agreement for an
additional term of three years if we meet specified sales targets and are in compliance with the
License Agreement.
Exclusive Supply Agreement
In July 2009 we entered into an exclusive supply agreement with China Ting Group Holdings
Limited (CTG). This agreement expanded the long standing relationship we have with CTG. CTG is a
vertically integrated garment manufacturer, exporter and retailer with headquarters in Hong Kong
and principal garment manufacturing facilities in Hangzhou, China. CTG will act as the exclusive
supplier of substantially all merchandise purchased by us in Asia beginning with our Spring 2010
line (product shipping in January to our customers) in addition to providing sample making and
production supervision services. CTG will be responsible for manufacturing product according to our
specifications. As part of this agreement, CTG assumed the responsibilities previously managed by
our Hong Kong office. The majority of the staff working at our Hong Kong office transferred to and
are employed by CTG and will continue to manage these functions under CTGs supervision.
Results of Operations
The following table sets forth, for the periods indicated, certain items expressed as a percentage
of net revenue.
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net Revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Gross Profit |
22.3 | % | 21.6 | % | 24.9 | % | 26.0 | % | ||||||||
Selling, general and administrative expenses |
33.0 | % | 34.1 | % | 31.7 | % | 30.8 | % | ||||||||
Interest expense |
1.0 | % | 1.1 | % | 0.8 | % | 0.9 | % | ||||||||
Net loss |
(11.7 | )% | (13.7 | )% | (7.6 | )% | (5.8 | )% |
Net revenues for the three months ended December 31, 2009 decreased by 18.8%, or $4.9
million, to $21.1 million from $26.0 million for the three months ended December 31, 2008. Units
sold decreased by approximately 17.9% and the overall price per unit decreased by approximately
1.3%. Our net revenues decreased due to decreases in revenues in our Chaus product lines of $4.2
million, private label product lines of $0.7 million, and licensed product lines of $0.5 million,
partially offset by an increase in revenues in our Cynthia Steffe product lines of $0.5 million.
Substantially all of the decrease in revenues in our Chaus product lines was a result of a decrease
in revenues in the discount channel primarily as a result of our decision to reduce levels of
inventory with off-price retailers.
Net revenues for the six months ended December 31, 2009 decreased by 25.2%, or $15.1 million,
to $44.8 million from $59.9 million for the six months ended December 31, 2008. Units sold
decreased by approximately 20.0% and the overall price per unit decreased by approximately 6.0%.
Our net revenues decreased due to decreases in revenues in our Chaus product lines of $12.0
million, private label product lines of $2.0 million, and licensed product lines of $1.1
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million. Over 90% of the decrease in revenues in our Chaus product lines was a result of a decrease in the
club channel as well as a
decrease in the discount channel primarily as a result of our decision to reduce levels of
inventory with off-price retailers.
Gross profit for the three months ended December 31, 2009 decreased $0.9 million to $4.7
million as compared to $5.6 million for the three months ended December 31, 2008, primarily
attributable to a decrease in revenues. Specifically, the decrease in gross profit was primarily
due to decreases in gross profit in our Chaus product lines of $0.9 million, licensed product lines
of $0.4 million and private label product lines of $0.1 million, partially offset by an increase in
gross profit in our Cynthia Steffe product lines of $0.5. The gross profit as a percentage of net
revenue increased approximately 0.7% primarily due to an increase in gross profit percentage in our
Cynthia Steffe product lines, partially offset by decreases in gross profit percentage in our
Chaus, private label and licensed product lines.
Gross profit for the six months ended December 31, 2009 decreased $4.4 million to $11.2
million as compared to $15.6 million for the six months ended December 31, 2008, primarily
attributable to a decrease in revenues. Specifically, the decrease in gross profit was primarily
due to decreases in gross profit in our Chaus product lines of $3.2 million, private label product
lines of $0.9 million, and licensed product lines of $0.7 million, partially offset by an increase
in gross profit in our Cynthia Steffe product line of $0.4. Gross profit for the six months ended
December 31, 2009 was reduced by a one time charge of $0.2 million reflecting net severance costs
related to the closure of the Companys Hong Kong office and the transfer of the majority of the
staff to CTG. (See Exclusive Supply Agreement above). The gross profit as a percentage of net
revenue decreased approximately1.1% due to a decrease in gross profit percentage in our Chaus,
private label and licensed product lines, partially offset by an increase in gross profit
percentage in our Cynthia Steffe product line. The decreases in gross profit percentage were
primarily attributable to our decision to reduce wholesale prices in response to competitive market
conditions.
Selling, general and administrative (SG&A) expenses decreased by $1.9 million to $7.0
million for the three months ended December 31, 2009 from $8.9 million for the three months ended
December 31, 2008. As a percentage of net revenue, SG&A expenses decreased to 33.0% for the three
months ended December 31, 2009 compared to 34.1% for the three months ended December 31, 2008.
The decrease in SG&A expenses for the three months ended December 31, 2009 was primarily related to
decreases in payroll and payroll related costs of $1.0 million and product development costs of
$0.8 million. The decrease in payroll and payroll related costs were due to staff reductions during
the third and fourth quarters of fiscal 2009. The decrease in product development costs was a
result of cost reduction initiatives across all product lines. The decrease in SG&A as a
percentage of net revenue was primarily due to the decrease in expense levels partially offset by
reduced leverage as a result of lower sales volume.
SG&A expenses decreased by $4.3 million to $14.2 million for the six months ended December 31,
2009 from $18.5 million for the six months ended December 31, 2008. As a percentage of net
revenue, SG&A expenses increased to 31.7% for the six months ended December 31, 2009 compared to
30.8% for the six months ended December 31, 2008. The decrease in SG&A expenses for the six months
ended December 31, 2009 was primarily related to decreases in payroll and payroll related costs of
$2.4 million, product development costs of $1.2 million, and marketing and advertising costs of
$0.4 million. The decrease in payroll and payroll related costs were due to staff reductions during
the third and fourth quarters of fiscal 2009. The decrease in product development costs was a
result of cost reduction initiatives across all product lines. The increase in SG&A as a percentage
of net revenue was primarily due to reduced leverage as a result of lower sales volume, partially
offset by decreases in expense levels.
Interest expense was lower for the three and six months ended December 31, 2009 as compared to
the three and six months ended December 31, 2008, primarily due to lower bank borrowings.
Our income tax provision for the three and six months ended December 31, 2009 and December 31,
2008 includes provisions for state and local taxes and also includes a deferred provision for the
temporary differences associated with the Companys indefinite lived intangibles. During the fourth
quarter of fiscal 2009 we determined that our goodwill was impaired and as a result our deferred
tax provision for the temporary differences associated with our indefinite lived intangibles was
reduced for the three and six months ended December 31, 2009 compared the three and six months
ended December 31, 2008.
We periodically review our historical and projected taxable income and consider available
information and
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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 December 31, 2009, June 30, 2009 and December 31, 2008, based upon our
evaluation of taxable income and the current business environment, we recorded a full valuation
allowance on our deferred tax assets including net operating losses (NOL). If we determine that
a portion of the deferred tax assets will be realized in the future, that portion of the valuation
allowance will be reduced and we will provide for an income tax benefit in our Statement of
Operation at the effective tax rate. See discussion below under Critical Accounting Policies and
Estimates regarding income taxes and the Companys federal NOL carryforward.
Financial Position, Liquidity and Capital Resources
General
Net cash used in operating activities was $4.9 million for the six months ended December 31,
2009 as compared to net cash used in operating activities of $7.9 million for the six months ended
December 31, 2008. Net cash used in operating activities for the six months ended December 31, 2009
resulted primarily from a net loss of $3.4 million, an increase in accounts receivable factored
of $2.9 million, and an increase in accounts receivable of $0.7 million, which were partially
offset by an increase in accounts payable of $2.3 million. The net increase in accounts receivable
factored and accounts receivable of $3.6 million was due to the increase in sales as well as the
timing of shipments for the three months ended December 31, 2009 as compared to the three months
ended June 30, 2009. Net cash used in operating activities for the six months ended December 31,
2008 resulted primarily from a net loss of $3.5 million, an increase in accounts receivable -
factored of $15.6 million, an increase in inventories of $3.8 million, partially offset by a
decrease in accounts receivable of $13.2 million and an increase in accounts payable of $1.2
million.
Cash used in investing activities in the six months ended December 31, 2009 was $266,000
compared to $2,000 in the previous year. For the six months ended December 31, 2008 purchases of
fixed assets of $194,000 were offset by proceeds from insurance recovery of $192,000.The purchases
of fixed assets for the six months ended December 31, 2009 consisted primarily of management
information system upgrades. In fiscal 2010, the Company anticipates capital expenditures of
approximately $450,000 primarily for management information system upgrades and other capital
items. The unexpended portion of capital expenditures for the remainder of fiscal 2010 is
approximately $184,000.
Net cash provided by financing activities of $5.2 million for the six months ended December
31, 2009 was primarily the result of net proceeds from short-term bank borrowings of $1.2 million
and proceeds from the CTG supply premium of $4.0 million. Net cash provided by financing
activities of $8.0 million for the six months ended December
31, 2008 was primarily the result of net proceeds from short-term bank borrowings of $8.4 million,
offset by principal payments on the term loan of $0.4 million.
Financing Agreement
On September 10, 2009 we entered into an Amended and Restated Factoring and Financing
Agreement (the September 2009 Agreement) with The CIT Group/Commercial Services, Inc. (CIT)
that expires on September 18, 2011. This agreement consolidated our financing and factoring
arrangements into one agreement and replaced all prior financing and factoring agreements with CIT.
The September 2009 Agreement provides us with a $30.0 million revolving line of credit including a
sub-limit in the amount of $12.0 million for issuance of letters of credit. The September 2009
Agreement was amended on November 5, 2009 to clarify the treatment of cash as well as the
unamortized portion of the exclusive supply premium received from CTG as described. See Exclusive
Supply Agreement above.
The borrowings under the September 2009 Agreement accrue interest at a rate of 2% above prime.
The interest rate as of December 31, 2009 was 5.25%.
Our obligations under the September 2009 Agreement are secured by a first priority lien on
substantially all of our assets, including accounts receivable, inventory, intangibles, equipment,
and trademarks, and a pledge of our interest in our subsidiaries.
The September 2009 Agreement contains various financial and operational covenants, including
limitations on
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additional indebtedness, liens, dividends, stock repurchases and capital expenditures. More
specifically, we are required to maintain minimum levels of defined tangible net worth, minimum
EBITDA, and minimum leverage ratios. At December 31, 2009, the Company was not in compliance
with these financial covenants.
Refer to discussion under Future Financing Requirements.
We have the option to terminate the agreement with CIT. If we terminate the agreement with CIT
due to the non-performance by CIT of certain obligations for a specific period of time, we will not
be liable for any termination fees. Otherwise, in the event of an early termination by us we will
be liable for minimum factoring fees and early termination fees of (a) 1.0% of the revolving credit
limit if we terminate on or before September 18, 2010 and (b) 0.50% of the revolving credit limit
if we terminate after September 18, 2010. However, the early termination fee will be waived if we
terminate 120 days from September 18, 2011.
Under our financing agreements with CIT prior to the September 2009 Agreement (the Prior
Agreements) we operated under various interest rates which were increased due to our covenant
defaults. Our obligations under the Prior Agreements were secured by the same assets as the
September 2009 Agreement.
On December 31, 2009, we had $1.5 million of outstanding letters of credit and total
availability of $4.0 million and $7.8 million of revolving credit borrowings under the September
2009 Agreement. On December 31, 2008, we had $2.5 million of outstanding letters of credit, total
availability of approximately of $1.0 million, and $15.0 million of revolving credit borrowings
under the Prior Agreements.
On November 1, 2009, CIT Group, Inc. and CIT Group Funding Company of Delaware LLC filed
voluntary petitions for reorganization seeking relief under Chapter 11 of the U.S. Bankruptcy Code
with the U.S. Bankruptcy Court in the Southern District of New York. On December 10, 2009, the CIT
Group, Inc. emerged from bankruptcy.. See Future Financing Requirements below.
Factoring Agreement
As discussed above the September 2009 Agreement replaced our previous factoring agreements
with CIT. The September 2009 Agreement is a non-recourse agreement which provides notification
factoring on substantially all of our sales. The proceeds of this agreement are assigned to CIT as
collateral for all indebtedness, liabilities and obligations due CIT. A factoring commission based
on various rates is charged on the gross face amount of all accounts with minimum fees as defined
in the agreement. The previous factoring agreements operated under similar conditions.
Prior to September 18, 2008, one of our subsidiaries, CS Acquisition had a factoring agreement
with CIT which provided for a factoring commission based on various sales levels.
Future Financing Requirements
At December 31, 2009, we had working capital of $0.5 million as compared with working capital
of $3.0 million at December 31, 2008. Our business plan requires the availability of sufficient
cash flow and borrowing capacity to finance our product lines and to meet our cash needs. We expect
to satisfy such requirements through cash on hand, cash flow from operations and borrowings from
our lender. Our fiscal 2010 business plan anticipates improvement from fiscal 2009 by achieving
improved gross margin percentages and additional cost reduction initiatives primarily in the last
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six months of
fiscal 2010.
There can be no assurance that we will be successful in our efforts. We rely on CIT, which is the
sole source of our financing to borrow money in order to fund our operations. On November 1, 2009
CIT Group, Inc. and CIT Group Funding Company of Delaware LLC filed voluntary petitions for
reorganization seeking relief under Chapter 11 of the U.S. Bankruptcy Code with the U.S Bankruptcy
Court in the Southern District of New York. On December 10, 2009, The CIT Group, Inc. emerged from
bankruptcy. CIT is an operating subsidiary of CIT Group Inc. CIT Group Inc. indicated that no
operating subsidiaries were included in the filings and that all of its operating entities would
continue normal operations while it is reorganizing. Should there be a disruption to the normal
operations of CIT, we believe we could obtain alternative financing, however such a disruption
could cause us to not have sufficient cash flow from operations to meet our liquidity needs, and
therefore this could result in a material adverse affect on our business, liquidity and financial
condition.
At
December 31, 2009, the Company was not in compliance with its financial covenants under
its financing agreement with CIT. The Company has been advised by CIT that although the
Company is not in compliance with its financial covenants under the financing agreement
and is therefore in default, CIT is not terminating the financing agreement, and, without
waiving those defaults, will continue to provide funding at its discretion. The Company
has not reached an agreement with CIT regarding an amendment to the financing agreement.
If the Company cannot achieve an acceptable amendment, it believes it will be unable
to meet the future financial covenants, resulting in additional defaults under the agreements.
As a result, CIT may, in its sole discretion halt any and all obligations to make loans,
advances and extensions of credit. Upon the continuance of such non-compliance, CIT may in
its sole discretion (i) declare that all financial obligations are due and immediately
payable; (ii) terminate the financing agreement; and (iii) require that all outstanding
and future financial obligations incur a higher default interest rate. To the extent the
Company cannot reach an agreement with CIT or find alternative financing, it will not have
sufficient cash flow from operations to meet its liquidity needs, and therefore, this will
have a material adverse affect on its business, results of operations, liquidity and financial
condition, and its ability to operate as a going concern.
Critical Accounting Policies and Estimates
Significant accounting policies are more fully described in Note 1 to the consolidated
financial statements. Certain of our 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 Sales are recognized 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.
Factoring Agreement and Accounts Receivable We have a financing and factoring agreement
with CIT whereby substantially all of our receivables are factored. The agreement is a non-recourse
factoring agreement whereby CIT, based on credit approved orders, assumes the accounts receivable
risk of our customers in the event of insolvency or non-payment. All other receivable risks for
customer deductions that reduce the customer receivable balances are retained by us, including, but
not limited to, allowable customer markdowns, operational chargebacks, disputes, discounts, and
returns. These deductions totaling $2.6 million as of December 31, 2009, $3.4 million as of June
30, 2009 and $3.3 million as of December 31, 2008 have been recorded as a reduction of amounts in
accounts receivable factored. We receive payment on non-recourse factored receivables from CIT
as of the earlier of: a) the date that CIT has been paid by our customers; b) the date of the
customers longest maturity if the customer is in bankruptcy or insolvency proceedings; or c) the
last day of the third month following the customers longest maturity date if the receivable
remains unpaid. We assume the accounts receivable risk on sales factored to CIT but not approved by
CIT as non-recourse factored receivables, which approximated $0.6 million at December 31, 2009,
$0.4 million June 30, 2009 and $0.6 million
December 31, 2008, respectively. We also assume the risk
on accounts receivable not factored to CIT which at December 31, 2009 and June 30, 2009, December
31, 2008 was approximately $0.9 million, $0.2 million and
$0.1 million, respectively, respectively.
Prior to October 2008 the Company extended credit to its customers based on an evaluation of the
customers financial condition and credit history, except for customers of the Companys wholly
owned subsidiary, Cynthia Steffe Acquisition, LLC.
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BERNARD CHAUS, INC. AND SUBSIDIARIES
Inventories Inventories are stated at the lower of cost or market, cost being determined on
the first-in, first-out method. The majority of our inventory purchases are shipped FOB shipping
point from our suppliers. We take title and assume the risk of loss when the merchandise is
received at the boat or airplane overseas. We record 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
approximately $0.4 million at December 31, 2009, $0.8 million at June 30, 2009, and $1.2 million
at December 31, 2008. Inventory reserves are based upon the level of excess and aged inventory and
estimated recoveries on the sale of the inventory. While markdowns have been within expectations
and the provisions established, we cannot guarantee that we will continue to experience the same
level of markdowns as in the past.
Valuation of Long-Lived Assets, Trademarks and Goodwill Periodically we review the carrying
value of our long-lived assets for continued appropriateness. We evaluate goodwill and trademarks
at least annually or whenever events and changes in circumstances suggest that the carrying value
maybe impaired. During the fourth quarter of fiscal 2009, we performed impairment testing by
determining the fair value of the entire Company based on the market capitalization at June 30,
2009. We then allocated the fair value among the various reporting units and determined that the
goodwill balances for SL Danielle and Cynthia Steffe were impaired because the carrying value
exceeded the allocated fair value. Accordingly, we recorded a goodwill impairment of $2.3 million
for fiscal year end 2009. As of June 30, 2009 we no longer maintain any goodwill. Our review of
trademarks and long-lived assets is based upon projections of anticipated future undiscounted cash
flows including market participant assumptions, when available. While we believe that our estimates
of future cash flows are reasonable, different assumptions regarding such cash flows could
materially affect evaluations. To the extent these future projections or our strategies change, the
conclusion regarding impairment may differ from the current estimates. For the three and six months
ended December 31, 2009 and 2008 no impairment of trademarks and long lived assets were recognized.
Income Taxes Results of operations have generated a federal tax NOL carryforward of
approximately $93.2 million as of June 30, 2009. Approximately 70% of the Companys net operating
loss carryforward expires between 2010 and 2012. Generally accepted accounting principles require
that we record a valuation allowance against the deferred tax asset associated with this NOL if it
is more likely than not that we will not be able to utilize it to offset future taxable income.
As of December 31, 2009, based upon its evaluation of our historical and projected results of
operations, the current business environment and the magnitude of the NOL, we recorded a full
valuation allowance on our deferred tax assets including NOLs. The provision for income taxes
primarily relates to provisions for state and local taxes and a deferred provision for temporary
differences associated with indefinite lived intangibles. It is possible, however, that we could
be profitable in the future at levels which cause us to conclude that it is more likely than not
we will realize all or a portion of the NOL carryforward. Upon reaching such a conclusion, we
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 our combined federal and state effective rates.
Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause
our 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 We are subject to market risk from exposure to changes in interest rates
based primarily on our 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
Financial Condition Liquidity and Capital Resources above and Note 3 of the Notes to the
Consolidated Financial Statements. We manage these exposures through regular operating and
financing activities. We have not entered into any derivative financial instruments for hedging or
other purposes. The following quantitative disclosures are based on the prevailing prime rate.
These quantitative disclosures do not represent the maximum possible loss or any expected loss that
may occur, since actual results may differ from these estimates.
At December 31, 2009 and 2008, the carrying amounts of our revolving credit borrowings
approximated fair value. As of December 31, 2009, our revolving credit borrowings bore interest at
5.25%. As of December 31, 2009, a hypothetical immediate 10% adverse change in prime interest rates
relating to our revolving credit borrowings would have approximately a $40,000 unfavorable impact
on our earnings and cash flows over a one-year period.
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BERNARD CHAUS, INC. AND SUBSIDIARIES
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 SECs 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 Companys management, including the
Companys Chairwoman and Chief Executive Officer, Chief Operating Officer and 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 Companys management, including the Companys Chairwoman and Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer, of the effectiveness of the design
and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon the foregoing, the Companys Chairwoman and Chief Executive Officer, Chief
Operating Officer and Chief Financial Officer, concluded that, as of December 31, 2009, the
Companys 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 Companys Exchange Act reports.
During the fiscal quarter ended December 31, 2009, there has been no change in the Companys
internal control over financial reporting that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
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BERNARD CHAUS, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
There are many factors that affect our business and the results of our operations. In
addition to the other information set forth in this quarterly report, you should carefully read and
consider Item 1A. Risk Factors in Part I, and Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations in Part II, of our Annual Report on Form 10-K for
the year ended June 30, 2009, which contain descriptions of significant factors that might
materially affect our business, financial condition or future results.
There have been no material changes with respect to the Companys risk factors previously
disclosed in our Annual Report on Form10-K for the year ended June 30, 2009. Additional risks and
uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) | The Annual Meeting of Stockholders of the Company was held on November 10, 2009 at 11:00 a.m. | ||
(c) | At such meeting, the Stockholders voted on the election of five directors of the Company to serve until the next Annual Meeting of Stockholders and until their respective successors have been elected and qualified. |
For | Withheld | |||||||
Philip G. Barach |
36,503,518 | 445,145 | ||||||
Josephine Chaus |
36,517,827 | 430,836 | ||||||
Robert Flug |
36,503,466 | 445,197 | ||||||
Harvey M. Krueger |
36,503,330 | 445,333 | ||||||
David Stiffman |
36,503,466 | 445,197 |
Item 5. Other Information.
None.
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BERNARD CHAUS, INC. AND SUBSIDIARIES
Item 6. Exhibits.
31.1 | Certification of Chief Executive Officer pursuant to Rule13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of Chief Operating Officer and Chief Financial Officer pursuant to Rule13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Josephine Chaus, Chairwoman of the Board and Chief Executive Officer of Bernard Chaus, Inc. | ||
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by David Stiffman, Chief Operating Officer and Chief Financial Officer of Bernard Chaus, Inc. |
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BERNARD CHAUS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
BERNARD CHAUS, INC. |
||||
Date: February 16, 2010 | By: | /s/ Josephine Chaus | ||
JOSEPHINE CHAUS | ||||
Chairwoman of the Board and Chief Executive Officer |
||||
Date: February 16, 2010 | By: | /s/ David Stiffman | ||
DAVID STIFFMAN | ||||
Chief Operating Officer and Chief Financial Officer |
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BERNARD CHAUS, INC. AND SUBSIDIARIES
Exhibit Number | Exhibit Title | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Josephine Chaus, Chairwoman of the Board and Chief Executive Officer of Bernard Chaus, Inc. | |
32.2
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by David Stiffman, Chief Operating Officer and Chief Financial Officer of Bernard Chaus, Inc. |
24